As filed with the Securities and Exchange Commission on December 7, 1998
Registration No. 333-64395
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
Amendment No. 1 to
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
PLANET ENTERTAINMENT CORPORATION
(Exact name of Registrant as specified in its charter)
Florida 33-0471728
(State of incorporation or (I.R.S. Employer
Organization or other jurisdiction) Identification No.)
John S. Arnone, President
222 Highway 35
P.O. Box 4085
Middletown, New Jersey 07748
(Address of Registrant's principal executive office, including zip code)
(732) 530-8819
(Registrant's telephone number)
Copies To:
JOHN B. M. FROHLING, ESQUIRE
FROHLING, HUDAK & MCCARTHY
425 EAGLE ROCK AVENUE
ROSELAND, NEW JERSEY 07068
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. [_]
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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. [_]
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CALCULATION OF REGISTRATION FEE
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Title of each Class Proposed Maximum Proposed Maximum
of securities to be Amount to be Offered Price Per Aggregate Offering
Registered (1)(2) Registered Unit Price Registration Fee
=============================================================================================================
<S> <C> <C> <C> <C>
Common Stock,
$.001 par value 1,441,336 $ 5.85 $8,431,815.56 $2,487.59
=============================================================================================================
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(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.
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.
DATED DECEMBER __, 1998
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Prospectus
[Logo]
PLANET ENTERTAINMENT CORPORATION
1,441,336 SHARES
COMMON STOCK
$.001 PAR VALUE
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." (SEE "RISK FACTORS"
WHICH BEGIN ON PAGE 8 HEREOF.)
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" or the
"Registrant"). This Prospectus is filed with the United States Securities and
Exchange Commission (the "Commission" or the "SEC") and relates to 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 (the "Warrants") or the conversion of convertible
preferred stock (the "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 Preferred Stock held
by certain of the Selling Stockholders and the exercise of Warrants by certain
of the Selling Stockholders. 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
Company's Amended and Restated Articles of Incorporation governing the Preferred
Stock (the "Terms"), and 225,000 shares of Common Stock issuable upon exercise
of the Warrants. The Preferred Stock and Warrants were issued in May 1998. The
Preferred Stock is convertible at any time into shares of Common Stock at the
lower of (a) $8.885 per share (the "Initial Conversion Price"), or (b)78% (the
"Discount Rate")multiplied by the average of the five lowest per share market
prices of the Company's Common Stock during ten trading days immediately
proceeding the notice of conversion, which as of November 30, 1998 was $3.12 per
share.
Pursuant to the Terms, upon the Company's failure to satisfy certain
obligations, each of the Initial Conversion Price and the Discount Rate will be
reduced by 2.5% on the date relating to the failure to satisfy a particular
obligation thereunder (the "Trigger Date"). If such failure to satisfy the
obligation has not yet been cured by the Company by the first monthly
anniversary of the Trigger Date, or waived by the holder of the Preferred Stock,
each of the Initial Conversion Price and the Discount Rate will be further
reduced by an additional 2.5% on such first monthly anniversary of the Trigger
Date. On the second monthly anniversary of the Trigger Date, if such failure to
satisfy the obligation has not, at such time, been cured by the Company, and on
each monthly anniversary
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thereafter until the respective obligation is satisfied, the holder of the
Preferred Stock can either (i) require further cumulative 2.5% discounts to
continue or (ii) require the Company to pay to it a cash payment of 2.5% of the
aggregate stated value of the Preferred Stock.
Pursuant to the Terms, the Company's failure to have the
Registration Statement declared effective by the SEC by September 4, 1998
resulted in (i) a reduction, on September 4, 1998, of the Initial Conversion
Price to $8.663 and of the Discount Rate to 75.5%, (ii) a further reduction, on
October 4, 1998, of the Initial Conversion Price to $8.441 and of the Discount
Rate to 73% and (iii) on November 4, 1998, a choice to JNC to either (x) reduce
the Initial Conversion Price to $8.219 and the Discount Rate to 70.5% or (y)
receive $125,000 in cash from the Company. As of the date hereof, JNC has not
yet notified the Company as to any decision made in this regard. Pursuant to the
Terms, the Preferred Stockholder is prohibited from converting the Preferred
Stock (or receiving shares of Common Stock as payment of dividends thereunder)
to the extent that such conversion would result in the Preferred Stockholder
owning more than 4.999% of the outstanding Common Stock of the Company following
such conversion. Such restriction is waivable by the Preferred Stockholder upon
not less than 75 days notice to the Company. (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 used in part
to acquire a wholly owned subsidiary and will be used for working capital, other
possible 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. 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 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 December 2, 1998, the
Common Stock closed at a price of $5.937 per share as reported on the OTC
Bulletin Board.
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").
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 Securities 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 $50,000), except that the Selling
Stockholders will bear the cost of any brokerage
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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"
BEGINNING ON PAGE 8 HEREOF.) 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 DECEMBER __, 1998.
AVAILABLE INFORMATION
This Prospectus constitutes a part of the Registration Statement
filed by the Company with the Commission under the Securities Act 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 Statement on
Form 10-SB with the Commission. 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 provided audited financial
statements to its stockholders, at its annual meeting of stockholders held
November 9, 1998. With respect to the 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 will 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 is 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
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or all the documents referenced in the Registration Statement to which this
Prospectus relates, other than exhibits to such documents, unless such exhibits
are specifically incorporated by reference in such 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), 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.
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SUMMARY OF PROSPECTUS
Planet Entertainment Corporation 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 in a reverse merger stock exchange
transaction by Ampro International Golf Tour, Inc. ("Ampro"), a Florida
corporation, which, as the surviving corporation, changed its name to Planet
Entertainment Corporation. In October 1998, subsequent to its acquisition of
NEOS, the Company changed its fiscal year to end August 31.
The Company is currently involved in various areas of the recorded
music industry. The Company's principal business is the wholesale distribution
of pre-recorded music in the form of compact diskettes ("CD's"), cassette tapes,
and other entertainment related products such as video tapes, Digital Video
Diskettes ("DVD's"), and to a very limited extent music or entertainment related
apparel, such as t-shirts. The Company's business activities also include the
acquisition, licensing, production, marketing and distribution of high quality
recorded music. Through its Northeast One Stop, Inc. ("NEOS") subsidiary, the
Company distributes approximately 130,000 front end titles of pre-recorded music
to independent record stores, college book stores and mass merchants. In
addition, through its recording studio, 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 exclusive and non-exclusive rights
associated with approximately 15,000 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, at
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
which exist 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 business strategy is to produce compilation CDs
containing enhanced or re-digitized master recordings from its existing library,
to contribute these compilation CDs to joint ventures in which the Company is a
party, and to license these compilation CDs to third parties for marketing and
sale by unaffiliated distributors. To date, however, prior to the Company's
acquisition of NEOS, substantially all the Company's revenues had been derived
from studio rental sales and licensing royalties and not from the licensing and
sale of the Company's compilation CDs. In September 1998, the Company acquired
all of the issued and outstanding capital stock of Northeast One Stop, Inc.
("NEOS"). NEOS employs approximately 200 individuals and 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 various 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 strategy is to permit the sale its products and other "front line"
titles over the Internet and to serve as its own fulfillment center and
distribute compilation CDs created from its own music catalogue through NEOS.
Currently, NEOS purchases the pre-recorded music from certain major record
companies and other distributors for sale at approximately 84% of its resale
price to its customers. The Company expects to supply compilation CDs to NEOS
from the Company's catalogue of existing master recordings, at a significantly
lower cost, or approximately 50% of their resale value, and thereby improve
NEOS' gross profit margins while generating increased revenues for the Company.
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In May 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 (the "Initial Conversion
Price"), or (b) 78% (the "Discount Rate") 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. 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 an identical term of five
years from May 1998. As a result of this transaction, the Company received net
proceeds of approximately $4,475,000. Under the terms of the Registration Rights
Agreement, the Company is required to file a Registration Statement for 200% of
the Common Stock issuable upon conversion of the Preferred Stock and payments of
dividends thereunder, along with an additional 225,000 shares of Common Stock
underlying the warrants, within 30 days of May 31, 1998 (the "Closing Date"),
and to have such Registration Statement declared effective within 95 days from
the Closing Date. (See "DESCRIPTION OF BUSINESS; RECENT DEVELOPMENT OF
BUSINESS")
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. With the exception of sales generated by
its NEOS subsidiary, 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 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 return basis estimated to be
approximately 25% of sales and the Company intends to establish reserves for
returns of finished products in accordance with such industry standards. With
the sale of finished products, and any increase in returns, however, the
Company's reserves could prove to be inadequate which could 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 currently sold through its NEOS subsidiary, the Company has expended, and
will continue to expend capital resources to upgrade 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 site within the first quarter of fiscal 1999. No
assurances can be made however, that the Company will complete the enhancement
of its web site 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 future business prospects and its ability to
expand and compete with other larger
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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.
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.
LACK OF SUFFICIENT CAPITAL RESOURCES. In August 31, the Company
realized approximately $4,475,000 million in proceeds from the sale of shares of
its Preferred Stock and as of August 31, 1998 had current assets of $4,532,026,
current liabilities of $1,339,134, and working capital of $3,192,892. In
September 1998, the Company acquired all the issued and outstanding common stock
of NEOS, a distributor of recorded music, for consideration of $3,000,000 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 lesser of $5.25 or
the closing bid price for the Company's Common Stock on the date of Closing.
According to the terms of the agreement, the Company paid $2,250,000 to the
Seller at the closing, and also issued 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 (the
"NEOS Note").
In August 1998, the Company acquired the right to reacquire
1,400,000 shares of its Common Stock and the outstanding principal portion of a
$1,250,000 promissory note (the "Promissory Note") together with accrued
interest from Gulf Coast Music, L.L.C. in exchange for approximately $175,000 in
cash and short term notes totaling approximately $2,850,000, (the "Gulf Coast
Note"). If the Company fails to pay the remaining balance of $2,550,000 by
December 15, 1998, according to the terms of the agreement, the Company may lose
its right to acquire 694,000 of the 1,400,000 shares, and would be bound by the
original terms of the Promissory Note under which there remains outstanding
$750,000 in principal, with interest and principal due and payable over the next
three years. Assuming that the Company is unable to obtain loan or other capital
sufficient to pay the remaining portion of the NEOS Note and the Gulf Coast
Note, these transactions will continue to result in a significant depletion of
the Company's capital resources and its liquidity. Together with any losses the
Company may incur 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 such additional
capital or loans are not available on terms favorable to the Company, of which
there is no assurance as of this date. (See "DESCRIPTION OF BUSINESS; RECENT
DEVELOPMENT OF BUSINESS")
SUBSTANTIAL LEVERAGE AND DEBT SERVICE REQUIREMENTS. The Company has
substantial indebtedness. As of August 31, 1998, the Company had notes payable
of $1,150,000. The degree to which the Company is leveraged could have
significant consequences to holders of Common Stock, including the following:
(i) the Company's ability to obtain additional financing in the future for
working capital, capital expenditures, acquisitions, general corporate purposes
or other purposes may be significantly impaired; (ii) a substantial portion of
the Company's cash flow from operations would be required to be dedicated to the
payment of principal and interest on its indebtedness, thereby reducing the
funds available for its operations; (iii) the Company may be
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hindered in its ability to adjust effectively to changing market conditions; and
(iv) the Company's substantial degree of leverage could make it more vulnerable
in the event of a downturn in general economic conditions or in its business.
Failure by the Company to make its scheduled debt payments under any of its
indebtednesses may result in an event of default which could have a material
adverse effect on the Company.
DEPENDENCE ON SUPPLIERS, MANUFACTURERS, AND RAW MATERIALS. With the
exception of those products sold by its NEOS subsidiary, 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, USA and Canada 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. The Company's subsidiary, NEOS, at
present has favorable relations with several suppliers, the loss of any one or
more of which could have an adverse impact on its ability to deliver a variety
of salable products to its customers.
DEPENDENCE ON FEW MAJOR 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. As of
the date hereof, this amount remains uncollected and in June 1998, the Company
assigned the collection of all producer and publisher royalties to an
unaffiliated third party. (See "DESCRIPTION OF BUSINESS; RECENT DEVELOPMENT OF
BUSINESS".) 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 Venneri, is a shareholder of MMIC, and Richard Bluestine, the
Company's Chief Financial Officer and a former director served as an officer and
director of MMIC from June of 1995 through May of 1997 and remains a stockholder
of MMIC. The Company anticipates that, as a result of its acquisition of NEOS,
approximately 30% of its sales will be derived from the sale of products to a
single department store chain, to which NEOS, through its rack-job division,
distributes products to approximately 35 store locations. Should the Company or
NEOS cease doing business and selling its products to this customer, it may have
a substantial adverse effect on the Company, its profitability, business and
business prospects. In addition, if the Company ceases doing business with this
customer the Company may be required to accept the return of a portion of the
Company's products sold to this customer with a limited right of return, which
may also have a substantial adverse impact on the Company, its business and
financial condition.
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, as well as
Louis J. DelSignore, the Chairman of NEOS, and Ron Nicks, the President and
Chief Executive Officer of NEOS. The Company has entered into employment
agreements with each of these officers with the exception of Richard Bluestine,
the Company's Executive Vice President and Chief Financial Officer. All
officers, except Mr. Bluestine, have agreed to devote a substantial portion of
their time to the affairs of the Company. 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
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<PAGE>
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 plans to obtain "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. However, no such
policy is in effect as of the date hereof.
COMPETITIVE BUSINESS CONDITIONS. In all lines of its business the
Company faces intense competition ranging from small regional businesses to
large international companies. 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
also increase the competitive pressures on 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 will not be able to
develop products which directly compete with the Company's products and offered
them at substantially lower prices than those available from the Company.
The "one stop" record distribution business is also highly price
sensitive with a limited number of larger companies such as Valley Media, Inc.,
AEC Onestop Group and Universal, accounting for a large percentage of the
industry's annual sales. These companies are significantly larger, have greater
financial resources and have larger technical and creative staffs than the
Company.
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 eight months ended August 31, 1998, approximately 30% of the Company's
net revenues were derived from studio operations, including rentals, and
approximately 70% from the sales or licensing of the Company's products.
Following the Company's acquisition of NEOS, it is expected that approximately
90-95% of the Company's revenues will be derived from the wholesale distribution
of pre-recorded music. Although NEOS is a 15 year old company, the Company, and
particularly its management, are inexperienced in the wholesale distribution of
pre-recorded music. Accordingly, 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 their 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
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<PAGE>
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 August 31, 1998 had an accumulated
deficit of $1,507,823. The Company intends to invest significant funds in
website 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 from its operations or
its website 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 and those of its
NEOS subsidiary are subject to seasonal variations by the timing of new
releases. In accordance with industry practice, the Company records revenues for
sales of music products, except those related to telemarketing C.O.D.
transactions, when such products are shipped to retailers. Companies in this
field usually experience a decline in revenues and net income in 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.
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 the ownership or the Company's right to
market, reproduce and distribute any of its master recordings, except that in
conjunction with the acquisition of certain non exclusive licensing rights to
masters, its vendors are engaged in clearing these rights within a bankruptcy
court process. If this process is not completed by December 15, 1998, the vendor
has agreed to replace the remaining disputed titles with undisputed titles. (See
"RISK FACTORS; DISPUTED INTELLECTUAL PROPERTY RIGHTS".) 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 exclusive and non-exclusive
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
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<PAGE>
of the Company's products or require licenses and the payment of royalties by
the Company.
DISPUTED INTELLECTUAL PROPERTY RIGHTS. From time to time, the
Company has received notices from a limited number of 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 them royalties. The Company has responded by
providing these entities with information regarding the Company's chain of title
to these recordings, and in two instances the Company has suspended the future
release of the recordings until the matters are resolved. There can be no
assurance that either of these matters will be resolved to the Company's
satisfaction or that additional claims will not be brought against the Company
in the future by other third parties, 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. Further, if the Company should become involved in
litigation, it could require significant financial and management resources of
the Company.
Documents supporting the chain of title to each master recording
owned by or licensed to the Company on an exclusive or non-exclusive basis are
maintained by the Company. Possession of the master recordings permits the
Company to reproduce and distribute them under the Company's own label, or
sub-license these rights to others in exchange for royalties. No assurances can
be given that the Company's right to use any and or all of its master
recordings, will not be subject to dispute which may result in the delay or the
inability to use or exploit any particular master recording or 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 principally
because the Company has made no sales of these recordings. 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 or licensing
rights of any master recording published by the Company.
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. 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.("Music Marketeers") and J. Jake, Inc. ("J. Jake") in exchange
for 2,000,000 shares of the Company's 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 and Music Marketeers
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. Subsequently, in
November 1996, an amended agreement was entered into between the Company and J.
Jake and Music
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<PAGE>
Marketeers whereby 500,000 of the 2,000,000 shares of stock previously
transferred to J. Jake and Music Marketeers were returned to the Company and the
Company was released from its obligation to purchase certain studio assets. In
1997, Music Marketeers' rights and obligations under this agreement with the
Company were assigned to Gulf Coast Music, L.L.C. ("Gulf Coast"). Currently, of
the 10,000 masters acquired by the Company, 2,500 were transferred directly from
J. Jake free and clear of encumbrances or disputes. The remaining 7,500 are to
be acquired from Gulf Coast. Gulf Coast is in the process of clarifying its
rights to the 11,500 songs in its catalogue as part of its Chapter 11
Reorganization Plan. Currently, the rights to 5,900 have been clarified as being
free of disputes or encumbrances and as of October 30, 1998, approximately 5,000
additional masters were in the process of resolution through the Bankruptcy
proceeding and negotiations relating thereto. In the opinion of counsel for Gulf
Coast, it is expected that approximately 75% or 4,200 of those disputed masters
will ultimately be resolved in favor of Gulf Coast. The Company is not a party
to these Court proceedings, however, the Company has entered into a separate
agreement with Gulf Coast wherein Gulf Coast agreed that to the extent that any
of the 7,500 masters to be delivered to the Company are not free of dispute by
December 15, 1998, unencumbered and undisputed replacement master recordings
will be delivered of substantially the same quality, appeal and commercial value
acceptable to the Company. However, no assurances can be given that the Company
will obtain clear and undisputed right to non exclusive licenses to the master
recordings. If the Company were required to notify its distributors to cease
distributing any of the Company's products, or to escrow revenues from the sale
of the Company's products because the right to sell or exploit these products is
contested, the Company's relationship with its distributors may be adversely
affected. (See "DESCRIPTION OF BUSINESS; RECENT BUSINESS DEVELOPMENTS")
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's assessment of its Year 2000 issues is not complete, however management
believes that the consequences of its year 2000 issues would not have a material
effect on the Company, its business, results of operations or financial
condition due to the fact that 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. Accordingly, the Company believes that it is in a state
of readiness, and the cost to address the Company's Year 2000 issues will be
minimal and, as a result, the Company has not made contingency plans. However,
if such a problem were to persist in the computer applications of the Company,
its suppliers, or its customers, and not be corrected, such a problem could
cause a disruption in operations and have a short term adverse effect on the
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<PAGE>
Company's business and results of operations.
GOVERNMENT REGULATIONS 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 affect 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 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 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 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. The Company is not eligible to rely on the
safe harbor provisions of the Private Securities Litigation Reform Act.
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of
the Shares registered herewith, 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
15
<PAGE>
lines of business and a substantial portion was used in connection with the
acquisition of NEOS. 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.
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.
DILUTION
The net tangible book value attributable to the Company's Common
Stock at August 31, 1998 was $7,280,302, or $.61 per share. "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. Assuming 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 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
$11,755,302, or $.89 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 $3.22 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 ................... $ .61
Increase attributable to conversion ......................... $ .28
Pro forma net tangible book value per share after conversion. $ .89
-------
Dilution per share to Preferred Stockholders ................ $ 3.22
=======
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%(1) $ 5,000,000 36 $ 4.11
---------- ---- ----------- ----
Total 13,192,311 100% $13,902,339 100%
========== ==== =========== ====
</TABLE>
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(1) Under the Company's Amended Articles of Incorporation the Preferred
Stockholder is prohibited from converting shares of Preferred Stock (or
receiving shares of Common Stock in payment of dividends thereon) to
the extent that the number of shares of Common Stock beneficially owned
by it and its affiliates after such conversion exceeds 4.999% of the
issued and outstanding shares of Common Stock following such
conversion.
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 Stockholders 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 number of shares of Common Stock listed as beneficially owned by
JNC represents the number of shares of Common Stock issuable to JNC,
(subject to the limitation imposed by the Company's Amended and
Restated Articles of Incorporation whereby the Preferred Stockholder is
prohibited from converting the Preferred Stock to the extent that such
conversion would result in the Preferred Stockholder owning at any
point in time more than 4.99% of the outstanding Common Stock of the
Company) upon (i) conversion of the Preferred Stock at an assumed
conversion price of the lesser of (a) the Initial Conversion Price of
$8.885 per share or (b) the Discount Rate, 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. 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 be issued in respect of such conversions or
dividend payments, and, consequently, the number of shares beneficially
owned by JNC, will fluctuate daily and cannot be determined at this
time. In no event, however, will the number of shares of Common Stock
exceed 1,291,336, the number of shares covered by the Registration
Statement, unless a post effective amendment is in effect with respect
to the sale of said additional shares. Nothing would prohibit Thee
Selling Stockholders from exercising a portion of their conversion
privileges, then selling shares of common stock and thereafter
exercising additional conversion rights.
(2) Includes shares of Common Stock issuable to JNC upon conversion of the
Preferred Stock, as payment of dividends thereunder and exercise in
full of the JNC Warrant. 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
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<PAGE>
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, offered for sale under this
Registration Statement, cannot be determined at this time. Accordingly,
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 JNC 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 May 31, 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.
PLAN OF DISTRIBUTION
The Selling Stockholders, their pledgees, donees, transferees or other
successors 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 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
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<PAGE>
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 $50,000) 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.
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 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 1,600 of the master recordings purchased from Gulf Coast Music,
Inc. are 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 recordings acceptable to
the Company.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The directors and executive officers 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 41 President, Chief Executive Officer, Director
Joseph Venneri 62 Executive Vice President, Director
Richard Bluestine 56 Executive Vice-President, Chief Financial Officer,
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.
</TABLE>
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.
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<PAGE>
WALLACE M. GIAKAS has been the Chairman of the Board of the Company
since October 1996 and Secretary since June 1997. 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. Mr. Giakas devotes most of his
professional time to the business of the Company.
JOHN S. ARNONE is President, Chief Executive Officer and a Director
of the Company which positions he has held since June 1998. From October 1996
through June 1998, Mr. Arnone served as a Director and the Secretary 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. From
March 1996 through January 1998, Mr. Arnone served as President of Whelan
Securities, Inc., an NASD registered general securities broker dealer. Since
January 1998 and continuing through the present, Mr.
Arnone devotes most of his professional time to the business of the Company.
JOSEPH VENNERI is Executive Vice President and a Director of the
Company. Prior to June 1998, Mr. Venneri was President and Chief Executive
Officer of the Company. Mr. Venneri has been self-employed as a recording
engineer and producer operating from the recording studio purchased by the
Company in Jackson, New Jersey since 1994. 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, The Grateful Dead, REM,
Cher, Michael Bolton, Kenny Rogers, Willie Nelson, Luciano Pavarotti, and
hundreds more. Mr. Venneri devotes his full professional time to the business of
the Company.
RICHARD C. BLUESTINE, C.P.A. is Executive Vice-President and Chief
Financial Officer of the Company. Mr. Bluestine is a Certified Public Accountant
with experience in the record and film industry. Mr. Bluestine is currently a
partner at the accounting firm of Brinster & Bergman, L.L.P., and has been since
January 1990. In addition, during that same time, 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 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. To date, 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. Mr. Bluestine devotes part of his professional time to
the business of the Company. (See "RISK FACTORS; DEPENDENCE ON MANAGEMENT AND
KEY PERSONNEL").
20
<PAGE>
LOUIS J. DELSIGNORE, 60 is a Director of the Company and Chairman of
the Company's subsidiary Northeast One Stop, Inc. From 1983 through September
1998, Mr. DelSignore served as president of Northeast One Stop, Inc. ("NEOS")
and currently is employed by the Company to assist in running NEOS. 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. Mr. DelSignore
devotes his full professional time to the business of the Company.
RONALD J. NICKS is a Director of the Company and is President and
Chief Executive Officer of the Company's subsidiary Northeast One Stop, Inc. Mr.
Nicks has been affiliated with NEOS since November 1997 and has served as its
President since October 1998. 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. Mr.
Nicks devotes his full professional time to the business of the Company.
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 Number of
or Identity of Group (1) Shares Owned Percent of Class (2)
Wallace M. Giakas 3,439,000 (1)(2)(3)* 26.4%
4 Tall Oaks Court
Farmingdale, N.J. 07727
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)* 26.8%
30 Penbrook Court
Shrewsbury, N.J. 07702
Briollette Investments, Ltd. 605,334 4.7%
c/o Richard J. Fagen
Charles House
St. Helier, Jersey JE49NZ
William J. Valenziano 806,000 (1) 6.2%
2500 Uranium Drive
Channel Islands, CA
21
<PAGE>
Gulf Coast Music, Inc. 694,000 5.3%
c/o Jeffrey Kranzdorf
757 St. Charles Ave.
New Orleans, LA 70130
Richard Bluestine 560,000 (1)(2)* 4.3%
100 Merrick Road
Rockville, N.Y. 11570
Louis J. DelSignore 225,000 (1)* 1.7%
7 Northway Lane
Latham, New York 10201
Ronald J. Nicks 75,000 (1)* .6%
7 Northway Lane
Latham, New York 10201
All executive officers, directors
and principal shareholders
as a Group (7 persons) 13,022,334 100%
- -----------------
* 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. Also
includes all shares which may be acquired within 60 days through
conversion of Preferred Stock or the exercise of outstanding warrants.
See table under "Management" for officer and directorships held by the
persons listed above.
(2) Also 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.
(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 Common Stock was $5.25 per
share.
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
November 30, 1998, the Company had 11,976,055 shares of Common Stock outstanding
and approximately 1,000 shareholders. (See "MARKET PRICE OF COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS").
PREFERRED STOCK . The Company authorized and issued 500 shares of
non-voting 7% Series A Convertible Preferred Stock with an aggregate stated
value of $5 million. Each share of the Preferred Stock over a period of two
22
<PAGE>
years, is convertible at any time into shares of Common Stock at the lower of
(a) $8.885 per share (the "Initial Conversion Price"), or (b)78% (the "Discount
Rate") multiplied by the average of the five lowest per share market prices of
the Company's Common Stock during ten trading days immediately proceeding the
notice of conversion.
Pursuant to the Company's Amended and Restated Articles of
Incorporation governing the Preferred Stock (the "Terms"), upon the Company's
failure to satisfy certain obligations, each of the Initial Conversion Price and
the Discount Rate will be reduced by 2.5% on the date relating to the failure to
satisfy a particular obligation thereunder (the "Trigger Date"). If such failure
to satisfy the obligation has not yet been cured by the Company by the first
monthly anniversary of the Trigger Date, or waived by the holder of the
Preferred Stock, each of the Initial Conversion Price and the Discount Rate will
be further reduced by an additional 2.5% on such first monthly anniversary of
the Trigger Date. On the second monthly anniversary of the Trigger Date, if such
failure to satisfy the obligation has not, at such time, been cured by the
Company and on each monthly anniversary thereafter until the respective
obligation is satisfied, the holder of the Preferred Stock can either (i)
require further cumulative 2.5% discounts to continue or (ii) require the
Company to pay to it a cash payment of 2.5% of the aggregate stated value of the
Preferred Stock. (See "DESCRIPTION OF BUSINESS; RECENT DEVELOPMENT OF BUSINESS")
No public market exists, or is expected to exist, for these shares
of Preferred Stock.
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 August 31,1998 and for the period from Inception (May 17, 1996) to
December 31, 1996, the year ended December 31, 1997 and for the period ended
August 31, 1998, 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.
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.
23
<PAGE>
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 in a reverse merger, which, as the surviving corporation, changed
its name to Planet Entertainment Corporation. In October 1998, subsequent to its
acquisition of NEOS, the Company changed its fiscal year to end August 31.
24
<PAGE>
DESCRIPTION OF BUSINESS
The Company is currently involved in various areas of the recorded
music industry. The Company's principal business, primarily through its newly
acquired wholly owned subsidiary NEOS, is the wholesale distribution of
pre-recorded music in the form of Compact Diskettes ("CD's"), cassette tapes,
and other entertainment related products such as video tapes, Digital Video
Diskettes ("DVD's"), and to a much lesser extent music or entertainment related
apparel, such as t-shirts. The Company's business activities also include the
acquisition, licensing, production, marketing and distribution of high quality
recorded music. Through NEOS, the Company distributes approximately 130,000
front end titles of pre-recorded music to independent record stores, college
book stores and mass merchants. In addition, through its recording studio, 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 exclusive and non-exclusive 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 market them directly through NEOS or other distributors, 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 "DESCRIPTION OF BUSINESS; RECENT DEVELOPMENT OF BUSINESS").
To date, however, prior to the Company's acquisition of NEOS, substantially all
the Company's revenues had been derived from studio rental sales and licensing
royalties and not from the licensing and sale of the Company's compilation CDs.
(See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS"). In September 1998, the Company acquired all of the issued and
outstanding capital stock of NEOS which employs approximately 200 individuals
and 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 strategy is to permit the sale of
the Company's products and other "front line" titles over the Internet and to
serve as its own fulfillment center. The Company's strategy is to distribute
compilation CDs from its own proprietary catalogue through NEOS. Currently, NEOS
purchases the pre-recorded music from certain major record companies and other
distributors for sale at approximately 84% of its resale price to its customers.
The Company expects to also supply compilation CDs from the Company's
proprietary catalogue of existing master recordings through NEOS, at a
significantly lower cost, or approximately 50% of their resale value, to NEOS,
with the intent to improve NEOS' gross profit margins and to generate increased
revenues for the Company.
25
<PAGE>
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 and video tapes, from various suppliers and
distributors of pre-recorded music and entertainment related products from its
existing catalog of approximately 15,000 pre-recorded musical master recordings.
From its proprietary catalogue of 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. In addition to the approximate 130,000 front
end titles of pre-recorded music which the Company distributes through its NEOS
subsidiary, 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.
ACQUISITION OF MASTER RECORDINGS. In June 1996, as a result of the
Company's acquisition of Maestro Holding Corporation ("Maestro"), the Company
acquired certain exclusive and non-exclusive 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 exclusive and non-exclusive
rights associated with the exploitation of approximately 10,000 additional
master recordings. The Company has recorded the 5,000 master recordings
purchased from Maestro on its books as having a value of approximately
$9,200,000 and its rights to 10,000 additional master recordings purchased from
J. Jake, Inc., Music Marketeers, Inc., and Gulf Coast Music, L.L.C. as having a
value of approximately $4,600,000.
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 non-exclusive master catalogue
include Louis Armstrong, Tony Bennett, George Benson, Glen Campbell, Nat King
Cole, Bing Crosby, Sammy Davis, Jr., Fats Domino, Duke Ellington, Ella
Fitzgerald, Marvin Gaye, George Gershwin, Dizzy Gillespie, Bill Haley's Comets,
Billie Holliday, John Lee Hooker, Lena Horne, The Ink Spots, Jackson Five, Al
Jolson, Quincy Jones, Frankie Lane, Glenn Miller, Willie Nelson, Charlie Parker,
Dolly Parton, Neil Sedaka, Pete Segar, Sisters Sledge, Steely Dan, Ike & Tina
Turner, The Tokens, The Crystals, The Tramps and Randy & the Rainbows.
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,
Carlton Burgess and Melvin Davis. Other artists presently under contract with
the Company include Nino Rossano (an Italian opera and classical singer), the
Crystals, the Tramps, 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. In addition to the 130,000 front end
titles distributed by its NEOS subsidiary, 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
26
<PAGE>
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 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, 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 Interactive Media, a division of Nippon
Columbia, Ltd.
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 a joint venture agreement with New
Millennium Communications concerning the distribution of the Company's products
in Europe. (See "DESCRIPTION OF BUSINESS; RECENT DEVELOPMENT OF BUSINESS").
In September 1998, the Company acquired all of the issued and
outstanding capital stock of NEOS in exchange for $3,000,000, and options to
acquire 250,000 shares of the Company's common stock over a period of two years
at an exercise price of $5.25 per share NEOS employs approximately 200
individuals, and is principally engaged in the wholesale 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. (See "RISK FACTORS; LACK OF SUFFICIENT
CAPITAL RESOURCES.")
27
<PAGE>
NEOS was formed in 1983 by Louis J. DelSignore, who, prior to
the Company's acquisition of NEOS in September 1998, was its sole shareholder.
NEOS is principally engaged in the wholesale distribution of pre-recorded music
which NEOS purchases from certain major record companies and other distributors.
Approximately sixty percent (60%) of NEOS's net sales are derived from its
"one-stop" division, and approximately forty percent (40%) of its net sales are
derived from its "rack-job" division. Through its "one-stop" division, NEOS
offers and sells approximately 130,000 front end titles or Shelf Keeping Units
("SKUs") of popular recorded music to approximately 750 customers, many of which
are independent music stores or retailers. Through its "rack-job" division,
Summit Entertainment, NEOS offers for sale approximately 130,000 front end
titles of popular recorded music through racks or kiosks located in certain mass
merchandise retailers and fifty college campuses nationwide.
RECENT DEVELOPMENT OF BUSINESS. In June, 1996 the Company acquired,
under the "purchase" method of accounting all of the outstanding capital stock
of Maestro Holding Corporation ("Maestro") for consideration of 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 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 "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS").
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
Venneri, is a shareholder of MMIC, and Richard Bluestine, the Company's Chief
Financial Officer and a former director of the Company, is a shareholder of
MMIC, and from June 1995 through May 1997, was an officer and director of MMIC.
In 1997, the Company recorded approximately $204,362 in revenues from MMIC, of
which amount $192,042 remains uncollected as of August 31, 1998. The Company
does not intend to engage in any business with MMIC in the future. (See "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS").
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 the Company's Common Stock under the
"purchase" 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. In 1997, the Company recorded approximately $49,883 in
studio sales and product sales from its HGR subsidiary, $51,002 for the eight
months ended August 31, 1998.
In November 1996, the Company agreed to acquire certain studio assets
and rights associated with 10,000 master recordings from Music Marketeers,
Inc.("Music Marketeers") and J. Jake, Inc. ("J. Jake") in exchange for 2,000,000
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shares of the Company's 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 and Music Marketeers 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. Subsequently, in November 1996, an amended
agreement was entered into between the Company and J. Jake and Music Marketeers
whereby 500,000 of the 2,000,000 shares of stock previously transferred to J.
Jake and Music Marketeers were returned to the Company and the Company was
released from its obligation to purchase certain studio assets. In 1997, Music
Marketeers' rights and obligations under this agreement with the Company were
assigned to Gulf Coast Music, L.L.C. ("Gulf Coast"). Currently, of the 10,000
masters acquired by the Company, 2,500 were transferred directly from J. Jake
free and clear of encumbrances or disputes. The remaining 7,500 are to be
acquired from Gulf Coast. Gulf Coast is in the process of clarifying its rights
to the 11,500 songs in its catalogue as part of its Chapter 11 Reorganization
Plan. Currently, the rights to 5,900 have been clarified as being free of
dispute or encumbrances and as of October 30, 1998, approximately 5,000
additional masters were in the process of resolution through the Bankruptcy
proceeding and negotiations relating thereto. In the opinion of counsel for Gulf
Coast, it is expected that approximately 75% or 4,200 of those disputed masters
will ultimately be resolved in favor of Gulf Coast. The Company is not a party
to these Court proceedings, however, the Company has entered into a separate
agreement with Gulf Coast wherein Gulf Coast agreed that to the extent that any
of the 7,500 masters to be delivered to the Company are not free of dispute by
December 15, 1998, replacement unencumbered and undisputed master recordings
will be delivered of substantially the same quality, appeal and commercial value
acceptable to the Company. Further, it was agreed that J. Jake and Gulf Coast
would return to the Company an aggregate of 1,400,000 shares of the Company's
Common Stock and forgive the outstanding principal portion of a $1,250,000
promissory note (the "Promissory Note") together with accrued interest in
exchange for approximately $175,000 in cash and short term notes totaling
approximately $2,850,000, (the "Gulf Coast Note"). If the Company fails to pay
$2,550,000, the remaining balance on the Gulf Coast Note, by December 15, 1998,
according to the terms of the agreement, the Company will lose its right to
acquire 694,000 of the 1,400,000 shares, and would be bound by the original
terms of the Promissory Note under which there remains outstanding $750,000 in
principal, with interest and principal due and payable over the next three
years. (See "RISK FACTORS; DISPUTED INTELLECTUAL PROPERTY RIGHTS" and "RISK
FACTORS; 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 Venneri, 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,
this amount was 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
no assurances can be given that it will be able to collect any revenues in the
future. The Company does not expect to receive any additional revenue from these
agreements.
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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 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. During the eight month period ended August 29, 1998, the
Company recorded studio sales, including rentals of approximately $35,451 (See
"RECENT SALES OF UNREGISTERED SECURITIES").
On April 22, 1997, the Company entered into a non-exclusive
licensing agreement with Sun Entertainment Corporation of Nashville, Tennessee
pursuant to which the Company obtained non-exclusive rights to 7,500 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. It is unknown to the Company, if any other entity or entities have been
granted non-exclusive rights to these recordings, and upon what terms, if any,
such non-exclusive rights might be available. To date, the Company has not
attempted to exploit these master recordings; has not received any royalties;
has not recognized any revenue as a result of this agreement; and is unable to
predict if and when the Company will earn revenue 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 Venneri, is a shareholder of
MMIC, and Richard Bluestine, the Company's Chief Financial Officer and a former
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 TRANSACTIONS".)
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 compilation CDs to NCC for distribution into the above markets
pursuant to the agreement, and expects to earn revenues pursuant to this
agreement in 1999.
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 revenue from catalogue sales, after
costs, will be divided on a fifty%-fifty%, equal basis. To date, the Company has
received no royalties, and has recognized no revenue or income as a result of
this joint venture. In 1999, the Company expects to earn revenue pursuant to its
agreement with Monaco Records.
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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 first quarter of fiscal 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 last quarter of 1998. To
date, however, the Company has received no royalties, and has recognized no
revenue or income as a result of this agreement. The Company expects to earn
revenues as a result of this agreement during the first half of fiscal 1999.
In May 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 (the "Initial Conversion
Price"), or (b) 78% (the "Discount Rate") multiplied by the average of the five
lowest per share market prices of the Company's Common Stock during ten trading
days immediately preceding the 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 an identical term of five
years from May 1998. As a result of this transaction, the Company received net
proceeds of approximately $4,475,000. Under the terms of the Registration Rights
Agreement, the Company is required to file a Registration Statement for 200% of
the Common Stock issuable upon conversion of the Preferred Stock and payments of
dividends thereunder, along with an additional 225,000 shares of Common Stock
underlying the warrants, within 30 days of May 31, 1998 (the "Closing Date"),
and to have such Registration Statement declared effective within 95 days from
the Closing Date.
Pursuant to the Company's Amended and Restated Articles of
Incorporation governing the Preferred Stock (the "Terms"), upon the Company's
failure to satisfy certain obligations, each of the Initial Conversion Price and
the Discount Rate will be reduced by 2.5% on the date relating to the failure to
satisfy a particular obligation thereunder (the "Trigger Date"). If such failure
to satisfy the obligation has not yet been cured by the Company by the first
monthly anniversary of the Trigger Date, or waived by the holder of the
Preferred Stock, each of the Initial Conversion Price and the Discount Rate will
be further reduced by an additional 2.5% on such first monthly anniversary of
the Trigger Date. On the second monthly anniversary of the Trigger Date, if such
failure to satisfy the obligation has not, at such time, been cured by the
Company and on each monthly anniversary thereafter until the respective
obligation is satisfied, the holder of the Preferred Stock can either (i)
require further cumulative 2.5% discounts to continue or (ii) require the
Company to pay to it a cash payment of 2.5% of the aggregate stated value of the
Preferred Stock.
Pursuant to the Terms, the Company's failure to have the
registration statement declared effective by the Securities and Exchange
Commission by September 4, 1998 resulted in (i) a reduction, on September 4,
1998, of the Initial Conversion Price to $8.663 and of the Discount Rate to
75.5%, (ii) a further reduction, on October 4, 1998, of the Initial Conversion
Price to $8.441 and of the Discount Rate to 73% and (iii) on November 4, 1998, a
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choice to JNC to either (x) reduce the Initial Conversion Price to $8.219 and
the Discount Rate to 70.5% or (y) receive $125,000 in cash from the Company. As
of the date hereof, JNC has not yet notified the Company as to any decision made
in this regard. Pursuant to the Terms, the Preferred Stockholder is prohibited
from converting the Preferred Stock (or receiving shares of Common Stock as
payment of dividends thereunder, to the extent that such conversion would result
in the Preferred Stockholder owning more than 4.999% of the outstanding Common
Stock of the Company following such conversion. Such restriction is waivable by
the Preferred Stockholder upon not less than 75 days notice to the Company. (See
"SELLING STOCKHOLDERS")
In September, 1998, the Company purchased 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
$375,000 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. On September 29, 1998, the Company publicly announced
the acquisition of NEOS, and in connection with such announcement made certain
forward looking statements regarding NEOS's expected revenue and revenue growth
in fiscal 1998. The Company believes that such forward looking statements are
"forward looking statements" as that term is defined under Section 21E and 27D
of the Exchange Act. However, the Company is not eligible to rely on the safe
harbor provisions provided for therein because the Company is not a reporting
company under Sections 13 (a) and 15(d) of the Exchange Act and there is no
assurance that such projections will be realized.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR
THE EIGHT MONTH PERIOD ENDED AUGUST 31, 1998 VERSUS
THE YEAR ENDED DECEMBER 31, 1997
In October 1998, subsequent to its acquisition of NEOS, the Company
changed its fiscal year to end August 31.
NET SALES. For the eight month period ended August 31, 1998, the
Company recorded net revenue of $109,495, which was comprised of $51,002 in
products sales, $23,042 in royalty income, and $35,451 in studio sales, as
compared to $293,428 in revenue for the year ended December 31, 1997, which was
comprised of $49,883 in product sales, $3,775 in royalty income and $239,779 in
studio sales.
COST OF SALES. For the eight month period ended August 31, 1998,
cost of sales was $11,139 or 10% of net sales. For the year ended December 31,
1997, cost of sales was $19,052 or 6% of net sales.
OPERATING EXPENSES. For the eight month period ended August 31,
1998, selling general and administrative expenses were $659,348 or 602% of net
sales. For the year ended December 31, 1997, selling, general and administrative
expenses were $794,314 or 270% of net sales.
For the eight month period ended August 31, 1998, the Company
recorded total expenses of $802,380 and a net loss of $645,464. For the year
ended December 31, 1997, the Company recorded total expenses of $1,103,340 and a
net loss of $809,912.
