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As filed with the Securities and Exchange Commission on May 5,1999
Registration No. 333-64395
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Amendment No. 4 to
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
PLANET ENTERTAINMENT CORPORATION
(Exact name of Registrant as specified in its charter)
Florida 33-0471728
(State of Incorporation or (I.R.S. Employer
Organization or other jurisdiction) Identification No.)
John S. Arnone, President
222 Highway 35
P.O. Box 4085
Middletown, New Jersey 07748
(Address of Registrant's principal executive office, including zip code)
(732) 530-8819
(Registrant's telephone number)
Copies To:
LAWRENCE G. NUSBAUM, ESQ.
GUSRAE, KAPLAN & BRUNO
120 WALL STREET
NEW YORK, NEW YORK 10005
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [x]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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Title of each Class Proposed Maximum Proposed Maximum
of securities to be Amount to be Offered Price Per Aggregate Offering
Registered (1)(2) Registered Unit Price Registration Fee
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<S> <C> <C> <C> <C>
Common Stock,
$.001 par value 2,750,000 $4.27125 $11,745,938 $3,265.37
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THERAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
(1) The Shares are offered at prices not presently determinable. The offering
price is estimated pursuant to the provisions of Rule 457 solely for the purpose
of calculating the registration fee based on the average bid and ask price for
the Company's Common Stock on April 28, 1999, which was $4.27125 per share.
(2) The exact number of shares issuable upon conversion of the Series A
Convertible Preferred Stock is not presently determinable.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
DATED May 5, 1999
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TABLE OF CONTENTS
SUMMARY OF PROSPECTUS.........................................................5
RISK FACTORS..................................................................7
USE OF PROCEEDS..............................................................16
SELLING STOCKHOLDERS.........................................................16
PLAN OF DISTRIBUTION.........................................................18
LEGAL PROCEEDINGS............................................................19
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.................20
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...............22
DESCRIPTION OF SECURITIES....................................................24
INTEREST OF NAMED EXPERTS AND COUNSEL........................................24
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT......25
ORGANIZATION WITHIN THE LAST FIVE YEARS......................................25
DESCRIPTION OF BUSINESS......................................................25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION..................35
LIQUIDITY AND CAPITAL RESOURCES..............................................40
DESCRIPTION OF PROPERTY......................................................43
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................43
MARKET PRICE OF COMMON EQUITY AND RELATED STOCKHOLDER MATTERS................45
EXECUTIVE COMPENSATION.......................................................46
FINANCIAL STATEMENTS.........................................................49
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS................................49
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY
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JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. UNTIL MAY 29, 1999 (25
DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN
THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS.
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Prospectus
PLANET ENTERTAINMENT CORPORATION
2,750,000 SHARES
COMMON STOCK
$.001 PAR VALUE
This Prospectus relates to 2,750,000 shares (the "Shares") of common
stock, $.001 par value (the "Common Stock"), of Planet Entertainment
Corporation, a Florida corporation ("Planet," the "Company" or the
"Registrant"). This Prospectus is filed with the United States Securities and
Exchange Commission (the "Commission" or the "SEC") and relates to a
Registration Statement on Form SB-2 (the "Registration Statement") also filed
with the SEC. The Shares will be outstanding shares of Common Stock acquired
upon exercise of warrants (the "Warrants") and the conversion of the Company's
Series A Convertible Preferred Stock (the "Preferred Stock"), owned by the
persons named in this Prospectus under the caption "SELLING STOCKHOLDERS" or by
pledges, donees, transferees or other successors in interest and permitted
assigns of such selling stockholders (the "Selling Stockholders"). The Shares
were or will be acquired by the Selling Stockholders upon the conversion of
Preferred Stock held by certain of the Selling Stockholders and the exercise of
Warrants by certain of the Selling Stockholders. This Prospectus relates to
2,525,000 shares of Common Stock issuable upon conversion of the Preferred
Stock, taking into consideration adjustments of the conversion price and the
requirements of the Company's Amended and Restated Articles of Incorporation
governing the Preferred Stock (the "Terms"), and 225,000 shares of Common Stock
issuable upon exercise of the Warrants. The Preferred Stock and Warrants were
issued in May 1998. The Preferred Stock is convertible at any time into shares
of Common Stock at the lower of (a) $8.885 per share (the "Initial Conversion
Price"), or (b) 58% (the "Discount Rate") multiplied by the average of the five
lowest closing bid prices of the Company's Common Stock during the ten (10)
trading days immediately preceding the notice of conversion, which as of April
28, 1999 was $4.56 per share.
Pursuant to the Terms, because the Company did not satisfy certain
express obligations to the holder of the Preferred Stock set forth in the Terms,
by a certain date (such date, the "Trigger Date"), the Discount Rate was reduced
from its initial rate to 58%.
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Pursuant to the Terms, the Preferred Stockholder is prohibited from
converting the Preferred Stock (or receiving shares of Common Stock as payment
of dividends thereunder) to the extent that such conversion would result in the
Preferred Stockholder owning more than 4.999% of the outstanding Common Stock of
the Company following such conversion. Such restriction is waivable by the
Preferred Stockholder upon not less than 75 days notice to the Company. (See
"SELLING STOCKHOLDERS")
The Company will not receive any of the proceeds from the sale of the
Shares; however, in consideration of issuing the Preferred Stock and Warrants,
the Company then received net proceeds of $4,475,000 which was used in part to
acquire a wholly-owned subsidiary and the remainder of which will be used for
working capital, other possible acquisitions, expansion of its principal lines
of business and other general corporate purposes. The weighted average exercise
price of the outstanding Warrants is approximately $9.625, the exercise of which
would result in the issuance of 225,000 shares of Common Stock. If all of the
Warrants were exercised, and assuming it is not a cashless exercise, the Company
would receive aggregate proceeds of approximately $2,165,625.
The Common Stock is traded on the over the counter ("OTC") electronic
bulletin board maintained by the National Association of Securities Dealers (the
"Bulletin Board") under the symbol "PNEC." On April 28, 1999 the Common Stock
closed at a price of $4.19 per share as reported on the OTC Bulletin Board.
This Prospectus is to be used in connection with the sale of the Shares
from time to time by the Selling Stockholders. The Shares may be sold from time
to time by the Selling Stockholders, directly or through underwriters, dealers
or agents, in market transactions on the OTC Bulletin Board, on any other
national securities exchange or automated quotation system on which the Common
Stock may be listed or traded, including block trades or ordinary brokers
transactions or in privately negotiated transactions. The price at which any of
the Shares may be sold, and the commissions, if any, paid in connection with any
sale, may be privately negotiated, may be based on then prevailing market prices
and may vary from transaction to transaction and as a result are not currently
known. (See "PLAN OF DISTRIBUTION").
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The Selling Stockholders and any broker/dealers participating in the
distribution of the Shares may be deemed to be "underwriters" within the meaning
of the Securities Act, and any commissions or discounts given to any such
broker/dealer may be regarded as underwriting commissions or discounts under the
1933 Act. The Shares have not been registered for sale by the Selling
Stockholders under the securities laws of any state as of the date of this
Prospectus. Brokers or dealers effecting transactions in the Shares should
confirm the registration thereof under the securities laws of the states in
which transactions occur or the existence of any exemption from registration.
The Company will pay certain of the legal and other expenses of this
offering (estimated to be approximately $85,000), except that the Selling
Stockholders will bear the cost of any brokerage commissions or discounts or
other selling expenses incurred by the Selling Stockholders in connection with
the sale of their Shares. The Company has agreed to indemnify the Selling
Stockholders against certain liabilities, including liabilities arising under
the Securities Act. (See "PLAN OF DISTRIBUTION.")
No Dealer, salesperson or other person has been authorized to give any
information or to make any representations not contained, or incorporated by
reference, in this Prospectus and, if given or made, such information or
representation must not be relied upon as having been authorized by the Company
or the Selling Stockholders. This Prospectus does not constitute an offer to
sell or the solicitation of any offer to buy any of the securities offered
hereby in any jurisdiction to any person to whom it is unlawful to make such
offer in such jurisdiction. Neither the delivery of this Prospectus nor any sale
made hereunder shall, under any circumstances, create any implication that the
information herein is correct as of any time subsequent to the date hereof or
that there has been no change in the affairs of the Company since such date.
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. (See "RISK FACTORS"
BEGINNING ON PAGE 7 HEREOF.) THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 5, 1999.
AVAILABLE INFORMATION
This Prospectus constitutes a part of the Registration Statement filed
by the Company with the Commission under the Securities Act with respect to the
Shares offered hereby. In accordance with the rules and regulations of the
Commission, this Prospectus omits certain of the information contained in the
Registration Statement. Reference is hereby made to the Registration Statement
and related exhibits for further information with respect to the Company and the
Company's Common Stock. Statements contained herein concerning the provisions of
any document are not necessarily complete and, in each instance, reference is
made to the copy of such document filed as an exhibit to the Registration
Statement or otherwise filed with the Commission. Each such statement is
qualified in its entirety by such reference.
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The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company
has not filed an annual report on Form 10-KSB with the Commission for fiscal
year 1997 or 1998 but the Company provided audited financial statements to its
stockholders at its annual meeting of stockholders held November 9, 1998. With
respect to the fiscal years in which the Company is required to file an annual
report with the Commission, the Company will furnish annual reports to its
stockholders which will include audited financial statements. The audited
financial statements to be available to stockholders are reported on by its
independent auditors. The Company will also furnish such other reports from time
to time as it may determine or as may be required by law.
The Company will furnish without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, upon the written or oral
request of such person, a copy of any or all the documents referenced in the
Registration Statement to which this Prospectus relates, other than exhibits to
such documents, unless such exhibits are specifically incorporated by reference
in such documents. Requests should be addressed to: Planet Entertainment
Corporation, 222 Highway 35, Middletown, New Jersey 07748 (732) 530-8819.
Reports and other information filed by the Company may be inspected and
copied at the public reference facilities maintained by the SEC at Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549 and at the Regional Offices of
the SEC at Seven World Trade Center, Suite 1300, New York, New York and at Suite
1400, 500 West Madison Street, Chicago, Illinois. Copies of such information can
be obtained by mail from the Public Reference Section of the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates.
Filings with the Commission made by the Company electronically through
the EDGAR system, such as the Form SB-2 and the Form 10-SB and all amendments
thereto (including certain exhibits), are also available on the Commission's
site on the World Wide Web, by pointing a browser to
http://www.sec.gov/cgi-bin/srch-edgar), inserting in the search box the phrase
"Planet Entertainment Corporation" and selecting the documents identified under
"Company name" as "Planet Entertainment Corporation".
The Company's executive offices are located at 222 Highway 35,
Middletown, New Jersey 07748, and its telephone number is (732) 530-8819.
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SUMMARY OF PROSPECTUS
Planet Entertainment Corporation was incorporated under the laws of the
State of Delaware in May 1996. On October 9, 1996, all of the outstanding
capital stock of the Company was acquired in a reverse merger stock exchange
transaction by Ampro International Golf Tour, Inc. ("Ampro"), a Florida
corporation, which, as the surviving corporation, changed its name to Planet
Entertainment Corporation. In October 1998, subsequent to its acquisition of
Northeast One Stop, Inc. ("NEOS"), the Company changed its fiscal year end to
August 31.
The Company is currently involved in various areas of the recorded
music industry. The Company's principal business is the wholesale distribution
of pre-recorded music in the form of compact diskettes ("CD's"), cassette tapes,
and other entertainment related products such as video tapes, Digital Video
Diskettes ("DVD's"), and to a very limited extent music or entertainment related
apparel, such as t-shirts. The Company's business activities also include the
acquisition, licensing, production, marketing and distribution of high quality
recorded music. Through its NEOS subsidiary, the Company distributes
approximately 130,000 front end titles of pre-recorded music to independent
record stores, college bookstores and mass merchants. Generally, "front end
titles" are popular, current pre-recorded music titles. 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. A "master recording" is the original, final, then
recorded version of a song recorded in the studio. Of such 15,000 master
recordings that the Company has rights to exploit, approximately 33% (5,000) the
Company has exclusive rights to, and the remaining approximately 67% (10,000)
the Company has non-exclusive rights to. These amounts are estimates based upon
one officer and director of the Company having indicated that he recorded such
masters, and representations contained in the contracts for such masters. The
Company's exclusive rights to such master recordings means that only the Company
is entitled to exploit the particular master recording. Non-exclusive rights to
master recordings allow the Company as well as other persons who demonstrate the
right to exploit such master recordings to exploit the particular master
recordings.
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. A
"glass master" CD is a CD created for a particular artist's recording which is
created and used as the master for mass duplication purposes.
With respect to its collection of master recordings, 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
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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 150 individuals
and is principally engaged in the distribution of records and compact diskettes
through "one-stops" and "rack-jobbers." "One-stops" are centralized order
fulfillment centers for small to medium sized retail stores, typically record
stores, that obtain a wide-variety of recorded music in various formats from
several independent producers at a stated price, or mark-up. "Rack-jobbers"
typically purchase and distribute recorded music through racks and kiosks in
retail stores, and encompass a narrower range of selection, typically from
proprietary sources for a stated percentage of sales, and often with the full
right of return. The Company's strategy is to permit the sale of 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.
In May 1998, the Company authorized and issued 500 shares of 7% Series
A Convertible Preferred Stock to JNC Opportunity Fund Ltd. ("JNC") at a stated
value of $10,000 per share for a total of $5 million. As a result of this
transaction, the Company received net proceeds of approximately $4,475,000. The
Preferred Stock issued to JNC will convert at a substantial discount to the
current market price of the Common Stock. (See "DESCRIPTION OF SECURITIES -
PREFERRED STOCK" and "DESCRIPTION OF BUSINESS - RECENT DEVELOPMENT OF
BUSINESS.")
RECENT DEVELOPMENTS
The Company recently lost a major customer which accounted for
approximately 40% of the net sales of NEOS during its fiscal year ended August
29, 1998. This customer, Meijer, Inc. ("Meijer"), is a department store chain
with approximately 118 store locations, of which NEOS serviced 46 locations.
Meijer informed the Company in January 1999 that it would no longer purchase any
of the Company's products. The Company was not given a reason for Meijer's
decision. Sales to Meijer were from the Company's rack-job division and
constituted approximately 78% of the net sales of such division for the
six-month period ended February 28, 1999 and approximately 37% of the net sales
of the Company as a whole for such period. The Company anticipates that its
accounts receivable from Meijer is collectible and that returns from sales to
this customer will not be material. Although the Company believes the loss of
Meijer may have a material adverse effect on the Company's future results of
operations, the Company believes that increased sales from its one-stop division
may partially offset the loss of Meijer as a customer. Additionally, the Company
is aggressively seeking to increase its sales by soliciting prospective new
one-stop and rack business customers, seeking to generate increased sales from
existing customers (including increases in the number of locations serviced),
and promoting its Internet customer service capabilities to third party
companies. No assurances can be given, however, that the Company will be able to
replace or offset sales losses from Meijer. The inability of the Company to
replace or offset such lost sales will have a material adverse effect on the
Company's results of operations. (See "RISK FACTORS - RECENT LOSS OF PRIMARY
CUSTOMER", "DESCRIPTION OF BUSINESS - RECENT DEVELOPMENT OF BUSINESS," and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.")
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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.
RECENT LOSS OF PRIMARY CUSTOMER. The Company recently lost a major
customer which accounted for approximately 40% of the net sales of NEOS during
its fiscal year ended August 29, 1998. This customer, Meijer, Inc. ("Meijer"),
is a department store chain with approximately 118 store locations, of which
NEOS serviced 46 locations. Meijer informed the Company in January 1999 that it
would no longer purchase any of the Company's products. The Company was not
given a reason for Meijer's decision. Sales to Meijer were from the Company's
rack-job division and constituted approximately 78% of the net sales of such
division for the six-month period ended February 28, 1999 and approximately 37%
of the net sales of the Company as a whole for such period. The Company
anticipates that its accounts receivable from Meijer is collectible and that
returns from sales to this customer will not be material. Although the Company
believes the loss of Meijer may have a material adverse effect on the Company's
future results of operations, the Company believes that increased sales from its
one-stop division may partially offset the loss of Meijer as a customer.
Additionally, the Company is aggressively seeking to increase its sales by
soliciting prospective new one-stop and rack business customers, seeking to
generate increased sales from existing customers (including increases in the
number of locations serviced), and promoting its Internet customer service
capabilities to third party companies. No assurances can be given that the
Company will be able to replace sales losses from Meijer. The inability of the
Company to replace or offset such lost sales will have a material adverse effect
on the Company's results of operations. (See "DESCRIPTION OF BUSINESS - RECENT
DEVELOPMENT OF BUSINESS," and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.")
SUBSTANTIAL LEVERAGE AND DEBT SERVICE REQUIREMENTS. The Company has
substantial indebtedness. As of February 28, 1999 the Company had notes payable
of $2,665,292 (which includes accrued interest of $323,568) outstanding, accrued
salaries of $339,383 and a $6,000,000 credit facility (the "CFC Credit
Agreement") with Congress Financial Corporation ("CFC"). As of February 28, 1999
there was an aggregate of $5,857,054 outstanding under the CFC Credit Agreement.
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 indebtedness may result in an event
of default which could have a material adverse effect on the Company.
POSSIBLE LACK OF SUFFICIENT CAPITAL RESOURCES TO REPAY CERTAIN
OUTSTANDING INDEBTEDNESS. As of February 28, 1999, the Company had current
assets of $15,248,257, current liabilities of $9,733,253 and working capital of
$5,515,004. In connection with the NEOS Acquisition, the Company issued to the
prior owner of NEOS two short term interest free notes totaling $750,000,
$375,000 of which was paid in March 1999, and the remaining $375,000 of which is
due in August 1999 (collectively, the "NEOS Note"). NEOS also owed to the prior
owner of NEOS approximately $344,000 as of February 28, 1999 , for expenses
prior to the NEOS Acquisition which became due in April 1999. In addition, in
connection with the Company's acquisition of the 15,000 master titles, the
Company had outstanding as of February 28, 1999 $1,024,562 on a restated
promissory note (the "Gulf Coast Note"). The $1,024,562 outstanding amount
(which includes interest) of the Gulf Coast Note is payable in three (3) equal
installments of principal and accrued interest of approximately $380,000 on
September 1, 1999, September 1, 2000 and September 1, 2001. As of February 28,
1999, the Company also had accrued salaries to certain officers of $339,383,
$101,840 in notes due that financed various assets purchased by the Company,
$230,884 due on demand to stockholders of the Company for advances made to the
Company and a 10% principal amount $150,000 demand note due in January 1999 owed
to one lender. Although the Company believes it will have sufficient funds to
repay all of such notes and obligations upon maturity, no assurances can be
given that the Company will have sufficient funds to repay such notes upon
maturity. See "Financial Statements."
