<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 31, 2000
REGISTRATION NO. 333-38794
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
VICTORY ENTERTAINMENT CORP.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
FLORIDA 7812 59-3579507
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
</TABLE>
1000 UNIVERSAL STUDIOS PLAZA
BUILDING 22A
ORLANDO, FL 32819
(407) 224-5360
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
------------------------------
MICHAEL H. GERBER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
VICTORY ENTERTAINMENT CORP.
1000 UNIVERSAL STUDIOS PLAZA
BUILDING 22A
ORLANDO, FL 32819
(407) 224-5360
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
GERALD S. TANENBAUM, ESQ. WILLIAM A. UBERT, ESQ.
CAHILL GORDON & REINDEL RUSKIN, MOSCOU, EVANS & FALTISCHEK, P.C.
80 PINE STREET 170 OLD COUNTY ROAD
NEW YORK, NY 10005-1702 MINEOLA, NY 11501-4366
(212) 701-3000 (516) 663-6600
(212) 269-5420 (FACSIMILE) (516) 663-6643 (FACSIMILE)
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
----------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
--
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
--
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED
TITLE OF EACH CLASS OF AMOUNT TO BE MAXIMUM OFFERING MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PRICE PER SHARE(1) OFFERING PRICE(1) REGISTRATION FEE(2)
<S> <C> <C> <C> <C>
Common Stock, $.001 par value per
share............................. 2,645,000 $12.00 $31,740,000 $8,380
</TABLE>
(1) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to rule 457 under the Securities Act.
(2) Includes $7,590 previously paid in connection with the initial filing and
$790 which is being paid in connection with Amendment No. 1.
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 OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED JULY 31, 2000
PROSPECTUS
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
2,300,000 SHARES
[LOGO]
COMMON STOCK
------------------
We are selling 2,300,000 shares of our common stock. The underwriters named
in this prospectus may purchase up to 345,000 additional shares of common stock
from us to cover over-allotments.
This is our initial public offering of common stock. We anticipate that the
initial public offering price will be between $10.00 and $12.00 per share. We
have applied to have the common stock included for quotation on the Nasdaq
National Market under the symbol VICT.
------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE 7 TO READ ABOUT FACTORS THAT YOU SHOULD CONSIDER BEFORE BUYING SHARES OF
OUR COMMON STOCK.
---------------------
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.
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------------- ---------------
<S> <C> <C>
Public Offering Price..................................... $ $
Underwriting Discounts and Commissions.................... $ $
Proceeds to Victory....................................... $ $
</TABLE>
The underwriters expect to deliver the shares to purchasers on or about
, 2000.
------------------------
WEATHERLY SECURITIES CORP. M.R. BEAL & COMPANY
, 2000
<PAGE>
[INSIDE FRONT COVER]
[The "Victory Entertainment" logo, the phrase "A Dynamic New Force in the
World of Entertainment," bullet points stating "Live Action Production," "3D
Animation," "Digital Visual Effects," "Original Content for the Internet" and
"Distribution." In addition, pictorial frames showing characters from THE DOOLEY
AND PALS SHOW, Ed McMahon's NEXTBIGSTAR.COM design, characters from VAMPS,
including the text "your greatest fantasy--your worst nightmare," characters
from SALTY THE SEA LION, including the text "A wonderful series for the whole
family," and characters from SK8RATZ and EXTREME TEAM.]
<PAGE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of our common stock only in jurisdictions where offers and sales are
permitted. The information in this prospectus is current only as of its date,
regardless of the time of delivery of this prospectus or any offer or sale of
our common stock. In this prospectus, "Victory," "we," "us" and "our" refer to
Victory Entertainment Corp. and its subsidiaries.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 7
Forward-Looking Statements............ 16
Use of Proceeds....................... 17
Dividend Policy....................... 17
Capitalization........................ 18
Dilution.............................. 19
Selected Historical Financial Data.... 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 22
</TABLE>
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Business.............................. 29
Management............................ 39
Principal Shareholders................ 46
Related Party Transactions............ 47
Description of Capital Stock.......... 48
Shares Eligible for Future Sale....... 51
Underwriting.......................... 53
Legal Matters......................... 55
Experts............................... 56
Where You Can Find Additional
Information......................... 56
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
------------------------
Until , 2000, all dealers that buy, sell or trade our common stock,
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.
i
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
YOU SHOULD READ THIS ENTIRE PROSPECTUS CAREFULLY, INCLUDING "RISK FACTORS" AND
THE FINANCIAL STATEMENTS AND THE NOTES TO THOSE FINANCIAL STATEMENTS INCLUDED
ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION
CONTAINED IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS DO NOT EXERCISE THEIR
OVER-ALLOTMENT OPTION.
VICTORY ENTERTAINMENT CORP.
OUR COMPANY
We are an integrated entertainment company specializing in television and
Internet programming. We develop, produce and distribute television and Internet
programming and license and market program-related branded consumer merchandise.
We operate a state-of-the-art 3-D computer animation and special effects studio
where we develop and produce our in-house projects and produce programming for
third parties. Our current projects include the production and distribution of
THE DOOLEY AND PALS SHOW, a children's television series; the development of
VAMPS, a sci-fi dramatic series, and EXTREME TEAM and SK8RATZ, two animated
shows for children; and the production of NEXTBIGSTAR.COM, an online
entertainment talent search hosted by television personality Ed McMahon. For the
year ended June 30, 2000, our revenues were $ and our net loss was
$ million. Through June 2000, our revenues were derived substantially from our
animation and special effects projects.
Our business areas are comprised of:
- TELEVISION PROGRAMMING AND DISTRIBUTION. We develop, produce and
distribute television series, specials and made-for-television movies.
Development entails the conceptualization and creation of a project.
Production includes overseeing all principal creative and business aspects
of a project, including the hiring of production personnel and studio
space, budgeting, casting, scripting, editing and, where applicable,
animation and special effects. Distribution involves the marketing and
sales of, and the licensing of rights to, program-related material.
