AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER , 2000.
REGISTRATION NO. 333-_________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------------------------------------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------------------------------------------------------------
SOUNDWORKS INTERNATIONAL, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
NEVADA 3652 91-1894164
(State or other jurisdiction of (Primary standard industrial (IRS employer
incorporation or organization) classification code number) identification
number)
8495 ODDFELLOWS ROAD, N.E.
BAINBRIDGE ISLAND, WASHINGTON 98110
(206) 780-0857
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
8495 ODDFELLOWS ROAD, N.E.
BAINBRIDGE ISLAND, WASHINGTON 98110
(206) 780-0857
(ADDRESS OF PRINCIPAL PLACE OF BUSINESS OR INTENDED PRINCIPAL PLACE OF BUSINESS)
GERALD B. DENNON, PRESIDENT
8495 ODDFELLOWS ROAD, N.E.
BAINBRIDGE ISLAND, WASHINGTON 98110
(206) 780-0857
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF AGENT FOR SERVICE)
COPY TO:
DAVID C. THOMAS, ESQ. JULE M. HANNAFORD, ESQ.
Raice Paykin Krieg & Schrader LLP Kelly, Hannaford & Battles, P.A.
185 Madison Avenue (10th Floor) 222 South 9th Street (Suite 3900)
New York, New York 10016 Minneapolis, Minnesota 55402
(212) 725-4423 Tel. (212) 684-9022 Fax (612) 341-0881 Tel. (612) 341-1041 Fax
COUNSEL TO ISSUER COUNSEL TO UNDERWRITER
-----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: AS SOON AS
PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
---------------
<PAGE>
IF DELIVERY OF THE PROSPECTUS IS EXPECTED TO BE MADE PURSUANT TO RULE 434, CHECK
THE FOLLOWING BOX. |_|
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
---------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE PER MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED BE SECURITY AGGREGATE REGISTRATION FEE
REGISTERED OFFERING PRICE
===========================================================================================================================
<S> <C> <C> <C> <C>
Units each consisting of one share of 1,500,000 $1.00 $1,500,000 $396.00
Common Stock, $0.001 Par Value and a
Warrant to acquire one share of Common
Stock(1)
---------------------------------------------------------------------------------------------------------------------------
Common Stock Underlying Warrants(2) 1,500,000 $1.20 $1,800,000 475.20
---------------------------------------------------------------------------------------------------------------------------
Common Stock Underlying Underwriter's 150,000 $1.25 187,500 12.00
Warrants(3)
---------------------------------------------------------------------------------------------------------------------------
Total Registration and Fee $3,487,500 $883.20
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Warrants:(a) may be purchased separately from the Common Stock thirty
days after the effective date of the offering (at which time the units will
automatically separate into a share and warrant ), (b) are exercisable at $1.20
per share during a five-year period commencing on the effective date of this
Registration Statement, and (c) shall be redeemable, at the option of the
Company, at $.05 per Warrant upon 30 days' prior written notice, (i) if the
closing bid price, as reported on the NASDAQ Electronic Bulletin Board, or the
closing sale price, as reported on a national or regional securities exchange,
as applicable, of the shares of the Registrant's Common Stock for 30 consecutive
trading days ending within ten days of the notice of redemption of the Warrants
averages in excess of $2.40 per share, subject to adjustment, and (ii) after a
then current registration statement has been declared effective by the
Commission with regard to the shares of Common Stock to be received by the
holder upon exercise. Pursuant to Rule 416 under the Securities Act of 1933, as
amended ("Securities Act"), such additional number of these securities are also
being registered to cover any adjustment resulting from stock splits, stock
dividends or similar transactions. The indeterminate number of additional shares
shall be issuable pursuant to Rule 416 to prevent dilution resulting from stock
splits, stock dividends or similar transactions.
(2) Reserved for issuance upon exercise of the Warrants. Pursuant to Rule 416
under the Securities Act, such additional number of shares of Common Stock
subject to the Warrants are also being registered to cover any adjustment
resulting from stock splits, stock dividends or similar transactions. The
indeterminate number of additional shares shall be issuable pursuant to Rule 416
to prevent dilution resulting from stock splits, stock dividends or similar
transactions.
(3) In connection with the offering the underwriter is to receive a warrant to
purchase Common Stock equal to 10% of the number of Units sold. The exercise
price is 125% of the Unit Price. Such Warrant is exercisable for a four year
period beginning on the first anniversary of the effective date of the offering.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
<PAGE>
Filed Pursuant to Rule 424____
Registration Statement No. 333-______
1,500,000 Units
[GRAPHIC OMMITTED]
This is an initial public offering of 1,500,000 units. The offering price per
unit is $1.00. Each unit consists of:
o one share of common stock; and
o one redeemable common stock purchase warrant.
This Prospectus also relates to warrants to purchase up to 1,500,000 shares of
common stock, which will be received in the future if all warrants included in
the units are exercised at $1.20 each. If all of the warrants are exercised,
Soundworks will receive $3,015,000 after the underwriter's discount, fee on
warrant exercise and non-accountable expense.
Soundworks common stock has, until recently, been traded on the over the counter
Bulletin Board maintained by the NASD under the symbol "SOWK". These securities
are currently traded in the over the counter market in the "pink sheets."
Soundworks expects that after this offering it will apply to resume trading of
our securities on the Bulletin Board.
Investing in the units involves significant risks. See "Risk Factors" beginning
on page 4.
Per Unit Total
Offering price of units......................... $1.00 $1,500,000
Proceeds from the sale of units-$1,500,000
Protective Group Securities Corporation is the Underwriter on a best efforts
basis.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
----------------
December , 2000
-----------------
PROTECTIVE GROUP SECURITIES CORPORATION
<PAGE>
PROSPECTUS SUMMARY
The following summary highlights information from this Prospectus. Because this
is a summary, it does not contain all of the information that you should
consider before investing in the units. You should read the entire Prospectus
carefully, including the "Risk Factors" section, at pages 4-7, the financial
statements and the notes to those financial statements.
Soundworks
SoundWorks International, Inc. ("Soundworks"), is a Nevada corporation formed on
March 19, 1997, with principal offices located at 8495 Oddfellows Road N.E.,
Bainbridge Island, WA 98110. It is the successor to SoundWorks USA, Inc., a
company formed in 1992. Its telephone number is (206) 780-0857.
Soundworks produces and markets music and spoken word discs and cassettes, under
the trade name Jerden Records, and recordings of interviews/speeches under the
name SpeechWorks (TM), to targeted and mass markets. Soundworks produces its
music discs and cassettes from a library of master recordings owned by it
comprised of over 200 name artists such as The Kingsmen, Pete Fountain and the
Brothers Four and covering the Pop, Country, Rock, Jazz, Big Band, Instrumental,
Folk and Blues genres. The music recordings have, for the most part, not been
released on compact disc and are copyrighted. Soundworks' SpeechWorks line
encompasses interviews with well known music personalities such as Elvis Presley
and speeches of historical figures such as John F. Kennedy and Franklin Delano
Roosevelt which are largely in the public domain and not copyrighted.
Market Opportunity
Soundworks' growth and development is now and has been, frustrated by:
o inadequate financial resources; and
o reliance on part time personnel to exploit and develop its music library
of master recordings and SpeechWorks (TM) spoken word market.
If all of the units are sold Soundworks intends to use the proceeds to:
o develop and market products from its library;
o produce and market the SpeechWorks (TM) products it has identified; and
o acquire Santa Fe Acquisitions Inc.
The Offering
Except as otherwise indicated, all information in this Prospectus has been
adjusted to give effect to a one for five reverse stock split effective
on 2000.
Securities Offered.... 1,500,000 units. Each unit consists of one share of
common stock and one warrant to purchase an additional
share of common stock. The Common Stock and Warrants may
not be sold separately until 30 days from the date of
this Prospectus. After that date the common stock and
warrants in the units will trade separately.
<PAGE>
Warrants.............. The warrants included in the units will be exercisable
beginning 30 days after the offering. The exercise price
of a warrant is $1.20. The Warrants expire on the fifth
anniversary of the date of this Prospectus. Soundworks
may redeem some or all of the outstanding warrants if
Soundworks provides the holders with 30 days' prior
written notice but it may only do this if the closing
price of Soundworks common stock averages at least $2.40
per share for 30 consecutive days ending within ten days
of the notice of redemption. The redemption price will
be $0.05 per warrant. No redemption can occur until six
months after the date of this Prospectus.
Capitalization........ Soundworks has 50,000,000 authorized shares of common
stock $0.001 par value. 8,425,331 of such shares of
common stock were issued and outstanding before the
offering. After this offering, there will be 9,925,331
shares outstanding (assuming all units offered are
sold). Both of these numbers exclude 1,500,000 shares of
common stock issuable upon exercise of the 1,500,000
warrants which will be outstanding immediately after the
offering, if all units offered are sold.
Key Personnel......... Soundworks' President and CEO is Gerald B. Dennon.
Robert L. Wikstrom is its Vice President,
Secretary-Treasurer and General Manager. See Management
on page 22.
Risks................. An investment in these securities is highly speculative
and involves a high degree of risk and immediate
substantial dilution. Soundworks' accountants have
placed a "going concern" reservation on their opinion.
See Risk Factors on page 4.
Dividend Policy....... Soundworks does not plan to pay dividends in the
foreseeable future.
Use of Proceeds....... Soundworks expects to use the proceeds from the
offering, approximately $1,305,000 to:
o complete product development;
o launch products and cover related marketing and
advertising expenses;
o complete the acquisition of Santa Fe Acquisitions,
Inc.;
o expand its office and warehouse facilities;
o build inventory;
o acquire needed personnel,
o acquire related businesses; and
o provide working capital. See Use of Proceeds on
page 8.
<PAGE>
Symbol for Common Stock..............................SOWK
Symbol for Warrants..................................SOWK.W
Proposed Symbol for Units............................SOWK.U
Summary Financial Data
The following table presents summary financial information for Soundworks. The
pro forma balance sheet data reflects the sale by Soundworks of 1,500,000 units
in the offering at $1.00 per unit and the use of the net proceeds as set forth
in "Use of Proceeds" on page 8. You should read this data together with the
financial statements and related notes included in this Prospectus.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED DEC. 31 NINE MONTHS
ENDED SEPT. 30
1999 1998 2000 1999
<S> <C> <C> <C> <C>
Statement of Earnings Data:
Net sales $ 128,535 $ 62,999 $ 167,056 $ 96,401
Operating profit (loss) (169,889) (51,679) (230,432) (127,417)
Earnings (loss) before income taxes (177,574) (18,705) (217,734) (133,180)
Net earnings (loss) (177,574) (18,705) (217,734) (133,180)
Earnings (loss) per share (.004) (.003) (.005) (.003)
Weighted average shares outstanding (.004) (.003) (.005) (.003)
<CAPTION>
September 30, 2000
HISTORICAL PRO FORMA (1)
<S> <C> <C>
Balance Sheet Data:
Working capital: $114,850 $1,564,850
Total assets 553,914 2,003,919
Total liabilities 140,037 140,037
Stockholders' equity (deficiency) 413,882 1,863,882
</TABLE>
(1) Adjusted to reflect the sale of our securities in this offering, less
expenses of this offering estimated at $50,000
<PAGE>
RISK FACTORS
An investment in the units involves many risks. These risks are substantial. You
should carefully consider the following information about these risks, together
with the other information in this Prospectus, before buying units.
If any of the following risks happen Soundworks business and prospects could
suffer, the trading price of the units, common stock or warrants could decline,
and you might lose all or part of your investment.
Soundworks has never earned a profit and may never become profitable.
o Soundworks has been operating at a loss since its inception and is not yet
profitable.
o Management estimates that our break even point is when product sales
exceed $250,000 per year.
o Soundworks sales for the fiscal year ended December 31, 1999 were only
$128,535.
Soundworks' has intense competition from traditional companies.
Soundworks major competitors in this area are:
Rhino Records, Heartland Music, Sony's Columbia Legacy, Curb Records, DCC
Compact Classics, and K-Tel International. Most of these companies are better
known than Soundworks and have far greater assets which enable them to produce a
broader range of records, secure more shelf space from retail distributors and
gain more value from their advertising expenditures. See "Competition," page 20.
Competition from the internet and "Napster style companies" may make it
difficult for Soundworks to sell records. The internet and file sharing
technology such as used by Napster, Inc., permits free sharing of high quality
music without payment to artists and traditional sellers. The impact this will
have on the music industry and on Soundworks and its traditional competitors is
uncertain. See " Competition-Internet", page 21.
Soundworks Shares are traded at low volumes and this may make it difficult
for Soundworks to sell records. The shares of Soundworks are traded on the pink
sheets and at very low volumes. There is no assurance that trading, in volume,
will ever develop either in shares or warrants. As a result, investors in the
shares in this offering may not be able to sell their shares or warrants when
they desire to or at all, as interested buyers are scarce.
Soundworks is dependent on two key men. Soundworks is dependent on the
services of Gerald B. Dennon, President, and Robert L. Wikstrom, Vice President,
Secretary/Treasurer and General Manager. Mr. Dennon has over 40 years of
experience as a senior executive, promoter, developer and producer of music
products and artists in the industry. Mr. Wikstrom is an operations specialist
who has taken several firms from bankruptcy to profitability in the
entertainment industry. The loss of their services could be very harmful to
Soundworks as their experience in the industry would be difficult to replace,
particularly at their current compensation levels of $55,000 and $36,000,
respectively.
Soundworks needs additional personnel to carry out its business plan.
Soundworks has only a small marketing and customer support staff, and it will
have to establish marketing and customer functions with enough experienced and
motivated people to put into effect its business strategy to penetrate its
targeted market. There is no assurance that Soundworks will
<PAGE>
raise enough from this offering to hire the additional people needed by
Management to grow Soundworks' business.
Soundworks has paid no dividends in the past and has no present plans to
pay them in the future. Soundworks has paid no dividends to date. Management
intends to retain earnings, if any, for expansion and does not plan to pay cash
dividends for some time, if ever. Management believes cash dividends should be
paid when and if the Company has expanded to cover adequately the markets
available to it and has generated sufficient earnings to pay dividends. Dividend
policy will be reviewed annually.
Soundworks provides Officer and Director indemnification. Soundwork's
Articles of Incorporation and By-laws provide that it must indemnify its
officers, directors, and employees to the full extent provided by Nevada law if
someone makes a claim against them because of their employment with Soundworks.
The Articles of Incorporation also provide that officers and directors have no
liability to Soundworks or its shareholders for cash damages to the full extent
permitted under Nevada law. This requirement to defend officers and directors
can be expensive in terms of legal fees, to Soundworks, even if it wins and it
could also divert needed cash from our operations. Indemnification could keep us
from getting cash for damages we might otherwise have recovered against
directors or officers for negligence which harms the corporation.
No commitment on anyone to Purchase Shares. This offering is being made
strictly on a "best-efforts" basis. There is no commitment by anyone to purchase
any part of the securities being offered. Soundworks can give no assurances that
any part let alone a significant part of this offering can be sold. There is no
minimum number of units that must be sold and no escrow arrangement until that
minimum is met. Therefore, even if not enough money is raised to enable
Soundworks to carry out its business program those who do buy its units in this
offering will not get their money back.
Substantial Dilution. The book value of the Soundworks' common stock is
substantially less than the offering price. As a result, this offering will
immediately increase the book value per share of existing shareholders and
reduce the book value per share of those buying in this offering and therefore
investors in this offering will experience immediate and substantial dilution of
their investment.
Penny Stock Rules may impede your ability to resell. Penny stock rules may
make it more difficult to resell units, shares, or warrants purchased in this
offering. Trading of Soundworks' stock will be subject to the "Penny Stock
Rules" of the Securities and Exchange Commission. These rules impose certain
sales practice requirements on broker-dealers who sell such securities to
persons other than established customers or accredited investors. The Penny
Stock Rules require broker-dealers to make a special suitability determination
for the purchaser and to also get the purchaser's written consent to the trade
before closing the sale. These rules, as a result, may make it difficult for
broker-dealers to make effective markets in common stock of Soundworks, and also
may make it harder for purchasers to resell their them in secondary markets.
Soundworks May Not Be Able to Manage Its Expanding Operations.
Soundworks operations have been on a limited scale. Soundworks will need to
expand its operations to achieve market acceptance for its products. To
accommodate this growth and to compete effectively, Soundworks will need to put
into place and improve its internal operating
<PAGE>
systems and controls. In addition Soundworks will have to fill important
management positions which are currently vacant.
Future Sales of Shares by Management and Others Could Lower Market Price.