Net cash used in operating activities totaled $310,592 for the eight
month period ended August 31, 1998 compared to net cash used in operating
activities of $295,791 for the year ended December 31, 1997. Net cash used in
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operating activities for the year ended December 31, 1997 was attributable to a
net loss of $645,464 and increases in prepaid expenses of $127,790, and
increases of $80,948 in accounts payable and accrued expenses, $98,134 increase
in accrued interest on related party debt and $33,758 in depreciation and
amortization.
Net cash used in investing activities totaled $225,000 for the eight
month period ended August 31, 1998. Net cash from financing activities totaled
$4,382,084 for the eight month period ended August 31, 1998 compared to $302,557
for the year ended December 31, 1997. The increase was principally attributable
to $4,475,000 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 August 31, 1998, the Company had $3,850,162 of cash and cash
equivalents.
Accounts receivable as of August 31, 1998 totaled approximately
$210,000, 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 shareholder, Joseph Venneri, is also the former President
and is a shareholder and a director of the Company. In addition, a former
officer and current shareholder of MMIC, Richard Bluestine, is also an officer
and a former director of the Company. No reserve against the collection of these
funds has been established. (See "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS").
As of August 31, 1998, the Company had a net operating loss ("NOL")
carryforward of approximately $1,118,000, which will begin to expire in 2013.
The utilization of the NOL carryforward may be limited as there is no assurance
as to future taxable income.
NORTHEAST ONE STOP, INC.
YEAR ENDED AUGUST 29, 1998 VERSUS
YEAR ENDED AUGUST 30, 1997
As of September 1, 1998, the Company acquired all the issued and
outstanding capital stock of Northeast One Stop, Inc. ("NEOS") in consideration
for cash and short term notes totaling $3 million and options to purchase
225,000 shares of the Company's Common Stock at a price of $5.25 per share for a
term of two years. NEOS was established in 1983, and operates on a fiscal year
ending on the Saturday closest to the last day of August.
NEOS has five offices. One administrative headquarters and warehouse
located in Latham, New York, and four sales offices located in Grand Rapids,
Michigan, Philadelphia, Pennsylvania, Baltimore, Maryland and Burlington,
Vermont. NEOS' primary business is selling pre-recorded music, videos and
accessories to retailers throughout the United States. NEOS acquires most of its
products from the major music labels and the balance from small private labels.
In 1995, NEOS commenced its "rack jobbing" operations. In "rack
jobbing," the vendor assumes full responsibility for the customer's display,
stocking the display at the customer's location and making the day to day
decisions as to which inventory to deliver, return and present in the displays.
A rack jobber owns the display material or fixtures and is responsible for the
proper presentation of goods within the display. In essence, it is a turnkey
type of service to the customer whose only concern is recording sales and paying
for the material delivered. Prior to 1995, NEOS was principally a wholesaler of
pre-recorded music and entertainment products through its "one stop" division.
The "one stop" business primarily operates as a centralized order fulfillment
center for the small to medium sized retail stores, typically record stores,
that obtain a variety of recorded music and video. This segment of the business
supplies merchandise based on the orders placed by its customers. The customers
in this segment of the business are responsible for the selection of titles and
the decisions regarding the return of merchandise.
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According to the Record Industry Association of America's Recording
Industry Releases 1997 Manufacturers' Shipments and Value Report, CD album unit
shipments dropped 3.3% from 778.9 million in 1996 to 753.1 million in 1997.
Cassette unit shipments in total dropped 23.4% from 225.3 million in 1996.to
172.6 million in 1997. CD singles saw the largest growth percentage from 43.2
million units in 1996 to 66.7 million units in 1997, a 54.4% increase. CD albums
accounted for 81% of total value and 70.8% of total units shipped in 1997 in the
United States. Cassettes accounted for 12.4% of total value and 16.2% of total
shipments in 1997. For NEOS, CD album sales rose to approximately 80% of total
gross sales and approximately 55% of total units while cassettes declined to
16.4% of total gross sales and 19% of total unit sales in 1997.
Commencing in 1994, competition from large retailers began to
increase significantly, resulting in falling retail prices which adversely
affected the one stop customers of NEOS. Ultimately, several of NEOS' customers
discontinued their operations through sale or bankruptcy. Meanwhile, competition
from companies located on the west coast of the United States increased. These
west coast suppliers stepped up their activities in the northeast region of the
United States by using pricing advantages and utilizing special overnight
shipping. Since 1995, all or most of NEOS' growth in revenues are the result of
the increased revenue reported by its rack job division. In fiscal 1994, NEOS
recorded approximately $22,000,000 in revenue, and in fiscal 1995, NEOS reported
approximately $21,600,000 in revenue, which increased to approximately
$21,800,000 in 1996. In fiscal year ended August 30, 1997, NEOS recorded
approximately $23,300,000 in revenue, comprised of approximately $9,600,000 in
rack business and $13,700,000 in one stop business. During this three year
period from 1994 through 1997, NEOS' one stop business decreased by
approximately $8,300,000 or 37%. In fiscal year ended August 29, 1998, NEOS
recorded revenues of approximately $34,800,000, of which approximately 57% or
$20,000,000 was derived from its one stop business and approximately 43% or
$14,800,000 from its rack job business.
NORTHEAST ONE STOP, INC.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED AUGUST 29, 1998 VERSUS
FISCAL YEAR ENDED AUGUST 30, 1997
NET SALES. For the year ended August 29, 1998, NEOS recorded net
sales of approximately $34,800,000 representing an increase of approximately
$11,500,000 or 49% over net sales recorded in fiscal 1997. This increase in net
sales was primarily attributable to increases in the net sales of its one stop
and rack job business segments, which increased 51% and 47% respectively. NEOS
recognizes revenue for its one stop and rack job divisions at the time of
shipment of products to its customers. All of the NEOS' products are sold with a
limited right of return by the customer. NEOS does not accrue returns and
allowances, but instead reduces revenues by calculating actual returns. In
fiscal year ended August 29, 1998, total returns and allowances accounted for
15.6% of gross sales or $6,510,096, as compared with 17.1% of gross sales or
$4,873,250 in fiscal year ended August 30,1997. Returns for NEOS' rack job
division were $4,866,693 in fiscal 1998, or 24.8% of net sales, and were
$3,649,907 or 26.6% of net sales in fiscal 1997. Returns for NEOS' one stop
division were $1,643,403 in fiscal 1998, or 7.4% of net sales, and were $122,334
or 8.3% of net sales in fiscal 1997.
NEOS' results of operation are subject to seasonal variations. The
industry has historically experienced a decline in revenues and net income
during January and February. This decline is due primarily to the fact that
retailers purchase products from the Company prior to November 30 in
anticipation of holiday sales followed by higher than normal returns after the
holidays.
In fiscal 1998, approximately 34% of NEOS' sales or 95% of the net
sales of its rack job division were derived from one customer. In fiscal 1997,
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approximately 40% of NEOS' sales or 94% of the net sales of its rack job
division were derived from one customer. NEOS is highly dependent on both of
these customers. In fiscal 1998, the largest rack job customer received rebates
of approximately $416,003 or 3% of NEOS's net sales to that customer.
NEOS is highly dependent on six major record labels to supply its
products. These six vendors include EMD, Sony, Polygram, BMG, Universal and
Warner, and in the aggregate represented 89% and 86% of gross purchase activity
in fiscal year ended August 30, 1997 and August 29, 1998, respectively. NEOS
also receives advertising income from the major labels to reflect the logos of
the major labels in the catalogues and advertisements of NEOS. Advertising
income is recorded from vendor invoices as a credit balance item in cost of
goods sold, the purchase is reflected at the gross amount and accounts payable
for the net amount. For the fiscal years ended August 30, 1997 and August 29,
1998, NEOS reflected advertising income of approximately $687,000, and
$1,761,000, respectively. For the fiscal years ended August 30, 1997 and August
29, 1998, NEOS reflected advertising expenses as a part of cost of sales of
approximately $293,000, and $778,000, respectively.
COST OF SALES. In fiscal year ended August 29, 1998, NEOS's cost of
sales were $29,100,000 on net sales of approximately $34,800,000 compared to
$19,900,000 on net sales of $23,200,000 in fiscal year ended August 30, 1997. As
a percentage of net sales, NEOS' gross profit margin in fiscal year ended August
29, 1998 was approximately 16.2% as compared with approximately 14.5% in fiscal
year ended August 30, 1997. In fiscal year ended August 29, 1998, gross profit
increased by approximately $2,200,000 from $3,400,000 in fiscal year ended
August 30, 1997 to $5,600,000 in fiscal year ended August 29, 1998. This
increase is primarily attributable to the increase in sales from NEOS' rack
division.
OPERATING EXPENSES. In fiscal 1998, NEOS' total operating expenses
increased $1,400,000 from $3,500,000 in fiscal year ended August 30, 1997 to
$4,900,000 in fiscal year ended August 29, 1998. This increase was largely
attributable to the relocation of NEOS into a larger facility in fiscal 1997. In
fiscal year ended August 29, 1998, operating expenses were 14% of net sales as
compared to 15% of net sales in fiscal year ended August 30, 1997. Selling,
general and administrative expenses increased approximately $1,400,000 from
$2,800,000 in fiscal year ended August 30, 1997 to $4,200,000 in fiscal year
ended August 29, 1998. Selling general and administrative expenses accounted for
approximately 11.9% of net sales in fiscal year ended August 29, 1998 as
compared with approximately 12% of net sales in fiscal year ended August 30,
1997.
INTEREST EXPENSE. Interest expense increased by approximately 33% or
$107,000 to $430,687 in fiscal year ended August 29, 1998 from $323,888 in
fiscal year ended August 30, 1997 largely as a result of increased borrowing by
NEOS under its revolving credit line with Congress Financial Corporation
("CFC")but decreased as a percentage of net sales from 1.39% in fiscal year
ended August 30,1997 to 1.25% in fiscal year ended August 29, 1998.
NET INCOME. In fiscal year ended August 29, 1998, net income before
taxes rose to approximately $751,040 as compared with a net loss before taxes of
$139,004 in fiscal year ended August 30, 1997. In fiscal year ended August 29,
1998, NEOS' effective tax rate was approximately 37%. In fiscal year ended
August 29, 1998, NEOS recorded after tax net income of approximately $475,993 or
1.3% of net sales as compared to a net loss of $135,176 in fiscal year ended
August 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of August 29, 1998, NEOS recorded cash and cash equivalents of
approximately $522,584 as compared with $377,936 as of August 30, 1997. Net cash
used in operating activities totaled $1,464,156 for the fiscal year ended August
29, 1998 compared to net cash provided from operating activities of $343,289 for
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the fiscal year ended August 30, 1997. Net cash used in operating activities for
the year ended August 29, 1998 was attributable to net income of $475,933 and
increases in accounts receivable of $1,750,708, prepaid expenses of $29,415, and
inventory of $2,445,746 partially offset by increases of $1,842,640 in accounts
payable and accrued expenses and $266,291 in depreciation and amortization.
Net cash used by investing activities totaled $3,246 for the fiscal
year ended August 29, 1998. Net cash from financing activities totaled
$1,612,050 for the fiscal year ended August 29, 1998 compared to $344,253 in net
cash used by financing activities for the fiscal year ended August 30, 1997. The
increase was principally attributable to $1,878,998 in proceeds from advances
from CFC in connection with NEOS' revolving line of credit.
As of August 29, 1998, NEOS had cash of approximately $522,584
compared to $377,936 as of August 30, 1997.
As of August 29, 1998, NEOS reported current assets of approximately
$13,100,000 and current liabilities of approximately $13,000,000 or working
capital of approximately $100,000. According to NEOS' revolving credit facility
with CFC, NEOS has been required to maintain working capital of no less than
$2,500,000, excluding its borrowing from CFC, and unadjusted net worth of not
less than $600,000. As of August 29, 1998, NEOS' total working capital exclusive
of its borrowings from CFC was $4,238,723. As of August 29, 1998 and August 30,
1997, NEOS' total shareholders' equity was a $367,326 surplus and a $108,607
deficit, respectively.
As of August 29, 1998, NEOS recorded accounts receivable of
approximately $5,500,000, net of allowances for doubtful accounts of $77,488, or
1.4%, as compared with net accounts receivable of $3,800,000, net of allowances
for doubtful accounts of $315,000, or 8.2%, as of August 30, 1997. As of August
29, 1998, there were 713 accounts receivable outstanding, representing
approximately 58.2 days sales outstanding. As of August 30, 1997, there were 505
accounts receivable outstanding, representing approximately 60 days sales
outstanding. As of August 29, 1998, accounts receivable represented 39.8% of
total assets versus 39.1% of total assets as of August 30, 1997. As of August
29, 1998, one account in the amount of $3,200,000 represented approximately 57%
of NEOS' total outstanding accounts receivable. Of NEOS' 713 outstanding
accounts 31 accounts with a net credit balance totaling ($4,016) have shown no
activity over the last 90 days. Management provides for an allowance based on a
review of specific accounts and a determination of collectability.
As of August 29, 1998, NEOS recorded accounts receivable from a
related party, More Music Plus, a corporation owned by NEOS' former sole
shareholder, Louis J. DelSignore in the amount of approximately $95,843.
Management has not established a reserve with regard to this amount since
management believes that it may recover this amount from the liquidation of the
inventory of More Music Plus. During fiscal year 1998, NEOS issued special
rebates to More Music Plus of approximately $150,000.
As of August 29, 1998, NEOS recorded inventory of $6,800,000 as
compared with an inventory of $4,400,000 as of August 30, 1997. On net sales of
approximately $34,800,000 in fiscal year ended August 29, 1998 and $23,300,000
in fiscal year ended August 30, 1997, NEOS' inventory turn over rate was 5.1
times as of August 29, 1998 as compared to 5.3 as of August 30, 1997.
Substantially all the products held by NEOS in inventory are associated with a
limited right of return by NEOS. NEOS accounts for its inventory on a
first-in-first-out basis, and NEOS has not created a reserve for obsolete,
impaired or damaged inventory.
As of August 29, 1998, NEOS recorded other assets of approximately
$43,000, consisting primarily of a note receivable in the amount of $30,853, as
compared with other assets of approximately $83,122 as of August 30, 1997.
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<PAGE>
As of August 29, 1998, NEOS recorded property, plant and equipment
of approximately $2,500,000, less accumulated depreciation and amortization of
approximately $1,700,000 as compared with property, plant and equipment of
approximately $2,300,000, less accumulated depreciation and amortization of
$1,500,000 as of August 30, 1997. As of August 29, 1998, NEOS had deployed rack
job fixtures in the gross amount of $468,825 as compared with rack job fixtures
of approximately $403,600 as of August 30, 1997.
As of August 29, 1998, NEOS had approximately $4,200,000 outstanding
under a $6,000,000 revolving line of credit with CFC bearing interest at prime
plus 1.5%. Advances under this line of credit are made on the basis of eligible
accounts receivable and inventory defined in the agreement. Under the terms of
the agreement, NEOS is required to comply with certain covenants including that
its working capital, exclusive of its borrowing from CFC, not fall below
$2,500,000 and an adjusted net worth of not less than $600,000. As of August 29,
1998, NEOS' working capital, exclusive of its borrowings from CFC was
approximately $4,200,000, and its shareholder equity was $367,326. In fiscal
year ended August 30, 1997 and fiscal year ended August 29, 1998, NEOS was
permitted by CFC to increase its cash balances and other current assets by
obtaining additional advances on its credit line and long term debt to increase
NEOS' working capital. NEOS also has three notes payable to a bank bearing
interest from 13% to 17% due April 1999 and August 2000. These notes are secured
by equipment and total approximately $36,551, the current portion of which is
approximately $24,551.
As of August 29, 1998, NEOS recorded accounts payable of
approximately $7,800,000, or 55.8% of liabilities and stockholders' equity, as
compared to total accounts payable of approximately $6,200,000, or 64% of
liabilities and stockholders' deficiency as of August 30, 1997. As of August 29,
1998, accounts payable principally consisted of amounts due to the six major
record labels in the amount of $6,300,000.
As of August 29, 1998, NEOS recorded $475,567 due to customers, as
compared to $491,847 due customers as of August 30,1997. This amount due to
customers represents rebates based on net sales.
As of August 29, 1998, NEOS recorded accrued expenses and other
current liabilities in the amount of approximately $389,599 as compared with
accrued expenses and other current liabilities of approximately $84,046 as of
August 30, 1997. The increase in these amounts is primarily attributable to
deferred revenue related to credits given for advertising not yet utilized.
As of August 29, 1998, NEOS owed $374,000 to its principal
stockholder and approximately $75,000 to one of its officers and employees.
These notes bear interest at the annual rate of 9% and 11%, respectively.
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 Venneri, 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
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<PAGE>
may adversely effect 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 Company to produce enhanced musical compositions and new master
recordings to be distributed by the Company and others.
Through its NEOS subsidiary, the Company is a party to a
year-to-year lease, relating to approximately 1,000 sq. ft. in Philadelphia,
Pennsylvania at the rate of $655 per month, is party to a two year lease in
Grand Rapids, Michigan relating to approximately 2,500 sq. ft. at the rate of
$1,305 per month, and is party to a five year lease in Latham, New York relating
to approximately 41,000 sq. ft. at the rate of $12,000 per month. With the
exception of the Latham, facility, these leases are with unrelated parties. The
Latham facility is owned by a corporation owned and controlled by Louis J.
DelSignore an officer and director of the Company, and former sole stockholder
of NEOS. ("CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS")
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since June 1996, the Company has been granted the use of certain
office and production space located in Jackson, New Jersey from Joseph Venneri,
one of its officers, 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, officers and directors, for the rent of office
space in Middletown, New Jersey in the amount of $1,000 per month for a term of
three years. The Company, through its NEOS subsidiary, also leases approximately
41,000 sq. ft. from a company owned and controlled by Louis J. DelSignore, an
officer and director of the Company for a term of five years at the rate of
$12,000 per month.
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 $270,884 due and owing
Messrs. Arnone and Giakas. During 1996 and 1997 the Company borrowed $100,000,
$156,234 and $4,650, 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.
Because of the relationship between officers and directors of the Company and
former officers, directors and beneficial owners of Walextin, this transaction
with Walextin presents a conflict of interest to the Company's officers and
directors.
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. One of the Company's officers,
directors and principal shareholders, Joseph Venneri, is also a
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<PAGE>
shareholder of MMIC, and Richard Bluestine, the Company's Chief Financial
Officer and a former 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. Because of the relationship between officers and directors of
the Company and former officers, directors and beneficial owners of MMIC, these
transactions with MMIC may present a conflict of interest to the Company. To
resolve any apparent conflict of interest, Messrs. Bluestine and Venneri have
not voted and will abstain from voting on any matter involving MMIC before the
Company's Board of Directors. Further, the Company does not intend to engage in
any business with MMIC in the future.
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.
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 Common Stock are as follows:
High Low Close
1996
December 31, 1996* $ 3.75 $ 1.00 $ 3.75
1997
March 31, 1997 10.00 3.62 8.875
June 30, 1997 8.875 7.62 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
September 30,1998 $ 5.50 $ 5.25 5.437
- -----------------
*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
39
<PAGE>
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 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.
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 eight months ended
August 31, 1998, nor has any compensation been paid to any officer or director
of the Company with the exception of Joseph Venneri. 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> <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, Chief Financial 1997 $ 18,750 $ 537,519 - 0 - $ 556,269
Officer, Chairman of 1998 - 0 - - 0 - (2) - 0 - - 0 -
Audit Committee
Louis J. DelSignore Director 1998 $145,000 - 0 - (3) - 0 - $ 145,000
Ron Nicks Director 1998 $125,000 - 0- (4) - 0 - $ 125,000
</TABLE>
40
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- -----------------
(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 Common Stock was $5.25 per share.
(2) The Company has not entered into an executive compensation agreement with
Mr. Bluestine as of the date hereof. 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 Common Stock at the time of Closing over a
period of two years as granted to Mr. DelSignore in connection with the
acquisition of Northeast One Stop, Inc. At the time these options were
granted, the price of the Company's Common Stock was $5.25 per share.
(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, of which 75,000 vested upon
execution of their executive compensation agreements 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 Common 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 and the
eight month period ended August 31, 1998.
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. 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 per share 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 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 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 Common Stock 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
41
<PAGE>
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
in control of the Company, 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 the Black-Scholes Model. 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 Common Stock 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 in control of the Company, 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
annual compensation in the amount of $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.
As of the date hereof 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 "RISK FACTORS; DEPENDENCE ON MANAGEMENT AND KEY
PERSONNEL").
In connection with the Company's acquisition of Northeast One Stop,
Inc., the Company secured 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. In addition, the Company has secured an employment and
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 18, 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 November 15, 1998, the Company and its subsidiaries, including
NEOS, had a total of 206 employees, all of whom were full-time employees. 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.
FINANCIAL STATEMENTS
Financial Statements: The financial statements filed herewith are
set forth in the Index to Financial Statements.
42
<PAGE>
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
AJ. Robbins, P.C. 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, P.C. voluntarily and without any
disagreement with the Company's prior accountant.
43
<PAGE>
TABLE OF CONTENTS
Summary of Prospectus
Risk Factors 8
Use of Proceeds 15
Determination of Offering Price 16
Dilution 16
Selling Stockholders 17
Plan of Distribution 18
Legal Proceedings 19
Directors, Executive Officers, Promoters and
Control Persons 19
Security Ownership of Certain Beneficial
Owners and Management 21
Description of Securities 22
Interest of Named Experts and Counsel 23
Disclosure of Commission Position on Indemnification
for Securities Act Liabilities 23
Organization Within the Last Five Years 24
Description of Business 25
Management's Discussion and Analysis of Financial
Condition and Results of Operations 32
Description of Property 37
Certain Relationships and Related Transactions 38
Market Price of Common Equity and Related
Stockholder Matters 39
Executive Compensation 40
Financial Statements 42
Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure 43
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.
44
<PAGE>
================================================================================
Prospectus
[Logo]
PLANET ENTERTAINMENT CORPORATION
1,441,336 SHARES
COMMON STOCK
$.001 PAR VALUE
================================================================================
INDEX TO FINANCIAL STATEMENTS
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
PROFORMA CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Financial Statements:
Proforma Explanatory Headnote F-2
For the Year Ended and as of August 31, 1998 (Unaudited)
Unaudited Proforma Consolidated Balance Sheet F-3
Unaudited Proforma Consolidated Statement of Operations F-5
Notes to Unaudited Proforma Consolidated Financial Statements F-6
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
Report of Independent Certified Public Accountants F-8
Financial Statements:
Consolidated Balance Sheets F-9
Consolidated Statements of Operations F-10
Consolidated Statement of Stockholders' Equity F-11
Consolidated Statements of Cash Flows F-13
Notes to Consolidated Financial Statements F-14
NORTHEAST ONE STOP, INC.
Report of Independent Certified Public Accountants F-31
Financial Statements:
Balance Sheets F-32
Statements of Operations F-33
Statement of Stockholder's Equity (Deficiency) F-34
Statements of Cash Flows F-35
Notes to Financial Statements F-36
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
PROFORMA EXPLANATORY HEADNOTE
=================================================
The following unaudited proforma consolidated financial statements give effect
to the 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, and the historical financial statements of NEOS and notes
thereto, which are included in this registration statement. 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 August 31, 1998. The proforma consolidated statements of operations for the
year ended August 31, 1998 include the operating results of the Company and NEOS
for such period.
Effective September 1, 1998, the Company 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 (September 25, 1998), 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 allocated as follows:
Cash $ 522,584
Inventory 6,848,567
Accounts receivable 5,646,804
Property and equipment 784,376
Other assets 141,799
Accounts payable and accrued expenses (8,180,609)
Notes payable (4,655,947)
Capitalized lease obligations (234,081)
Other liabilities (506,167)
Goodwill 2,966,424
Options granted, NEOS stockholder -
additional paid-in capital 814,000
-----------------
Total purchase price (including acquisition
costs of $1,147,750) 4,147,750
Less:
Cash paid at signing of letter of intent (100,000)
Notes payable (750,000)
Options granted, acquisition costs -
additional paid-in capital (1,147,750)
-----------------
Cash paid at closing $ 2,150,000
=================
F-2
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
UNAUDITED PROFORMA CONSOLIDATED BALANCE SHEET
===============================================
ASSETS
------
<TABLE>
<CAPTION>
Planet
Entertainment
Corporation and Northeast
Subsidiaries One Stop, Inc. Proforma Consolidated
August 31, 1998 August 29, 1998 Adjustments Proforma
--------------- --------------- ------------------ --------------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash $ 3,850,162 $ 522,584 $ (2,150,000) (2) $ 2,222,746
Trade accounts receivable, net 17,959 5,550,961 - 5,568,920
Accounts and notes receivable -
related parties 192,042 95,843 - 287,885
Inventories - 6,848,567 - 6,848,567
Prepaid expenses and other
current assets 246,863 31,698 - 278,561
Deferred income taxes - 56,000 - 56,000
Current maturities of notes
receivable - 10,371 - 10,371
Escrow deposit 225,000 - (100,000)(2) 125,000
--------------- --------------- --------------- -------------
Total Current Assets 4,532,026 13,116,024 (2,250,000) 15,398,050
--------------- --------------- --------------- -------------
PROPERTY, PLANT AND
EQUIPMENT, net 172,410 784,376 - 956,786
---------------- --------------- --------------- -------------
-
OTHER ASSETS, net
Record masters 13,800,000 - - 13,800,000
Goodwill, net 70,839 - 2,966,424 (5) 3,037,263
Publishing rights 880 - - 880
Organization costs, net 42,495 - - 42,495
Security deposits - 8,171 - 8,171
Financing costs, net - 4,706 - 4,706
Notes receivable less current
maturities - 30,853 - 30,853
--------------- --------------- --------------- ------------
Total Other Assets 13,914,214 43,730 2,966,424 16,924,368
--------------- --------------- --------------- ------------
$ 18,618,650 $ 13,944,130 $ 716,424 $ 33,279,204
=============== =============== ================ ============
SEE ACCOMPANYING NOTES TO UNAUDITED PROFORMA CONSOLIDATED FINANCIAL STATEMENTS AND EXPLANATORY HEADNOTE
F-3
</TABLE>
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
UNAUDITED PROFORMA CONSOLIDATED BALANCE SHEET
===============================================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
Planet
Entertainment
Corporation and Northeast
Subsidiaries One Stop, Inc. Proforma Consolidated
August 31, 1998 August 29, 1998 Adjustments Proforma
----------------- ----------------- ------------------ --------------
<S> <C> <C> <C> <C>
CURRENT LIABILITIES:
Deferred revenue $ 123,524 $ - $ - $ 123,524
Note payable - line of credit - 4,170,396 - 4,170,396
Notes payable - related party 150,000 - - 150,000
Accounts payable and accrued
expenses 329,108 8,180,609 - 8,509,717
Accrued interest - related
party 275,618 - - 275,618
Due to stockholders 270,884 - - 270,884
Current portion of long-term
debt - related parties 250,000 - - 250,000
Current portion of obligation
under capital lease - 196,574 - 196,574
Notes payable, current portion - 24,551 - 24,551
Purchase obligation - - 750,000 4 750,000
Due to customer - 475,567 - 475,567
------------- ------------- ------------- --------------
Total Current Liabilities 1,399,134 13,047,697 750,000 15,196,831
------------- ------------- ------------- --------------
LONG-TERM LIABILITIES:
Deferred taxes 4,600,000 30,600 - 4,630,600
Due to stockholder - 374,000 - 374,000
Long-term debt - related
parties, net of
current portion 750,000 - - 750,000
Obligation under capital
lease, net of current portion - 37,507 - 37,507
Notes payable non-current
portion - 12,000 - 12,000
Due to employee - 75,000 - 75,000
------------- ------------- ------------- --------------
Total Long-Term Liabilities 5,350,000 529,107 - 5,879,107
------------- ------------- ------------- --------------
Total Liabilities 6,749,134 13,576,804 750,000 21,075,938
------------- ------------- ------------- --------------
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) (1,507,823) 357,326 (357,326) (1,507,823)
------------- ------------- ------------- --------------
Total Stockholders' Equity 11,869,516 367,326 (33,576) 12,203,266
------------- ------------- ------------- --------------
$ 18,618,650 $ 13,944,130 $ 716,424 $ 33,279,204
=============== =============== =============== ==============
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED PROFORMA CONSOLIDATED FINANCIAL
STATEMENTS AND EXPLANATORY HEADNOTE
F-4
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
UNAUDITED PROFORMA CONSOLIDATED STATEMENT OF OPERATIONS
========================================================
<TABLE>
<CAPTION>
Planet
Entertainment
Corporation and Northeast
Subsidiaries One Stop, Inc.
For the Twelve For the Year
Months Ended Ended Proforma Consolidated
August 31, 1998 August 29, 1998 Adjustments Proforma
----------------- ----------------- ------------------ --------------
<S> <C> <C> <C> <C>
REVENUES:
Sales, net $ 44,035 $ 34,793,341 $ - $ 34,837,376
Royalty 26,817 - - 26,817
Studio 288,155 - - 288,155
------------------ ------------------ ------------------ ------------------
Total Revenues 359,007 34,793,341 - 35,152,348
------------------ ------------------ ------------------ ------------------
COSTS AND EXPENSES:
Cost of sales 18,247 29,152,959 - 29,171,206
Selling, general and
administrative 1,058,523 4,161,426 - 5,219,949
Depreciation and amortization 47,149 238,165 72,423 357,737
Interest expense - 430,687 - 430,687
Interest expense - related partly 154,098 - - 154,098
Bad debt expense - 38,106 - 38,106
Amortization of loan costs - 28,526 - 28,526
------------------ ------------------ ------------------ ------------------
Total Costs and Expenses 1,278,017 34,049,869 72,423 35,400,309
------------------ ------------------ ------------------ ------------------
INCOME (LOSS) FROM
OPERATIONS (919,010) 743,472 (72,423) (247,961)
------------------ ------------------ ------------------ ------------------
OTHER INCOME:
Dividend income 47,421 - - 47,421
Interest income - 2,289 - 2,289
Other - 5,279 - 5,279
------------------ ------------------ ------------------ ------------------
Total Other Income 47,421 7,568 - 54,989
------------------ ------------------ ------------------ ------------------
INCOME (LOSS)
BEFORE
PROVISION FOR
INCOME TAXES (871,589) 751,040 (72,423) (192,972)
PROVISION FOR INCOME TAXES - (275,107) (275,107) -
------------------ ------------------ ------------------ ------------------
NET INCOME (LOSS) $ (871,589) $ 475,933 $ 202,684 $ (192,972)
================== ================== ================== ==================
NET INCOME (LOSS) $ (871,589) $ 475,933 $ 202,684 $ (192,972)
LESS PREFERRED STOCK DIVIDENDS (87,500) - (262,500) (350,000)
------------------ ------------------ ------------------ ------------------
NET INCOME (LOSS)
ATTRIBUTABLE TO COMMON
STOCKHOLDERS $ (959,089) $ 475,933 $ (59,816) $ (542,972)
================== ================== ================= ================
NET (LOSS) PER COMMON SHARE
BASIC $ (.05)
================
Weighted average number of 11,436,595
common shares outstanding ================
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED PROFORMA CONSOLIDATED FINANCIAL
STATEMENTS AND EXPLANATORY HEADNOTE
F-5
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PROFORMA CONSOLIDATED FINANCIAL STATEMENTS
=============================================================
NOTE 1 - PROFORMA ADJUSTMENTS
The adjustments relating to the unaudited proforma consolidated statement of
operations are computed assuming the acquisition of Northeast One Stop, Inc.
("NEOS") was consummated at the beginning of the applicable period presented.
NOTE 2 - ACQUISITION OF SUBSIDIARY
The unaudited proforma consolidated balance sheet as of August 31, 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 unaudited proforma consolidated statement of operations for the twelve
months ended August 31, 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.
NOTE 5 - GOODWILL
Goodwill consists of the excess of the purchase price of NEOS over the estimated
fair values of the assets acquired and liabilities assumed, including the
issuance to two stockholders of the Company, 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. Goodwill is being
amortized over a 40 year period.
NOTE 6 - PLANET ENTERTAINMENT CORPORATION - CHANGE IN YEAR END
Planet Entertainment Corporation changed its fiscal year from December 31 to
August 31. For proforma purposes, the period from September 1 to December 31,
1997 has been added to the eight months ended August 31, 1998 to reflect a full
twelve months as follows:
F-6
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PROFORMA CONSOLIDATED FINANCIAL STATEMENTS
=============================================================
NOTE 6 - PLANET ENTERTAINMENT CORPORATION - CHANGE IN YEAR END (Continued)
<TABLE>
<CAPTION>
September 1, January 1,
to to
December 31, August 31,
1997 1998 Proforma
------------------ ----------------- -------------
<S> <C> <C> <C>
Revenues $ 249,512 $ 109,495 $ 359,007
Costs and expenses 475,637 802,380 1,278,017
------------------ ----------------- -----------------
Loss From Operations (226,125) (692,885) (919,010)
Other income - 47,421 47,421
------------------ ----------------- -----------------
Loss Before Provision for Income Taxes (226,125) (645,464) (871,589)
Provision for Income Taxes - - -
------------------ ----------------- -----------------
Net Loss $ (226,125) $ (645,464) $ (871,589)
=================== ================= =================
</TABLE>
NOTE 7 - PROVISION FOR INCOME TAXES
The unaudited proforma consolidated statement of operations include an
adjustment to eliminate the provision for income taxes of NEOS, recognizing the
benefit from utilization of Planet Entertainment Corporation's net loss.
F-7
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Planet Entertainment Corporation
Middletown, New Jersey
We have audited the accompanying consolidated balance sheets of Planet
Entertainment Corporation and subsidiaries, as of August 31, 1998 and December
31, 1997, and the related consolidated statements of operations and
stockholders' equity, and cash flows for the eight months ended August 31, 1998
and 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 August 31, 1998 and December 31, 1997, and
the results of its operations and stockholders' equity and its cash flows for
the eight months ended August 31, 1998, 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.
AJ. ROBBINS, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
AND CONSULTANTS
Denver, Colorado
October 30, 1998
F-8
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
===========================
ASSETS
------
<TABLE>
<CAPTION>
December 31, August 31,
1997 1998
----------------- -----------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,670 $ 3,850,162
Accounts receivable, net 21,026 17,959
Accounts receivable, net - related party 183,684 192,042
Prepaid expenses and other current assets 119,073 246,863
Escrow deposit - 225,000
------------------ -----------------
Total Current Assets 327,453 4,532,026
------------------ -----------------
EQUIPMENT, at cost, net 189,085 172,410
------------------ -----------------
OTHER ASSETS:
Record masters 13,800,000 13,800,000
Goodwill, net 77,917 70,839
Publishing rights, net 880 880
Organization costs, net 52,500 42,495
------------------ -----------------
Total Other Assets 13,931,297 13,914,214
------------------ -----------------
$ 14,447,835 $ 18,618,650
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 106,693 $ 187,641
Accrued interest expense, related party 177,484 275,618
Deferred revenue 146,225 123,524
Due to stockholders 263,800 270,884
Note payable, related party - 150,000
Current portion, of long-term debt, related party 500,000 250,000
Accrued officer's salary 112,000 141,467
------------------ -----------------
Total Current Liabilities 1,306,202 1,399,134
LONG-TERM DEBT, less current portion, related party 750,000 750,000
DEFERRED INCOME TAXES 4,600,000 4,600,000
------------------ -----------------
Total Liabilities 6,656,202 6,749,134
------------------ -----------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Convertible preferred stock, 10,000,000 shares authorized, $.0001
par value, -0- and 500 shares issued and outstanding - 5,000,000
Common stock, $.001 par value; 50,000,000 shares authorized;
11,421,966 and 11,976,055 shares issued and outstanding 11,422 11,976
Additional paid-in capital 8,642,570 8,365,363
Accumulated deficit (862,359) (1,507,823)
------------------ -----------------
Total Stockholders' Equity 7,791,633 11,869,516
------------------ -----------------
$ 14,447,835 $ 18,618,650
================== =================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-9
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
=====================================
<TABLE>
<CAPTION>
For the Period
May 17, 1996 For the Year For the Eight
(Inception) to Ended Months Ended
December 31, December 31, August 31,
1996 1997 1998
------------------ ----------------- -----------------
<S> <C> <C> <C>
REVENUES:
Royalty $ 105,000 $ 3,775 $ 23,042
Sales - 49,883 51,002
Studio - 239,770 35,451
------------------ ----------------- -----------------
Total Revenues 105,000 293,428 109,495
------------------ ----------------- -----------------
COSTS AND EXPENSES:
Cost of sales - 19,052 11,139
Selling, general and administrative 104,342 794,314 659,348
Depreciation and amortization 10,005 40,592 33,758
Interest expense, related party 43,100 144,382 98,135
Bad debt expense - 105,000 -
------------------ ----------------- -----------------
Total Costs and Expenses 157,447 1,103,340 802,380
------------------ ----------------- -----------------
OTHER INCOME:
Dividend income - - 47,421
------------------ ----------------- -----------------
NET LOSS $ (52,447) $ (809,912) $ (645,464)
================== ================= =================
NET LOSS $ (52,447) $ (809,912) $ (645,464)
Less preferred stock dividend - - (87,500)
------------------ ----------------- -----------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (52,447) $ (809,912) $ (732,964)
================== ================= =================
NET LOSS PER COMMON SHARE BASIC $ (.02) $ (.08) $ (.06)
================== ================= =================
Weighted Average Number of Common Shares Outstanding 3,377,255 10,211,250 11,827,308
================== ================= =================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-10
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
==============================================
<TABLE>
<CAPTION>
Additional
Common Stock Preferred Stock Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit Total
----------- ------------ --------- ------------- ------------- ------------ -------------
<S> <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)
---------- ----------- ---------- -------------- ------------ ------------ -------------
Balances, December 31, 1996 9,826,055 9,826 - - 7,996,199 (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-11
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Continued)
==========================================================
<TABLE>
<CAPTION>
Additional
Common Stock Preferred Stock Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit Total
------------ ---------- ---------- ----------- -------------- ------------- -------------
<S> <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)
----------- ---------- ----------- ------------ ------------- ------------- -------------
Balances, December 31, 1997 11,421,966 11,422 - - 8,642,570 (862,359) 7,791,633
Issuance of common stock
for services rendered 554,089 554 - - 247,793 - 248,347
Offering costs from sale
of convertible
preferred stock
for cash - - - - (525,000) - (525,000)
Issuance of convertible
preferred stock - - 500 5,000,000 - - 5,000,000
Net loss for the period - - - - - (645,464) (645,464)
----------- ---------- ----------- ------------ ------------- ------------- -------------
Balances, August 31, 1998 11,976,055 $ 11,976 500 $ 5,000,000 $ 8,365,363 $ (1,507,823) $ 11,869,516
=========== ========== =========== ============ ============= ============= =============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-12
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
=====================================
<TABLE>
<CAPTION>
For the Period
May 17, 1996 For the Year For the Eight
(Inception) to Ended Months Ended
December 31, December 31, August 31,
1996 1997 1998
------------------ ------------------ -----------------
<S> <C> <C> <C>
CASH FLOWS FROM (TO) OPERATING ACTIVITIES:
Net loss $ (52,447) $ (809,912) $ (645,464)
Adjustments to reconcile net loss to net cash used by
operations:
Bad debt expense - 105,000 -
Depreciation and amortization 10,000 40,592 33,758
Stock issued for services 5,140 239,967 248,347
Changes in:
Accounts receivable (105,000) (21,026) 3,067
Accounts receivable, related party - (183,684) (8,358)
Prepaid expenses and other current assets (29,810) (89,264) (127,790)
Accounts payable and accrued expenses 65,772 19,927 80,948
Accrued interest expense, related party 43,100 144,384 98,134
Deferred revenue - 146,225 (22,701)
Accrued officer's salary - 112,000 29,467
--------- ---------- -------------
Cash Flows From (To) Operating Activities (63,245) (295,791) (310,592)
--------- ---------- -------------
CASH FLOWS FROM (TO) INVESTING ACTIVITIES:
Purchase of equipment - (10,094) -
Escrow deposit - - (225,000)
--------- ---------- -------------
Cash Flows From (To) Investing Activities - (10,094) (225,000)
--------- ---------- -------------
CASH FLOWS FROM (TO) FINANCING ACTIVITIES:
Advances from stockholders 70,243 118,557 7,084
Proceeds from note payable, related party - 100,000 150,000
Proceeds from issuance of common stock - 84,000 -
Proceeds from issuance of preferred stock - - 5,000,000
Preferred stock issuance costs - - (525,000)
Repayment of long-term debt, related party - - (250,000)
--------- ---------- -------------
Cash Flows From (To) Financing Activities 70,243 302,557 4,382,084
--------- ---------- -------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 6,998 (3,328) 3,846,492
CASH AND CASH EQUIVALENTS, beginning of period - 6,998 3,670
--------- ---------- -------------
CASH AND CASH EQUIVALENTS,
end of period $ 6,998 $ 3,670 $ 3,850,162
========= ========== =============
</TABLE>
See Note 15
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-13
<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. which changed its name to Planet (See Note
2). The Company 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 common stock
valued at $25. Assets acquired include the rights to artists' contracts,
production agreements and publishing contracts.
The Company acquired 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 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 common stock valued at $5,850,860. For
financial statement purposes the acquisition was accounted for as a purchase
because Maestro was a nonoperating company prior to the acquisition by Planet.
The common stock issued in the purchase was valued at the predecessor costs of
the assets acquired less the deferred tax liability of $3,400,000, related to
the music masters acquired. Assets acquired include over 5,000 master
recordings, publishing rights to 300 songs, royalty income and a recording
studio located in New Jersey.
On September 1, 1998 the Company acquired all of the assets and the business of
Northeast One Stop, Inc. (See Note 18).
The Company changed its fiscal year from December 31 to August 31 for the period
ending August 31, 1998.
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.
F-14
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==========================================
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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. 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 an original 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 $2,500 and
$18,509, respectively, for the periods ended December 31, 1996 and 1997 and
$16,675 for the period ended August 31, 1998.
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. Deferred revenue represents advances
received in connection with production and distribution agreements.
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, 1996 and 1997 and August 31, 1998.
F-15
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==========================================
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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, 1996 and 1997 and August 31, 1998.
IMPAIRMENT OF LONG LIVED ASSETS
- -------------------------------
The Company evaluates its long lived assets by measuring the carrying amount of
the asset against the estimated undiscounted future cash flows associated with
them. At the time such evaluations indicate that the future undiscounted cash
flows of certain long lived assets are not sufficient to recover the carrying
value of such assets, the assets are adjusted to their fair values. No
adjustment to the carrying value of the assets have been made.
ORGANIZATION COSTS
- ------------------
Amortization of organization costs are calculated using the straight-line method
over five years. Amortization expense for the periods ended December 31, 1996
and 1997 was $7,500 and $15,000, respectively, and for the period ended August
31, 1998 was $10,000.
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 December 31,
1996 and 1997 was $-0- and $7,083, respectively, for the period ended August 31,
1998 was $7,083.