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
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Company recognized revenue of approximately $105,000 as a result of the
agreement with JAD Records. As of the date hereof, this amount remains
uncollected and in June 1998, the Company assigned the collection of all
producer and publisher royalties to an unaffiliated third party. (See
"DESCRIPTION OF BUSINESS; RECENT DEVELOPMENT OF BUSINESS.") For the year ended
December 31, 1997, approximately 50% of the Company's sales and royalty revenue
were generated from one customer, Multimedia Industries Corporation ("MMIC").
One of the Company's executive officers and directors, Joseph Venneri, is a
stockholder of MMIC, and Richard Bluestine, the Company's Chief Financial
Officer and a former director served as the Chief Financial Officer and a
director of MMIC from June of 1995 through May of 1997 and remains a stockholder
of MMIC. Moreover, generally, in the music industry, wholesale distributors such
as NEOS do not enter into written contracts with its customers. As a result, a
customer can at any time and without warning terminate its relationship with the
Company.
LIMITED OPERATING HISTORY. In 1996, the Company began selling
music-related products. Accordingly, the Company has only a very limited
operating history on which to base an evaluation of its business and prospects.
For the eight months ended August 31, 1998, approximately 30% of the Company's
net revenues were derived from studio operations, including rentals, and
approximately 70% from the sales or licensing of the Company's products.
Following the Company's acquisition of NEOS, it is expected that approximately
90-95% of the Company's revenues will be derived from the wholesale distribution
of pre-recorded music. Although NEOS is a 15 year old company, the Company, and
particularly its management, is 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,
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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.
SALES SUBJECT TO SIGNIFICANT POPULARITY FLUCTUATIONS. The Company's
products are music-related. The sales of music-related products are subject to
various factors including, without limitation, the popularity of the recording
artist and of the type of genre of music. Such popularity may fluctuate greatly
and irregularly, and thus affect the sales of products featuring certain artists
and types of music. To address this risk, the Company must, among other things,
expand its customer base, sucessfully implement its business and marketing
strategies, continue to develop its website and transaction-processing systems,
provide superior customer service, resond to competitive developments and
changing or emerging trends in the music industry and attract and retain
qualified personnel. There can be no assurance that prevailing popular
preferences for artists and types of music will remain relatively constant or
not fluctuate significantly, that the Company can identify and resond to and
capitalize on changing or emerging music industry trends, or that sales of the
Company's products would not be adversely affected by such trends and its
failure to adequately respond thereto. (See "DESCRIPTION OF BUSINESS")
LIMITED EXPERIENCE AS A WHOLESALE DISTRIBUTOR. Prior to the
acquisition of NEOS in September 1998, current management of the Company had no
experience in the wholesale distribution of recorded music, the business of
NEOS. However, management of NEOS, substantially all of which has remained with
NEOS following the acquisition, as well as certain additional persons hired by
NEOS following the acquisition, have substantial experience in the wholesale
distribution of pre-recorded music. No assurances can be given, however, that
the inexperience of management of the Company in such business would not have a
material adverse effect on the operations of the Company.
CONTINUED OPERATING LOSSES. Since inception, the Company has incurred
significant losses, and as of February 28, 1999 had an accumulated deficit of
$4,922,920. 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.")
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.
RECORDING MASTERS NOT INSURED. The Company is engaged in the music
recording industry and is highly dependent upon its libraries of music recording
masters for its business. Presently, the Company does not have an insurance
policy covering casualties to these masters but is in the process of obtaining
insurance for them. However, there can be no assurance that such casualty
insurance will be obtained, can be maintained at an acceptable cost to the
Company, or will cover all casualties to which the masters might be subject.
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
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Internet website to market and distribute its products over the Internet by
making its enhanced catalogue available for sale and downloading to wholesale
consumers, in a variety of compositions. The Company has completed the first
stage of the development of its Internet website, and is expected to complete
the design and development of its site and have its website available for its
commercial use by approximately the third 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 on a wholesale basis 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) other
retailers that offer music products, including mass merchandisers, superstores
and consumer electronic stores; and (v) non-store retailers such as music clubs.
Many of these traditional retailers also support dedicated websites which would
compete directly with 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, United States 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 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,
10
<PAGE>
as well as Louis J. DelSignore, the Chairman of NEOS and a director of the
Company, and Ron Nicks, the President and Chief Executive Officer of NEOS and a
director of the Company. 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. Because Mr. Bluestine has indicated that he is not
available on a full time basis, the Company has not offered Mr. Bluestine an
employment contract. The Company may hire a new chief financial officer in the
future it it believes it needs a full-time individual in that capacity. The
Company believes, if necessary, that it could readily hire a new chief financial
officer. In connection with the employment of Messrs. Giakas and Arnone, the
Company has obtained "key man" life insurance with respect to these individuals,
which in the event of their death, the first $500,000 in benefits from any such
insurance policy to be paid to the Company.
SIGNIFICANT CONTRACTUAL OBLIGATIONS TO CERTAIN MEMBERS OF MANAGEMENT.
The Company has entered into employment agreements with two principal executive
officers which provide for them to receive a percentage of any capital raised by
the Company, the value of any acquisition by the Company, and the Company's
pre-tax profits. The officers, John Arnone, the President and Chief Executive
Officer of the Company, and Wallace Giakas, the Chairman and Secretary of the
Company, respectively, each will receive: (a) 2.5% of all pre-tax profits
recorded by the Company in accordance with Generally Accepted Accounting
Principles ("GAAP"); (b) the greater of (i) 2% of the value of any acquisition
by the Company (as computed by the purchase price plus the value of any
additional consideration paid in connection with such acquisition) or (ii) 2% of
the revenue reported by the acquired party in its preceding fiscal year; and (c)
2.5% of any capital raised for the Company. 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. At each officer's option, any compensation due under the
foregoing provisions may be converted into the Company's Common Stock at a
conversion price equal to the average closing bid price for the Common Stock 30
days prior to any such acquisition or capital funding. Under these agreements,
in the event of a change of control the officers may resign and all amounts due
and owing for the term of the agreements shall become due and payable. Both Mr.
Arnone and Mr. Giakas waived the aforementioned compensation with regards to the
NEOS acquisition, in exchange for options to each to purchase 125,000 shares of
Common Stock for $5.25 per share for five years after the closing date of the
NEOS acquisition. As a result of such provisions, the Company's results of
operations could be adversely affected, and its amount of available cash could
be diminished.
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 One-Stop 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.
SEASONALITY. The Company's results of operations and those of its NEOS
subsidiary are subject to seasonal variations and 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
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<PAGE>
comparisons of the Company's historical results are not necessarily meaningful
and should not be relied upon as an indication of future results.
The Company's results of operations in future periods may not meet the
expectations of securities analysts and investors, in which case the price of
the Company's Common Stock would likely be materially adversely affected.
COPYRIGHT AND TRADEMARK PROTECTION. The Company's success will depend
in substantial part on its ability to obtain and maintain copyright or trademark
protection for its compositions in order to preserve the value of its master
recordings library; and to generate revenues from operations without infringing
on the proprietary rights of third parties. The Company is currently not the
subject of any action regarding the ownership or the Company's right to market,
reproduce and distribute any of its master recordings. 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
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<PAGE>
potential monetary liability for damages, the Company would be required to
obtain a license in order to continue to market the compositions in question or
could be enjoined from enhancing or selling such compositions if such a license
were not made available on acceptable terms. Further, if the Company should
become involved in litigation, it could require significant financial and
management resources of the Company.
Documents supporting the chain of title to each master recording owned
by or licensed to the Company on an exclusive or non-exclusive basis are
maintained by the Company. Possession of the master recordings permits the
Company to reproduce and distribute them under the Company's own label, or
sub-license these rights to others in exchange for royalties. No assurances can
be given that the Company's right to use any and or all of its master
recordings, will not be subject to dispute which may result in the delay or the
inability to use or exploit any particular master recording or require that the
Company pay royalties which may not be available or affordable by the Company.
The master recordings acquired from Maestro Holding Corporation ("Maestro") have
not been recorded in the Company's financial statements, while the value of
master recordings acquired from Music Marketeers Inc. ("Music Marketeers") and
J. Jake, Inc. ("J. Jake") is reflected in the Company's financial statements at
a value of $3.50 per share for the 1,500,000 shares of the Company's Common
Stock paid to such parties ($5,250,000) plus $1,250,000 principal amount
promissory notes. 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 limited sales of these recordings. The Company will begin
amortizing the costs of its record masters upon the initial sales generated from
the exploitation of these masters. The Company, however, has determined that at
such time as the Company generates $100,000 of net sales from its master
recordings, the Company will begin reserving and placing into escrow 5% of all
sales derived from its master recordings. The Company intends on a periodic
basis to review whether such 5% reserve is sufficient and may, based upon such
periodic reviews, increase or decrease such amount based upon the dollar amount
of claims it receives resulting from its master recordings. As of February 28,
1999, because the Company had not generated a minimum of $100,000 of net sales
from its master recordings, no funds were reserved and escrowed relating to
sales of its master recordings. No assurances can be given that such 5% reserve
amount will be sufficient to offset any claims made against the Company based
upon its master recordings.
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. Moreover, 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
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<PAGE>
products because the right to sell or exploit these products is contested, the
Company's relationship with its distributors may be adversely affected. (See
"LEGAL PROCEEDINGS.")
In November 1996, the Company agreed to acquire certain studio assets
and rights associated with 10,000 master recordings from Music Marketeers and J.
Jake in exchange for 2,000,000 shares of the Company's Common Stock, valued at
approximately $7,000,000, and the assumption of three promissory notes totaling
$1,250,000 payable over 5 years, (the "Promissory Notes"). 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 were acquired from Gulf Coast as of December 15,
1998. (See "DESCRIPTION OF BUSINESS; RECENT BUSINESS DEVELOPMENTS")
DEPENDENCE ON TECHNOLOGY. The market for the Company's products and
services is characterized by rapidly changing technology, changing customer
needs, frequent new product introductions and evolving industry standards that
may render existing products and services obsolete. The life cycles of the
Company's products are difficult to estimate. The Company's growth and future
financial performance will depend upon its ability to enhance its existing
products and to introduce new products on a timely and cost-effective basis and
that meet dynamic customer requirements. There can be no assurance that the
Company will be successful in developing new products or enhancing its existing
products or that such new or enhanced products will receive market acceptance or
be delivered timely to the market. The Company has experienced product
development delays in the past and may experience delays in the future.
YEAR 2000 ISSUES. Many existing computer programs use only two digits
to identify a year in the date field, with the result that data referring to the
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 create erroneous results. This could cause a disruption in operations
and have a short-term adverse effect on the Company's business and results of
operations. Using internal staff and outside consultants, the Company is
actively addressing this situation and anticipates that it will not experience a
material adverse impact to its operations, liquidity or financial condition
related to systems under its control. Specifically, the Company is in the
process of converting its mainframe inventory and financial accounting computer
software to Nxtrend's "Trend" system software package. The Company expects to
have this conversion completed by the summer of 1999. In addition, the majority
of the computer hardware is currently being replaced and a new LAN network has
been installed and is currently being tested. This should be completed by April
1999. Also, the Company is taking
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the necessary steps to provide itself with reasonable assurance that its service
providers, suppliers, customers and financial institutions are Year 2000
compliant. This process is approximately 50% complete. The total cost to achieve
Year 2000 compliance is estimated at $550,000. The majority of this amount has
already been expended, primarily in the third fiscal quarter of 1999. The
Company is developing contingency plans to identify and mitigate potential
problems and disruptions to the Company's operations arising from the Year 2000
issue. This process is expected to be completed by August 1999. While the
Company believes that its own internal assessment and planning efforts with
respect to its external service providers, suppliers, customers and financial
institutions are and will be adequate to address its Year 2000 concerns, there
can be no assurance that these efforts will be successful or will not have a
material adverse effect on the Company's 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 effect on the Company.
POSSIBLE VOLATILITY OF STOCK PRICE. There may be significant volatility
in the market price of the Company's Common Stock. Quarterly operating results
of the Company, deviations in results of operations from estimates of securities
analysts, changes in general conditions in the economy or the Internet services
industry or other developments affecting the Company, or its competitors, could
cause the market price of the Company's Common Stock to fluctuate substantially.
The equity markets have, on occasion, experienced significant price and volume
fluctuations that have affected the market prices for many companies' securities
and 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.
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<PAGE>
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, however, is not eligible to rely on the safe harbor
provisions of the Private Securities Litigation Reform Act in connection with
these statements.
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of the
Shares registered herewith; however, in consideration of issuing the Preferred
Stock and Warrants, the Company received net proceeds of $4,475,000 which was
used for working capital, expansion of its principal lines of business and a
substantial portion was used in connection with the acquisition of NEOS. The
weighted average exercise price of the outstanding Warrants is approximately
$9.625, the exercise of which would result in the issuance of 225,000 shares of
Common Stock. If all of the Warrants were exercised, and assuming it is not a
cashless exercise, the Company would receive aggregate proceeds of approximately
$2,165,625.
SELLING STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of Common Stock of the Selling Stockholders as of March 31,
1999, and the number of shares of Common Stock included in this Prospectus.
<TABLE>
<CAPTION>
Number of
Shares Percentage and
Beneficially Number of Shares
Owned Prior Number of Beneficially
to Shares Being Owned After
Selling Stockholders Offering Offered Offering (4)
- -------------------- -------- ------- ----------------------
Number of
Percent Shares
------- ---------
<S> <C> <C> <C> <C>
JNC Opportunity Fund Ltd. 630,185 (1) 2,600,000 (2) -0- -0-
CDC Consulting, Inc. 150,000 (3) 150,000 -0- -0-
</TABLE>
(1) The number of shares of Common Stock listed as beneficially owned by
JNC Opportunity Fund Ltd. ("JNC") represents the number of shares of
Common Stock issuable to JNC, (subject to the limitation imposed by the
Company's Amended and Restated Articles of Incorporation whereby the
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<PAGE>
Preferred Stockholder is prohibited from converting the Preferred Stock
to the extent that such conversion would result in the Preferred
Stockholder owning at any point in time more than 4.999% of the
outstanding Common Stock of the Company, including shares issuable upon
conversion of the Preferred Stock) upon (i) conversion of the Preferred
Stock at an assumed conversion price of the lesser of (a) the Initial
Conversion Price of $8.885 per share or (b) the Discount Rate of 58%,
multiplied by the average of the five lowest per share market prices of
the Common Stock during the ten trading days immediately preceding
notice of conversion and (ii) exercise of the Warrants. Because the
conversion price applicable to the Preferred Stock is subject to
changes based upon fluctuations in the market price of the Common
Stock, the actual number of shares of Common Stock that will be issued
in respect of such conversions or dividend payments and consequently
the number of shares of Common Stock that will be beneficially owned by
JNC, will fluctuate daily and therefore the foregoing prices and
numbers cannot be determined at this time. Nothing would prohibit the
Selling Stockholders from exercising a portion of their conversion
privileges, which would not result in beneficial ownership by such
stockholders in excess of 4.999% of the outstanding Common Stock, and
then selling shares of common stock issued upon such conversion and
thereafter exercising an additional portion of its conversion rights.
(2) Includes shares of Common Stock issuable to JNC upon conversion of the
Preferred Stock, as payment of dividends thereunder and exercise in
full of the JNC Warrants. Because the number of shares of Common Stock
issuable upon conversion of the Preferred Stock and as payment of
dividends thereon is dependent in part upon the market price of the
Common Stock prior to a conversion, the actual number of shares of
Common Stock that will be issued in respect of such conversions or
dividend payments and, consequently, offered for sale under this
Registration Statement, cannot be determined at this time. Accordingly,
to provide for such fluctuations, the Company has contractually agreed
to include herein an aggregate of 2,600,000 shares of Common Stock
issuable, subject to the 4.999% limitation expressed in footnote 1,
upon conversion of the Preferred Stock, payment of dividends thereunder
and exercise of the JNC Warrants.
(3) Includes the number of shares of Common Stock issuable upon conversion
of the warrants to purchase 150,000 shares of the Company's Common
Stock issued to CDC Consulting, Inc. at a price of $9.625 per share
over a term of five years from May 31, 1998.
(4) Assumes the sale by the Selling Stockholders of all Shares offered
thereby. The shares to be sold shall include, in addition to the
numbers indicated, any additional shares of Common Stock of the Company
that become issuable in connection with the Shares by reason of any
stock dividend, stock split, recapitalization or other similar
transaction effected without the receipt of consideration that results
in an increase in the number of outstanding shares of the Company's
Common Stock.
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PLAN OF DISTRIBUTION
The Selling Stockholders, their pledgees, donees, transferees or other
successors in interest, may, from time to time, sell all or a portion of the
Shares on the OTC Bulletin Board, in privately negotiated transactions or
otherwise, at fixed prices that may be changed, at market prices prevailing at
the time of sale, at prices related to such market prices or at negotiated
prices. The Shares may be sold by the Selling Stockholders by one or more of the
following methods, without limitation: (a) block trades in which the broker or
dealer so engaged will attempt to sell the Shares as agent but may position and
resell a portion of the block as principal to facilitate the transaction, (b)
purchases by a broker or dealer as principal and resale by such broker or dealer
for its account pursuant to this Prospectus, (c) an exchange distribution in
accordance with the rules of such exchange, (d) ordinary brokerage transactions
and transactions in which the broker solicits purchasers, (e) privately
negotiated transactions, (f) short sales and (g) a combination of any such
methods of sale. In effecting sales, brokers and dealers engaged by the Selling
Stockholders may arrange for other brokers or dealers to participate. Brokers or
dealers may receive commissions or discounts from the Selling Stockholders (or,
if any such broker/dealer acts as agent for the purchaser of such shares, from
such purchaser) in amounts to be negotiated which are not expected to exceed
those customary in the types of transactions involved. Broker/dealers may agree
with the Selling Stockholders to sell a specified number of such Shares at a
stipulated price per share, and, to the extent such broker/dealer is unable to
do so acting as agent for a Selling Stockholder, to purchase as principal any
unsold Shares at the price required to fulfill the broker/dealer commitment to
the Selling Stockholders. Broker/dealers who acquire Shares as principal may
thereafter resell such Shares from time to time in transactions (which may
involve block transactions and sales to and through other broker/dealers,
including transactions of the nature described above) in the over-the-counter
market or otherwise at prices and on terms then prevailing at the time of sale,
at prices then related to the then-current market price or in negotiated
transactions and, in connection with such resales, may pay to or receive from
the purchasers of such Shares commissions as described above. The Selling
Stockholders may also sell the Shares in accordance with Rule 144 under the
Securities Act, rather than pursuant to this Prospectus.