A large number of Soundworks' outstanding shares are "restricted securities", as
defined by the Securities Act of 1933 and eligible for sale, from time to time,
subject to volume, holding period and other limitations imposed under Rule 144
of that Act. Sales of large amounts of common stock after the offering, or even
the potential for those sales, are likely to lower the market price of common
stock. The existence of the Warrants being offered in this Prospectus and the
$1.20 exercise price provided is also likely to serve as an overhang which
impacts and limits the value of Soundworks common shares. After the offering,
Soundworks will have, if all units are sold, 9,925,331 shares of common stock
outstanding. In addition to the 1,500,000 shares that will be freely tradable
after the offering, and the 1,500,000 additional shares that may be issued if
the warrants sold in the offering are exercised, 8,425,331 currently outstanding
or reserved shares may be sold in the future subject to compliance with the
Securities Act of 1933 and Rule 144. The Shares may come on the market as
follows:
o within 90 days 4,913,429 shares or 58.3 %
o within 180 days 157,956 shares or 1.9 %
o within 270 days 84,253 shares or 1 %
Number of Shares Description 8,425,331 Common stock currently outstanding.
Control of Soundworks By Management could conflict with your interests.
The interests of Soundworks' directors and executive officers, and its principal
stockholders could conflict with the interests of other Soundworks stockholders,
including the purchasers in the offering. Following completion of the offering,
Soundworks' directors and executive officers, together with the principal
stockholders of Soundworks, will own or control approximately 43.5 % of its
outstanding common stock. Accordingly, these stockholders may be able to
influence the outcome of stockholder votes, including votes to elect directors,
some amendments to Soundworks' charter and bylaws, and the approval of
significant corporate transactions such as a merger or a sale of Soundworks'
assets. This influence could delay, defer or prevent a change in control of
SoundWorks
Statute, Charter and By-laws May Delay or Prevent an Acquisition of Soundworks.
Soundworks is subject to the anti-takeover provisions of Section 203 of the
Nevada General Corporation Law. Section 203 could delay or prevent a third party
or a significant stockholder from acquiring control of Soundworks In addition,
Soundworks' charter and by-laws may have the effect of discouraging, delaying or
preventing a merger, tender offer or proxy contest involving SoundWorks. Any of
these anti-takeover provisions could lower the market price of the common stock
and deny shareholders the premium a person intent on a takeover might offer.
Soundworks needs additional financing to survive.
Soundworks has a "going concern" qualification in its accountant's opinion. That
means that without additional financing and enough sales to remain in business
Soundworks will go out of business and you could lose your entire investment.
Soundworks' Warrants can be redeemed on short notice.
<PAGE>
Soundworks can redeem your warrants for $0.05 per warrant on 30 days' notice, if
the closing price of the common stock has been at least $2.40 for the ten
consecutive trading days immediately preceding the date of notice of redemption.
If we redeem the warrants you would be forced to sell or exercise the warrants
or accept the redemption price. This kind of redemption cannot occur until six
months after the date of this prospectus.
Your ability to exercise Warrants is dependent on Soundworks' maintaining an
effective Registration Statement.
Soundworks will be able to issue shares of its common stock upon exercise of
your warrants only if there is a then current prospectus relating to the common
stock under an effective registration statement filed with the Securities and
Exchange Commission, and only if the common stock is qualified for sale or
exempt from qualification under applicable state securities laws. Soundworks has
agreed to use its best efforts to meet these requirements but cannot assure you
that it will be able to do so. The warrants may lose all of their value and the
market for the warrants may be limited if Soundworks does not meet these
requirements.
Purchasers in the offering will face immediate and substantial dilution.
The initial public offering unit price is substantially higher than the net
tangible book value per share of common stock. If 1,500,000 units are being sold
in the offering at $1.00 per unit, Soundworks' net tangible book value per share
will be $.06 or $.94 below the $1.00 offering price. The net tangible book value
after the offering will thus be 80% below the $1.00 offering price. Sales of
additional common stock in the future may reduce net tangible book value per
share, resulting in further dilution to purchasers of units sold in the
offering.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Some of the statements contained in this Prospectus discuss future events and
developments, including Soundworks' ability to generate revenue, income and cash
flows, or state other "forward-looking" information. Soundworks generally
identifies these forward-looking statements by using the words "anticipate,"
"believe," "estimate," "expect," and similar expressions. Many known and unknown
risks, uncertainties and other factors that could cause the actual results to be
very different from those contemplated by the statements. Soundworks does not
promise to update forward-looking information to reflect actual results or
changes in assumptions or other factors that could affect those statements.
USE OF PROCEEDS
Soundworks will receive net proceeds from the sale of units in the offering of
approximately $1,305,000 after the deduction of expenses payable by it.
Soundworks expect to use the proceeds as follows:
<TABLE>
<S> <C>
Offering Expenses:
Filing fees $ 2,000
Legal 50,000
Accounting 6,000
Printing 10,000
Acquisition of Santa Fe Acquisitions, Inc. 348,000
Product Development 125,000
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Product Launch (Marketing and Advertising) 200,000
Retention of needed personnel 120,000
Inventory 100,000
Working Capital/Possible future Acquisition of other Related Businesses 294,000
----------
TOTAL $1,305,000
APPROXIMATE AMOUNT
OF NET PROCEEDS 100%
</TABLE>
If warrants included in units are exercised, the total proceeds to Soundworks
from the exercise of the warrants included in all units will be approximately
$3,015,000. Management expects to use the proceeds of warrant exercise to:
o repay debt;
o for further product development;
o working capital; and
o other acquisitions which would complement Soundworks' business.
Until the net proceeds are used Management intends to invest such funds in short
term bank deposits, investment grade securities, United States government
securities and other short term income producing securities.
The discussion above is an estimate based on Soundworks' current business plans.
Actual expenditures may vary depending on the circumstances which may arise.
UNDERWRITING
The Underwriter named below has agreed, subject to the terms of an underwriting
agreement, to purchase from us and we have agreed to sell to the underwriter, at
the initial offering price less the underwriting discounts set forth below and
on the cover page of this prospectus up to 1,500,000 units consisting of a share
of Common Stock and as Warrant to purchase a share of Common Stock.
The underwriting agreement provides that it is a best efforts undertaking on the
underwriter's part and there is no commitment to acquire a single Unit of our
securities. The underwriting agreement provides that we will indemnify the
underwriter against some liabilities, including liabilities under the Securities
Act.
The underwriter has informed us that it proposes to offer the units directly to
the public at the public offering price stated on the cover sheet of this
prospectus and to certain dealers at such public offering price less a selling
concession not to exceed $ a Unit. The underwriter may allow and such dealers
may re-allow, a concession of not more than $ per Unit to certain other
dealers. After the offering the underwritten may change the offering price, the
concession to dealers and other selling terms.
The following table lays out the amount of the underwriting discount and the
compensation paid to the underwriter for each Unit sold and in total.
<PAGE>
<TABLE>
<CAPTION>
Compensation to be paid to the Underwriter
------------------------------------------
Per Unit Per Share Total
-------- --------- -----
<S> <C> <C> <C>
Underwriter's Discount $.10 $150,000
Underwriter's Warrant (1) 1/10th Wrnt 150,000 Wrnts
Non-accountable Expense Allowance (2) $.03 $45,000
Fee on Warrant Exercise (3) 5% $90,000
</TABLE>
------
(1) In connection with the offering we have agreed to issue warrants to the
underwriter to acquire Common Shares in an amount equal to 10% of the number of
Units sold. The Warrant will be exercisable for four (4) years beginning on the
first anniversary of the effective date of the offering, at 125% of the offering
price per unit if the underwriter realizes a gain from the resale of the shares
exercisable upon the exercise of the Warrants, the gain may be considered
additional underwriting compensation.
(2) We have agreed to pay the underwriter a non-accountable expense allowance of
3% of the gross amount raised in this offering. This allowance will be reduced
by any investment banking fees and deposits the underwriter receives within one
year from this offering. In addition, we have agreed to pay all accountable
expenses incurred by the underwriter, including legal and accounting.
(3) We have also agreed to pay the underwriter 5% of the proceeds from the
exercise of the Warrants, which are part of the Units offered, as soliciting
agent.
The following table itemizes the expenses we will pay in connection with the
issuance and distribution of the securities being registered. Except for the SEC
Registration Fee the amounts listed below are estimates.
Nature of the Expense Amount
--------------------- ------
SEC Registration Fee-------------------------------------------------$ 883.20
NASD and Blue Sky Fees and Expenses----------------------------------- 10,000.00
Printing and Engraving Fee-------------------------------------------- 10,000.00
Registrant's Counsel Fee and Expenses--------------------------------- 20,000.00
Accounting Fee and Expense--------------------------------------------- 6,000.00
Underwriter's Expenses----------------------------------------------- 195,000.00
Transfer Agents Fee---------------------------------------------------- 2,500.00
Other Offering Expenses------------------------------------------------
Miscellaneous----------------------------------------------------------
TOTAL------------------------------------------------------$244,388.20+
Prior to this offering there has been no public market for our Units or
Warrants. There has been a market for our shares of Common Stock on the Bulletin
Board. The initial public offering price of our Units was determined by
negotiations with our underwriter and do not necessarily bear any relationship
to our assets, book value, financial condition, or other established criteria of
value. Consideration was given to:
<PAGE>
o prevailing market conditions,
o the prospects for the business and industry in which we compete,
o an assessment of our management, our capital structure, our past and
present operations, and
o our prospects for future earnings
The offering price of our Units and exercise price of the Warrants does not,
therefore indicate our actual value. There is no assurance that a trading market
will develop for our Units or Warrants or that any of the securities being
offered, will sell, in any market that may develop, at a price equal to or
higher than the price the securities are being offered to you.
In connection with this offering the underwriter and selling group members, if
any, may engage in transactions that stabilize, maintain or otherwise affect the
market price of our Units, Common Stock and/or Warrants. These transactions may
include stabilization transactions effected in accordance with Regulation M of
the Securities Exchange Act of 1934, in which these people may bid for or
purchase Units, Common Stock, or Warrants for the purpose of pegging, fixing or
maintaining the price of our Units, Common Stock, or Warrants at a level is
higher than the market would dictate in the absence of these transactions.
If the underwriter engages in these actions it may keep the price levels for
Units, Common Stock and Warrants above what might otherwise prevail in the open
market. We and the underwriter make no representation as to how the described
transactions will affect the price of the securities being offered. Nor do we or
the underwriter make any representation that any of these transactions will be
engaged in, or that if they are commenced, they will not be discontinued without
notice.
Protective Group Securities Corporation, the underwriter, was organized in 1989.
It is a member firm of the NASD.
DETERMINATION OF OFFERING PRICE
The offering price of the units has been established through negotiations
between the underwriter and us and as described above bears no relationship to
revenues, earnings, book value or any other criteria of investment value.
Soundworks makes no representations as to any objectively determined value of
the units offered. There is no assurance that the securities offered can be
resold at the offering price after you purchase them in this offering.
DIVIDEND POLICY
Soundworks has never paid any cash dividends on its shares of common stock and
does not expect to pay any cash dividends on its shares of common stock in the
foreseeable future. We intend to keep future earnings, if any, for reinvestment
in our business. Future cash dividends will depend on Soundworks' financial
condition, results of operations, capital requirements and other factors that
the Board of Directors thinks are relevant.
CAPITALIZATION
The following table sets forth as of September 30, 2000 for Soundworks
International, Inc. and Subsidiary:
<PAGE>
o the actual capitalization,
o the pro forma as adjusted capitalization which shows the effect of the
sale of 1,500,000 units in the offering at the initial public offering
price of $1.00 per unit and the use of the net proceeds of the offering.
--------------------------------------------------------------------------------
Pro Forma Actual as of 9/30/00
--------- --------------------
--------------------------------------------------------------------------------
Common Stock $.001 pv 8,425 42,127
--------------------------------------------------------------------------------
Paid in Capital $2,826,450 $1,292,753
--------------------------------------------------------------------------------
This table should be read in conjunction with our Financial Statements included
elsewhere in this prospectus.
DILUTION
As of September 30, 2000, Soundworks' pro forma net tangible book value was
$413,882 or $0.05 per share of common stock. Pro forma net tangible book value
per share is Soundworks total tangible assets less total liabilities divided by
the total number of shares of common stock outstanding. If Soundworks had sold
the units on September 30, 2000 at the initial public offering price of $1.00
per unit and applied the net proceeds of the offering, the net tangible book
value of Soundworks as of September 30, 2000, would have been $1,863,882 or $.22
per share. This represents an immediate increase of $.17 per share of common
stock to existing stockholders and an immediate dilution of $.78 per share of
common stock to the new stockholders who purchase units in the offering. The
following table illustrates this per share dilution:
-------------------------------------------------------------------------------
Public offering price per unit of the securities in this offering $1.00
-------------------------------------------------------------------------------
Pro forma net tangible book value per share, before the offering $.05
-------------------------------------------------------------------------------
Increase per share attributable to the sale by Soundworks in this
offering $.17
-------------------------------------------------------------------------------
Pro forma net tangible book value per share, after the offering $.22
-------------------------------------------------------------------------------
Dilution per share to new investors $.78
-------------------------------------------------------------------------------
If the warrants are exercised in full, dilution per share to new stockholders
would be $.90 per share of common stock.
The following table summarizes, as of September 30, 2000, the number of shares
of common stock purchased, the total consideration paid, and the average price
per share paid by existing shareholders and by new shareholders after the
offering.:
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
SHARES PERCENTAGE AGGREGATE PERCENT AVERAGE
PURCHASED OF TOTAL CONSIDERATION OF TOTAL PRICE PER
SHARES INVESTED SHARE
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Present 8,425,311 85.1% $1,334,875 47.1% $.16
Stockholders
-------------------------------------------------------------------------------------------------------------------------
New 1,500,000 14.9% 1,500,000 52.9% $1.00
Stockholders
Total 9,925,311 100% 2,834,875 100% $.29
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
The above computations assume no exercise of outstanding options or warrants to
purchase common stock or the warrants included in units sold in the offering.
SELECTED FINANCIAL DATA
The following selected financial data of Soundworks and the predecessor business
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on page 11 and the Financial
Statements and notes thereto beginning on page F-1.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
9 MONTHS ENDED 9/30 YEAR ENDED DECEMBER 31
------------------------------------------------------------------------------------
2000 1999 1998 1999
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Statement of Earnings Data:
------------------------------------------------------------------------------------
Net sales $ 167,056 $ 96,401 $ 62,999 $ 128,535
------------------------------------------------------------------------------------
Operating profit (loss) ($230,432) ($127,417) ($51,679) ($177,574)
------------------------------------------------------------------------------------
Earnings (loss) before
income taxes ($217,734) ($133,180) ($18,705) ($177,574)
------------------------------------------------------------------------------------
Net earnings (loss) ($217,734) ($133,180) ($18,705) ($177,574)
------------------------------------------------------------------------------------
Erngs.(loss) per sh (.005) (.003) (.003) (.004)
------------------------------------------------------------------------------------
Weighted average shares (.005) (.003) (.003) (.004)
outstanding
------------------------------------------------------------------------------------
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
<PAGE>
Soundworks has, from its beginnings, in December 1992, devoted most of its
resources to developing, manufacturing and marketing its music and spoken word
CD's, audio cassettes and videos. Through March 31, 2000, Soundworks has
accumulated a deficit of $(820,373).
Soundworks' sales revenues have increased over the last two years (from
$62,999 to $128,535) and the 9 month figures for the period ended September 30,
2000 ($167,056), when compared with the comparable period in 1999 ($96,401) show
a continuing trend in that direction, but Soundworks operated at a loss in each
annual period and continues to operate at a loss. This is because Soundworks'
spending for marketing, product development, and general and administrative
costs have exceeded its gross revenues. Soundworks expects the operating deficit
to continue and increase over the next 12 months as it spends more to support
the development and growth of its product line.
Soundworks believes that its historical operating results do not indicate
future performance because:
o The acquisition of Santa Fe Acquisitions, Inc. will allow Soundworks' to
introduce an audio book line and expand Soundworks' library of music
products;
o The proceeds of this offering will enable Soundworks to ready more of its
products for marketing and provide it with the funds to hire more people
to market the products; and
o Soundworks has recently emerged from the development stage and anticipates
increases in the number and size of customer offers and revenues from
operations.
Although Soundworks expects substantial growth in both revenues and
expenses, management anticipates that expenses will increase more rapidly than
revenues.
Results of Operations
The following table shows the results of operations expressed as a
percentage of revenues:
Revenues
Nine Months Ended September 30, 2000 and 1999:
These two periods are in no way comparable. The quarter ended March 31,
2000 reflects efforts to acquire Santa Fe Acquisitions, Inc. and through it,
Sunset Productions, an audio book company based in Santa Fe, New Mexico.
Significant increases of travel expenses were experienced as several trips to
New Mexico were required in connection with inspection of the assets and
inventory of Sunset and the negotiation of the purchase agreement.
Expenses also reflect an increase in legal and accounting fees in connection
with the review of Sunset's business.
Net sales increased by about 18% due to the introduction of new product and
alignment with a new distributor.