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.
F-16
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==========================================
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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. Diluted per share
amounts are not presented as such affect is anti-dilutive.
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 No. 131, "Disclosures about Segments
of an Enterprise and Related Information". The Company's adoption of these
statements are reflected in the accompanying financial statements. There was no
difference between the Company's net loss and comprehensive loss.
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. Anticipated costs in connection with compliance are
estimated to be insignificant.
F-17
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==========================================
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 period 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.
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.
F-18
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==========================================
NOTE 3 - PRODUCTION AND DISTRIBUTION AGREEMENTS (Continued)
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.
NOTE 4 - EQUIPMENT
Equipment consists of the following:
DECEMBER 31, AUGUST 31,
1997 1998
------------------ -----------------
Recording studio equipment $ 200,000 $ 200,000
Computer equipment and other 10,094 10,094
Less accumulated depreciation
and amortization (21,009) (37,684)
------------------ -----------------
$ 189,085 $ 172,410
================== =================
F-19
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==========================================
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 periods ended December 31, 1997 and August 31,
1998, $3,775 and $22,701, respectively, were earned under the agreement.
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.
F-20
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==========================================
NOTE 8 - LONG-TERM DEBT, RELATED PARTY
Long-term debt consists of the following:
DECEMBER 31, AUGUST 31,
1997 1998
------------------ -------------
Note payable to Gulf Coast Music, LLC,
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 $ 1,000,000
Less current portion (500,000) (250,000)
-------------- --------------
$ 750,000 $ 750,000
============== ==============
The Company has not made all of the required payments due under the terms of the
note since Gulf Coast Music, LLC 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
August 31,:
2000 $ 250,000
2001 250,000
2002 250,000
------------------
$ 750,000
==================
Interest expense for the periods ended December 31, 1996 and 1997 was $43,100
and $144,382, respectively, and $82,189 for the period ended August 31, 1998.
F-21
<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:
DECEMBER 31, AUGUST 31,
1997 1998
------------------ -------------
Deferred tax assets:
Accrued interest $ 50,000 $ 36,000
Meals and entertainment 28,000 11,000
Net operating loss carryforwards 222,000 413,000
------------- -------------
Gross deferred tax assets 300,000 460,000
Valuation allowance (300,000) (460,000)
------------- -------------
Total deferred tax assets - -
Deferred tax liability:
Record masters 4,600,000 4,600,000
------------- -------------
Net deferred tax liability $ 4,600,000 $ 4,600,000
============= =============
No provision for income taxes has been recorded for the periods ended December
31, 1996 and 1997 and for the period ended August, 1998 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 $1,118,000 as of August 31, 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.
F-22
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==========================================
NOTE 10 - COMMITMENTS AND CONTINGENCIES
RESTATED AGREEMENT
- ------------------
The financial statements have been prepared based on the assumption of the
formation of Gulf Coast (Note 8). 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.
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.
Subsequent to the date of these financial statements, the agreement has been
restated again, into two separate agreements, which will become effective upon
the transfer of shares as noted in the following description of the agreements.
In one agreement with Jake and Music, Planet will receive unencumbered title to
10,000 masters and the surrender of 706,000 shares of its common stock, in
exchange for a $25,000 payment and an unconditional promise to pay $200,000
within ninety days from the effective date of the agreement. In connection with
this agreement, Planet has placed $25,000 in escrow.
According to the other agreement with Gulf Coast, Planet will receive title to
7,500 masters (of the aforementioned 10,000 masters) and the surrender of
694,000 shares of its common stock, in exchange for executing a promissory note
in the amount of $1,250,000 with interest at 9.75%. Planet will be credited
$500,000 against the principle of the note payable, representing payments which
it has made under the previous agreements. In connection with this agreement,
Planet has placed $100,000 in escrow.
The conditions of the restated agreements are not contingent on the approval of
the bankruptcy court. The original agreements will remain in full force if the
Company does not satisfy its requirements under the amended agreements. The
financial statements have been presented to reflect the amended and restated
agreement.
Following is a proforma balance sheet as of August 31, 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.
F-23
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==========================================
NOTE 10 - COMMITMENTS AND CONTINGENCIES (Continued)
<TABLE>
<CAPTION>
MUSIC JAKE
PROFORMA PROFORMA PROFORMA
PLANET ADJUSTMENT ADJUSTMENT BALANCES
------------------ ----------------- ----------------- ------------------
<S> <C> <C> <C> <C>
ASSETS:
Current assets $ 4,532,026 $ - $ - $ 4,532,026
Equipment 172,410 - - 172,410
Other assets 13,914,214 - 570,000 2 14,484,214
------------------ ----------------- ----------------- ------------------
Total Assets $ 18,618,650 $ - $ 570,000 $ 19,188,650
================== ================= ================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities $ 1,399,134 $ 20,000 1 $ 570,000 2 $ 1,989,134
Long-Term debt 750,000 80,000 1 - 830,000
Deferred income taxes 4,600,000 - - 4,600,000
Stockholders' equity 11,869,516 (100,000)1 - 11,769,516
------------------ ----------------- ----------------- ------------------
Total Liabilities and
Stockholders' Equity $ 18,618,650 $ - $ 570,000 $ 19,188,650
================== ================= ================= ==================
</TABLE>
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
uninsured casualty property losses were incurred or charged to operations for
the periods ended December 31, 1996 and 1997 and August 31, 1998.
F-24
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==========================================
NOTE 10 - COMMITMENTS AND CONTINGENCIES (Continued)
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 recouped
from future royalties due the artist. In accordance with the terms of the
contracts, all masters, records and reproductions are the property of Higher
Ground Records.
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. The amounts
and terms have not yet formally been negotiated and are not anticipated to have
a material effect on the financial statements.
CONSULTING AGREEMENTS
- ---------------------
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.
OFFICER EMPLOYMENT AGREEMENTS
- -----------------------------
On August 14, 1998, the Company entered into employment agreements with three of
its officers. The agreements are for a term of ten years and provide for annual
compensation of $125,000 per officer and an incentive bonus based upon the
Company's profitability and acquisition activities.
LEASE AGREEMENT
- ---------------
The Company entered into a lease agreement with the former shareholders of Al
Alberts On Stage, Ltd. (Note 16) 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 period ended
August 31, 1998 was $18,373.
LITIGATION
- ----------
The Company is a party to various claims, complaints, and other legal actions
that have arisen in the ordinary course of business. Management of 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.
F-25
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==========================================
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 the 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 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. Compensation earned for the periods ended December 31,
1996, December 31, 1997 and August 31, 1998 was $-0-, $2,298 and $3,069,
respectively.
F-26
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==========================================
NOTE 13 - 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 the fund to purchase 75,000 shares of common stock,
exercisable at $9.625 for 5 years. 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 such
basis at the end of two years. The Company has the right to redeem the preferred
stock on the same terms as the conversion. Preferred stock dividends as of
August 31, 1998 were $87,500.
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 14 - 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
August 31, 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 a basic 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-27
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==========================================
NOTE 15 - SUPPLEMENTAL INFORMATION TO STATEMENT OF CASH FLOWS FOR
NONCASH INVESTING AND FINANCING ACTIVITIES
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 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 August 31, 1998:
Issued 554,089 shares of common stock for services.
NOTE 16 - AL ALBERTS ON STAGE, LTD.
On March 1, 1997, the Company acquired 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 because Planet has acquired only
specific assets and assumed specific liabilities of On Stage. Accordingly, the
assets and liabilities of the acquired business are included in the consolidated
balance sheets at December 31, 1997 and August 31, 1998. 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:
F-28
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==========================================
NOTE 16 - AL ALBERTS ON STAGE, LTD. (Continued)
Equipment $ 150,000
Goodwill 85,000
Liabilities (21,000)
-----------------
$ 214,000
=================
The common stock issued in the purchase of On Stage was valued at a 75% discount
from the prevailing market price due to the lack of registration and low trade
volume of the Company's common stock as of the date of acquisition.
The results of On Stage's operations from January 1, 1997 through February 28,
1997 are not material.
NOTE 17 - SEGMENT INFORMATION
The Company operates in three business segments: music record masters
production, music studio operations and record label production. All operations
and revenues are conducted and earned in the United States. The following table
presents sales and other financial information by business segment:
<TABLE>
<CAPTION>
NET OPERATING IDENTIFIABLE CAPITAL
REVENUES EARNINGS DEPRECIATION ASSETS EXPENDITURES
---------------- ---------------- ---------------- ---------------- ---------------
<S> <C> <C>
1998:
Music record master
production $ 23,042 $ (631,538) $ 3,333 $ 14,254,370 $ -
Music studio
operations 35,451 (71,363) 13,341 71,207 -
Record label
productions 51,002 10,016 - 222,126 -
---------------- ---------------- ---------------- ---------------- -----------
$ 109,495 $ (692,885) $ 16,674 $ 14,547,703 $ -
================ ================ ================ ================ ===========
1997:
Music record master
production $ 3,775 $ (788,300) $ 5,000 $ 14,139,612 -
Music studio
production 239,770 (32,413) 13,509 226,716 10,094
Record label
production 49,883 10,801 - 81,507 -
---------------- --------------- --------------- --------------- ----------
$ 293,428 $ (809,912) $ 18,509 $ 14,447,835 $ 10,094
================ ================ ================ ================ ===========
Corporate assets include $3,970,947 of cash and cash equivalents and $100,000 of
restricted cash at August 31, 1998. Operations for the period ended December 31,
1996 consisted primarily of music record master production.
</TABLE>
F-29
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==========================================
NOTE 18 - ACQUISITION OF NORTHEAST ONE STOP, INC.
On September 1, 1998, the Company acquired all of the assets and the business of
Northeast One Stop, Inc., a record and entertainment products distribution
company. The purchase price was $4,147,750 comprised of $2,250,000 in cash of
which $100,000 was placed in escrow as of August 31, 1998, and a $750,000
promissory note of which $375,000 is payable within six months from the date of
closing and of which $375,000 shall be payable within one year from date of
closing, and options to purchase 250,000 shares of the Company's common stock
valued at $1,147,750 issued to two stockholders of the Company, in consideration
for advisory services rendered in connection with the acquisition. The
promissory note is secured by the Company's common stock. There is also an
option for the seller to purchase 250,000 shares of Planet Entertainment common
stock, exercisable at a price equal to the lesser of $5.25 per share of closing
bid price on the closing date. These stock options are valid and exercisable for
a term of two years from the date of closing. For financial statement purposes
the acquisition will be accounted for as a purchase because Planet exchanged
cash and notes payable in exchange for all of the outstanding common stock of
Northeast One Stop, Inc.
Prior to the acquisition, the Company had a fiscal year end of December 31. The
Company's results of operations have been restated to conform with Northeast One
Stop, Inc. The following summarized unaudited proforma financial information
assumes the acquisition had occurred on September 1, 1997:
Net revenues $ 35,152,348
Net loss $ (192,972)
Net loss per common share $ (.05)
The proforma results do not necessarily represent results which would have
occurred if the acquisition had taken place on the basis assumed above, nor are
they indicative of the results of future combined operations.
F-30
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS
NORTHEAST ONE STOP, INC.
LATHAM, NEW YORK
We have audited the accompanying balance sheets of Northeast One Stop, Inc., as
of August 29, 1998 and August 30, 1997, and the related statements of
operations, stockholder's equity (deficiency), and cash flows for each of the
years in the three year period ended August 29, 1998. 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 Northeast One Stop, Inc. as of
August 29, 1998 and August 30, 1997, and the results of its operations,
stockholder's equity (deficiency) and its cash flows for each of the years in
the three year period ended August 29, 1998, in conformity with generally
accepted accounting principles.
DENVER, COLORADO
OCTOBER 19, 1998
F-31
<PAGE>
NORTHEAST ONE STOP, INC.
BALANCE SHEETS
==============
ASSETS
------
<TABLE>
<CAPTION>
August 30, August 29,
1997 1998
------------------ -----------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 377,936 $ 522,584
Accounts receivable, net 3,830,004 5,550,961
Accounts receivable - related party, net 104,198 95,843
Prepaid expenses and other current assets 2,283 31,698
Inventory 4,402,819 6,848,567
Current maturities of notes receivable 11,650 10,371
Deferred income taxes 187,779 56,000
------------------ -----------------
Total Current Assets 8,916,669 13,116,024
------------------ -----------------
PROPERTY AND EQUIPMENT, at cost, net 785,416 784,376
------------------ -----------------
OTHER ASSETS:
Notes receivable less current maturities 39,135 30,853
Financing costs, net 23,232 4,706
Security deposits 20,755 8,171
------------------ -----------------
Total Other Assets 83,122 43,730
------------------ -----------------
$ 9,785,207 $ 13,944,130
================== =================
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY)
-------------------------------------------------
CURRENT LIABILITIES:
<S> <C> <C>
Note payable - line of credit $ - $ 4,170,396
Accounts payable 6,253,923 7,791,050
Due to customer 491,847 475,567
Capital lease obligations, current portion 215,149 196,574
Notes payable, current portion - 24,551
Accrued expenses and other current liabilities 84,046 389,559
------------------ -----------------
Total Current Liabilities 7,044,965 13,047,697
------------------ -----------------
LONG-TERM DEBT:
Due to stockholder 374,000 374,000
Due to employee 77,103 75,000
Capital lease obligations, non-current portion 66,967 37,507
Deferred income taxes 39,381 30,600
Note payable - line of credit 2,291,398 -
Notes payable, non-current portion - 12,000
------------------ -----------------
Total Long-Term Debt 2,848,849 529,107
------------------ -----------------
Total Liabilities 9,893,814 13,576,804
------------------ -----------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY (DEFICIENCY):
Common stock, no par value; 200 shares authorized;
6 shares issued and outstanding 10,000 10,000
Retained earnings (deficit) (118,607) 357,326
------------------ -----------------
Total Stockholder's Equity (Deficiency) (108,607) 367,326
------------------ -----------------
$ 9,785,207 $ 13,944,130
================== =================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-32
<PAGE>
NORTHEAST ONE STOP, INC.
STATEMENTS OF OPERATIONS
========================
<TABLE>
<CAPTION>
For the Year For the Year For the Year
Ended Ended Ended
August 31, August 30, August 29,
1996 1997 1998
------------------ ----------------- -----------------
<S> <C> <C> <C>
NET SALES $ 21,822,666 $ 23,258,608 $ 34,793,341
COST OF SALES 18,579,021 19,880,051 29,152,959
----------------- ----------------- -----------------
GROSS PROFIT 3,243,645 3,378,557 5,640,382
----------------- ----------------- -----------------
OPERATING EXPENSES:
Selling, general and administrative 2,597,337 2,799,158 4,161,426
Depreciation and amortization 188,535 216,851 238,165
Interest expense 356,898 323,888 430,687
Bad debt expense 425,588 131,628 38,106
Amortization of loan costs 25,215 35,215 28,526
----------------- ----------------- -----------------
Total Operating Expenses 3,593,573 3,506,740 4,896,910
----------------- ----------------- -----------------
INCOME (LOSS) FROM OPERATIONS (349,928) (128,183) 743,472
----------------- ----------------- -----------------
OTHER INCOME (EXPENSE):
Interest income 25,960 22,695 2,289
Other, net (5,973) (33,516) 5,279
----------------- ----------------- -----------------
Net Other Income (Expense) 19,987 (10,821) 7,568
----------------- ----------------- -----------------
INCOME (LOSS) BEFORE (PROVISION) BENEFIT (329,941) (139,004) 751,040
(PROVISION) BENEFIT FOR INCOME TAXES 114,758 3,828 (275,107)
----------------- ----------------- -----------------
NET INCOME (LOSS) $ (215,183) $ (135,176) $ 475,933
================= ================= =================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-33
<PAGE>
NORTHEAST ONE STOP, INC.
STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIENCY)
YEARS ENDED AUGUST 29, 1998, AUGUST 30, 1997 AND AUGUST 31, 1996
================================================================
<TABLE>
<CAPTION>
Common Stocks Retained
-------------------------- Earning
Shares Amount (Deficit) Total
------ ------ -------- -----
<S> <C> <C> <C> <C>
Balance August 28, 1995 6 $ 10,000 $ 231,752 $ 241,752
Net loss for the year - - (215,183) (215,183)
---------------- ---------------- ---------------- ----------------
Balance August 31, 1996 6 10,000 16,569 26,569
Net loss for the year - - (135,176) (135,176)
---------------- ---------------- ---------------- ----------------
Balance August 30, 1997 6 10,000 (118,607) (108,607)
Net income for the year - - 475,933 475,933
---------------- ---------------- ---------------- ----------------
Balance August 29, 1998 6 $ 10,000 $ 357,326 $ 367,326
================ ================ ================ ================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-34
<PAGE>
NORTHEAST ONE STOP, INC.
STATEMENTS OF CASH FLOWS
========================
<TABLE>
<CAPTION>
For the Year For the Year For the Year
Ended Ended Ended
August 31, August 30, August 29,
1996 1997 1998
------------------ ----------------- -----------------
<S> <C> <C> <C>
CASH FLOWS FROM (TO) OPERATING ACTIVITIES:
Net income (loss) $ (215,183) $ (135,176) $ 475,933
Adjustments to reconcile net loss to net cash used by
operations:
Bad debt expense 425,588 131,628 38,106
Depreciation and amortization 213,750 252,066 266,691
Deferred income taxes (122,285) (3,828) 122,998
Loss on abandonment of leasehold improvements 15,660 35,402
and disposition of equipment 31,627
Changes in:
Accounts receivable (395,895) (1,198,498) (1,750,708)
Prepaid expenses and other current assets 69,452 (1,095) (29,415)
Inventory 337,270 (894,858) (2,445,748)
Due to customer 65,568 351,279 (16,280)
Accounts payable and accrued expenses (23,339) 1,748,958 1,537,127
Accrued expenses and other current liabilities (14,030) 57,411 305,513
----------------- ----------------- -----------------
Cash Flows Provided (Used) by Operating Activities 356,556 343,289 (1,464,156)
----------------- ----------------- -----------------
CASH FLOWS FROM (TO) INVESTING ACTIVITIES:
Purchase of equipment (5,875) (72,242) (25,391)
Repayments on notes receivable (41,838) 16,609 9,561
Advances on notes receivable 19,830 (25,473) -
Deposit on leased equipment (13,663) 15,833 12,584
----------------- ----------------- -----------------
Cash Flows (Used) by Investing Activities (41,546) (65,273) (3,246)
----------------- ----------------- -----------------
CASH FLOWS FROM (TO) FINANCING ACTIVITIES:
Proceeds from note payable - line of credit 193,233 (34,698) 1,878,998
Proceeds from notes payable - - 36,551
Repayment of long-term debt (63,604) (64,142) -
Repayment of capitalized lease obligations (128,764) (253,347) (291,396)
Loans from employees 16,669 7,934 (2,103)
Financing costs (30,000) - (10,000)
----------------- ----------------- -----------------
Cash Flows Provided (Used) by Financing Activities (12,466) (344,253) 1,612,050
------------------ ----------------- -----------------
NET CHANGE IN CASH 302,544 (66,237) 144,648
CASH, beginning of period 141,629 444,173 377,936
----------------- ----------------- -----------------
CASH, end of period $ 444,173 $ 377,936 $ 522,584
- ------------------- ================= ================= =================
See Note 14
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-35
<PAGE>
NORTHEAST ONE STOP, INC.
NOTES TO FINANCIAL STATEMENTS
=============================
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS DESCRIPTION
- --------------------
Northeast One Stop, Inc. (the "Company") was incorporated under the laws of New
York State on January 25, 1983. The Company distributes recorded music (CD's,
cassettes or records) to the retail industry from its warehouse located in
Latham, New York. The Company's products are sold through its sales offices
located throughout the U.S.
REVENUE RECOGNITION
- -------------------
The Company recognizes a sale when the CD, cassette or record is shipped.
The Company records an allowance, when material, for sales returns from
customers that are not in turn returnable to the Company's distributor.
CASH
- ----
The Company maintains its cash accounts in commercial banks located in New York.
The balance in each account is insured by the Federal Deposit Insurance
Corporation (FDIC) up to $100,000.
INVENTORY
- ---------
Inventory, consisting primarily of compact disks for resale, is 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 (five to seven years) using straight-line
and accelerated methods. Maintenance and repairs are charged to operations in
the period incurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS
- -----------------------------------
The carrying value of accounts and notes receivable, accounts payable, and
accrued expenses and other current liabilities 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.
FISCAL YEAR END
- ---------------
The Company's fiscal year ends on the Saturday closest to August 31, which
results in a 52 or 53 week year. 1998 and 1997 included 52 weeks; 1996 included
53 weeks.
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.
F-36
<PAGE>
NORTHEAST ONE STOP, INC.
NOTES TO FINANCIAL STATEMENTS
=============================
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
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.
ALLOWANCE FOR BAD DEBTS
- -----------------------
Management provides for an allowance based on a review of specific accounts and
determination of collectibility.
ADVERTISING
- -----------
The Company expenses the costs of advertising the first time the advertising
takes place. Advertising expense for the years ended August 29, 1998, August 30,
1997 and August 31, 1996, was $777,654, $293,281 and $265,529, respectively.
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,
are not yet applicable to the Company and are not anticipated to have a
significant impact on the Company's financial statements when adopted.
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. Anticipated costs in connection with compliance are
estimated to be insignificant.
F-37
<PAGE>
NORTHEAST ONE STOP, INC.
NOTES TO FINANCIAL STATEMENTS
=============================
NOTE 2 - ACCOUNTS RECEIVABLE
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
August 30, August 29,
1997 1998
----------------- -----------------
<S> <C> <C>
Gross $ 4,145,004 $ 5,628,449
Less allowance for doubtful accounts 315,000 77,488
----------------- -----------------
$ 3,830,004 $ 5,550,961
================= =================
</TABLE>
NOTE 3 - ACCOUNTS RECEIVABLE, RELATED PARTY
Accounts receivable, related party primarily represents amounts due from a
company acquired by the stockholder during the year ended August 29, 1998. An
allowance for doubtful accounts of $150,000 is reflected in the balance as of
August 30, 1997. Related party sales for the year ended August 29, 1998 were
$141,244.
NOTE 4 - NOTES RECEIVABLE
Notes receivable consist of the following:
<TABLE>
<CAPTION>
August 30, August 29,
1997 1998
----------------- -----------------
<S> <C> <C>
Installment note receivable due from an unrelated party. Monthly
payments of $850 including interest at 8% per annum through February
1999. $ 14,867 $ 6,327
Installment note receivable due from an unrelated party. Monthly
payments of $500 including interest at 10% per annum through November
2006. 35,918 34,897
---------------- -----------------
50,785 41,224
Less current portion 11,650 10,371
----------------- -----------------
$ 39,135 $ 30,853
================= =================
</TABLE>
F-38
<PAGE>
NORTHEAST ONE STOP, INC.
NOTES TO FINANCIAL STATEMENTS
=============================
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
Property, plant and equipment consists of the following:
August 30, August 29,
1997 1998
----------------- -----------------
<S> <C> <C>
Leasehold improvements $ 5,362 $ 25,356
Computer equipment 530,782 588,886
Computer software 152,030 159,731
Equipment 1,042,524 1,084,328
Furniture and fixtures 149,528 174,905
Rack jobbing fixtures 403,600 468,825
Vehicles 10,026 8,026
----------------- -----------------
2,293,852 2,510,057
Less accumulated depreciation and amortization 1,508,436 1,725,681
----------------- -----------------
$ 785,416 $ 784,376
================= =================
</TABLE>
NOTE 6 - NOTES PAYABLE AND LINE OF CREDIT
The Company has a $6,000,000 line of credit, which bears interest at prime plus
1.5%, with Congress Financial Corporation, collateralized principally by all of
the Company'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 are made on the basis of eligible accounts receivable
and inventory defined in the agreement. The provisions of the line of credit
agreement contain various covenants. The Company is required to maintain a
certain working capital and adjusted net worth amounts. At August 29, 1998 the
balance owed is $4,170,396.
At August 30, 1997, under a previous agreement, the Company had a $4,000,000
line of credit which bore interest at prime plus 2%.
The Company has three notes payable with a bank. The notes bear interest from
13% to 17%, are due April 1999 to August 2000 and are collateralized by
equipment.
August 29,
1998
-----------------
Total notes $ 36,551
Current portion 24,551
-----------------
Non-current portion $ 12,000
=================
The Company amortizes costs incurred in connection with obtaining financing over
the term of the credit agreement. Amortization expense for the years ended
August 31, 1996, August 30, 1997 and August 29, 1998 was $25,215, $35,215 and
$28,526, respectively.
F-39
<PAGE>
NORTHEAST ONE STOP, INC.
NOTES TO FINANCIAL STATEMENTS
=============================
NOTE 7 - CAPITALIZED LEASE OBLIGATIONS
The Company 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 depreciated over the assets'
estimated useful lives.
<TABLE>
<CAPTION>
Minimum future lease payments under the capital leases as of August 29, 1998 are
as follows:
<S> <C>
Fiscal year ending August 1999 $ 219,561
Fiscal year ending August 2000 38,018
Fiscal year ending August 2001 4,779
-----------------
Total minimum lease payments 262,358
Less amount representing interest 28,277
Present value of net minimum lease payments with interest at approximately 11%- 26% 234,081
Less current portion 196,574
-----------------
$ 37,507
=================
</TABLE>
The non-current portion of capitalized lease obligations are due during fiscal
year ending August 2000. As of August 29, 1998, machinery and equipment includes
$410,801 acquired through capital leases. Accumulated depreciation related to
these assets was $86,640.
NOTE 8 - DUE TO STOCKHOLDER
Amounts due to the stockholder bear interest at 9% and have no scheduled
repayment terms. Interest expense for each of the years ended August 31, 1996,
August 30, 1997 and August 29, 1998 was $30,960.
NOTE 9 - DUE TO EMPLOYEE
Amounts due to an employee bear interest at 11% and have no scheduled repayment
terms. Interest expense for the years ended August 31, 1996, August 30, 1997 and
August 29, 1998, and was $9,169, $7,934 and $8,428, respectively.
F-40
<PAGE>
NORTHEAST ONE STOP, INC.
NOTES TO FINANCIAL STATEMENTS
=============================
NOTE 10 - PROVISION FOR INCOME TAXES
The composition of deferred tax assets and (liabilities) are as follows:
August 30, August 29,
1997 1998
----------------- ----------------
Total deferred tax assets $ 187,779 $ 56,000
Total valuation allowance - -
----------------- ----------------
Net total deferred tax assets 187,779 56,000
Total deferred tax liabilities (39,381) (30,600)
----------------- -----------------
Net deferred tax assets $ 148,398 $ 25,400
================= =================
The tax effects of temporary differences that give rise to deferred tax assets
and (liabilities) are as follows:
August 30, August 29,
1997 1998
----------------- -----------------
General business credit carryforward $ 20,000 $ 20,000
Property and equipment (63,000) (54,200)
Inventory capitalization 19,000 31,000
Allowance for doubtful accounts 167,000 27,000
Lease payments 5,398 1,600
----------------- -----------------
$ 148,398 $ 25,400
================= =================
The provision (benefit) for income taxes consist of the following:
<TABLE>
<CAPTION>
For the Year For the Year For the Year
Ended Ended Ended
August 31, August 30, August 29,
1996 1997 1998
------------------ ----------------- ------------
<S> <C> <C> <C>
CURRENT:
Federal $ 2,107 $ - $ 127,511
State 5,420 - 24,013
----------------- ----------------- -----------------
Total Current Provision 7,527 - 151,524
----------------- ----------------- -----------------
DEFERRED:
Federal (95,019) (3,063) 96,473
State (27,266) (765) 27,110
----------------- ----------------- -----------------
Total Deferred Income Taxes (Benefit) (122,285) (3,828) 123,583
----------------- ------------------ -----------------
Total Provision (Benefit) for Income
Taxes $ (114,758) $ (3,828) $ 275,107
================ ================ ================
</TABLE>
F-41
<PAGE>
NORTHEAST ONE STOP, INC.
NOTES TO FINANCIAL STATEMENTS
=============================
NOTE 10 - PROVISION FOR INCOME TAXES (Continued)
The following is a reconciliation of the amount of current federal 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:
<TABLE>
<CAPTION>
For the Year For the Year For the Year
Ended Ended Ended
August 31, August 30, August 29,
1996 1997 1998
------------------ ----------------- -----------------
<S> <C> <C> <C>
Expected tax provision (benefit) at federal
statutory rates $ (99,000) $ (42,000) $ 262,500
Inventory capitalization (3,000) 3,600 20,000
Excess of tax over book depreciation (12,000) (5,400) (12,000)
Bad debt expense 117,000 - (136,000)
(Benefit) of net operating loss carryforward - 42,000 (42,000)
State tax, net of federal benefit (2,000) - (5,000)
Other 1,107 1,800 40,011
----------------- ----------------- -----------------
$ 2,107 $ - $ 127,511
================= ================= =================
</TABLE>
NOTE 11 - CONCENTRATION OF CREDIT RISK
The Company grants credit to customers in the retail industry throughout the
United States. Consequently, the Company's ability to collect the amounts due
from customers is affected by economic fluctuations in retailing.
Individual customers aggregating in excess of 10% of net sales are as follows:
<TABLE>
<CAPTION>
For the Year For the Year For the Year
Ended Ended Ended
August 31, August 30, August 29,
1996 1997 1998
------------------ ----------------- -----------------
<S> <C> <C> <C>
Customer A 34% 40% 40%
The amounts due from this customer were $ 1,024,352 $ 2,154,938 $ 3,158,032
</TABLE>
NOTE 12 - COMMITMENTS AND CONTINGENCIES
The Company leases its Latham office and warehouse from a company owned by the
stockholder. Additionally, the Company rents office space in Pennsylvania and
Michigan.
Effective September 1, 1998, in conjunction with the acquisition of the Company
by Planet Entertainment Corporation (see Note 13), the Company entered into a
new lease with a company controlled by the former stockholder.
F-42
<PAGE>
NORTHEAST ONE STOP, INC.
NOTES TO FINANCIAL STATEMENTS
=============================
NOTE 12 - COMMITMENTS AND CONTINGENCIES (Continued)
The Pennsylvania and Michigan leases expire in April 1999 and February 1999,
respectively. Future minimum rental payments under operating leases are as
follows:
<TABLE>
<CAPTION>
Related Party Other Total
<S> <C> <C> <C> <C>
Fiscal year ending August 1999 $ 144,400 $ 11,723 $ 156,123
Fiscal year ending August 2000 180,000 - 180,000
Fiscal year ending August 2001 180,000 - 180,000
Fiscal year ending August 2002 180,000 - 180,000
Fiscal year ending August 2003 180,000 - 180,000
----------------- ----------------- -----------------
$ 864,400 $ 11,723 $ 876,123
================= ================= =================
</TABLE>
Rent expense was $133,391, $135,185 and $167,228 and during fiscal years 1996,
1997 and 1998, respectively.
NOTE 13 - SUBSEQUENT EVENT
Effective September 1, 1998, the Company was purchased by Planet Entertainment
Corporation. In connection with the acquisition, the Company entered into
employment agreements with certain employees.
NOTE 14 - SUPPLEMENTAL INFORMATION TO STATEMENT OF CASH FLOWS FOR NONCASH
INVESTING AND FINANCING ACTIVITIES
During fiscal years ended August 29, 1996, August 30, 1997 and August 31, 1998,
and $174,929, $282,367 and $236,549, respectively, of capitalized lease
obligations were incurred in connection with the acquisition of property and
equipment.
<TABLE>
<CAPTION>
For the Year For the Year For the Year
Ended Ended Ended
August 31, August 30, August 29,
1996 1997 1998
------------------ ----------------- -----------------
<S> <C> <C> <C>
Cash paid for interest $ 356,898 $ 323,888 $ 430,687
================= ================= =================
Cash paid (received) for income taxes $ (53,905) $ 6,530 $ 27,521
================= ================= =================
</TABLE>
F-43
<PAGE>
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
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.
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses, other than
underwriting 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 17,500.00
Blue Sky fees and expenses --
Accounting fees 28,500.00
Miscellaneous 12.41
--------------
Total $ 50,000.00
==============
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 $.001 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
II-1
<PAGE>
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 who had performed on
various contractual obligations in payment of certain accounts payable or trade
liabilities totaling approximately $248,347.
To the extent that the Company has issued Common Stock in payment of
certain contracts to be performed after 1997, the Company has recorded these
amounts as pre-paid expenses over the term of such contracts or agreements
relating to the services to be performed for the Company.
In May 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. 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 exercise price of
$9.625 per share 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.
exercisable at a price of $9.625 per share for an identical term of five years
from May 1998. As a result of this transaction, the Company received net
proceeds of approximately $4,475,000. The Preferred Stock is convertible at any
time into shares of Common Stock at the lower of (a) $8.885 per share (the
"Initial Conversion Price"), or (b)78% (the "Discount Rate") 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
November 30, 1998 was $3.12 per share. Pursuant to the Company's Amended and
Restated Articles of Incorporation governing the Preferred Stock (the "Terms"),
upon the Company's failure to satisfy certain obligations, each of the Initial
Conversion Price and the Discount Rate will be reduced by 2.5% on the date
relating to the failure to satisfy a particular obligation thereunder (the
"Trigger Date"). If such failure to satisfy the obligation has not yet been
cured by the Company by the first monthly anniversary of the Trigger Date, or
waived by the holder of the Preferred Stock, each of the Initial Conversion
Price and the Discount Rate will be further reduced by an additional 2.5% on
such first monthly anniversary of the Trigger Date. On the second monthly
anniversary of the Trigger Date, if such failure to satisfy the obligation has
not, at such time, been cured by the Company and on each monthly anniversary
thereafter until the respective obligation is satisfied, the holder of the
Preferred Stock can either (i) require further cumulative 2.5% discounts to
continue or (ii) require the Company to pay to it a cash payment of 2.5% of the
aggregate stated value of the Preferred Stock. Pursuant to the Terms, the
Company's failure to have this registration statement declared effective by the
Securities and Exchange Commission by September 4, 1998 resulted in (i) a
reduction, on September 4, 1998, of the Initial Conversion Price to $8.663 and
of the Discount Rate to 75.5%, (ii) a further reduction, on October 4, 1998, of
the Initial Conversion Price to $8.441 and of the Discount Rate to 73% and (iii)
on November 4, 1998, a choice to JNC to either (x) reduce the Initial Conversion
Price to $8.219 and the Discount Rate to 70.5% or (y) receive $125,000 in cash
from the Company. As of the date hereof, JNC has not yet notified the Company as
to any decision made in this regard. Pursuant to the Terms, the Preferred
Stockholder is prohibited from converting the Preferred Stock (or receiving
shares of Common Stock as payment of dividends thereunder, to the extent that
such conversion would result in the Preferred Stockholder owning more than
4.999% of the outstanding Common Stock of the Company following such
conversion.) Such restriction is waivable by the Preferred Stockholder upon not
less than 75 days notice to the Company.
In the opinion of the Company's counsel the sales of the above
securities were exempt from registration under the Securities Act in reliance on
Rule 506 of Regulation D promulgated under Section 3(a)(9) pursuant to Section
4(2) of the Securities Act of 1933 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.
II-2
<PAGE>
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 L.L.C. 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*
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 Venneri*
n. Purchase and Sale Agreement with Northeast One Stop, Inc.*
o. Ronald J. Nicks Executive Compensation Agreement
p. Gulf Coast Master Recording Purchase Agreement
q. Gulf Coast Addendum to Master Recording Agreement
r. NEOS Lease from L & P Feed
s. NEOS Financing Agreement with Congress Financial Corporation
t. NEOS Amendment to Financing Agreement dated July, 1995
u. NEOS Amendment to Financing Agreement dated August 1997
v. NEOS Amendment to Financing Agreement dated September 1998
w. NEOS Guarantee
x. NEOS Waiver of Line of Credit Covenant
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
II-3
<PAGE>
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:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high and of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
II-4
<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 7TH DAY OF DECEMBER, 1998
By: /s/ JOHN S. ARNONE
-----------------------------------------
John S. Arnone
President, Chief Executive Officer,
Director
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, Secretary December 7, 1998
- ----------------------------------
Wallace M. Giakas
/s/ Joseph Venneri Executive Vice President, Director December 7, 1998
- ----------------------------------
Joseph Venneri
/s/ Richard Bluestine Executive Vice-President, Chief Financial December 7, 1998
- ---------------------------------- Officer
Richard Bluestine
/s/ Louis J. DelSignore Director December 7, 1998
- ----------------------------------
Louis J. DelSignore
/s/ Ronald J. Nicks Director December 7, 1998
- ----------------------------------
Ronald J. Nicks
</TABLE>
II-4
EXECUTIVE COMPENSATION AGREEMENT
THIS AGREEMENT, made as of this 21st day of September, 1998, by and
between Northeast One Stop, Inc., a New York corporation, having its principal
place of business at 7 Northway Lane, Latham, New York 12110 (hereinafter "NEOS"
or the "Company") and Ronald J. Nicks, an individual residing at 44 Brendon
Court, Clifton Park, New York 12065 (hereinafter referred to as "Nicks").
W I T N E S S E T H
WHEREAS, it is deemed in the best interest of the Company that Nicks
devote his professional time and energies to the business of the Company;
WHEREAS, the Company seeks to be assured of the continued special
services of Nicks; and Nicks desires to be so employed; and
WHEREAS, the parties desire to set forth in writing their prior
understanding and agreement with respect to such employment;
N O W T H E R E F O R E,
In consideration of the promises and the mutual covenants contained
herein, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
1. POSITION.
The Company hereby employs Nicks as the Company's Chief Executive
Officer, in accordance with the powers and duties specified herein, and
generally to be responsible for the day to day management of any executive
decisions concerning the operations of the Company, direct and control its day
to day affairs, make necessary decisions commensurate with his positions in the
Company, be responsible for the operations of the Company and, in general, to
exercise his authority for the best long term interests of the Company and its
shareholders. Duties shall also include primary responsibility for all aspects
of sales, personnel, marketing, management, and operations of the Company, along
with such other duties as may be delegated to him from time to time by the
Company.
Page 1 of 7
<PAGE>
2. TERM.
Effective as of even date, the employment of Nicks shall be for a term
of three (3) years subject to Nicks's good faith performance of the powers and
duties outlined in this Agreement.
3. COMPENSATION.
Nicks shall be paid a salary of $125,000 each year for the term of this
agreement. Said compensation will commence on the effective date of this
agreement as set forth in Paragraph 2 above.
4. BONUS.
Nicks shall participate in the Management Incentive Plan with his bonus
being based upon the revenue and profitability of NEOS, as recorded each year
during the term, as follows: (a) If the Company records net sales or net
revenues (as determined in accordance with Generally Accepted Accounting
Principles ("GAAP"), of at least $50,000,000 but less than $75,000,000, and if
the Company has a pre-tax net profit margin of at least 3.0% (as determined by
GAAP), then Nicks's bonus shall be equal to 15% of the amount such pre-tax net
profit of the entire Company exceeds 3.0%. (b) If the Company records net sales
or net revenues (as determined in accordance with Generally Accepted Accounting
Principles ("GAAP"), in excess of $75,000,000, and if the Company has a pre-tax
net profit margin of at least 4.0%(as determined by GAAP), then Nicks's bonus
shall be equal to the amount as shown in paragraph 4(a) above of the first
75,000,000, plus 20% of the amount the pre-tax net profit of the Company exceeds
4.0% on any amount in excess of $75,000,000. Unless determined otherwise by the
Company's Board of Directors, Nicks's bonus and salary in any given year shall
not exceed $225,000.
5. ADDITIONAL COMPENSATION.
Nicks shall have the right to obtain options to purchase 100,000 shares
of the Common Stock of Planet Entertainment Corporation at an exercise price of
$5.25 per share for a term of two years from the date of issuance. Of these
options, Nicks shall be granted options to purchase 25,000 shares of the Common
Stock of Planet Entertainment Corporation upon execution of this Agreement, and
the remaining options for the purchase of 75,000 shares of Common Stock shall
vest and be issued in equal annual installments upon each annual anniversary of
this Agreement over the next three years. Nothing herein shall prohibit the
Board of Directors from
Page 2 of 7
<PAGE>
granting additional compensation to Nicks in the form of employee stock options
and his salary shall be reviewed annually be the Board concerning appropriate
increases and/or to grant appropriate bonuses for his contributions to the
Company. Under no circumstances shall the compensation be reduced without
Nicks's consent.
6. POWERS AND DUTIES.
Nicks shall be required to devote his professional time, attention and
energies to the business of the Company and particularly as it relates to his
position as Chief Executive Officer, in accordance with the powers and duties
specified herein, and generally to be responsible for the day to day management
of any executive decisions concerning the operations of the Company, direct and
control its day to day affairs, make necessary decisions commensurate with his
positions in the Company, be responsible for the operations of the Company and,
in general, to exercise his authority for the best long term interests of the
Company and its shareholders. Duties shall also include primary responsibility
for all aspects of sales, personnel, marketing, management, and operations of
the Company, along with such other duties as may be delegated to him from time
to time by the Company.
7. COVENANT OF NON-COMPETITION.
In consideration for entering into this Agreement, during the period of
this Agreement, provided the Company is not in material default of any of the
provisions hereof, Nicks shall not, directly or indirectly, engage in any
activity which may be deemed competitive or in any way in conflict with the
Company's business and activities; nor shall he engage in or be a member of any
partnership or as an officer, director or employee of any corporation or
business entity, which competes directly or indirectly with the company without
the express permission of the Board of Directors; nor shall he engage in or be
actively involved in an other consultation or advisory agreements, contracts or
activities of a professional or commercial nature, which would compete directly
or indirectly with the Company unless permitted by the Company and its Board of
Directors for a term of three years in the Continental United States.
8. CONFIDENTIALITY.
Nicks acknowledges that he is in receipt of certain customer names,
identities, addresses, associations, methods, formulations, inventions, sales
and marketing techniques, know-
Page 3 of 7
<PAGE>
how, trade secrets, and other information utilized by the Company, and which
provide, or may provide the Company with a competitive advantage in the
marketplace (the "trade secrets"). Seller agrees to keep these trade secrets
confidential and not to disclose them to any person at any time without the
express written consent of the Company through its Board of Directors.
9. EMPLOYEE BENEFITS.
During the term of Nicks's employment hereunder, the Company shall
provide health, hospitalization, and major medical insurance coverage to Nicks
and his family of the same character and quality as that as made available to
the other executive employees of the Company.
10. TERMINATION.
The Company shall have the right at any time, upon not less than thirty
(30) days written notice to Nicks, to terminate the employment of Nicks for
"Cause." For purposes of this agreement "Cause" shall mean Nicks's arrest or
conviction for a crime of dishonesty, or his failure or refusal in a material
and continuing manner to perform his obligations as set forth in this agreement,
or his material breach of any provision of this Agreement, for a period of more
than twenty (20) days after receipt of written notice from the Company
specifying the failure or breach, requesting that it be cured and Nicks's
failure to cure the same or to be diligently exerting his best efforts to cure
the same. "Cause" shall not include the inability of Nicks to perform his
obligations hereunder due to mental or physical impairment, or external
circumstances of the market place, governmental regulations or policies or
adverse domestic or world conditions adversely effecting the Company's business.