The Selling Stockholders and any broker/dealers or agents that
participate with the Selling Stockholders in sales of the Shares may be deemed
to be "underwriters" within the meaning of the Securities Act in connection with
such sales. In such event, any commissions received by such broker/dealers or
agents and any profit on the resale of the Shares purchased by them may be
deemed to be underwriting commissions or discounts under the Securities Act.
From time to time the Selling Stockholders may engage in short sales,
short sales against the box, puts and calls and other transactions in securities
of the Company or derivatives thereof, and may sell and deliver the Shares in
connection therewith or in settlement of securities loans. If the Selling
Stockholders engage in such transactions, the conversion price may be affected.
From time to time the Selling Stockholders may pledge their Shares pursuant to
the margin provisions of its customer agreements with its brokers. Upon a
default by the Selling Stockholders, the broker may offer and sell the pledged
Shares from time to time.
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The Company is required to pay all fees and expenses incident to the
registration of the Shares, including fees and disbursements (in the approximate
amount of $85,000) of counsel to the Selling Stockholders. The Company has
agreed to indemnify the Selling Stockholders against certain losses, claims,
damages and liabilities, including liabilities under the Securities Act.
LEGAL PROCEEDINGS
There are currently no threatened or pending legal proceedings against
the Company. From time to time, the Company 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 assurances that either of these
matters will be resolved to the Company's satisfaction or that additional claims
will not be brought against the Company in the future by other third parties, or
that any such claims will not be successful. If such a claim were successful,
the Company's business could be materially adversely affected. In addition to
any potential monetary liability for damages, the Company would be required to
obtain a license in order to continue to market the compositions in question or
could be enjoined from enhancing or selling such compositions if such a license
were not made available on acceptable terms. Further, if the Company should
become involved in litigation, it could require significant financial and
management resources of the Company. Documents supporting the chain of title to
each master recording owned by or licensed to the Company on an exclusive or
non-exclusive basis are maintained by the Company. Possession of the master
recordings permits the Company to reproduce and distribute them under the
Company's own label, or sub-license these rights to others in exchange for
royalties. No assurances can be given that the Company's right to use any and or
all of its master recordings, will not be subject to dispute which may result in
the delay or the inability to use or exploit any particular master recording or
require that the Company pay royalties which may not be available or affordable
by the Company. The value of master recordings acquired from J. Jake and Music
Marketeers is reflected in the Company's financial statements at a value of
$3.50 per share for the 1,500,000 shares of the Company's Common Stock paid to
such parties plus $1,250,000 principal amount promissory notes, while the value
of master recordings acquired from Maestro has not been recorded in the
Company's financial statements because predecessor costs could not be
determined. However, the Company as of the date of this Prospectus 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 only limited sales of these recordings.
The Company will begin amortizing the costs of its record masters upon the
initial sales generated from the exploitation of the masters. The Company,
however, has determined that at such time as it generates $100,000 of net sales
from its master recordings, it will create a reserve and placing into escrow an
amount equal to five (5%) percent of net sales resulting from its master
recordings. The Company intends on a periodic basis to review whether such 5%
reserve is sufficient and may based upon such periodic reviews increase or
decrease such amount. As of February 28, 1999, the Company has not amortized any
of the costs of its record masters, nor has it placed any funds into escrow.
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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. Moreover, 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 "Risk Factors."
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 By-Laws 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 By-Laws 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
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do so in the future. The Company currently does not 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 the Chief Financial
Officer, a director, and stockholder of Multi-Media Industries Corporation
("MMIC"). (See "CERTAIN RELATIONSHIPS AND
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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. Mr. Bluestine devotes part of his
professional time to the business of the Company. Because Mr. Bluestine has
indicated that he is not available on a full time basis, the Company has not
offered Mr. Bluestine an employment contract. The Company may seek to hire a new
chief financial officer if it believes it needs a full-time individual in that
capacity. The Company believes, if necessary, that it could readily hire a new
chief financial officer. (See "RISK FACTORS; DEPENDENCE ON MANAGEMENT AND KEY
PERSONNEL").
LOUIS J. DELSIGNORE, is a Director of the Company and Chairman of the
Company's subsidiary Northeast One Stop, Inc. From 1983 through September 1998,
Mr. DelSignore served as president of Northeast One Stop, Inc. ("NEOS") and
currently is employed by the Company to assist in running NEOS. From August 1973
through January 1983, Mr. DelSignore was vice president of finance and a member
of the Board of Directors of Trans World Music Corporation. Mr. DelSignore has
substantial experience in the wholesale distribution of recorded music and other
entertainment related products. Mr. DelSignore has a Bachelor of Science degree
from the State University of New York at Albany. Mr. DelSignore devotes his full
professional time to the business of the Company.
RONALD J. NICKS is a Director of the Company and is President and Chief
Executive Officer of the Company's subsidiary Northeast One Stop, Inc. Mr. Nicks
has been affiliated with NEOS since November 1997 and has served as its
President since October 1998. From July 1996 through September 1998, Mr. Nicks
was Senior Vice President of Alliance Entertainment Corporation ("Alliance"),
and from January 1994 through July 1996 was Chief Executive Officer of
Alliance's One Stop Group. From November 1990 through January 1994, Mr. Nicks
was Vice President and General Manager of CD One Stop, where he oversaw all
operations including sales and purchasing. From November 1988 through November
1990, Mr. Nicks was director of purchasing for CD One Stop, and from April 1987
through November 1988, was associated with Western Merchandisers, Inc. Mr. Nicks
has significant experience in the wholesale distribution of recorded music. Mr.
Nicks devotes his full professional time to the business of the Company.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of the date hereof, information
regarding ownership of the Company's Common Stock, by each person known by the
Company to be the beneficial owner of more than 5% of the Company's outstanding
Common Stock, by each director, by certain related shareholders, and by all
executive officers and directors of the Company as a group. All persons named
below have sole voting and investment power over their shares except as
otherwise noted.
Name of Beneficial Owner Number of Percent of
or Identity of Group (1) Shares Owned Class (2)
- ------------------------ ------------ ----------
Wallace M. Giakas 3,892,000 (1)(2)(3)* 29.7%
4 Tall Oaks Court
Farmingdale, N.J. 07727
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Name of Beneficial Owner Number of Percent of
or Identity of Group (1) Shares Owned Class (2)
- ------------------------ ------------ ----------
Joseph Venneri 3,060,000 (1)(2)* 23.6%
336 East Pleasant Grove Rd.
Jackson, N.J. 08527
John S. Arnone 3,767,000 (1)(2)(3)* 29.6%
30 Penbrook Court
Shrewsbury, N.J. 07702
Gulf Coast Music, Inc. 694,000 5.3%
c/o Jeffrey Kranzdorf
757 St. Charles Avenue
New Orleans, LA 70130
Richard Bluestine 527,300 (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)* 0.6%
7 Northway Lane
Latham, New York 10201
All executive officers and
directors as a
Group (6 persons) 11,546,300 (1)(2)(3) 75.7%
- -----------------
* 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.
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DESCRIPTION OF SECURITIES
COMMON STOCK. The authorized voting Common Stock of the Company
consists of 50,000,000 shares of Common Stock, with a par value of $0.001. As of
March 31, 1999, the Company had 11,976,055 shares of Common Stock outstanding
and approximately 1,000 shareholders. (See "MARKET PRICE OF COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS").
PREFERRED STOCK. The Company authorized and issued 500 shares of
non-voting 7% Series A Convertible Preferred Stock with an aggregate stated
value of $5 million. Each share of the Preferred Stock is convertible at any
time into shares of Common Stock at the lower of (a) $8.885 per share or (b) 58%
multiplied by the average of the five lowest per share market prices of the
Company's Common Stock during the ten trading days immediately proceeding the
notice of conversion. (See "DESCRIPTION OF BUSINESS; RECENT DEVELOPMENT OF
BUSINESS.")
Pursuant to the Company's Amended and Restated Articles of
Incorporation governing the Preferred Stock (also, the "Terms"), because the
Company did not satisfy certain express obligations to the holder of the
Preferred Stock set forth in the Terms, the Discount Rate was reduced
retroactively to 58%. (See "DESCRIPTION OF BUSINESS; RECENT DEVELOPMENT OF
BUSINESS")
No public market exists, or is expected to exist, for these shares of
Preferred Stock.
INTEREST OF NAMED EXPERTS AND COUNSEL
The validity of the Common Stock offered hereby will be passed upon for
the Company by Gusrae, Kaplan & Bruno, 120 Wall Street, New York, New York
10005. No person affiliated with said firm is an officer, director or principal
stockholder of the Company.
The financial statements of the Company, as of December 31, 1997 and
August 31, 1998 and for the year ended December 31, 1997 and for the period
ended August 31, 1998, included in this Prospectus have been audited by AJ.
Robbins, P.C., independent public accountants, as indicated in their
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report with respect thereto, and are included herein in reliance upon the
authority of such firm as experts in giving said report.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
Officers and directors of the Company are indemnified by the Company in
accordance with its Articles of Incorporation, and its Bylaws, under each, to
the maximum extent permissible by law. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to directors,
officers and controlling persons of the Company pursuant to the Laws of the
State of Florida or the provisions of the Company's Articles of Incorporation or
Bylaws, or otherwise, the Company has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
the indemnification against such liabilities (other than the payment by the
Company of expenses incurred or paid by a director, officer or controlling
person of the Company in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
ORGANIZATION WITHIN THE LAST FIVE YEARS
The Company was incorporated under the laws of the State of Delaware in
May 1996. On October 9, 1996, all of the outstanding capital stock of the
Company was acquired by Ampro International Golf Tour, Inc. ("Ampro"), a Florida
corporation in a reverse merger, which, as the surviving corporation, changed
its name to Planet Entertainment Corporation. In October 1998, subsequent to its
acquisition of NEOS, the Company changed its fiscal year end to August 31.
DESCRIPTION OF BUSINESS
The Company is currently involved in various areas of the recorded
music industry. The Company's principal business, primarily through its newly
acquired wholly owned subsidiary NEOS, is the wholesale distribution of
pre-recorded music in the form of Compact Diskettes ("CD's"), cassette tapes,
and other entertainment related products such as video tapes, Digital Video
Diskettes ("DVD's"), and to a much lesser extent music or entertainment related
apparel, such as t-shirts. The Company's business activities also include the
acquisition, licensing, production, marketing and distribution of high quality
recorded music. Through NEOS, the Company distributes approximately 130,000
front end titles of pre-recorded music to independent record stores, college
book stores and mass merchants. Generally, "front end titles" are popular,
current pre-recorded music titles. 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.
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The Company has acquired certain exclusive and non-exclusive rights
associated with approximately 15,000 music master recordings from existing music
catalogues of recorded music. The Company has exclusive rights to approximately
33% (5,000) of these recordings rights to and the remaining approximately 67%
(10,000) the Company has non-exclusive rights to. These amounts are estimates
based upon one officer and director of the Company having indicated that he
recorded such masters, and representations contained in the contracts for such
masters. The Company's exclusive rights to such master recordings means that the
Company is the only person entitled to exploit the particular master recording.
Non-exclusive rights to master recordings allow the Company as well as other
persons who demonstrate the right to exploit such master recordings to exploit
the particular master recordings. The Company also records new artists. These
master recordings are typically stored on Digital Audio Tape ("DAT"). The
Company, through its 48-track recording studio and mastering facility in
Chester, Pennsylvania, and its 24-track studio in Jackson, New Jersey,
re-digitizes existing master recordings, enhances these master recordings by
removing certain impure sounds due to aging, and re-compiles these recordings
along with its recordings of new artists on "glass master" CDs for mass
production and distribution to its customers through traditional and
non-traditional distribution channels. A "glass master" CD is a CD created for a
particular artist's recording which is created and used as the master for mass
duplication purposes.
The Company's strategy has been to produce compilation CDs containing
enhanced or re-digitized master recordings from its existing library, to market
them directly through NEOS or other distributors, to contribute these
compilation CDs to joint ventures involving the Company, and to license these
compilation CDs to third parties for marketing and sale by unaffiliated
distributors. (See "DESCRIPTION OF BUSINESS; RECENT DEVELOPMENT OF BUSINESS").
To date, however, prior to the Company's acquisition of NEOS, substantially all
the Company's revenues had been derived from studio rental sales and licensing
royalties and not from the licensing and sale of the Company's compilation CDs.
(See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS").
In September 1998, the Company acquired all of the issued and
outstanding capital stock of NEOS which employs approximately 150 individuals
and is principally engaged in the distribution of records and compact diskettes
through "one-stops" and "rack-jobbers." "One-stops" are centralized order
fulfillment centers for small to medium sized retail stores, typically record
stores, that obtain a wide-variety of recorded music in a variety of formats
from several independent producers at a stated price, or mark-up.
"Rack-jobbers," typically purchase and distribute recorded music through racks
and kiosks in retail stores, and encompass a narrower range of selection,
typically from proprietary sources for a stated percentage of sales, and often
with the full right of return. The Company's strategy is to permit the sale of
the Company's products and other "front line" titles over the Internet and to
serve as its own fulfillment center. The Company's strategy is to distribute
compilation CDs from its own proprietary catalogue through NEOS. Currently, NEOS
purchases the pre-recorded music from certain major record companies (including,
but not limited to SONY Music Entertainment, Inc., Universal Music and Video
Distribution, Polygram Group Distribution, EMI Music Distribution,
Warner/Electra/Atlantic Corporation and BMG Distribution), and other
distributors for sale at approximately 84% of its resale price to its customers.
The Company, similar to other wholesale distributors of pre-recorded music does
not have any written contracts with these major record companies and as a result
such relationships may be
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terminated at any time. Although NEOS has been distributing pre-recorded music
for such major record companies for a number of years, no assurances can be
given any of such persons would not terminate its relationship with NEOS. The
termination of one or more of such relationships could have a material adverse
affect on the Company. The Company expects to also supply compilation CDs from
the Company's proprietary catalogue of existing master recordings through NEOS,
at a significantly lower cost, or approximately 50% of their resale value, to
NEOS, with the intent to improve NEOS' gross profit margins and to generate
increased revenues for the Company.
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, the Company acquired certain exclusive rights
associated with the exploitation of approximately 5,000 master recordings, and
in November 1996, through its agreements with J. Jake, Music Marketeers, and
Gulf Coast, the Company acquired non-exclusive rights associated with the
exploitation of approximately 10,000 additional master recordings. The Company
has not recorded the 5,000 master recordings purchased from Maestro on its books
because predecessor costs could not be determined, but has recorded on its
financial statements its rights to 10,000 additional master recordings purchased
from J. Jake, Music Marketeers, and Gulf Coast as having a value of
approximately $6,500,000. Of the approximately 15,000 master recordings owned by
the Company, approximately 33% (5,000) the Company has certain exclusive rights
to and approximately 67% (10,000) the Company has non-exclusive rights to. These
amounts are estimates based upon one officer and director of the Company having
indicated that he recorded such masters, and representations contained in the
contracts for such masters.
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,
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Christmas, country, pop, rock and roll, and rhythm and blues, and a partial
listing of artists included in the Company's non-exclusive master catalogue
include Louis Armstrong, Tony Bennett, George Benson, Glen Campbell, Nat King
Cole, Bing Crosby, Sammy Davis, Jr., Fats Domino, Duke Ellington, Ella
Fitzgerald, Marvin Gaye, George Gershwin, Dizzy Gillespie, Bill Haley's Comets,
Billie Holliday, John Lee Hooker, Lena Horne, The Ink Spots, Jackson Five, Al
Jolson, Quincy Jones, Frankie Lane, Glenn Miller, Willie Nelson, Charlie Parker,
Dolly Parton, Neil Sedaka, Pete Seeger, Sister 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 manufactures "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. A "glass master" CD is a CD created for a
particular artist's recording which is created and used as the master for mass
duplication purposes. Currently, the Company's products are mass produced or
pressed by Denon Interactive Media, a division of Nippon Columbia, Ltd.
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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 enter into joint ventures with other parties
under which such other parties would license, mass produce and market these
products through traditional retail distribution channels, in exchange for
royalties. To date, the Company has entered into one license agreement (the "NCL
License Agreement"), with Nippon Columbia Co. Ltd. ("NCL"), pursuant to which
the Company granted the exclusive rights to NCL and Denon Corporation, USA, a
wholly-owned subsidiary of NCL to press, duplicate, distribute, sell and market
music CDs and video rights in various regions of Asia. In addition, the Company
is actively engaged in negotiations with other persons for similar license
arrangements. No assurances can be given, however, that the NCL License
Agreement will produce any material revenues to the Company, or the Company in
the future will be able to enter into any other similar arrangements. The
Company's products also are distributed through Navarre Corporation, as a result
of a joint venture with Black Tiger Records, DRG Associates, Inc. ("DRG"), and
Koch International Corporation. In February 1998, the Company entered into an
agreement with Monaco Records to distribute the Company's products throughout
Europe, in May 1998 the Company entered into a joint venture agreement with New
Millennium Communications concerning the licensing and distribution of the
Company's products in Europe and in February 1999 the Company entered into a
joint venture with Shandel Music Company, a South African limited liability
company concerning the distribution of products in Africa, Australia, New
Zealand and Israel. No assurances can be given that any revenues or income will
be generated as a result of such arrangements. (See "DESCRIPTION OF BUSINESS;
RECENT DEVELOPMENT OF BUSINESS").
The Company intends to continue to develop and expand 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. To date the Company has spent approximately $75,000 in
connection with developing its Internet website. Such costs include payments to
its developer and other technical support providers. Although no assurances can
be given, the Company expects its Website to be active in approximately its
third fiscal quarter, which commences on March 1, 1999.