-- We produce THE DOOLEY AND PALS SHOW, a children's television series,
and we have obtained commitments from public broadcasting stations that
reach over 60% of households in the United States to air THE DOOLEY AND
PALS SHOW. We have completed the production of 37 of the 39 episodes
comprising our first broadcasting season. The remaining two episodes
are scheduled for completion prior to September 30, 2000.
-- Our projects currently under development consist of VAMPS, a sci-fi
dramatic series, and two animated series which we are developing in
association with Fred Silverman Productions, EXTREME TEAM and SK8RATZ.
-- We currently distribute THE DOOLEY AND PALS SHOW for television
broadcast under an arrangement with South Carolina Educational TV. We
plan to distribute our other proprietary programming, including 22
completed television episodes and a feature film for SALTY THE SEA
LION, and third-party programming in virtually all media, including
television, home video, DVD, music publishing and e-commerce. We
believe that we have the infrastructure, relationships and management
experience necessary to provide a value-added service to other
producers of high-quality programming.
- INTERNET PROGRAMMING. We develop and produce Internet programming. Our
Internet programming involves the creation, design and publishing of
interactive websites that provide streaming video and high-quality stereo
sound over the Internet. Some of our websites will display both
pre-recorded and live telecast events.
-- Together with television personality Ed McMahon, we produce
NEXTBIGSTAR.COM, an online entertainment talent search, where, after
viewing contestants' performances online, viewers
<PAGE>
can vote for contestants in a series of competitive rounds, including
four telecast finals, the first of which was broadcast live on
NEXTBIGSTAR.COM on July 22, 2000.
- ANIMATION AND SPECIAL EFFECTS. We produce state-of-the-art animation and
special effects, including multimedia 3-D graphics and animation, for our
own programming as well as programming for third parties. Our animation
and special effects team is led by Art David, a member of the special
effects team for the feature motion picture THE MATRIX.
-- Our animation and special effects team currently provides animation for
THE DOOLEY AND PALS SHOW and is developing, in association with Fred
Silverman Productions, EXTREME TEAM and SK8RATZ, two animated series
targeted for the six-to-twelve year old market.
- BRANDED MERCHANDISE.
-- LICENSING AND DIRECT SALES. We will offer a wide variety of branded,
retail merchandise through domestic and international licensing
programs, e-commerce and a direct sales effort. We and our licensees
will market our merchandise worldwide through a variety of distribution
channels, including mass market and specialty retailers, our television
programs and websites.
Images of our characters will appear on numerous retail products,
including various types of apparel, toys and video games, and a wide
assortment of other items. We intend to retain creative approval over
all licensed products.
-- HOME VIDEO. We intend to build a video library containing programming
from our television shows as well as programs specifically designed for
home video use.
-- MUSIC. Our programming features original music, including theme songs
composed specifically for our performers. Music is an integral part of
the entertainment experience in our television programs. We intend to
compile our original songs onto compact discs which will be available
for retail sale.
REVENUE SOURCES
While we currently derive substantially all of our revenues from our
animation and special effects projects, we are in the process of implementing
our business plan in our other business areas. We anticipate our future sources
of revenue will include:
- TELEVISION. We expect to receive revenues as a producer of television
programming through domestic network and cable cash licensing fees and
domestic first run syndication fees (other than for THE DOOLEY AND PALS
SHOW). We expect to receive revenues as a distributor of television
programming through international distribution fees and domestic re-run
fees.
- INTERNET. We expect to receive revenues from Internet advertising on our
websites through cross-promotional agreements with other websites, direct
sales of our products online and, for our NEXTBIGSTAR.COM website, an
integrated Internet and television advertising package including Internet
and television commercials, category-specific sponsorship packages,
banner ads, tags and website links.
- MERCHANDISING. We expect to receive revenues from the licensing,
marketing and distribution and direct sales of our program-related
merchandise, which includes toys, CDs and interactive CD-Roms, board
games, apparel and home videos.
2
<PAGE>
OUR STRATEGIES
Our goal is to continue to be an innovative developer, producer and
distributor of television and Internet programming. Our strategies are to:
- develop, produce and distribute quality television and Internet
programming;
- operate the largest worldwide online talent search domestically and
internationally;
- expand upon our animation and special effects studio capabilities by
continuing our commitment to state-of-the-art technology and by continuing
to hire experienced creative personnel who specialize in the creation,
development and production of 3-D computer animation and special effects;
- maximize our licensing, marketing, distribution and direct online sales
opportunities for our program-related merchandise; and
- expand our revenues by continuing to capitalize on our existing business
and strategic relationships.
CHALLENGES WE FACE
As discussed elsewhere in this prospectus, including under the heading "Risk
Factors," our future success depends on many factors, some of which are outside
of our control. Challenges we face include the following:
- We will need to successfully implement our business plan in one or more of
our business areas before we can become profitable.
- We are currently losing money and cannot predict when we will become
profitable, and we have had and may continue to have difficulty paying our
debts on time.
- Our markets are extremely competitive and the success of our businesses is
dependent on changing consumer preferences and other factors outside of
our control.
ADDITIONAL INFORMATION
We were incorporated in Florida in May 1999. On July 1, 1999, we acquired
Lightpoint Entertainment, Inc., which was founded in 1997 and is now our wholly
owned subsidiary. Our principal executive offices are located at 1000 Universal
Studios Plaza, Building 22A, Orlando, Florida 32819, and our telephone number is
(407) 224-5360. The address of our website is WWW.VICTORYENTERTAINMENT.COM.
Information contained on our website is not part of this prospectus.
We own or have rights to various trademarks and trade names used in our
business. "DOOLEY" is our registered trademark. We have applied for federal
registration of the marks "DOOLEY AND PALS," "THE DOOLEY AND PALS SHOW,"
"NEXTBIGSTAR.COM," "NEXTBIGSTAR.COM" design and "THE NEXTBIGSTAR.COM." This
prospectus also includes trademarks, service marks and trade names owned by
other companies.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
COMMON STOCK OFFERED................. 2,300,000 shares
COMMON STOCK TO BE OUTSTANDING AFTER 12,492,339 shares
THIS
OFFERING...........................