It is agreed that the Company shall not discharge or terminate the services of
Nicks unless there is a material breach of this Agreement supported by a good
faith resolution of the Board of Directors based upon an opinion of Counsel to
the Company specifying in detail the basis for said termination. In the event of
termination for cause, Mr. Nicks shall receive his accrued salary as due and
owing as of the time of termination without any accrued bonus or other benefits
as of that date.
11. VACATION.
Nicks shall be entitled to a paid vacation consistent with that of
other executives of the Company. Any and all unused vacation may be carried over
to The succeeding year(s).
Page 4 of 7
<PAGE>
12. STOCK OPTION.
Nicks shall have the right to participate in the Company's
non-qualified stock option plan, or any subsequent stock option plan adopted by
the Company.
13. STOCK SPLITS AND DIVIDENDS.
Should the stock of the company split or a stock dividend be paid for
any reason during the term of this Agreement, any unexercised stock option or
warrant, or portion thereof, shall be deemed to be subject to the terms of the
stock split or purchase the equivalent number of shares covered by the split as
if he had previously owned or received his option prior to the stock split.
14. REPRESENTATION ON THE BOARD OF DIRECTORS
Planet Entertainment Corporation agrees to nominate Nicks to the Board
of Directors, subject to a majority vote by the shareholders of Planet
Entertainment as required by the By-Laws of Planet Entertainment Corporation and
the laws of the State of Florida.
15. NOTICES.
All notices and other communications required hereunder shall be in
writing and shall be deemed to have ben duly given if delivered or mailed
(registered or certified mail, postage prepaid, return receipt requested), if to
Nicks, to his residence, and if to the Company to its principal office.
16. WAIVER.
No waiver of any provision of this Agreement shall be deemed or shall
constitute a waiver of any other provision. No waiver shall be effective unless
executed in writing by the parties hereto.
17. LAW GOVERNING.
This Agreement shall be construed and governed in accordance with the
laws of the State of New York.
18. ENTIRE AGREEMENT.
This Agreement contains the entire understanding of the parties and may
not be modified, amended or supplemented, except by the written agreement of the
parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the
day and year first above written.
Page 5 of 7
<PAGE>
NORTHEAST ONE STOP, INC.
BY: /s/ LOUIS J. DELSIGNORE
-----------------------
NAME: Louis J. DelSignore
TITLE: Chairman
DATE: 9/24/98
PLANET ENTERTAINMENT CORPORATION
BY: /s/ WALLACE M. GIAKIS
----------------------
NAME: Wallace M. Giakis
TITLE: Chairman
DATE: 9/24/98
RONALD J. NICKS
BY: /s/ RONALD J. NICKS
--------------------
DATE: 9/21/98
Page 6 of 7
<PAGE>
ADDENDUM
EXECUTIVE COMPENSATION AGREEMENT
THIS AGREEMENT, made as of this 21st day of September, 1998, by and
between Northeast One Stop, Inc., a New York corporation, having its principal
place of business at 7 Northway Lane, Latham, New York 12110 (herein after
"NEOS"), Planet Entertainment Corporation ("Planet" or the "Company") and Ronald
J. Nicks, an individual residing at 44 Brendon Court, Clifton Park, New York
12065 (hereinafter referred to as "Nicks").
1. Ron Nicks as part of his executive compensation, shall receive
options to purchase an additional 50,000 shares of the
Company's common stock at $5.25 per share exercisable for two
years vesting immediately, thereby granting Nicks total
options to acquire 150,000 shares of the Company's common
stock pursuant to his employment agreement.
NORTHEAST ONE STOP, INC.
BY: /s/ LOUIS J. DELSIGNORE
------------------------
NAME: Louis J. DelSignore
TITLE: Chairman
DATE: 9/24/98
PLANET ENTERTAINMENT CORPORATION
BY: /s/ WALLACE M. GIAKIS
----------------------
NAME: Wallace M. Giakis
TITLE: Chairman
DATE: 9/24/98
RONALD J. NICKS
BY: /s/ RONALD J. NICKS
--------------------
DATE: 9/21/98
Page 7 of 7
MASTER RECORDING PURCHASE AGREEMENT
This Master Recording Purchase Agreement (the "Agreement") dated
October ____, 1998 is entered into between PLANET ENTERTAINMENT CORPORATION, a
Florida corporation ("Buyer"), and GULF COAST MUSIC, L.L.C., a Louisiana
corporation ("Seller").
WHEREAS, Seller is the business of owning, using and exploiting master
recordings; and
WHEREAS, Seller desires to sell on a nonexclusive basis seven thousand
five hundred master recordings (the "Master Recordings") and Buyer desires to
acquire such Master recordings under the terms and conditions hereinafter set
forth and for the consideration provided herein.
NOW, THEREFORE, in consideration of the foregoing and the mutual
promises contained herein, the parties hereby covenant and agree as follows:
ARTICLE I
MASTER RECORDINGS TO BE PURCHASED AND SOLD
1.1 Master Recordings to be Purchased by Buyer. Upon the terms and
subject to the conditions and provisions set forth in this Agreement, on the
Closing (as defined in Section 7.1 below), Seller shall convey, sell, transfer,
assign and deliver to Buyer, and Buyer shall purchase from Seller, one digital
audio tape copy of each of the Master Recordings as described in Section 1.2 and
subject to Sections 1.3 through 1.7.
1.2 Description of Assets. The Master Recordings to which this
Agreement relates shall be as follows:
The Master Recordings set forth on Schedule A. Buyer acknowledges that
it has received certain Master Recordings as of the date of this Agreement
pursuant to a certain agreement between Buyer and J. Jake, Inc. and Music
Marketeers, Inc. Seller shall supplement this list through November 30, 1998 in
order to ensure that Buyer receives 7,500 Master Recordings.
All rights, agreements and obligations regarding licenses held by
Seller necessary or incidental to the Master Recordings (to the extent the same
are transferable), including license agreements and other executory commitments
held by Seller, whether oral or written.
All proprietary rights, marks, trademarks, names, trade names, symbols,
service marks, logos, copyrights and registrations thereof, designs and
drawings, and licenses in respect of the Master Recordings (the "Proprietary
Rights").
All of the Masters, Contracts and Proprietary Rights to be conveyed,
sold, transferred, assigned and delivered to Buyer on a nonexclusive basis
pursuant to this Section 1.2, are hereinafter collectively referred to herein as
the "Assets."
1
<PAGE>
1.3 Third Party Consent; Non-Assignment of Certain Assets.
Notwithstanding anything to the contrary in this Agreement, to the extent that
the transfer or assignment hereunder of any item of the Assets shall require the
consent of any other party (or in the event that any of the same shall be
nonassignable), neither this Agreement nor any action taken pursuant to its
provisions shall constitute a transfer or assignment or an agreement to transfer
or assign if such transfer or assignment or attempted transfer or assignment
would constitute a breach thereof or result in the loss or diminution thereof.
Seller has identified on the appropriate Schedules all Assets which require the
consent of a third party for their transfer or assignment to Buyer. Seller shall
obtain such consents at the earliest feasible date and in no event later than
the Closing. If such consent is not obtained, Seller and Buyer shall cooperate
with each other in any reasonable arrangement designed to provide for Buyer the
benefits with respect to any such Assets, requiring third party consent,
including enforcement, for the account and benefit of Buyer, of any and all
rights of Seller against any other person arising out of the breach or
cancellation by such other person or otherwise, all of such actions of Seller to
be at the direction of Buyer and at the expense of Seller; provided, however,
that in the event, due to failure of consent, any of the Assets are not
transferred to Buyer, Seller agrees that the Purchase Price (as defined in
Section 3.1 below) shall be reduced by the reasonable value of the Assets not
transferred or assigned.
1.4 Instruments of Transfer. The sale, assignment, transfer, conveyance
and delivery of the Assets shall be made by such bills of sale and other
instruments of assignment, transfer and conveyance as Buyer shall reasonably
request.
1.5 Nonexclusive Nature of Sale. The parties hereto agree that the
Assets to be conveyed, sold, transferred, assigned and delivered to Buyer are
conveyed, sold, transferred, assigned to Buyer on a nonexclusive basis only and
that Seller shall retain all of its right, title and interest in and to the
Assets.
1.6 Licensing Rights. Buyer expressly agrees that it not sell,
transfer, convey or assign to any third party any right to license to any other
third party any rights in and to any of the Master Recordings listed in Schedule
A.
1.7. Notice. THIS AGREEMENT IS MADE SUBJECT TO THE AMENDED JOINT PLAN
OF REORGANIZATION, AS MODIFIED (THE "PLAN"), CONFIRMED BY ORDER OF THE UNITED
STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF LOUISIANA, DATED NOVEMBER
21, 1997, IN CONNECTION WITH THE JOINTLY ADMINISTERED BANKRUPTCIES OF MARSHALL
E. SEHORN, WHITE DOG RECORDS, INC. AND RED DOG EXPRESS, INC., IN CASE NOS.
96-10278, 96-10277 AND 96-10276.
PURSUANT TO SAID PLAN (AND NOTWITHSTANDING ANY OTHER PROVISION HEREIN
TO THE CONTRARY), THE TRANSFER TO PLANET ENTERTAINMENT CORPORATION OF PROPERTY
RIGHTS, TITLE AND/OR INTERESTS PURSUANT TO THIS AGREEMENT SHALL ONLY BE OF GULF
COAST MUSIC, L.L.C.'S RIGHTS, TITLE AND/OR INTERESTS, IF ANY, IN THE PROPERTY
DESCRIBED IN EXHIBIT A ATTACHED HERETO AND IS MADE EXPRESSLY SUBJECT TO THE
RIGHTS, TITLE, INTERESTS AND/OR CLAIMS, IF ANY, OF ANY THIRD PARTY, WHICH THIRD
PARTY RIGHTS, TITLE, INTERESTS AND/OR CLAIMS ARE EXPRESSLY PRESERVED.
2
<PAGE>
ARTICLE II
LIMITED ASSUMPTION OF OBLIGATIONS
2.1 Specific Exclusion of Certain Liabilities. The parties agree that
Buyer does not hereby assume the debts, liabilities, commitments or obligations
of Seller of any nature whatsoever, except with respect to those obligations
assumed by Buyer as a result of the transfer and assignment of certain of the
Contracts, as more particularly described below in Section 2.2. With the
exception of the obligations assumed by Buyer in Section 2.2, Seller agrees to
remain solely liable for all of its debts, obligations and liabilities and
claims related thereto.
2.2 Assumption of Certain Obligations. Buyer shall not, by the
execution, delivery and performance of this Agreement, assume, be bound by or
otherwise be responsible for any liability or obligation of Seller of any kind
or nature, known, unknown, accrued, absolute, contingent or otherwise,
whatsoever whether arising out of occurrences prior to, at or after the date
hereof, with reference to the Assets except those obligations assumed by Buyer
under those certain licenses. Without limiting the foregoing, it is understood
that Buyer does not assume, undertake or accept any obligations, duties,
responsibilities or liabilities of Seller that now exist or may arise in the
future with respect to matters occurring on or prior to the Closing (a) to any
contract which does not relate expressly to the Masters; (b) to any employee or
former employee of Seller or any of such employee's beneficiaries, heirs or
assigns, arising out of such employee's or former employee's employment by
Seller, or out of the transactions contemplated by this Agreement; (c) with
respect to (i) any income, profits, property, excise or similar taxes (it being
understood that Seller shall pay and be responsible for any and all taxes
related to the operations of the Business through the Closing), or (ii) any
claims for any personal injuries, property damage or consequential damage
relating to products sold or manufactured by Seller on or prior to the Closing;
(d) under any statutes, rule, regulation, code or ordinance, including, but not
limited to, civil rights, health, safety, labor, discrimination and
environmental laws, rules, regulations, codes and ordinances; (e) in connection
with this Agreement and the transactions provided for herein, including transfer
and other taxes, and expenses pertaining to the performance by Seller of its
obligations hereunder, provided that Seller shall pay any sales taxes due to the
State of Louisiana upon the sale of the Assets to Buyer; (f) to any shareholder
of Seller; and (g) with respect to any options, warrants, agreements or
convertible or other rights to acquire any securities of or interests in the
Seller.
ARTICLE III
PURCHASE PRICE
3.1 Consideration. Upon the terms and subject to the conditions
contained in this Agreement, in consideration for the Assets and in full payment
therefor, on or prior to the Closing, Buyer will relinquish the "Purchase
Price," which shall consist of Six Hundred and Ninety Four Thousand (694,000)
shares of its common stock. In addition, Buyer shall enter into a Promissory
Note in the form annexed hereto as Schedule B, in the amount of $1,250,000, with
interest at nine and three quarters (9 and 3/4) per cent from the inception of
the Note. The parties acknowledge that Buyer has already paid and shall be
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credited in the amount of $500,000 against the principle in connection with said
Note.
(1) Buyer shall execute and provide to Seller as security for the
balance of the purchase price outstanding from time to time a UCC-1 filing over
the Assets, which filing will be in substantially the form attached hereto as
Schedule C.
(2) There shall be an adjustment of the Purchase Price if it is
determined that Seller lacks legal title to any master recording set forth in
Schedule A or Buyer cannot market such master recording. Buyer shall notify
Seller in writing who will either replace such master recording or adjust the
Purchase Price within ten (10) days of notice.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
4.1 Buyer's Representations and Warranties. Buyer hereby represents and
warrants to Seller that:
(a) Organization: Authorization. Buyer is an individual, validly
existing and in good standing under the laws of the state of Florida and has all
requisite power and authority to enter into this Agreement, perform its
obligations hereunder and consummate the transactions contemplated hereby, and
the execution and delivery of this Agreement and the other documents and
agreements referred to herein or related hereto to be executed by Buyer, the
consummation of the transactions contemplated hereby and thereby and the
compliance by Buyer with the terms of this Agreement will not conflict with or
result in a breach of any terms of, or constitute a default under, Buyer's or
any agreement, obligation or instrument to which Buyer is a party or by which it
is bound, or any order by which it is bound. Buyer is duly licensed or qualified
to do business is in good standing under the laws of any other jurisdiction in
which the character of the properties owned or leased by it or in which the
transaction of its business makes such qualification necessary. All necessary
and appropriate action has been taken by Buyer with respect to the execution and
delivery of this Agreement and the other documents and agreements referred to
herein or related hereto to be executed by Buyer, and this Agreement and the
other documents and agreements referred to herein or related hereto to be
executed by Buyer constitute valid and binding obligations of Buyer enforceable
in accordance with their terms.
4.2 Seller's Representations and Warranties. Seller hereby represents
and warrants to Buyer as follows:
(a) Organization: Authorization. Seller is a limited liability
corporation organized, validly existing and in good standing under the laws of
the state of Louisiana and has all requisite corporate power and authority to
enter into this Agreement, perform its obligations hereunder and consummate the
transactions contemplated hereby, including, without limitation, the execution
and delivery of this Agreement, general conveyances, bills of sale, assignments
of Contracts and other documents and instruments delivered in accordance with
Section 7.2 (the "Closing Documents"). Seller is duly licensed or qualified to
do business as a foreign corporation and is in good standing under the laws of
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any other jurisdiction in which the character of the properties owned or leased
by it or in which the transaction of its business makes such qualification
necessary. All necessary and appropriate corporate action has been taken by
Seller with respect to the execution and delivery of this Agreement and the
Closing Documents and the consummation of the transactions contemplated hereby.
This Agreement constitutes a valid and binding obligation of Seller, enforceable
in accordance with its terms.
(b) Compliance with Law. Seller has complied in all material respects,
and is in compliance in all material respects, with all applicable federal,
state and local laws, statutes, franchise and licensing requirements, rules and
regulations, and judicial or administrative decisions pertaining to the
Business. Seller has been granted all licenses, permits, authorizations and
approvals from all applicable federal, state and local government regulatory
bodies necessary for the conduct of the Business, all of which are currently
valid and in full force and effect, nor are there any proceedings pending or
threatened which question the existence, continuation or scope of any of the
foregoing. There is no order issued, investigation or proceeding pending or to
the best of Seller's knowledge, threatened, or notice served with respect to any
violation of any law, ordinance, order, writ, decree, rule or regulation issued
by any federal, state or local court or governmental agency or instrumentality
to which Seller, the Assets or the operation of the Business is subject.
(c) Contracts and Commitments. There are no material contracts,
commitments, leases, permits, and other instruments (written or oral) binding
upon Seller with respect to the Assets except as delivered to Buyer or incurred
in accordance with the terms of this Agreement. Subject to the provisions of
Section 1.2 herein, Seller has delivered or furnished access to Buyer true and
complete copies of all of the Contracts relating to the Assets and any
amendments thereof. All of the Contracts are in full force and effect and are
valid, binding and enforceable in accordance with their respective terms, and
Seller is not in material default and no event or condition has occurred which,
with the passage of time or giving of notice (or both), would constitute a
material default with respect to the payment or performance of any obligation
thereunder, and there is no basis upon which such a claim could validly be made.
All such Contracts are fully assignable, subject to any notices, consents or
approvals provided for therein, by Seller to Buyer, except as Buyer has been
previously informed. Seller has a continuing obligation to supplement and update
all information and documents provided to Buyer.
(d) Assets. Schedule A contains a complete list of all assets sold
nonexclusively by Seller.
(e) Title to the Assets. Subject to the provisions of Section 1 herein,
Seller's predecessors had at the time of delivery to Buyer or Seller has, or
will have as of the Closing, good and marketable title to the Assets, free and
clear of all mortgages, pledges, liens, encumbrances, security interests,
equities, charges, clouds and restrictions of any nature whatsoever. By virtue
of the deliveries made on the Closing, Buyer will obtain good and marketable
title to the Assets, free and clear of all liens, mortgages, pledges,
encumbrances, security interests, charges, equities, clouds and restrictions of
any nature whatsoever, except as provided herein.
(f) Litigation. Except as set forth in Schedule D, there is no claim,
litigation, action, suit or proceeding, administrative or judicial, pending or,
to the best knowledge of Seller, threatened against Seller, at law or in equity,
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before any federal, state, local or foreign court or regulatory agency, or other
governmental authority which could have a material adverse effect on (i) the
ability of Seller to perform its respective obligations under this Agreement;
(ii) the Assets or the condition, financial or otherwise, or operation of the
Business; or (iii) the consummation of the transactions contemplated by this
Agreement, nor is there any basis upon which any such claim, litigation, action,
suit or proceeding could reasonably be brought or initiated.
(g) No Conflict or Default. Neither the execution and delivery of this
Agreement, nor compliance with the terms and provisions hereof by Seller,
including without limitation, the consummation of the transactions contemplated
hereby, will violate any statute, regulation or ordinance of any governmental
authority, or will conflict with or result in the breach of any term, condition
or provision of the certificate or articles of incorporation or bylaws of Seller
or a material breach of any agreement, deed, contract, mortgage, indenture,
writ, order, decree, legal obligation or instrument to which Seller is a party
or by which it or any of the Assets are or may be bound, or constitute a
material default (or an event which, with the lapse of time or the giving of
notice, or both, would constitute a material default) thereunder, or result in
the creation or imposition of any lien, charge or encumbrance, or restriction of
any nature whatsoever with respect to any of the Assets, or give to others any
interest or rights, including rights of termination, acceleration or
cancellation in or with respect to the Assets or the operation of the Business.
(h) Regulators' Approvals. No consent, approval or authority of, or
declaration, filing or registration with, any federal, state or local
governmental agency or authority is required in connection with the execution
and delivery by Seller of this Agreement and the consummation of the
transactions contemplated hereby.
(i) Taxes. Seller hereby affirms to Buyer that Seller has filed or will
file federal, state or local and foreign tax returns and tax reports required to
be filed with respect to the period during which the Business has been operated
by Seller and that all taxes, including without limitation, income, property,
sales, use, franchise, added value, employees' income withholding, and social
security taxes, imposed by the United States, by any state, municipality, other
local government or other sub-division or instrumentality of the United States,
or by any foreign country or any state or other government thereof, or by any
other taxing authority, that are due or payable by Seller and all interest and
penalties thereon, whether disputed or not, and which would result in the
imposition of a lien, claim or encumbrance on the Assets or against Buyer, other
than taxes which are not yet due and payable, have been paid in full, all tax
returns required to be filed in connection therewith have been accurately
prepared and duly and timely filed and all deposits required by law to be made
by Seller with respect to employees' withholding taxes have been duly made.
Seller is not delinquent in the payment of any tax, assessment or governmental
charge or deposits which would result in the imposition of a lien, claim or
encumbrance on the Assets or against Buyer, and Seller has no tax, deficiency or
claim outstanding, proposed or assessed against it, and there is no basis for
any such deficiency or claim, which would result in the imposition of any lien,
claim or encumbrance on the Assets or against Buyer.
(j) Complete Disclosure. No representation or warranty made by Seller
in this Agreement, and no Schedule, Exhibit, statement, certificate or other
writing furnished to Buyer by or on behalf of Seller pursuant to this Agreement
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or in connection with the transactions contemplated hereby contains or will
contain any untrue statement of a material fact or omits or will omit to state a
material fact necessary to make the statements herein or therein not misleading.
(k) Replacement. Seller warrants that it is in almost all cases the
non-exclusive owner of the Assets substantially representing 7,500 master
recordings (subject only to those limited non-exclusive licenses, artist and
production royalties, if any, as ascertained during delivery of title
documents). In the event that any particular master recording is found to
present serious legal or marketing problems, a mutually acceptable recording
shall be substituted (or the purchase price adjusted accordingly as set forth in
Section 3.1, with all rights of exploitation connected thereto, including all
rights reasonably related to the manufacture by any method or media now or
hereafter known, advertising, sale, license, distribution and other dealings
with respect to the Assets and recordings derived from the Assets, all
synchronization rights, all rights of public performance of the Assets and
performances embodied thereon and the rights to use and disseminate the names,
likenesses and biographical information of such artists, producers and others
whose performances are embodied on the Assets for the purposes of the
advertising and other promotion of the Assets and "derivatives" therefrom and
all other proprietary rights and copyrights which are the property of Seller
with respect to the Assets.
ARTICLE V
CLOSING
5.1 Closing. The transactions contemplated by this Agreement shall
close and all deliveries to be made shall take place at 4:30 p.m. Daylight
Savings Time, on or before December 15, 1998, at the offices of Davis Pfahl &
Fix, P.C., 261 Madison Avenue, New York, New York, or at such other place or
date as may be agreed upon from time to time in writing by Seller and Buyer (the
"Closing").
5.2 Deliveries by Seller. On or prior to the Closing, Seller shall
deliver to Buyer the following:
(a) A good and sufficient general conveyance, assignment and bill of
sale, which shall be in form and substance reasonably satisfactory to Buyer,
conveying, selling, delivering, transferring and assigning to Buyer title to all
of the Assets owned by Seller, free and clear of all mortgages, pledges, liens,
encumbrances, security interests, equities, charges, clouds and restrictions of
any nature whatsoever, which interfere with Buyer's ability to use the same
except for those matters expressly referred to in this Agreement or the
Schedules attached hereto or the Contracts previously delivered to Buyer.
(b) Good and sufficient assignments and third party consents of the
Contracts for which assignments and third party consents are required which
shall be in form and substance reasonably satisfactory to Buyer. In the event
Seller is unable to provide all underlying original Contracts on the date of
Closing, Seller will set forth those items in writing and agrees to provide such
original documents within sixty (60) days of Closing.
(c) Resolutions of the Seller authorizing the execution and delivery of
this Agreement by Seller and the performance of its obligations hereunder,
certified by the General Manager of Seller.
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(d) Such other separate instruments of sale, assignment or transfer
that Buyer may reasonably deem necessary or appropriate in order to perfect,
confirm or evidence in Buyer title to all or any part of the Assets and
consummate the transactions contemplated by this Agreement.
5.3 Deliveries by Buyer. On or prior to the Closing, Buyer shall
deliver to Seller the following:
(a) The Stock and Note required under Section 3.1 and the UCC-1's
required under Section 3.2.
5.4 Further Assurances. On or after the Closing, Seller shall prepare,
execute and deliver, at Buyer's direction and at Seller's expense, such further
instruments of conveyance, sale, assignment or transfer, and shall take or cause
to be taken such other or further action, as Buyer shall reasonably request at
any time or from time to time in order to perfect, confirm or evidence in Buyer
title to all or any part of the Assets or to consummate, in any other manner,
the terms and provisions of this Agreement.
ARTICLE VI
INDEMNIFICATION
6.1 Damages. For purposes of this Article, with respect to either party
"Damages" shall mean any and all losses, liabilities, damages, demands, claims,
suits, actions, judgments or causes of action, assessments, costs, expenses,
interest, penalties and, solely in connection with indemnifiable claims below,
attorneys' fees and all costs and expenses incurred in investigating, preparing
or defending against any litigation. For purposes of this Article VI, all
Damages shall be computed net of any insurance coverage with respect thereto
which reduces the Damages that would otherwise be sustained; provided, however,
that, in all cases, the timing of the receipt or realization of insurance
proceeds shall be taken into account in determining the amount of reduction of
Damages. Buyer and Seller shall be deemed to have suffered Damages arising out
of or resulting from the matters referred to in Section 6.2 or 6.3 if the same
shall be suffered by any parent, subsidiary or affiliate of Buyer or Seller.
6.2 Indemnification by Seller. Seller hereby agrees to indemnify and
hold harmless Buyer and its officers, directors and shareholders for and against
the following ("Seller's Indemnifiable Claims"):
(a) For the period of ten (10) years after the Closing, any and all
Damages incurred by or threatened against Buyer or any of its officers,
directors or shareholders in connection with any third party action which is
based upon or arises from any inaccuracy, breach or non fulfillment of any of
the representations made by Seller in this Agreement or any facts or
circumstances constituting such an inaccuracy, breach or non fulfillment.
6.3 Indemnification by Buyer. Buyer hereby agrees to indemnify and hold
harmless Seller for and against the following ("Buyer's Indemnifiable Claims"):
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(a) For the period of five (5) years after the Closing, any of the
Representations made by Buyer in this Agreement or any facts or circumstances
constituting such an inaccuracy, breach or non fulfillment.
6.4 Procedure for Indemnification with Respect to Third-Party Claims.
For purposes for this Section 6.4, Buyer's Indemnifiable Claims and Seller's
Indemnifiable Claims, when referred to generically, shall be referred to as
"Indemnifiable Claims".
(a) If a determination is made to seek indemnification under this
Article VI with respect to Indemnifiable Claims (the party seeking such
indemnification hereinafter referred to as the "Indemnified Party" and the party
against whom such indemnification is sought is hereinafter referred to as the
"Indemnifying Party") resulting from the assertion of liability by third
parties, the Indemnified Party shall give notice to the Indemnifying Party
within ninety (90) days of the Indemnified Party becoming aware of any such
Indemnifiable Claim or of facts upon which any such Indemnifiable Claim will be
based; the notice shall set forth such material information with respect thereto
as is then reasonably available to the Indemnified Party. In case any such
liability is asserted against the Indemnified Party, and the Indemnified Party
notifies the Indemnifying Party thereof, the Indemnifying Party will be
entitled, if it so elects by written notice delivered to the Indemnified Party
within 20 days after receiving the Indemnified Party's notice and acknowledges
in writing that such claim is an Indemnifiable Claim hereunder, to assume the
defense thereof with counsel satisfactory to the Indemnified Party at the
expense of the Indemnifying Party. Notwithstanding the foregoing, (i) the
Indemnified Party shall also have the right to employ separate counsel in such
Indemnifiable Claim and to participate in the defense thereof, but the fees and
expenses of such counsel shall be at the expense of the Indemnified Party unless
(1) the employment of separate counsel shall have been specifically authorized
by the Indemnifying Party in writing, or (2) the named parties in such
Indemnifiable Claim include both the Indemnifying Party and the Indemnified
Party, and the Indemnified Party shall have been advised by such counsel that
there may be one or more legal defenses available to it which are different from
or additional to those available to the Indemnifying Party, (ii) the Indemnified
Party shall not have any obligation to give any notice of any assertion of
liability by a third party unless such assertion is in writing, and (iii) the
rights of the Indemnified Party to be indemnified hereunder in respect of
Indemnifiable Claims resulting from the assertion of liability by third parties
shall not be adversely affected by its failure to give notice pursuant to the
foregoing unless, and, if so, only to the extent that, the Indemnifying Party is
materially prejudiced thereby. With respect to any assertion of liability by a
third party that results in an Indemnifiable Claim, the parties hereto shall
make available to each other all relevant information in their possession
material to any such assertion.
(b) In the event that the Indemnifying Party, within twenty
(20) days after receipt of the aforesaid notice of an Indemnifiable
Claim, fails to assume the defense of the Indemnified Party and employ counsel
against such Indemnifiable Claim, the Indemnified Party shall have the right to
employ counsel and undertake the defense, compromise or settlement of such
Indemnifiable Claim on behalf of and for the account and risk of the
Indemnifying Party and the Indemnifying Party will pay all the costs, fees and
expenses of such defense, counsel, compromise and settlement as incurred.
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(c) Notwithstanding anything in this Section to the contrary, the
Indemnifying Party shall not, without the Indemnified Party's written consent,
settle or compromise any Indemnifiable Claim or consent to entry of any judgment
in respect thereof unless such settlement, compromise or consent includes as an
unconditional term thereof the giving by the claimant or the plaintiff to the
Indemnified Party a release from all liability in respect of such Indemnifiable
Claim.
6.5 Tax Indemnity. In the event Seller or Buyer is required to pay any
taxes, or any interest or penalties on such taxes, which are the obligation of
the other party under this Agreement, the party so obligated to pay such taxes,
interest or penalties shall promptly reimburse and indemnify and hold harmless
the party that pays such taxes, interest and penalties.
6.6 Cumulative Rights. The rights, powers and remedies of any party
hereto shall be in addition to all rights, powers and remedies given to such
party by virtue of any statute or rule of law, all of which rights, powers and
remedies shall be cumulative and may be exercised successively, concurrently or
in any other order.
ARTICLE VII
MISCELLANEOUS PROVISIONS
7.1 Notices. All notices and other communications required or permitted
under this Agreement shall be deemed to have been duly given and made if in
writing and if served either by personal delivery to the party for whom intended
or by being deposited, postage prepaid, certified or registered mail, return
receipt requested, in the United States mail bearing the address shown in this
Agreement for, or such other address as may be designated in writing hereafter
by, such party:
If to Seller: Gulf Coast Music, L.L.C
757 St. Charles, Ste. 205
New Orleans, Louisiana 70130
If to Buyer: Planet Entertainment Corporation
999 Highway 35
P.O. Box 4085
Middletown, New Jersey 07748
7.2 Entire Agreement. This Agreement, the Exhibits and Schedules
hereto, and the documents referred to herein embody the entire agreement and
understanding of the parties hereto with respect to the subject matter hereof,
and supersede all prior and contemporaneous agreements and understandings, oral
or written, relative to said subject matter.
7.3 Binding Effect: Assignment. This Agreement and the various rights
and obligations arising hereunder shall inure to the benefit of and be binding
upon Seller and its successors and permitted assigns, and Buyer, and its
successors and permitted assigns. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be transferred or assigned (by
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operation of law or otherwise) by any party hereto without the prior written
consent of Buyer and Seller, except that Buyer and Seller may assign any or all
of their rights, interests and obligations hereunder, including the rights to
acquire specific Assets hereunder, to subsidiaries or affiliates of Buyer
without the consent of Seller, provided that each such subsidiary or affiliate
agrees in writing to be bound by all of the terms, conditions and provisions
contained herein and Buyer unconditionally guarantees to Seller in writing all
of the obligations of the assignee which are so assigned, which written
guarantee shall be in form and substance satisfactory to Seller.
7.4 Captions. The Article and Section headings of this Agreement are
inserted for convenience only and shall not constitute a part of this Agreement
in construing or interpreting any provision hereof.
7.5 Expenses of Transaction. Buyer and Seller shall each be responsible
for the payment of their respective financial adviser and accounting fees, and
any other costs or expenses incurred by them in connection with this Agreement
and the transactions contemplated hereby.
7.6 Waiver: Consent. This Agreement may not be changed, amended,
terminated, augmented, rescinded or discharged (other than by performance), in
whole or in part, except by the agreement in writing of the parties hereto, and
no waiver of any of the provisions or conditions of this Agreement or any of the
rights of a party hereto shall be effective or binding unless such waiver shall
be in writing and signed by the party claimed to have given or consented
thereto. Except to the extent that a party hereto may have otherwise agreed in
writing, no waiver by that party of any condition of this Agreement or document
delivered on the Closing or breach by any other party of any of its obligations
or representations hereunder or thereunder shall be deemed to be a waiver of any
other condition or subsequent or prior breach of the same or any other
obligation or representation by such other party, nor shall any forbearance by
the first party to seek a remedy for any noncompliance or breach by such other
party be deemed to be a waiver by the first party of its rights and remedies
with respect to such noncompliance or breach.
7.7 No Third-Party Beneficiaries. Nothing herein, expressed or implied,
is intended or shall be construed to confer upon or give to any person, firm,
corporation or legal entity, other than the parties hereto and their
shareholders, any rights, remedies or other benefits under or by reason of this
Agreement.
7.8 Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute one and the same instrument.
7.9 Gender. Whenever the context requires, words used in the singular
shall be construed to mean or include the plural and vice versa, and pronouns of
any gender shall be deemed to include and designate the masculine, feminine or
neuter gender.
7.10 Severability. With respect to any provision of this Agreement
finally determined by a court of competent jurisdiction to be unenforceable,
Seller and Buyer hereby agree that such court shall have jurisdiction to reform
such provision so that it is enforceable to the maximum extent permitted by law,
and the parties agree to abide by such court's determination. In the event that
any provision of this Agreement cannot be reformed, such provision shall be
deemed to be severed from this Agreement, but every other provision of this
Agreement shall remain in full force and effect.
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7.11 Governing Law. This Agreement shall in all respects be construed
in accordance with and governed by the laws of the State of Louisiana.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written.
GULF COAST MUSIC, L.L.C.
By: /s/ JEFFREY KRANZDORF
--------------------------------------------
Jeffrey Kranzdorf, General Manager
PLANET ENTERTAINMENT CORPORATION
By: /s/ WALLACE GIAKIS
--------------------------------------------
Wallace Giakis, Chairman
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ADDENDUM TO MASTER RECORDING PURCHASE AGREEMENT
ADDENDUM TO MASTER RECORDING PURCHASE AGREEMENT dated as of the __ day
of September 1998, by and between PLANET ENTERTAINMENT CORPORATION., a Florida
corporation ("Buyer"), and GULF COAST MUSIC, L.L.C., a Louisiana corporation
("Seller").
WHEREAS, the parties hereto have entered into a Master Recording
Purchase Agreement as of the date hereof, and
WHEREAS, Buyer wishes to enter into new arrangements by which to redeem
its common stock and the Promissory Note entered into in connection with the
Master Recording Purchase Agreement,
NOW, THEREFORE, in consideration of the foregoing and the mutual
promises contained herein, the parties hereby covenant and agree as follows:
1. Seller shall transfer the 694,000 shares of common stock issued to
Seller pursuant to Paragraph 3.1 of the Master Recording Purchase Agreement to
"Davis Pfahl & Fix, P.C., as Escrow Agent for Gulf Coast Music, L.L.C." Such
shares shall be released by Seller to the Buyer upon receipt of payment of the
Promissory Note as set forth in Paragraph 5, below. It is expressly understood
that the Seller is not a "Seller" as that term is defined under the Securities
Act of 1933, and that Seller's interest, and that of its Escrow Agent, in these
securities is solely that of a secured party holding a security interest in
these shares to secure payment under the Promissory Note. Should Seller be
construed as a "Seller" as that term is defined under the Securities Act of
1933, Buyer agrees to fully indemnify Seller from all liability arising
therewith, as provided for with regard to those Indemnifiable Matters as set
forth in the Master Recording Purchase Agreement.
2. Buyer shall make a Promissory Note in the amount of $2,300,000,
payable to Seller in full on or before December 15, 1998. Seller shall place
this Note in escrow with Davis Pfahl & Fix, P.C., as Escrow Agent.
3. Seller shall place in escrow with Davis Pfahl & Fix, P.C., the
Promissory Note in the amount of $1,250,000 (the principal amount outstanding of
which is $750,000) (hereinafter the "$1,250,000 Promissory Note"), made pursuant
to Paragraph 3.2 of the Master Recording Purchase Agreement.
4. Seller shall place in escrow with Davis Pfahl & Fix, P.C. a UCC-3
form, duly executed, releasing Seller's security interest in and to the Master
Recordings sold to Buyer pursuant to the Master Recording Purchase Agreement.
5. Upon payment by Buyer to Seller of $2,300,000 by certified or bank
check to Seller care of Davis Pfahl & Fix, P.C., as Escrow Agent, the 694,000
shares of common stock referred to in Paragraph 1 above shall be transferred to
the Buyer, the Promissory Notes referred to in Paragraphs 2 and 3 above, and the
UCC-3 referred to in Paragraph 4 above shall be released to
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Buyer by the Escrow Agent and the amount of $2,300,000 shall be released to
Seller.
6. In the event that the Buyer does not make timely payment to Seller
in the amount of $2,300,000 as referred to in Paragraph 6 above, Davis Pfahl &
Fix, P.C., as Escrow Agent, shall transfer to the Seller the 694,000 shares of
common stock referred to in Paragraph 1 above and shall release to Seller the
$1,250,000 Promissory Note referred to in Paragraph 3 above and the UCC-3
referred to in Paragraph 4 above. Simultaneously, Davis Pfahl & Fix, P.C., as
Escrow Agent, shall release to Buyer the Promissory Note in the amount of
$2,300,000 referred to in Paragraph 2 above.
7. The parties acknowledge that although Escrow Agent has acted as the
Attorney for the Seller for all other purposes, the Escrow Agent is acting
solely as a stakeholder at the request of the parties and for their convenience
and that Escrow Agent shall not be liable to either party or to anyone else for
any act or omission on its part unless taken or suffered in bad faith or in
willful disregard of this Agreement or involving gross negligence on the part of
the Escrow Agent. Seller and Buyer jointly and severally shall defend, indemnify
and hold Escrow Agent harmless from and against all costs, claims and expenses,
including but not limited to, reasonable attorney's fees, incurred in connection
with the performance of Escrow Agent's duties hereunder except with respect to
actions or omissions taken or suffered by Escrow Agent in bad faith or willful
disregard of this Agreement or involving gross negligence on the part of Escrow
Agent. Except with respect to actions, omissions, or refraining to act, taken or
suffered by Escrow Agent in bad faith or willful disregard of this Agreement or
involving gross negligence on the part of Escrow Agent, Escrow Agent may act or
refrain from acting in respect of any matter referred to herein in full reliance
upon and with the advice of counsel outside its firm which may be selected by
it, and shall be fully protected in so acting or refraining from acting upon the
advice of such counsel. Any fees payable to outside counsel shall be the sole
responsibility of Seller and shall be paid in full prior to the release of any
materials from escrow
8. Any notice, request, demand, consent, approval or other
communication ("Notice") required or permitted to be given hereunder shall be
validly given, made or served if in writing and either (a) sent by either of the
parties hereto or by the respective attorneys who are hereby authorized to do so
on their behalf or by the Escrow Agent by certified mail return receipt
requested or (b) delivered in person, with the receipt acknowledged, to the
respective addressees as set forth below for each party and for the Escrow Agent
or to use such other address as such party or Escrow Agent shall hereafter
designate by Notice given to the other party or parties and the Escrow Agent
pursuant to this paragraph. Each Notice mailed shall be deemed to be given on
the fourth business day following the date of mailing the same, except that any
Notice to Escrow Agent shall be deemed given only upon receipt by Escrow Agent
and each Notice given in person shall be deemed given when delivered.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written.
GULF COAST MUSIC, L.L.C.
By: /s/ JEFFREY KRANZDORF
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Jeffrey Kranzdorf, General Manager
PLANET ENTERTAINMENT CORPORATION
By: /s/ WALLACE GIAKIS
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Wallace Giakis, Chairman
AGREEMENT OF LEASE
Agreement of Lease, made as of the 22nd day of September,
1998, between L & P FEED, INC., a New York corporation with its office at 17
Amity Point, Cilfton Park, New York 12065, hereinafter referred to as Landlord,
and NORTHEAST ONE STOP, INC., a New York corporation with its office at 7
Northway Lane, Latham, New York 12110, hereinafter referred to as Tenant.
W I T N E S S E T H :
1. DEMISED PREMISES:
1.01. Landlord hereby leases to Tenant and Tenant
hereby hires from Landlord, the premises (hereinafter referred to as the Demised
Premises) consisting of a commercial building, containing approximately 46,450
square feet, (the Building) and parking lot suitably identified on Exhibit I,
annexed hereto and by this reference made a part hereof and commonly known as 7
Northway Lane, Latham, New York (the "Parcel"), together with any and all
rights, privileges, easements and appurtenances belonging thereto.
2. TERM:
2.01. The term of this Lease shall be for five (5)
years, commencing on the 1st day of October, 1998 (the Commencement Date) and
terminating on the 30th day of September, 2003.
3. RENT:
3.01. Tenant agrees to pay Landlord, during the term
aforesaid, an annual rental as hereinafter provided:
A. For the first year of the term the sum of One
Hundred Forty-Four Thousand and 00/100ths Dollars ($144,000.00), payable in
equal, monthly installments of Twelve Thousand and 00/100ths Dollars
($12,000.00) each on the first day of each month of said term, in advance;
B. For the second through the fifth year of the term
the sum of One Hundred Eighty Thousand and 00/100ths Dollars ($180,000.00),
payable in equal, monthly installments of Fifteen
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Thousand and 00/100ths Dollars ($15,000.00) each on the first day of each month
of said term, in advance.
4. USE OF PREMISES:
4.01. Tenant may use and occupy the Demised Premises
and the Building thereon for the purposes of offices, sales, distribution and
warehousing, and for no other purpose or purposes.
4.02. Tenant will not, nor will it permit, any other
persons to do anything or, bring anything in or upon the Demised Premises or to
be kept therein, which will in any way increase the rate of fire insurance on
the Demised Premises, nor use or permit the Demised Premises to be used for any
purpose which would cause an increase in the rate of fire insurance on the
Demised Premises.
5. TAXES:
5.01. In addition to the annual rental provided for
in Article "3" hereof, Tenant agrees to pay to Landlord as additional rent all
property taxes, water and sewer rents, rates and charges, and assessments, which
may be levied or assessed against the Demised Premises by any lawful authority
for the period of the term of this Lease. Landlord agrees that Tenant shall have
the right to contest the amount of or legality of any taxes which it is
obligated to pay, and the right to make application for the reduction thereof or
of any assessment upon which the same may be based, but this shall not be deemed
or construed in any way as releasing or discharging Tenant's covenant to pay
such taxes. Landlord shall, at the request of Tenant, join in any such
proceedings or application. If any refund or reduction is made to Landlord, such
refund or reduction shall be credited against the payments of additional rent
due thereafter. Should the State of New York or any political subdivision
thereof or any governmental authority having jurisdiction thereover, impose a
tax and/or assessment (other than a net income or franchise tax) upon or against
the rental payable by Tenant to Landlord, or any other tax which is intended in
whole or in part as a substitute for the
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current method of real estate taxation, such tax and/or assessment shall be
deemed to constitute a tax and/or assessment against the Demised Premises for
the purpose of this Article.