In September 1998, the Company acquired all of the issued and
outstanding capital stock of NEOS in exchange for $2,250,000 in cash, a $750,000
principal amount promissory note (of which $375,000 has been paid) 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 150
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
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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 have been derived from its
"one-stop" division, and approximately forty percent (40%) of its net sales have
been derived from its "rack-job" division. However, NEOS recently lost its
primary rack-job division customer, Meijer, which stopped ordering products form
the Company in January 1999. Although the Company believes the loss of Meijer as
a customer may have a material adverse effect on the Company's future results of
operations, the Company believes that increased sales from its one-stop division
may partially offset the loss of Meijer as a customer. There can be no assurance
that the Company will be able to either replace or offset sales losses from
Meijer. (See "SUMMARY - RECENT DEVELOPMENTS" and "RISK FACTORS - LOSS OF PRIMARY
CUSTOMER.") 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 $50,860, the
predecessor's cost of a studio and publishing right. No value was recorded for
record masters acquired from Maestro because the predecessor costs for such
masters could not be determined. 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 the Chief Financial Officer and a
director of MMIC. In 1997, the Company recorded approximately $204,362 in
revenues from MMIC, of which amount $180,615 remains uncollected as of November
30, 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
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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 Fold, as well as many prominent artists
in the gospel field. In 1997, the Company recorded approximately $49,883 in
product sales from its HGR subsidiary and $51,002 for the eight months ended
August 31, 1998.
In September 1996, the Company agreed to acquire certain studio assets
and rights associated with 10,000 master recordings from Music Marketeers and J.
Jake in exchange for 2,000,000 shares of the Company's Common Stock, valued at
approximately $7,000,000, and the assumption of three promissory notes totaling
$1,250,000 payable over five years (the "Promissory Notes"). 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. Of the 10,000 masters
the Company agreed to acquire, 2,500 were transferred directly from J. Jake free
and clear of encumbrances or disputes, and the remaining 7,500 were acquired
from Gulf Coast. The Company 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 were not free of dispute by December 15, 1998, such
masters would be replaced with unencumbered and undisputed master recordings 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 on the $1,250,000 Promissory Notes (the
"Promissory Notes") together with accrued interest in exchange for approximately
$175,000 in cash and short term notes totaling approximately $2,850,000. If the
Company failed 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 would
lose its right to acquire 694,000 of the 1,400,000 shares, and would be bound by
the original terms of the Promissory Notes under which there remains outstanding
$750,000 in principal, with interest and principal due and payable over the next
three years. The Company did not make the required payment by December 15, 1998
and thus is bound by the original terms of the Promissory Notes. (See "RISK
FACTORS; DISPUTED INTELLECTUAL PROPERTY RIGHTS" and "RISK FACTORS; LACK OF
SUFFICIENT CAPITAL RESOURCES").
In February 1997, the Company obtained a 50% interest in Black Tiger
Records consisting primarily of certain master recordings embodying the
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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 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 a previous agreement with JAD Records. In fiscal 1997,
this amount was reserved by the Company as uncollectible. To date, 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.
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
MMIC regarding the production of 20 compilation CDs per year by the Company.
According to the terms of the agreement, all net income from the production,
development and distribution of the releases are to be divided equally on a
50%-50% basis between the Company and MMIC. No revenues have been earned under
this agreement. One of the Company's executive officers and directors, Joseph
Venneri, is a shareholder of MMIC, and Richard Bluestine, the Company's Chief
Financial Officer, and the former Chief Financial Officer and a director of
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MMIC, is a shareholder of MMIC, and from June 1995 through May 1997, was an
officer and director of MMIC. Further, the Company does not intend to engage in
any 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. To date, the Company has shipped
50 of the compilation CDs to NCC for distribution into the above markets
pursuant to the agreement, and although no assurances can be given, 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 right of first refusal to 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 an equal basis. To date, the Company has received no royalties,
and has recognized no revenue or income as a result of this joint venture.
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 third 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 an equal basis. As of February 28, 1999, the
Company has contributed 15 compilations of its master recordings to the joint
venture, and distribution is expected to begin in the third quarter of fiscal
1999. To date, however, the Company has received no royalties, and has
recognized no revenue or income as a result of this agreement. Although no
assurances can be given, the Company expects to earn revenues as a result of
this agreement during the second half of fiscal 1999.
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In May 1998, the Company authorized and issued 500 shares of 7% Series
A Convertible Preferred Stock (the "Preferred Stock") to JNC 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, initially was convertible into the Company's
Common Stock at the lesser of (a) $8.885 per share, 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 agreed to
indemnify JNC against certain liabilities and damages and issued warrants to
purchase 75,000 shares of the Company's Common Stock to JNC at a price of $9.625
per share exercisable over a term of five years, and 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 was required to file the 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"), because the Company
did not satisfy certain express obligations to the holder of the Preferred Stock
set forth in the Terms, the Discount Rate was retroactively reduced to 58%.
Pursuant to the Terms, the Preferred Stockholder is prohibited from
converting the Preferred Stock (or receiving shares of Common Stock as payment
of dividends thereunder) to the extent that such conversion would result in the
Preferred Stockholder owning more than 4.999% of the outstanding Common Stock of
the Company following such conversion. Such restriction is waivable by the
Preferred Stockholder upon not less than 75 days notice to the Company. (See
"SELLING STOCKHOLDERS")
In September 1998, the Company purchased all of the issued and
outstanding capital stock of NEOS, in consideration for $2.25 million in cash,
and a non-interest bearing Promissory Note in the amount of $750,000, of which
$375,000 was paid in March 1999 and the remaining $375,000 is payable by
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August 31, 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 in connection with the offering made hereby.
As discussed elsewhere in this Prospectus, the Company recently lost a
major customer which accounted for approximately 40% of the net sales of NEOS
during its fiscal year ended August 29, 1998. This customer informed the Company
in January 1999 that it would no longer purchase any of the Company's products.
Sales to this customer were from the Company's rack-job division and constituted
approximately 78% of the net sales of such division, and approximately 37% of
the overall net sales of the Company, for the six-month period ended February
28, 1999. (See "SUMMARY - RECENT DEVELOPMENTS" and "RISK FACTORS - LOSS OF
PRIMARY CUSTOMER.")
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
The Company was incorporated under the laws of the State of Delaware in
May 1996 to raise capital and acquire, own, integrate and operate seasoned
privately-held companies in the music business. In June 1996, the Company
acquired from Messrs. Arnone, Giakas and Venneri, the three controlling
shareholders, directors and officers of the Company, for shares of Common Stock
in the Company, all of the issued and outstanding common stock of Maestro
Holding Corporation ("Maestro"). Maestro owned exclusive rights to approximately
5,000 master recordings, and subsequently acquired non-exclusive rights to an
additional 10,000 master records.
Prior to the Company's NEOS Acquisition effective as of September 1,
1998, the Company had limited revenues and income. As a result, all financial
data of the Company prior to August 31, 1998 is to a large extent non-material,
other than certain losses resulting from general and administrative expenses
incurred in connection with entering into the various production and
distribution agreements, as well as professional fees incurred related to the
registration of the Company's Common Stock.
As indicated elsewhere herein, as of September 1, 1998, the Company
acquired NEOS for approximately $3,000,000, of which $750,000 was in the form of
a promissory note and of which $375,000 has been paid and the remaining $375,000
is payable 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.
For the year ended August 29, 1998, NEOS had net sales of $34,793,341 and net
income of $475,933. As a result, the results of operations of the Company
commencing as of September 1, 1998, reflect in large part the operations of
NEOS.
GENERAL
NEOS has five offices. One administrative headquarters and warehouse is
located in Latham, New York, and four sales offices are 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 ("Rack
Business"). 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. Prior to
1995, NEOS was principally a wholesaler of pre-recorded music and entertainment
products through its one stop division ("One Stop Business"). 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 aspect 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' Shipment 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 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 retailing 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. From 1995 to 1997, most of NEOS' growth in net sales was the result of
the increased net sales reported from its Rack Business. During this four year
period from 1994 through 1997, NEOS' One Stop Business decreased by
approximately 37%.
NEOS recognizes sales for its One Stop Business and Rack Job Business
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. Generally, in the music
distribution industry, wholesalers, such as NEOS, have a limited right of return
to the manufacturers. Accordingly, NEOS does not accrue returns and allowances.
NEOS, however, reduces net sales by calculating actual returns. NEOS' business,
similar to other businesses in the music distribution industry, is a highly
seasonal business where a high proportion of sales occur in the Christmas season
but a high amount of returns occur in the months of January through March.
To assist the reader in a clearer understanding of the MD&A section of
this Prospectus, the Company will compare the results for the first six (6)
months of fiscal 1999 ended February 28, 1999 which reflect the Company's
unaudited consolidated results of operations for such period, to the Company's
unaudited pro forma results of operations for the comparable period in fiscal
1998, which assumes the NEOS Acquisition occurred effective as of September 1,
1997. In addition, for the period ended August 31,
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1998 and the year ended December 31, 1997, the Company will discuss the
Company's operations in such period without giving effect to the NEOS
Acquisition and also separately discuss NEOS' operations during the years ended
August 29, 1998 and August 30, 1997.
RESULTS OF OPERATIONS FOR THE COMPANY'S
SIX MONTH PERIOD ENDED FEBRUARY 28, 1999
AS COMPARED TO THE PRO FORMA RESULTS OF
OPERATIONS OF THE COMPANY FOR THE SIX
MONTH PERIOD ENDED FEBRUARY 28, 1998
NET SALES. For the six months ended February 28, 1999 net sales were
approximately $26,388,000 as compared to pro forma net sales of approximately
$17,685,000 for the comparable period in fiscal 1998, which represented an
increase in net sales of $8,703,000 or 49%. Net sales from the One Stop Business
for the six months ended February 28, 1999 versus the comparable period in the
prior year, respectively, were $13,994,000 as compared to $9,028,000, an
increase of 55%. This increase was due to an expanded customer base as well as
general improvement in music industry revenues. Net sales from the Rack Business
for the six months ended February 28, 1999 were $12,365,000 as compared to
$8,376,000 in the comparable period of the prior year, an increase of 48%. This
increase was primarily due to the additional block of Meijer store locations
(approximately 20) added to the Company's service area in the first quarter of
fiscal 1999. In the period ended February 28, 1999, Meijer accounted for net
sales of $9,682,000, or 37% of net sales for the Company and approximately 78%
of net sales for the Rack Business. As discussed elsewhere in this Prospectus,
however, Meijer stopped ordering products from the Company in January 1999. The
Company anticipates that, based upon payment activity since March 1999, an
accounts receivable balance from Meijer, which at February 28, 1999 was
$1,613,072, is collectible. Ths Company also anticipates, based upon nominal
returns from this customer since March 1999, that the amount of returns from
sales to this customer wil not be material. Although the Company believes the
loss of Meijer may have a material adverse effect on the Company's current and
future results of operations, the Company believes, based upon preliminary sales
figures since March 1999, that increased sales from its one-stop division may
offset the loss of Meijer as a customer of its rack-job division. Additionally,
the Company is aggresively seeking increased sales volume by soliciting
propective new one-stop and rack business customers, seeking to generate
increased sales orders from existing customers (including increases in the
number of locations serviced), and promoting its Internet customer service
capabilities to third party companies. No assurances can be given that the
Company will be able to replace such loss of sales from Meijer in the Rack
Business or at all, or that such preliminary sales figures will be indicative of
future sales or results of operations. The inability of the Company to replace
or offset such lost sales would have a material adverse effect on the Company's
future net sales and results of operations. See "SUMMARY-RECENT DEVELOPMENTS",
"DESCRIPTION OF BUSINESS - RECENT DEVELOPMENT OF BUSINESS" and "RISK
FACTORS-RECENT LOSS OF PRIMARY CUSTOMER."
COST OF SALES. For the six months ended February 28, 1999, cost of
sales was $21,775,000 or 82% of net sales as compared to pro forma cost of sales
for the comparable period in fiscal 1998 of $14,588,000 or 82% of net sales.
OPERATING EXPENSES. For the six months ended February 28, 1999,
selling, general and administrative expenses (SG&A) were $3,992,000 or 15% of
net sales compared to pro forma SG&A of $2,312,000 or 13% of net sales in the
comparable period in fiscal 1998. Such increase in SG&A resulted from the higher
level of NEOS' payroll ($937,000) in the period ended February 28, 1999,
resulting from additional locations being serviced, and the increased
professional and consulting fees ($353,000) primarily related to the NEOS
Acquisition and the sale of the Preferred Stock.
INTEREST EXPENSE. For the six months ended February 28, 1999, interest
expense was $250,000, or 0.9% of net sales versus pro forma interest expenses of
$276,000 or 1.6% of net sales in the comparable period of fiscal 1998. An
increase in NEOS' interest expense ($19,000) caused by additional borrowing on
its line of credit was more than offset by less accrued interest ($45,000) on
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outstanding notes to related parties.
NET INCOME. For the six months ended February 28, 1999, net income was
$205,593 or 0.8% of net sales, as compared to net income of $315,044 or 1.8% of
net sales for the pro forma results for the six months ended February 28, 1998.
Excluding the one-time costs related to the NEOS Acquisition and the Preferred
Stock sale, net income as a percentage of net sales for the period ended
February 28, 1999 would have been approximately the same as the pro forma
results in the comparable period for the prior year.
NEOS' RESULTS OF OPERATIONS FOR FISCAL
YEAR ENDED AUGUST 29, 1998 COMPARED TO
FISCAL YEAR ENDED AUGUST 30, 1997
NET SALES. For the year ended August 29, 1998, NEOS recorded net sales
of $34,793,000 representing an increase of approximately $11,534,000 or 50%
above net sales recorded in fiscal 1997, which were $23,258,608. In fiscal year
ended August 29, 1998, of the approximately $34,793,000 of net sales,
approximately 59% or $20,434,000 was derived from its One Stop Business and
approximately 41% or $14,359,000 from its Rack Business. The net sales increase
of the Rack Business and One Stop Business was relatively comparable as One Stop
Business increased 51% and Rack Business increased 48%. The primary reasons for
such higher net sales were an increase in the number of customers and/or
locations served and increased volume with existing customers. The Company
believes such fiscal 1998 positive trends in net sales were facilitated by the
fall 1997 hiring of NEOS' CEO Ron Nicks as well as a sales director, both with
extensive music industry experience.
The returns as compared to gross sales are depicted in the chart below
for both periods.
August 1998
Full Year Net
Sales Gross Sales Returns Sales Return %
One Stop Business $22,077,495 $(1,643,403) $20,434,092 - 7.4%
Rack-Business 19,225,942 (4,866,693) 14,359,249 -25.3%
Totals: $41,303,437 $(6,510,096) $34,793,341 -15.8%
August 1997
Full Year Net
Sales Gross Sales Returns Sales Return %
One Stop Business $14,761,210 $(1,223,343) $13,537,867 - 8.3%
Rack-Business 13,370,648 (3,649,907) 9,720,741 -27.3%
Totals: $28,131,858 $(4,873,250) $23,258,608 -17.3%
As discussed elsewhere in this Prospectus, the Rack Business was highly
dependent on its largest customer - Meijer. Meijer stopped ordering products
from the Company in January 1999. In the fiscal year ended August 29, 1998,
Meijer accounted for net sales of approximately $13,917,000 or 97% of the total
Rack Business net sales (40% of total NEOS net sales). In the six month period
ended February 28, 1999, net sales to Meijer were approximately $9,682,309 or
approximately 78% of the net sales of the Rack Business for such period. See "
SUMMARY - RECENT DEVELOPMENTS" and RISK FACTORS-RECENT LOSS OF PRIMARY
CUSTOMER."
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COST OF SALES. For the fiscal year ended August 29, 1998, cost of sales
were $29,152,959 or 83.8% of net sales as compared to $19,880,051 or 85.5% of
net sales for fiscal 1997. The 1.7% reduction in costs of sales as a percentage
of net sales was primarily due to a higher margin percentage (0.7% of net sales)
resulting from increased Rack Business sales (the Rack Business generally has a
higher initial margin to cover the higher costs of servicing the inventory), and
an increased level of co-op advertising credits (1.0% of net sales) earned due
to increased purchase levels.
OPERATING EXPENSES. For the fiscal year ended August 29, 1998, selling,
general and administrative expenses were $4,161,426 or 12% of net sales as
compared to $2,799,158 or 12% of net sales in fiscal 1997. This increase was
caused by two changes in expense activity. The first was the higher level of
NEOS payroll ($881,000) in fiscal 1998 necessitated by additional volume and
locations serviced. The second change was a general increase in fiscal 1998
operating expenses ($481,000) caused by the relocation of NEOS into a larger
facility in the second half of fiscal 1997. Bad debt expense decreased by
$93,500 from fiscal 1997 to fiscal 1998. The majority of the NEOS accounts that
management felt it did not have a reasonable expectation of collecting were
written off in fiscal 1996 and 1997.
INTEREST EXPENSE AND TAXES. For the fiscal year ended August 29, 1998,
interest expense was $430,687 or 1.2% of net sales versus $323,888 or 1.4% of
net sales in fiscal 1997. This increase was due to increased borrowing by NEOS
under its revolving credit line with Congress Financial Corporation ("CFC"). The
tax provision for fiscal 1998, representing an effective tax rate of 37%,
increased by $279,000 over fiscal 1997 due to the positive operating earnings.
NET INCOME. For the fiscal year ended August 29, 1998, net income was
$475,933 or 1.4% of net sales. For the fiscal year ended August 30, 1997 net
loss was ($135,176) or (0.6%) of net sales. The increase in net income in fiscal
1998 reflects the increase in volume and customer base over fiscal 1997. The
volume improvement was partially offset by the increased costs of expanding the
facilities and payroll to accommodate that growth. As discussed earlier, the
Rack Business of NEOS was highly dependent on Meijer Inc. This customer stopped
ordering from NEOS in January 1999. Although Management feels these revenue
dollars will be replaced, the risk exists that they will not be.
THE COMPANY'S RESULTS OF OPERATIONS FOR THE
EIGHT MONTH PERIOD ENDED AUGUST 31, 1998
VERSUS THE YEAR ENDED DECEMBER 31, 1997
In October 1998, subsequent to the NEOS Acquisition, the Company
changed its fiscal year to end August 31 to be consistent with the year-end of
NEOS. Accordingly, the following discussion presents an analysis of the eight
months of results ended August 31, 1998 for the Company immediately prior to its
September 1, 1998 NEOS Acquisition as compared to the results for the twelve
months ended December 31, 1997 of the Company.