USE OF PROCEEDS...................... We intend to use the net proceeds from this offering:
- to repay an outstanding promissory note;
- to fund our NEXTBIGSTAR.COM joint venture;
- to settle litigation relating to our Lightpoint
subsidiary; and
- for general corporate purposes, including expanding our
television and Internet programming and other working
capital requirements and identifying and funding potential
acquisitions of complementary and/or Internet-based
businesses, technologies, product lines or products.
PROPOSED NASDAQ NATIONAL MARKET VICT
SYMBOL.............................
</TABLE>
The share information above is stated as of June 30, 2000 and includes
160,428 shares of common stock to be issued upon the consummation of this
offering in connection with the resolution of litigation relating to our
Lightpoint subsidiary which is further described under "Business--Legal
Proceedings" and to which we refer to in this prospectus as the CMI litigation,
assuming a public offering price of $11.00 per share, the midpoint of the range
shown on the cover of this prospectus, and excludes:
- 5,002,866 shares of common stock issuable upon the exercise of outstanding
warrants;
- 668,000 shares of common stock issuable upon the exercise of outstanding
stock options; and
- an additional 332,000 shares of common stock reserved for issuance under
our stock option plan.
4
<PAGE>
SUMMARY FINANCIAL DATA
The following table summarizes:
- the statements of operations of Lightpoint Entertainment, Inc., our
predecessor, for the period from July 31, 1997 (Lightpoint's date of
inception) through June 30, 1998 and for the fiscal year ended June 30,
1999;
- the unaudited statement of operations of Lightpoint for the nine months
ended March 31, 1999; and
- our unaudited consolidated statement of operations for the nine months
ended March 31, 2000 (which includes the results of Lightpoint for the
entire period).
The table below does not include our results of operations from May 27, 1999
(the date of our inception) through June 30, 1999 since that information is
not considered meaningful for purposes of this presentation as we had
minimal activity. Diluted loss per share does not differ from basic loss per
share since the effect of potential common shares is anti-dilutive.
<TABLE>
<CAPTION>
LIGHTPOINT
(OUR PREDECESSOR) VICTORY
---------------------------------------------- --------------
FOR THE PERIOD FOR THE YEAR
FROM JULY 31, ENDED FOR THE NINE FOR THE NINE
1997 THROUGH JUNE 30, MONTHS ENDED MONTHS ENDED
JUNE 30, 1998 1999 MARCH 31, 1999 MARCH 31, 2000
-------------- ------------ -------------- --------------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
Revenues.................................................. $ 579 $ 222 $ 101 $ 118
Expenses:
Operating............................................... 860 1,335 1,033 2,848
General and administrative.............................. 1,248 3,039 2,187 3,373
Common stock, options and warrants issued for general
and administrative services........................... -- 2,875 710 2,257
Depreciation and amortization........................... 137 348 254 274
Abandonment of software................................. 150 -- -- --
Loss on disposal of equipment........................... -- 8 -- 8
------- ------- ------- -------
Total expenses........................................ 2,395 7,605 4,184 8,760
------- ------- ------- -------
Loss from operations...................................... (1,816) (7,383) (4,083) (8,642)
Interest expense, net..................................... 194 357 272 197
------- ------- ------- -------
Net loss.................................................. $(2,010) $(7,740) $(4,355) $(8,839)
======= ======= ======= =======
Net loss per share--basic and diluted..................... $(19.01) $ (5.05) $ (5.10) $ (.96)
======= ======= ======= =======
Weighted average common shares--basic and diluted......... 106 1,534 854 9,175
======= ======= ======= =======
</TABLE>
5
<PAGE>
The following table summarizes:
- our unaudited historical consolidated balance sheet as of March 31, 2000;
- our unaudited pro forma consolidated balance sheet as of March 31, 2000 to
reflect our issuance of a promissory note in the amount of $5,000,000, net
of financing costs of $670,000 on April 3, 2000; and
- our unaudited consolidated balance sheet as of March 31, 2000 on a pro
forma as adjusted basis to give effect to the sale of 2,300,000 shares of
common stock by us in this offering, after deducting the underwriting
discounts and commissions and estimated offering expenses; the repayment
of the $5,000,000 promissory note from the net proceeds of this offering;
and the payment of $1,000,000 in cash and the issuance of 160,428 shares
of common stock in settlement of our $2,745,417 notes payable and accrued
interest upon consummation of this offering in connection with the
resolution of the CMI litigation, assuming a public offering price of
$11.00, the midpoint of the range shown on the cover of this prospectus.
The table below does not show our historical balance sheet at June 30, 1999,
since that information is not meaningful for purposes of this presentation
as we had minimal activity.
<TABLE>
<CAPTION>
VICTORY
--------------------------------
AS OF MARCH 31, 2000
--------------------------------
PRO FORMA
AS
ACTUAL PRO FORMA ADJUSTED
-------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents................................... $ 148 $ 4,478 $20,124
Working capital (deficit)................................... (2,799) (2,799) 19,922
Total assets................................................ 1,376 5,706 21,352
Short-term debt............................................. 2,000 6,330 --
Total liabilities........................................... 3,201 7,531 456
Total shareholders' equity (deficit)........................ (1,825) (1,825) 20,246
</TABLE>
6
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER EACH OF THE RISKS DESCRIBED BELOW, TOGETHER
WITH ALL OF THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, BEFORE DECIDING
TO INVEST IN SHARES OF OUR COMMON STOCK. ADDITIONAL RISKS AND UNCERTAINTIES NOT
PRESENTLY KNOWN TO US MAY ALSO HARM OUR BUSINESS. IF ANY OF THE FOLLOWING EVENTS
ACTUALLY OCCUR, OUR BUSINESS COULD BE HARMED, THE PRICE OF OUR COMMON STOCK
COULD DECLINE AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE WE HAVE A LIMITED OPERATING
HISTORY
We began operating in July 1999. Because of our limited operating history,
our historical financial information is of limited value in projecting our
future results. Therefore, it is difficult to evaluate our business and
prospects.