5.02. Upon receipt of all tax bills and assessment
bills attributable to any calendar year during the term hereof, Landlord shall
furnish Tenant with a written statement of the amount due from Tenant's for
taxes and assessments of such year. Tenant shall pay to Landlord said amount
within ten (10) days from the receipt of said statement. Tenant shall be
responsible for payment of taxes hereunder from the Commencement Date of this
Lease. In the event Landlord is required under a mortgage covering the Demised
Premises to escrow real estate taxes, Landlord may require Tenant to pay the
aforesaid taxes and assessments during the term hereof in monthly installments
on or before the first day of each calendar month, in advance, in an amount
estimated by said mortgagee. If the total amount paid by Tenant under this
Article during the term of this Lease shall be less than the actual amount due
from Tenant for any calendar year thereof, as shown on such statement, Tenant
shall pay to Landlord the deficiency within ten (10) days after demand therefor
by Landlord; and if the total amount paid by Tenant hereunder for any such
calendar year shall exceed such amount due from Tenant for such calendar year,
Tenant shall be entitled to offset the excess against payments next thereafter
become due under this Article 5. For the calendar years in which this Lease
commences and terminates, the provisions of this Article shall apply and
Tenant's liability for the taxes and assessments for any such year shall be
subject to a pro rata adjustment based on the number of days of any such year
during which term of this Lease is in effect. A copy of a tax bill or assessment
bill submitted by Landlord to Tenant shall at all times be sufficient evidence
of the amount of taxes and/or assessments levied or assessed against the
property to which such bill relates. Prior to or at the commencement of the term
of this Lease and from time to time
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thereafter throughout the term hereof, Landlord shall notify Tenant in writing
of Landlord's estimate of Tenant's monthly installments due hereunder.
Landlord's and Tenant's obligations under this Article shall survive the
expiration of the term of this Lease.
5.03. Nothing herein contained is intended to make the
Tenant responsible for franchise, corporate or partnership taxes which are
charged to the Landlord, including excise, inheritance, capital levy, transfer
or income, profits or revenue, upon income of Landlord, except that, in the
event of the passage of any statute, act or law as the result of which Landlord
becomes obligated to pay any income tax or any other tax, charge, levy,
assessment or imposition, in lieu or place of any general tax, school tax, or
other real estate tax or assessment, which would otherwise be levied against
and/or become a lien upon the Demised Premises, such tax, charge, levy,
assessment or imposition shall be payable by Tenant as provided for by this
Article "5".
6. INSURANCE:
6.01. Tenant agrees to carry comprehensive commercial
general liability insurance on an occurrence basis on the Demised Premises
during the term hereof, covering Tenant and covering Landlord as an additional
insured with terms and companies reasonably satisfactory to Landlord, but in any
event including coverage for Tenant's indemnity to Landlord contained in Article
"19" of this Lease, for limits of not less than Three Million ($3,000,000.00)
Dollars for bodily injury and property damage arising out of any one occurrence
and providing that Landlord and Tenant shall be given a minimum of thirty (30)
days written notice by the insurance company prior to cancellation, termination
or change in such insurance. Tenant shall provide Landlord with copies of the
policies or certificates evidencing that all insurance coverage provided for
herein is in full force and effect and stating the terms thereof. Tenant's
insurance carrier shall be licensed to do business in the State of New York and
shall have a
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policyholder's rating of not less than A+V in the most recent edition of Best's
Insurance Reports.
6.02. Landlord shall carry during the term hereof
insurance for fire, extended coverage, vandalism, malicious mischief, and such
other hazards Landlord or Landlord's first mortgagee may require, insuring
improvements located on the Demised Premises and all appurtenances thereto
(excluding Tenant's merchandise, trade fixtures, furnishings, equipment,
personal property and Tenant's work) for not less than the full insurable value
thereof. Tenant agrees to reimburse Landlord, as additional rent herein, the
cost of the premiums for such insurance within twenty (20) days from the receipt
from Landlord of a written statement for such amount which shall be accompanied
by a copy of the bill of the insurance carrier for same. Tenant shall be
responsible for payment of insurance premiums from the Commencement Date of this
Lease.
6.03. Tenant shall be responsible for the maintenance
of the plate glass and doors in or on the Demised Premises but shall have the
option either to insure the risk or to self insure.
7.01. ALTERATIONS:
7.01. Tenant may not make any installations,
alterations or additions in or to the Demised Premises without the consent of
Landlord, which consent will not be unreasonably withheld or delayed.
7.02 Tenant is leasing the Demised Premises in an "as
is" condition.
8. REPAIRS AND MAINTENANCE:
8.01. The Tenant shall take good care of the Demised
Premises, maintain same including landscaping, grass cutting, ice and snow
removal and shall, at Tenant's own cost and expense, make all repairs, except
repairs to the roof, foundation, exterior walls and other structural elements
which shall be Landlord's responsibility, unless said structural repairs are
required as a result of the negligence of the Tenant, its agents, servants
and/or
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employees, and at the end or other expiration of the term, shall deliver up the
Demised Premises in good order and condition, damage by the elements and
ordinary wear and tear excepted.
9. DESTRUCTION BY FIRE OR OTHER CASUALTY:
9.01. In the event the Demised Premises are hereafter
damaged or destroyed or rendered partially untenantable for their accustomed
uses by fire or other casualty insured or required to be insured under the
coverage which Landlord is obligated to carry pursuant to Article "6" hereof,
then Landlord shall promptly repair said premises and restore the same to
substantially the condition in which they were immediately prior to the
happening of such casualty, and from the date of such casualty until the Demised
Premises are so repaired and restored, annual rental payments, except for taxes
or charges due under Article "5" and "6" hereof, shall abate in such proportion
as the part of the Demised Premises thus destroyed or rendered untenantable
bears to the total Demised Premises. In the event, however, that either Landlord
or Tenant reasonably determines that such damage cannot be repaired and/or the
Demised Premises made tenantable within ninety (90) days from the date of the
occurrence thereof, either Landlord or Tenant may cancel this Lease within
thirty (30) days after the date of such damages, by giving written notice as
provided in the next Article "26" of this Lease.
10. SIGNS:
10.01. Landlord grants to Tenant the right to install a
sign upon the Demised Premises of whatever size permitted by the zoning laws of
the Town of Colonie, New York. Tenant shall neither place, nor cause, or allow
to be placed any other sign or signs upon the Demised Premises without the
approval of Landlord, which approval will not be unreasonably withheld, and the
approval, if necessary, of municipal authorities. In the case that Landlord
shall deem it necessary to remove any such sign or signs in order to make any
repairs or alterations or improvements in or upon the
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<PAGE>
Demised Premises or building or any part thereof, the Landlord shall have the
right to do so, providing the same be removed and replaced at the Landlord's
expense, whenever the said repairs, alterations or improvements shall be
completed. Notwithstanding the foregoing, Tenant shall have the right during the
term of this Lease and any renewal term, at its own cost and expense, to place
on or more descriptive signs advertising Tenant's business on any of the
exterior windows of the Building if permitted by local laws.
11. UTILITIES:
11.01. Tenant shall be responsible for payment of all
utilities servicing the Demised Premises, including but not limited to electric,
gas, sewer, and water.
12. ASSIGNMENT OF LEASE:
12.01. Tenant may not sublet or assign this Lease
without the Landlord's consent, which consent will not be unreasonably withheld
or delayed after Tenant notifies Landlord of its intention to assign or sublet.
If within twenty (20) days after Tenant's notice, Landlord shall have failed to
either approve or disapprove (and in the case of disapproval, set forth the
reasons therefore) Tenant's proposed assignment or subletting, such assignment
or subletting shall be deemed to have been approved. It is further agreed that
no assignment or sublease shall be effective unless the assignee or sublessee
agrees directly with the Landlord to perform Tenant's obligations under this
Lease. Notwithstanding any permitted assignment or subletting, no further
assignment or subletting may be made without Landlord's consent and, in all
events, Tenant shall remain fully and primarily liable for the payment of all
rent, additional rent and the performance of all the terms, covenants and
conditions contained herein jointly and severally with such assignee or
sublessee. Landlord's dealing with an assignee or sublessee shall not affect the
continued liability of the Tenant under this Lease. Notwithstanding the
foregoing, this Lease may be assigned, or the Demised Premises may be sublet,
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<PAGE>
in whole or in part, without Landlord's prior consent, (a) to any corporation
into or with which Tenant may be merged or consolidated, or (b) to any
corporation which shall be an affiliate, subsidiary, parent or successor of
Tenant, or of a corporation into or with which Tenant may be merged or
consolidated.
13. COMPLIANCE WITH LAWS:
13.01. Except as otherwise provided herein, Tenant shall
comply with all laws, orders and regulations of federal, state, county and
municipal authorities, and with any direction pursuant to law of any public
officer thereof, which shall impose any violation, order or duty upon Landlord
or Tenant resulting from the use and occupancy of the Demised Premises by
Tenant. Tenant shall have the right, upon giving notice to Landlord, to contest
any obligations imposed upon Tenant pursuant to the provisions of this Article,
and to defer compliance during the pendency of such contest, provided that the
failure of Tenant to so comply will not subject Landlord to prosecution or
criminal penalty. Landlord shall comply with any such laws, orders, regulations,
directions and rules in respect to the Demised Premises, other than those
imposing an obligation upon Tenant as aforesaid, subject, however, to the right
of Landlord similarly to contest as aforesaid and defer compliance during the
pendency of such contest.
14. SUBORDINATION:
14.01. This instrument shall not be a lien against said
Demised Premises with respect to any first mortgage that is now on or that
hereafter may be placed against said Demised Premises, and upon the recording of
such mortgage or mortgages, the same shall have preference and precedence and be
superior and prior in lien to this Lease, irrespective of the date or recording
of the same and the Tenant agrees to execute any such instrument, without cost,
which may be deemed necessary or desirable to further effect the subordination
of this Lease to any such mortgage, and a refusal
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<PAGE>
to execute such instrument shall entitle the Landlord, or the Landlord's assigns
and legal representatives to the option of cancelling this Lease without
incurring any expense or damage and the term hereby granted is expressly limited
accordingly, provided, however, that a non-disturbance agreement shall have
first been entered into in respect to such mortgage that is now on or that
hereinafter may be placed against the Demised Premises. The term
"non-disturbance agreement" as used in this Article shall mean an agreement in
recordable form between the Tenant and the holder of any mortgage lien, which
shall provide, in substance, that the Tenant shall attorn to any such mortgagee
and that as long as Tenant is not in default under this Lease beyond any period
given to Tenant to cure such default, such holder will not name or join Tenant
as a party defendant or otherwise in any suit, action or proceeding to enforce,
nor will this Lease be terminated or otherwise affected by enforcement of, any
rights given to such holder pursuant to the terms, covenants or conditions
contained in such mortgage or mortgages, or any other documents held by such
holder or any rights given to such holder as a matter of law. Tenant agrees to
make minor, reasonable changes to this Lease as may be required by any such
mortgagee, provided such mortgagee is a recognized lending institution and the
said changes do not modify the substance of this agreement.
15. WAIVER OF REDEMPTION:
15.01. Tenant hereby expressly waives any and all rights
of redemption granted by or under any present or future laws in the event of
Tenant being dispossessed or removed from the Demised Premises because of
default by Tenant pursuant to the covenants or agreements contained in this
Lease.
16. DEFAULT:
16.01. (a) It is expressly understood and agreed that
in case the Demised Premises shall be deserted or vacated, or if default be made
in the payment of the rent or additional rent or
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any part thereof as herein specified, or if, without the consent of the
Landlord, the Tenant shall sell, assign, or mortgage this Lease or if default be
made in the performance of any of the covenants and agreements in this Lease
contained on the part of the Tenant to be kept and performed, or if the Tenant
shall fail to comply with any of the statutes, ordinances, rules, orders,
regulations and requirements of the Federal, State and local governments or of
any and all their departments or bureaus, applicable to the Demised Premises, or
if the Tenant shall file or there shall be filed against Tenant a petition in
bankruptcy or arrangement, or under any insolvency laws now or hereinafter
enacted, or Tenant be adjudicated a bankrupt or make an assignment for the
benefit of the creditors to take advantage of any insolvency act, the Landlord
may, if the Landlord so elects, and may at any time thereafter terminate this
Lease and the term hereof, on giving to the Tenant thirty (30) days notice in
writing to cure such default, or if such default cannot be cured within thirty
(30) days, Tenant does not commence to cure such default within thirty (30) days
and diligently pursues the same to completion thereafter, except in the case of
non-payment of rent said notice shall require a cure within ten (10) days and
for non-payment of additional rent, said notice shall require a cure within
twenty (20) days, and if such default is not so cured, this Lease and the term
hereof shall expire and come to an end on the date fixed in such notice as if
the said date were the date originally fixed in this Lease for the expiration
hereof, and Landlord may re-enter the Demised Premises and dispossess or remove
Tenant or any other occupant of the Demised Premises by summary proceedings or
otherwise, and remove their effects and hold the Demised Premises as if this
Lease had not been made, but without prejudice to Landlord's remedies, on
account thereof as set forth in paragraph (b) below. Tenant acknowledges that
Tenant has read and is fully familiar with this Article "17" of the Lease and
that in the event of any default with respect to
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<PAGE>
payment of rent or additional rent by Tenant after notice is given as required
herein, Landlord may forthwith enter, take possession and operate the Demised
Premises.
(b) In the event of such dispossession, termination
or removal and notwithstanding such action or the termination of this Lease, (i)
the Tenant shall be liable forthwith to pay the rent and additional rent payable
under this Lease up to the date of such dispossession, removal or termination,
(ii) Landlord may re-let the Demised Premises, or any part or parts thereof,
either in the name of Landlord or otherwise, for a term or terms which may, at
the option of Landlord, be less than or exceed the period which would otherwise
have constituted the balance of the term of this Lease and may grant concessions
or free rent for a reasonable time; (iii) Tenant shall pay to Landlord as
liquidated damages for the failure of Tenant to observe and perform the
covenants and agreements of Tenant under this Lease, any deficiency between the
rent and additional rent payable by Tenant under this Lease and the net amount,
if any, of the rents collected on account of the Lease or Leases of the Demised
Premises for each month of the period which would otherwise have constituted the
balance of the term of this Lease, (iv) amounts received by Landlord after
reletting shall first be applied against Landlord's expenses incurred in any
reletting, until the same are recovered, and until such recovery, Tenant shall
pay, as of each day when a payment would fall due under this Lease, the amount
which Tenant is obligated to pay under the terms of this Lease (Tenant's
liability prior to any such reletting and such recovery not in any way to be
diminished as a result of the fact that such reletting might be for a rent
higher than the rent provided for in this Lease); when and if such expenses have
been completely recovered, the amounts received from reletting by Landlord as
have not previously been applied shall be credited against Tenant's obligations
as of each day when a payment would fall due under this Lease, and only the net
amount thereof
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shall be payable by Tenant; further, amounts received by Landlord from such
reletting for any period shall be credited only against obligations of Tenant
allocable to such period, and shall not be credited against obligations of
Tenant hereunder accruing subsequent or prior to such period; nor shall any
credit of any kind be due for any period after the date when the term of this
Lease is scheduled to expire according to its terms. Landlord may make such
reasonable alterations, repairs, replacements and decorations in the Demised
Premises as Landlord considers advisable and necessary for the purpose of
reletting the Demised Premises, and the making of such alterations and
decorations shall not operate or be construed to release Tenant from liability
under this Lease. The failure or refusal of Landlord to re-let the Demised
Premises or any part thereof shall not release or affect the liability of Tenant
for damages under this Lease, however Landlord shall use reasonable effort to
re-let the Demised Premises. Landlord shall in no event be liable in any way
whatsoever for inability to re-let the Demised Premises or, in the event that
the Demised Premises are re-let, for inability to collect the rent under such
reletting.
(c) After default of payment of rent, or violation of
any other provision of this Lease, or expiration thereof, the Tenant moves out
or is dispossessed and fails to remove any trade fixture or other property prior
to such said default, removal, expiration of Lease, or prior to the issuance of
the final order or execution of the warrant, then in that event, the said
fixtures and properties shall be deemed abandoned by the said Tenant and shall
become the property of the Landlord.
17. CURING DEFAULT:
17.01. If Tenant shall default in the observance or
performance of any covenant or agreement of this Lease on the part of Tenant to
be observed or performed, beyond any period given to Tenant to cure such
default, and after reasonable notice and
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demand, Landlord may perform the same for the account of Tenant, and if Landlord
makes any reasonable expenditures or incurs any obligation for the payment of
money in connection therewith, including, but not limited to, reasonable
attorneys' fees in instituting, prosecuting or defending any action or
proceeding, including bankruptcy proceedings involving Tenant as a debtor, such
expenditures paid, or obligations incurred, with interest and costs, shall be
deemed to be additional rent and shall be paid by Tenant to Landlord within ten
(10) days of rendition to Tenant of any bill or statement therefor.
18. EMINENT DOMAIN:
18.01. If the whole of the Demised Premises shall be
acquired or condemned by Eminent Domain for any public or quasi-public use or
purpose, then in that event, the term of this Lease shall cease and terminate
from the date of title vesting in such proceeding.
18.02. In the event of a Taking of less than the whole
of the Demised Premises, this Lease shall cease and expire with respect to the
portion of the Demised Premises taken, upon vesting of title as a result of the
Taking, and if in the reasonable opinion of Tenant, such taking renders the
Demised Premises not suitable for the use for which it was being utilized
immediately prior thereto, Tenant may elect to terminate this Lease by giving
notice to Landlord to such election not more than forty-five (45) days after
receipt by Tenant of notice of the Taking, stating the date of termination,
which date of termination shall be not more than thirty (30) days after the date
on which such notice to Landlord is given, and upon the date specified in such
notice to Landlord, this Lease and the term hereof shall cease and expire. If
Tenant does not elect to terminate this Lease as aforesaid (i) the annual rent
payable under this Lease shall be reduced to an amount to be determined by
multiplying the annual rent by a fraction, the numerator of which is the area of
the Demised
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Premises remaining after the Taking, and the denominator of which is the total
area of the Demised Premises immediately preceding the Taking, and (ii) after
the determination of Landlord's award on account of the Taking, Landlord shall
expend as much of the award as necessary to restore the portion of the
improvements remaining after the Taking, to a complete architectural unit
substantially the same as to the condition and tenantability prior to the taking
for the use and occupancy of the Tenant. Should the net amount so awarded to
Landlord be insufficient to cover the cost of restoring the Demised Premises, in
the reasonable estimate of Landlord, Landlord may, but shall have no obligation
to, supply the amount of such insufficiency and restore the Demised Premises to
such an architectural unit, with all reasonable diligence, or Landlord may
terminate this Lease by giving notice to Tenant not later than a reasonable time
after Landlord has determined the estimated net amount which may be awarded to
Landlord and the estimated cost of such restoration.
18.03. In the event of a Taking of the Demised Premises
or any part thereof, Landlord shall have and hereby reserves and excepts, and
Tenant hereby grants and assigns to Landlord, all rights to recover for damages
to the Demised Premises, the Building in which the same are located, and the
leasehold interest hereby created, and to compensation accrued or hereafter to
accrue by reason of such Taking, as aforesaid, and by way of confirming the
foregoing, Tenant hereby grants and assigns, and covenants with Landlord to
grant and assign, to Landlord all rights to such damages or compensation.
Nothing contained herein shall be construed to prevent Tenant from prosecuting
in any condemnation proceedings any claims permitted by law to recover for
relocation expenses, loss of business, or depreciation to, or cost of removable
trade fixtures, furniture and other personal property belonging to Tenant, or
any alterations which are of the nature that would remain the property of
Tenant, provided that such action
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shall not affect the amount of compensation otherwise recoverable by Landlord
from the Taking Authority.
19. INDEMNIFICATIONS:
19.01. Tenant does hereby covenant and agree with said
Landlord that it will indemnify and save harmless Landlord from and against any
and all liability, damage, penalties or judgments arising from injury to person
or property sustained by anyone in and about the Demised Premises resulting from
any act or acts of omission or commission of Tenant, or Tenant's officers,
agents, servants, employees, contractors, or assignees. Tenant shall, at its own
cost and expense, defend any and all suits or actions (just or unjust) which may
be brought against Landlord or in which Landlord may be impleaded with others
upon any such above-mentioned matter, claim or claims, except as may result from
any act or acts of omission or commission of Landlord, or Landlord's officers,
agents, servants, employees, assignees or contractors.
20. END OF TERM:
20.01. Upon expiration or other termination of the term
of this Lease, Tenant shall quit and surrender to Landlord the Demised Premises,
broom clean, in good order and condition, reasonable wear and tear and damage by
fire or other casualty excepted.
21. QUIET ENJOYMENT:
21.01. Landlord covenants and agrees that Tenant may
peaceably and quietly enjoy the Demised Premises, subject, however, to the
covenants and agreements contained in this Lease.
22. NO WAIVER:
22.01. The failure of Landlord to seek redress for
violation of, or to insist upon the strict performance of, any covenant or
agreement contained in this Lease shall not prevent a similar subsequent act
from constituting a default under this Lease. This Lease contains the entire
agreement between the parties, and cannot be changed, modified, or amended
unless such
15
<PAGE>
change, modification or amendment is in writing and signed by the party against
whom enforcement of such change, modification or amendment is sought.
22.02. No payment by Tenant, or acceptance by Landlord,
of a lesser amount than shall be due from Tenant to Landlord shall be treated
otherwise than as a payment on account. The acceptance by Landlord of a check
for a lesser amount with an endorsement or statement thereon, or upon any letter
accompanying such check, that such lesser amount is payment in full, shall be
given no effect, and Landlord may accept such check without prejudice to any
other rights or remedies which Landlord may have against Tenant.
23. WAIVER OF TRIAL BY JURY AND COUNTERCLAIMS:
23.01. Landlord and Tenant agree that they shall, and
they hereby do, waive trial by jury in any action, proceeding or counterclaim
brought by either of the parties hereto against the other on any matters
whatsoever arising out of, or in any way connected with, this Lease. If Landlord
commences any summary proceeding for non-payment of rent or additional rent,
Tenant will not interpose any counterclaim in such proceeding unless such
counterclaim arises out of, or is in any way connected with this Lease.
24. MEMORANDUM OF LEASE:
24.01. Upon request of either party to this Lease,
Landlord and Tenant agree to execute and deliver a memorandum of this Lease and
a memorandum of any modification of this Lease, in recordable form, containing
the information required by Section 291-c and 291-cc of the Real Property Law of
the State of New York.
25. INSPECTION OF PREMISES:
25.01. The Tenant agrees that the Landlord and its
agents and/or representatives shall have the right to enter into and upon
Demised Premises, or any part thereof, at all reasonable hours and upon
reasonable notice (except in the case of an emergency) for
16
<PAGE>
the purpose of examining the same, or making such repairs or alterations therein
as may be necessary for the safety and preservation thereof, provided that such
entry shall not unreasonably inconvenience Tenant in its operation and use of
the Demised Premises.
25.02 The Tenant also agrees to permit during the last
six (6) months of the term of this Lease at all reasonable times and upon
reasonable notice, the Landlord or the Landlord's agents to show the Demised
Premises to persons wishing to lease the same, provided that such entry shall
not unreasonably inconvenience Tenant and its operation and use of the Demised
Premises.
26. NOTICES:
26.01. Any notice or demand required to be given under
this Lease, or pursuant to any law or governmental regulations, by Landlord to
Tenant or by Tenant to Landlord shall be in writing. Unless otherwise required
by law or governmental regulations, any such notice or demand shall be deemed
given if sent by registered or certified mail, enclosed in a secure postage
prepaid wrapper, addressed (i) to Landlord, at the address of Landlord first
hereinabove set forth, or such other address as Landlord may designate by notice
to Tenant, or (ii) to Tenant, at the address of Tenant first hereinabove set
forth or such other address as Tenant may designate by notice to Landlord.
26.02. After receiving notice from any person, firm or
other entity that it holds a mortgage which includes the Demised Premises as
part of the mortgaged premises, no notice from Tenant to Landlord shall be
effective unless and until a copy of the same is given to such holder, and the
curing of any of Landlord's default by such holder shall be treated as
performance by Landlord.
27. CAPTIONS:
27.01. The captions preceding the Articles of this Lease
are inserted only as a matter of convenience and for reference
17
<PAGE>
and in no way define, limit or describe the scope of this Lease nor the intent
of any provision of this Lease.
28. SUCCESSOR AND ASSIGNS:
28.01. The covenants and agreements contained in this
Lease shall bind and inure to the benefit of Landlord and the heirs, personal
representatives, successors and assigns of Landlord, and Tenant and its
successors and assigns.
29. MISCELLANEOUS:
29.01. The covenants of the Landlord contained in this
Lease shall be binding upon Landlord and Landlord's successors in title only
with respect to breaches occurring during the Landlord's and Landlord's
successors in title only with respect to breaches occurring during Landlord's
and Landlord's successors' respective ownership of Landlord's interest in the
Demised Premises, and the Tenant specifically agrees to look solely to
Landlord's equity interest in the property of which the Demised Premises are a
part for the recovery of any judgment against Landlord. There shall be
absolutely no personal liability of persons, partnerships, firms, corporations
or other entities who at any time constitute the Landlord with respect to any of
the terms, covenants, conditions and provisions of this Lease.
29.02. If any term or provision of this Lease, or the
application thereof to any person or circumstance shall, to any extent, be
invalid or unenforceable, the remainder of this Lease, or the application of
such term or provision to persons or circumstances other than those as to which
it is held invalid or unenforceable, shall not be affected thereby, and each
term and provision of this Lease shall be valid and be enforced to the fullest
extent permitted by law.
29.03. This Lease and the obligation of Tenant to pay
rent hereunder and perform all of the other covenants and agreements hereunder
on part of Tenant to be performed shall in no way be affected, impaired or
excused because Landlord is unable to perform any of the obligations of Landlord
in this Lease where the inability to so perform
18
<PAGE>
is due to causes beyond Landlord's reasonable control.
29.04. Landlord and Tenant understand, agree, and
acknowledge that:
(a) This Lease has been freely negotiated by both
parties; and
(b) That, in any controversy, dispute, or contest
over the meaning, interpretation, validity, or enforceability of this Lease or
any of its terms or conditions, there shall be no inference, presumption, or
conclusion drawn whatsoever against either party by virtue of that party having
drafted this Lease or any portion thereof.
29.05 Tenant will not suffer or permit, during the term
herein granted, or any extensions thereof, any mechanic's or other liens for
work, labor, services or materials to attach to the Demised Premises or to any
portion thereof; and that whenever and as often, if ever, as any such lien or
liens shall be filed, or shall attach, Tenant will, within sixty (60) days
thereafter, either pay the same or procure the cancellation thereof by giving
security, or in such a manner as is or may be prescribed by law.
30. EXTENDED TERM:
30.01. Tenant shall have the right, provided this Lease
has not been terminated pursuant to any of the provisions contained herein, to
elect to extend the term of this Lease for an additional five (5) year term;
such extended term to be upon the same terms, covenants and agreements as in
this Lease provided, with the exception that the annual rent shall increase to
Two Hundred Ten Thousand and 00/100ths ($210,000.00) Dollars per annum, payable
in equal monthly installments of Seventeen Thousand Five Hundred and 00/100ths
($17,500.00) Dollars on the first day of each and every month of said extended
term, in advance. If Tenant so elects to extend the term of this Lease, Tenant
shall give notice thereof to Landlord, at least One (1) year prior to the
expiration date of the original term thereof.
19
<PAGE>
31. OPTION TO PURCHASE:
31.01. Landlord hereby grants to Tenant an option to
purchase the Demised Premises, at any time during the original five year Lease
term for the fair market value thereof, less ten (10) percent. Tenant may
exercise said option by written notice to Landlord at least sixty (60) days
prior to the requested date for closing and the parties shall have thirty (30)
days to agree on a fair market value. In the absence of such agreement of fair
market value within thirty (30) days of Tenant's notice to purchase, both
Landlord and Tenant shall each immediately order an independent MAI appraisal to
be completed within thirty (30) days. Said appraisal shall provide a fair market
value of comparable buildings in the Town of Colonie, New York area. If the two
appraisals obtained are five percent (5%) or less apart, Landlord shall be
obligated to establish the fair market value of the Premises at the average of
the two (2) appraisals less ten percent (10%). In the event the two (2)
appraisals obtained are more than five percent (5%) apart then the two (2)
appraisers shall immediately secure a third MAI appraisal and the fair market
value of the Demised Premises shall be determined by the majority opinion of
said three appraisers. Both Landlord and Tenant shall each be responsible for
the cost of their respective appraisal reports and share equally in the cost of
the third appraisal report, if any.
31.02 In the event that Tenant exercises the option
granted herein, the sale and transfer of the Demised Premises shall be governed
by the following terms and conditions:
A. The purchase price shall be paid by wire transfer
or certified bank officer's check at the time of transfer of title.
B. The Landlord shall convey the Demised Premises to
the Tenant by Bargain and Sale Deed with Covenant against Grantor in proper form
for recording, which deed shall include the covenant required by Subdivision "5"
of Section 13 of the Lien Law. The said deed shall be prepared, duly signed by
the Landlord, signature acknowledged and have any transfer tax stamps in the
proper amount
20
<PAGE>
affixed thereto, all at the Landlord's expense, so as to convey to the Tenant
the fee simple of the Demised Premises free and clear of all liens and
encumbrances, except as herein stated.
C. The Landlord shall convey the Demised Premises
subject to: all covenants, conditions, restrictions and easements of record;
zoning and environmental protection laws; any unpaid installments of street and
improvement assessments payable after the date of the transfer of title of the
premises; any state of facts which an inspection and/or accurate survey may
show, provided that this does not render the title to the premises unmarketable.
D. Landlord may pay and discharge any liens and
encumbrances not provided for herein out of the monies paid by Tenant on the
transfer of title.
E. The Buildings on the premises shall be sold "as
is" without warranty as to condition, express or implied, in their condition on
the date of transfer of title.
F. Tenant covenants that it shall pay all Rent,
Additional Rent, and other charges that accrue pursuant to this Lease up to and
including the date of the Closing.
G. Transfer of title is to be completed at the
office of D'Agostino, Hoblock, Greisler & Siegal, P.C., 39 North Pearl Street,
Albany, New York 12207, or such other place as is mutually convenient to the
parties hereto.
32. RIGHT OF FIRST REFUSAL.
32.01 If Landlord shall desire to sell the fee
ownership of the Demised Premises, to any unrelated person or entity, Landlord
shall be required to secure from such unrelated person or entity a bona fide
offer in writing for the purchase thereof for a monetary consideration,
immediate or deferred, subscribed by the offeror and promptly submit a photocopy
of the same to Tenant. Tenant shall have a period of twenty (20) days after
receipt thereof within which to elect to purchase the Demised Premises from
Landlord upon the same terms and provisions and at the
21
<PAGE>
price contained in said bona fide offer. However, if that offer is made during
the original term of the Lease, Tenant shall have the option to exercise the
right to purchase under the terms set forth in Article "31" hereof. If Tenant
elects to purchase the Demised Premises under the offer received pursuant to
this Article, Tenant shall notify Landlord in writing within said 20-day period,
shall designate the date, time and place of closing, and the closing shall be
governed by the terms and conditions as set forth in the Article "31.02,
subparagraphs A through G." In the event that Seller elects not to purchase the
Demised Premises under the offer and Seller sells the Demised Premises to a
third party, the sale shall be subject to the terms of this Lease.
33. EXECUTION OF LEASE BY LANDLORD:
33.01. The submission of this document for examination
and negotiation does not constitute an offer to lease, or a reservation of, or
option for, the Demised Premises and this document becomes effective and binding
only upon the execution and delivery hereof by Landlord and by Tenant. All
negotiations, considerations, representations and understandings between
Landlord and Tenant are incorporated herein and may be modified or altered only
by agreement in writing between Landlord and Tenant, and no act or omission of
any employee or other agent of Landlord shall alter, change or modify any of the
provisions hereof.
34. TENANT AUTHORITY TO EXECUTE LEASE:
34.01. Tenant represents and warrants that it is duly
formed and in good standing, and has full corporate or partnership power and
authority, as the case may be, to enter into this Lease and has taken all
corporate or partnership action, as the case may be, necessary to carry out the
transaction contemplated herein, so that when executed, this Lease constitutes a
valid and binding obligation enforceable in accordance with its terms. Tenant
shall provide Landlord with corporate resolutions or other proof in a form
22
<PAGE>
acceptable to Landlord, authorizing the execution of the Lease at the time of
such execution.
IN WITNESS WHEREOF, the Landlord and Tenant have signed
these presents to be signed by its duly authorized partner or officer as of the
date and year first above written.
L & P FEED, INC.
By: /s/ LOUIS J. DELSIGNORE
-----------------------------
Louis J. DelSignore
President
NORTHEAST ONE STOP, INC.
By: /s/ LOUIS J. DELSIGNORE
-----------------------------
Louis J. DelSignore
President
LEASES\ARCH2.LSE
23
<PAGE>
STATE OF NEW YORK )
COUNTY OF ALBANY ) ss.:
On this 22 day of September, 1998, before me personally
came LOUIS J. DELSIGNORE, to me known, who being by me duly sworn, did depose
and say that he resides at Clifton Park, New York; that he is the President of L
& P FEEDS, INC., the corporation described in, and which executed the above
instrument by order of the Board of Directors of said corporation and that he
signed his name thereto by like order.
/s/
----------------------------------
Notary Public, State of New York
Qualified in Albany County
My Commission Expires:
STATE OF NEW YORK )
COUNTY OF ALBANY ) ss.:
On this 22 day of September, 1998, before me personally
came LOUIS J. DELSIGNORE, to me known, who being by me duly sworn, did depose
and say that he resides at Clifton Park, New York; that he is the President of
NORTHEAST ONE STOP, INC., the corporation described in, and which executed the
above instrument by order of the Board of Directors of said corporation and that
he signed his name thereto by like order.
/s/
----------------------------------
Notary Public, State of New York
Qualified in Albany County
My Commission Expires:
24
<PAGE>
MAP OF DEMISED PREMISES
<PAGE>
EXHIBIT I
<PAGE>
NORTHEAST ONE STOP, INC.
INDEX TO LEASE
ARTICLE CAPTION PAGE
- ------- ------- ----
1 DEMISED PREMISES 1
2 TERM 1
3 RENT 1
4 USE OF PREMISES 2
5 TAXES 2
6 INSURANCE 4
7 ALTERATIONS 5
8 REPAIRS AND MAINTENANCE 5
9 DESTRUCTION BY FIRE OR
OTHER CASUALTY 5
10 SIGNS 6
11 UTILITIES 6
12 ASSIGNMENT OF LEASE 7
13 COMPLIANCE WITH LAWS 7
14 SUBORDINATION 8
15 WAIVER OF REDEMPTION 9
16 DEFAULT 9
17 CURING DEFAULTS 12
18 EMINENT DOMAIN 12
19 INDEMNIFICATIONS 13
20 END OF TERM 13
21 QUIET ENJOYMENT 13
22 NO WAIVER 14
23 WAIVER OF TRIAL BY JURY
AND COUNTERCLAIMS 14
24 MEMORANDUM OF LEASE 16
25 INSPECTION OF PREMISES 16
26 NOTICES 16
27 CAPTIONS 17
28 SUCCESSORS AND ASSIGNS 17
29 MISCELLANEOUS 17
30 EXTENDED TERM 18
31 OPTION TO PURCHASE 19
32 RIGHT OF FIRST REFUSAL 20
33 EXECUTION OF LEASE BY LANDLORD 21
34 TENANT AUTHORITY TO
EXECUTE LEASE 21
Loan and Security Agreement
by and between
CONGRESS FINANCIAL CORPORATION (NEW ENGLAND)
as Lender
and
Northeast One Stop, Inc.
as Borrower
Dated: April __, 1995
<PAGE>
TABLE OF CONTENTS
Page
- ----
<PAGE>
INDEX TO
EXHIBITS AND SCHEDULES
Exhibit A Information Certificate
Schedule 8.4 Existing Liens
Schedule 9.9 Shareholder Debt
Schedule 9.11 Permitted Dividends and Other Distributions on
Capital Stock
LOAN AND SECURITY AGREEMENT
This Loan and Security Agreement dated April __, 1995 is entered into by
and between Congress Financial Corporation (New England), a Massachusetts
corporation ("Lender") and Northeast One Stop, Inc., a New York corporation
("Borrower").
W I T N E S S E T H:
WHEREAS, Borrower has requested that Lender enter into certain financing
arrangements with Borrower pursuant to which Lender may make loans and provide
other financial accommodations to Borrower; and
WHEREAS, Lender is willing to make such loans and provide such financial
accommodations on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual conditions and agreements
set forth herein, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
SECTION 1. DEFINITIONS
All terms used herein which are defined in Article 1 or Article 9 of the
Uniform Commercial Code shall have the meanings given therein unless otherwise
defined in this
<PAGE>
Agreement. All references to the plural herein shall also mean the singular and
to the singular shall also mean the plural. All references to Borrower and
Lender pursuant to the definitions set forth in the recitals hereto, or to any
other person herein, shall include their respective successors and assigns. The
words "hereof", "herein", "hereunder", "this Agreement" and words of similar
import when used in this Agreement shall refer to this Agreement as a whole and
not any particular provision of this Agreement and as this Agreement now exists
or may hereafter be amended, modified, supplemented, extended, renewed, restated
or replaced. An Event of Default shall exist or continue or be continuing until
such Event of Default is waived in accordance with Section 11.3. Any accounting
term used herein unless otherwise defined in this Agreement shall have the
meanings customarily given to such term in accordance wit GAAP. For purposes of
this Agreement, the following terms shall have the respective meanings given to
them below:
1.1. "Accounts" shall mean all present and future rights of Borrower to
payment for goods sold or leased or for services rendered, which are not
evidenced by instruments or chattel paper, and whether or not earned by
performance.
1.2. "Adjusted Net Worth" shall mean as to any Person, at any time, in
accordance with GAAP (except as otherwise specifically set forth below), on a
consolidated basis for such Person and its subsidiaries (if any), the amount
equal to: (a) the difference between: (i) the aggregate net book value of all
assets of such Person and its subsidiaries, calculating the book value of
inventory for this purpose on a first-in-first-out basis, after deducting from
such book values all appropriate reserves in accordance with GAAP (including all
reserves for doubtful receivables, obsolescence, depreciation and amortization)
and (ii) the aggregate amount of the indebtedness and other liabilities of such
Person and its subsidiaries (including tax and other proper accruals) PLUS (b)
indebtedness of such Person and its subsidiaries which is subordinated in right
of payment to the full and final payment of all of the Obligations on terms and
conditions acceptable to Lender.
1.3. "Availability Reserves" shall mean, as of any date of
determination, such amounts as Lender may from time to time establish and revise
in good faith reducing the amount of Revolving Loans and Letter of Credit
Accommodations which would otherwise be available to Borrower under the lending
formula(s) provided for herein: (a) to reflect events, conditions, contingencies
or risks which, as determined by Lender in good faith, do or may affect either
(i) the Collateral or any other property which is security for the Obligations
or its value, (ii) the assets, business or prospects of Borrower or any Obligor
or (iii) the security interests and other rights of Lender in the Collateral
(including the enforceability, perfection and priority thereof) or (b) to
reflect Lender's good faith belief that any collateral report or financial
information furnished by or on behalf of Borrower or any Obligor to Lender is or
may have been incomplete, inaccurate or misleading in any material respect or
(c) in respect of any state of facts which Lender determines in good faith
constitutes an Event of Default or may, with notice or passage of time or both,
constitute an Event of Default. Availability Reserves shall include, without
limitation, inventory reserves established by Lender from time to time, for
authorized returns.
<PAGE>
1.4. "Blocked Accounts" shall have the meaning set forth in Section 6.3
hereof.
1.5. "Collateral" shall have the meaning set forth in Section 5 hereof.
1.6. "Eligible Accounts" shall mean Accounts created by Borrower which
are and continue to be acceptable to Lender based on the criteria set forth
below. In general, Accounts shall be Eligible Accounts if:
(0.) such Accounts arise from the actual and BONA FIDE sale and
delivery of goods by Borrower or rendition of services by Borrower in the
ordinary course of its business which transactions are completed in accordance
with the terms and provisions contained in any documents related thereto;
(1.) such Accounts are not unpaid more than ninety (90) days after
the date of the original invoice for them;
(2.) such Accounts comply with the terms and conditions contained
in Section 7.2(c) of this Agreement;
(3.) such Accounts do not arise from sales on consignment,
guaranteed sale, sale and return, sale on approval, or other terms under which
payment by the account debtor may be conditional or contingent;
(4.) the chief executive office of the account debtor with respect
to such Accounts is located in the United States of America or Canada, or, at
Lender's option, if either: (i) the account debtor has delivered to Borrower an
irrevocable letter of credit issued or confirmed by a bank satisfactory to
Lender, sufficient to cover such Account, in form and substance satisfactory to
Lender and, if required by Lender, the original of such letter of credit has
been delivered to Lender or Lender's agent and the issuer thereof notified of
the assignment of the proceeds of such letter of credit to Lender, or such
Account is subject to credit insurance payable to Lender issued by an insurer
and on terms and in an amount acceptable to Lender, or (ii) such Account is
otherwise acceptable in all respects to Lender (subject to such lending formula
with respect thereto as Lender may determine);
(5.) such Accounts do not consist of progress billings, bill and
hold
<PAGE>
invoices or retainage invoices, except as to bill and hold invoices, if Lender
shall have received an agreement in writing from the account debtor, in form and
substance satisfactory to Lender, confirming the unconditional obligation of the
account debtor to take the goods related thereto and pay such invoice;
(6.) the account debtor with respect to such Accounts has not
asserted a counterclaim, defense or dispute and does not have, and does not
engage in transactions which may give rise to, any right of setoff against such
Accounts;
(7.) there are no facts, events or occurrences which would impair
the validity, enforceability or collectability of such Accounts or reduce the
amount payable or delay payment thereunder;
(8.) such Accounts are subject to the first priority, valid and
perfected security interest of Lender and any goods giving rise thereto are not,
and were not at the time of the sale thereof, subject to any liens except those
permitted in this Agreement;
(9.) neither the account debtor nor any officer or employee of the
account debtor with respect to such Accounts is an officer, employee or agent of
or affiliated with Borrower directly or indirectly by virtue of family
membership, ownership, control, management or otherwise;
(10.) the account debtors with respect to such Accounts are not any
foreign government, the United States of America, any State, political
subdivision, department, agency or instrumentality thereof, unless, if the
account debtor is the United States of America, any State, political
subdivision, department, agency or instrumentality thereof, upon Lender's
request, the Federal Assignment of Claims Act of 1940, as amended or any similar
State or local law, if applicable, has been complied with in a manner
satisfactory to Lender;
(11.) there are no proceedings or actions which are threatened or
pending against the account debtors with respect to such Accounts which might
result in any material adverse change in any such account debtor's financial
condition;
(12.) such Accounts of a single account debtor or its affiliates do
not constitute more than fifty (50%) percent of all otherwise Eligible Accounts
(but the portion of the Accounts not in excess of such percentage may be deemed
Eligible Accounts);
(13.) such Accounts are not owed by an account debtor who has
Accounts unpaid more than ninety (90) days after the date of the original
invoice for them which constitute more than fifty (50%) percent of the total
Accounts of such account debtor;
(14.) such Accounts are owed by account debtors whose total
indebtedness to Borrower does not exceed the credit limit with respect to such
account
<PAGE>
debtors as determined by Lender from time to time (but the portion of the
Accounts not in excess of such credit limit may still be deemed Eligible
Accounts); and
(15.) such Accounts are owed by account debtors deemed creditworthy
at all times by Lender, as determined by Lender. General criteria for Eligible
Accounts may be established and revised from time to time by Lender in good
faith. Any Accounts which are not Eligible Accounts shall nevertheless be part
of the Collateral.