Years Ended December 31, 1999 and 1998:
In August, 1999, Soundworks' major distributor, MS Distributing, a
national audio and video distribution company, announced that it was
discontinuing its audio distribution business and terminating all agreements
with audio vendors. MS Distributing had been Soundworks primary distributor of
product to the retail level, nationwide, since 1992. This action temporary
disrupted distribution of Soundworks' products and increased expenses, in some
areas, for the year ended December 31 1999.
<PAGE>
Advertising and Internet Expense. In an effort to find alternative means
of product distribution, Soundworks increased its internet presence by updating
and promoting its web site, resulting in additional costs when compared to the
1998 period. Soundworks also ran a series of television advertisements promoting
some of its products in 1999, in an effort to sell product directly to the
consumer.
Bad Debt Expense. The Bad Debt Expense increase from 1998 to 1999 was
because of unpaid MS Distributing invoices. The distributor returned most of
Soundworks' products held for distribution, but we wrote off a considerable
balance.
Printing and Production Expenses. With seven new releases in 1999 as
compared to only three in 1998, Production and Printing costs increased. These
expenses include design, artwork, printing, mastering, recording and
manufacturing of the finished product.
Year Ended December 31, 1998 and 1997
Although there were several new product releases in 1998, Soundworks'
emphasis was on restocking depleted and back ordered inventory. Overall expenses
for the two years were relatively constant. Increased product inventory resulted
in a significant, 58% increase in net sales from 1997 to 1998.
BUSINESS
The Company
Soundworks was incorporated in Nevada on March 19, 1997. Its corporate
offices are located at 8495 Oddfellows Road, N.E. Bainbridge Island, Washington
98110. Its mailing address is P.O. Box 4608, Rolling Bay, WA 98061-0608. Its
telephone number is 206-780-0857.
History
Soundworks was founded to produce and market recordings selected from a
large library of master recordings from the period 1940 - 1980 owned by
SoundWorks' founder, Mr. Dennon. This master recording library includes over
2000 recordings by such artists as The Kingsmen, The Brothers Four, Wes
Montgomery, Glenn Yarbrough, Pete Fountain, Stephane Grappelli, Thelonious Monk,
Ian Whitcomb, Danny O'Keefe, Martin Denny, Scott Cossu, and many others, most of
which have not previously been released on Compact Disc ("CD"). The genres
include Pop, Country, Rock, Jazz, Big Band, Instrumental, Folk, and Blues.
Shortly after its founding, Soundworks began appropriating from the public
domain and/or acquiring rights to issue spoken word materials, primarily
speeches by American Presidents and well-known persons from recent American
history.
Management believes that Soundworks has significant opportunities in two
areas of the multi-billion dollar audio and video industries - music and the
spoken word. Management is actively seeking to expand Soundworks' business from
a focus on music and the spoken word for nostalgia markets in disc and cassette
format, to a focus on the information, education and entertainment markets.
Management also intends to expand its marketing program to include pay for view
delivery via the internet. See New Products at page 15.
The Industry
Soundworks' products presently fall within the niche "Nostalgia" area of
the audio and video industry. "Nostalgia" releases are Compact Discs (CDs),
cassette recordings, and videos containing entertainment or materials from the
past. The nostalgia market target is comprised of
<PAGE>
the more than 65 million Americans - 34% of the population - who are over the
age of 50. According to a recent CNN report, these people represent the fastest
growing market segment for CD and Video products. Soundworks is currently
seeking to sell the Nostalgia market through tailored products:
o audio or video material previously released, but no longer generally
available to the public; and
o material from an artists, musical era, or historical period which has
never been released publicly before.
Products
Soundworks presently produces and markets:
o music recordings and videos under its trade name Jerden Records,
o and spoken word products under its trade name SpeechWorks(TM). Soundworks
releases these products as audio recordings in the audio cassette and
Compact Disk ("CD") formats, and in videotape. Soundworks is focusing on
what Management believes to be significant opportunity in three areas:
Spoken Word Audio, Nostalgia Music and Nostalgia Video. Soundworks'
products are designed for specific niche markets using proprietary
copyrighted material and other materials to which Soundworks has access.
Music Products. Music product releases on the Jerden label consist
primarily of original music from the Soundworks' extensive library of original
master recordings performed by some of the top names of the 1950's and '60's,
including The Kingsmen, Don & the Goodtimes, The Brothers Four, Wes Montgomery,
Pete Fountain, and many more. Soundworks' President acquired most of these
master recordings over his many years in the record business and licensed them
to Soundworks for release. This library of original master recordings includes
copyrighted recordings of more than 200 name artists of the 1950's, 60's and
70's, and forms the basis for many marketable releases of known artists from the
past for the "nostalgia" market." Some of the recordings produced by Jerden are
"Greatest Hits" compilations, or songs from popular albums that have never
before been produced on CD format. Soundworks also seeks to license other music
recordings, past and present, Soundworks' management believes can be marketed
successfully by Soundworks.
Soundworks has produced and released nine music titles including The
Kingsmen, Don & The Goodtimes, The Sonics, Willie Nelson and History of the
NWRock. Soundworks' Library of Master Recordings includes recordings in the
following genres by the following artists:
Big Band Artists
----------------
Louis Armstrong Duke Ellington Jack Teagarden
Tex Beneke Woody Herman Pete Fountain
Jimmy Dorsey Ralph Flanagan Stan Kenton
Bobby Sherwood Pee Wee Erwin Tony Pastor
Buddy Morrow Vaughn Monroe Ray Anthony
Art Mooney Claude Thornhill Connie Haines
Henry Jerome Artie Shaw Enoch Light
Red Nichols Shep Fields Hugo Winterhalter
<PAGE>
Del Courtney Russ Morgan Jonah Jones
Country Music
-------------
Slim Pickens Mickey Gilley Johnny Lee
George Jones Kitty Wells Hank Locklin
Alabama Faron Young Johnny Horton
Bobby Wayne Last Mile Ramblers T. Texas Tyler
Webb Pierce Conway Twitty Buddy Redbow
Buck Owens Freddy Fender Tom T. Hall
Marvin Rainwater Carl Belew Ferlin Husky
John D. Loudermilk Maddox Bros. & Rose Jimmy Wakely
Jazz Music
----------
Dizzy Gillespie Charlie Barnett Quincy Jones
Charlie Mingus Don Cherry Jerry Frank
Oscar Moore Trio George Voumard Don Mock
Diane Schuur Mark Winkler Arnold Ross
Andre Previn Grachan Moncur III Jimmy Lyons
Jazz All-Stars Otis Spahn Dave Burrell
Wes Montgomery Teddy Wilson Kitty White
Stephanie Grappelli Overton Berry Memphis Slim
Freddie Hubbard Chamber Jazz Sextet Lena Horn
Rock Music
----------
The Kingsmen Ian Matthews Magic Fern
Ian Whitcomb Diamond Reo Lucky Pierre
Spirit The Sonics Dave Lewis
Bobby Lewis PH Phactor Jug Band The Juveniles
Leon Russell Ron Davies The Bards
Don & The Goodtimes Hi Fi Lucky Pierre
Springfield Rifle The Small Faces Pepper Porter
Charlie Ryan Danny O'Keefe Barry "The Fish" Melton
Pop Music
---------
Ray Charles Tom Jones The Crewcuts
The Hudson Brothers Vic Damone Al Jolson
Gladys Knight & Pips Mac Davis Evie Sands
<PAGE>
Martin Denny Suzie Nichols Kay Starr
Frankie Laine Roy Thoreson Michael Parks
Kostas Papaya
Blues Music
-----------
Jimmy Witherspoon Issac Scott "Gatemouth" Brown
Lightnin' Hopkins Memphis Slim
Folk Music
----------
The Brothers Four Glenn Yarbrough Jim Page
Mark Pearson
Instrumental
------------
Banjo King Vision Jac Murphy
Scott Cossu Banjo Greats Waltz Kings
Bronn Journey Klaus Lendzian
Spoken Word Products. Spoken word products released to date by Soundworks
under its SpeechWorks(TM) label consist primarily of recordings of speeches made
by rock and roll icons ("Rock Icons") and people important to U.S. history
(Historical Icons"). Releases include JFK: The Kennedy Tapes; FDR: Nothing to
Fear; Harry S. Truman: Give 'Em Hell, Harry; Martin Luther King, Jr.: The MLK
Tapes; Ronald Reagan: The Great Speeches; The Greatest Speeches of All-Time;
Apollo 13: The Real Mission; The Beatles: The Beatles Tapes (now in 5 volumes);
Elvis Presley: The Elvis Tapes; Buddy Holly: The Buddy Holly Tapes; and Gene
Vincent:"Be Bop a Lula".
The Historical Icon series features live recordings of major speeches by
historical figures - mainly U.S. Presidents and major political figures, and
will be expanded to feature business leaders, military leaders, coaches,
religious speakers, celebrities, etc. Historical Icon products are sold to:
o audio book buyers;
o history buffs; and
o educational institutions
o through various traditional channels, such as direct marketing television,
retail stores, catalogs, etc.; and non-traditional channels, such as the
Internet.
Soundworks is making a marketing effort, in the Historical Icon area, to
educational institutions, in order to reach beyond the nostalgia market and
break into the educational, sports and business markets.
The Rock Icon series features live recordings of special interviews and
press conferences with Rock 'n' Roll legends such as Elvis Presley, The Beatles,
Buddy Holly, and others. These
<PAGE>
products are sold to nostalgia rock 'n' roll enthusiasts via television
promotions, catalog and retail distribution, and the Internet.
New Products
Soundworks is involved in a continuing process of evaluating its library of
master recordings, and remastering and producing new releases from this library
as Soundworks' resources, both financial and personnel, permit. We give priority
to releases which Management believe can be profitable to Soundworks, but there
can be no assurance that any particular release will be profitable. Soundworks
intends to expand its product line into video releases, as its resources permit.
Soundworks has produced its first video product - "The Greatest Speeches of
All-Time, Part I" designed to be sold initially on television via direct
response advertising and then through retail outlets. Soundworks also is trying
to locate and secure rights for spoken word business, educational, historical
and/or nostalgia releases
Soundworks presently has the following products in pre-production for
manufacturing and marketing in 2000 and early 2001:
<TABLE>
<CAPTION>
Audio/Spoken Word: Audio Music:
------------------ ------------
<S> <C>
Martin Luther King, Jr./"We Shall Overcome" Tex Beneke, Stan Kenton, Ralph Flanagan/
President Dwight Eisenhower/"Ike" "Live at Edgewater, Vol II".
President Lyndon Baines Johnson/"LBJ" Various Artists/"The History of Northwest
President Gerald Ford Rock, Vol II".
President Jimmy Carter Various Artists/"Northwest Rocks".
President George Bush Bobby Wayne/"Classic Country & Rock-
John Lennon/"Exclusive Interviews" abilly".
The Beatles/"Beatles Tape V" Dave Lewis/"The Dave Lewis Trio".
Video: Various Artists/"The Jerden Records
-----
Story" (Hits from 60's & 70's)
"Presidential Speeches"
Frank Sinatra/"Ol Blue Eyes in Black & White Wes Montgomery/"Untitled"
Pete Fountain/"Untitled".
Jac Murphy/" A Child's Gift".
</TABLE>
Audio Books, Sports Albums, Acquisition of a Music Library
Soundworks' management has entered into a letter of intent, dated February
11, 2000, to acquire Sunset Productions from Santa Fe Acquisitions, its holder.
Sunset Productions is based in Santa Fe, New Mexico. Over the past nine years,
Sunset has distributed over 1 million individual audio books representing 250
titles in contemporary literature, for which it holds copyrighted audio
reproduction rights. In addition, Sunset holds the mechanical licenses to more
than 250 albums containing more than 2,500 classic songs by artists such as
Chuck Berry, The Grateful Dead, Merle Haggard, The Jefferson Airplane, Willie
Nelson and Jonis Joplin. Sunset also has the rights to reproduce 102 sports
albums giving sports buffs the ability to relive some great moments in sports
history. Sunsets' music library will complement Soundworks' current library.
Management plans to digitize both libraries and market them through a
combination of:
<PAGE>
o artist specific internet web sites
o direct marketing and
o mass retailers. Soundworks is currently seeking to acquire additional
music and audio literature libraries that will complement its business.
Business and Educational Products
Soundworks' management is exploring the possibility of acquiring an entity
in California and another in Connecticut which would provide it with libraries
of audio programs of business and educational programs. These products would be
marketed to school age children and adults and would be downloadable, for a fee,
from the internet. The negotiations for these acquisitions are at an early
stage. There is no assurance that they will be concluded successfully.
Video Products. Soundworks intends to produce additional video products
for release in videotape and DVD home video formats. Motion picture and/or video
recordings exist for many of the historical events in the U.S. and around the
world since the advent of the motion picture and videotape eras. Film and video
footage also exist of music performances. Management believes that rights to
release this material on home video formats can be obtained for enough
commercially viable productions to justify Soundworks' pursuing releases in this
field when it is financially able to do so. Video production and release can
involve significantly more production and manufacturing expenses than an audio
only release. No video products other than The Greatest Speeches of All Time I
have, as yet, been released.
Copyrights, Royalties
Soundworks' library of master recordings is copyrighted and Soundworks
must acquire rights for its release and pay royalties to the artist (or other
copyright holder) before use. Accordingly, when Soundworks begins production on
a particular release, it must verify the standing of its copyrights on material
where it is the copyright holder, or acquire "mechanical license" rights to
issue copyrighted material owned by others. Soundworks can obtain a "mechanical
license" as to any previously recorded and released material relatively easily
under U.S. copyright law. Where ownership of the copyright is not clear,
Soundworks may have to engage copyright clearance experts. Much of the
historical spoken word material that would be released on the SpeechWorks(TM)
label is in the public domain and no copyright clearance is required for its
release. This is not the case motion pictures or videotapes of historic
speeches.
Soundworks pays royalties to the copyright holders for copyrighted
material released on its labels. These royalties range from $0.50 to $2.00 per
selection, per record released.
Soundworks does not intend to release any material for which it has not
obtained full rights and any "mechanical licenses" permitting legal release.
Pricing
Soundworks' Compact Disks (CD's) have an "industry standard" suggested
retail price of $15.98, and its cassettes a suggested retail price of $10.98.
Management expects to set $19.95 as the suggested retail price for videotape
releases. We expect direct television marketing to be priced at about $15.98 per
CD and $10.98 per cassette. The pricing structure for CD's, cassettes, and
videos is fairly well established by the industry, and Soundworks intends,
generally, to follow this pricing structure.
Product Development
<PAGE>
Markets
Soundworks presently competes in the nostalgia voice and music markets and
intends to expand its product line offerings into the education (general and
business) market and general entertainment markets through audio books and video
offerings.
The Nostalgia Music Market
Soundworks produces CDs and audio cassettes from its library of master
recordings, recorded by many name artists of the 40's, 50's, 60's and 70's.
Typically, consumers who purchase products in this niche market already are fans
of the particular recording artist, and their decision to buy is, for the most
part, a subjective one. Because much of our music nostalgia material is being
released on CD for the first time, the decision to buy may be based on replacing
an old long-play (LP) album to take advantage of the new technology and better
sound and convenience offered by the CD format, or simply on the fact that they
don't have the recording and want to fill out their collection of works by the
artist or from the particular period. Often, we make nostalgia sales because a
particular song or style of music reminds consumers of a significant time in
their lives. These products are not sold based on the product's present day hit
status. Therefore, sales will never be "hot", as in a "million-seller", but
sales are continuous and long lasting. For example, artists such as Duke
Ellington and Count Basie will continue to appeal to Jazz fans for many years
and the prospect of a different version of a song that is already in a
consumer's collection will, in many cases, eventually prompt the buying decision
if continuously presented.
The Spoken Word Market
The market for spoken word products is a niche market within the overall
non-music sector of the record industry, which includes audio books. Management
feels the consumer market for the SpeechWorks(TM) series, like the audio book
market, is typically 40-plus-years-old, professional, and intelligent. We have
designed and positioned our SpeechWorks(TM) products to go beyond mere
nostalgia, to be perceived as living history.
Management believes the explosive growth in popularity of audio books and
the enthusiastic early response we have received from our retail customers
indicates an untapped market demand at the consumer level for this type of
product. Management believes that additional markets can be developed in:
o the educational community
o museums
o the internet and other non-traditional retail outlets.
Marketing
We market our music and spoken word products through normal record market
distribution channels and direct marketing. Management believes there is also
great sales potential in marketing "nostalgia" releases through direct
television marketing. Management believes that the key to sales in the record
market is promotion, advertising, and maintaining good working relationships
with marketers in this field. The conventional record market is composed of
record distributors, retail stores, record clubs, and mail order catalog
sellers. A less conventional market, but one Management feels suits Soundworks'
products, is direct marketing by Soundworks to the consumer, both through direct
marketing programs of Soundworks, and
<PAGE>
direct marketing programs under arrangements with experienced direct marketing
organizations. The following is a summary discussion of how Soundworks
distributes its products in the conventional record industry, and its direct
marketing program.