NET SALES. For the eight month period ended August 31, 1998, the
Company had net sales of $109,495, an average of $13,686 per month. For the
twelve month period ended December 31, 1997, the Company had net sales of
$293,428, an average of $24,452 per month. This 1998 drop in net sales resulted
primarily from elevated 1997 sales activity with a related party - MMIC. The
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accounts receivables for such 1997 sales with MMIC remain uncollected. See
"Certain Relationships and Related Transactions."
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. The majority of revenue for the
year ended December 31, 1997 came from a related party - MMIC. (See "DESCRIPTION
OF BUSINESS - RECENT DEVELOPMENT OF BUSINESS.") Based on the terms of the
Company's production and distribution agreement with MMIC, production costs were
borne by MMIC. The Company believes that this resulted in cost of sales being
lower, as a percentage of net sales, for the year ended December 31, 1997.
OPERATING EXPENSE. For the eight month period ended August 31, 1998,
selling, general and administrative expenses (SG&A) were $659,348. For the year
ended December 31, 1997, selling, general and administrative expenses were
$794,314. The majority of the SG&A costs prior to the NEOS Acquisition are
unrelated to sales volumes. Such expenses include officers' and staff salaries
and professional and consulting fees. Generally, the average monthly SG&A costs
during the eight month period ended August 31, 1998 were approximately $82,419
as compared to the average monthly SG&A costs during the year ended December 31,
1997 which were $66,192. Such average monthly SG&A costs were higher during the
eight month period ended August 31, 1998 because of higher professional fees and
expenses and other expenses related to increased efforts by the Company to
prepare business plans and analyze various acquisitions and other matters prior
to the decision to acquire NEOS. Excluding the increase in professional fees,
the average SG&A expenses per month for the eight month period ended August 31,
1998 was approximately $5,000 per month lower than SG&A expenses for the average
twelve month period ended December 31, 1997.
INTEREST EXPENSE. For the eight month period ended August 31, 1998 and
the twelve month period ended December 31, 1997, respectively, interest expense
was $98,135 or an average of $12,267 per month versus $144,382 or an average of
$12,032 per month.
NET INCOME (LOSS). For the eight month period ended August 31, 1998,
the net loss was $645,464. The net loss for the twelve month period ended
December 31, 1997 was $809,912. As discussed elsewhere in this Prospectus, the
operating activity of the Company prior to the NEOS Acquisition did not produce
significant revenue.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements are for payments for NEOS'
products and operating expenses, as well as various notes, including to related
parties. Prior to the NEOS Acquisition, the Company's primary source of cash was
loans from its principal shareholders, Messrs. Arnone and Giakas, and other
related parties, as well as the sale of the Preferred Stock. NEOS' sources of
cash include revenue from normal operations and its revolving credit line with
Congress Financial Corporation ("CFC").
Cash and cash equivalents as of February 28, 1999 were $1,162,920 as
compared to the pre-NEOS August 31, 1998 cash balance of $3,850,162, or a
reduction of $2,687,242. This reduction was primarily the result of the paydown
of accounts payable ($1,965,314), the costs and purchase price of the NEOS
Acquisition ($1,627,416), and an increase in inventory ($855,052). These
increases were partially offset by the amounts drawn from the CFC credit line
($1,686,658).
Net cash flow to operating activities for the six month period ended
February 28, 1999 was $2,052,622. The primary uses of cash were for the paydown
of accounts payable balances after the holiday season ($1,965,314) as well as an
increase in inventory built up for the holiday season ($855,052).
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<PAGE>
These outflows were only partially offset by increases in deferred revenue and
rebates to customers ($174,460) as well as other non-cash items (i.e.
depreciation, accrued expenses).
As of February 28, 1999, outstanding accounts receivable totaled
$5,772,285. This amount is net of an allowance for returns of $182,488. By
comparison, the pro forma consolidated accounts receivable balance as of August
31, 1998 was $5,856,805, net of an identical allowance of $182,488. The accouns
receivable balance at February 28, 1999 includes $1,613,072 due from a major
customer, Meijer, which has stopped purchasing from the Company. (See "SUMMARY -
RECENT DEVELOPMENTS" and "RISK FACTORS - LOSS OF PRIMARY CUSTOMER.") The Company
believes that, based upon payment activity and nominal returns since March 1999,
this receivable balance is collectible and that the amount of returns from sales
to this customer will not be material.
At February 28, 1999 inventory was $7,703,619 versus a pro forma
balance as of August 31, 1998 of $6,848,567. The Company believes this increase
is normal due to increased sales volume. NEOS accounts for its inventory on a
first-in-first-out basis.
At February 28, 1999 the Company's accounts payable balance was
$6,163,560 versus the pro forma balance as of August 31, 1998 of $8,509,717.
NEOS has a revolving credit agreement (the "CFC Credit Agreement") with
Congress Financial Corporation ("CFC"). The maximum line of credit available
under the CFC Credit Agreement is $6,000,000. Advances under the CFC Credit
Agreement are made on the basis of eligible accounts receivable and inventory as
defined in the agreement. CFC requires NEOS to maintain working capital of no
less than $2,500,000 excluding its borrowings from CFC. In addition, NEOS must
maintain an adjusted net worth of no less than $600,000. The adjustment to the
net worth calculation allows NEOS to add the balance of any subordinated debt
due to the former shareholder of NEOS to the net worth calculation to meet the
required level. Working capital and adjusted net worth as of February 28, 1999
were $6,568,279 and $1,833,776, respectively. As of February 28, 1999, NEOS had
an aggregate of $5,857,054 outstanding under the CFC Credit Agreement. NEOS pays
interest to CFC at the rate of prime plus 1.5% on all outstanding amounts under
the CFC Credit Agreement. All obligations of NEOS under the CFC Credit Agreement
are guaranteed by the the Company.
Net cash flow to investing activities for the six month period ended
February 28, 1999 was approximately $1,905,709. The primary cash outflow for the
Company was the cash needed for the NEOS Acquisition. Although the cash outlay
for the purchase was $2,250,000 with the balance in stock options and notes
payable, the amount of cash on hand at NEOS as of the purchase date approximated
$523,000, and $100,000 had already been paid out to escrow in a prior fiscal
quarter. This resulted in a net cash outlay in the current period of
approximately $1,627,000. In addition, fixed assets (including a new telephone
system at NEOS) totaling $288,626 were acquired during the period.
Net cash flow from financing activities for the six month period ended
February 28, 1999 was $1,271,089. The primary source of cash was advances on the
CFC line of credit of $1,686,658. This was partially offset by the repayment of
advances to employees and stockholders of $145,000 and a principal payment of
$250,000 on the Gulf Coast Note (the remaining principal and interest balance on
this note as of February 28, 1999 was $1,024,562 to be paid in three equal
annual payments of $380,000).
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<PAGE>
As of February 28, 1999, the Company had outstanding an aggregate of
$3,004,675 in notes (including accrued interest of $323,568 ), and accrued
salaries. Such amounts consist of an aggregate of $750,000 in the form of two
notes to the former owner of NEOS for $375,000, of which one was paid in full in
March 1999 and the other note becomes due in August 1999, $1,024,562 on the Gulf
Coast Note, a $344,000 principal amount 9% demand note to the former owner of
NEOS issued prior to the NEOS Acquisition (after giving effect to $30,000 repaid
in December 1998), a $230,884 principal amount 9% demand note due to privately
held corporations owned by Messrs. Giakas and Arnone representing working
capital advances made by such entities to the Company, a $150,000 principal
amount 10% demand note due to one private lender, a $15,000 principal amount 9%
demand note due to Whelan, Inc. also a privately held corporation owned by
Messrs. Arnone and Giakas, accrued officers' salaries of $339,383 and $101,840
in notes due to finance various assets purchased by the Company. See "Risk
Factors - Possible Lack of Sufficient Capital Resources To Repay Certain
Outstanding Indebtedness" and "Certain Relationships and Related Transactions."
NEOS has several capital leases in the aggregate amount $162,221 that
are secured by the related equipment and fixtures.
The Company believes that its current cash, cash from operations and
loans under the CFC Credit Agreement will be sufficient to fund the Company's
working capital requirements for the foreseeable future. No assurances can be
given, however, that due to any number of events and/or circumstances including,
but not limited to, a downturn in the pre-recorded music industry or in the
economy in general, the Company will not need additional working capital.
Furthermore, no assurances can be given that the Company will be able to obtain
such additional working capital when and if needed or on terms acceptable to the
Company.
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 the 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 create
erroneous results. This could cause a disruption in operations and have a
short-term adverse effect on the Company's business and results of operations.
Using internal staff and outside consultants, the Company is actively addressing
this situation and anticipates that it will not experience a material adverse
impact to its operations, liquidity or financial condition related to systems
under its control. Specifically, the Company is in the process of converting its
mainframe inventory and financial accounting computer software to Nxtrend's
"Trend" system software package. The Company expects to have this conversion
completed by the summer of 1999. In addition, the majority of the computer
hardware is currently being replaced and a new LAN network has been installed.
Also, the Company is taking the necessary steps to provide itself with
reasonable assurance that its service providers, suppliers, customers and
financial institutions are Year 2000 compliant. This process is approximately
50% complete. The total cost to achieve Year 2000 compliance is estimated at
$550,000. The majority of this amount has already been expended, primarily in
the third fiscal quarter of 1999. The Company is developing contingency plans to
identify and mitigate potential problems and disruptions to the Company's
operations arising from the Year 2000 issue. This process is expected to be
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completed by August 1999. While the Company believes that its own internal
assessment and planning efforts with respect to its external service providers,
suppliers, customers and financial institutions are and will be adequate to
address its Year 2000 concerns, there can be no assurance that these efforts
will be successful or will not have a material adverse effect on the Company's
operations. See "Risk Factors."
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 affect the Company's financial condition and results of
operations.
Currently, the Company is also party to a five year lease agreement
relating to approximately a 13,400 sq. ft. facility located on 15 East 8th
Street, Chester, Pennsylvania from Albert N. Albertini, Albert V. Albertini,
Christopher M. Albertini, and Al Alberts On Stage, Ltd. These premises are
leased for a term of five years from March 1, 1997 through February 28, 2002,
and which may be renewed at the election of the Company for an additional five
years. Rent during the initial term is equal to debt service on the mortgage and
the real estate taxes imposed on the premises of approximately $24,000 per year.
At the end of the first term, the Company has the option to acquire the premises
for $10, with the assumption of certain liabilities principally consisting of an
outstanding mortgage in the approximate amount of $125,748. 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, increasing to
$15,000 per month commencing September 1, 1999. With the exception of the
Latham, facility, these leases are with unrelated parties. The Latham facility
is owned by a corporation owned and controlled by Louis J. DelSignore an officer
and director of the Company, and former sole stockholder of NEOS. ("CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS")
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since June 1996, the Company has been granted the use of certain office
and production space located in Jackson, New Jersey from Joseph Venneri, one of
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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, increasing to $15,000 per month commencing September 1, 1999.
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 February 28, 1999, the Company owed to Messrs. Arnone and Giakas
in the aggregate $262,885 (which includes accrued interest of $32,001)
representing the balance of funds owed to such persons (collectively, the
"Insider Loans"). The Insider Loans are evidenced by nine (9%) percent demand
promissory notes issued to Walextin, Inc. ("Walextin"), a privately held
corporation owned and controlled by Messrs. Arnone and Giakas. In January 1998,
the Company borrowed in the aggregate an additional $16,150 from Walextin and
Whelan Inc. ("Whelan"), also a privately held corporation owned and controlled
by Messrs. Arnone and Giakas. Such loans also are payable on demand and bear
interest at nine (9%) percent per annum. The Company also owes to Messrs.
Arnone, Giakas, Venneri and Bluestine an aggregate of $339,383 of accrued
salaries. Because of the relationship between officers and directors of the
Company and former officers, directors and beneficial owners of Walextin and
Whelan, these transactions with Walextin and Whelan present 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
through May 1997, was the Chief Financial Officer and a director of MMIC. In
1997, the Company recorded approximately $204,362 in revenues from MMIC, of
which amount $180.615 remains uncollected as of February 28, 1999.
In 1997, the Company entered into a joint venture agreement with MMIC.
The agreement provides that the Company will produce for the production of a
minimum of 20 new releases per year, contingent upon MMIC advancing to the
Company $10,000 per album, plus production and distribution costs. 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 diskettes. 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
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not voted and will abstain from voting on any matter involving MMIC before the
Company's Board of Directors. Further, the Company does not intend to engage in
any business with MMIC in the future.
There are no other material agreements and/or arrangements between the
Company, its officers, directors or shareholders, and the Company believes that
the terms of its agreements with related parties are no less favorable to the
Company than those that would be available from unrelated third parties.
MARKET PRICE OF COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is currently traded on the National
Association of Securities Dealers, Inc. Automated Quotation System's Bulletin
Board (OTC:BB), and only a limited public trading market exists for the
Company's outstanding stock. There can be no assurance that an active public
market will develop for this outstanding Common Stock. Further, no assurance can
be given that, in the event that such a public market does develop, the price
will be equal to or higher than the price established by the Company upon the
issuance of such equity. Prices for the Company's Common Stock are as follows:
High Low Close
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 5.43
December 31, 1998 $ 4.75 $ 4.62 $ 4.62
------ ------ -------
1999
April 28, 1999 $ 4.44 $ 4.12 $ 4.19
------ ------ -------
- -----------------
*Sources: National Association of Securities Dealers, Inc. Automated Quotation
System ("NASDAQ"), OTC Bulletin Board.
DIVIDEND POLICY. The Company has not paid any cash dividends on its
Common Stock and does not anticipate paying any cash dividends in the
foreseeable future. The Company currently intends to retain future earnings, if
any, to fund the development and growth of its business. Any future
determination to pay cash dividends will be at the discretion of the Board of
Directors and will be dependent upon the Company's financial condition,
operating results, capital requirements, applicable contractual restrictions and
such other factors as the Board of Directors deems relevant.
VOLATILITY AND LIMITED MARKET. The market price of the Company's Common
Stock has in the past been highly volatile and is expected to continue to be
subject to significant price and volume fluctuations in the future based on a
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number of factors, including market uncertainty about the Company's financial
condition or business prospects; shortfalls in the revenues or results of
operations expected by securities analysts; announcements of new products by the
Company or its competitors; quarterly fluctuations in the Company's financial
results or in the results of other entertainment companies, including those of
direct competitors of the Company; changes in analysts' estimates of the
Company's financial performance, the financial performance of competitors, or
the financial performance of entertainment companies in general; the
introduction of new products or product enhancements by the Company or its
competitors; general conditions in the industry; changes in prices for the
Company's products or competitors' products; changes in revenue growth rates for
the Company, and its competitors in general; changes in the mix of revenues
attributable to domestic and international sales; and seasonal trends in
purchases and other general economic conditions.
In addition, the stock market may from time to time experience extreme
price and volume fluctuations, which particularly affect the market for the
securities of many entertainment companies and which have often been unrelated
to the operating performance of the specific companies. There can be no
assurance that the market price of the Company's Common Stock will not
experience significant fluctuations in the future. To date, the Company has
neither declared nor paid any cash dividends on shares of its Common Stock. The
Company presently intends to retain all profits for its business for operations
and it does not anticipate paying cash dividends on its Common Stock in the
foreseeable future.
EXECUTIVE COMPENSATION
The following table sets forth the cash and accrued compensation, and
warrants issued by the Company to each executive officer of the Company for the
year ended December 31, 1997 and the eight months ended August 31, 1998. No
compensation was accrued during the period May 17, 1996 (inception) through
December 31, 1996.
<TABLE>
<CAPTION>
OTHER LONG TERM TOTAL
NAME OF INDIVIDUAL PRINCIPAL POSITION YEAR SALARY COMPENSATION COMPENSATION COMPENSATION
- ------------------ ------------------ ---- ------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
John S. Arnone President, Chief Executive 1996 - 0 - - 0 - - 0 - - 0 -
Officer, Director 1997 $ 31,250 $3,359,493 - 0 - $3,390,743
1998 $125,000 $ 573,875(1) - 0 - $ 698,875
Wallace M. Giakas Chairman of the Board, 1996 - 0 - - 0 - - 0 - - 0 -
Secretary 1997 $ 31,250 $3,359,493 - 0 - $3,390,743
1998 $125,000 $ 573,875(1) - 0 - $ 698,875
Joseph Venneri Executive Vice President 1996 - 0 - - 0 - - 0 - - 0 -
Director 1997 $ 36,200 $3,359,493 - 0 - $3,395,693
1998 $125,000 - 0 - - 0 - $ 125,000
Richard Bluestine Executive Vice- 1996 - 0 - - 0 - - 0 - - 0 -
President, Chief Financial 1997 $ 18,750 $ 537,519 - 0 - $ 556,269
Officer, Chairman of 1998 $ 31,250 - 0 - (2) - 0 - $ 31,250
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>
- -----------------
(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
46
<PAGE>
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 here of. Because Mr. Bluestine has
indicated that he is not available on a full time basis, the Company
has not offered Mr. Bluestine an employment agreement. The Company may
seek to hire a new chief financial officer in the future it it believes
it needs a full-time individual in that capacity. The Company believes,
if necessary, that it could readily hire 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, Louis DelSignore and Ronald Nicks, none of the officers and directors
have received any cash compensation from the Company. As set forth above, the
amounts due to officers and directors have been accrued and expensed for the
year ended December 31, 1997 and the eight month period ended August 31, 1998.
On January 29, 1997, the Board of Directors approved the employment
agreements, effective January 1, 1997, for Wallace Giakas, Joseph Venneri, John
Arnone and Richard Bluestine. However, on March 24, 1998, the individual
officers and directors of the Company, agreed to waive, except with respect to
the accrued amounts shown above, all other amounts due or owing pursuant to
these employment agreements effective March 31, 1998. The Board did however
retain certain incentive based compensation for the Board of Directors of the
Company in the form of warrants which are convertible into 10 shares of
Company's Common Stock at the price of $2.00 per share over a term of ten years.
On August 14, 1998 the Company entered into an employment agreement
with Mr. Giakas. This agreement is for the term of ten years, and provides for
compensation in the amount of $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
47
<PAGE>
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
NEOS Acquisition Mr. Giakas has waived all incentive based compensation due
under the terms of his agreement only with regards to that acquisition 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 of $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 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 NEOS Acquisition, Mr. Arnone has
waived all incentive based compensation due under the terms of his agreement
only with regards to that acquisition 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 studio division of 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. Because Mr. Bluestine has indicated
that he is not available on a full time basis, the Company has not offered Mr.