15.0. "Eligible Inventory" shall mean Inventory consisting of finished
goods held for resale in the ordinary course of the business of Borrower and raw
materials for such finished goods which are acceptable to Lender based on the
criteria set forth below. In general, Eligible Inventory shall not include (a)
work-in-process; (b) components which are not part of finished goods; (c) spare
parts for equipment; (d) packaging and shipping materials; (e) supplies used or
consumed in Borrower's business; (f) Inventory at premises other than those
owned and controlled by Borrower, except if Lender shall have received an
agreement in writing from the person in possession of such Inventory and/or the
owner or operator of such premises in form and substance satisfactory to Lender
acknowledging Lender's first priority security interest in the Inventory,
waiving security interests and claims by such person against the Inventory and
permitting Lender access to, and the right to remain on, the premises so as to
exercise Lender's rights and remedies and otherwise deal with the Collateral;
(g) Inventory subject to a security interest or lien in favor of any person
other than Lender except those permitted in this Agreement; (h) bill and hold
goods; (i) unserviceable, obsolete or slow moving Inventory; (j) Inventory which
is not subject to the first priority, valid and perfected security interest of
Lender; (k) returned, damaged and/or defective Inventory; and (l) Inventory
purchased or sold on consignment. General criteria for Eligible Inventory may be
established and revised from time to time by Lender in good faith. Any Inventory
which is not Eligible Inventory shall nevertheless be part of the Collateral.
15.1. "Equipment" shall mean all of Borrower's now owned and hereafter
acquired equipment, machinery, computers and computer hardware and software
(whether owned or licensed), vehicles, tools, furniture, fixtures, all
attachments, accessions and property now or hereafter affixed thereto or used in
connection therewith, and substitutions and replacements thereof, wherever
located.
15.2. "Event of Default" shall mean the occurrence or existence of any
event or condition described in Section 10.1 hereof.
15.3. "Excess Availability" shall mean the amount, as determined by
Lender, calculated at any time, equal to: (a) the lesser of (i) the amount of
the Revolving Loans
<PAGE>
available to Borrower as of such time based on the applicable lending formulas
multiplied by the Net Amount of Eligible Accounts and the Value of Eligible
Inventory, as determined by Lender, and subject to the sublimits and
Availability Reserves from time to time established by Lender hereunder and (ii)
the Maximum Credit, MINU (b) the sum of: (i) the amount of all then outstanding
and unpaid Obligations, plus (ii) the aggregate amount of all trade payables of
Borrower which are more than sixty (60) days past due as of such time.
15.4. "Financing Agreements" shall mean, collectively, this Agreement
and all notes, guarantees, security agreements and other agreements, documents
and instruments now or at any time hereafter executed and/or delivered by
Borrower or any Obligor in connection with this Agreement, as the same now exist
or may hereafter be amended, modified, supplemented, extended, renewed, restated
or replaced.
15.5. "GAAP" shall mean generally accepted accounting principles in the
United States of America as in effect from time to time as set forth in the
opinions and pronouncements of the Accounting Principles Board and the American
Institute of Certified Public Accountants and the statements and pronouncements
of the Financial Accounting Standards Boards which are applicable to the
circumstances as of the date of determination consistently applied, except that,
for purposes of Sections 9.13 and 9.14 hereof, GAAP shall be determined on the
basis of such principles in effect on the date hereof and consistent with those
used in the preparation of the audited financial statements delivered to Lender
prior to the date hereof.
15.6. "Information Certificate" shall mean the Information Certificate
of Borrower constituting Exhibit A hereto containing material information with
respect to Borrower, its business and assets provided by or on behalf of
Borrower to Lender in connection with the preparation of this Agreement and the
other Financing Agreements and the financing arrangements provided for herein.
15.7. "Inventory" shall mean all of Borrower's now owned and hereafter
existing or acquired raw materials, work in process, finished goods and all
other inventory of whatsoever kind or nature, wherever located.
15.8. "Loans" shall mean the Revolving Loans.
15.9. "Maximum Credit" shall mean the amount of $4,000,000.
15.10. "Net Amount of Eligible Accounts" shall mean the gross amount of
Eligible Accounts less (a) sales, excise or similar taxes included in the amount
thereof and (b) returns, discounts, claims, credits and allowances of any nature
at any time issued, owing, granted, outstanding, available or claimed with
respect thereto.
15.11. "Obligations" shall mean any and all Revolving Loans and all other
obligations, liabilities and indebtedness of every kind, nature and description
owing by Borrower to Lender and/or its affiliates, including principal,
interest, charges, fees, costs
<PAGE>
and expenses, however evidenced, whether as principal, surety, endorser,
guarantor or otherwise, whether arising under this Agreement or otherwise,
whether now existing or hereafter arising, whether arising before, during or
after the initial or any renewal term of this Agreement or after the
commencement of any case with respect to Borrower under the United States
Bankruptcy Code or any similar statute (including, without limitation, the
payment of interest and other amounts which would accrue and become due but for
the commencement of such case), whether direct or indirect, absolute or
contingent, joint or several, due or not due, primary or secondary, liquidated
or unliquidated, secured or unsecured, and however acquired by Lender.
15.12. "Obligor" shall mean any guarantor, endorser, acceptor, surety or
other person liable on or with respect to the Obligations or who is the owner of
any property which is security for the Obligations, other than Borrower.
15.13. "Payment Account" shall have the meaning set forth in Section 6.3
hereof.
15.14. "Permanent Blocked Reserve" shall mean the permanent $350,000
availability reserve reducing the amount of Revolving Loans that would otherwise
be available to Borrower under the lending formula(s) provided for herein and
that shall remain in effect at all times, in the discretion of the Lender.
15.15. "Person" or "person" shall mean any individual, sole
proprietorship, partnership, corporation (including, without limitation, any
corporation which elects subchapter S status under the Internal Revenue Code of
1986, as amended), business trust, unincorporated association, joint stock
corporation, trust, joint venture or other entity or any government or any
agency or instrumentality or political subdivision thereof.
15.16. "Prime Rate" shall mean the rate from time to time publicly
announced by CoreStates Bank, N.A., or its successors, at its office in
Philadelphia, Pennsylvania, as its prime rate, whether or not such announced
rate is the best rate available at such bank.
15.17. "Rackjobbing Program" shall mean an Inventory Sales Program
pursuant to which Borrower sells inventory under an arrangement pursuant to
which Borrower is responsible to review the purchaser's inventory needs and to
make selections as to inventory purchases and returns on such purchaser's
behalf, so long as such arrangement does not constitute a sale of the type
described in Section 1.6(d) hereof.
15.18. "Records" shall mean all of Borrower's present and future books of
<PAGE>
account of every kind or nature, purchase and sale agreements, invoices, ledger
cards, bills of lading and other shipping evidence, statements, correspondence,
memoranda, credit files and other data relating to the Collateral or any account
debtor, together with the tapes, disks, diskettes and other data and software
storage media and devices, file cabinets or containers in or on which the
foregoing are stored (includin any rights of Borrower with respect to the
foregoing maintained with or by any other person).
15.19. "Revolving Loans" shall mean the loans now or hereafter made by
Lender to or for the benefit of Borrower on a revolving basis (involving
advances, repayments and readvances) as set forth in Section 2.1 hereof.
15.20. "Trustco Reserve" shall mean the permanent availability reserve
representing two months of principal and interest payments due under that
certain Interest Bearing Promissory Note and Security Agreement dated July 10,
1992 from the Borrower in favor of Trustco Bank, reducing the amount of
Revolving Loans that would otherwise be available to Borrower under the lending
formula(s) provided for herein.
15.21. "Value" shall mean, as determined by Lender in good faith, with
respect to Inventory, the lower of (a) cost computed on a first-in-first-out
basis in accordance with GAAP or (b) market value.
15.22. "Working Capital" shall mean as to any Person, at any time, in
accordance with GAAP, on a consolidated basis for such Person and its
subsidiaries (if any), the amount equal to the difference between: (a) the
aggregate net book value of all current assets of such Person and its
subsidiaries (as determined in accordance with GAAP), calculating the book value
of inventory for this purpose on a first-in-first-out basis, and (b) all current
liabilities of such Person and its subsidiaries (a determined in accordance with
GAAP), PROVIDED, THAT, as to Borrower, for purposes of Section 9.13, the
liabilities of Borrower and its subsidiaries to Lender under this Agreement
shall not be considered current liabilities (whether or not classified as
current liabilities in accordance with GAAP).
SECTION 16. CREDIT FACILITIES
16.0. REVOLVING LOANS.
(0.) Subject to, and upon the terms and conditions contained
herein, Lender agrees to make Revolving Loans to Borrower from time to time in
amounts requested by Borrower up to the amount equal to the sum of:
(i) seventy-five (75%) percent of the Net Amount of
Eligible Accounts which are not generated under the Borrower's Rackjobbing
Program; PLUS
<PAGE>
(ii) the lesser of (A) $500,000 or (B) thirty-five (35%)
percent of the Net Amount of Eligible Accounts generated under the Borrower's
Rackjobbing Program; PLUS
(iii) the lesser of: (A) $2,000,000 or (B) thirty-five (35%)
percent of the Value of Eligible Inventory consisting of finished goods, LESS
(iv) the Permanent Blocked Reserve, LESS
(v) the Trustco Reserve, LESS
(vi) any Availability Reserves.
(1.) Lender may, in its discretion, from time to time, upon not
less than five (5) days prior notice to Borrower, (i) reduce the lending formula
with respect to Eligible Accounts to the extent that Lender determines in good
faith that: (A) the dilution with respect to the Accounts for any period (based
on the ratio of (1) the aggregate amount of reductions in Accounts other than as
a result of payments in cash to (2) the aggregate amount of total sales) has
increased in any material respect or may be reasonably anticipated to increase
in any material respect above historical levels, or (B) the general
creditworthiness of account debtors has declined or (ii) reduce the lending
formula(s) with respect to Eligible Inventory to the extent that Lender
determines that: (A) the number of days of the turnover of the Inventory for any
period has changed in any material respect or (B) the liquidation value of the
Eligible Inventory, or any category thereof, has decreased, or (C) the nature
and quality of the Inventory has deteriorated. In determining whether to reduce
the lending formula(s), Lender may consider events, conditions, contingencies or
risks which are also considered in determining Eligible Accounts, Eligible
Inventory or in establishing Availability Reserves. Without limitation of the
foregoing, in the event that the dilution with respect to the Accounts for any
period exceeds fifteen (15%) percent, the lending formula described in section
2.1(a)(i) above shall immediately reduce to seventy (70%) percent of the Net
Amount of Eligible Accounts not generated under the Borrower's Rackjobbing
Program.
(2.) Except in Lender's discretion, the aggregate amount of the
Loans outstanding at any time shall not exceed the Maximum Credit. In the event
that the outstanding amount of any component of the Loans exceeds the amounts
available under the lending formulas or the Maximum Credit, as applicable, such
event shall not limit, waive or otherwise affect any rights of Lender in that
circumstance or on any future occasions and Borrower shall, upon demand by
Lender, which may be made at any time or from time to time, immediately repay to
Lender the entire amount of any such excess(es) for which payment is demanded.
<PAGE>
2.0. AVAILABILITY RESERVES. All Revolving Loans otherwise available to
Borrower pursuant to the lending formulas and subject to the Maximum Credit and
other applicable limits hereunder shall be subject to Lender's continuing right
to establish and revise Availability Reserves.
SECTION 3. INTEREST AND FEES
3.0. INTEREST.
(0.) Borrower shall pay to Lender interest on the outstanding
principal amount of the non-contingent Obligations at the rate of two (2.0%)
percent per annum in excess of the Prime Rate, except that Borrower shall pay to
Lender interest, at Lender's option, without notice, at the rate of four (4.0%)
percent per annum in excess of the Prime Rate: (i) on the non-contingent
Obligations for the period from and after the date of termination or non-renewal
hereof, or the date of the occurrence of an Event of Default, and for so long as
such Event of Default is continuing as determined by Lender and until such time
as Lender has received full and final payment of all such Obligations
(notwithstanding entry of any judgment against Borrower) and (ii) on the
Revolving Loans at any time outstanding in excess of the amounts available to
Borrower under Section 2 (whether or not such excess(es), arise or are made with
or without Lender's knowledge or consent and whether made before or after an
Event of Default). All interest accruing hereunder on and after the occurrence
of any of the events referred to in Sections 3.1(a)(i) or 3.1(a)(ii) above shall
be payable on demand.
(1.) Interest shall be payable by Borrower to Lender monthly in
arrears not later than the first day of each calendar month and shall be
calculated on the basis of a three hundred sixty (360) day year and actual days
elapsed. The interest rate shall increase or decrease by an amount equal to each
increase or decrease in the Prime Rate effective on the first day of the month
after any change in such Prime Rate is announced based on the Prime Rate in
effect on the last day of the month in which any such change occurs. In no event
shall charges constituting interest payable by Borrower to Lender exceed the
maximum amount or the rate permitted under any applicable law or regulation, and
if any part or provision of this Agreement is in contravention of any such law
or regulation, such part or provision shall be deemed amended to conform
thereto.
3.1. CLOSING FEE. Borrower shall pay to Lender as a closing fee the
amount of $60,000, which shall be fully earned as of the date hereof and paid in
equal installments of $30,000, with the first installment payable on the date
hereof and the second installment payable on the first anniversary of the date
hereof.
3.2. UNUSED LINE FEE. Borrower shall pay to Lender monthly an unused
line fee equal to one-half of one (.50%) percent per annum calculated upon the
amount by which
<PAGE>
$4,000,000 exceeds the average daily principal balance of the outstanding
Revolving Loans during the immediately preceding month (or part thereof) while
this Agreement is in effect and for so long thereafter as any of the Obligations
are outstanding, which fee shall be payable on the first day of each month in
arrears.
SECTION 2. CONDITIONS PRECEDENT
2.0. CONDITIONS PRECEDENT TO INITIAL LOANS AND LETTER OF CREDIT
ACCOMMODATIONS. Each of the following is a condition precedent to Lender making
the initial Loans and providing the initial Letter of Credit Accommodations
hereunder:
(0.) Lender shall have received, in form and substance
satisfactory to Lender, all releases, terminations and such other documents as
Lender may request to evidence and effectuate the termination by the existing
lender or lenders to Borrower of their respective financing arrangements with
Borrower and the termination and release by it or them, as the case may be, of
any interest in and to any assets and properties of Borrower and each Obligor,
duly authorized, executed and delivere by it or each of them, including, but not
limited to, (i) UCC termination statements for all UCC financing statements
previously filed by it or any of them or their predecessors, as secured party
and Borrower or any Obligor, as debtor and (ii) satisfactions and discharges of
any mortgages, deeds of trust or deeds to secure debt by Borrower or any Obligor
in favor of such existing lender or lenders, in form acceptable for recording in
the appropriate government office;
(1.) all requisite corporate action and proceedings in connection
with this Agreement and the other Financing Agreements shall be satisfactory in
form and substance to Lender, and Lender shall have received all information and
copies of all documents, including, without limitation, records of requisite
corporate action and proceedings which Lender may have requested in connection
therewith, such documents where requested by Lender or its counsel to be
certified by appropriate corporate officers or governmental authorities;
(2.) no material adverse change shall have occurred in the assets,
business or prospects of Borrower since the date of Lender's latest field
examination and no change or event shall have occurred which would impair the
ability of Borrower or any Obligor to perform its obligations hereunder or under
any of the other Financing Agreements to which it is a party or of Lender to
enforce the Obligations or realize upon the Collateral;
<PAGE>
(3.) Lender shall have completed a field review of the Records and
such other information with respect to the Collateral as Lender may require to
determine the amount of Revolving Loans available to Borrower, the results of
which shall be satisfactory to Lender, not more than three (3) business days
prior to the date hereof;
(4.) Lender shall have received, in form and substance
satisfactory to Lender, all consents, waivers, acknowledgments and other
agreements from third persons which Lender may deem necessary or desirable in
order to permit, protect and perfect its security interests in and liens upon
the Collateral or to effectuate the provisions or purposes of this Agreement and
the other Financing Agreements, including, without limitation, acknowledgements
by lessors, mortgagees and warehousemen o Lender's security interests in the
Collateral, waivers by such persons of any security interests, liens or other
claims by such persons to the Collateral and agreements permitting Lender access
to, and the right to remain on, the premises to exercise its rights and remedies
and otherwise deal with the Collateral;
(5.) Lender shall have received evidence of insurance and loss
payee endorsements required hereunder and under the other Financing Agreements,
in form and substance satisfactory to Lender, and certificates of insurance
policies and/or endorsements naming Lender as loss payee;
(6.) Lender shall have received, in form and substance
satisfactory to Lender, a Mortgage and Security Agreement (the "Mortgage") and
Hazardous Materials Compliance and Indemnification Agreement in favor of Lender
from L&P Feed, Inc. relating to the real property occupied by Borrower in
Latham, New York.
(7.) Lender shall have received environmental audits of the plant
and the real property located in Latham, New York conducted by an independent
environmental engineering firm acceptable to Lender, and in form, scope and
methodology satisfactory to Lender, confirming (i) Borrower and L&P Feed, Inc.
are in compliance with all material applicable Environmental Laws and (ii) the
absence of any material environmental problems;
(8.) Lender shall have received, in form and substance
satisfactory to Lender, a valid and effective title insurance policy issued by a
company and agent acceptable to Lender (i) insuring the priority, amount and
sufficiency of the Mortgage, (ii) insuring against matters that would be
disclosed by surveys and (iii) containing any legally available endorsements,
assurances or affirmative coverage requested by Lender for protection of its
interests;
(9.) Lender shall have received, in form and substance
satisfactory to Lender, such opinion letters of counsel to Borrower with respect
to the Financing Agreements and such other matters as Lender may request; and
(10.) the Excess Availability as determined by Lender, as of the
date hereof, shall be not less than $500,000 after giving effect to the initial
Loans made or to be made in connection with the initial transactions hereunder;
<PAGE>
(11.) Lender shall have received, in form and substance
satisfactory to Lender, the unlimited guarantee of Louis J. DelSignore and the
limited guarantee of Patricia A. DelSignore;
(12.) Lender shall have received, in form and substance
satisfactory to Lender, the assignment of a $1,000,000 Key Man Life Insurance
Policy on the life of Louis J. DelSignore;
(13.) Lender shall have received, in form and substance
satisfactory to Lender, Subordination Agreements in favor of Lender from
stockholders of the Borrower holding at least $344,000 of indebtedness for
borrowed money owed by Borrower;
(14.) Lender shall have received, in form and substance
satisfactory to Lender, an Intercreditor Agreement between Lender and Trustco
Bank regarding certain machinery and equipment of the Borrower;
(15.) Lender shall have received, in form and substance
satisfactory to Lender, Subordination Agreements in favor of Lender from vendors
of the Borrower relating to their liens on the inventory of the Borrower; and
(16.) the other Financing Agreements and all instruments and
documents hereunder and thereunder shall have been duly executed and delivered
to Lender, in form and substance satisfactory to Lender.
16.0. CONDITIONS PRECEDENT TO ALL LOANS. Each of the following is an
additional condition precedent to Lender making Loans to Borrower, including the
initial Loans and any future Loans:
(0.) all representations and warranties contained herein and in
the other Financing Agreements shall be true and correct in all material
respects with the same effect as though such representations and warranties had
been made on and as of the date of the making of each such Loan and after giving
effect thereto; and
(1.) no Event of Default and no event or condition which, with
notice or passage of time or both, would constitute an Event of Default, shall
exist or have occurred and be continuing on and as of the date of the making of
such Loan and after giving effect thereto.
<PAGE>
SECTION 2. GRANT OF SECURITY INTEREST
To secure payment and performance of all Obligations, Borrower hereby
grants to Lender a continuing security interest in, a lien upon, and a right of
set off against, and hereby assigns to Lender as security, the following
property and interests in property, whether now owned or hereafter acquired or
existing, and wherever located (collectively, the "Collateral"):
2.0. Accounts;
2.1. all present and future contract rights, general intangibles
(including, but not limited to, tax and duty refunds, registered and
unregistered patents, trademarks, service marks, copyrights, trade names,
applications for the foregoing, trade secrets, goodwill, processes, drawings,
blueprints, customer lists, licenses, whether as licensor or licensee, choses in
action and other claims and existing and future leasehold interests in
equipment, real estate and fixtures), chattel paper, documents, instruments,
letters of credit, bankers' acceptances and guaranties;
2.2. all present and future monies, securities, credit balances,
deposits, deposit accounts and other property of Borrower now or hereafter held
or received by or in transit to Lender or its affiliates or at any other
depository or other institution from or for the account of Borrower, whether for
safekeeping, pledge, custody, transmission, collection or otherwise, and all
present and future liens, security interests, rights, remedies, title and
interest in, to and in respect of Accounts an other Collateral, including,
without limitation, (a) rights and remedies under or relating to guaranties,
contracts of suretyship, letters of credit and credit and other insurance
related to the Collateral, (b) rights of stoppage in transit, replevin,
repossession, reclamation and other rights and remedies of an unpaid vendor,
lienor or secured party, (c) goods described in invoices, documents, contracts
or instruments with respect to, or otherwise representing or evidencing,
Accounts or other Collateral including, without limitation, returned,
repossessed and reclaimed goods, and (d) deposits by and property of account
debtors or other persons securing the obligations of account debtors;
2.3. Inventory;
2.4. Equipment;
2.5. Records; and
2.6. all products and proceeds of the foregoing, in any form, including,
without limitation, insurance proceeds and all claims against third parties for
loss or damage to or destruction of any or all of the foregoing.
<PAGE>
SECTION 3. COLLECTION AND ADMINISTRATION
3.0. BORROWER'S LOAN ACCOUNT. Lender shall maintain one or more loan
account(s) on its books in which shall be recorded (a) all Loans, Letter of
Credit Accommodations and other Obligations and the Collateral, (b) all payments
made by or on behalf of Borrower and (c) all other appropriate debits and
credits as provided in this Agreement, including, without limitation, fees,
charges, costs, expenses and interest. All entries in the loan account(s) shall
be made in accordance with Lender's customary practices as in effect from time
to time.
3.1. STATEMENTS. Lender shall render to Borrower each month a statement
setting forth the balance in the Borrower's loan account(s) maintained by Lender
for Borrower pursuant to the provisions of this Agreement, including principal,
interest, fees, costs and expenses. Each such statement shall be subject to
subsequent adjustment by Lender but shall, absent manifest errors or omissions,
be considered correct and deemed accepted by Borrower and conclusively binding
upon Borrower as an account stated except to the extent that Lender receives a
written notice from Borrower of any specific exceptions of Borrower thereto
within thirty (30) days after the date such statement has been mailed by Lender.
Until such time as Lender shall have rendered to Borrower a written statement as
provided above, the balance in Borrower's loan account(s) shall be presumptive
evidence of the amounts due and owing to Lender by Borrower.
3.2. COLLECTION OF ACCOUNTS.
(0.) Borrower shall establish and maintain, at its expense,
blocked accounts or lockboxes and related blocked accounts (in either case,
"Blocked Accounts"), as Lender may specify, with such banks as are acceptable to
Lender into which Borrower shall promptly deposit and direct its account debtors
to directly remit all payments on Accounts and all payments constituting
proceeds of Inventory or other Collateral in the identical form in which such
payments are made, whether by cash, check or other manner. The banks at which
the Blocked Accounts are established shall enter into an agreement, in form and
substance satisfactory to Lender, providing that all items received or deposited
in the Blocked Accounts are the property of Lender, that the depository bank has
no lien upon, or right to setoff against, the Blocked Accounts, the items
received for deposit therein, or the funds from time to time on deposit therein
and that the depository bank will wire, or otherwise transfer, in immediately
available funds, on a daily basis, all funds received or deposited into the
Blocked Accounts to such bank account of Lender as Lender may from time to time
designate for such purpose ("Payment Account"). Borrower agrees that all
payments made to such Blocked Accounts or other funds received and collected by
Lender, whether on the Accounts or as proceeds of Inventory or other Collateral
or otherwise shall
<PAGE>
be the property of Lender.
(1.) For purposes of calculating interest on the Obligations, such
payments or other funds received will be applied (conditional upon final
collection) to the Obligations two (2) business days following the date of
receipt of immediately available funds by Lender in the Payment Account. For
purposes of calculating the amount of the Revolving Loans available to Borrower
such payments will be applied (conditional upon final collection) to the
Obligations on the business day of receipt by Lender in the Payment Account, if
such payments are received within sufficient time (in accordance with Lender's
usual and customary practices as in effect from time to time) to credit
Borrower's loan account on such day, and if not, then on the next business day.
(2.) Borrower and all of its affiliates, subsidiaries,
shareholders, directors, employees or agents shall, acting as trustee for
Lender, receive, as the property of Lender, any monies, checks, notes, drafts or
any other payment relating to and/or proceeds of Accounts or other Collateral
which come into their possession or under their control and immediately upon
receipt thereof, shall deposit or cause the same to be deposited in the Blocked
Accounts, or remit the same or cause the same to be remitted, in kind, to
Lender. In no event shall the same be commingled with Borrower's own funds.
Borrower agrees to reimburse Lender on demand for any amounts owed or paid to
any bank at which a Blocked Account is established or any other bank or person
involved in the transfer of funds to or from the Blocked Accounts arising out of
Lender's payments to or indemnification of such bank or person. The obligation
of Borrower to reimburse Lender for such amounts pursuant to this Section 6.3
shall survive the termination or non-renewal of this Agreement.
2.0. PAYMENTS. All Obligations shall be payable to the Payment Account
as provided in Section 6.3 or such other place as Lender may designate from time
to time. Lender may apply payments received or collected from Borrower or for
the account of Borrower (including, without limitation, the monetary proceeds of
collections or of realization upon any Collateral) to such of the Obligations,
whether or not then due, in such order and manner as Lender determines. At
Lender's option, all principal, interest, fees, costs, expenses and other
charges provided for in this Agreement or the other Financing Agreements may be
charged directly to the loan account(s) of Borrower. Borrower shall make all
payments to Lender on the Obligations free and clear of, and without deduction
or withholding for or on account of, any setoff, counterclaim, defense, duties,
taxes, levies, imposts, fees, deductions, withholding, restrictions or
conditions of any kind. If after receipt of any payment of, or proceeds of
Collateral applied to the payment of, any of the Obligations, Lender is required
to surrender or return such payment or proceeds to any Person for any reason,
then the Obligations intended to be satisfied by such payment or proceeds shall
be reinstated and continue and this Agreement shall continue in full force and
effect as if such payment or proceeds had not been received by Lender. Borrower
shall be liable to pay to Lender, and does hereby indemnify and hold Lender
harmless for the amount of any payments or proceeds surrendered or returned.
This Section 6.4 shall remain effective notwithstanding any contrary action
which may be taken by Lender in reliance upon such payment or proceeds. This
Section 6.4 shall survive the payment of the Obligations and the termination or
non-renewal of this Agreement.
<PAGE>
2.1. AUTHORIZATION TO MAKE LOANS. Lender is authorized to make the Loans
based upon telephonic or other instructions received from anyone purporting to
be an officer of Borrower or other authorized person or, at the discretion of
Lender, if such Loans are necessary to satisfy any Obligations. All requests for
Loans hereunder shall specify the date on which the requested advance is to be
made (which day shall be a business day) and the amount of the requested Loan.
Requests received after 11:00 a.m. Boston, Massachusetts time on any day shall
be deemed to have been made as of the opening of business on the immediately
following business day. All Loans under this Agreement shall be conclusively
presumed to have been made to, and at the request of and for the benefit of,
Borrower when deposited to the credit of Borrower or otherwise disbursed or
established in accordance with the instructions of Borrower or in accordance
with the terms and conditions of this Agreement.
2.2. USE OF PROCEEDS. Borrower shall use the initial proceeds of the
Loans provided by Lender to Borrower hereunder only for: (a) payments to each of
the persons listed in the disbursement direction letter furnished by Borrower to
Lender on or about the date hereof and (b) costs, expenses and fees in
connection with the preparation, negotiation, execution and delivery of this
Agreement and the other Financing Agreements. All other Loans made by Lender to
Borrower pursuant to the provisions hereof shall be used by Borrower only for
general operating, working capital and other proper corporate purposes of
Borrower not otherwise prohibited by the terms hereof. None of the proceeds will
be used, directly or indirectly, for the purpose of purchasing or carrying any
margin security or for the purposes of reducing or retiring any indebtedness
which was originally incurred to purchase or carry any margin security or for
any other purpose which might cause any of the Loans to be considered a "purpose
credit" within the meaning of Regulation G of the Board of Governors of the
Federal Reserve System, as amended.
SECTION 3. COLLATERAL REPORTING AND COVENANTS
3.0. COLLATERAL REPORTING. Borrower shall provide Lender with the
following documents in a form satisfactory to Lender: (a) on a regular basis as
required by Lender, a schedule of Accounts; (b) on a monthly basis or more
frequently as Lender may request, (i) perpetual inventory reports, (ii)
inventory reports by category and (iii) agings of accounts payable, (c) upon
Lender's request, (i) copies of customer statements and credit memos, remittance
advices and reports, and copies of deposit slips and bank statements, (ii)
copies of shipping and delivery documents, and (iii) copies of purchase orders,
invoices and delivery documents for Inventory and Equipment acquired by
Borrower; (d) agings of accounts receivable on a monthly basis or more
frequently as Lender may request; and (e)
<PAGE>
such other reports as to the Collateral as Lender shall request from time to
time. If any of Borrower's records or reports of the Collateral are prepared or
maintained by an accounting service, contractor, shippe or other agent, Borrower
hereby irrevocably authorizes such service, contractor, shipper or agent to
deliver such records, reports, and related documents to Lender and to follow
Lender's instructions with respect to further services at any time that an Event
of Default exists or has occurred and is continuing.
3.1. ACCOUNTS COVENANTS.
(0.) Borrower shall notify Lender promptly of: (i) any material
delay in Borrower's performance of any of its obligations to any account debtor
or the assertion of any claims, offsets, defenses or counterclaims by any
account debtor, or any disputes with account debtors, or any settlement,
adjustment or compromise thereof, (ii) all material adverse information relating
to the financial condition of any account debtor and (iii) any event or
circumstance which, to Borrower's knowledge would cause Lender to consider any
then existing Accounts as no longer constituting Eligible Accounts. No credit,
discount, allowance or extension or agreement for any of the foregoing shall be
granted to any account debtor without Lender's consent, except in the ordinary
course of Borrower's business in accordance with practices and policies
previously disclosed in writing to Lender. So long as no Event of Default exists
or has occurred and is continuing, Borrower shall settle, adjust or compromise
any claim, offset, counterclaim or dispute with any account debtor. At any time
that an Event of Default exists or has occurred and is continuing, Lender shall,
at its option, have the exclusive right to settle, adjust or compromise any
claim, offset, counterclaim or dispute with account debtors or grant any
credits, discounts or allowances.
(1.) Borrower shall promptly report to Lender any return of
Inventory by an account debtor having a sales price in excess of $1,000. At any
time that Inventory is returned, reclaimed or repossessed, the portion of the
related Account attributable to such Inventory shall be deducted from the Net
Amount of such Eligible Account. In the event any account debtor returns
Inventory when an Event of Default exists or has occurred and is continuing,
Borrower shall, upon Lender's request, (i) hold the returned Inventory in trust
for Lender, (ii) segregate all returned Inventory from all of its other
property, (iii) dispose of the returned Inventory solely according to Lender's
instructions, and (iv) not issue any credits, discounts or allowances with
respect thereto without Lender's prior written consent.
(2.) With respect to each Account: (i) the amounts shown on any
invoice delivered to Lender or schedule thereof delivered to Lender shall be
true and complete, (ii) no payments shall be made thereon except payments
immediately delivered to Lender pursuant to the terms of this Agreement, (iii)
no credit, discount, allowance or extension or agreement for any of the
foregoing shall be granted to any account debtor except as reported to Lender in
accordance with this Agreement and except for credits, discounts, allowances or
extensions made or given in the ordinary course of Borrower's business in
accordance with practices and policies previously disclosed to Lender, (iv)
there shall be no setoffs, deductions, contras, defenses, counterclaims or
disputes existing or asserted with respect
<PAGE>
thereto except as reported to Lender in accordance with the terms of this
Agreement, (v) none of the transactions giving rise thereto will violate any
applicable State or Federal laws or regulations, all documentation relating
thereto will be legally sufficient under such laws and regulations and all such
documentation will be legally enforceable in accordance with its terms.
(3.) Lender shall have the right at any time or times, in Lender's
name or in the name of a nominee of Lender, to verify the validity, amount or
any other matter relating to any Account or other Collateral, by mail,
telephone, facsimile transmission or otherwise.
(4.) Borrower shall deliver or cause to be delivered to Lender,
with appropriate endorsement and assignment, with full recourse to Borrower, all
chattel paper and instruments which Borrower now owns or may at any time acquire
immediately upon Borrower's receipt thereof, except as Lender may otherwise
agree.
(5.) Lender may, at any time or times that an Event of Default
exists or has occurred and is continuing, (i) notify any or all account debtors
that the Accounts have been assigned to Lender and that Lender has a security
interest therein and Lender may direct any or all accounts debtors to make
payment of Accounts directly to Lender, (ii) extend the time of payment of,
compromise, settle or adjust for cash, credit, return of merchandise or
otherwise, and upon any terms or conditions, any and all Accounts or other
obligations included in the Collateral and thereby discharge or release the
account debtor or any other party or parties in any way liable for payment
thereof without affecting any of the Obligations, (iii) demand, collect or
enforce payment of any Accounts or such other obligations, but without any duty
to do so, and Lender shall not be liable for its failure to collect or enforce
the payment thereof nor for the negligence of its agents or attorneys with
respect thereto and (iv) take whatever other action Lender may deem necessary or
desirable for the protection of its interests. At any time that an Event of
Default exists or has occurred and is continuing, at Lender's request, all
invoices and statements sent to any account debtor shall state that the Accounts
and such other obligations have been assigned to Lender and are payable directly
and only to Lender and Borrower shall deliver to Lender such originals of
documents evidencing the sale and delivery of goods or the performance of
services giving rise to any Accounts as Lender may require.
5.0. INVENTORY COVENANTS. With respect to the Inventory: (a) Borrower
shall at all times maintain inventory records reasonably satisfactory to Lender,
keeping correct and accurate records itemizing and describing the kind, type,
quality and quantity of Inventory, Borrower's cost therefor and daily
withdrawals therefrom and additions thereto; (b) Borrower shall conduct a
physical count of the Inventory at least once each year, but at any time or
<PAGE>
times as Lender may request on or after an Event of Default, and promptly
following such physical inventory shall supply Lender with a report in the form
and with such specificity as may be reasonably satisfactory to Lender concerning
such physical count; (c) Borrower shall not remove any Inventory from the
locations set forth or permitted herein, without the prior written consent of
Lender, except for sales of Inventory in the ordinary course of Borrower's
business and except to move Inventory directly from one location set forth or
permitted herein to another such location; (d) upon Lender's request, Borrower
shall, at its expense, no more than once in any twelve (12) month period, but at
any time or times as Lender may request on or after an Event of Default, deliver
or cause to be delivered to Lender written reports or appraisals as to the
Inventory in form, scope and methodology acceptable to Lender and by an
appraiser acceptable to Lender, addressed to Lender or upon which Lender is
expressly permitted to rely; (e) Borrower shall produce, use, store and maintain
the Inventory, with all reasonable care and caution and in accordance with
applicable standards of any insurance and in conformity with applicable laws
(including, but not limited to, the requirements of the Federal Fair Labor
Standards Act of 1938, as amended and all rules, regulations and orders related
thereto); (f) Borrower assumes all responsibility and liability arising from or
relating to the production, use, sale or other disposition of the Inventory; (g)
Borrower shall not sell Inventory to any customer on approval, or any other
basis which entitles the customer to return or may obligate Borrower to
repurchase such Inventory; (h) Borrower shall keep the Inventory in good and
marketable condition; and (i) Borrower shall not, without prior written notice
to Lender, acquire or accept any Inventory on consignment or approval.
5.1. EQUIPMENT COVENANTS. With respect to the Equipment: (a) upon
Lender's request, Borrower shall, at its expense, at any time or times as Lender
may request on or after an Event of Default, deliver or cause to be delivered to
Lender written reports or appraisals as to the Equipment in form, scope and
methodology acceptable to Lender and by an appraiser acceptable to Lender; (b)
Borrower shall keep the Equipment in good order, repair, running and marketable
condition (ordinary wear and tear excepted); (c) Borrower shall use the
Equipment with all reasonable care and caution and in accordance with applicable
standards of any insurance and in conformity with all applicable laws; (d) the
Equipment is and shall be used in Borrower's business and not for personal,
family, household or farming use; (e) Borrower shall not remove any Equipment
from the locations set forth or permitted herein, except to the extent necessary
to have any Equipment repaired or maintained in the ordinary course of the
business of Borrower or to move Equipment directly from one location set forth
or permitted herein to another such location and except for the movement of
motor vehicles used by or for the benefit of Borrower in the ordinary course of
business; (f) the Equipment is now and shall remain personal property and
Borrower shall not permit any of the Equipment to be or become a part of or
affixed to real property; and (g) Borrower assumes all responsibility and
liability arising from the use of the Equipment
5.2. POWER OF ATTORNEY. Borrower hereby irrevocably designates and
appoints Lender (and all persons designated by Lender) as Borrower's true and
lawful attorney-in-fact, and authorizes Lender, in Borrower's or Lender's name,
to: (a) at any time an Event of Default or event which with notice or passage of
time or both would constitute an Event of Default exists or has occurred and is
continuing (i) demand payment on Accounts or other proceeds of Inventory or
other
<PAGE>
Collateral, (ii) enforce payment of Accounts by legal proceedings or otherwise,
(iii) exercise all of Borrower's rights and remedies to collect any Account or
other Collateral, (iv) sell or assign any Account upon such terms, for such
amount and at such time or times as the Lender deems advisable, (v) settle,
adjust, compromise, extend or renew an Account, (vi) discharge and release any
Account, (vii) prepare, file and sign Borrower's name on any proof of claim in
bankruptcy or other similar document against an account debtor, (viii) notify
the post office authorities to change the address for delivery of Borrower's
mail to an address designated by Lender, and open and dispose of all mail
addressed to Borrower, and (ix) do all acts and things which are necessary, in
Lender's determination, to fulfill Borrower's obligations under this Agreement
and the other Financing Agreements and (b) at any time to (i) take control in
any manner of any item of payment or proceeds thereof, (ii) have access to any
lockbox or postal box into which Borrower's mail is deposited, (iii) endorse
Borrower's name upon any items of payment or proceeds thereof and deposit the
same in the Lender's account for application to the Obligations, (iv) endorse
Borrower's name upon any chattel paper, document, instrument, invoice, or
similar document or agreement relating to any Account or any goods pertaining
thereto or any other Collateral, (v) sign Borrower's name on any verification of
Accounts and notices thereof to account debtors and (vi) execute in Borrower's
name and file any UCC financing statements or amendments thereto. Borrower
hereby releases Lender and its officers, employees and designees from any
liabilities arising from any act or acts under this power of attorney and in
furtherance thereof, whether of omission or commission, except as a result of
Lender's own gross negligence or wilful misconduct as determined pursuant to a
final non-appealable order of a court of competent jurisdiction.
5.3. RIGHT TO CURE. Lender may, at its option, (a) cure any default by
Borrower under any agreement with a third party or pay or bond on appeal any
judgment entered against Borrower, (b) discharge taxes, liens, security
interests or other encumbrances at any time levied on or existing with respect
to the Collateral and (c) pay any amount, incur any expense or perform any act
which, in Lender's judgment, is necessary or appropriate to preserve, protect,
insure or maintain the Collateral and the rights of Lender with respect thereto.
Lender may add any amounts so expended to the Obligations and charge Borrower's
account therefor, such amounts to be repayable by Borrower on demand. Lender
shall be under no obligation to effect such cure, payment or bonding and shall
not, by doing so, be deemed to have assumed any obligation or liability of
Borrower. Any payment made or other action taken by Lender under this Section
shall be without prejudice to any right to assert an Event of Default hereunder
and to proceed accordingly.
5.4. ACCESS TO PREMISES. From time to time as requested by Lender, at
the cost and expense of Borrower, (a) Lender or its designee shall have complete
access to all of Borrower's premises during normal business hours and after
notice to Borrower, or at any
<PAGE>
time and without notice to Borrower if an Event of Default exists or has
occurred and is continuing, for the purposes of inspecting, verifying and
auditing the Collateral and all of Borrower's books and records, including,
without limitation, the Records, and (b) Borrower shall promptly furnish to
Lender such copies of such books and records or extracts therefrom as Lender may
request, and (c) use during normal business hours such of Borrower's personnel,
equipment, supplies and premises as may be reasonably necessary for the
foregoing and if an Event of Default exists or has occurred and is continuing
for the collection of Accounts and realization of other Collateral.
SECTION 6. REPRESENTATIONS AND WARRANTIES
Borrower hereby represents and warrants to Lender the following (which
shall survive the execution and delivery of this Agreement), the truth and
accuracy of which are a continuing condition of the making of Loans by Lender to
Borrower:
6.0. CORPORATE EXISTENCE, POWER AND AUTHORITY; SUBSIDIARIES. Borrower is
a corporation duly organized and in good standing under the laws of its state of
incorporation and is duly qualified as a foreign corporation and in good
standing in all states or other jurisdictions where the nature and extent of the
business transacted by it or the ownership of assets makes such qualification
necessary, except for those jurisdictions in which the failure to so qualify
would not have a material adverse effect on Borrower's financial condition,
results of operation or business or the rights of Lender in or to any of the
Collateral. The execution, delivery and performance of this Agreement, the other
Financing Agreements and the transactions contemplated hereunder and thereunder
are all within Borrower's corporate powers, have been duly authorized and are
not in contravention of law or the terms of Borrower's certificate of
incorporation, by-laws, or other organizational documentation, or any indenture,
agreement or undertaking to which Borrower is a party or by which Borrower or
its property are bound. This Agreement and the other Financing Agreements
constitute legal, valid and binding obligations of Borrower enforceable in
accordance with their respective terms. Borrower does not have any subsidiaries
except as set forth on the Information Certificate.