OUR FUTURE RESULTS ARE DIFFICULT TO PREDICT BECAUSE WE HAVE AN UNPROVEN BUSINESS
MODEL
Our business model is broader than that of either a traditional
entertainment company or an Internet-based content provider and requires us to
perform successfully in a number of diverse areas in the entertainment industry.
These areas include developing, producing and distributing traditional
entertainment programming and Internet programming and licensing and
merchandising our program related products. Because of our unproven business
model, which anticipates revenues from multiple business areas as we implement
our business plan, we cannot predict our future results with certainty.
WE EXPECT TO CONTINUE TO INCUR LOSSES AND EXPERIENCE NEGATIVE CASH FLOW
We expect to have significant operating losses and to record significant net
cash outflow before receiving the proceeds of this offering. Our business has
not generated sufficient cash flow from operating activities to fund our
operations without resorting to external sources of capital. Starting up Victory
and establishing our infrastructure required substantial capital and other
expenditures. As a result, we reported a net loss of $8.8 million for the nine
months ended March 31, 2000. Further developing our business and expanding our
programming and product development will require significant additional capital
and other expenditures. As we expand our business, we expect that our operating
expenses will increase as a result of additional production costs of THE DOOLEY
AND PALS SHOW, expansion costs associated with NEXTBIGSTAR.COM, the development
of new projects in each of our existing business areas and the related
marketing, advertising and promotional expenses. Under our agreement with a
public broadcasting affiliate, we will not receive revenues from the
distribution of THE DOOLEY AND PALS SHOW in the United States.
WE HAVE HAD AND MAY CONTINUE TO HAVE DIFFICULTY PAYING OUR DEBTS IN A TIMELY
MANNER
Our Lightpoint subsidiary is currently subject to litigation for amounts
alleged to be due under promissory notes. We plan to settle upon consummation of
this offering as further described under "Business-Legal Proceedings." However,
we cannot assure you that we will be successful in paying our debts on time in
the future.
WE MAY NEED ADDITIONAL CAPITAL TO FUND OUR OPERATIONS AND FINANCE OUR GROWTH,
AND WE MAY NOT BE ABLE TO OBTAIN IT ON TERMS ACCEPTABLE TO US OR AT ALL
We believe that the net proceeds from the sale of common stock in this
offering, together with cash on hand, will be sufficient to fund our operations
for the next 24 months, including the production of the next broadcast seasons
of THE DOOLEY AND PALS SHOW and NEXTBIGSTAR.COM. However, if we expand more
rapidly than currently anticipated, if our working capital needs exceed our
current expectations or
7
<PAGE>
if we make acquisitions, we will need to raise additional capital from equity or
debt sources within that 24-month period. If we cannot obtain financing on terms
acceptable to us or at all, we may be forced to curtail our planned business
expansion and may be unable to fund our ongoing operations, which would
materially harm our business.
Lightpoint's financial statements for the year ended June 30, 1999 have
received a "going concern" qualification by our outside auditors due to
substantial working capital deficiencies, lack of significant revenues on a
sustained basis from business operations, and the disputed defaults under our
notes payable. This means that there is a question as to whether, if we are
unable to complete this offering or find an alternate source of additional
financing, we have the financial resources to continue as a business enterprise,
or "going concern."
THE LENGTH OF THE DEVELOPMENT, PRODUCTION AND DISTRIBUTION CYCLES FOR OUR
PROJECTS IS DIFFICULT TO PREDICT AND MAY CHANGE, WHICH COULD CAUSE OUR QUARTERLY
OPERATING RESULTS TO VARY, WHICH MAY HARM OUR STOCK PRICE
We currently do not have significant revenues, and we have limited operating
results. We anticipate our revenues and operating results may vary significantly
from quarter to quarter due to a number of factors, many of which are beyond our
control. For the foreseeable future, we expect to enter into a finite number of
discrete projects, and the length of the development, production and
distribution cycles for these projects is difficult to predict and may change.
As a result, we expect our quarterly operating results to fluctuate. Our
financial results may as a consequence of quarterly revenue fluctuations fall
short of the expectations of analysts or investors. If this occurs, the price of
our common stock may decline.
THE COMMERCIAL SUCCESS OF OUR CURRENT PROJECTS, THE DOOLEY AND PALS SHOW AND
NEXTBIGSTAR.COM, IS DEPENDENT, IN PART, ON FACTORS OUTSIDE OUR CONTROL
The commercial success of THE DOOLEY AND PALS SHOW and NEXTBIGSTAR.COM is
dependent upon unpredictable and volatile factors beyond our control, such as
changing consumer preferences and the success of our competitors' projects. Our
failure to attract a significant television audience for THE DOOLEY AND PALS
SHOW or to establish NEXTBIGSTAR.COM as a successful Internet program would
materially harm our business. We cannot assure you that either THE DOOLEY AND
PALS SHOW or NEXTBIGSTAR.COM will be successful or that, if successful, that
success will be sustained or will generate significant revenues or profits for
us.
OUR FAILURE TO DEVELOP AND PRODUCE CREATIVE AND ENTERTAINING PROGRAMMING WOULD
HARM OUR BUSINESS
The continued development and production of THE DOOLEY AND PALS SHOW and
NEXTBIGSTAR.COM and the development and production of other creative and
entertaining television and Internet programming is critical to our ability to
generate revenues. If we fail to create popular programming, particularly with
characters that generate licensing and merchandising opportunities, our business
will be materially harmed.