Bluestine an employment agreement. The Company may seek to hire a new chief
financial officer in the future it it believes it needs a full-time individual
in that capacity. The Company believes, if necessary, that it could readily hire
a new chief financial officer. (See "RISK FACTORS; DEPENDENCE ON MANAGEMENT AND
KEY PERSONNEL").
48
<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 February 1, 1999, the Company and its subsidiaries, including
NEOS, had a total of approximately 150 employees, all of whom were full-time
employees. The Company has no collective bargaining agreement with its employees
and no union represents them. There have been no interruptions or curtailments
of operations due to labor disputes and the Company believes that relations with
its employees are good.
FINANCIAL STATEMENTS
Financial Statements: The financial statements filed herewith are set
forth in the Index to Financial Statements.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
AJ. Robbins, P.C. of Denver, Colorado was retained by the Company on
August 6, 1996, replacing Fung T. Yen, C.P.A, of San Gabriel California. The
Board of Directors retained AJ. Robbins, P.C. voluntarily and without any
disagreement with the Company's prior accountant.
49
<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 Statement of Operations F-3
Notes to Unaudited Proforma Consolidated Financial Statements F-4
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
Report of Independent Certified Public Accountants F-6
Financial Statements:
Consolidated Balance Sheets F-7
Consolidated Statements of Operations F-9
Consolidated Statement of Stockholders' Equity F-10
Consolidated Statements of Cash Flows F-12
Notes to Consolidated Financial Statements F-13
NORTHEAST ONE STOP, INC.
Report of Independent Certified Public Accountants F-41
Financial Statements:
Balance Sheets F-42
Statements of Operations F-43
Statement of Stockholder's Equity (Deficiency) F-44
Statements of Cash Flows F-45
Notes to Financial Statements F-46
<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 statement of operations for the year ended August 31,
1998 assumes the acquisition was consummated at August 31, 1998 and includes the
operating results of the Company and NEOS for the year then ended.
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 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
----------------- --------------- ----------- -------------
REVENUES:
<S> <C> <C> <C> <C>
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
party 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) BENEFIT
FOR INCOME TAXES (871,589) 751,040 (72,423) (192,972)
(PROVISION) BENEFIT 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
COMMON SHARES OUTSTANDING 11,436,595
=============
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED PROFORMA CONSOLIDATED FINANCIAL
STATEMENTS AND EXPLANATORY HEADNOTE
F-3
<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 periods presented.
NOTE 2 - ADDITIONAL AMORTIZATION
The unaudited proforma consolidated statement of operations reflect amortization
of goodwill using the straight-line method over 40 years.
NOTE 3 - 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 options to
purchase a total of 500,000 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, pursuant to the
their employment agreements (see Planet Entertainment Corporation and
Subsidiaries Financial Statement Note 15). The options were valued pursuant to
SFAS 123 (see Planet Entertainment Corporation and Subsidiaries Financial
Statement Note 19). In estimating the above acquisition cost, the Company used
the Modified Black-Scholes European Pricing Model. The average risk-free
interest rate used was 5.09%, volatility was estimated at 131% and the expected
life was less than 5 years. Goodwill is being amortized over a 40 year period.
NOTE 4 - 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-4
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PROFORMA CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - PLANET ENTERTAINMENT CORPORATION - CHANGE IN YEAR END (CONTINUED)
SEPTEMBER 1, JANUARY 1,
TO TO
DECEMBER 31, AUGUST 31,
1997 1998 PROFORMA
----------- ----------- -----------
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)
=========== =========== ===========
NOTE 5 - 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-5
<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 for the year ended December 31, 1997. 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 and for the year ended December 31, 1997
in conformity with generally accepted accounting principles.
AJ. ROBBINS, PC
CERTIFIED PUBLIC ACCOUNTANTS
AND CONSULTANTS
DENVER, COLORADO
OCTOBER 30, 1998
EXCEPT FOR THE SECOND PARAGRAPH
OF NOTE 12 WHICH IS DATED DECEMBER 15, 1998
F-6
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31, FEBRUARY 28,
1997 1998 1999
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,670 $ 3,850,162 $ 1,162,920
Accounts receivable, net 21,026 17,959 5,517,598
Accounts receivable, net - related party 183,684 192,042 254,687
Prepaid expenses and other current assets 119,073 246,863 421,502
Inventory -- -- 7,703,619
Escrow deposit -- 225,000 125,000
Current maturities of note receivable -- -- 6,931
Deferred income taxes -- -- 56,000
----------- ----------- -----------
Total Current Assets 327,453 4,532,026 15,248,257
----------- ----------- -----------
PROPERTY AND EQUIPMENT, at cost, net 189,085 172,410 1,097,526
----------- ----------- -----------
OTHER ASSETS:
Record masters 6,500,000 6,500,000 6,500,000
Goodwill, net 77,917 70,839 2,995,928
Publishing rights, net 880 880 880
Organization costs, net 52,500 42,495 35,000
Note receivable less current maturities -- -- 29,365
Financing costs, net -- -- 1,176
Security deposits -- -- 2,766
----------- ----------- -----------
Total Other Assets 6,631,297 6,614,214 9,565,115
----------- ----------- -----------
$ 7,147,835 $11,318,650 $25,910,898
=========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-7
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31, FEBRUARY 28,
1997 1998 1999
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 106,693 $ 187,641 $ 6,163,560
Accrued interest expense, related parties 177,484 275,618 323,568
Deferred revenue 146,225 123,524 449,165
Due to stockholders 263,800 270,884 230,884
Note payable, related party -- 150,000 150,000
Current portion, of long-term debt, related
parties 500,000 250,000 1,000,000
Accrued officer's salary 112,000 141,467 339,383
Due to customer -- -- 563,762
Capital lease obligations, current portions -- -- 132,704
Notes payable, current portion -- -- 36,227
Note payable - former stockholder of NEOS -- -- 344,000
------------ ------------ ------------
Total Current Liabilities 1,306,202 1,399,134 9,733,253
------------ ------------ ------------
LONG-TERM LIABILITIES:
Capital lease obligations, non-current portion -- -- 29,517
Note payable - line of credit -- -- 5,857,054
Notes payable - non-current portion -- -- 65,613
Long-term debt, less current portion, related
parties 750,000 750,000 500,000
Deferred income taxes -- -- 30,600
------------ ------------ ------------
Total long-term liabilities 750,000 750,000 6,482,784
------------ ------------ ------------
Total Liabilities 2,056,202 2,149,134 16,216,037
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES
(NOTES 2, 14 AND 15)
STOCKHOLDERS' EQUITY:
Convertible preferred stock, 10,000,000 shares
authorized, $.0001 par value -0-, 500 and 500
shares issued and outstanding -- 5,000,000 5,000,000
Common stock, $.001 par value; 50,000,000
shares authorized;11,421,966, 11,976,055 and
11,976,055 shares issued and outstanding 11,422 11,976 11,976
Additional paid-in capital 5,942,570 9,286,053 9,605,805
Accumulated deficit (862,359) (5,128,513) (4,922,920)
------------ ------------ ------------
Total Stockholders' Equity 5,091,633 9,169,516 9,694,861
------------ ------------ ------------
$ 7,147,835 $ 11,318,650 $ 25,910,898
============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-8
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE EIGHT FOR THE SIX FOR THE SIX
ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED
DECEMBER 31, AUGUST 31, FEBRUARY 28, FEBRUARY 28,
1997 1998 1998 1999
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Royalty $ 3,775 $ 23,042 $ 4,738 $ 2,452
Sales 49,883 51,002 66,119 26,374,704
Studio 239,770 35,451 211,077 10,704
------------ ------------ ------------ ------------
Total Revenues 293,428 109,495 281,934 26,387,860
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Cost of sales 19,052 11,139 42,160 21,775,346
Selling, general and administrative 794,314 659,348 406,159 3,991,705
Depreciation and amortization 40,592 33,758 24,237 200,245
Interest expense -- -- -- 194,191
Interest expense, related party 144,382 98,135 81,105 56,060
Bad debt expense 105,000 -- -- 217
------------ ------------ ------------ ------------
Total Costs and Expenses 1,103,340 802,380 553,661 26,217,764
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS (809,912) (692,885) (271,727) 170,096
OTHER INCOME:
Interest and dividend income -- 47,421 -- 35,497
------------ ------------ ------------ ------------
NET INCOME (LOSS) BEFORE (PROVISION)
BENEFIT FOR INCOME TAXES (809,912) (645,464) (271,727) 205,593
(PROVISION) BENEFIT FOR INCOME TAXES -- -- -- --
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (809,912) $ (645,464) $ (271,727) $ 205,593
============ ============ ============ ============
NET INCOME (LOSS) $ (809,912) $ (645,464) $ (271,727) $ 205,593
LESS PREFERRED STOCK DIVIDEND -- (87,500) -- (175,000)
LESS PREFERRED STOCK DIVIDEND RETURN
OF CAPITAL -- (3,620,690) -- --
------------ ------------ ------------ ------------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON $ (809,912) $ (4,353,654) $ (271,727) $ 30,593
STOCKHOLDERS
============ ============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE BASIC
BASIC $ (.08) $ (.37) $ (.02) $ *
============ ============ ============ ============
BASIC WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 10,211,250 11,827,308 10,995,630 11,976,055
============ ============ ============ ============
NET INCOME PER COMMON SHARE DILUTED $ *
============
DILUTED WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 13,910,952
============
</TABLE>
*LESS THEN $(.01) PER SHARE
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMEMTS
F-9
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK ADDITIONAL
--------------------- --------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------- -------- ------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, DECEMBER 31, 1996 9,826,055 $ 9,826 -- $ -- $ 5,296,199 $ (52,447) $5,253,578
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
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 -- -- 5,942,570 (862,359) 5,091,633
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 1,379,310 3,620,690 -- 5,000,000
Preferred stock dividend,
return of capital -- -- -- 3,620,690 -- (3,620,690) --
Net loss for the period -- -- -- -- -- (645,464) (645,464)
---------- -------- ------- ----------- ----------- ----------- ----------
BALANCES, AUGUST 31, 1998 11,976,055 11,976 500 5,000,000 9,286,053 (5,128,513) 9,169,516
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-10
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK ADDITIONAL
------------------------ ------------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------- ----------- ----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Options Granted to the
former owner of NEOS -- -- -- -- (814,000) -- (814,000)
Options granted for the
acquisition of NEOS -- -- -- -- 1,147,750 -- 1,147,750
Excess cash received from
sale of common stock in
litigation settlement -- -- -- -- 17,627 -- 17,627
Offering costs from the
sale of convertible
preferred stock -- -- -- -- (31,625) -- (31,625)
Net income for the period -- -- -- -- -- 205,593 205,593
(unaudited) ---------- ----------- ----------- ----------- ----------- ------------ -----------
BALANCES, FEBRUARY 28, 1999 11,976,055 $ 11,976 500 $ 5,000,000 $ 9,605,805 $(4,922,920) $ 9,694,861
========== =========== =========== =========== =========== ============ ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-11
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE EIGHT FOR THE SIX FOR THE SIX
ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED
DECEMBER 31, AUGUST 31, FEBRUARY 28, FEBRUARY 28,
1997 1998 1998 1999
----------- ------------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM (TO) OPERATING ACTIVITIES:
Net income (loss) $ (809,912) $ (645,464) $ (271,727) $ 205,593
Adjustments to reconcile net loss to net cash
used by operations:
Bad debt expense 105,000 -- -- 217
Depreciation and amortization 40,592 33,758 24,237 196,716
Stock issued for services 239,967 248,347 501,315 --
Changes in:
Due to customer -- -- -- 88,195
Accounts receivable (21,026) 3,067 (33,294) 51,105
Accounts receivable, related party (183,684) (8,358) (180,615) 33,198
Prepaid expenses and other current assets (89,264) (127,790) (156,074) (139,411)
Inventory -- -- (4,895) (855,052)
Accounts payable and accrued expenses 19,927 80,948 (21,216) (1,965,314)
Accrued interest expense, related party 144,384 98,134 69,354 47,950
Deferred revenue 146,225 (22,701) (4,397) 86,265
Accrued officers' salary 112,000 29,467 27,083 197,916
----------- ----------- ----------- -----------
Cash Flows From (To) Operating Activities (295,791) (310,592) (50,229) (2,052,622)
----------- ----------- ----------- -----------
CASH FLOWS FROM (TO) INVESTING ACTIVITIES:
Purchase of NEOS -- -- -- (2,150,000)
Cash acquired in the purchase of NEOS -- -- -- 522,584
Purchase of equipment (10,094) -- (10,094) (288,626)
Escrow deposit -- (225,000) -- --
Repayments on note receivable -- -- -- 4,928
Deposit on leased equipment -- -- -- 5,405
----------- ----------- ----------- -----------
Cash Flows From (To) Investing Activities (10,094) (225,000) (10,094) (1,905,709)
----------- ----------- ----------- -----------
CASH FLOWS FROM (TO) FINANCING ACTIVITIES:
Repayment of advances from employees -- -- -- (75,000)
Repayment of advances from stockholders -- -- -- (70,000)
Advances from stockholders 118,557 7,084 126,649 --
Proceeds from note payable -- -- 50,000 82,030
Proceeds from note payable, related party 100,000 150,000 150,000 --
Proceeds from issuance of common stock 84,000 -- -- 17,627
Proceeds from issuance of preferred stock -- 5,000,000 -- --
Repayment of note payable - line of credit -- -- -- 1,686,658
Repayment of note payable -- -- -- (8,941)
Preferred stock issuance costs -- (525,000) -- (31,625)
Repayment of long-term debt, related party -- (250,000) (250,000) (250,000)
Repayment of capitalized lease obligations -- -- -- (79,660)
----------- ----------- ----------- -----------
Cash Flows From (To) Financing Activities 302,557 4,382,084 76,649 1,271,089
----------- ----------- ----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS (3,328) 3,846,492 16,326 (2,687,242)
CASH AND CASH EQUIVALENTS, beginning of period 6,998 3,670 6,216 3,850,162
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS,
end of period $ 3,670 $ 3,850,162 $ 22,542 $ 1,162,920
=========== =========== =========== ===========
CASH PAID FOR INTEREST EXPENSE $ -- $ -- $ -- $ 194,015
=========== =========== =========== ===========
CASH PAID FOR INCOME TAXES $ -- $ -- $ -- $ 259,609
=========== =========== =========== ===========
</TABLE>
See Note 20
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-12
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED FEBRUARY 28, 1999 AND 1998 IS UNAUDITED
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. 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 July 1996 the Company issued 3,060,000 shares of common stock to acquire
5,000 master recordings, publishing rights to 300 songs and a recording studio
located in New Jersey from a related party. The master recordings acquired have
not been recorded in the financial statements since predecessor costs could not
be determined.
In December 1995 a third party company, Music Marketeers agreed to acquire 7,500
music master recordings from a group of companies (Gulf Coast) in a Chapter 11
bankruptcy proceeding for future consideration. This transaction was subject to
confirmation of a plan of reorganization.
In September 1996 Planet agreed to acquire the 7,500 master recordings from
Music Marketeers for 694,000 shares of its common stock and notes totaling
$1,250,000.
Also in September 1996, another Company (J. Jake) controlled by the same
individual as Music Marketeers sold another 2,500 master recordings to Planet
for 806,000 shares of Planet common stock.
In November 1996, both the Music Marketeers and J. Jake agreements were amended.
The new agreement included a combined sale of 10,000 master recordings for
1,500,000 shares of Planet common stock and a note payable for $1,250,000. 7,500
of these master recordings were still subject to approval of sale by the
bankruptcy court.
In November of 1997, the bankruptcy court approved the plan or reorganization so
that the sale of the final 7,500 recordings was approved.
The Company recorded the purchase of the 2,500 master recordings in 1996 for
$2,821,000 or $3.50 per share for the 806,000 shares transferred based upon the
trading price of the common stock issued. Also, in 1996 the Company recorded the
purchase of the 7,500 master recordings for $3,679,000, representing the
$1,250,000 notes and 694,000 shares of Planet common stock valued at $3.50 per
share, the current trading price.
F-13
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED FEBRUARY 28, 1999 AND 1998 IS UNAUDITED
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
On September 1, 1998 the Company acquired all of the assets and the business of
Northeast One Stop, Inc. (NEOS) (See Note 23). Upon acquisition of NEOS, the
Company derives substantially all of its revenues' from the wholesale
distribution of music products and accessories.
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, Al Alberts On Stage, Ltd. and Northeast One Stop, Inc. All
significant intercompany accounts and transactions have been eliminated.
FISCAL YEAR END
The NEOS subsidiary fiscal year ends on the Saturday closest to August 31, which
results in a 52 or 53 week year.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and revenues and expenses during the reporting period.
Actual results could differ from those estimates and assumptions. 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 $18,509
and $16,675, respectively, for the periods ended December 31, 1997 and August
31, 1998 and $12,487 and $147,886, respectively, for the periods ended February
28, 1998 and 1999.
F-14
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED FEBRUARY 28, 1999 AND 1998 IS UNAUDITED
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 recordings are recognized when the
compact disk, cassette or record is shipped. An allowance is recorded, when
material, for sales returns from customers that are not in turn returnable to
the Company's distributors. No right of return exists for Higher Ground record
sales. Deferred revenue represents advances received in connection with
production and distribution agreements, and deferred advertising revenues for
advances received from NEOS's suppliers.
RESERVE FOR POTENTIAL DISPUTES CONCERNING RECORD MASTERS
Upon attaining $100,000 in sales from the exploitation of record masters, a
reserve will be placed in escrow equal to 5% of the net sales from all such
exploitation. The level of reserve will be subject to periodic review by
management of the Company.
PUBLISHING RIGHTS
Publishing rights consist of rights to 300 songs, stated at predecessor cost.
Amortization of publishing rights is computed based on the ratio that current
years' revenues will bear to anticipated total gross revenues over the estimated
life of the publishing right (generally 5-10 years). No amortization has been
recorded for the periods ended December 31, 1997, August 31, 1998 and February
28, 1998 and 1999.
RECORD MASTERS
Record masters consist of record titles acquired, and have been assigned a
purchased cost.
Amortization of record masters will be computed based on the ratio that current
years' revenues will bear to anticipated total gross revenues over the estimated
life of the record master (generally 5-10 years). No amortization has been
recorded for the periods ended December 31, 1997, August 31, 1998 and February
28, 1998 and 1999.