Sales to Distributors. In the conventional record market,
distributors buy recorded product from the "label" at a distributor's discount,
and resell the product to record retailers at a markup. The pricing structure
for this is fairly well established and uniform in the industry. Distributors
usually have their own representatives who service record retail stores. It is
up to the "label," however, to promote its products so the retailers will have
an incentive to order its products from the distributor. We intend to employ a
distributor sales representative who will be responsible for continuing and
developing distributor relations, and servicing the needs of the distributors,
including furnishing them sales materials. Soundworks' Jerden Records and
SpeechWorks(TM) products are currently represented by over twenty distributors
nationwide. Management believes that with the expanded product line and a
reasonable marketing budget, we can increase sales through distributors,
especially when we have adequate capital to design and distribute professional
sales materials for the distributors to share with their retail customers and to
subsidize advertising space in the catalogs of a few larger distributors to
heighten visibility.
To sell distributors Soundworks needs to promote its products to the
public and heighten the awareness of retail marketers to these products so they
will order from the distributor. If we raise enough capital through this
offering, we plan an intensive telemarketing/fax-marketing campaign at the
retail level to familiarize store managers with our product line. We also plan
to influence retail store manager's purchasing decisions with direct telephone
contact and in-store marketing assistance, such as posters, etc.
Sales to Retail Stores and Through the Internet. We plan to sell
products directly to retailers who may not be able to get our products easily
from distributors. These include:
o record stores
o book store
o educational stores
o museums, etc.
We will use a telemarketing sales force to establish and service retail
accounts, using commercially available qualified lists of retail prospects in
our target market. Soundworks' marketing department will systematically contact
our active and prospective retail accounts to promote Soundworks' products. We
plan to produce sample cassettes and CDs,
o in-store posters and flyers,
o in-store displays, and information on new products.
We also plan to use fax and e-mail to keep in contact with our retail accounts.
Our retail customers include Costco, Tower Records, Borders, Barnes & Noble,
Store of Knowledge, Columbia House, PBS Home Video, The Sixth Floor Bookstore,
The Smithsonian Shops, West point Military Academy, FDR Library, Winston
Churchill Library, and many more traditional record and book outlets.
Soundworks' products are available on the internet at its website
<PAGE>
www.soundworks.net as well through web sites maintained by Borders, Barnes and
Nobel, Amazon.com and others.
Sales to Consumers. We believe that a major source of sales will be
direct sales to consumers. Sales to consumers would be at "retail" prices, with
product shipped directly to the consumer by Soundworks, or a shipper or
"fulfillment house" with whom Soundworks would contract for this service. Direct
consumer sales generally are made by distributing catalogs and flyers of
Soundworks' products to potential customers. Soundworks intends to reach this
market, assuming the proceeds from this offering are sufficient by buying a
large, commercially available, list of bona-fide nostalgia and historical
product buyers for initial and continued mailings to people who have been
"qualified" as buyers. Soundworks' marketing department plans on using customary
direct marketing strategies to make these sales and to refine its consumer
mailing lists on a continuing basis to be able to predict with greater accuracy
the probable success of its direct mail marketing campaigns.
Sales via Direct Response Television and Publications. Management
believes that "direct response" promotions on television and other publications
media can be a major source of sales for nostalgia products. We have begun to
design and produce products for this marketing approach. Direct response
marketing uses TV, radio, magazines or newspapers to persuade, the buyer to buy
a product directly from the producer. The purchase is usually made using a 1-800
telephone number, or - a mail-in order form. Shoppers in the over-50 age group
are particularly appropriate for this marketing method as they seek convenience
and have money to spend. We have not used this selling method before but believe
it offers the greatest opportunity for capitalizing on Sounworks' library of
master recordings. It is the source of greatest profit for many of the
Soundworks' competitors.
Typically, before undertaking a direct response marketing campaign, the
seller conducts a test marketing program at relatively low cost to determine
whether the direct marketing approach proposed will work and to provide a basis
for predicting how many units might be sold in a full scale campaign. Sales
volumes through direct response marketing can be very high - even with
marginally popular artists - if the marketing is executed correctly. For
example, USA Today reports that Roger Whitaker's Best Loved Ballads sold
approximately 800,000 units through direct response television promotion at
$24.95 each. That translates to sales revenues of $20 million. Gross profits on
these sales would be in excess of $10 per unit, or $8 million. Albums by flute
artist Zamfir, of the Pan Flute, have sold more than 1 million copies. According
to USA Today, Heartland Music sold over 600,000 copies of Stage Door Canteen -
an album of hits from the 1940's. Soundworks is ready to manufacture a sequel to
this album with a collection of World War II hits from the period 1940-1945
called Juke Box Saturday Night. We have also identified other products from our
library of master recordings which will be targeted at specific buyer niches. We
have extensive research on which broadcast media - and which geographic markets
- represent Soundworks' target audience. Soundworks plans to undertake direct
response television marketing through marketing and distribution arrangements
with established independent television marketing companies.
Direct Response Marketing Agreement
We have entered into a comprehensive marketing and distribution agreement
with WNR, a Los Angeles company, to joint venture direct response marketing of
our video, "The Greatest Speeches of All-Time". For their services, Soundworks
will pay WNR fifty percent (50%) of the net profits from sale of this product.
<PAGE>
This Direct Response program will include:
o Production: Production of a 60 and 120 second direct response commercial.
It includes all elements of production including script, talent, voice
over, directing and editing. This also includes post production services
such as dubbing and video distribution.
o Media: WNR will plan, purchase and manage all media from test phase
through full roll out and provide complete media analysis and reports.
Reports will detail spots run and sales on a station by station basis.
This will be a comprehensive media analysis to optimize cost per response
and media efficiency.
o Telemarketing: WNR will manage telemarketing operations and customer
support. Also included in this function is credit card processing, check
clearing and report generation.
o Fulfillment: WNR will provide order processing, warehousing and
fulfillment services. They will coordinate telemarketing and fulfillment
to clear payment and ship to individual customers.
o Manufacturing: WNR will assist with manufacturing of product, packaging,
shipping boxes, etc. Production management and inventory planning will
also be performed.
o Electronic Retailing: This aspect of television direct response sales will
include consideration and possible use of shopping channels, such as QVC
and HSN to promote sales.
Liability and Property Insurance
We have liability insurance covering our property and operations with coverage
and deductible amounts and exclusions that Management believe are customary for
companies of our size and adequate for our industry. We cannot give any
assurance that our current insurance coverage is adequate or that Soundworks
will be able to maintain insurance at an acceptable cost.
Employees
As of September 30, 2000, we employed four full-time employees, and one part
time employee all of whom were engaged in research and development and
manufacturing activities and three of whom were engaged in administrative
activities. None of our' employees is covered by a collective bargaining
agreement, and we believe that our relations with our employees are good.
Properties
We acquired our master tape library from Gerald B. Dennon, our President, for
stock when we were organized. Ownership of the library is subject to the normal
royalty interests in the recording business.
We lease, on a month to month basis, approximately 4,000 square feet of office
and warehouse space on Oddfellows Road, Bainbridge Island, Washington, from
Montcalm LLC, an entity owned by Gerald B. Dennon, at $2,000 per month. We
believe that the rental payments are at or below market for such location.
The only other property or equipment Soundworks leases is a Canon fax and a
Canon copying machine under a 5 year lease with an unrelated third party for
$280. a month plus copying charges ( should more then 3,000 copies be made a
month) of $0.02222 a copy.
<PAGE>
COMPETITION
Many major record labels and record clubs offer Greatest Hits packages and
Vintage Classics, but there are only a few niche companies with which Soundworks
competes directly.
o Rhino Records
Rhino, a privately held company, is a major force in our market niche. It has
used direct TV to sell collections of such artists as Aretha Franklin and
Manhattan Transfer, as well as Christmas music. It also publishes a catalog of
its releases and has acquired a very small library of master recordings. Rhino
was founded in 1980 and released it's first CD in 1984. It has grown
dramatically since then to approximately $50 million in sales on more than 200
releases. Since 1991, the company has expanded into packaging beat poetry and
music, nostalgia rock 'n roll, blues, punk, new-wave, power pop, doo-wop, and
just about anything that was popular. According to the Wall Street Journal,
"Rhino got started with titles like The Best of Louie Louie... assembling 10
versions of the Kingsmen's classic."
SoundWorks licenses a Slim Pickens song from its master recording library to
Rhino for use in its boxed set, Songs of the West. Rhino has reported sales of
more than 10,000 units.
o Heartland Music
o This company was founded by Lawrence Welk Jr. in 1983 and is a
market leader. According to USA Today, Heartland sells four to five
million album sets per year. Heartland markets exclusively via
Direct TV and follow-up mailings. The company, we believe, has
compiled a list of over one million buyers. Heartland produces for
four markets. We compete in two of these:
o Legendary Artists--such as Nat King Cole, Patsy Cline, Jim Reeves,
Mario Lanza, etc.
o Compilation--such as Feel Good Rock, Country Nights, Wacky
Favorites, etc.
o Sony's Columbia Legacy
As a result of Rhino's success, Sony was attracted into the
nostalgia arena and has had some notable successes including blues
man Robert Johnson, which sold more than 600,000 units.
o Curb Records
This company was founded and is owned by Mike Curb, producer and
former Lt. Governor of the State of California. The label has
concentrated on building a "Gold Catalog" as part of their marketing
strategy--mostly licensing Greatest Hits packages from major labels.
Industry sources estimate that Curb had sales of over $20 million in
this division in 1993. Curb has approximately 100 albums in their
catalog.
o DCC Compact Classics
This is a specialty label that began operations in 1986. DCC has
approximately 100 "vintage classics" in its catalog, plus 15 Gold Releases
and 30 other releases that are marketed separately. They had sales of $7
million in 1993.
o K-Tel International
K-Tel is an international marketing company listed on the NASDAQ stock
exchange. Approximately 60% of K-Tel's revenues are derived from sales of
entertainment products,
<PAGE>
primarily compilations of music into themes, such as Today's Hit Country
and The Fabulous 50's. The company markets these products in Europe and
North America through several labels including K-Tel, Dominion, and Era.
K-Tel reported revenues of $56 million in 1993, due largely to strong
increases in U.S. music sales.
Soundworks' Competitive Position--Music
Each of the above mentioned companies enjoys a competitive advantage over
Soundworks in three obvious ways:
o They are able to market their products through Direct
TV.
o They are financially able to pursue new products and
promote them as necessary.
o They command the attention of the major distributors
when they release product.
Soundworks enjoys an important advantage over these producers:
o Soundworks has a library of proprietary master
recordings.
Rhino, Heartland, and other producers which specialize in nostalgia material
have built a market for products that sell in 10,000 to 30,000 unit range, but
unlike Soundworks, they do not have a library of master recordings to draw
product from.
Sony and other majors, have extensive libraries but are unable to compete in
products that sell less than 50,000 units. They are also becoming increasingly
less interested in supplying potential majors with product.
Competitors--Spoken Word
Rhino is the only competitor now producing material which is roughly comparable
to Soundworks' SpeechWorks(TM) Historical Icon series.
o Rhino Records
Rhino presently produces beat poetry, lectures, and audio tapes, and they have
released a series which they call Great Speeches of the 20th Century. Other new
endeavors include infomercials and a partnership with a radio network for the
release of audio books and concert tapes compiled by the network. They don't
mind trying something new and we must expect that our penetration of new markets
will be noticed. At the present time, Rhino is concentrated in other product
areas and in limited marketing channels.
o Others
Time-Life and other majors can be expected to enter this market if
Soundworks' performance and/or Rhino's performance in this area demonstrates
substantial market demand. Demand of something more than 30,000 units per
release would justify their interest. Management believes the market may be that
large, but that Soundworks has the ability to establish its brand and take
substantial market share long before the competition can get organized.
SoundWorks' Competitive Position--Spoken Word
<PAGE>
Soundworks' competitors enjoy the same advantages with respect to
SpeechWorks(TM) products as Soundworks' Jerden Records competitors do with
respect to music products. However, we bring focus of effort to this market
niche which Management believes that our competitors have not shown. This is
demonstrated by our discovery of many buyers in the distribution channel for
SpeechWorks(TM) products that our competitors are either unaware of or not
interested in pursuing, such as museum stores, EDSA and libraries. In addition,
with 30 new titles and more underway, we have a substantial head start in
product development.
Competition- the Internet
Management shares the view of David Geffen, one of the founders of DreamWorks
SKG and a veteran music industry executive who is quoted in the Wall Street
Journal of July 28, 2000 as saying, " All that happened [ as a result of
Napster] is that the record business has expanded, and more records will be
sold."
CAPITALIZATION
Soundworks has authorized capital of 50,000,000 shares of Common Stock,
$0.001 par value, of which 42,126,555 are, as of September 30, 2000, issued and
outstanding.
BUSINESS COMBINATION WITH
SOUNDWORKS USA, INC.
On September 1, 1997, Soundworks International, Inc. agreed to acquire and
merge with SoundWorks USA, Inc. dba Jerden Records (formerly The Great Northwest
Music Company), a Washington corporation.
The merger was effected through a stock exchange. In the merger SoundWorks
USA, Inc. became a wholly-owned subsidiary of Soundworks International, Inc.
Shareholders of SoundWorks USA, Inc. received 5.2651 shares of common stock of
Soundworks International, Inc. for each one share of outstanding common stock of
SoundWorks USA, Inc. Upon completing this merger, the former shareholders of
SoundWorks USA, Inc. became the majority shareholders of Soundworks
International, Inc. as they acquired approximately 74% of the combined
companies. Shareholders of SoundWorks USA, Inc. received "restricted
securities", in accord with federal and relevant state securities laws.
Directors, Officers and controlling shareholders are subject to the holding
period and volume limitations established by Rule 144 enacted under the
Securities Act of 1933 should they wish to sell
The principal founder of SoundWorks USA, Inc. were elected to the Board of
Directors of Soundworks International, Inc., and they now have full control of
all operations, management, policies and other affairs of Soundworks. See
"Management" below.
LEGAL PROCEEDINGS
Soundworks is not a party to any material legal proceedings.
<PAGE>
MANAGEMENT
Directors, Executive Officers and Key Employees
The following table provides information about our directors, executive officers
and key employees:
Name Age Served From Position
---- --- ----------- --------
Gerald B. Dennon 61 1992 Director, Chairman, President & CEO
Robert L. Wikstrom 53 1993 Director, Vice President, Secretary-
Treas.& Gen Mgr.(COO & CFO)
Robert Flick 61 1999 Director
Dianne Botefuhr 48 1995 Product and Administrative Manager
Daniel Dennon 28 1999 E-Commerce manager & Art Director
Background of Management and Key Employees
Gerald B. Dennon, CEO. Mr. Dennon has held positions in record production,
promotion and distribution, and various other sales and management positions in
the broadcasting and entertainment industries. In 1963 he founded Jerden Music
which discovered, produced, developed and marketed recording artists such as The
Hudson Brothers, Danny O'Keefe, Gail Davies, The Sonics, Don & The Goodtimes,
The Springfield Rifle, The Bards, and Dave Lewis. Mr. Dennon has two Gold
Records as a producer of recordings by The Kingsmen and another Gold Record as a
producer for Ian Whitcomb. He has two CLIOs--the international broadcasting
award honoring the world's best broadcast advertisements. In 1977 Mr. Dennon
created First American Records, Inc. which under several labels--including The
Great Northwest Music Company label--won several Grammy Awards. Since 1982 he
has served as a radio and television media broker and as a consultant to major
companies. He has been Soundworks' President, Chairman and CEO, on a part time
basis, since September 1, 1997.
Robert L. Wikstrom, COO. Mr. Wikstrom is an operations specialist who has
founded radio stations, taken several from bankruptcy to profitability, written
and marketed traffic/billing and music rotation software systems and produced
local television programs. Prior to joining us, in March 1993, and for the
previous seven years he was the General Manager of radio station KKFX in
Seattle. Previously, he worked in radio station management for KHIT, KYYX, and
KXA. He has served on the boards of directors of the Puget Sound Radio
Broadcasters, The Washington State Association of Broadcasters and the Northwest
Area Music Association. He has served as Soundworks' Vice President , Director,
Secretary Treasurer and Chief Operating Officer, on a part time basis, since
September 1, 1997. Mr. Wikstrom joined Soundworks, on a full time basis, on May
1, 2000.
Robert Flick, Director. Mr. Flick is, and has for more than the past five years
been a music producer, songwriter and screenwriter. He is a founding member of
the singing group, The Brothers Four. Mr. Flick is also available to serve
Soundworks as an audio and music producer.
<PAGE>
Diane Botefuhr. Ms Botefuhr is Product and Administrative Manager. She
coordinates all aspects of the production of audio compact discs, cassettes and
videos, from the source master through art direction, printing and replication.