WE NEED TO GENERATE LICENSING AND MERCHANDISING REVENUES FROM CONSUMER PRODUCTS
BASED ON OUR CHARACTERS IN ORDER TO BE SUCCESSFUL
Our success further depends on the licensing and merchandising of characters
and products based on characters in our projects. Our ability to successfully
exploit the merchandising opportunities afforded by these projects is dependent
on the popularity of the project, our ability to create a brand for its
characters and our ability to establish favorable licensing and merchandising
arrangements. Even if our projects are popular with television or Internet
audiences, if we are unable to successfully brand our characters and create the
merchandising and licensing opportunities based upon our characters, we will not
be able to generate any significant licensing or merchandising revenues, which
would materially
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harm our business. Our failure to generate significant licensing and
merchandising revenues would restrict the amount of cash available to us to
operate our business.
WE WILL DEPEND ON SPONSORSHIP AND ADVERTISING REVENUES, WHICH ARE DIFFICULT TO
PREDICT BECAUSE OF THE SHORT-TERM NATURE OF TRADITIONAL ADVERTISING CONTRACTS
AND THE LIMITED HISTORY OF THE INTERNET AS AN ADVERTISING AND COMMERCE MEDIUM
While we have not to date derived significant revenues from sponsorships and
advertising, we expect to compete with other online content providers, as well
as traditional offline media, such as television, radio and print, for
sponsorships and advertising. We believe that the number of companies selling
web-based sponsorships and advertising and the available inventory of
advertising space has recently increased substantially. Accordingly, we may face
increased pricing pressure for the sale of advertising, which could affect our
ability to generate sponsorship and advertising revenues.
We expect to derive the majority of our advertising revenues from the sale
of advertisements under short-term contracts, which are difficult to forecast
accurately. Our expenses are based in part on expectations of future revenues
and, to a large extent, are fixed. Accordingly, the cancellation or deferral of
advertising or sponsorship contracts could materially harm our ability to recoup
our development and production expenses and continue to develop new television
and Internet programming.
Our advertising revenue may also be subject to seasonal fluctuations.
Historically, advertisers spend less in the first and third calendar quarters,
and viewer traffic on our websites may be lower during the summer and vacation
periods.
WE DEPEND ON THE SERVICES OF KEY INDIVIDUALS, THE LOSS OF WHICH WOULD MATERIALLY
HARM OUR BUSINESS
We rely on the efforts of Michael H. Gerber, our President and Chief
Executive Officer, and on the services of Art David, the president of our
animation and special effects subsidiary, and Kobi Jaeger, the president of our
television programming subsidiary. We also rely to a great extent on the efforts
of Ed McMahon, the noted television personality, to be the host of
NEXTBIGSTAR.COM. Although we have entered into employment agreements with
Mr. Gerber, Mr. David and Mr. Jaeger, the loss of the services of either
Mr. Gerber, Mr. David and Mr. Jaeger could materially harm our business. In
addition, our contractual arrangement which allows us to consolidate the
revenues and other financial results of NEXTBIGSTAR.COM in our financial
statements will terminate if Mr. Gerber is no longer employed by Victory. The
loss of the services of Mr. McMahon, who is 77 years old and who is closely
identified with NEXTBIGSTAR.COM, could also materially harm our business. Prior
to the consummation of this offering, we anticipate obtaining key person life
insurance for Mr. Gerber; however, this insurance may not be in an amount which
would adequately compensate us for his loss.
AS A 50% OWNER OF OUR NEXTBIGSTAR.COM JOINT VENTURE, MR. MCMAHON MAY HAVE
INTERESTS THAT CONFLICT WITH THOSE OF OUR MANAGEMENT AND SHAREHOLDERS
Victory and Mr. McMahon, through McMahon Communications Inc., each holds a
50% interest in Next Big Star, LLC, which is a joint venture between us and
Mr. McMahon that operates the NEXTBIGSTAR.COM website. Although Victory
maintains voting control over the operations of NEXTBIGSTAR.COM under a voting
arrangement, as a 50% member of the NEXTBIGSTAR.COM joint venture, Mr. McMahon
may have interests that are different than those of our management and our
shareholders, such as those relating to the strategic direction of
NEXTBIGSTAR.COM, exploitation of merchandising opportunities or the time
commitment or amount of travel required by Mr. McMahon to promote
NEXTBIGSTAR.COM. Any unresolved differences between us and Mr. McMahon could
affect the success of our NEXTBIGSTAR.COM enterprise.
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WE MAY NOT BE ABLE TO EFFECTIVELY MANAGE GROWTH
We expect our business to grow rapidly, and we may not be equipped to
successfully manage any future periods of rapid growth or expansion, which could
place a significant strain on our management, operating, financial and other
resources. We may require implementation of additional management information
systems to further develop our operating, administrative, financial and
accounting systems and controls, and to maintain close coordination among
project production, accounting, finance, marketing, sales, distribution and
operations. Moreover, we may need to hire and train additional personnel. Our
failure to develop and maintain the infrastructure necessary to run our
operations could slow our growth and materially harm our business.
RISKS RELATED TO THE ENTERTAINMENT INDUSTRY
WE MUST DEVELOP AND MAINTAIN A "BRAND IDENTITY" FOR OUR CHARACTERS, PRODUCTS AND
PROGRAMMING IN ORDER TO ATTRACT AND EXPAND OUR VIEWER AND ADVERTISER BASE
We believe that establishing and maintaining THE DOOLEY AND PALS SHOW,
NEXTBIGSTAR.COM and other planned brands is critical to our effort to attract
and expand our viewer, sponsor and advertiser base. We also believe that the
importance of brand recognition will increase due to the growing number of
entertainment related websites and the relatively low barriers to entry.