F-15
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED FEBRUARY 28, 1999 AND 1998 IS UNAUDITED
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INVENTORY
Inventory is valued at the lower of cost (first in, first out basis) or market.
Management continually evaluates the carrying value of the inventory and has not
experienced a decline in the value of the inventory. NEOS has a full right of
return for most products it distributes and as such, titles which experience a
decline in popularity are generally returned to distributors and removed from
the vendor catalogs. NEOS's business requires that they maintain one or two
copies of less popular titles so that they can function as a one-stop
distributor for its customers. The carrying values of these copies are reduced
accordingly.
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.
Factors considered in determining the recoverability of the record masters
relative to impairment include existing signed contracts for exploitation of the
record masters, numerous existing distribution channels, industry popularity
trends, potential rights disputes by others and potential conflict concerning
record masters for which non-exclusive exploitation rights have been granted.
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, 1997,
August 31, 1998 and February 28, 1998 and 1999 was $15,000, $10,000, $7,500 and
$7,500, respectively.
GOODWILL
The Company amortizes costs in excess of the fair value of net assets of
businesses acquired goodwill using the straight-line method over the estimated
recovery periods. Recoverability is reviewed annually (or sooner), if events or
circumstances indicate that the carrying amount may exceed fair value.
Recoverability is determined by comparing the undiscounted net cash flows of the
assets, to which goodwill applies, to the net book value including goodwill of
those assets. The analysis involves significant management judgment to evaluate
the capacity of an acquired business to perform within projections.
Recoverability for Al Albert's On Stage, Ltd. is estimated to be 10 years and
recoverability for NEOS is estimated to be 40 years. Amortization expense for
the periods ended December 31, 1997, August 31, 1998 and February 28, 1998 and
1999 was $7,083, $7,083, $4,250 and $41,335, respectively.
F-16
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED FEBRUARY 28, 1999 AND 1998 IS UNAUDITED
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 have been established to reduce deferred tax assets
to the amount expected to be realized. Income tax expense is the tax payable for
the current period and the change during the period in deferred tax assets and
liabilities.
The deferred tax assets and liabilities have been netted to reflect the tax
impact of temporary differences.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of accounts receivable, accounts payable, accrued expenses
and due to stockholders approximate fair value because of the short maturity of
these items. The fair value of notes payable and long-term debt was based upon
current borrowing rates available for financings with similar terms and
maturities.
EARNINGS PER COMMON SHARE
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS
No. 128) was issued in February 1997 (effective for financial statements issued
for periods ending after December 15, 1997). This Statement simplifies the
standards for computing earnings per share (EPS) previously found in Accounting
Principles Board Opinion No. 15, "Earnings Per Share", and makes them more
comparable to international EPS standards. SFAS No. 128 replaces the
presentation of primary EPS with a presentation of basic EPS. In addition, the
Statement requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation. Diluted per share
amounts are not presented as such affect is anti-dilutive in periods of net
loss.
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.
F-17
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED FEBRUARY 28, 1999 AND 1998 IS UNAUDITED
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
YEAR 2000 ISSUES
Many existing computer programs use only two digits to identify a year in the
date field, with the result that data referring to year 2000 and subsequent
years may be misinterpreted by these programs. If present in the computer
applications of the Company, or its suppliers and customers, and not corrected,
this problem could cause computer applications to fail or to create erroneous
results. This could cause a disruption in operations and have a short-term
adverse effect on the Company's business and results of operations.
Using internal staff and outside consultants, the Company is actively addressing
this situation and anticipates that it will not experience a material adverse
impact to its operations, liquidity or financial condition related to systems
under its control.
Specifically, the Company is in the process of converting its mainframe
inventory and financial accounting computers software to Nxtrend's "Trend"
system software package. The Company expects to have this conversion completed
by the summer of 1999. In addition, the majority of the computer hardware is
currently being replaced and a new LAN network has been installed and is
currently being tested. This should be completed by April 1999. Also, the
Company is taking the necessary steps to provide itself with reasonable
assurance that its service providers, suppliers, customers and financial
institutions are Year 2000 compliant. This process is approximately 50%
complete.
The total cost to achieve Year 2000 compliance is estimated at $550,000. The
majority of this amount has already been expended, primarily in the second
fiscal quarter of 1999.
The Company is developing contingency plans to identify and mitigate potential
problems and disruptions to the Company's operations arising from the Year 2000
issue. This process is expected to be completed by August 1999.
While the Company believes that its own internal assessment and planning efforts
with respect to its external service providers, suppliers, customers and
financial institutions are and will be adequate to address its Year 2000
concerns, there can be no assurance that these efforts will be successful or
will not have a material adverse effect on the Company's operations.
F-18
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED FEBRUARY 28, 1999 AND 1998 IS UNAUDITED
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
UNAUDITED INTERIM FINANCIAL STATEMENTS
In the opinion of management, the unaudited interim financial statements for the
six month periods ending February 28, 1998 and 1999 are presented on a basis
consistent with the audited annual financial statements and reflect all
adjustments, consisting only of normal recurring accruals, necessary for fair
presentation of the results of such periods. The results of operations for the
interim period November 30, 1998 reflect the acquisition of NEOS effective
September 1, 1998 and are not necessarily indicative of the results to be
expected for the year ended August 31, 1999.
NOTE 2 - 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-19
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED FEBRUARY 28, 1999 AND 1998 IS UNAUDITED
NOTE 2 - 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 January, 1999, the Company has
contributed 31 compilations of its master recordings to the joint venture, and
distribution is expected to begin in March, 1999. To date, however, the Company
has received no royalties, and has recorded no revenue or income as a result of
this agreement.
SHANDEL MUSIC
In February 1999, the Company entered into an agreement with Shandel Music to
form a limited liability company in South Africa under the label Planet Africa
to distribute the Company's products throughout the Africa, Australia, New
Zealand and Israel ("the territory"). According to the agreement, all catalogue
sales, after costs, will be divided equally. The Company has granted exclusive
rights to distribute the releases in the territory to Planet Africa. To date,
the Company has received no royalties and has recognized no revenue or income in
connection with this agreement.
F-20
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED FEBRUARY 28, 1999 AND 1998 IS UNAUDITED
NOTE 3 - ACCOUNTS RECEIVABLE
Accounts receivable consists of the following:
DECEMBER 31, AUGUST 31, FEBRUARY 28,
1997 1998 1999
----------- ----------- -----------
(UNAUDITED)
Gross $ 126,026 $ 122,959 $ 5,700,086
Less allowance for doubtful accounts (105,000) (105,000) (182,488)
----------- ----------- -----------
$ 21,026 $ 17,959 $ 5,517,598
=========== =========== ===========
NOTE 4 - ACCOUNTS RECEIVABLE, RELATED PARTY
Accounts receivable, related party primarily represents amounts due from a
company acquired by the former stockholder of NEOS during the year ended August
29, 1998. Related party sales for the six months ended February 28, 1999 were
$72,173. (See Note 17 for additional related party disclosures).
NOTE 5 - NOTES RECEIVABLE
Notes receivable consist of the following:
FEBRUARY 28,
1999
----------
(UNAUDITED)
Installment note receivable due from an unrelated party.
Monthly payments of $850 including interest at 8% per
annum through February 1999. $ 1,398
Installment note receivable due from an unrelated party.
Monthly payments of $500 including interest at 10% per
annum through November 2006. 34,898
----------
Less current portion 6,931
----------
$ 29,365
==========
F-21
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED FEBRUARY 28, 1999 AND 1998 IS UNAUDITED
NOTE 6 - EQUIPMENT
Equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31, FEBRUARY 28
1997 1998 1999
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Recording studio equipment $ 200,000 $ 200,000 $ 200,000
Computer equipment and other 10,094 10,094 838,028
Leasehold improvements -- -- 29,778
Equipment -- -- 1,150,389
Furniture and fixtures -- -- 179,659
Rack jobbing fixtures -- -- 468,826
Vehicles -- -- 142,097
Less accumulated depreciation and amortization (21,009) (37,684) (1,911,251)
----------- ----------- -----------
$ 189,085 $ 172,410 $ 1,097,526
=========== =========== ===========
</TABLE>
NOTE 7 - 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 acquired have not been recorded in the financial
statements since predecessor costs could not be determined.
B) The Company issued 1,500,000 shares of common stock based
upon the trading price of $3.50 or $5,250,000 and assumed
promissory notes for $1,250,000 to acquire 10,000 masters
from an unrelated third party.
The Company has exclusive and non-exclusive right to manufacture, distribute,
advertise, sell, and promote in all configurations, the performances contained
on the masters.
F-22
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED FEBRUARY 28, 1999 AND 1998 IS UNAUDITED
NOTE 8 - 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 recognizes royalty
revenue of $1 per sale of each compact disc licensed to NCC.
The Company received a $150,000 advance under the agreement which was recorded
as deferred revenue. For the periods ended December 31, 1997, August 31, 1998
and February 28, 1998 and 1999, $3,775, $22,701,$4,738 and $2,452, respectively,
were earned under the agreement.
NOTE 9 - NOTES PAYABLE AND LINE OF CREDIT
NEOS 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 guaranteed by Planet. 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 certain working capital and
adjusted net worth amounts. At February 28, 1999 the balance owed is $5,857,054.
The Company has four notes payable with banks. The notes bear interest from
7.25% to 17%, are due April 1999 to November 2003, and are collateralized by
equipment.
FEBRUARY 28,
1999
----------
(UNAUDITED)
Total notes $ 101,840
Current portion 36,227
----------
Non-current portion $ 65,613
==========
The Company amortizes costs incurred in connection with obtaining financing over
the term of the credit agreement. Amortization expense for the six months ended
February 28, 1999 was $3,529.
F-23
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED FEBRUARY 28, 1999 AND 1998 IS UNAUDITED
NOTE 10 - 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.
Minimum future lease payments under the capital leases as of February 28, 1999
are as follows:
<TABLE>
<CAPTION>
<S> <C>
Fiscal year ending August 1999 $ 104,232
Fiscal year ending August 2000 62,203
Fiscal year ending August 2001 9,117
---------
175,552
Total minimum lease payments
Less amount representing interest (13,331)
---------
Present value of net minimum lease payments with interest at approximately 11%- 26% 162,221
Less current portion 132,704
---------
$ 29,517
=========
</TABLE>
The non-current portion of capitalized lease obligations are due during fiscal
years ending August 2000 and 2001. As of February 28, 1999, machinery and
equipment includes $456,543 acquired through capital leases. Accumulated
depreciation related to these assets was $119,115.
NOTE 11 - 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-24
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED FEBRUARY 28, 1999 AND 1998 IS UNAUDITED
NOTE 12 - LONG-TERM DEBT, RELATED PARTIES
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31, NOVEMBER 30
1997 1998 1998
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
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 $ 750,000
Notes payable to former stockholder of
NEOS. Payments of $375,000 due in
February 28, 1999 and August 31,
1999, unsecured. -- -- 750,000
Note payable to former stockholder of
NEOS, due April 21, 1999; interest at
9%, unsecured -- -- 344,000
------------ ------------ ------------
Total 1,250,000 1,000,000 1,844,000
Less current portion (500,000) (250,000) (1,344,000)
------------ ------------ ------------
$ 750,000 $ 750,000 $ 500,000
============ ============ ============
</TABLE>
Prior to December 1998, the Company had not made all of the required payments
due under the terms of the note since Gulf Coast Music, LLC had not completed
its obligation to deliver unencumbered title to certain of the master
recordings. In December 1998, all disputes have been resolved, and the Company
has obtained unencumbered title to the master recordings.
F-25
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED FEBRUARY 28, 1999 AND 1998 IS UNAUDITED
NOTE 12 - LONG-TERM DEBT, RELATED PARTIES (CONTINUED)
Estimated maturities on long-term debt are as follows for the years ending
August 31,:
2001 $ 250,000
2002 250,000
-----------
$ 500,000
===========
Interest expense for the periods ended December 31, 1997 and August 31, 1998 was
$144,382 and $98,135, respectively, and $81,105 and $56,060 for the six months
ended February 28, 1998 and 1999, respectively.
NOTE 13 - INCOME TAXES
The composition of deferred tax assets and (liabilities) are as follows:
DECEMBER 31, AUGUST 31, NOVEMBER 30,
1997 1998 1998
--------- --------- ---------
(UNAUDITED)
Total deferred tax assets $ 300,000 $ 460,000 $ 587,000
Total valuation allowance (300,000) (460,000) (531,000)
--------- --------- ---------
Net total deferred tax assets -- -- 56,000
Total deferred tax liabilities -- -- (30,600)
--------- --------- ---------
Net deferred tax assets $ -- $ -- $ 25,400
========= ========= =========
F-26
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED FEBRUARY 28, 1999 AND 1998 IS UNAUDITED
NOTE 13 - INCOME TAXES (CONTINUED)
The tax effects of temporary differences and carryforwards that give rise to
deferred tax assets and liabilities are as follows:
DECEMBER 31, AUGUST 31, NOVEMBER 30,
1997 1998 1998
--------- --------- ---------
(UNAUDITED)
Deferred tax assets:
Accrued interest $ 50,000 $ 36,000 $ 120,000
Accrued officers' salary -- -- 126,000
Inventory capitalization -- -- 27,000
Allowance for doubtful accounts -- -- 29,000
Other 28,000 11,000 --
Net operating loss carryforwards 222,000 413,000 285,000
--------- --------- ---------
Gross deferred tax assets 300,000 460,000 587,000
Valuation allowance (300,000) (460,000) (531,000)
--------- --------- ---------
Total deferred tax assets -- -- 56,000
Deferred tax liability:
Property and equipment -- -- (30,600)
--------- --------- ---------
Net deferred tax asset (liability) $ -- $ -- $ 25,400
========= ========= =========
No provision for income taxes has been recorded for the period ended December
31, 1997 and for the periods ended February 28, 1998 and August, 1998 as the
Company has incurred losses during these periods. The Company has net operating
loss carryovers of approximately $1,500,000 which expire during 2011 through
2013. The Company is providing a valuation allowance in connection with deferred
tax assets at the parent company level, as there is no assurance of future
taxable income.
F-27
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED FEBRUARY 28, 1999 AND 1998 IS UNAUDITED
NOTE 13 - INCOME TAXES (CONTINUED)
The provision (benefit) for income taxes consist of the following:
FOR THE YEAR FOR THE EIGHT FOR THE SIX FOR THE SIX
ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED
DECEMBER 31, AUGUST 31, FEBRUARY 28, FEBRUARY 28,
1997 1998 1998 1999
------------ ------------ ------------ ---------
(UNAUDITED) (UNAUDITED)
CURRENT:
Federal $ -- $ -- $ -- $ 162,782
State -- -- -- 14,363
------------ ------------ ------------ ---------
Total Current
Provision -- -- -- 177,145
------------ ------------ ------------ ---------
DEFERRED:
Federal $ -- $ -- $ -- $(162,782)
State -- -- -- (14,363)
------------ ------------ ------------ ---------
Total Deferred -- -- -- (177,145)
------------ ------------ ------------ ---------
Income Taxes
(Benefit)
------------ ------------ ------------ ---------
Total Provision
(Benefit) for -- -- -- --
Income Taxes ============ ============ ============ =========
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:
FOR THE YEAR FOR THE EIGHT FOR THE SIX FOR THE SIX
ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED
DECEMBER 31, AUGUST 31, FEBRUARY 28, FEBRUARY 28,
1997 1998 1998 1999
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
Expected tax provision $ -- $ -- $ -- $ 162,782
(benefit) at federal
statutory rates
(Benefit) of net -- -- -- (162,782)
------------ ------------ ------------ ------------
operating loss
carryforward
-- -- -- --
$ -- $ -- $ -- $ --
============ ============ ============ ============
F-28
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED FEBRUARY 28, 1999 AND 1998 IS UNAUDITED
NOTE 14 - CONCENTRATION OF CREDIT RISK
Individual customers aggregating in excess of 10% of net sales for the six
months ended February 28, 1999 (unaudited) is as follows:
Customer A $ 9,682,309
The amounts due from this customer were 1,613,072
As of January 15, 1999, the Company no longer has sales to this customer. The
Company anticipates that substantially all of the accounts receivable balance
due from this customer will be fully collected and that returned product sold to
this customer in connection with the receivable balance, will not be material.
There were no individual customers aggregating in excess of 10% of net sales for
any other periods presented.
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.
NOTE 15 - COMMITMENTS AND CONTINGENCIES
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, 1997, August 31, 1998, and February 28, 1998 and
1999.
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.
F-29
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED FEBRUARY 28, 1999 AND 1998 IS UNAUDITED
NOTE 15 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
In conjunction with the acquisition of NEOS, the Company secured the continued
employment of former sole stockholder of NEOS for a one-year period, which
provides for annual compensation of $145,000.
The Company has secured an employment and executive compensation agreement with
an employee of NEOS for a term of three years at an annual rate of $125,000. The
agreement includes an incentive bonus based on the Company's profitability.
There also are options to purchase 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 the agreement date (September 21, 1998) and
the remaining 75,000 options vesting in equal annual installments of 25,000 on
each subsequent anniversary date of this agreement.
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 leases land and a building which house a recording studio under an
agreement with the former shareholders of Al Alberts On Stage, Ltd. (Note 21).
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 and $4,466 and $4,500 for the periods ended February 28, 1998
and 1999.
NEOS leases its Latham office and warehouse from a company owned by the former
stockholder. Additionally, the Company rents office space in Pennsylvania and
Michigan.
Effective September 1, 1998, in connection with the acquisition of NEOS (Note
23), NEOS entered into a new lease with a company controlled by the former
stockholder.
F-30
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED FEBRUARY 28, 1999 AND 1998 IS UNAUDITED
NOTE 15 - 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:
RELATED
PARTY OTHER TOTAL
------------ ------------ ------------
Fiscal year ending August 1999 $ 72,000 $ 4,911 $ 76,911
Fiscal year ending August 2000 177,000 1,800 178,800
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
Fiscal year ending August 2004 15,000 -- 15,000
------------ ------------ ------------
$ 804,000 $ 6,711 $ 810,711
============ ============ ============
NEOS rent expense for the periods ending February 28, 1998 and 1999 were $84,393
and $86,711, respectively.
LITIGATION
There are currently no threatened or pending legal proceedings against the
Company. 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 assurances 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. 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.
