As filed with the Securities and Exchange Commission on December 14, 1998
Registration No.____________
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1 TO
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS
UNDER SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
PLANET ENTERTAINMENT CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA
(STATE OF INCORPORATION
OR ORGANIZATION OR 33-0471728
OTHER JURISDICTION) (IRS EMPLOYER I.D. NO.)
222 HIGHWAY 35
P.O. BOX 4085
MIDDLETOWN, NEW JERSEY 07748
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICERS)
(732) 530-8819
(REGISTRANT'S TELEPHONE NUMBER)
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
11,976,055 COMMON STOCK, PAR VALUE $0.001
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TABLE OF CONTENTS
PART I
Description of Business ................................................... 1
Risk Factors .............................................................. 8
Management's Discussion &
Analysis .................................................................. 16
Description of Property ................................................... 21
Security Ownership of
Certain Beneficial Owners
and Management ............................................................ 22
Directors, Executive Officers
Promoters and Control Persons ............................................. 23
Executive Compensation .................................................... 25
Certain Relationships and
Related Transactions ...................................................... 28
Description of Registrant's
Securities ................................................................ 29
PART II
Market Price of and Dividends
on the Registrant's Common Equity
and Related Stockholder Matters ........................................... 29
Legal Proceedings ......................................................... 30
Changes in and Disagreements
with Accountants........................................................... 30
Recent Sales of Unregistered Securities ................................... 30
Indemnification of Directors and Officers ................................. 32
PART F/S .................................................................. 32
Financial Statements and Exhibits.......................................... F-1
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THIS FORM CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A
OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF
1934. 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."
DESCRIPTION OF BUSINESS
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
Northeast One Stop, Inc. ("NEOS"), the Company changed its fiscal year to end
August 31.
BUSINESS SUMMARY. 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 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 NEOS. NEOS employs
approximately 200 individuals and is
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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.
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, LLC, 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-exclusivemaster catalogue
include Louis Armstrong, Tony Bennett, George Benson,
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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
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.
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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.")
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
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$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 and $51,002, for the
eight month period 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 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 to be 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 determining its rights to the masters in its catalogue as part
of its Chapter 11 Reorganization Plan. Currently, the rights to 5,900 have been
determined as being free of dispute or encumbrances and have been transferred to
the Company 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 the
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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.
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 31, 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
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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. The Company does not intend to be doing business with MMIC in
the future. (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.
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
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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 "TriggerDate"). 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
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 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 1999. 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.
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RISK FACTORS
In addition to the other information in this Prospectus, the
following factors should be carefully considered in evaluating an investment in
the Shares offered by this Prospectus:
DEPENDENCE ON DISTRIBUTORS. 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 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 May, 1998, the Company
realized approximately $4,475,000 in proceeds from the sale of shares of its
Preferred Stock and as of August 31, 1998, had current assets of approximately
$4,532,026, current liabilities of approximately $1,339,134, and working capital
of approximately $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
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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 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
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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 1997and remains
a stockholder of MMIC. The Company does not anticipate doing business with MMIC
in the future. 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 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.
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LIMITED OPERATING HISTORY. In 1996, the Company began selling
music-related products. Accordingly, the Company has only a very limited
operating history on which to base an evaluation of its business and prospects.
For the 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 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
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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 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
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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 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 to be 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 determining its rights to the masters in its catalogue as part
of its Chapter 11 Reorganization Plan. Currently, the rights to 5,900 have been
determined as being free of dispute or encumbrances and have been transferred to
the Company 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 disputes 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")
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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 upgrades 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
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.
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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.
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,
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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
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.
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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.
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 four 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
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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,
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 this
customer. 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 years 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 $23,300,000 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
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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
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 an 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
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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.
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
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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
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")
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
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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
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 Centre, 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%
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- -----------------
* 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.
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:
Name Age Position(s) Held
- ---- --- ----------------
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.
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
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intend to pay cash fees to directors for attendance at meetings.
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
25
<PAGE>
of the Company. (See "RISK FACTORS; DEPENDENCE ON MANAGEMENT AND KEY
PERSONNEL").
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.
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
Name of Individual Principal Position Year Salary Compensation Compensation Total Compensation
- ------------------ ------------------ ---- ------ ------------ ------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
John S. Arnone President, Chief 1996 - 0 - - 0 - - 0 - - 0 -
Executive Officer, 1997 $ 31,250 $3,359,493 - 0 - $3,390,743
Director 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 1996 - 0 - - 0 - - 0 - - 0 -
President, 1997 $ 36,200 $3,359,493 - 0 - $3,395,693
Director 1998 $125,000 - 0 - - 0 - $ 125,000
Richard Bluestine Executive Vice- 1996 - 0 - - 0 - - 0 - - 0 -
President, 1997 $ 18,750 $ 537,519 - 0 - $ 556,269
Chief Financial Officer, 1998 - 0 - - 0 -(2) - 0 - - 0 -
Chairman of 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>
26
<PAGE>
- -----------------------
(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.
27
<PAGE>
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
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").
28
<PAGE>
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.
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 August 31, 1998, there was approximately $270,884 due and owing
Messrs. Arnone and Giakas. During 1996, 1997 and 1998, the Company borrowed
$100,000, $166,234 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 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
29
<PAGE>
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.
DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
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 AND DIVIDENDS ON THE
REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS")
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S 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.
30
<PAGE>
DIVIDEND POLICY. The Company has not paid any cash dividends on its
Common Stock and does not anticipate paying any cash dividends in the
foreseeable future. The Company currently intends to retain future earnings, if
any, to fund the development and growth of its business. Any future
determination to pay cash dividends will be at the discretion of the Board of
Directors and will be dependent upon the Company's financial condition,
operating results, capital requirements, applicable contractual restrictions and
such other factors as the Board of Directors deems relevant.
VOLATILITY AND LIMITED MARKET. The market price of the Company's
Common Stock has in the past been highly volatile and is expected to continue to
be subject to significant price and volume fluctuations in the future based on a
number of factors, including market uncertainty about 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.
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
31
<PAGE>
items with recordings acceptable to the Company.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
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.
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
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
32
<PAGE>
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 pursuant to
Section 4(2) of the Securities Act. 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.
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).
33
<PAGE>
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.
PART F/S
Financial Statements and Exhibits.
Financial Statements: The financial statements filed herewith are
set forth in the Index to Financial Statements, which financial statements are
incorporated herein by reference.
34
<PAGE>
================================================================================
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
F1
<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>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities
Exchange Act of 1934, the registrant has duly caused this registration statement
to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: December __, 1998
PLANET ENTERTAINMENT CORPORATION.
By: /s/ Wallace Giakas, Chairman
--------------------------------
Wallace Giakas, Chairman
35
<PAGE>
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
<PAGE>
Consents of Experts and Counsel Ex-23
Financial Data Schedule* Ex-27
- -----------------
* Filed as Exhibits to Form 10-SB, File Number 000-22549, dated September 23,
1998 and are herein incorporated by reference.
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 10-SB.
AJ. ROBBINS, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
AND CONSULTANTS
DENVER, COLORADO
DECEMBER 14, 1998