6.1. FINANCIAL STATEMENTS; NO MATERIAL ADVERSE CHANGE. All financial
statements relating to Borrower which have been or may hereafter be delivered by
Borrower to Lender have been prepared in accordance with GAAP and fairly present
the financial condition and the results of operation of Borrower as at the dates
and for the periods set forth therein. Except as disclosed in any interim
financial statements furnished by Borrower to Lender prior to the date of this
Agreement, there has been no material adverse change in the assets, liabilities,
properties and condition, financial or otherwise, of Borrower, since the date of
the most recent audited financial statements furnished by Borrower to Lender
prior to the date of this Agreement.
6.2. CHIEF EXECUTIVE OFFICE; COLLATERAL LOCATIONS. The chief executive
office of Borrower and Borrower's Records concerning Accounts are located only
at the address set forth below and its only other places of business and the
only other locations of Collateral,
<PAGE>
if any, are the addresses set forth in the Information Certificate, subject to
the right of Borrower to establish new locations in accordance with Section 9.2
below. The Information Certificate correctly identifies any of such locations
which are not owned by Borrower and sets forth the owners and/or operators
thereof and to the best of Borrower's knowledge, the holders of any mortgages on
such locations.
6.3. PRIORITY OF LIENS; TITLE TO PROPERTIES. The security interests and
liens granted to Lender under this Agreement and the other Financing Agreements
constitute valid and perfected first priority liens and security interests in
and upon the Collateral subject only to the liens indicated on Schedule 8.4
hereto and the other liens permitted under Section 9.8 hereof. Borrower has good
and marketable title to all of its properties and assets subject to no liens,
mortgages, pledges, security interests, encumbrances or charges of any kind,
except those granted to Lender and such others as are specifically listed on
Schedule 8.4 hereto or permitted under Section 9.8 hereof.
6.4. TAX RETURNS. Borrower has filed, or caused to be filed, in a timely
manner all tax returns, reports and declarations which are required to be filed
by it (without requests for extension except as previously disclosed in writing
to Lender). All information in such tax returns, reports and declarations is
complete and accurate in all material respects. Borrower has paid or caused to
be paid all taxes due and payable or claimed due and payable in any assessment
received by it, except taxes the validity of which are being contested in good
faith by appropriate proceedings diligently pursued and available to Borrower
and with respect to which adequate reserves have been set aside on its books.
Adequate provision has been made for the payment of all accrued and unpaid
Federal, State, county, local, foreign and other taxes whether or not yet due
and payable and whether or not disputed.
6.5. LITIGATION. Except as set forth on the Information Certificate,
there is no present investigation by any governmental agency pending, or to the
best of Borrower's knowledge threatened, against or affecting Borrower, its
assets or business and there is no action, suit, proceeding or claim by any
Person pending, or to the best of Borrower's knowledge threatened, against
Borrower or its assets or goodwill, or against or affecting any transactions
contemplated by this Agreement, which if adversely determined against Borrower
would result in any material adverse change in the assets, business or prospects
of Borrower or would impair the ability of Borrower to perform its obligations
hereunder or under any of the other Financing Agreements to which it is a party
or of Lender to enforce any Obligations or realize upon any Collateral.
6.6. COMPLIANCE WITH OTHER AGREEMENTS AND APPLICABLE LAWS. Borrower is
not in default in any material respect under, or in violation in any material
respect of any of the terms of, any agreement, contract, instrument, lease or
other commitment to which it is a
<PAGE>
party or by which it or any of its assets are bound and Borrower is in
compliance in all material respects with all applicable provisions of laws,
rules, regulations, licenses, permits, approvals and orders of any foreign,
Federal, State or local governmental authority.
6.7. ACCURACY AND COMPLETENESS OF INFORMATION. All information furnished
by or on behalf of Borrower in writing to Lender in connection with this
Agreement or any of the other Financing Agreements or any transaction
contemplated hereby or thereby, including, without limitation, all information
on the Information Certificate is true and correct in all material respects on
the date as of which such information is dated or certified and does not omit
any material fact necessary in order to make such information not misleading. No
event or circumstance has occurred which has had or could reasonably be expected
to have a material adverse affect on the business, assets or prospects of
Borrower, which has not been fully and accurately disclosed to Lender in
writing.
6.8. SURVIVAL OF WARRANTIES; CUMULATIVE. All representations and
warranties contained in this Agreement or any of the other Financing Agreements
shall survive the execution and delivery of this Agreement and shall be deemed
to have been made again to Lender on the date of each additional borrowing or
other credit accommodation hereunder and shall be conclusively presumed to have
been relied on by Lender regardless of any investigation made or information
possessed by Lender. The representations and warranties set forth herein shall
be cumulative and in addition to any other representations or warranties which
Borrower shall now or hereafter give, or cause to be given, to Lender.
SECTION 7. AFFIRMATIVE AND NEGATIVE COVENANTS
7.0. MAINTENANCE OF EXISTENCE. Borrower shall at all times preserve,
renew and keep in full, force and effect its corporate existence and rights and
franchises with respect thereto and maintain in full force and effect all
permits, licenses, trademarks, tradenames, approvals, authorizations, leases and
contracts necessary to carry on the business as presently or proposed to be
conducted. Borrower shall give Lender thirty (30) days prior written notice of
any proposed change in its corporate name, which notice shall set forth the new
name and Borrower shall deliver to Lender a copy of the amendment to the
Certificate of Incorporation of Borrower providing for the name change certified
by the Secretary of State of the jurisdiction of incorporation of Borrower as
soon as it is available.
7.1. NEW COLLATERAL LOCATIONS. Borrower may open any new location within
the continental United States provided Borrower gives Lender thirty (30) days
prior written notice of the intended opening of any such new location and
executes and delivers, or causes to be executed and delivered, to Lender such
agreements, documents, and instruments as Lender may deem reasonably necessary
or desirable to protect its interests in the Collateral at such location,
including, without limitation, UCC financing statements.
7.2. COMPLIANCE WITH LAWS, REGULATIONS, ETC. Borrower shall, at all
times, comply in all material respects with all laws, rules, regulations,
licenses, permits, approvals and orders of any Federal, State or local
governmental authority applicable to it.
<PAGE>
7.3. PAYMENT OF TAXES AND CLAIMS. Borrower shall duly pay and discharge
all taxes, assessments, contributions and governmental charges upon or against
it or its properties or assets, except for taxes the validity of which are being
contested in good faith by appropriate proceedings diligently pursued and
available to Borrower and with respect to which adequate reserves have been set
aside on its books. Borrower shall be liable for any tax or penalties imposed on
Lender as a result of the financing arrangements provided for herein and
Borrower agrees to indemnify and hold Lender harmless with respect to the
foregoing, and to repay to Lender on demand the amount thereof, and until paid
by Borrower such amount shall be added and deemed part of the Loans, PROVIDED,
THAT, nothing contained herein shall be construed to require Borrower to pay any
income or franchise taxes attributable to the income of Lender from any amounts
charged or paid hereunder to Lender. The foregoing indemnity shall survive the
payment of the Obligations and the termination or non-renewal of this Agreement.
7.4. INSURANCE. Borrower shall, at all times, maintain with financially
sound and reputable insurers insurance with respect to the Collateral against
loss or damage and all other insurance of the kinds and in the amounts
customarily insured against or carried by corporations of established reputation
engaged in the same or similar businesses and similarly situated. Said policies
of insurance shall be satisfactory to Lender as to form, amount and insurer.
Borrower shall furnish certificates, policies or endorsements to Lender as
Lender shall require as proof of such insurance, and, if Borrower fails to do
so, Lender is authorized, but not required, to obtain such insurance at the
expense of Borrower. All policies shall provide for at least thirty (30) days
prior written notice to Lender of any cancellation or reduction of coverage and
that Lender may act as attorney for Borrower in obtaining, and at any time an
Event of Default exists or has occurred and is continuing, adjusting, settling,
amending and canceling such insurance. Borrower shall cause Lender to be named
as a loss payee and an additional insured (but without any liability for any
premiums) under such insurance policies and Borrower shall obtain
non-contributory lender's loss payable endorsements to all insurance policies in
form and substance satisfactory to Lender. Such lender's loss payable
endorsements shall specify that the proceeds of such insurance shall be payable
to Lender as its interests may appear and further specify that Lender shall be
paid regardless of any act or omission by Borrower or any of its affiliates. At
its option, Lender may apply any insurance proceeds received by Lender at any
time to the cost of repairs or replacement of Collateral and/or to payment of
the Obligations, whether or not then due, in any order and in such manner as
Lender may determine or hold such proceeds as cash collateral for the
Obligations.
<PAGE>
7.5. FINANCIAL STATEMENTS AND OTHER INFORMATION.
(0.) Borrower shall keep proper books and records in which true
and complete entries shall be made of all dealings or transactions of or in
relation to the Collateral and the business of Borrower and its subsidiaries (if
any) in accordance with GAAP and Borrower shall furnish or cause to be furnished
to Lender: (i) within twenty (20) days after the end of each fiscal month,
monthly unaudited consolidated financial statements, and, if Borrower has any
subsidiaries, unaudited consolidating financial statements (including in each
case balance sheets, statements of income and loss and statements of
shareholders' equity), all in reasonable detail, fairly presenting the financial
position and the results of the operations of Borrower and its subsidiaries as
of the end of and through such fiscal month and (ii) within ninety (90) days
after the end of each fiscal year, audited consolidated financial statements
and, if Borrower has any subsidiaries, audited consolidating financial
statements of Borrower and its subsidiaries (including in each case balance
sheets, statements of income and loss, statements of cash flow and statements of
shareholders' equity), and the accompanying notes thereto, all in reasonable
detail, fairly presenting the financial position and the results of the
operations of Borrower and its subsidiaries as of the end of and for such fiscal
year, together with the opinion of independent certified public accountants,
which accountants shall be an independent accounting firm selected by Borrower
and reasonably acceptable to Lender, that such financial statements have been
prepared in accordance with GAAP, and present fairly the results of operations
and financial condition of Borrower and its subsidiaries as of the end of and
for the fiscal year then ended.
(1.) Borrower shall promptly notify Lender in writing of the
details of (i) any loss, damage, investigation, action, suit, proceeding or
claim relating to the Collateral or any other property which is security for the
Obligations or which would result in any material adverse change in Borrower's
business, properties, assets, goodwill or condition, financial or otherwise and
(ii) the occurrence of any Event of Default or event which, with the passage of
time or giving of notice or both, would constitute an Event of Default.
(2.) Borrower shall promptly after the sending or filing thereof
furnish or cause to be furnished to Lender copies of all reports which Borrower
sends to its stockholders generally and copies of all reports and registration
statements which Borrower files with the Securities and Exchange Commission, any
national securities exchange or the National Association of Securities Dealers,
Inc.
(3.) Borrower shall furnish or cause to be furnished to Lender
such budgets, forecasts, projections and other information respecting the
Collateral and the business of Borrower, as Lender may, from time to time,
reasonably request. Lender is hereby authorized to deliver a copy of any
financial statement or any other information relating to the business of
Borrower to any court or other government agency or to any participant or
assignee or prospective participant or assignee. Borrower hereby irrevocably
authorizes and directs all accountants or auditors to deliver to Lender, at
Borrower's expense, copies of the financial statements of Borrower and any
reports or management letters prepared by such accountants or auditors on behalf
of Borrower and to disclose to Lender
<PAGE>
such information as they may have regarding the business of Borrower. Any
documents, schedules, invoices or other papers delivered to Lender may be
destroyed or otherwise disposed of by Lender one (1) year after the same are
delivered to Lender, except as otherwise designated by Borrower to Lender in
writing.
3.0. SALE OF ASSETS, CONSOLIDATION, MERGER, DISSOLUTION, ETC. Borrower
shall not, directly or indirectly, (a) merge into or with or consolidate with
any other Person or permit any other Person to merge into or with or consolidate
with it, or (b) sell, assign, lease, transfer, abandon or otherwise dispose of
any stock or indebtedness to any other Person or any of its assets to any other
Person (except for (i) sales of Inventory in the ordinary course of business and
(ii) the disposition of worn-out or obsolete Equipment or Equipment no longer
used in the business of Borrower so long as (A) if an Event of Default exists or
has occurred and is continuing, any proceeds are paid to Lender and (B) such
sales do not involve Equipment having an aggregate fair market value in excess
of $25,000 for all such Equipment disposed of in any fiscal year of Borrower),
or (c) form or acquire any subsidiaries, or (d) wind up, liquidate or dissolve
or (e) agree to do any of the foregoing.
3.1. ENCUMBRANCES. Borrower shall not create, incur, assume or suffer to
exist any security interest, mortgage, pledge, lien, charge or other encumbrance
of any nature whatsoever on any of its assets or properties, including, without
limitation, the Collateral, EXCEPT: (a) the liens and security interests of
Lender; (b) liens securing the payment of taxes, either not yet overdue or the
validity of which are being contested in good faith by appropriate proceedings
diligently pursued and available to Borrower and with respect to which adequate
reserves have been set aside on its books; (c) non-consensual statutory liens
(other than liens securing the payment of taxes) arising in the ordinary course
of Borrower's business to the extent: (i) such liens secure indebtedness which
is not overdue or (ii) such liens secure indebtedness relating to claims or
liabilities which are fully insured and being defended at the sole cost and
expense and at the sole risk of the insurer or being contested i good faith by
appropriate proceedings diligently pursued and available to Borrower, in each
case prior to the commencement of foreclosure or other similar proceedings and
with respect to which adequate reserves have been set aside on its books; (d)
zoning restrictions, easements, licenses, covenants and other restrictions
affecting the use of real property which do not interfere in any material
respect with the use of such real property or ordinary conduct of the business
of Borrower as presently conducte thereon or materially impair the value of the
real property which may be subject thereto; (e) in addition to encumbrances
permitted under section 9.8(f), purchase money security interests in Equipment
(including capital leases) and purchase money mortgages on real estate not to
exceed $300,000 (including existing indebtedness to Trustco Bank as set forth in
subsection (f) below) in the aggregate at any time outstanding so long as such
security interests and mortgages do not apply to any property of Borrower other
than the Equipment or real estate so acquired, and the
<PAGE>
indebtedness secured thereby does not exceed the cost of the Equipment or real
estate so acquired, as the case may be; (f) the liens and security interests of
Trustco Bank on the assets of Borrower consisting of machinery and equipment, so
long as the indebtedness secured thereby does not exceed $167,000; and (g) the
security interests and liens set forth on Schedule 8.4 hereto.
3.2. INDEBTEDNESS. Borrower shall not incur, create, assume, become or
be liable in any manner with respect to, or permit to exist, any obligations or
indebtedness, except:
(a) the Obligations;
(b) trade obligations and normal accruals in the ordinary course
of business not yet due and payable, or with respect to which Borrower is
contesting in good faith the amount or validity thereof by appropriate
proceedings diligently pursued and available to Borrower and with respect to
which adequate reserves have been set aside on its books;
(c) purchase money indebtedness (including capital leases) to the
extent not incurred or secured by liens (including capital leases) in violation
of any other provision of this Agreement;
(d) unsecured indebtedness of Borrower to the Persons and in
respect of the notes and instruments listed on Schedule 9.9 hereto, not to
exceed the aggregate principal amount of $344,000 which indebtedness is subject
to, and subordinate in right of payment to, the right of Lender to receive the
prior payment in full of all of the Obligations; PROVIDED, THAT: (i) Borrower
shall not, directly or indirectly, make any payments in respect of such
indebtedness, including but not limited to, any prepayments or other
non-mandatory payments, (ii) Borrower shall not, directly or indirectly, (A)
amend, modify, alter or change any terms of such indebtedness or any agreement,
document or instrument related thereto, or (B) redeem, retire, defease, purchase
or otherwise acquire such indebtedness, or set aside or otherwise deposit or
invest any sums for such purpose, and (iii) Borrower shall furnish to Lender all
notices, demands or other materials concerning such indebtedness either received
by Borrower or on its behalf, promptly after receipt thereof, or sent by
Borrower or on its behalf, concurrently with the sending thereof, as the case
may be.
(e) obligations to Trustco Bank in a maximum principal amount of
$167,000; PROVIDED THAT, (i) Borrower shall not, directly or indirectly, make
any payments in respect of such indebtedness, including but not limited to, any
prepayments or other non-mandatory payments, except that until an Event of
Default, or event which with notice or passage of time or both would constitute
an Event of Default, shall exist or have occurred and be continuing, Borrower
may make regularly scheduled payments of principal and interest in accordance
with the terms of such agreement or instrument as in effect on the date hereof,
(ii) Borrower shall not, directly or indirectly, (A) amend, modify, alter or
change any terms of such indebtedness or any agreement, document or instrument
related thereto, or (B) redeem, retire, defease, purchase or otherwise acquire
such indebtedness, or set aside or otherwise deposit or invest any sums for such
purpose, and (iii) Borrower shall furnish to
<PAGE>
Lender all notices, demands or other materials concerning such indebtedness
either received by Borrower or on its behalf, promptly after receipt thereof, or
sent by Borrower or on its behalf, concurrently with the sending thereof, as the
case may be.
3.3. LOANS, INVESTMENTS, GUARANTEES, ETC. Borrower shall not, directly
or indirectly, make any loans or advance money or property to any person, or
invest in (by capital contribution, dividend or otherwise) or purchase or
repurchase the stock or indebtedness or all or a substantial part of the assets
or property of any person, or guarantee, assume, endorse, or otherwise become
responsible for (directly or indirectly) the indebtedness, performance,
obligations or dividends of any Person or agree to do any of the foregoing,
EXCEPT: (a) the endorsement of instruments for collection or deposit in the
ordinary course of business; (b) investments in: (i) short-term direct
obligations of the United States Government, (ii) negotiable certificates of
deposit issued by any bank satisfactory to Lender, payable to the order of the
Borrower or to bearer and delivered to Lender, and (iii) commercial paper rated
A1 or P1; PROVIDED, THAT, as to any of the foregoing, unless waived in writing
by Lender, Borrower shall take such actions as are deemed necessary by Lender to
perfect the security interest of Lender in such investments and the guarantees
set forth in the Information Certificate.
3.4. DIVIDENDS AND REDEMPTIONS. Borrower shall not, directly or
indirectly, declare or pay any dividends on account of any shares of class of
capital stock of Borrower now or hereafter outstanding, or set aside or
otherwise deposit or invest any sums for such purpose, or redeem, retire,
defease, purchase or otherwise acquire any shares of any class of capital stock
(or set aside or otherwise deposit or invest any sums for such purpose) for any
consideration other than common stock or apply or set apart any sum, or make any
other distribution (by reduction of capital or otherwise) in respect of any such
shares or agree to do any of the foregoing, except as set forth on Schedule 9.11
hereto.
3.5. TRANSACTIONS WITH AFFILIATES. Borrower shall not enter into any
transaction for the purchase, sale or exchange of property or the rendering of
any service to or by any affiliate, except in the ordinary course of and
pursuant to the reasonable requirements of Borrower's business and upon fair and
reasonable terms no less favorable to the Borrower than Borrower would obtain in
a comparable arm's length transaction with an unaffiliated person.
3.6. WORKING CAPITAL. Borrower shall, at all times, maintain Working
Capital of not less than $___________.
3.7. ADJUSTED NET WORTH. Borrower shall, at all times, maintain Adjusted
Net Worth of not less than $_____________.
<PAGE>
3.8. COSTS AND EXPENSES. Borrower shall pay to Lender on demand all
costs, expenses, filing fees and taxes paid or payable in connection with the
preparation, negotiation, execution, delivery, recording, administration,
collection, liquidation, enforcement and defense of the Obligations, Lender's
rights in the Collateral, this Agreement, the other Financing Agreements and all
other documents related hereto or thereto, including any amendments, supplements
or consents which may hereafter be contemplated (whether or not executed) or
entered into in respect hereof and thereof, including, but not limited to: (a)
all costs and expenses of filing or recording (including Uniform Commercial Code
financing statement filing taxes and fees, documentary taxes, intangibles taxes
and mortgage recording taxes and fees, if applicable); (b) all title insurance
and other insurance premiums, appraisal fees and search fees; (c) costs and
expenses of remitting loan proceeds, collecting checks and other items of
payment, and establishing and maintaining the Blocked Accounts, together with
Lender's customary charges and fees with respect thereto; (d) costs and expenses
of preserving and protecting the Collateral; (e) costs and expenses paid or
incurred in connection with obtaining payment of the Obligations, enforcing the
security interests and liens of Lender, selling or otherwise realizing upon the
Collateral, and otherwise enforcing the provisions of this Agreement and the
other Financing Agreements or defendin any claims made or threatened against
Lender arising out of the transactions contemplated hereby and thereby
(including, without limitation, preparations for and consultations concerning
any such matters); (f) all out-of-pocket expenses and costs heretofore and from
time to time hereafter incurred by Lender during the course of periodic field
examinations of the Collateral and Borrower's operations, plus a per diem charge
at the rate of $500.00 per person per day for Lender's examiners in the field
and office; and (h) the fees and disbursements of counsel (including legal
assistants) to Lender in connection with any of the foregoing.
3.9. FURTHER ASSURANCES. At the request of Lender at any time and from
time to time, Borrower shall, at its expense, duly execute and deliver, or cause
to be duly executed and delivered, such further agreements, documents and
instruments, and do or cause to be done such further acts as may be necessary or
proper to evidence, perfect, maintain and enforce the security interests and the
priority thereof in the Collateral and to otherwise effectuate the provisions or
purposes of this Agreemen or any of the other Financing Agreements. Lender may
at any time and from time to time request a certificate from an officer of
Borrower representing that all conditions precedent to the making of Loans
contained herein are satisfied. In the event of such request by Lender, Lender
may, at its option, cease to make any further Loans until Lender has received
such certificate and, in addition, Lender has determined that such conditions
are satisfied. Where permitted by law, Borrower hereby authorizes Lender to
execute and file one or more UCC financing statements signed only by Lender.
SECTION 4. EVENTS OF DEFAULT AND REMEDIES
4.0. EVENTS OF DEFAULT. The occurrence or existence of any one or more
of the following events are referred to herein individually as an "Event of
Default", and collectively
<PAGE>
as "Events of Default":
(0.) Borrower fails to pay when due any of the Obligations or
fails to perform any of the terms, covenants, conditions or provisions contained
in this Agreement or any of the other Financing Agreements;
(1.) any representation, warranty or statement of fact made by
Borrower to Lender in this Agreement, the other Financing Agreements or any
other agreement, schedule, confirmatory assignment or otherwise shall when made
or deemed made be false or misleading in any material respect;
(2.) any Obligor revokes, terminates or fails to perform any of
the terms, covenants, conditions or provisions of any guarantee, endorsement or
other agreement of such party in favor of Lender;
(3.) any judgment for the payment of money is rendered against
Borrower or any Obligor in excess of $25,000 in any one case or in excess of
$50,000 in the aggregate and shall remain undischarged or unvacated for a period
in excess of thirty (30) days or execution shall at any time not be effectively
stayed, or any judgment other than for the payment of money, or injunction,
attachment, garnishment or execution is rendered against Borrower or any Obligor
or any of their assets;
(4.) any Obligor (being a natural person or a general partner of
an Obligor which is a partnership) (other than Patricia A. DelSignore) dies or
Borrower or any Obligor, which is a partnership or corporation, dissolves or
suspends or discontinues doing business;
(5.) Borrower or any Obligor becomes insolvent (however defined or
evidenced), makes an assignment for the benefit of creditors, makes or sends
notice of a bulk transfer or calls a meeting of its creditors or principal
creditors;
(6.) a case or proceeding under the bankruptcy laws of the United
States of America now or hereafter in effect or under any insolvency,
reorganization, receivership, readjustment of debt, dissolution or liquidation
law or statute of any jurisdiction now or hereafter in effect (whether at law or
in equity) is filed against Borrower or any Obligor or all or any part of its
properties and such petition or application is not dismissed within thirty (30)
days after the date of its filin or Borrower or any Obligor shall file any
answer admitting or not contesting such petition or application or indicates its
consent to,
<PAGE>
acquiescence in or approval of, any such action or proceeding or the relief
requested is granted sooner;
(7.) a case or proceeding under the bankruptcy laws of the United
States of America now or hereafter in effect or under any insolvency,
reorganization, receivership, readjustment of debt, dissolution or liquidation
law or statute of any jurisdiction now or hereafter in effect (whether at a law
or equity) is filed by Borrower or any Obligor or for all or any part of its
property; or
(8.) any default by Borrower or any Obligor under any agreement,
document or instrument relating to any indebtedness for borrowed money owing to
any person other than Lender, or any capitalized lease obligations, contingent
indebtedness in connection with any guarantee, letter of credit, indemnity or
similar type of instrument in favor of any person other than Lender, in any case
in an amount in excess of $50,000, which default continues for more than the
applicable cure period, if any, with respect thereto, or any default by Borrower
or any Obligor under any material contract, lease, license or other obligation
to any person other than Lender, which default continues for more than the
applicable cure period, if any, with respect thereto;
(9.) any change in the controlling ownership of Borrower;
(10.) the indictment or threatened indictment of Borrower or any
Obligor under any criminal statute, or commencement or threatened commencement
of criminal or civil proceedings against Borrower or any Obligor, pursuant to
which statute or proceedings the penalties or remedies sought or available
include forfeiture of any of the property of Borrower or such Obligor;
(11.) there shall be a material adverse change in the business,
assets or prospects of Borrower or any Obligor after the date hereof;
(12.) Borrower shall not have hired a controller, with experience
and qualifications satisfactory to Lender, within six (6) months from the date
hereof; or
(13.) there shall be an event of default under any of the other
Financing Agreements.
13.0. REMEDIES.
(0.) At any time an Event of Default exists or has occurred and is
continuing, Lender shall have all rights and remedies provided in this
Agreement, the other Financing Agreements, the Uniform Commercial Code and other
applicable law, all of which rights and remedies may be exercised without notice
to or consent by Borrower or any Obligor, except as such notice or consent is
expressly provided for hereunder or required by applicable law. All rights,
remedies and powers granted to Lender hereunder, under any of
<PAGE>
the other Financing Agreements, the Uniform Commercial Code or other applicable
law, are cumulative, not exclusive and enforceable, in Lender's discretion,
alternatively, successively, or concurrently on any one or more occasions, and
shall include, without limitation, the right to apply to a court of equity for
an injunction to restrain a breach or threatened breach by Borrower of this
Agreement or any of the other Financing Agreements. Lender may, at any time or
times, proceed directly against Borrower or any Obligor to collect the
Obligations without prior recourse to the Collateral.
(1.) Without limiting the foregoing, at any time an Event of
Default exists or has occurred and is continuing, Lender may, in its discretion
and without limitation, (i) accelerate the payment of all Obligations and demand
immediate payment thereof to Lender (PROVIDED, THAT, upon the occurrence of any
Event of Default described in Sections 10.1(g) and 10.1(h), all Obligations
shall automatically become immediately due and payable), (ii) with or without
judicial process or the aid or assistance of others, enter upon any premises on
or in which any of the Collateral may be located and take possession of the
Collateral or complete processing, manufacturing and repair of all or any
portion of the Collateral, (iii) require Borrower, at Borrower's expense, to
assemble and make available to Lender any part or all of the Collateral at any
place and time designated by Lender, (iv) collect, foreclose, receive,
appropriate, setoff and realize upon any and all Collateral, (v) remove any or
all o the Collateral from any premises on or in which the same may be located
for the purpose of effecting the sale, foreclosure or other disposition thereof
or for any other purpose, (vi) sell, lease, transfer, assign, deliver or
otherwise dispose of any and all Collateral (including, without limitation,
entering into contracts with respect thereto, public or private sales at any
exchange, broker's board, at any office of Lender or elsewhere) at such prices
or terms as Lender may deem reasonable, for cash, upo credit or for future
delivery, with the Lender having the right to purchase the whole or any part of
the Collateral at any such public sale, all of the foregoing being free from any
right or equity of redemption of Borrower, which right or equity of redemption
is hereby expressly waived and released by Borrower and/or (vii) terminate this
Agreement. If any of the Collateral is sold or leased by Lender upon credit
terms or for future delivery, the Obligations shall not be reduced as a result
thereof until payment therefor is finally collected by Lender. If notice of
disposition of Collateral is required by law, five (5) days prior notice by
Lender to Borrower designating the time and place of any public sale or the time
after which any private sale or other intended disposition of Collateral is to
be made, shall be deemed to be reasonable notice thereof and Borrower waives any
other notice. In the event Lender institutes an action to recover any Collateral
or seeks recovery of any Collateral by way of prejudgment remedy, Borrower
waives the posting of any bond which might otherwise be required.
(2.) Lender may apply the cash proceeds of Collateral actually
received by Lender from any sale, lease, foreclosure or other disposition of the
Collateral to payment
<PAGE>
of the Obligations, in whole or in part and in such order as Lender may elect,
whether or not then due. Borrower shall remain liable to Lender for the payment
of any deficiency with interest at the highest rate provided for herein and all
costs and expenses of collection or enforcement, including attorneys' fees and
legal expenses.
(3.) Without limiting the foregoing, upon the occurrence of an
Event of Default or an event which with notice or passage of time or both would
constitute an Event of Default, Lender may, at its option, without notice, (i)
cease making Loans or reduce the lending formulas or amounts of Revolving Loans
available to Borrower and/or (ii) terminate any provision of this Agreement
providing for any future Loans to be made by Lender to Borrower.
SECTION 4. JURY TRIAL WAIVER; OTHER WAIVERS AND CONSENTS; GOVERNING LAW
4.0. GOVERNING LAW; CHOICE OF FORUM; SERVICE OF PROCESS; JURY TRIAL
WAIVER.
(0.) The validity, interpretation and enforcement of this
Agreement and the other Financing Agreements and any dispute arising out of the
relationship between the parties hereto, whether in contract, tort, equity or
otherwise, shall be governed by the internal laws of the Commonwealth of
Massachusetts (without giving effect to principles of conflicts of law).
(1.) Borrower and Lender irrevocably consent and submit to the
non-exclusive jurisdiction of the Superior Courts of the Commonwealth of
Massachusetts and the United States District Court for the District of
Massachusetts and waive any objection based on venue or FORUM NON CONVENIENS
with respect to any action instituted therein arising under this Agreement or
any of the other Financing Agreements or in any way connected with or related or
incidental to the dealings of the parties hereto in respect of this Agreement or
any of the other Financing Agreements or the transactions related hereto or
thereto, in each case whether now existing or hereafter arising, and whether in
contract, tort, equity or otherwise, and agree that any dispute with respect to
any such matters shall be heard only in the courts described above (except that
Lender shall have the right to bring any action or proceeding against Borrower
or its property in the courts of any other jurisdiction which Lender deems
necessary or appropriate in order to realize on the Collateral or to otherwise
enforce its rights against Borrower or its property).
(2.) Borrower hereby waives personal service of any and all
process upon it and consents that all such service of process may be made by
certified mail (return receipt requested) directed to its address set forth on
the signature pages hereof and service so made shall be deemed to be completed
five (5) days after the same shall have been so deposited in the U.S. mails, or,
at Lender's option, by service upon Borrower in any other manner provided under
the rules of any such courts. Within thirty (30) days after such service,
<PAGE>
Borrower shall appear in answer to such process, failing which Borrower shall be
deemed in default and judgment may be entered by Lender against Borrower for the
amount of the claim and other relief requested.
(3.) BORROWER AND LENDER EACH HEREBY WAIVES ANY RIGHT TO TRIAL BY
JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION ARISING UNDER THIS
AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR IN ANY WAY CONNECTED WITH
OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO IN RESPECT OF
THIS AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR THE TRANSACTIONS
RELATED HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER
ARISING, AND WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE. BORROWER AND LENDER
EACH HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF
ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT BORROWER OR
LENDER MAY FILE AN ORIGINAL COUNTERPART OF A COPY OF THIS AGREEMENT WITH ANY
COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF
THEIR RIGHT TO TRIAL BY JURY.
(4.) Lender shall not have any liability to Borrower (whether in
tort, contract, equity or otherwise) for losses suffered by Borrower in
connection with, arising out of, or in any way related to the transactions or
relationships contemplated by this Agreement, or any act, omission or event
occurring in connection herewith, unless it is determined by a final and
non-appealable judgment or court order binding on Lender, that the losses were
the result of acts or omissions constitutin gross negligence or willful
misconduct. In any such litigation, Lender shall be entitled to the benefit of
the rebuttable presumption that it acted in good faith and with the exercise of
ordinary care in the performance by it of the terms of this Agreement.
4.0. WAIVER OF NOTICES. Borrower hereby expressly waives demand,
presentment, protest and notice of protest and notice of dishonor with respect
to any and all instruments and commercial paper, included in or evidencing any
of the Obligations or the Collateral, and any and all other demands and notices
of any kind or nature whatsoever with respect to the Obligations, the Collateral
and this Agreement, except such as are expressly provided for herein. No notice
to or demand on Borrower whic Lender may elect to give shall entitle Borrower to
any other or further notice or demand in the same, similar or other
circumstances.
4.1. AMENDMENTS AND WAIVERS. Neither this Agreement nor any provision
hereof
<PAGE>
shall be amended, modified, waived or discharged orally or by course of conduct,
but only by a written agreement signed by an authorized officer of Lender.
Lender shall not, by any act, delay, omission or otherwise be deemed to have
expressly or impliedly waived any of its rights, powers and/or remedies unless
such waiver shall be in writing and signed by an authorized officer of Lender.
Any such waiver shall be enforceable only to the extent specifically set forth
therein. A waiver by Lender of any right, power and/or remedy on any one
occasion shall not be construed as a bar to or waiver of any such right, power
and/or remedy which Lender would otherwise have on any future occasion, whether
similar in kind or otherwise.
4.2. WAIVER OF COUNTERCLAIMS. Borrower waives all rights to interpose
any claims, deductions, setoffs or counterclaims of any nature (other then
compulsory counterclaims) in any action or proceeding with respect to this
Agreement, the Obligations, the Collateral or any matter arising therefrom or
relating hereto or thereto.
4.3. INDEMNIFICATION. Borrower shall indemnify and hold Lender, and its
directors, agents, employees and counsel, harmless from and against any and all
losses, claims, damages, liabilities, costs or expenses imposed on, incurred by
or asserted against any of them in connection with any litigation,
investigation, claim or proceeding commenced or threatened related to the
negotiation, preparation, execution, delivery, enforcement, performance or
administration of this Agreement, any other Financing Agreements, or any
undertaking or proceeding related to any of the transactions contemplated hereby
or any act, omission, event or transaction related or attendant thereto,
including, without limitation, amounts paid in settlement, court costs, and the
fees and expenses of counsel. To the extent that the undertaking to indemnify,
pay and hold harmless set forth in this Section may be unenforceable because it
violates any law or public policy, Borrower shall pay the maximum portion which
it is permitted to pay under applicable law to Lender in satisfaction of
indemnified matters under this Section. The foregoing indemnity shall survive
the payment of the Obligations and the termination or non-renewal of this
Agreement.
SECTION 5. TERM OF AGREEMENT; MISCELLANEOUS
5.0. TERM.
(0.) This Agreement and the other Financing Agreements shall
become effective as of the date set forth on the first page hereof and shall
continue in full force and effect for a term ending on the date three (3) years
from the date hereof (the "Renewal Date"), and from year to year thereafter,
unless sooner terminated pursuant to the terms hereof; PROVIDED, THAT, Lender
may, at its option, extend the Renewal Date to the date four (4) years from the
date hereof by giving Borrower notice at least sixty (60) days prior to the
third anniversary of this Agreement. Lender or Borrower (subject to Lender's
right to extend the Renewal Date as provided above) may terminate this Agreement
and the other Financing Agreements effective on the Renewal Date or on the
anniversary of the Renewal Date in any
<PAGE>
year by giving to the other party at least sixty (60) days prior written notice;
PROVIDED, THAT, this Agreement and all other Financing Agreements must be
terminated simultaneously. Upon the effective date of termination or non-renewal
of the Financing Agreements, Borrower shall pay to Lender, in full, all
outstanding and unpaid Obligations and shall furnish cash collateral to Lender
in such amounts as Lender determines are reasonably necessary to secure Lender
from loss, cost, damage or expense, including attorneys' fees and legal
expenses, in connection with any contingent Obligations, checks or other
payments provisionally credited to the Obligations and/or as to which Lender has
not yet received final and indefeasible payment. Such cash collateral shall be
remitted by wire transfer in Federal funds to such bank account of Lender, as
Lender may, in its discretion, designate in writing to Borrower for such
purpose. Interest shall be due until and including the next business day, if the
amounts so paid by Borrower to the bank account designated by Lender are
received in such bank account later than 12:00 noon, Boston, Massachusetts time.
(1.) No termination of this Agreement or the other Financing
Agreements shall relieve or discharge Borrower of its respective duties,
obligations and covenants under this Agreement or the other Financing Agreements
until all Obligations have been fully and finally discharged and paid, and
Lender's continuing security interest in the Collateral and the rights and
remedies of Lender hereunder, under the other Financing Agreements and
applicable law, shall remain in effect until all such Obligations have been
fully and finally discharged and paid.
(2.) If for any reason this Agreement is terminated prior to the
end of the then current term or renewal term of this Agreement, in view of the
impracticality and extreme difficulty of ascertaining actual damages and by
mutual agreement of the parties as to a reasonable calculation of Lender's lost
profits as a result thereof, Borrower agrees to pay to Lender, upon the
effective date of such termination, an early termination fee in the amount set
forth below if such termination is effective in the period indicated:
Amount Period
------ ------
(i) 5% of Maximum Credit April __, 1995 to and including
April __, 1996
(ii) 3% of Maximum Credit April __, 1996 to and including
April __, 1997
(iii) 1% of Maximum Credit April __, 1997 to and including
April __, 1998 (or to and
including April __, 1999 if the
Renewal Date is extended to the
date four (4) years from the date
hereof pursuant to Section 12.1(a)
<PAGE>
Such early termination fee shall be presumed to be the amount of damages
sustained by Lender as a result of such early termination and Borrower agrees
that it is reasonable under the circumstances currently existing. The early
termination fee provided for in this Section 12.1 shall be deemed included in
the Obligations.
(3.) Notwithstanding the foregoing, in the event that Lender has
not, by July 31, 1995, consented to any increase of the advance rate with
respect to the Net Amount of Eligible Accounts generated under the Borrower's
Rackjobbing Program, as set forth in Section 2.1(a)(ii), then, if the Borrower
obtains a written, unconditional commitment from a bank or established
commercial finance company (an "Alternative Lender") (i) containing a higher
advance rate with respect to the Net Amoun of Eligible Accounts generated under
the Borrower's Rackjobbing Program than the rate set forth herein, and (ii)
otherwise offering terms and conditions identical to the terms and conditions of
the Financing Agreements (as determined by Lender), then, in the event that the
Borrower completes the financing with the Alternative Lender upon the terms and
conditions set forth in the commitment (including the higher advance rate on
Rackjobbing Accounts) and the Obligations are repaid in full within sixty days
of Lender's receipt of the commitment, Lender will waive the termination fee
under Section 12.1(c), PROVIDED THAT, Lender shall have the option for a period
of thirty days from its receipt of a copy of the commitment to increase its
advance rate with respect to the Net Amount of Eligible Accounts generated under
the Borrower's Rackjobbing Program to that proposed in the commitment from the
Alternative Lender. Upon any increase of the advance rate for the Net Amount of
Eligible Accounts generated under th Borrower's Rackjobbing Program, Lender
shall have no further obligation under this Section 12.1(d) for any additional
increase in such advance rate. In the event that Borrower fails to obtain a
commitment from an Alternative Lender on or before September 30, 1995,
Borrower's rights under this Section 12.1(d) shall terminate.
3.0. NOTICES. All notices, requests and demands hereunder shall be in
writing and (a) made to Lender at its address set forth below and to Borrower at
its chief executive office set forth below, or to such other address as either
party may designate by written notice to the other in accordance with this
provision, and (b) deemed to have been given or made: if delivered in person,
immediately upon delivery; if by telex, telegram or facsimile transmission,
immediately upon sending and upon confirmation of receipt; if by nationally
recognized overnight courier service with instructions to deliver the next
business day, one (1) business day after sending; and if by certified mail,
return receipt requested, five (5) days after mailing.
3.1. PARTIAL INVALIDITY. If any provision of this Agreement is held to
be invalid or unenforceable, such invalidity or unenforceability shall not
invalidate this Agreement as a whole, but this Agreement shall be construed as
though it did not contain the particular provision held to be invalid or
unenforceable and the rights and obligations of the parties
<PAGE>
shall be construed and enforced only to such extent as shall be permitted by
applicable law.
3.2. SUCCESSORS. This Agreement, the other Financing Agreements and any
other document referred to herein or therein shall be binding upon and inure to
the benefit of and be enforceable by Lender, Borrower and their respective
successors and assigns, except that Borrower may not assign its rights under
this Agreement, the other Financing Agreements and any other document referred
to herein or therein without the prior written consent of Lender. Lender may,
after notice to Borrower, assign its rights and delegate its obligations under
this Agreement and the other Financing Agreements and further may assign, or
sell participations in, all or any part of the Loans or any other interest
herein to another financial institution or other person, in which event, the
assignee or participant shall have, to the extent of such assignment or
participation, the same rights and benefits as it would have if it were the
Lender hereunder, except as otherwise provided by the terms of such assignment
or participation.
3.3. ENTIRE AGREEMENT. This Agreement, the other Financing Agreements,
any supplements hereto or thereto, and any instruments or documents delivered or
to be delivered in connection herewith or therewith represents the entire
agreement and understanding concerning the subject matter hereof and thereof
between the parties hereto, and supersede all other prior agreements,
understandings, negotiations and discussions, representations, warranties,
commitments, proposals, offers and contracts concerning the subject matter
hereof, whether oral or written.
IN WITNESS WHEREOF, Lender and Borrower have caused these presents to be
duly executed as of the day and year first above written.
LENDER BORROWER
CONGRESS FINANCIAL CORPORATION NORTHEAST ONE STOP, INC.
(NEW ENGLAND)
By: By:
-------------------------- -------------------
Name: Name:
----------------------- -----------------
Title: Title:
---------------------- ----------------
Address: Chief Executive Office:
- -------- -----------------------
One Post Office Square 138 Sicker Road
Boston, Massachusetts 02109 Latham, New York 12110
<PAGE>
SSHEDULE 9.9
SHAREHOLDER DEBT
$344,000 Promissory Note, dated April 10, 1995,
in favor of Louis J. DelSignore.