From 1980 to 1986 Ms. Botefuhr served as an executive for a major magazine
distribution company. From 1986-1991 she operated her own franchising business
and from 1991-1993 she worked in the video production field. From 1993 until
joining us she served as a real estate investor for her own account. Ms.
Botefuhr is a graduate of the University of Dayton, Dayton , Ohio, where she was
awarded a Bachelor of Science degree in 1974.
Daniel Dennon. Mr. Dennon, is the son of Gerald B. Dennon, the President of
Soundworks. Daniel Dennon is Soundworks' E-Commerce Warehouse Manager and Art
Director. He manages Soundworks' website "soundworks .net" and is responsible
for developing and implementing Soundworks' internet strategy. Prior to joining
us he was, for the preceding 3 years, a member of the crew that managed and
sailed the world on the 145-foot sailing yacht "Juliet."
Advisory Board
Members and Background
Soundworks has, in addition to its regular Board, an advisory Board of four who
have experience in the music and broadcasting business. They have served in that
capacity since September 1, 1997.
Clifford Johnston. Mr. Johnston has a broad background in corporate
administration, accounting tax and legal matters. For the past 25 years Mr.
Johnston has provided corporate planning, business counseling and assistance
with accounting and tax planning. He has held various top management, financial,
and marketing positions with U.S. corporations since 1970. For the past three
years Mr. Johnston has been associated with several public companies in an
investor relations capacity. For the prior 12 years he served as President or
CFO of Quality Tax Service, Inc., Altrett Corporation, Econocraft Corporation,
E/S Corporation and Health Guard International Corporation.
Arnold Levitt. Mr. Levitt has been the Senior Vice President, Finance, and Chief
Financial Officer of Franklin Electronic Publishers, Inc. (NYSE:FP), an entity
located in , since May 1999. From 1996 until May 1999, he was the principal
in the financial consulting firm ADL Associates. From May 1994 to March 1996 he
was the Chief Operating officer of Wico Gaming Supply Corporation in Las Vegas,
Nevada. Previously, he was the CEO and COO of several publishing and
manufacturing companies of which he was the principal shareholder. From 1978 to
1993 Mr. Levitt was Senior Vice President, Finance and Chief Operating Officer
of LFP Inc., a $250,000,000 magazine publishing and national distribution
company.
Jim Newhouse. Mr. Newhouse is, and has been for more than five years, the
President of KC Sales, a Los Angeles based video and record marketing company.
He is a veteran music industry executive who has held senior management
positions with several major record companies
Gary Taylor. Mr. Taylor is a broadcasting executive and consultant. He is the
former President and CEO of the Broadcast Marketing Executives Association in
Los Angeles. He was the Senior Vice President and General Manager of
Transtar/Unistar Radio Network, and has been
<PAGE>
the General Manager of several major radio stations, including KYCW, Seattle;
K101, San Francisco; KRPM, Seattle, and KZZU, Spokane.
Director and Advisory Board Compensation
As of the date hereof neither the Directors nor the Members of the Advisory
Board have been compensated for their services as such. They will not receive
any remuneration for the ensuing fiscal year other then reimbursement of
expenses for attendance at meetings and for services performed at the behest of
Soundworks. For the year ended December 31, 1999, Messrs. Dennon and Wikstrom
received $55,000 and $8,000 in salary as President and Vice President,
Secretary/Treasurer, respectively. Mr. Dennon also received $7,083 for his
travel, lodging and entertainment expenses.
Vacant Positions and Soundworks' Intentions
Soundworks' intends to hire personnel to fill the following positions within the
next six to twelve months:
Chief Financial Officer
The CFO will be responsible for the integrity of Soundworks'
financial systems, reporting to the CEO and the Board of Directors
on the financial position of Soundworks, and for anticipation of
Soundwork's future financial needs. This position is presently being
filled by Soundworks' accountants until sales volume and production
justifies the need for a full-time executive, probably in the third
or fourth quarter of 2000.
Marketing Manager
The Marketing Manager will be responsible for marketing and
promoting the full line of Soundworks products. In addition he/she
will coordinate marketing and promotion activities with the
Production Manager and our Direct TV partners. This position
involves coordinating news releases, production of radio and TV
commercials, sales sheets, production catalogs, etc. We will fill
this position after we receive the proceeds of this offering,
assuming a sufficient number of units are sold if, as and when a
successful candidate is recruited.
Committees of the Board of Directors
There are presently no Committees of the Board of Directors.
Executive Compensation
The following table provides information about compensation awarded to, earned
by, or paid to Soundworks Chief Executive Officer and executive officers during
the years ended December 31, 1997, 1998 and 1999. No executive officer or
officers received individually or in the aggregate $100,000 during any year in
that period.
<PAGE>
<TABLE>
<CAPTION>
Name and Position Year Salary Bonus Other Restricted Securities
------------------ ---- ------ ----- Annual Stock Under-
Compen- Awards lying
sation ------ Options/
------ SARs
----
<S> <C> <C> <C> <C> <C> <C>
1997 $30,000 0 0 0 0
Gerald Dennon 1998 $40,000 0 0 0 0
Pres. & CEO 1999 $55,000 0 0 0 0
Robert L. Wikstrom 1997 $6,000 0 0 0 0
Vice Pres, Sectretary 1998 $8,000 0 0 0 0
Treasurer & Gen. Mgr. 1999 $8,000 0 0 0 0
</TABLE>
Stock Options Granted to Executive Officers During 1999
No stock options or warrants / SARS have been issued in the past to officers,
directors or members of the Soundworks' advisory board and no grants are
foreseen for the coming fiscal year. Soundworks does not have an employee stock
option plan.
PRINCIPAL STOCKHOLDERS
The following table provides information regarding the beneficial ownership of
common stock as of September 30, 2000 by:
each person or group of affiliated persons known by us to be the beneficial
owner of more than 5% of Soundworks outstanding common stock,
o each of Soundworks' directors
o each of Soundworks' executive officers and
o all of Soundworks' executive officers and directors as a group.
As of that date, there were 8,425,331 shares of common stock outstanding before
giving effect to the sale of units in the offering. The number of shares of
common stock actually owned by each principal stockholder is listed in Column A,
entitled "Shares of Common Stock." In addition, each principal stockholder is
deemed to be the beneficial owner of common stock that he can acquire upon the
exercise of warrants or options on or within 60 days after September 30, 2000,
including options or warrants which vest upon consummation of the offering.
These option and warrant shares, if any, are listed separately in Column B,
entitled "Shares Underlying Options/Warrants." The total of these two columns is
then set forth in Column C. Each principal stockholder's percentage ownership
before the offering is in Column D and is based on the share numbers in Column
C. Column E presents their percentage ownership of outstanding common stock
immediately after the offering taking into account the 1,500,000 shares of
common stock offered as part of units offered for sale in the offering and
assuming all will be sold. The warrants included in units offered in the
offering are disregarded in calculating the percentages
<PAGE>
in Column E. Unless otherwise noted, we believe that all persons named in the
table have sole voting and investment power with respect to all shares
beneficially owned.
<TABLE>
<CAPTION>
PERCENTAGE
OF SHARES
-----------------------------------------------------------------------------------------------------
Name of Beneficial Shares of Shares Total Total Total
Owner Common Underlying Beneficial Percentage Percentage
Stock Warrants/ Ownership Owned Owned
to Options (Column A Before After
Plus Offering Offering
Column B)
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gerald B. Dennon * 3,520,452 0 3,520,452 41.8% 35.5%
-----------------------------------------------------------------------------------------------------
Robert L. Wikstrom 159,956 0 159,956 1.9% 1.6%
-----------------------------------------------------------------------------------------------------
All Executive Officers 3,680,408 0 3,680,408 43.7% 37.1%
and Directors as a Group
(3 persons)
</TABLE>
-------------
*Daniel Dennon , an adult son of Gerald B. Dennon, owns 10,000 shares. Gerald B.
Dennon disclaims beneficial interest in those shares.
CERTAIN TRANSACTIONS
In September 1997 Soundworks acquired the music voice library and Jerden Records
business from a corporation, SoundWorks USQ, Inc. owned by Gerald B. Dennon,
President and Director of Soundworks for 4 million shares of Soundworks stock.
The Board of Directors valued these assets at $100,000.
In May 1997 Soundworks entered into an agreement with TCKTS, LLC. d.b.a. Bristol
Media, Ltd. under which that firm agreed to provide financial, venture capital ,
public relations and brokerage relations consulting services to Soundworks in
return for 400,000 shares of Soundworks stock. The stock was to be divided
equally between three contractors; Toby Investments, L.L.C., 4 Point Lake
L.L.C., and XXX Enterprises Corp. The three contractors were issued warrants to
acquire an additional total of one million shares of Soundworks stock at 50
cents a share for the one year period ended July 31, 1998. Toby Investments is
managed by Gerald B. Dennon for the benefit of the Dennon Family Trust and 4
Point Lake is owned and controlled by Clifford M. Johnston and his wife, Judy
Morton Johnston. Mr. Johnston is a member of the advisory Board and a holder of
approximately 5% of Soundworks shares. The options referred to have been
exercised and each of Toby Investments, 4 Point Lake and XXX Enterprises Corp.
have agreed that all transactions they do on behalf of Soundworks will be done
according to industry standards and on terms no more favorable than if
negotiated at arms length.
<PAGE>
In February 2000, Soundworks entered into a Letter of Intent to acquire Santa Fe
Acquisitions, Inc. for $380,000. Through March 31, 2000 Soundworks has loaned
Santa Fe $55,000 to cover its operating expenses. We will use part of the
proceeds of this offering to acquire all of the outstanding shares of Santa Fe
Acquisitions, Inc.,. Santa Fe Acquisitions Inc. is presently wholly owned by
Gerald B. Dennon, Soundworks' Chairman, President and CEO. Santa Fe's sole asset
is Sunset Productions which it is acquiring for $380,000. Sunset owns a music
library viewed by Management to be complimentary to that owned by Soundworks and
an Audio Book line of products. Soundworks also leases its 4,000 square feet of
office and warehouse space from Montcalm, LLC, an entity owned by Mr. Dennon.
Soundworks believes the rental charge of $2,000 a month it pays Montcalm is at
or below market. Soundworks also acquired its Master Tape Library at , as noted
above, a deemed value of $100,000 from Mr. Dennon for stock at Soundworks
inception. In addition, $50,000 was paid to a third party for accumulated
storage and other expenses associated with the Master Tape Library through
issuance to him of 100,000 shares of Soundworks shares.
Finally, Mr. Dennon and Montcalm, Inc., as at September 30, 2000, together owe
Soundworks $146,001 as a result of the reapportionment of rental charges for the
space occupied by Soundworks to Montcalm, Inc. and other entities controlled by
Mr. Dennon. This obligation to Soundworks is represented as an account
receivable due. The obligation is not reflected by a Note and the obligation
bears no interest.
DESCRIPTION OF CAPITAL STOCK
Upon completion of the offering, Soundworks authorized capital stock will
consist of 50,000,000 shares of common stock, $0.001 par value per share. The
following description of Soundworks' capital stock is a summary only. A detailed
description is to be found in Soundworks' Amended and Certificate of
Incorporation as Amended and By-laws, copies of which have been filed as
exhibits to the registration statement of which this Prospectus forms a part.
Units
Each unit consists of one share of common stock and one warrant to purchase an
additional share of common stock. The units will automatically separate 30 days
from the date of this Prospectus, after which the common stock and warrants in
the units will trade separately.
Common Stock
The issued and outstanding shares of common stock being offered will be, when
sold and issued, validly issued, fully paid for and not subject to assessments
by Soundworks. Each holder of shares of common stock will be entitled to one
vote for each share held of record and may not cumulate votes for election of
directors. This means that if five directors are being elected and the
shareholder owns 1 share, each share may be voted once for each director and
that the shareholder is not entitled to vote 5 shares for one director.
Cumulative voting often allows a minority shareholder to elect a representative
director while in Soundworks case a majority of the shareholders will elect all
of the directors. The shares will not be entitled to preemptive rights under
applicable law and will not be subject to redemption or assessment. The lack of
preemptive rights means that if Soundworks issues additional shares a present
shareholder will have no right to retain his/her percentage interest in
Soundworks by purchasing some of the offered shares. Subject to the rights and
preferences of the holders of any preferred stock outstanding in the future,
upon Soundworks' liquidation, dissolution or winding-up, the holders of shares
of common stock will be entitled to receive, pro rata, its assets which are
legally
<PAGE>
available for distribution to stockholders. In addition, subject to the rights
and preferences of the holders of any preferred stock outstanding in the future,
the holders of shares of common stock will be entitled to share ratably in
dividends as, if and when declared by its Board of Directors. Soundworks does
not anticipate that any dividends will be paid in the foreseeable future. As of
March 31, 2000, there were approximately 500 holders of common stock.
Unit Warrants
Each warrant comprising part of the units sold in the offering will entitle the
holder to purchase one share of common stock at an exercise price of $1.20. We
may reduce the exercise price of the warrants for a period of at least 20 days.
The warrants will generally be exercisable at any time commencing 30 days after
the date of this Prospectus until the fifth anniversary of the date of this
Prospectus, unless earlier redeemed. We may redeem all or some of the warrants,
pro rata, from all warrant holders, at a price of $0.05 per warrant, upon 30
days' prior written notice, if the closing price defined in the warrant
agreement, which is described below, per share of common stock for the ten
consecutive trading days immediately before the date of notice of redemption
equals or exceeds $2.40. We cannot redeem any warrants until six months have
passed from the date of this Prospectus. We may give more than one notice of
redemption. If given, notices of redemption must to be mailed by registered or
certified mail to record holders of warrants. If we give notice of our intention
to redeem, a holder will have the choice either to sell or exercise his or her
warrants before the date specified in the redemption notice or to accept the
redemption price. After the redemption date, there can be no exercise of the
warrants that were the subject of the redemption.
The warrants will be issued in registered form. The shares of common stock
underlying the warrants, when issued upon exercise of a warrant, will be fully
paid and non-assessable. Soundworks will pay any transfer tax incurred as a
result of the issuance of common stock to the holder upon its exercise.
The warrants contain provisions that protect the holders against dilution by
adjustment of the exercise price. These adjustments will occur in the event of a
merger, consolidation, sale or conveyance of all of the capital stock or
substantially all of the assets of Soundworks, a stock split, or reverse stock
split, stock dividend, capital reorganization or reclassification of our common
stock. We have the option to issue fractional shares or cash for fractional
shares upon the exercise of a warrant. The holder of a warrant will not, as a
result of owning a warrant, have any rights as a Soundworks' shareholder until
he or she exercises the warrant.
A warrant may be exercised upon surrender of the warrant certificate on or
before the expiration or redemption date of the warrant at the offices of the
warrant agent, with the form of "Election to Purchase" on the reverse side of
the warrant certificate completed and executed as indicated, accompanied by
payment of the exercise price (by certified or bank check payable to the order
of Soundworks, Inc.) for the number of shares for which the warrant is being
exercised.
For a holder to exercise the warrants, there must be a current registration
statement in effect with the Securities and Exchange Commission and
qualification in effect under applicable state securities laws (or applicable
exemptions from state qualification requirements) with respect to the issuance
of common stock or other securities underlying the warrants. We intend to use
all commercially reasonable efforts to cause the registration statement, of
which this Prospectus forms a part, to remain effective before the exercise of
the warrants and to take other actions under the laws of various states as may
be required to cause the sale of common stock upon the exercise of warrants to
be lawful. We will not be required to honor the exercise of warrants if, in
<PAGE>
the opinion of our Board of Directors, acting with the advice of counsel, the
sale of securities upon exercise would be unlawful. If the securities underlying
the warrants are not registered under a current effective registration statement
or qualified under applicable state securities laws and securities of the same
class are listed on a securities exchange or there are at least two independent
market makers for the securities of the same class, we may elect to redeem
warrants submitted for exercise instead of obtaining registration and
qualification. If we elect to redeem the warrants instead of registering and
qualifying the common stock the redemption price of the warrants would be equal
to the difference between the aggregate low asked price or closing price of the
securities underlying the warrants and the exercise price of the warrants.
The above discussion of material terms of the warrants is qualified in its
entirety by reference to the detailed provisions of the warrant agreement with
The Fidelity Transfer Company. The form of this agreement has been filed as an
exhibit to the registration statement of which this Prospectus is a part.
For the life of the warrants, the holders have the opportunity to profit from a
rise in the market price of the common stock without assuming the risk of owning
of the shares of common stock underlying the warrants. The warrant holders may
be expected to exercise their warrants at a time when we would, in all
likelihood, be able to obtain any needed capital by an offering of common stock
on terms more favorable than those provided for by the warrants. Furthermore,
the terms on which Soundworks could obtain additional capital during the life of
the warrants may be adversely affected by the existence of the warrants.