Promotion and enhancement of our brands will depend largely on our success in
providing high-quality programming and quality branded consumer products and
merchandise. In order to attract and retain viewers and to promote and maintain
viewership of THE DOOLEY AND PALS SHOW, NEXTBIGSTAR.COM and other planned
brands, we may find it necessary to increase expenditures devoted to creating
and maintaining brand loyalty. In the event we do not develop quality television
and Internet programming, or in the event of any breach or alleged breach of
security or privacy involving our website, or if any third party undertakes
illegal or harmful actions utilizing our communications or e-commerce services,
we could suffer substantial adverse publicity and impairment of our brands and
reputation. If any of these events occur, our business will be materially
harmed.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, WHICH HAVE BEEN
CHALLENGED BY OTHERS
Entertainment companies traditionally rely on intellectual property rights,
particularly under trademark and copyright laws, for the protection of their
intellectual property assets. Our failure to enforce our intellectual property
rights, or a challenge to our intellectual property rights by others, could
materially harm our business and distract our management from the day-to-day
operations of our business. On February 8, 2000, as further discussed in
"Business--Legal Proceedings," Big Star Entertainment, which hosts a website
called BigStar.com, sued our NEXTBIGSTAR.COM joint venture, alleging trademark
infringement, unfair competition, federal trademark dilution, common law unfair
competition, violation of applicable New York General Business Law and unjust
enrichment. An unsuccessful result in this litigation for us would materially
harm our business.
WE MAY BE UNABLE TO ATTRACT OR RETAIN HIGHLY SKILLED EMPLOYEES THAT ARE
NECESSARY FOR THE SUCCESS OF OUR BUSINESS
As we continue to grow, we will need to hire additional personnel in all
operational areas. Competition for personnel in our industry, particularly in
the areas of information technology, animation and special effects, is intense.
If we do not succeed in attracting or retaining personnel, we may not be able to
remain competitive in our quickly evolving business areas and our business could
be materially harmed.
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WE ARE IN A HIGHLY COMPETITIVE INDUSTRY AND SOME OF OUR COMPETITORS MAY BE MORE
SUCCESSFUL IN ATTRACTING AND RETAINING VIEWERS
We face intense competition from other companies and other organizations
operating in our industry. Most of our competitors have greater financial,
technical, marketing, production, distribution and human resources than we do.
We cannot assure you that we will have the ability or financial resources needed
to develop projects in a timely fashion which is necessary for us to achieve
commercial success. With respect to our television programming, we will compete
for time slots, ratings and for the licensing and merchandising of products
related to our projects, including THE DOOLEY AND PALS SHOW. Many of our
competitors' projects are sponsored or endorsed by celebrities, have achieved
significant market loyalty and are distributed by entities having significantly
greater resources than we do. Our failure to successfully compete in any of
these areas could hinder our ability to promote, license and market our
products, which would materially harm our business.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH ACQUISITIONS
In order to grow our business, we intend to evaluate acquisition
opportunities of products or businesses in the entertainment industry
complementary to ours. Engaging in acquisitions involves numerous risks,
including but not limited to difficulties in the assimilation of the operations,
services, products and personnel of the acquired company and the diversion of
management's attention from other business concerns. The successful
implementation of this strategy depends on our ability to identify suitable
acquisition candidates, acquire companies on acceptable terms, integrate their
operations successfully with our own and maintain the goodwill of the acquired
business.
RISKS RELATED TO THE INTERNET
THE CONTINUING EVOLUTION OF THE INTERNET AS A MEDIUM FOR ENTERTAINMENT
PROGRAMMING CREATES UNCERTAINTIES FOR OUR BUSINESS
We rely on the Internet in our business, currently in our NEXTBIGSTAR.COM
joint venture. The success of our entertainment programming on the Internet is
subject to many factors, including:
- the level of usage of the Internet;
- demand for Internet programming sponsorships and advertising;
- the level of user traffic on our websites;
- continued technological developments regarding the delivery of streaming
video and stereo quality sound;
- the introduction of new products or programming by our competitors;
- pricing changes for Internet-based sponsorships or advertising;
- the timing of initial set-up, engineering or development fees that may be
paid in connection with larger marketing and distribution arrangements;
and
- technical difficulties with respect to the use of our Internet
programming.
WE MUST CONTINUE TO ENHANCE OUR WEBSITES' NEW INTERNET PROGRAMMING TO BE
SUCCESSFUL IN THE CONTINUALLY EVOLVING MARKET FOR ONLINE VIEWERS
To be competitive, we must continue to enhance and improve the programming
of NEXTBIGSTAR.COM and our other planned and future websites. We may not be able
to successfully develop the increasingly complex technologies needed to improve
the quality of our programming on our websites. We cannot
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assure you that additional revenues will offset additional expenses incurred
from enhancing our websites.
OUR INTERNET PROGRAMMING MAY NOT ATTRACT USERS WITH DEMOGRAPHIC CHARACTERISTICS
VALUABLE TO OUR ADVERTISERS OR SPONSORS
Our future success depends upon our ability to develop and produce Internet
programming that attracts a loyal viewer user base possessing specific interest
areas, particular demographic characteristics or geographic locations attractive
to advertisers or sponsors. If we fail to attract the appropriate viewer base
our business could be harmed. In addition, we may be unable to anticipate or
respond to rapidly changing viewer preferences to continue to attract enough
viewers to our websites. Internet users can freely navigate and choose among a
large number of entertainment related websites that offer original content.
Thus, it may be difficult for us to distinguish our content and attract or
retain viewers.
OUR INTERNET PROGRAMMING WILL RELY ON CROSS-PROMOTIONAL AND DISTRIBUTION
RELATIONSHIPS
In order to create traffic for our Internet programming and make it more
attractive to advertisers and consumers, our NEXTBIGSTAR.COM joint venture has
entered into various cross-promotional and distribution agreements with leading
websites such as Microsoft's MSN.com and Windowsmedia.com. These
cross-promotional and distribution arrangements are not exclusive and may be
terminated upon little or no notice. In addition, we may be required to
establish additional relationships with other providers of similar services. Any
failure to obtain cost-effective services we require could restrict our use of
technologies necessary to develop competitive Internet programming, which could
materially harm our business.