<PAGE>
SCHEDULE 9.11
PERMITTED DIVIDENDS AND OTHER DISTRIBUTIONS
None.
Northeast One Stop, Inc.
138 Sicker Road
Latham, New York 12110
July __, 1995
Congress Financial Corporation
(New England)
One Post Office Square
Suite 3600
Boston, MA 02109
Re: AMENDMENT NO. 1 TO FINANCING AGREEMENTS
Ladies and Gentlemen:
Reference is made to the Loan and Security Agreement, dated April 20,
1995 (the "Loan Agreement"), and all supplements, agreements, documents and
instruments entered into by Northeast One Stop, Inc. ("Borrower") pursuant
thereto, as such may have been amended from time to time (collectively, the
"Financing Agreements"). Capitalized terms used herein shall have the meanings
given them in the Financing Agreements. Congress Financial Corporation (New
England) is referred to herein as "Congress."
The Borrower has requested that the Financing Agreements be amended as
set forth herein. Accordingly, effective as of the date set forth above, the
Borrower and Congress agree as follows:
A. AMENDMENTS TO THE LOAN AGREEMENT
1. Section 2.1(a)(ii) of the Loan Agreement is amended by deleting the
words and number "thirty-five (35%) percent" therefrom and inserting in lieu
thereof the words and number "fifty-five (55%) percent."
2. Section 3 of the Loan Agreement is amended by adding a new Section
3.4 thereto as follows:
"3.4 OVERADVANCE FEE. Borrower shall pay to Lender an overadvance
fee of $3,500 per year which shall be payable in monthly
installments of $292 each, due and payable in arrears on the first
day of each month commencing August 1, 1995. Installments once paid,
shall be non-refundable and shall be deemed to be fully earned."
3. Section 2.1(vi) of the Loan Agreement is amended by deleting the
period at the end of the Section and adding the following: ", PLUS".
<PAGE>
Congress Financial Corporation (New England)
July __, 1995
Page 2
4. Section 2.1 of the Loan Agreement is amended by adding a new Section
2.1(vii) thereto as follows:
"(vii) only during the period beginning from and after the
twenty-second day of each calendar month and for thirteen
consecutive days thereafter and in Lender's sole discretion,
$175,000."
5. Section 9.9(d) of the Loan Agreement is amended by deleting the
number "$344,000" on the fourth line thereof and inserting in lieu thereof the
number "$374,000."
6. Schedule 9.9 of the Loan Agreement is amended by adding the
following paragraph at the end thereof:
"$30,000 Promissory Note, dated ________ ____, 1995, in favor of
Louis J. DelSignore."
7. Section 12.1(d) of the Loan Agreement is amended by deleting the
date "July 31, 1995" on the second line thereof and inserting in lieu thereof
the date "September 30, 1995."
B. SUBORDINATION AGREEMENT
1. Exhibit A to the Subordination Agreement is amended by adding the
following at the end thereof:
"$30,000 Demand Promissory Note, dated ________ ____, 1995
from Northeast One Stop, Inc. in favor of Louis J. DelSignore."
C. CONDITIONS PRECEDENT
Notwithstanding any other provisions of this Amendment or any of the
other Financing Agreements, and without affecting in any manner the rights of
Congress under the other Sections of this Amendment, this Amendment shall not be
effective as to Congress unless and until each of the following conditions has
been and continues to be satisfied.
1. DOCUMENTATION. Congress shall have received, in form and substance
<PAGE>
Congress Financial Corporation (New England)
July __, 1995
Page 3
satisfactory to Congress and its counsel, a duly executed copy of this
Amendment, the original $30,000 Demand Promissory Note from the Borrower to
Louis J. DelSignore, together with such additional documents, instruments and
certificates as Congress and its counsel shall require in connection therewith
from time to time, all in form and substance satisfactory to Congress and its
counsel.
2. NO DEFAULT. No Default or Event of Default shall exist.
D. ACKNOWLEDGMENT OF OBLIGATIONS
Borrower and Guarantors hereby (1) reaffirm and ratify all of the
promises, agreements, covenants and Obligations to Congress under or in respect
of the Financing Agreements as amended hereby and (2) acknowledge they are
unconditionally liable for the punctual and full payment of all Obligations,
including, without limitation, all charges, fees, expenses and costs (including
attorneys' fees and expenses) under the Financing Agreements, as amended hereby,
and that they have no defenses, counterclaims or setoffs with respect to full,
complete and timely payment and performance of all Obligations under the
Financing Agreements. Borrower further confirms and agrees to its obligation to
pay to Congress all fees and costs which have been incurred by Congress in
connection with the negotiation and preparation of this Amendment No. 1 and all
other documents and agreements prepared in connection with this Amendment No. 1
including, without limitation, all reasonable attorney's fees and disbursements.
E. MISCELLANEOUS
Except as set forth herein, the Borrower confirms that the Financing
Agreements remain in full force and effect without amendment or modification of
any kind. The Borrower further confirms that no Event of Default or events which
with notice or the passage of time or both could constitute an Event of Default
have occurred and are continuing. The execution and delivery of this Amendment
by Congress shall not be construed as a waiver by Congress of any Event of
Default under the Financing Agreements. This Amendment, together with the
Financing Agreements, constitute the entire agreement between the parties with
respect to the subject matter hereof and supersedes all prior dealings,
correspondence, conversations or communications between the parties with respect
to the subject matter hereof.
Executed under seal on the date set forth above.
<PAGE>
Congress Financial Corporation (New England)
July __, 1995
Page 4
ATTEST: NORTHEAST ONE STOP, INC.
By:
- --------------------
Name:
Title:
<PAGE>
Congress Financial Corporation (New England)
July __, 1995
Page 5
L & P FEED, INC.
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
----------------------------
Louis J. DelSignore
----------------------------
Patricia A. DelSignore
Accepted in Boston, Massachusetts
on ____________ ____, 1995.
CONGRESS FINANCIAL CORPORATION
(NEW ENGLAND)
By:
Name:
Title:
<PAGE>
Congress Financial Corporation (New England)
July __, 1995
Page 6
STATE OF NEW YORK
_______________, ss July __, 1995
Then personally appeared the above-named Louis J. DelSignore, and
stated that he is the duly authorized President of Northeast One Stop, Inc. and
L&P Feed, Inc. (the "Corporations"), and acknowledged the foregoing instrument
to be his free act and deed, and the free act and deed of each of said
Corporations, before me.
-------------------------
Notary Public
My Commission Expires:
STATE OF NEW YORK
_______________, ss July __, 1995
Then personally appeared the above-named Louis J. DelSignore, and
Patricia A. DelSignore and acknowledged the foregoing instrument to be their
free act and deed, before me.
-------------------------
Notary Public
My Commission Expires:
Northeast One Stop, Inc.
7 Northway Lane
Latham, New York 12110
November 18, 1997
Congress Financial Corporation
(New England)
One Post Office Square
Suite 3600
Boston, MA 02109
Re: AMENDMENT TO FINANCING AGREEMENTS
Ladies and Gentlemen:
Reference is made to the Loan and Security Agreement, dated April 20,
1995 as amended (the "Loan Agreement"), and all supplements, agreements,
documents and instruments entered into by Northeast One Stop, Inc. ("Borrower")
pursuant thereto, as such may have been amended from time to time (collectively,
the "Financing Agreements"). Capitalized terms used herein shall have the
meanings given them in the Financing Agreements. Congress Financial Corporation
(New England) is referred to herein as "Congress."
The Borrower has requested that the Financing Agreements be amended as
set forth herein. Accordingly, effective as of the date set forth above, the
Borrower and Congress agree as follows:
A. AMENDMENTS TO THE LOAN AGREEMENT
1. Section 1.16 of the Loan Agreement is deleted and the following is
inserted in place thereof:
"1.16 "Maximum Credit" shall mean the amount $6,000,000."
2. Section 2.1(a)(ii) of the Loan Agreement is amended by deleting the
number "$500,000" therefrom and inserting in lieu thereof the number "900,000."
3. Subsection 2.1(a)(iii) of the Loan Agreement is amended by deleting
the subsection and inserting the following in lieu thereof:
"(iii) the lesser of: (A) $4,000,000 or (B) fifty (50%) percent of the
Value of Eligible Inventory consisting of finished goods, LESS"
<PAGE>
Congress Financial Corporation (New England)
November 18, 1997
Page 2
4. Section 3.1 of the Loan Agreement is amended by deleting the words
and number "two (2.0%)" from the third line thereof and by inserting in lieu
thereof the words and number "one and one-half (1 1/2%)".
5. Section 9.14 is deleted and the following is substituted in place
thereof:
"9.14 ADJUSTED NET WORTH. Borrower shall, at all times, maintain
Adjusted Net Worth of not less than $600,000."
6. Section 12.1 of the Loan Agreement is amended by deleting the first
sentence thereof and by replacing it with: "This Agreement and the other
Financing Agreements shall become effective as of the date set forth in the
first page hereof and shall continue in full force and effect for a term ending
on April 20, 1999 (the "Renewal Date"), and from year to year thereafter."
7. Section 12.1(c)(iii) of the Loan Agreement is deleted and the
following is substituted in lieu thereof:
"(iii) 1% of Maximum Credit April 20, 1997
and including April 20, 1999"
B. CONDITIONS PRECEDENT
Notwithstanding any other provisions of this Amendment or any of the
other Financing Agreements, and without affecting in any manner the rights of
Congress under the other Sections of this Amendment, this Amendment shall not be
effective as to Congress unless and until each of the following conditions has
been and continues to be satisfied.
1. DOCUMENTATION. Congress shall have received, in form and substance
satisfactory to Congress and its counsel, a duly executed copy of this
Amendment, together with such additional documents, instruments and certificates
as Congress and its counsel shall require in connection therewith from time to
time, all in form and substance satisfactory to Congress and its counsel.
2. NO DEFAULT. No Default or Event of Default shall exist.
3. AMENDMENT FEE. Congress shall have received an amendment fee of
$10,000, which fee shall be fully earned and due and payable on the date hereof.
<PAGE>
Congress Financial Corporation (New England)
November 18, 1997
Page 3
C. ACKNOWLEDGMENT OF OBLIGATIONS
Borrower and Guarantors hereby (1) reaffirm and ratify all of the
promises, agreements, covenants and Obligations to Congress under or in respect
of the Financing Agreements as amended hereby and (2) acknowledge they are
unconditionally liable for the punctual and full payment of all Obligations,
including, without limitation, all charges, fees, expenses and costs (including
attorneys' fees and expenses) under the Financing Agreements, as amended hereby,
and that they have no defenses, counterclaims or setoffs with respect to full,
complete and timely payment and performance of all Obligations under the
Financing Agreements. Borrower further confirms and agrees to its obligation to
pay to Congress all fees and costs which have been incurred by Congress in
connection with the negotiation and preparation of this Amendment No. 1 and all
other documents and agreements prepared in connection with this Amendment No. 1
including, without limitation, all reasonable attorney's fees and disbursements.
D. MISCELLANEOUS
Except as set forth herein, the Borrower confirms that the Financing
Agreements remain in full force and effect without amendment or modification of
any kind. The Borrower further confirms that no Event of Default or events which
with notice or the passage of time or both could constitute an Event of Default
have occurred and are continuing. The execution and delivery of this Amendment
by Congress shall not be construed as a waiver by Congress of any Event of
Default under the Financing Agreements. This Amendment, together with the
Financing Agreements, constitute the entire agreement between the parties with
respect to the subject matter hereof and supersedes all prior dealings,
correspondence, conversations or communications between the parties with respect
to the subject matter hereof.
Executed under seal on the date set forth above.
ATTEST: NORTHEAST ONE STOP, INC.
- ----------------------------
By:
------------------------------
Name:
----------------------------
<PAGE>
Congress Financial Corporation (New England)
November 18, 1997
Page 4
Title:
L & P FEED, INC.
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
/s/ LOUIS J. DELSIGNORE
------------------------------
Louis J. DelSignore
/s/ PATRICIA A. DELSIGNORE
------------------------------
Patricia A. DelSignore
Accepted in Boston, Massachusetts
on November ___, 1997.
CONGRESS FINANCIAL CORPORATION
(NEW ENGLAND)
By:
Name:
Title:
Northeast One Stop, Inc.
7 Northway Lane
Latham, New York 12110
September 24, 1998
Congress Financial Corporation
(New England)
One Post Office Square
Suite 3600
Boston, MA 02109
Re: SECOND AMENDMENT TO FINANCING AGREEMENTS
Ladies and Gentlemen:
Reference is made to the Loan and Security Agreement dated April 20,
1995, as amended (the "Loan Agreement"), and all supplements, agreements,
documents and instruments entered into by Northeast One Stop, Inc. ("Borrower")
pursuant thereto, as such may have been amended from time to time (collectively,
the "Financing Agreements"). Capitalized terms used herein shall have the
meanings given them in the Financing Agreements. Congress Financial Corporation
(New England) is referred to herein as "Congress."
The Borrower has requested that the Financing Agreements be amended
as set forth herein relating to the acquisition of all of Borrower's common
stock (the "Stock Sale Transaction") by Planet Entertainment Corporation
("PEC"). Accordingly, effective as of the date set forth above, the Borrower and
Congress hereby agree as follows:
A. AMENDMENTS TO THE LOAN AGREEMENT
1. Section 9.6(a) of the Loan Agreement is amended by adding
the following at the end thereof:
"For purposes of this Agreement, Lender acknowledges that
the accounting firm of A.J. Robbins, P.C., of Denver, Colorado is reasonably
acceptable to Lender."
2. Subsection 10.1(j) of the Loan Agreement is deleted and the
following is inserted in its place thereof:
"(j) any change in the controlling ownership of PEC, any
change in the ownership of Borrower, or any termination, other than for Cause
(as defined in the
<PAGE>
Congress Financial Corporation (New England)
September 24, 1998
Page 2
applicable employment agreements as in effect on the date hereof), of the
employment relationships with Louis J. DelSignore (at any time before September
24, 1999) or with Ronald Nicks or William Castle (in each case, at any time
before September 24, 2001);"
B. CONDITIONS PRECEDENT
Notwithstanding any other provisions of this Second Amendment or any
of the other Financing Agreements, and without affecting in any manner the
rights of Congress under the other Sections of this Second Amendment, this
Second Amendment shall not be effective as to Congress unless and until each of
the following conditions has been and continues to be satisfied:
1. DOCUMENTATION. Congress shall have received, in form and
substance satisfactory to Congress and its counsel, (a) a duly executed copy of
this Second Amendment, together with such additional documents, instruments and
certificates as Congress and its counsel shall require in connection therewith
from time to time; (b) duly executed copies of all documentation and amendments
thereto relating to the Stock Sale Transaction and evidence satisfactory to
Congress that all conditions to the effectiveness thereof have been satisfied
and not amended, modified or waived; (c) the Guarantee of PEC in the form of
Exhibit A hereto; and (d) evidence satisfactory to Lender that Borrower shall
have entered into customary employment contracts with Louis J. DelSignore for a
period of at least one year, with Ronald Nicks for a period of at least three
years, and with William Castle for a period of at least three years.
2. NO DEFAULT. No Default or Event of Default shall exist.
3. NO MATERIAL ADVERSE CHANGE. No material adverse change
shall have occurred in the assets, business or financial condition of Borrower
since the date of the Congress' latest field examination or in PEC since the
date of the latest financial statements for PEC furnished to Congress and no
change or event shall have occurred which would impair the ability of Borrower,
PEC or any other Guarantor to perform its obligations under any of the Financing
Agreements to which it is a party or of Congress to enforce the Obligations or
realize on the Collateral.
C. RELEASE OF DELSIGNORE GUARANTEES.
Effective upon the satisfaction of the conditions precedent set forth
in paragraph B above, Lender agrees to release the Guarantee dated April 20,
1995 of Louis J.
<PAGE>
Congress Financial Corporation (New England)
September 24, 1998
Page 3
DelSignore and the Limited Guarantee dated April 7, 1995 of Patricia A.
DelSignore, subject in each case to the terms thereof.
D. ACKNOWLEDGMENT OF OBLIGATIONS
Borrower and Guarantors hereby (1) reaffirm and ratify all of the
promises, agreements, covenants and Obligations to Congress under or in respect
of the Financing Agreements as amended hereby and (2) acknowledge they are
unconditionally liable for the punctual and full payment of all Obligations,
including, without limitation, all charges, fees, expenses and costs (including
attorneys' fees and expenses) under the Financing Agreements, as amended hereby,
and that they have no defenses, counterclaims or setoffs with respect to full,
complete and timely payment and performance of all Obligations under the
Financing Agreements. Borrower further confirms and agrees to its obligation to
pay to Congress all fees and costs which have been incurred by Congress in
connection with the negotiation and preparation of this Second Amendment and all
other documents and agreements prepared in connection with this Second Amendment
including, without limitation, all reasonable attorneys' fees and disbursements.
E. CERTAIN CONSENTS
You have informed Congress that, absent a waiver, the Stock Sale
Transaction would constitute an Event of Default under Section 10.1(j) of the
Loan Agreement. Congress hereby consents to the Stock Sale Transaction and
waives the occurrence of any Event of Default under Section 10.1(j) caused by
the change in the controlling ownership of Borrower pursuant to the Stock Sale
Transaction. This consent and waiver is limited to this one occasion and the
facts described above. This consent and waiver shall not constitute a consent to
or waiver of any other term, covenant or provision of the Agreement or of any
other Financing Agreement or any of Congress's rights and remedies thereunder,
all of which are reserved.
F. MISCELLANEOUS
Except as set forth herein, the Borrower confirms that the Financing
Agreements remain in full force and effect without amendment or modification of
any kind. The Borrower further confirms that no Event of Default or events which
with notice or the passage of time or both could constitute an Event of Default
have occurred and are continuing. The execution and delivery of this Second
Amendment by Congress shall not be construed as a waiver by Congress of any
Event of Default under the Financing
<PAGE>
Congress Financial Corporation (New England)
September 24, 1998
Page 4
Agreements. This Second Amendment, together with the Financing Agreements,
constitute the entire agreement between the parties with respect to the subject
matter hereof and supersedes all prior dealings, correspondence, conversations
or communications between the parties with respect to the subject matter hereof.
Executed under seal on the date set forth above.
ATTEST: NORTHEAST ONE STOP, INC.
- ---------------------- By:
------------------------------
Name:
----------------------------
Title:
---------------------------
<PAGE>
Congress Financial Corporation (New England)
September 24, 1998
Page 5
ATTEST: L & P FEED, INC.
- ---------------------- By:
------------------------------
Name:
----------------------------
Title:
---------------------------
ATTEST: PLANET ENTERTAINMENT CORPORATION
- ---------------------- By:
------------------------------
Name:
----------------------------
Title:
---------------------------
Accepted in Boston, Massachusetts
on September ___, 1998
CONGRESS FINANCIAL CORPORATION
(NEW ENGLAND)
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
GUARANTEE
September 24, 1998
Congress Financial Corporation (New England)
One Post Office Square, Suite 3600
Boston, MA 02109
Re: NORTHEAST ONE STOP, INC. ("BORROWER")
Gentlemen:
Congress Financial Corporation (New England) ("Lender") and Borrower
have entered into certain financing arrangements pursuant to which Lender may
make loans and advances and provide other financial accommodations to Borrower
as set forth in the Loan and Security Agreement, dated April 20, 1995, as
amended, by and between Borrower and Lender (as the same now exists or may
hereafter be amended, modified, supplemented, extended, renewed, restated or
replaced, the "Loan Agreement"), and other agreements, documents and instruments
referred to therein or at any time executed and/or delivered in connection
therewith or related thereto, including, but not limited to, this Guarantee (all
of the foregoing, together with the Loan Agreement, as the same now exist or may
hereafter be amended, modified, supplemented, extended, renewed, restated or
replaced, being collectively referred to herein as the "Financing Agreements").
Due to the close business and financial relationships between Borrower
and the undersigned ("Guarantor"), in consideration of the benefits which will
accrue to Guarantor and as an inducement for and in consideration of Lender
making loans and advances and providing other financial accommodations to
Borrower pursuant to the Loan Agreement and the other Financing Agreements,
Guarantor hereby agrees in favor of Lender as follows:
1. GUARANTEE.
(a) Guarantor absolutely and unconditionally guarantees and
agrees to be liable for the full and indefeasible payment and performance when
due of the following (all of which are collectively referred to herein as the
"Guaranteed Obligations"): (i) all obligations, liabilities and indebtedness of
any kind, nature and description of Borrower to Lender and/or its affiliates,
including principal, interest, charges, fees, costs and expenses, however
evidenced, whether as principal, surety, endorser, guarantor or otherwise,
whether
<PAGE>
arising under the Loan Agreement, the other Financing Agreements or otherwise,
whether now existing or hereafter arising, whether arising before, during or
after the initial or any renewal term of the Loan Agreement or after the
commencement of any case with respect to Borrower under the United States
Bankruptcy Code or any similar statute (including, without limitation, the
payment of interest and other amounts, which would accrue and become due but for
the commencement of such case, whether or not such amounts are allowed or
allowable in whole or in part in any such case and including loans, interest,
fees, charges and expenses related thereto and all other obligations of Borrower
or its successors to Lender arising after the commencement of such case),
whether direct or indirect, absolute or contingent, joint or several, due or not
due, primary or secondary, liquidated or unliquidated, secured or unsecured, and
however acquired by Lender and (ii) all expenses (including, without limitation,
attorneys' fees and legal expenses) incurred by Lender in connection with the
preparation, execution, delivery, recording, administration, collection,
liquidation, enforcement and defense of Borrower's obligations, liabilities and
indebtedness as aforesaid to Lender, the rights of Lender in any collateral or
under this Guarantee and all other Financing Agreements or in any way involving
claims by or against Lender directly or indirectly arising out of or related to
the relationships between Borrower, Guarantor or any other Obligor (as
hereinafter defined) and Lender, whether such expenses are incurred before,
during or after the initial or any renewal term of the Loan Agreement and the
other Financing Agreements or after the commencement of any case with respect to
Borrower or Guarantor under the United States Bankruptcy Code or any similar
statute.
(b) This Guarantee is a guaranty of payment and not of
collection. Guarantor agrees that Lender need not attempt to collect any
Guaranteed Obligations from Borrower, Guarantor or any other Obligor or to
realize upon any collateral, but may require Guarantor to make immediate payment
of all of the Guaranteed Obligations to Lender when due, whether by maturity,
acceleration or otherwise, or at any time thereafter. Lender may apply any
amounts received in respect of the Guaranteed Obligations to any of the
Guaranteed Obligations, in whole or in part (including attorneys' fees and legal
expenses incurred by Lender with respect thereto or otherwise chargeable to
Borrower or Guarantor) and in such order as Lender may elect.
(c) Payment by Guarantor shall be made to Lender at the office
of Lender from time to time on demand as Guaranteed Obligations become due.
Guarantor shall make all payments to Lender on the Guaranteed Obligations free
and clear of, and without deduction or withholding for or on account of, any
setoff, counterclaim, defense, duties, taxes, levies, imposts, fees, deductions,
withholding, restrictions or conditions of any kind. One or more successive or
concurrent actions may be brought hereon against Guarantor either in the same
action in which Borrower or any other Obligor is sued or in separate actions. In
the event any claim or action, or action on any judgment, based on this
Guarantee is brought against Guarantor, Guarantor agrees not to deduct, set-off,
or seek any counterclaim for or recoup any amounts which are or may be owed by
Lender to Guarantor.
<PAGE>
2. WAIVERS AND CONSENTS.
(a) Notice of acceptance of this Guarantee, the making of
loans and advances and providing other financial accommodations to Borrower and
presentment, demand, protest, notice of protest, notice of nonpayment or default
and all other notices to which Borrower or Guarantor is entitled are hereby
waived by Guarantor. Guarantor also waives notice of and hereby consents to, (i)
any amendment, modification, supplement, extension, renewal, or restatement of
the Loan Agreement and any of the other Financing Agreements, including, without
limitation, extensions of time of payment of or increase or decrease in the
amount of any of the Guaranteed Obligations, the interest rate, fees, other
charges, or any collateral, and the guarantee made herein shall apply to the
Loan Agreement and the other Financing Agreements and the Guaranteed Obligations
as so amended, modified, supplemented, renewed, restated or extended, increased
or decreased, (ii) the taking, exchange, surrender and releasing of collateral
or guarantees now or at any time held by or available to Lender for the
obligations of Borrower or any other party at any time liable on or in respect
of the Guaranteed Obligations or who is the owner of any property which is
security for the Guaranteed Obligations (individually, an "Obligor" and
collectively, the "Obligors"), (iii) the exercise of, or refraining from the
exercise of any rights against Borrower or any other Obligor or any collateral,
(iv) the settlement, compromise or release of, or the waiver of any default with
respect to, any of the Guaranteed Obligations and (v) any financing by Lender of
Borrower under Section 364 of the United States Bankruptcy Code or consent to
the use of cash collateral by Lender under Section 363 of the United States
Bankruptcy Code. Guarantor agrees that the amount of the Guaranteed Obligations
shall not be diminished and the liability of Guarantor hereunder shall not be
otherwise impaired or affected by any of the foregoing.
(b) No invalidity, irregularity or unenforceability of all or
any part of the Guaranteed Obligations shall affect, impair or be a defense to
this Guarantee, nor shall any other circumstance which might otherwise
constitute a defense available to or legal or equitable discharge of Borrower in
respect of any of the Guaranteed Obligations, or Guarantor in respect of this
Guarantee, affect, impair or be a defense to this Guarantee. Without limitation
of the foregoing, the liability of Guarantor hereunder shall not be discharged
or impaired in any respect by reason of any failure by Lender to perfect or
continue perfection of any lien or security interest in any collateral or any
delay by Lender in perfecting any such lien or security interest. As to
interest, fees and expenses, whether arising before or after the commencement of
any case with respect to Borrower under the United States Bankruptcy Code or any
similar statute, Guarantor shall be liable therefor, even if Borrower's
liability for such amounts does not, or ceases to, exist by operation of law.
Guarantor acknowledges that Lender has not made any representations to Guarantor
with respect to Borrower, any other Obligor or otherwise in connection with the
execution and delivery by Guarantor of this Guarantee and Guarantor is not in
any respect relying upon Lender or any statements by Lender in connection with
this Guarantee.
(c) Until such time as the Guaranteed Obligations are
indefeasibly paid in full, Guarantor hereby irrevocably and unconditionally
waives and relinquishes all statutory, contractual, common law, equitable and
all other claims against Borrower, any
<PAGE>
collateral for the Guaranteed Obligations or other assets of Borrower or any
other Obligor, for subrogation, reimbursement, exoneration, contribution,
indemnification, setoff or other recourse in respect to sums paid or payable to
Lender by Guarantor hereunder and Guarantor hereby further irrevocably and
unconditionally waives and relinquishes any and all other benefits which
Guarantor might otherwise directly or indirectly receive or be entitled to
receive by reason of any amounts paid by or collected or due from Guarantor,
Borrower or any other Obligor upon the Guaranteed Obligations or realized from
their property.
3. SUBORDINATION. Payment of all amounts now or hereafter owed to
Guarantor by Borrower or any other Obligor is hereby subordinated in right of
payment to the indefeasible payment in full to Lender of the Guaranteed
Obligations and all such amounts and any security and guarantees therefor are
hereby assigned to Lender as security for the Guaranteed Obligations.
4. ACCELERATION. Notwithstanding anything to the contrary
contained herein or any of the terms of any of the other Financing Agreements,
the liability of Guarantor for the entire Guaranteed Obligations shall mature
and become immediately due and payable, even if the liability of Borrower or any
other Obligor therefor does not, upon the occurrence of any act, condition or
event which constitutes an Event of Default as such term is defined in the Loan
Agreement.
5. ACCOUNT STATED. The books and records of Lender showing the
account between Lender and Borrower shall be admissible in evidence in any
action or proceeding against or involving Guarantor as PRIMA FACIE proof of the
items therein set forth, and the monthly statements of Lender rendered to
Borrower, to the extent to which no written objection is made within thirty (30)
days from the date of sending thereof to Borrower, shall be deemed conclusively
correct and constitute an account stated between Lender and Borrower and be
binding on Guarantor.
6. TERMINATION. This Guarantee is continuing, unlimited, absolute
and unconditional. All Guaranteed Obligations shall be conclusively presumed to
have been created in reliance on this Guarantee. Guarantor shall continue to be
liable hereunder until one of Lender's officers actually receives a written
termination notice from Guarantor sent to Lender at its address set forth above
by certified mail, return receipt requested and thereafter as set forth below.
Revocation or termination hereof by Guarantor shall not affect, in any manner,
the rights of Lender or any obligations or duties of Guarantor under this
Guarantee with respect to (a) Guaranteed Obligations which have been created,
contracted, assumed or incurred prior to the receipt by Lender of such written
notice of revocation or termination as provided herein, including, without
limitation, (i) all amendments, extensions, renewals and modifications of such
Guaranteed Obligations (whether or not evidenced by new or additional
agreements, documents or instruments executed on or after such notice of
revocation or termination), (ii) all interest, fees and similar charges accruing
or due on and after revocation or termination, and (iii) all attorneys'
<PAGE>
fees and legal expenses, costs and other expenses paid or incurred on or after
such notice of revocation or termination in attempting to collect or enforce any
of the Guaranteed Obligations against Borrower, Guarantor or any other Obligor
(whether or not suit be brought), or (b) Guaranteed Obligations which have been
created, contracted, assumed or incurred after the receipt by Lender of such
written notice of revocation or termination as provided herein pursuant to any
contract entered into by Lender prior to receipt of such notice. The sole effect
of such revocation or termination by Guarantor shall be to exclude from this
Guarantee the liability of Guarantor for those Guaranteed Obligations arising
after the date of receipt by Lender of such written notice which are unrelated
to Guaranteed Obligations arising or transactions entered into prior to such
date. Without limiting the foregoing, this Guarantee may not be terminated and
shall continue so long as the Loan Agreement shall be in effect (whether during
its original term or any renewal, substitution or extension thereof).
7. REINSTATEMENT. If after receipt of any payment of, or proceeds
of collateral applied to the payment of, any of the Guaranteed Obligations,
Lender is required to surrender or return such payment or proceeds to any Person
for any reason, then the Guaranteed Obligations intended to be satisfied by such
payment or proceeds shall be reinstated and continue and this Guarantee shall
continue in full force and effect as if such payment or proceeds had not been
received by Lender. Guarantor shall be liable to pay to Lender, and does
indemnify and hold Lender harmless for the amount of any payments or proceeds
surrendered or returned. This Section 7 shall remain effective notwithstanding
any contrary action which may be taken by Lender in reliance upon such payment
or proceeds. This Section 7 shall survive the termination or revocation of this
Guarantee.
8. AMENDMENTS AND WAIVERS. Neither this Guarantee nor any
provision hereof shall be amended, modified, waived or discharged orally or by
course of conduct, but only by a written agreement signed by an authorized
officer of Lender. Lender shall not by any act, delay, omission or otherwise be
deemed to have expressly or impliedly waived any of its rights, powers and/or
remedies unless such waiver shall be in writing and signed by an authorized
officer of Lender. Any such waiver shall be enforceable only to the extent
specifically set forth therein. A waiver by Lender of any right, power and/or
remedy on any one occasion shall not be construed as a bar to or waiver of any
such right, power and/or remedy which Lender would otherwise have on any future
occasion, whether similar in kind or otherwise.
9. CORPORATE EXISTENCE, POWER AND AUTHORITY. Guarantor is a
corporation duly organized and in good standing under the laws of its state or
other jurisdiction of incorporation and is duly qualified as a foreign
corporation and in good standing in all states or other jurisdictions where the
nature and extent of the business transacted by it or the ownership of assets
makes such qualification necessary, except for those jurisdictions in which the
failure to so qualify would not have a materia adverse effect on the financial
condition, results of operation or businesses of Guarantor or the rights of
Lender hereunder or under any of the other Financing Agreements. The execution,
delivery and performance
<PAGE>
of this Guarantee is within the corporate powers of Guarantor, have been duly
authorized and are not in contravention of law or the terms of the certificates
of incorporation, by-laws, or other organizational documentation of Guarantor,
or any indenture, agreement or undertaking to which Guarantor is a party or by
which Guarantor or its property are bound. This Guarantee constitutes the legal,
valid and binding obligation of Guarantor enforceable in accordance with its
terms.
10. GOVERNING LAW; CHOICE OF FORUM; SERVICE OF PROCESS; JURY TRIAL
WAIVER.
(a) The validity, interpretation and enforcement of this
Guarantee and any dispute arising out of the relationship between Guarantor and
Lender, whether in contract, tort, equity or otherwise, shall be governed by the
internal laws of the Commonwealth of Massachusetts (without giving effect to
principles of conflicts of law).
(b) Guarantor hereby irrevocably consents and submits to
the non-exclusive jurisdiction of the Suffolk County Superior Court of the
Commonwealth of Massachusetts and the United States District Court for the
District of Massachusetts and waives any objection based on venue or FORUM NON
CONVENIENS with respect to any action instituted therein arising under this
Guarantee or any of the other Financing Agreements or in any way connected with
or related or incidental to the dealings of Guarantor and Lender in respect of
this Guarantee or any of the other Financing Agreements or the transactions
related hereto or thereto, in each case whether now existing or hereafter
arising and whether in contract, tort, equity or otherwise, and agrees that any
dispute arising out of the relationship between Guarantor or Borrower and Lender
or the conduct of any such persons in connection with this Guarantee, the other
Financing Agreements or otherwise shall be heard only in the courts described
above (except that Lender shall have the right to bring any action or proceeding
against Guarantor or its property in the courts of any other jurisdiction which
Lender deems necessary or appropriate in order to realize on any collateral at
any time granted by Borrower or Guarantor to Lender or to otherwise enforce its
rights against Guarantor or its property).
(d) Guarantor hereby waives personal service of any and
all process upon it and consents that all such service of process may be made by
certified mail (return receipt requested) directed to its address set forth on
the signature pages hereof and service so made shall be deemed to be completed
five (5) days after the same shall have been so deposited in the U.S. mails, or,
at Lender's option, by service upon Guarantor in any other manner provided under
the rules of any such courts. Within thirty (30) days after such service,
Guarantor shall appear in answer to such process, failing which Guarantor shall
be deemed in default and judgment may be entered by Lender against Guarantor for
the amount of the claim and other relief requested.
(d) GUARANTOR HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY OF
ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (i) ARISING UNDER THIS GUARANTEE OR
ANY OF THE OTHER FINANCING AGREEMENTS
<PAGE>
OR (ii) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF
GUARANTOR AND LENDER IN RESPECT OF THIS GUARANTEE OR ANY OF THE OTHER FINANCING
AGREEMENTS OR THE TRANSACTIONS RELATED HERETO OR THERETO, IN EACH CASE WHETHER
NOW EXISTING OR HEREAFTER ARISING, AND WHETHER IN CONTRACT, TORT, EQUITY OR
OTHERWISE. GUARANTOR HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND,
ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND
THAT GUARANTOR OR LENDER MAY FILE AN ORIGINAL COUNTERPART OF A COPY OF THIS
AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF GUARANTOR AND
LENDER TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
(e) Lender shall not have any liability to Guarantor
(whether in tort, contract, equity or otherwise) for losses suffered by
Guarantor in connection with, arising out of, or in any way related to the
transactions or relationships contemplated by this Guarantee, or any act,
omission or event occurring in connection herewith, unless it is determined by a
final and non-appealable judgment or court order binding on Lender that the
losses were the result of acts or omissions constituting gross negligence or
willful misconduct. In any such litigation, Lender shall be entitled to the
benefit of the rebuttable presumption that it acted in good faith and with the
exercise of ordinary care in the performance by it of the terms of the Loan
Agreement and the other Financing Agreements.
11. NOTICES. All notices, requests and demands hereunder shall be
in writing and (a) made to Lender at its address set forth above and to
Guarantor at its chief executive office set forth below, or to such other
address as either party may designate by written notice to the other in
accordance with this provision, and (b) deemed to have been given or made: if
delivered in person, immediately upon delivery; if by telex, telegram or
facsimile transmission, immediately upon sending and upon confirmation of
receipt; if by nationally recognized overnight courier service with instructions
to deliver the next business day, one (1) business day after sending; and if by
certified mail, return receipt requested, five (5) days after mailing.
12. PARTIAL INVALIDITY. If any provision of this Guarantee is held
to be invalid or unenforceable, such invalidity or unenforceability shall not
invalidate this Guarantee as a whole, but this Guarantee shall be construed as
though it did not contain the particular provision held to be invalid or
unenforceable and the rights and obligations of the parties shall be construed
and enforced only to such extent as shall be permitted by applicable law.
13. ENTIRE AGREEMENT. This Guarantee represents the entire
agreement and understanding of this parties concerning the subject matter
hereof, and supersedes all other prior agreements, understandings, negotiations
and discussions, representations, warranties, commitments, proposals, offers and
contracts concerning the subject matter hereof, whether oral or written.
<PAGE>
14. SUCCESSORS AND ASSIGNS. This Guarantee shall be binding upon
Guarantor and its successors and assigns and shall inure to the benefit of
Lender and its successors, endorsees, transferees and assigns. The liquidation,
dissolution or termination of Guarantor shall not terminate this Guarantee as to
such entity or as to Guarantor.
15. CONSTRUCTION. All references to the term "Guarantor" wherever
used herein shall mean Guarantor and its successors and assigns (including,
without limitation, any receiver, trustee or custodian for Guarantor or any of
its assets or Guarantor in its capacity as debtor or debtor-in-possession under
the United States Bankruptcy Code). All references to the term "Lender" wherever
used herein shall mean Lender and its successors and assigns and all references
to the term "Borrower" wherever used herein shall mean Borrower and its
successors and assigns (including, without limitation, any receiver, trustee or
custodian for Borrower or any of its assets or Borrower in its capacity as
debtor or debtor-in-possession under the United States Bankruptcy Code). All
references to the term "Person" or "person" wherever used herein shall mean any
individual, sole proprietorship, partnership, corporation (including, without
limitation, any corporation which elects subchapter S status under the Internal
Revenue Code of 1986, as amended), limited liability company, limited liability
partnership, business trust, unincorporated association, joint stock
corporation, trust, joint venture or other entity or any government or any
agency or instrumentality or political subdivision thereof. All references to
the plural shall also mean the singular and to the singular shall also mean the
plural.
IN WITNESS WHEREOF, Guarantor has executed and delivered this Guarantee
as an instrument under seal as of the day and year first above written.
ATTEST: PLANET ENTERTAINMENT
CORPORATION
By:
- ------------------------ ------------------------------
Secretary/Clerk
Title:
---------------------------
[CORPORATE SEAL]
CHIEF EXECUTIVE OFFICE
222 Highway 35, P.O. Box 4085
Middletown, NJ 07748
<PAGE>
STATE OF )
) ss.:
COUNTY OF )
On this ____ day of September, 1998, before me personally came
_________________ _____________________, to me known, who stated that he is the
____________________ of Planet Entertainment Corporation, the corporation
described in and which executed the foregoing instrument; and that he signed his
name thereto by order of the Board of Directors of said corporation.
__________________________ , Notary
Public
My Commission Expires:
CONGRESS FINANCIAL CORPORATION
Post Office Square
Boston, MA 02138
L.J. DelSignore
Northeast One Stop, Inc.
7 Latham Lane
Albany, New York
RE: Waiver Line of Credit Covenant
Dear Mr. DelSignore:
This letter shall confirm that pursuant to the Loan Agreement between
Congress Financial Corporation and Northeast One Stop, Inc. the borrowings from
Congress are to be excluded from the calculation of Northeast One Stop's current
liabilities and working capital under the terms and covenants of the agreement.
Very truly yours,
/s/ KATHLEEN J. MERRITT
-----------------------------
Kathleen J. Merritt
FROHLING, HUDAK & MCCARTHY, P.C.
COUNSELLORS AT LAW
425 EAGLE ROCK AVENUE P.O. BOX 926
SUITE 200 NEWARK, NJ 07101
ROSELAND, NJ 07068 (201) 622-2800
(201) 226-4600
FAX (201) 226-0969 Please Reply to:
[X] Roseland
[ ] Newark
December , 1998
Wallace M. Giakis, Chairman
Planet Entertainment Corp.
222 Highway 35 South
Middletown, NJ 07748
RE: PLANET ENTERTAINMENT SB-2/A FILING
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 December , 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 fully paid, 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,
FROHLING HUDAK & McCARTHY P.C.
EXHIBIT 17
COMPUTATION OF LOSS PER COMMON SHARE
<TABLE>
<CAPTION>
For the period Year ended Eight months ended
May 17, 1996 (inception) December 31, August 31,
to December 31, 1996 1997 1998
-------------------- ---- ----
<S> <C> <C> <C>
Basic/Diluted
Net Loss $ 52,447 $ 809,912 $ 732,964
Weighted Average Share
Outstanding 3,377,255 10,211,250 11,827,308
Basic Loss per
Common Share $ .02 $ .08 $ .06
</TABLE>
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 accountants, we hereby consent to the use of our
reports dated:
REPORT DATE: FINANCIAL STATEMENTS OF:
------------ ------------------------
October 30, 1998 Planet Entertainment Corporation
October 19, 1998 Northeast One Stop, Inc.
and to the reference made to our firm under the caption "Experts" included in or
made part of this Amendment #1 Form SB-2.
AJ. ROBBINS, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
AND CONSULTANTS
DENVER, COLORADO
DECEMBER 7, 1998
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001038284
<NAME> PLANET ENTERTAINMENT CORPORATION
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C> <C> <C>
<PERIOD-TYPE> 8-MOS YEAR 8-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997 DEC-31-1998
<PERIOD-START> MAY-17-1996 JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1996 DEC-31-1997 AUG-31-1998
<EXCHANGE-RATE> 1 1 1
<CASH> 6,998 3,670 3,850,162
<SECURITIES> 0 0 0
<RECEIVABLES> 105,000 21,026 17,959
<ALLOWANCES> 0 0 0
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 141,808 327,453 4,532,026
<PP&E> 50,000 210,094 210,094
<DEPRECIATION> 2,500 21,009 37,684
<TOTAL-ASSETS> 14,057,688 14,447,835 18,618,650
<CURRENT-LIABILITIES> 504,110 1,306,202 1,339,134
<BONDS> 0 0 0
0 0 5,000,000
0 0 0
<COMMON> 9,826 11,422 11,976
<OTHER-SE> 7,943,752 7,780,211 6,857,540
<TOTAL-LIABILITY-AND-EQUITY> 14,057,688 14,447,835 18,618,650
<SALES> 0 49,883 51,002
<TOTAL-REVENUES> 105,000 293,428 109,495
<CGS> 0 19,052 11,139
<TOTAL-COSTS> 157,447 1,103,340 802,380
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 43,100 144,382 98,135
<INCOME-PRETAX> (52,447) (809,912) (645,464)
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> (52,447) (809,912) (645,464)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (52,447) (809,912) (645,464)
<EPS-PRIMARY> (.02) (.08) (.O6)
<EPS-DILUTED> (.02) (.08) (.06)
</TABLE>