Federal Income Tax Considerations
The following discussion sets forth the material federal income tax
consequences, under current law, relating to the purchase and sale of the units
and the underlying common stock and warrants. The discussion is a summary and
does not deal with all aspects of federal taxation that may be applicable to an
investor. It does not consider specific facts and circumstances that may be
relevant to a particular investor's tax position. Some holders, such as dealers
in securities, insurance companies, tax exempt organizations, foreign persons
and those holding common stock or warrants as part of a straddle or hedge
transaction, may be subject to special rules that are not addressed in this
discussion. This discussion is based only on current provisions of the Internal
Revenue Code of 1986, as amended, and on administrative and judicial
interpretations as of the date of this prospectus, all of which are subject to
change. You should consult your own tax advisor as to the specific tax
consequences to you of this offering, including the applicability of federal,
state, local and foreign tax laws.
Allocation of Purchase Price
Each unit as a whole will have a tax basis equal to the cost of the unit. The
measure of income or loss from some of the transactions described below depends
on the tax basis in each of the warrant and the common stock comprising the
unit. Soundworks has allocated the purchase price between the warrant and the
common stock so that the tax basis for the warrant will be $0.05 and the tax
basis for the common stock will be equal to $0.95. If you disagree with the
allocation, please see your tax advisor for advice on how to notify the Internal
Revenue Service that you disagree with the allocation and claim a different
basis.
Exercise or Sale of Warrants
No gain or loss will be recognized by a holder of a warrant on the purchase of
shares of common stock for cash on an exercise of a warrant, except that gain
will be recognized to the extent cash
<PAGE>
is received in the place of fractional shares. The tax basis of common stock
received upon exercise of a warrant will equal the sum of the holder's tax basis
for the exercised warrant and the exercise price. The holding period of the
common stock acquired will begin on the date the warrant is exercised and the
common stock is purchased. It does not include the period during which the
warrant was held.
Gain or loss from the sale or other disposition of a warrant will be capital
gain or loss to its holder if the common stock to which the warrant relates
would have been a capital asset in the holder's hands. This capital gain or loss
will be long-term capital gain or loss if the holder has held the warrant for
more than one year at the time of the sale, disposition or lapse. If we redeem a
warrant, the holder generally will realize capital gain or loss. Individuals
generally have a maximum federal income tax of 20% on long term capital gains.
The deduction of capital losses is subject to limitations.
Sale of Common Stock
A holder who sells common stock other than in connection with a tax free
reorganization of Soundworks will recognize gain or loss in an amount equal to
the difference between the amount realized and the holder's tax basis in the
common stock. If the common stock is a capital asset in the holder's hands gain
or loss upon the sale of the common stock will be a long-term or short-term
capital gain or loss, depending on whether the common stock has been held for
more than one year. Individuals generally have a maximum federal income tax of
20% on long term capital gains. The deductions of capital losses is subject to
limitations.
Expiration of Warrants Without Exercise
If a holder of a warrant allows it to expire without exercise, the expiration
will be treated as a sale or exchange of the warrant on the expiration date. The
holder will have a loss equal to the amount of such holder's tax basis in the
lapsed warrant. If the warrant is a capital asset in the hands of the holder,
the loss will be a long-term or short-term capital loss, depending on whether
the warrant was held for more than one year. The deduction of capital losses is
subject to limitations.
Takeover Protection and Certain Charter and By-law Provisions
Provisions of the Nevada General Corporation Law (the "NGCL"), Soundworks
Certificate of Incorporation (the "Charter") and its By-Laws (the "By-Laws") may
delay, deter or prevent a tender offer, proxy contest or other takeover attempt.
This may be true even if a takeover attempt is at a premium over market price
for shares held by stockholders.
We are subject to the provisions of Section 203 of the NGCL which prohibits,
subject to exceptions, a Nevada corporation from engaging in any business
combination with any interested stockholder for a period of three years
following the date that such stockholder became an interested stockholder. A
business combination includes mergers, asset sales and other transactions that
may result in a financial benefit to stockholders. A person is an interested
stockholder triggering this protection if the person together with any of his
affiliates or associates, beneficially owns, directly or indirectly, 15% or more
of Soundworks' outstanding voting stock. There are three exceptions to these
provisions. First, if Soundworks' Board of Directors gives prior approval to
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder then the restrictions do not
apply. Second, the restrictions will not apply if, upon the consummation of the
transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owns
<PAGE>
at least 85% of Soundworks' outstanding voting stock. Finally, the restrictions
will not apply if, at the time of or following completion of the transaction in
which the stockholder became an interested stockholder, Soundworks' Board of
Directors approves the business combination and stockholders holding at least 66
2/3% of Soundworks' outstanding voting stock not owned by the interested
stockholder authorize the business combinations.
Our Certificate of Incorporation does not permit stockholders to act by written
consent in lieu of a meeting. Our Certificate of Incorporation and By-laws also
provide that special meetings of stockholders may only be called by a majority
of its Board of Directors, its Chairman or its Chief Executive Officer.
Stockholders will not be permitted to call a special meeting or to require that
Soundworks' Board of Directors call a special meeting of stockholders. These
provisions make it difficult for you to compel the calling of a meeting to
discuss grievances you may have with management.
The provisions of the Certificate of Incorporation and the By-laws summarized in
the preceding paragraphs may delay, deter or prevent a merger or other business
combination that might be attractive to you but not to management. These
provisions are intended to encourage any person interested in acquiring
Soundworks' to negotiate with and obtain the approval of its Board of Directors
in connection with the transaction. These provisions could also discourage bids
for our common stock at a premium, as well as depress the market price of our
common stock. See "Risk Factors-- Statute, Charter and By-laws May Delay or
Prevent Acquisition of SoundWorks"
Our By-laws establish an advance notice procedure for nomination, other than by
or at the direction of its Board of Directors, of candidates for election as
directors. Advance notice procedures also exist for other stockholder proposals
to be considered at annual or special meetings of stockholders. In general, we
must receive notice of intent to nominate a director or raise business at an
annual meeting not less than 60 nor more than 90 days prior to the scheduled
annual meeting. In the case of a special meeting called to elect directors, the
notice of intent must be received not later than the close of business on the
fifth day following the day on which notice of the date of the meeting was
mailed. The notice of intent must contain specific information about the person
to be nominated or the matter to be brought before the meeting.
Transfer Agent
The transfer and warrant agent for our units, common stock and warrants is The
Fidelity Transfer Company 1800 South West Temple (Suite 301), Salt Lake City,
Utah 84115
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, we expect to have 9,925,331 shares of common
stock outstanding, assuming no exercise of outstanding options or warrants. Of
these shares, the 1,500,000 shares of common stock, and the 1,500,000 shares of
common stock issued upon exercise of the warrants, issued as part of the units
sold in the offering will (assuming a registration is in effect when the
warrants are exercised) be freely tradable without restrictions or further
registration under the Securities Act, except that any shares purchased by
people who control us, may generally only be sold in compliance with the
limitations of Rule 144 under the Securities Act. All of the remaining
outstanding shares of common stock are restricted securities within the meaning
of Rule 144 and may not be sold unless they are either registered under the
Securities Act or an exemption from registration is available, including the
exemption from registration offered by Rule 144.
<PAGE>
In general, under Rule 144, as currently in effect, beginning 90 days after the
date of this Prospectus, a person who has beneficially owned restricted shares
for at least one year, including a controlling person, may sell within any
three-month period a number of shares of common stock that does not exceed a
maximum number of shares. This maximum is equal to the greater of 1% of the then
outstanding shares of Soundworks' common stock . Sales under Rule 144 are also
subject to restrictions relating to manner of sale, notice and availability of
current public information about us. In addition, under Rule 144(k) of the
Securities Act, a person who is not our affiliate, has not been an affiliate of
ours within three months prior to the sale and has beneficially owned shares for
at least two years, would be entitled to sell those shares immediately without
regard to volume limitations, manner of sale provisions, notice or other
requirements of Rule 144.
Prior to this offering, our shares have traded on the NASDAQ Electronic Bulletin
Board and Pink Sheets. There has been no significant trading in volume of our
common stock and there can be no assurance that a significant public market for
the common stock will develop or be sustained after the offering. Future sales
of substantial amounts of common stock, including shares issued upon exercise of
outstanding warrants in the public market after the offering, or the perception
that such sales may occur, from time to time, could adversely affect market
prices of our securities and impair our ability to raise capital by selling
securities.
DETERMINATION OF OFFERING PRICE
Prior to the offering, there has been no public market for our units or warrants
and no significant public market, in terms of trading volume, for our shares of
common stock. The initial public offering price of the units and the exercise
price and other terms of the warrants underlying the units were determined by
the Board of Directors of Soundworks after discussions with the underwriter and
do not necessarily bear any relationship to our assets, book value, financial
condition, or other established criteria of value. In determining those prices
and terms, consideration was given to prevailing market conditions, the
prospects for the business and industry in which Soundworks competes, an
assessment of our management, our capital structure, our past and present
operations, and our prospects for future earnings. The initial public offering
price of the units and the exercise price of the warrants should not be
considered to indicate actual value. There can be no assurance that an active
trading market will develop for Soundworks' units, shares of common stock or
warrants or that the aggregate prices at which its units, common stock and
warrants will sell in the public market after the offering will be higher than
the price at which the units will be sold in the offering.
LEGAL MATTERS
The validity of units offered hereby will be passed upon for us by Raice Paykin
Krieg & Schrader LLP of New York, New York, which has acted as counsel for
Soundworks in connection with the offering.
EXPERTS
The audited financial statements included in this prospectus and elsewhere in
the registration statement for the fiscal years ended December 31, 1997-1999
have been audited by William L. Butcher, CPA, P.S., independent public
accountants, as indicated in the reports with respect thereto, and are included
herein in reliance upon the authority of that firm as experts in accounting and
auditing. The report contained elsewhere in this Prospectus
<PAGE>
on Soundworks contains an explanatory paragraph regarding its ability to
continue as a going concern.
WHERE YOU CAN GET MORE INFORMATION
Our fiscal year ends on December 31. We will file annual, quarterly and current
reports, proxy statements and other information with the Securities and Exchange
Commission. You may read and copy any reports, statements or other information
on file at the SEC's public reference room in Washington, D.C. You can request
copies of those documents, upon payment of a duplicating fee, by writing to the
SEC.
We have filed a registration statement on Form SB-2 with the SEC. This
prospectus, which forms a part of that registration statement, does not contain
all of the information included in the registration statement. References made
in this Prospectus to any contract or other document relating to us, such
references are not necessarily complete. You should refer to the exhibits
attached to the registration statement for copies of the actual contract or
document. You may review a copy of the registration statement at the SEC's
public reference room in Washington, D.C., and at the SEC's regional offices in
Los Angeles, California and New York, New York. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the public reference
rooms. Our SEC filings, including the registration statement, can also be
reviewed by accessing the SEC's Internet site at http://www.sec.gov.
SOUNDWORKS INTERNATIONAL, INC.
AND SUBSIDIARY
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Public Accountants ............................... F-2
Consolidated Balance Sheets ............................................ F-3-4
Consolidated Statements of Loss and Accumulated Deficit ................ F-5-6
Consolidated Statements of Cash Flows .................................. F-7
Consolidated Statements of Changes in Stockholders'
<PAGE>
Equity ............................................................ F-8-9
Notes to Financial Statements .......................................... F-10-13
F-1
<PAGE>
WILLIAM L. BUTCHER, CPA P.S.
-------------Certified Public Accountant------------
Everett-(425) 335-0603 Fax-(425) 335-3567
Marysville-(360) 683-9460 Fax-(360) 658-1165
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
SoundWorks International, Inc.
Rolling Bay, Washington
I have audited the accompanying Consolidated Balance Sheet of
SoundWorks International, Inc. and subsidiary as of December 31, 1999, 1998 and
1997 and the related Consolidated Statements of Loss and Deficit, Consolidated
Statement of Cash Flows for the periods than ended, and the Consolidated
Statement of Changes in Stockholders' Equity. My responsibility is to express an
opinion on those financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing
standards. Those standards require that I plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that my audit provide a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of SoundWorks
International, Inc. and subsidiary as of December 31, 1999, 1998 and 1997 and
the results of its operations and its cash flows for the periods than ended in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
SoundWorks International, Inc. will continue as a going concern. As discussed in
Note 4 to the financial statements, SoundWorks International, Inc. is engaged in
new operations, and the ability to continue to exist as a going concern relies
on the company's ability to retain adequate financing and to generate sufficient
sales. These conditions raise substantial doubt about the company's ability to
continue as a going concern. Management plans in this regard are described in
Note 4. The financial statements do not include any adjustment that might result
from the outcome of the uncertainty of future agreements, financings or sales.
/S/ William L. Butcher
William L. Butcher, CPA, P.S.
Everett, Washington
May 23, 2000
F-2
<PAGE>
SOUNDWORKS INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
September 30, 2000 and 1999 Unaudited and December 31, 1999 and 1998 Audited
ASSETS
------
Unaudited Audited
--------- -------
9/30/00 9/30/99 12/31/99 12/31/98
------- ------- -------- --------
CURRENT ASSETS
Cash ($2,534) (6,293) ($2,635) ($343)
Accounts Receivable 67,760 62,099 16,682 44,845
Inventory 43,695 44,058 48,579 37,804
Deposits & Prepaid Expenses 1,931 1931 1,931 1,931
Notes Receivable 144,035 413,459 373,744 -0-
--------- --------- --------- ---------
Total Current Assets 254,887 515,254 438,301 84,237
--------- --------- --------- ---------
FIXED ASSETS
Equipment 19,791 19,791 19,791 19,791
Furniture & Fixtures 2,800 2,800 2,800 2,800
Master Tape Library (N.3) 150,000 150,000 150,000 150,000
Leasehold Improvements 2,024 2,024 2,024 2,024
Less:
Accumulated Depreciation (83,454) (74,926) 77,454) (67,551)
--------- --------- --------- ---------
Total Fixed Assets 95,161 99,689 97,161 107,064
--------- --------- --------- ---------
OTHER ASSETS
Loan Rec. Santa Fe (N.4) 61,870
Loan Rec Montcalm 146,001 148,607 188,201 130,447
--------- --------- --------- ---------
Total Other Assets 207,871 148,607 188,201 130,447
--------- --------- --------- ---------
TOTAL ASSETS $553, 919 $ 763,550 $ 723,663 $ 321,748
--------- --------- --------- ---------
F-3
<PAGE>
SOUNDWORKS INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
September 30, 2000 and 1999 Unaudited and December 31, 1999 and 1998 Audited
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
Unaudited Audited
--------- -------
9/30/00 9/30/99 12/31/99 12/31/98
------- ------- -------- --------
CURRENT LIABILITIES
<S> <C> <C> <C> <C>
Accounts Payable $ 102,070 $ 60,179 $ 60,082 $ 52,077
Notes Payable (N.7) 7,375 35,369 38,006 40,006
Adv. Royalties Payable (N.9) 30,592 0 0 0
----------- ----------- ----------- -----------
Total Current LiabilitieS 140,087 95,548 98,088 92,083
----------- ----------- ----------- -----------
LONG TERM LIABILITIES
Deposits on Options (N.4) 0 0 0 2,591
----------- ----------- ----------- -----------
Total Long Term Liability 0 0 0 2,591
----------- ----------- ----------- -----------
STOCKHOLDERS EQUITY
Common Stock, $0.001 par value,
50,000,000 shares authorized; 7,254,381
shares issued and out standing at December
31, 1998; 42,096,655 shares issued and
outstanding at December 31,1999;
42,126,555 shares issued and outstanding
at September 30, 2000 42,126 42,096 42,096 7,254
Paid in Capital 1,292,753 1,286,779 1,286,779 745,546
Accumulated Deficit (920,998) (660,873) (703,300) (525,726)
----------- ----------- ----------- -----------
Total Stockholders' Equity $ 413,882 668,002 625,575 227,074
----------- ----------- ----------- -----------
TOTAL LIABILITIES
AND STOCKHOLDERS' EQUITY $ 553,919 $ 763,550 $ 723,663 $ 321,748
----------- ----------- ----------- -----------
</TABLE>
F-4
<PAGE>
SOUNDWORKS INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF LOSS AND ACCUMULATED DEFICIT
March 31, 2000 and 1999 Unaudited and December 31, 1999 and 1998 Audited
<TABLE>
<CAPTION>
Period Ended Period Ended Year Ended Inception to Year
Ended
09/30/00 09/30/99 12/31/99 12/31/98
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Sales $174,690 $102,005 $136,006 $438,380
Uncategorized Income 0 0 0 18,171
Sales Back Ordered 0 17 23 126
Vendor Adjustment 16,040 12,566 16,755 4,379
Cost of Goods Sold (23,674) (18,202) (24,269) (92,015)
-------- -------- ------- --------
Gross Profit $167,056 $96,386 $128,535 $369,041
Expenses
America onLine 0 0 0 245
Advertising 14,7566 15,038 20,051 16,753
Automobile Expense 9,735 423 564 12,947
Bad Debt (3,327) 3,865 5,153 2,408
Bank Service Charges 1,938 1,377 1,836 5,854
Cash Discounts 0 240 320 4,429
Commissions-Sales 2,700 0 0 5,896
Copyright Registration Fees 62 448 593 0
Customer Relations 0 707 943 0
Depreciation 6,000 7,375 6,873 67,551
Distribution Discounts 0 0 0 3,611
Dues and Subscriptions 2,705 1979 2,638 6,737
Employee Benefits 0 206 274 1,445
Equipment Rental 3,085 2,726 3,635 4,025
Freight and Delivery 5,046 5,275 7,033 24,316
Insurance 19,532 8,870 11,826 14,642
Internet Expense 130 5,410 7,213 0
Investor Relations Fees/Expenses 37,207 34,928 46,570 14,655
Legaland Professional 0 0 0 5,822
Licenses and Permits 118 567 756 1,213
Loan Fees 0 348 464 0
Meals and Entertainment 1,489 0 0 4,957
Miscellaneous 35 74 370 31,448
</TABLE>
F-5
<PAGE>
SOUNDWORKS INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF LOSS AND ACCUMULATED DEFICIT (CONT.)