E-COMMERCE ACTIVITIES MAY EXPOSE US TO UNCERTAIN LEGAL RISKS AND POTENTIAL
LIABILITIES
As part of our business, we plan to enter into agreements with sponsors,
content providers, service providers and merchants under which we will be
entitled to receive a share of revenue from the purchase of goods and services
by viewers of our Internet programming. These types of arrangements may expose
us to additional legal risks and uncertainties, including potential liabilities
relating to the products and services offered by these third parties.
WE MAY BE SUBJECT TO LEGAL LIABILITY FOR OUR ONLINE CONTENT
We plan to enter into arrangements to offer third-party content through
NEXTBIGSTAR.COM and other planned websites. We may be subject to claims
concerning this content by virtue of our involvement in marketing, branding,
broadcasting or providing access to other content, even in cases where we do not
ourselves host, operate, or provide access to this content. While we have
insurance to cover our potential exposure and these agreements with these
parties provide us with indemnification against these liabilities, our insurance
and indemnification may not be adequate.
WE RELY ON THIRD PARTIES TO MAINTAIN OUR TECHNOLOGICAL INFRASTRUCTURE AND ARE
SUBJECT TO RISK OF SYSTEM FAILURE OVER WHICH WE HAVE LITTLE OR NO CONTROL
Our success depends on the efficient and uninterrupted operation of our
technological infrastructure. Substantially all of our computer hardware for
operating our NEXTBIGSTAR.COM website is currently located at the facilities of
Exodus Communications, Inc. in Santa Clara, California and Sterling, Virginia.
These systems and operations are vulnerable to damage or interruption from
earthquakes, floods, fires, power loss, telecommunication and system failures,
break-ins, sabotage, intentional acts of vandalism and similar events. Although
we have a fully redundant system, we do not have a formal disaster recovery
plan, other than routine back-up procedures. In addition, internally generated
disruptions due to programming errors or other factors could affect the
reliability of our
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operations. We do not carry any business interruption insurance to compensate us
for losses that may occur. Despite any precautions taken by, and planned to be
taken by us, the occurrence of a natural disaster or other unanticipated
problems at the Exodus facility could result in interruptions in our services.
Any damage to or failure of our systems could result in reductions in, or
terminations of, our service, which could materially harm our business. Although
we plan to implement various network security measures, our servers are also
vulnerable to computer viruses, physical or electronic break-ins and similar
disruptions, which could lead to interruptions, delays or loss of data, any and
all of which could materially harm our business.
In addition, iBEAM provides NEXTBIGSTAR.COM broadcasting and bandwidth
services through its proprietary streaming audio and video Internet delivery
network. We will depend substantially upon ongoing technical support and
services from iBEAM to ensure effective distribution of our programming.
We will initially rely on streaming media products licensed from Microsoft
for the software we will use to encode and broadcast our content over the
Internet, including our NEXTBIGSTAR.COM joint venture. Together with Microsoft
and its vendors, we will provide for distribution of the player software
"Windows Media Player" needed by viewers to receive streaming content via the
Internet. We have limited or no control over the availability or acceptance of
streaming media software, and to the extent that any of these circumstances
occur, we would need to find alternative services or technologies, if they exist
and can be incorporated into our NEXTBIGSTAR.COM website, which could limit the
availability of functionality of our services and could materially harm our
business.
WE WILL BE SUBJECT TO U.S. AND FOREIGN GOVERNMENT REGULATION OF THE INTERNET,
THE IMPACT OF WHICH IS DIFFICULT TO PREDICT
There are currently few laws or regulations directly applicable to the
Internet. The application of existing laws and regulations relating to issues
such as user privacy, defamation, pricing, advertising, taxation, gambling,
sweepstakes, promotions, content regulation, quality of products and services,
and intellectual property ownership and infringement can be unclear. In
addition, we will also be subject to new laws and regulations directly
applicable to our activities. Any existing or new legislation applicable to us
could expose us to substantial liability, including significant expenses
necessary to comply with these laws and regulations, and impair the growth in
use of the Internet. A number of proposals have been made at the federal, state
and local level that would impose additional taxes on the sale of goods and
services through the Internet. If any of these proposals are adopted, it could
substantially impair the growth of e-commerce on the Internet and potentially
adversely affect us.
Several recently passed federal laws could have an impact on our business.
The Digital Millennium Copyright Act is intended to reduce the liability of
online service providers for listing or linking to third-party websites that
include materials that infringe copyrights or other rights of others. The
Children's Online Protection Act and the Children's Online Privacy Protection
Act are intended to restrict the distribution of materials deemed harmful to
children and impose additional restrictions on the ability of online services to
collect user information from minors. In addition, the Protection of Children
From Sexual Predators Act of 1998 requires online service providers to report
evidence of violations of federal child pornography laws under various
circumstances. We are currently reviewing this legislation, and cannot currently
predict the effect, if any, that these laws will have on our business. They may
impose significant additional costs on our business or subject us to additional
liabilities.
We plan to post policies concerning the use and disclosure of user data. Any
failure by us to comply with our posted privacy policies could materially harm
our business. Due to the global nature of the Internet, it is possible that the
governments of other states and foreign countries might attempt to regulate our
transmissions or prosecute us for violations of their laws. Other nations,
including Germany, have taken actions to restrict the free flow of material
deemed to be objectionable on the
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Internet. The European Union has recently adopted privacy and copyright
directives that may impose additional burdens and costs on our planned
international operations. We might unintentionally violate these laws, these
laws may be modified, or new laws enacted in the future. Any of these
developments could limit our ability to compete internationally and materially
harm our business.
RISKS RELATED TO THIS OFFERING
YOU WILL EXPERIENCE AN IMMEDIATE AND SUBSTANTIAL DILUTION IF YOU PURCHASE COMMON
STOCK IN THIS OFFERING
The initial public offering price for our common stock is substantially
higher than the net tangible book value per share of the outstanding common
stock. Any common stock you purchase in this offering will have a post-offering
net tangible book value per share of $9.34 less than the initial public offering
price, based upon an assumed initial public offering price of $11.00 per share,
the midpoint of the offering range shown on the cover of this prospectus. In
addition, in the event of the exercise by holders of our outstanding options or
warrants for shares of common stock, your investment may be further diluted.