In connection with the settlement of a disputed agreement with a former
consultant, the Company cancelled the agreement, and agreed to deliver $45,000
of the proceeds of the sale of 100,000 shares of the Company's common stock
which was returned to the Company by the consultant. The excess of the proceeds
from the sale of the stock ($17,627) has been credited to additional paid in
capital during the interim period.
F-31
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED FEBRUARY 28, 1999 AND 1998 IS UNAUDITED
NOTE 16 - 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 17 - 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 stockholders are also stockholders 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,
1997, August 31, 1998 and February 28, 1998 and 1999 was $175,298, $3,069,
$173,000 and $-0-, respectively.
F-32
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED FEBRUARY 28, 1999 AND 1998 IS UNAUDITED
NOTE 18 - 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 58% of the prior 10 days trading price of the
common stock at the issue date. 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 and February 28, 1999 were $87,500 and $175,000,
respectively. The Company has agreed to indemnify the fund against any losses,
claims, damages or liabilities that may arise. During August 1998, the Company
recorded a dividend as a return of capital to the preferred stockholders for the
42% beneficial discount given with respect to the conversion price, in
accordance with Emerging Issues Task Force Topic No. D-60, which indicates that
"a discount resulting from an allocation of proceeds to the beneficial
conversion feature is analogous to a dividend and should be recognized as a
return to the preferred shareholders over the minimum period in which the
preferred shareholders can realize the return." As the stock is convertible upon
issuance, the dividend has been reflected accordingly.
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 19 - 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 (effectively $2 per share). 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, August 31, 1998 and February 28, 1998, their effect on
the weighted average number of shares outstanding is anti-dilutive and no
warrants have been exercised. The dilutive effect of the option has been
included in the February 28, 1999 diluted earnings per share calculation.
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.
F-33
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED FEBRUARY 28, 1999 AND 1998 IS UNAUDITED
NOTE 19 - STOCK-BASED COMPENSATION (CONTINUED)
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.
In September 1998, the Company granted options to an employee to purchase
150,000 shares of the Company's common stock. Each option is exercisable at
$5.25 per share. The options were issued at the fair market value of the stock
at the date of grant. 75,000 options are exercisable immediately for a period of
3 years. The remaining options vest at a rate of 25,000 shares per year and are
exercisable for 3 years from the date of grant. As of February 28, 1999 no
options have been exercised.
Had the Company adopted the fair value method with respect to options issued to
employees, an additional charge to income of $313,000 would have been required
during the six months ended February 28, 1998; proforma net income would have
been $68,583 and net income, both on the basic and diluted basis would have been
less than $.01 per share.
In estimating the above expense, the Company used the Modified Black-Scholes
European Pricing Model. The average risk-free interest rate used was 5.38%,
volatility was estimated at 141%; expected life was less than three years.
NOTE 20 - SUPPLEMENTAL INFORMATION TO STATEMENT OF CASH FLOWS FOR
NONCASH INVESTING AND FINANCING ACTIVITIES
For the period ended February 28, 1998:
Issued 18,000 shares of common stock for services.
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.
F-34
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED FEBRUARY 28, 1999 AND 1998 IS UNAUDITED
NOTE 20 - SUPPLEMENTAL INFORMATION TO STATEMENT OF CASH FLOWS FOR
NONCASH INVESTING AND FINANCING ACTIVITIES (CONTINUED)
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.
For the period ended February 28, 1999:
In connection with the acquisition of NEOS, the Company executed notes payable
to the former owner of NEOS for $750,000, granted options to purchase 250,000
shares of the Company's common stock valued at $814,000 (pursuant to SFAS 123),
assumed liabilities of $13,576,804, granted options to purchase a total of
500,000 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 pursuant to their employment agreements
(pursuant to SFAS 123) and paid cash of $2,250,000 in exchange for the following
assets:
Cash $ 522,584
Inventory 6,848,567
Accounts receivable 5,646,804
Property and equipment 784,376
Other assets 141,799
Goodwill 2,966,424
-----------
$16,910,554
===========
NOTE 21 - 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, August 31, 1998 and February 28, 1999. 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-35
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED FEBRUARY 28, 1999 AND 1998 IS UNAUDITED
NOTE 21 - 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.
F-36
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED FEBRUARY 28, 1999 AND 1998 IS UNAUDITED
NOTE 22 - SEGMENT INFORMATION
The Company operates in five business segments: music record masters production,
music studio operations, record label production, rack distribution sales, and
one-stop distribution sales. 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> <C> <C> <C>
August 31, 1998:
Music record master
production $ 23,042 $ (631,538) $ 3,333 $ 6,954,370 $ --
Music studio operations 35,451 (71,363) 13,341 222,126 --
Record label productions 51,002 10,016 -- 71,207 --
------------ ------------ ------------ ------------ ------------
$ 109,495 $ (692,885) $ 16,674 $ 7,247,703 $ --
============ ============ ============ ============ ============
December 31, 1997:
Music record master
production $ 3,775 $ (788,300) $ 5,000 $ 6,839,612 $ --
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 $ 7,147,835 $ 10,094
============ ============ ============ ============ ============
February 28, 1998:
Music record master
production $ 4,738 $ (255,331) $ 3,750 $ 7,020,427 $ --
Music studio
production 211,077 (28,584) 8,737 262,252 10,094
Record label
production 66,119 12,188 -- 38,189 --
------------ ------------ ------------ ------------ ------------
$ 281,934 $ (271,727) $ 12,487 $ 7,320,868 $ 10,094
============ ============ ============ ============ ============
February 28, 1999:
Rack distribution sales $ 12,364,938 $ 182,149 $ 74,186 $ 9,636,320 $ 125,693
One-Stop distribution
sales 13,993,558 933,693 63,196 8,208,717 162,933
Music record master
production 2,452 (870,513) -- 7,817,443 --
Music studio
production 10,704 (52,985) 10,504 226,228 --
Record label
production 16,208 (22,248) -- 22,190 --
------------ ------------ ------------ ------------ ------------
$ 26,387,860 $ 170,096 $ 147,886 $ 25,910,898 $ 288,626
============ ============ ============ ============ ============
</TABLE>
Corporate assets include $3,970,947 of cash and cash equivalents and $100,000 of
restricted cash at August 31, 1998 and $1,287,920 of cash and cash equivalents
at February 28, 1999.
F-37
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED FEBRUARY 28, 1999 AND 1998 IS UNAUDITED
NOTE 23 - 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 a total of 500,000 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
pursuant to their employment agreements (see Note 15). The options were valued
pursuant to SFAS 123 (see Note 19). In estimating the above acquisition cost,
the Company used the Modified Black-Scholes European Pricing Model. The average
risk-free interest rate used was 5.09%, volatility was estimated at 131% and the
expected life was less than 5 years. 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 was 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 attributable to common stockholders
after giving affect to preferred stock dividend,
return of capital of $3,620,690 $ (3,813,662)
Net loss per common share $ (.99)
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-38
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED FEBRUARY 28, 1999 AND 1998 IS UNAUDITED
NOTE 24 - DUE TO EMPLOYEE
Amounts due to a NEOS employee bear interest at 11% and have no scheduled
repayment terms. Interest expense for the period ended February 28, 1998 was
$2,100.
NOTE 25 - EARNINGS PER SHARE
FOR THE SIX MONTHS ENDED FEBRUARY 28, 1999
------------------------------------------
PER
INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- -------------
Basic EPS:
Income available to common
stockholders $ 30,593 11,976,055 $ --
Effect of Dilutive Securities Options -- 1,934,897 --
---------- ---------- -------------
Diluted EPS:
Income available to common
stockholders including assumed
conversion $ 30,593 13,910,952 $ --
========== ========== =============
A reconciliation of Basic and Diluted EPS for other periods is not presented as
the options are not common stock equivalents during these years.
F-39
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED FEBRUARY 28, 1999 AND 1998 IS UNAUDITED
NOTE 26 - COMMON STOCK RESERVES
<TABLE>
<CAPTION>
OUTSTANDING
---------------------------------------- CONVERSION/ EXPIRATION
SHARES RESERVED WARRANTS OPTIONS PREFERRED STOCK EXERCISE PRICE DATE
--------------- ---------- ----------- --------------- -------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
January 29, 1997 3,160,000 316,000 -- -- $ 2.00 January 29, 2007
May 31, 1998 75,000 75,000 -- -- 9.63 May 31, 2003
May 31, 1998 1,050,000 -- -- 500 4.78 May 31, 2000
September 1, 1998 250,000 -- 250,000 -- 5.25 September 1, 2000
September 1, 1998 150,000 -- 150,000 -- 5.25 September 1, 2001
September 1, 1998 500,000 -- 500,000 -- 5.25 September 1, 2000
------------- ---------- ----------- ----------- -------------
5,185,000 391,000 900,000 500 $ 2.00-9.63
============= ========== =========== =========== =============
</TABLE>
F-40
<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.
AJ. ROBBINS, PC
CERTIFIED PUBLIC ACCOUNTANTS
AND CONSULTANTS
DENVER, COLORADO
OCTOBER 19, 1998
F-41
<PAGE>
<TABLE>
<CAPTION>
NORTHEAST ONE STOP, INC.
BALANCE SHEETS
ASSETS
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:
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
============ ============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
</TABLE>
F-42
<PAGE>
<TABLE>
<CAPTION>
NORTHEAST ONE STOP, INC.
STATEMENTS OF OPERATIONS
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 FOR
INCOME TAXES (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
============ ============ ============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
</TABLE>
F-43
<PAGE>
NORTHEAST ONE STOP, INC.
STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIENCY)
FOR THE YEARS ENDED AUGUST 29, 1998, AUGUST 30, 1997 AND AUGUST 31, 1996
COMMON STOCK RETAINED
--------------------- EARNINGS
SHARES AMOUNT (DEFICIT) TOTAL
--------- --------- --------- ---------
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
========= ========= ========= =========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-44
<PAGE>
<TABLE>
<CAPTION>
NORTHEAST ONE STOP, INC.
STATEMENTS OF CASH FLOWS
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
and disposition of equipment 15,660 35,402 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-45
<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-46
<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-47
<PAGE>
NORTHEAST ONE STOP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - ACCOUNTS RECEIVABLE
Accounts receivable consists of the following:
AUGUST 30, AUGUST 29,
1997 1998
------------- ------------
Gross $ 4,145,004 $ 5,628,449
Less allowance for doubtful accounts 315,000 77,488
------------- ------------
$ 3,830,004 $ 5,550,961
============= ============
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-48
<PAGE>
NORTHEAST ONE STOP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
AUGUST 30, AUGUST 29,
1997 1998
------------ ------------
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
============ ============
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-49
<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.
Minimum future lease payments under the capital leases as of August 29, 1998 are
as follows:
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
==========
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-50
<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:
<TABLE>
<CAPTION>
AUGUST 30, AUGUST 29,
1997 1998
----------- -----------
<S> <C> <C>
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
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
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-51
<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>
F-52
<PAGE>
NORTHEAST ONE STOP, INC.
NOTES TO FINANCIAL STATEMENTS
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.
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>
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-53
<PAGE>
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Articles of Incorporation and the Bylaws provide that the Company
shall indemnify and hold harmless each officer and director of the Company (and
each officer and director of another entity serving at the request of the
Company) who is a party to, or is threatened to be made a party to, any
threatened, pending or contemplated action, suit, or proceeding, whether civil,
criminal, administrative, or investigative, against expenses (including
attorney's fees), judgment, fines, and amounts paid in settlement, actually and
reasonably incurred in connection with such action, suit or proceeding. They
further provide that the Company shall indemnify each such officer and director
in any derivative action, suit or proceeding, if he acted in good faith and in a
manner he reasonably believed to be in, or not opposed to, the best interests of
the Company or its shareholders; except that no indemnification shall be made
with respect to any such derivative action, suit or proceeding as to which he
shall have been adjudged to be liable for gross negligence or misconduct in the
performance of his duties to the Company (unless and only to the extent that the
court in which such action or suit was brought shall determine, upon
application, that, despite the adjudication or liability, but in view of all of
the circumstances of the case, he is fairly and reasonably entitled to indemnity
for such expenses which such court shall deem proper).
The Articles of Incorporation and the Bylaws also provide that costs in
defending any action, suit or proceeding referred to above may be paid by the
Company in advance of the final disposition thereof under certain circumstances.
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses, other than
underwriting discounts and commissions, in connection with the issuance and
distribution of the shares of Common Stock being registered, all of which are
being borne by the Company:
Registration fee 3,265.37
Transfer agent and registrar fees 1,000.00
Printing and engraving 500.00
Legal fees 85,000.00
Blue Sky fees and expenses -0-
Accounting fees 28,500.00
Miscellaneous 34.63
--------------
Total: $ 118,300.00
==============
RECENT SALES OF UNREGISTERED SECURITIES
In May 1996, the Company issued 75,000 shares of Common Stock to its
founding shareholders, Messrs. Arnone, Giakas and Venneri, and in June 1996,
issued 3,060,000 shares of Common Stock to Messrs. Arnone, Giakas and Venneri,
in exchange for all the issued and outstanding capital stock of
II-1
<PAGE>
Maestro Holding Corporation valued at $50,860.
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 and Music Marketeers in exchange for certain rights associated
with 10,000 master recordings purchased by the Company, valued at $5,250,000. In
March 1997, the Company issued 100,000 shares of its Common Stock to the
shareholders 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 (the "Preferred Stock") to JNC 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 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) 58%, (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 April 28, 1999 was
$4.56 per share. Pursuant to the Company's Amended and Restated Articles of
Incorporation governing the Preferred Stock (the "Terms"), because prior to the
effective date of this Prospectus, the Company did not satisfy certain
obligations to the holder of Preferred Stock set forth in the Terms, the
Discount Rate was retroactively reduced to 58%.
Pursuant to the Terms, the Preferred Stockholder is prohibited from converting
the Preferred Stock (or receiving shares of Common Stock as payment of dividends
thereunder) to the extent that such conversion would result in the Preferred
Stockholder owning more than 4.999% of the outstanding Common Stock of the
Company following such conversion. Such restriction is waivable by the Preferred
Stockholder upon not less than 75 days notice to the Company.
In the opinion of the Company's counsel the sales of the above
securities were exempt from registration under the Securities Act in reliance on
Rule 506 of Regulation D promulgated under Section 3(a)(9) pursuant to Section
4(2) of the Securities Act of 1933 as transactions by an issuer not involving a
public offering of securities. The recipients of securities in each such
transaction represented their intention to acquire the securities for investment
only and not with a view to or for sale in connection with any distribution
thereof and appropriate legends were affixed to the share certificates and
warrants issued in such transactions. All recipients had adequate access,
through their relationships with the Company, to information about the
Registrant.
II-2
<PAGE>
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following is a list of exhibits filed as part of this Registration
Statement.
Acquisition Agreements Exhibit 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 Exhibit 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*
II-3
<PAGE>
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* Exhibit 3
By-Laws of Incorporation*
Opinion Re: Legality Exhibit 5
Statement Regarding Earnings Per Share* Exhibit 11
Computation of Loss Per Common Share* Exhibit 17
Consents of Experts and Counsel Exhibit 23
Financial Data Schedule* Exhibit 27
- -----------------
* Filed as Exhibits to Form 10-SB, File Number 000-22549, dated September 23,
1998 and are herein incorporated by reference.
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high and of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
53
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN MIDDLETOWN, NEW JERSEY,
THIS 5TH DAY OF MAY 1999.
By: /s/ JOHN S. ARNONE
--------------------------------------------
John S. Arnone
President, Chief Executive Officer, Director
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN
THE CAPACITIES AND ON THE DATES INDICATED.
Each person in so signing also makes, constitutes and appoints John S. Arnone
acting alone, his true and lawful attorney-in-fact, with full power of
substitution, to execute and cause to be filed with the Securities and Exchange
Commission pursuant to the requirements of the Securities Act of 1933, as
amended, any and all amendments and post-effective amendments to this
Registration Statement, and including any Registration Statement for the same
offering that its to be effective upon filing pursuant to Rule 462(b) under the
Securities Act, with exhibits thereto and other documents in connection
therewith, and hereby ratifies and confirms all that said attorney-in-fact or
his substitute or substitutes may do or cause to be done by virtue hereof.
NAME CAPACITY DATE
- --------------------------------------------------------------------------------
/s/ WALLACE M. GIAKAS Chairman of the Board, May 5, 1999
- --------------------------- Secretary
Wallace M. Giakas
/s/ JOSEPH VENNERI Executive Vice President, May 5, 1999
- --------------------------- Director
Joseph Venneri
/s/ RICHARD BLUESTINE Executive Vice-President, May 5, 1999
- --------------------------- Chief Financial Officer
Richard Bluestine
/s/ LOUIS J. DELSIGNORE Executive Vice-President May 5, 1999
- --------------------------- Chief Financial Officer
Louis J. DelSignore
/s/ RONALD J. NICKS Director May 5, 1999
- ---------------------------
Ronald J. Nicks
FROHLING, HUDAK & MCCARTHY, P.C.
COUNSELLORS AT LAW
425 EAGLE ROCK AVENUE P.O. BOX 926
SUITE 200 NEWARK, NJ 07101
ROSELAND, NJ 07068 (201) 622-2800
(201) 226-4600
FAX (201) 226-0969 Please Reply to:
[X] Roseland
[ ] Newark
December , 1998
Wallace M. Giakis, Chairman
Planet Entertainment Corp.
222 Highway 35 South
Middletown, NJ 07748
RE: PLANET ENTERTAINMENT SB-2/A FILING
Gentlemen:
We have reviewed all pertinent corporate documents and materials
required to be reviewed in connection with the status of the shares of common
stock (the "Shares") of the Company being registered with the U.S. Securities
and Exchange Commission on December , 1998 pursuant to Form SB-2 the Securities
Act of 1933, as amended, (the "Registration Statement") and in connection
therewith render the following opinion:
(a) All the Shares of Common Stock being registered pursuant to the
Registration Statement will, when issued upon the proper exercise of the
conversion rights and warrants, be fully paid, validly issued, and
non-assessable.
(b) All corporate action required to be taken by the Company in
connection with the registration of the Shares has been taken.
Very truly yours,
FROHLING HUDAK & McCARTHY P.C.
AJ. ROBBINS, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
AND CONSULTANTS
3033 EAST 1ST AVENUE, SUITE 201
DENVER, COLORADO 80206
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the
use of our 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 #4 Form SB-2.
/s/ AJ ROBBINS
-----------------------------------
AJ Robbins
DENVER, COLORADO
May 5, 1999