September 30, 2000 and 1999 Unaudited and December 31, 1999 and 1998 Audited
<TABLE>
<CAPTION>
Period Ended Period Ended Year Ended Inception to
09/30/00 09/30/00 12/31/99 12/31/98
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Moving Expense $0 $0 $0 $2,609
Office Expense/Supplies 3,522 1,581 2,108 39,280
Office Security 350 1,487 1,982 1,096
Payroll Expense 0 0 0 15,219
Postage and Delivery 3,763 1,939 2,585 11,112
Printing and Reproduction 11,992 8,192 10,922 28,106
Professional Fees 135,402 42,695 56,926 163,130
Professional Development 0 0 0 197
Production Expense 11,684 13,104 17,472 34,934
Reference Materials 5,000 431 574 6,257
Rent 25,977 3,904 5,205 36,406
Repairs and Maintenance 5,645 3,677 4,902 5,928
Royalty Payment 1,468 538 717 1,697
Sales Promotions 1,500 0 0 19,459
Seminars 0 0 0 613
Storage 0 0 0 1,593
Supplies 3,737 185 247 4,330
Taxes 6,233 242 323 1,081
Telephone 1,859 4,301 5,734 25,776
Trade Show Expense 0 0 0 43
Travel & Entertainment 19780 5,312 7,083 27,705
Utilities 1,884 1,149 1,532 8,876
Wages-Officers 58,250 47,250 63,000 108,000
------ ------ ------ -------
Total Operating Expenses $397,488 $225,769 $298,424 $772,461
</TABLE>
See accompanying notes and independent auditor's report.
F-6
<PAGE>
SOUNDWORKS INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF LOSS AND ACCUMULATED DEFICIT (CONT.)
September 30, 2000 and 1999 Unaudited and December 31, 1999 and 1998 Audited
<TABLE>
<CAPTION>
Period Ended Period Ended Year Ended Inception to
09/30/00 09/30/99 12/31/99 12/31/98
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Loss From Operations $ (230,432) $ (129,383) $ (169,889) $ (403,420)
Other Income and
Experience
Interest Expense $ (4,672) $ (6,999) $ (9,332) $ (46,946)
Royalties 17,532 1,235 1,647 35,190
Received
Other Income 0 0 0 46,421
Other Expense 165 0 0 (143,075)
----------- ----------- ----------- -----------
Net Loss 217,734 (135,147) (177,574) (511,829)
----------- ----------- ----------- -----------
Net Loss Per Share (.005) (.003) (.004) (.071)
----------- ----------- ----------- -----------
Accumulated Deficit
beginning of period (703,300) (525,726) (525,726) 0
Adjustment-
Accumulated Deficit 36 0 0 (13,897)
----------- ----------- ----------- -----------
Accumulated Deficit
end of the period $ (920,998) $ (660,873) $ (703,300) (525,726)
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes and independent auditor's report.
F-7
<PAGE>
SOUNDWORKS INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE PERIODS ENDED
September 30, 2000 and 1999 Unaudited and December 31, 1999 and 1998 Audited
<TABLE>
<CAPTION>
Period Ended Period Ended Year Ended Inception to
09/30/00 09/30/99 12/31/99 12/31/98
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net Loss $ (217,734) $ (135,147) $ (177,574) $ (511,829)
----------- ----------- ----------- -----------
Adjustment to Reconcile Net Loss to
Net Cash Provided by Operating
Expenses:
Depreciation 6,000 7,375 9,903 67,551
(Increase) Decrease In:
Accounts Receivable (51,078) (17,254) 28,163 (44,845)
Leasehold Improvements 0 0 0 (2,024)
Inventory 4,884 (6,254) (10,775) (37,804)
Deposits,Prepaid Expense 0 0 0 (1,931)
Equipment 0 0 0 (19,791)
Furniture & Fixtures 0 0 0 (2,800)
Master Tape Library 0 0 0 (150,000)
Increase (Decrease) In:
Accounts Payable 41,988 8,102 8,005 52,077
Adjustment-Retained
Earnings 36 0 0 (13,897)
----------- ----------- ----------- -----------
Total Adjustments 1,830 (8,031) 35,296 (153,464)
----------- ----------- ----------- -----------
Net Cash Provided by
Operating Activities: (215,904) (143,178) (142,278) (665,293)
Cash Flows From Financing
Activities:
Notes Receivable 229,709 (413,469) (373,744) 0
Notes Payable (30,631) (4,637) (2,000) 40,006
Loan Rec.-Santa Fe (30,592) 0 0 0
Loan Rec.-Shareholder (61,870) (18,160) (57,754) (130,447)
</TABLE>
See accompanying notes and independent auditor's report.
F-8
<PAGE>
SOUNDWORKS INTERNATIONAL, INC. AND SUBSIDIARY CONSOLIDATED
STATEMENT OF CASH FLOWS FOR THE PERIODS ENDED
September 30, 2000 and 1999 Unaudited and December 31, 1999 and 1998 Audited
CONTINUED
<TABLE>
<CAPTION>
Period Ended Period Ended Year Ended Inception to
09/30/00 09/30/99 12/31/99 12/31/98
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Common Stock 31 34,842 34,842 7,254
Paid in Capital 5,974 541,233 541,233 745,546
Deposits on Options 0 (2,591) (2,591) 2,591
----------- ----------- ----------- -----------
Net Cash Received From
Financing Activities: 216,005 137,228 139,986 664,950
Cash Beginning of
Periods (2,635) (343) (343) 0
Cash End of Periods (2,534) (6,293) (2,635) (343)
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes and independent auditor's report.
F-9
<PAGE>
SOUNDWORKS INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
SEPTEMBER 30, 2000 AND 1999 UNAUDITED AND DECEMBER 31, 1999 AND 1998 AUDITED
<TABLE>
<CAPTION>
Par Value Paid In Accumulated
Shares Amount Capital Losses Total
------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
BALANCE, DEC.31, 1997 6,412,531 6,413 325,462 (493,124) (161,249)
Adjustment-Retained
Earnings 0 0 0 (13,897) (13,897)
December 31, 1998-
Issuance of 841,850
shares of $0.001 par value
common stock for $420,925
from 504 Reg. D Offering 841,850 842 420,083 0 420,925
Net Profit (Loss)-Year
Ended December 31, 1998 0 0 0 (18,705) (18,705)
--------- --------- --------- --------- ---------
BAL. DEC. 31,1998 7,254,381 7,254 745,546 (525,726) 227,074
February 10, 1999-
Issuance of 31,400 shares of
$0.001 par value common
stock for $15,700 in services
from 504 Reg. D offering 31,400 31 15,669 0 15,700
February 10, 1999-
Issuance of 14,000 shares of
Restricted Rule 144 common
stock for services (web site
development) 14,000 14 6,986 0 7,000
February 10, 1999-
Issuance of 1,106,750 shares
of $0.001 par value common
stock for $553,375 from 504
Reg. D offering 1,106,750 1,107 552,268 0 553,375
--------- --------- --------- --------- ---------
Subtotal 8,406,531 8,406 1,320,469 (525,726) 803,149
</TABLE>
See accompanying notes and independent auditor's report
F-10
<PAGE>
SOUNDWORKS INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
SEPTEMBER 30, 2000 AND 1999 UNAUDITED AND DECEMBER 31, 1999 AND 1998 AUDITED
CONTINUED
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value Paid In Accumulated
Shares Amount Capital Losses Total
------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
February 12, 1999-
Issuance of a 4 share for
1 share stock dividend 33,626,124 33,626 (33,626) 0 0
March, 1999-
Issuance of stock, record
date corrections 64,000 64 (64) 0 0
Net Loss-Year Ended
December 31, 1999 (177,574) (177,574)
---------- --------- --------- --------- ---------
BAL., DEC. 31, 1999 42,096,655 42,096 1,286,779 (703,300) (625,575)
March, 2000-
Issuance of 30,000 shares
of restricted Rule 144 stock
for services 30,000 31 5,970 0 6,000
Net Loss-Period Ended
September 30, 2000 0 0 0 (217,734) (217,734)
Adjustment-Retained Earnings 0 0 4 36 s 40
---------- --------- --------- --------- ---------
BAL. June 30, 2000 42,126,655 42,126 1,292,749 (820,373) 514,502
</TABLE>
See accompanying notes and independent auditor's report.
F-11
<PAGE>
SOUNDWORKS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999 UNAUDITED AND DECEMBER 31, 1999 AND 1998 AUDITED
Note 1. The Company
SoundWorks USA, Inc. ("the Company") is a Washington corporation founded
December 16, 1992. The Company produces and markets spoken word and music
products on audio compact disc, cassette tapes, and video. These products are
marketed under the Company's trade names Jerden Records and SpeechWorks. Its
focus is on "nostalgia" products.
The Jerden Records products consist of original music from the company's library
of original master recordings performed by some of the top names of the 50's and
60's, including The Kingsmen, Don & The Goodtimes, Shocking Blue, The Brothers
Four, Wes Montgomery, Pete Fountain, etc. Some of the products are "Greatest
Hits" compilations, or songs from popular albums that have never before been
produced on CD format.
The Company's library of master recordings is utilized by it to produce releases
of artists that appeal to the nostalgia market.Material in the master library is
copyrighted and royalties are payable upon the sale of the recording. The
Company verifies the legal standing of its copyrights before production is begun
on any particular title. The Company believes its copyrights are in order but
also recognizes that its library contains some material where copyrights are
clouded. Historical Icon material is in the public domain, and therefore
requires no payment of royalties.
Jerry Dennon is the founder of the Company. His experience includes positions in
record production, promotion and distribution as well as various positions in
the broadcasting and entertainment industries.
In 1963 Mr. Dennon founded Jerden Music as a production company to produce and
develop recording artists. He has two CLIOs--the international broadcasting
award honoring the world's best broadcast advertisements.
In 1977 Mr. Dennon created First American Records, Inc. which under several
labels--including The Great Northwest Music Company label--won several Grammy
Awards.SoundWorks International, Inc. ("SoundWorks"), a Nevada corporation, was
formed on March 19, 1997 as a subsidiary of E/S Corporation for the purpose of
acquiring SoundWorks USA, Inc., a Washington corporation, by issuing shares of
E/SCorporation for such acquisition. E/S Corporation changed its plans for this
acquisition on April 17, 1997 by first spinning off to its shareholders
100% (1,012,531 shares) of its issued and outstanding common stock and then
having
F-12
<PAGE>
SOUNDWORKS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30,2000 AND 1999 UNAUDITED AND DECEMBER 31, 1999 AND 1998
Note 1. The Company - continued
Soundworks International, Inc., as a separate corporate entity, acquired
Soundworks USA, Inc. in a reverse takeover by issuing 4,000,000 shares to the
shareholders of SoundWorks USA, Inc. pursuant to an Agreement and Plan of
Business Combination with the effective date of the acquisition being September
1, 1997.
SoundWorks International, Inc. also issued 400,000 shares to its investor
relations subcontractors (Toby Investments, L.L.C. 133,334 shares; 4 Point Lake,
L.L.C. 133,334; shares XXX Enterprises Corp. 133,333 shares) as a consulting fee
incident to the above mentioned Agreement and Plan of Business Combination.
On December 17, 1997 SoundWorks, through its sponsoring market maker, West
America Securities Corp. filed its l5(c)2-ll application with the NASD to have
its stock quoted on the NASD's Electronic Bulletin Board (NASD:OTC:BB). On
September 16, 1998 SoundWorks obtained the trading symbol "SOWK" and is
currently being traded under that symbol on NASD's Electronic Bulletin Board. In
April 2000, the company's stock was removed from the Electronic Bulletin Board
and is currently being traded on the "pink sheets" as a result of its not being
an SEC reporting company. SoundWorks is in the process of preparing an SB-2
registration statement and offering. When completed, SoundWorks' stock will be
traded on the Electronic Bulletin Board.
Note 2. Summary of Significant Accounting Policies
This summary of significant accounting policies of SoundWorks International,
Inc. (the Company) is presented to assist in understanding the Company's
financial statements. The financial statements and notes are representations of
the company's management who is responsible for their integrity and objectivity.
These accounting policies conform to generally accepted accounting principles
and have been consistently applied in the preparation of the financial
statements.
Nature of Operations
See The Company above.*
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
short-term debt securities purchased with a maturity of three months or less to
be cash equivalents.
Property and Equipment
Property and equipment are stated at the lower of cost or fair market value.
Depreciation is computed for financial statement purposes as well as for federal
income tax purposes using the MACRS (Modified Accelerated Cost Recovery System)
method of depreciation. Equipment is depreciated over five years; Furniture and
Fixtures over seven years; and Leasehold Improvements over 39 years. The master
tape library is classified as Furniture and Fixtures and is being depreciated
over a seven year period. The leasehold improvements for the old facility were
written off on September 30, 1998. The leasehold improvements for the new
facility began on October 1, 1998 along with the related depreciation for three
months. Inventory consists primarily of tapes and compact discs held for resale
and is valued at the lower of actual cost or market value.
F-13
<PAGE>
SOUNDWORKS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999 UNAUDITED AND DECEMBER 31, 1999 AND 1998 AUDITED
Note 2. Summary of Significant Accounting Policies - continued Income Taxes
The Company has filed all tax returns. The Company has incurred net operating
losses from 1992 through 1999 of $703,300. The losses will begin expiring for
income tax purposes in the year 2007.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
effect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
Operating Expenses
Operating expenses are allocated between the Company and Montcalm, Inc. based on
the percentage of gross revenues generated each by the Company and Montcalm,
Inc.
Note 3. Acquisition of Master Tape Library
The Master Tape Library of the Company was acquired at a deemed value of
$100,600 from Jerry Dennon for stock in the Company at the Company's inception.
Ownership of the Master Tape Library is subject to the normal royalty interests
in the recording business and was also subject to a $0.25 per unit royalty
interest of $50,000 in payment of prior years' accumulated expenses and storage
charges. This $50,000 has been paid via 100,000 shares of stock from the
Company's 504 Reg. D Offering at $0.50 per share.
Note 4. Going Concern and Financings *
The Company requires adequate financing and sufficient sales to remain in
operation. The Company has completed a corporate development plan involving a
reverse takeover of a Nevada corporation named SoundWorks International, Inc.
which was finalized on September 1, 1997, and subsequent Reg. D 504 financings.
SoundWorks is now a public company with its stock quoted on the NASD's
Electronic Bulletin Board. The first 504 Reg. D financing scheduled for
5,000,000 shares at $0.01 for a total of $50,000 was closed on December 5, 1997
at $10,000 to avoid excessive dilution to existing shareholders. A second 504
Reg. D Offering was then filed with the State of New York for 1,980,000 shares
at $0.50 per share or $990,000. As of December 31, 1998, 841,850 shares have
been sold at $0.50 per share for $420,925. As of December 31, 1999, 1,138,510
shares were sold (total 1,980,000) at $0.50 per share for $569,075. Of this
amount, 1,106,750 shares were bought with three collateralized notes for
$184,458.50, $184,458.50, and $184,458.00 (total $553,750). These notes were
adequately collateralized using collateral other than the stock being purchased.
During 1999 $180,000 was paid and during the first quarter 2000 $140,724 was
paid against these notes, leaving a balance of $233,020.00.
In February 2000, Soundworks entered into an agreement to acquire Santa Fe
Acquisitions, Inc. using part of the proceeds from its SB-2 offering. Through
March 31, 2000 SoundWorks had loaned Santa Fe $61,870 to cover its operating
costs.
F-14
<PAGE>
SOUNDWORKS INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND DECEMBER 31, 1999 AND 1998
Note 5. Company Facilities
The Company currently occupies approximately 4,000 square feet of office and
warehouse space located on Oddfellows Road on Bainbridge Island, which is 7
miles (across Puget Sound) from downtown Seattle, Washington. The Company rents
these facilities on a month-to-month basis for $2,000.00 per month commencing
January 1, 1999 from Montcalm, LLC, the owner of the property. The Company's
mailing address is post office Box 4608, Rolling Bay, WA.98061-0608.The
Company's phone and fax numbers are (206) 780-0857 and (206) 780-0859
respectively. Montcalm, LLC is owned by Gerald B. Dennon, President of the
Company. The monthly rental amount was set at or below the fair market value
rent for Bainbridge Island.
Note 6 Equipment Lease
The Company entered into an equipment lease agreement with the Wm. Dierick Co.
(now * IKON Office Solutions, Inc.) on December 18, 1996 for the lease of a
Canon NP6030 copier and a Canon L-4000 fax machine. The lease agreement provides
for a minimum * monthly payment, excluding taxes, of $280.80 per month for sixty
(60) months plus a monthly charge per copy of $O.0222 for copies in excess of
3,000 copies per month.
Note 7. Notes Payable
Wilma J. Akin is owed $7,350 on a six month promissory note due December 26,
1998 with interest at 12% per annum.
Note 8. Certain Relationships
Gerald B. Dennon, through Montcalm, Inc., has periodically funded the
Company over the past six years by loans. Such loans have been paid back
periodically consistent with the Company's working capital requirements. In
addition, Gerald B. Dennon, * through Montcalm, LLC, owned by Montcalm, Inc.,
owns and rents the Company's office and warehouse facility to the Company at a
fair market rental (see Note 5).
The Company's financial statements show a $146,001 loan receivable owed to the
Company by Gerald B. Dennon and Montcalm, Inc. at March 31, 2000. This is a
result of the reallocation of expenses from Soundworks to Montcalm, Inc. and the
charges to Wages-Officers.
On October 18, 2000 the Board of Directors awarded Mr. Dennon 6,000 shares out
of the 30,000 shares of restricted stock of SpeechWorks International, Inc.
stock owned by the Company as discussed in Note 10 Subsequent Events. Mr. Dennon
abstained from the voting. The Directors made this award because of his
extraordinary initial efforts in securing the asset for the Company; because of
Mr. Dennon's personal guarantees on a $25,000 bridge loan secured for the
Company; and because of Mr. Dennon in return agreeing to transfer 900,000 of his
personal shares back to the Company for retirement into treasury stock. These
900,000 shares were approximately equal in value to the 6,000 shares of
SpeechWorks stock discounted to fifty percent based on the stock being
restricted for one year and consequently subject to potential market
fluctuations.
F-15
<PAGE>
SOUNDWORKS INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND DECEMBER 31, 1999 AND 1998
--------------------------------------------------------------------------------
Note 9. Advance Royalties Payable
The following are non-refundable advances to be recouped over five years against
future sales:
Delta Music, Inc. $7,532
Columbia House 3,826
Sunset Productions 2,834
Sundazed Music 6,400
Ace Music 10,000
------
$30,592
Note 10. Subsequent Events
On October 20, 2000 the Company announced its securing of $250,000 of bridge
financing personally guaranteed by Mr. Dennon, a principal use for which was to
exercise its 30,000 warrants in SpeechWorks International, Inc. (NASD: SPWK) for
$85,000. The Company had received these warrants in 19888 along with $45,000 as
a result of the sale of the Company's domain name SpeechWorks.com to Applied
language Technologies , Inc., a private company. On August 1, 2000 after
changing its name to SpeechWorks International, Inc. it went public in a
$100,000,000 offering, thus giving the warrants a substantial value. This value
has not been shown on the Company's books.
F-16
<PAGE>
--------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give any
information or represent anything not contained in this prospectus. You must not
rely on any unauthorized information. This prospectus does not offer to sell or
buy any units in any jurisdiction where it is unlawful. The information in this
prospectus is current as of ______, 2000.
--------------------------------------------------------------------------------
TABLE OF CONTENTS
Prospectus Summary.....................2
Summary Financial Data.................4
Risk Factors...........................4
Use of proceeds........................8
Plan of Distribution...................9
Determination of Offering Price........9
Divided Policy.........................9
Capitalization.........................9
Dilution..............................10
Selected Financial Data...............10
Business..............................12
Competition...........................20
Capitalization........................22
Legal Proceedings.....................22
Management............................22
Principal Stockholders................25
Certain Transactions..................26
Description of Capital Stock..........26
Sales Eligible for Future Sale........30
Determination of Offering Price......30
Legal Matters.........................31
Experts...............................31
Further Information...................31
PROSPECTUS
SOUNDWORKS INTERNATIONAL, INC.
ISSUER
1,500,000 Units
Each Unit Consisting of one share of Common Stock $.001
Par Value and One Redeemable Warrant to Acquire a Share
December , 2000
----------------
Until , 2001 (25 days after the date of this prospectus), all dealers
that buy, sell or trade these securities, whether or not participating in this
offering, may be required to deliver a prospectus. This is in addition to the
dealers' obligation to deliver a prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
[GRAPHIC SOUNDWORKS INTERNATIONAL INC.]
<PAGE>
PART TWO
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As permitted by Nevada law, Soundworks' Certificate of Incorporation includes a
provision which provides that a director of Soundworks shall not be personally
liable to or its stockholders for monetary damages for a breach of fiduciary
duty as a director, except (i) for any breach of the director's duty of loyalty
to the Company or its stockholders, (ii) for acts or omissions not in good faith
or that involve intentional misconduct or a knowing violation of the law, (iii)
under Section 174 of the General Corporation Law of the State of Nevada, which
prohibits the unlawful payment of dividends or the unlawful repurchase or
redemption of stock, or (iv) for any transaction from which the director derives
an improper personal benefit. This provision is intended to provide directors
with protection against, and to limit their potential liability for monetary
damages resulting from, suits alleging a breach of the duty of care by a
director. As a consequence of this provision, stockholders of Soundworks will be
unable to recover monetary damages against directors for action taken by them
that may constitute negligence or gross negligence in performance of their
duties unless such conduct falls within one of the foregoing exceptions. The
provision, however, does not alter the applicable standards governing a
director's fiduciary duty and does not eliminate or limit the right of
Soundworks or any stockholder to obtain an injunction or any other type of
non-monetary relief in the event of a breach of fiduciary duty. Management of
Soundworks believes this provision will assist Soundworks in securing and
retaining qualified persons to serve as directors. Soundworks is unaware of any
pending or threatened litigation against Soundworks or its directors that would
result in any liability for which such director would seek indemnification or
similar protection.
Such indemnification provisions are intended to increase the protection provided
directors and, thus, increase Soundworks' ability to attract and retain
qualified persons to serve as directors. Because directors liability insurance
is only available at considerable cost and with low dollar limits of coverage
and broad policy exclusions, Soundworks does not currently maintain a liability
insurance policy for the benefit of its directors although Soundworks may
attempt to acquire such insurance in the future. Sounworks believes that the
substantial increase in the number of lawsuits being threatened or filed against
corporations and their directors and the general unavailability of directors
liability insurance to provide protection against the increased risk of personal
liability resulting from such lawsuits have combined to result in a growing
reluctance on the part of capable persons to serve as members of boards of
directors of public companies. Soundworks also believes that the increased risk
of personal liability without adequate insurance or other indemnity protection
for its directors could result in overcautious and less effective direction and
management of Soundworks. Although no directors have resigned or have threatened
to resign as a result of the Soundworks' failure to provide insurance or other
indemnity protection from liability, it is uncertain whether Soundworks'
directors would continue to serve in such capacities if improved protection from
liability were not provided.
The provisions affecting personal liability do not abrogate a director's
fiduciary duty to the Soundworks and its shareholders, but eliminate personal
liability for monetary damages for breach of that duty. The provisions do not,
however, eliminate or limit the liability of a director for failing to act in
good faith, for engaging in intentional misconduct or knowingly violating a law,
for authorizing the illegal payment of a dividend or repurchase of stock, for
obtaining an
--------------------------------------------------------------------------------
<PAGE>
improper personal benefit, for breaching a director's duty of loyalty (which is
generally described as the duty not to engage in any transaction which involves
a conflict between the interest of Soundworks and those of the director) or for
violations of the federal securities laws. The provisions also limit or
indemnify against liability resulting from grossly negligent decisions including
grossly negligent business decisions relating to attempts to change control of
Soundworks.
The provisions regarding indemnification provide, in essence, that Soundworks
will indemnify its directors against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
in connection with any action, suit or proceeding arising out of the director's
status as a director of Soundworks, including actions brought by or on behalf of
Soundworks (shareholder derivative actions). The provisions do not require a
showing of good faith. Moreover, they do not provide indemnification for
liability arising out of willful misconduct, fraud, or dishonesty, for
"short-swing" profits violations under the federal securities laws, or for the
receipt of illegal remuneration. The provisions also do not provide
indemnification for any liability to the extent such liability is covered by
insurance. One purpose of the provisions is to supplement the coverage provided
by such insurance. However, as mentioned above, Soundworks does not currently
provide such insurance to its directors, and there is no guarantee that
Soundworks will provide such insurance to its directors in the near future
although Soundworks may attempt to obtain such insurance.
The provisions diminish the potential rights of action which might otherwise be
available to shareholders by limiting the liability of officers and directors to
the maximum extent allowable under Nevada law and by affording indemnification
against most damages and settlement amounts paid by a director of Soundworks in
connection with any shareholders derivative action. However, the provisions do
not have the effect of limiting the right of a shareholder to enjoin a director
from taking actions in breach of his fiduciary duty, or to cause Soundworks to
rescind actions already taken, although as a practical matter courts may be
unwilling to grant such equitable remedies in circumstances in which such
actions have already been taken. Also, because Soundworks does not presently
have directors liability insurance and because there is no assurance that
Soundworks will procure such insurance or that if such insurance is procured it
will provide coverage to the extent directors would be indemnified under the
provisions, Soundworks may be forced to bear a portion or all of the cost of the
director's claims for indemnification under such provisions. If Soundworks is
forced to bear the costs for indemnification, the value of Soundworks' stock may
be adversely affected. In the opinion of the Securities and Exchange Commission,
indemnification for liabilities arising under the Securities Act of 1933 is
contrary to public policy and, therefore, is unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is an itemization of expenses, payable by Soundworks from the
proceeds of this offering, incurred by Soundworks in connection with the
issuance and distribution of the securities of Soundworks being offered hereby.
All expenses are estimated except the SEC and the NASD Registration and Filing
Fees. See "Use of Proceeds."
--------------------------------------------------------------------------------
<PAGE>
SEC Registration and Filing Fee $883.20
NASD Registration and Filing Fee 830.00
Transfer & Warrant Agent Fees 2,500.00
Financial Printing 10,000.00
Accounting Fees and Expenses 6,000.00
Legal Fees and Expenses 50,000.00(1)
Blue Sky Fees and Expenses 5,000.00
Miscellaneous
TOTAL $80,000.00
(1) $15,000.00 of which was paid prior to the initial filing of this
Registration Statement and related Prospectus.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
1. (a) On March 7, 2000 Soundworks issued 30,000 shares of its Common
Stock to four employees as follows: Robert L.Wikstrom, 10,000 shares; Scott
Schmidt, 5,000 shares; Daniel Dennon, 5,000 shares; and Diane Botefuhr, 10,000
shares. Mr. Dennon is the son of Gerald B. Dennon, President of Soundworks.
(b) There was no underwriter involved. All shares were issued to
employees for past services. Each employee was required to provide suitable
investment representations
(c) The shares were valued at $6000 or $20 per share.
(d) The shares were all taken for investment, bear a legend to that
effect and were issued in reliance upon Section 4 (2) of the Securities Act of
1933, as amended as only four persons were involved two of whom are either
Management or related to Management.
2. (a) On February 10, 1999 Soundworks issued 31,400 shares of its
Common Stock
(b) There was no underwriter involved.
(c) The shares were issued for $15,700 in services.
(d) The shares were issued in reliance on an exemption from
registration under Rule 504 of Regulation D of the Securities Act of 1933.
3. (a) On February 10, 1999, Soundworks issued 14,000 shares of its
Common Stock to one person.
--------------------------------------------------------------------------------
<PAGE>
(b) There was no underwriter involved .The shares were issued for
web site development to one person .
(c) There was no underwriter. The shares were issued to one person
for services valued at $7,000.
(d) The shares were taken for investment, bear a legend to that
effect, and were issued in reliance upon Section 4 (2) of the Securities Act of
1933
4. (a) On February 10, 1999, Soundworks issued 1,106,750 shares of its
Common Stock for $553,375
(b) There was no underwriter involved.
(c) The shares were issued by the company for $553,375. There was no
underwriter involved
(d) The shares were issued pursuant to the exemption from
registration provided under Rule 504 of Regulation D.
5. (a) In May 1997, Soundworks issued 400,000 shares of its Common
Stock to be divided equally between Toby Investments, L.L.C., 4 Point Lake
L.L.C. and XXX Enterprises Corp.
(b) There was no underwriter involved. The shares were issued to
entities related to executive officers or members of the Board of Directors or
Advisory Board of Soundworks.
(c) All shares were issued for financial, venture capital, public
relations and brokerage services to be rendered valued at $400.00. In addition,
as past and future consideration for such services rendered and to be rendered
the above mentioned contractors were provided with warrants to acquire an
additional 1,000,000 shares of Soundworks Common Stock. Such warrants were
subsequently exercised on February 10, 1999, as indicated in item 4 above.
(d) The shares and warrants were issued in reliance on Section 4 (2)
of the Securities Act of 1933, as amended, to a limited number of entities (3)
controlled by Management.
6. (a) In September 1997, Soundworks issued 4,000,000 shares of its
Common Stock to an entity controlled by Gerald B. Dennon which owned the music
and voice library and business currently being pursued by Soundworks in return
for such library and business
(b) There was no underwriter involved and Gerald B. Dennon is
President and CEO of the company.
(c) The music and voice library were "booked" at $100,000 although
the value to be considerably higher.
(d) The shares were issued in reliance on Section 4 (2) of the
Securities Act of 1933, as amended as no public offering was involved.
--------------------------------------------------------------------------------
<PAGE>
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
1. Underwriting Agreement. (to be filed by Amendment)
3.(i) Certificate of Incorporation (Nevada), March 19, 1997.
3.(i)(a) Certificate of Incorporation, as amended (to be filed by amendment).
3.(ii) By-laws, as amended.
3.(ii)(a) Amended and Restated By-laws (to be filed by amendment).
4.(i) Specimen Copy of Common Stock Certificate. - (to be filed by
Amendment).
4.(ii) Form of Warrant Certificate
5. Opinion of Raice Paykin Krieg & Schrader LLP for Registrant.
10.(i) Agreement to acquire Santa Fe Acquisitions , Inc. (to be filed by
amendment)
21. Subsidiaries of the Registrant. (to be filed by Amendment)
23.(i) Consent of Raice Paykin Krieg & Schrader LLP is included in Exhibit
5.
23.(ii) Consent of William L. Butcher, CPS P.S. is included in Exhibit 24 .
24. Power of Attorney appointing Gerald B. Dennon.
ITEM 28. UNDERTAKINGS
[The undersigned Registrant hereby undertakes to provide to participating
broker-dealers, at the closing, certificates in such denominations and
registered in such names as required by the participating broker-dealers, to
permit prompt delivery to each purchaser.]
The undersigned Registrant also 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:
(in the registration statement or any material change to such information in the
registration statement; provided, however, that paragraphs (a)(1)(i) and
(a)(1)(ii) do not apply if iii)To include any material information with respect
to the plan of distribution not previously disclosed the registration statement
is on Form S-3 or Form S-8, and the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic reports
filed by the registrant pursuant to section 13 or section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) That, for the purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
--------------------------------------------------------------------------------
<PAGE>
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant 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 Registrant 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 Act and will be governed by the final adjudication of
such issue.
This Registration Statement consists of the following:
1. Facing page.
3. Prospectus.
4. Complete text of Items 24-28 in Part Two of Registration Statement.
5. Exhibits.
6. Signature page.
7. Consents of:
Raice Paykin Krieg & Schrader LLP
William L. Butcher, CPA P.S.
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<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Seattle, State of Washington, on December , 2000.
/s/ GERALD B. DENNON
----------------------------
Gerald B. Dennon
Chairman of the Board
<PAGE>
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated:
SIGNATURE TITLE DATE
Chairman, President, CEO, Director December 21, 2000
Vice President, Secretary/Treasurer December 21, 2000
Director, COO and CFO December 21, 2000
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
I have issued my report dated May 23, 2000, accompanying the financial
statements of Soundworks, International, Inc. and Subsidiary contained in the
Registration Statement and Prospectus. I consent to the use of the
aforementioned report in the Registration Statement and Prospectus, and to the
use of my name as it appears under the caption "Experts."
/s/ William L. Butcher
--------------------------------
December 21, 2000 William L. Butcher CPA, P.S.
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