OUR COMMON STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE
In recent months, the stock market in general, and particularly as it
relates to companies with Internet-based or Internet-related operations, or
companies like ours which anticipate losses for the foreseeable future, has been
extremely volatile, and the market price of our common stock is likely to be
highly volatile. We cannot assure you that our common stock will trade at the
same levels as the capital stock of other entertainment or Internet companies.
Market volatility may materially harm the market price of our common stock,
regardless of our operating performance.
OUR MANAGEMENT MAY NOT USE THE PROCEEDS OF THIS OFFERING EFFECTIVELY
Our management has broad discretion over how to apply the net proceeds of
this offering. Accordingly, it is possible that our management may allocate the
proceeds differently than investors in this offering would have preferred, or in
a manner that does not increase the value or price of our common stock.
OUR EXECUTIVE OFFICERS AND DIRECTORS WILL OWN APPROXIMATELY 45% OF OUR
OUTSTANDING COMMON STOCK AFTER THIS OFFERING AND WILL THUS BE ABLE TO CONTROL
OUR OPERATIONS
Following this offering, our executive officers and directors will own
approximately 45% of our outstanding common stock and may be able to control
various matters relating to our governance, including the election of directors.
The interests of our executive officers may at times be different than those of
unaffiliated shareholders, because shareholder value is only one of the
considerations of our officers and directors when evaluating business
opportunities, and we may from time to time enter into loan agreements or issue
debt securities which may limit benefits available to our shareholders, such as
dividends on our common stock.
THE LEAD UNDERWRITER OF THIS OFFERING LACKS UNDERWRITING EXPERIENCE
While certain of the officers of the lead underwriter of this offering,
Weatherly Securities Corp., have significant experience in corporate financing
and the underwriting of securities and Weatherly Securities Corp. has co-managed
underwritten public offerings in the past, Weatherly Securities Corp. has
limited experience acting as lead underwriter in underwritten public offerings.
Accordingly, there can be no assurance that the lead underwriter's limited
public offering experience will not affect this offer of our common stock and
subsequent development of a trading market, if any.
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WE MAY ISSUE PREFERRED STOCK THAT WOULD REDUCE THE VOTING AND OTHER RIGHTS OF
THE HOLDERS OF OUR COMMON STOCK
Our board of directors has the authority to issue, without vote or action by
the shareholders, preferred stock in one or more series and to fix the rights,
including voting rights and conversion rights, of the preferred stock. The
rights of the holders of common stock will be subject to, and may be adversely
affected by the rights of the holders of any preferred stock that may be issued
in the future. No preferred stock is currently outstanding. The issuance of
preferred stock, while providing flexibility in connection with possible
financing or acquisitions or other corporate purposes, may have the effect of
delaying, deferring or preventing a change in control, could result in the
dilution of the voting power of the common stock purchased in this offering and
may harm the market price of, and the voting and other rights of, the holders of
the common stock.
WE HAVE ENTERED INTO AGREEMENTS WHICH MAY MAKE IT MORE DIFFICULT FOR A THIRD
PARTY TO ACQUIRE OUR COMPANY
Our employment agreements with Michael Gerber and Art David provide for
severance payments in the event of a change of control of our company, which may
deter an acquisition of our company by a third party, including an acquisition
that our shareholders may consider beneficial.
THE SALE OR AVAILABILITY FOR SALE OF SUBSTANTIAL AMOUNTS OF OUR COMMON STOCK
COULD CAUSE OUR STOCK PRICE TO DECLINE
Sales of substantial amounts of our common stock in the public market after
the completion of this offering or the public perception that these sales could
occur could cause a decline in the market price of our common stock and could
impair our future ability to raise capital through offerings of our common
stock. There will be 12,492,339 shares of common stock outstanding immediately
after this offering or 12,837,339 shares if the underwriters exercise their
over-allotment option in full, 5,670,866 shares underlying outstanding options
and warrants and 332,000 additional shares available for issuance under our
stock option plan. The 2,300,000 shares sold in this offering will be freely
tradable without restriction or further registration under the Securities Act,
unless held by our "affiliates" as that term is defined in Rule 144 under the
Securities Act. The remaining shares are "restricted securities," and, subject
to the restrictions described below, will become eligible for sale in the public
market at various times after 90 days after the date of this prospectus, subject
to the limitations and other conditions of Rule 144 under the Securities Act.
In connection with this offering, our executive officers and directors and
significantly all of our shareholders have agreed, except in limited
circumstances, not to sell an aggregate of 9,961,053 shares of common stock
owned by them, including the 160,428 shares to be issued in the settlement of
the CMI litigation, and options and warrants exercisable for an additional
4,690,836 shares of common stock, or the common stock underlying those options
and warrants, for one year, or six months in the case of the 160,428 shares,
after completion of this offering without our consent and the consent of our
underwriters, and holders of an aggregate of 880,000 shares underlying warrants
have agreed, except in limited circumstances, not to sell those warrants or the
underlying shares for 180 days after completion of this offering without our
consent. We cannot predict what effect, if any, market sales of shares held by
principal shareholders or any other shareholder or the availability of these
shares for future sale will have on the market price of our common stock.
The holders of warrants to purchase 880,000 shares of our common stock are
parties to agreements that provide these holders with the right to require us to
register the sale of shares underlying those warrants concurrent with this
offering. The holder of the 160,428 shares to be issued in the settlement of the
CMI litigation also will have registration rights. Registration of these shares
of our common stock would permit the sale of these shares without regard to the
restrictions of Rule 144. We are going to file a shelf registration statement
registering the shares underlying these warrants and the 160,428 shares for
resale. We cannot predict the timing of these sales or the effect these sales
may have on the market price of our common stock.
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FORWARD-LOOKING STATEMENTS
Some of the matters described in this prospectus contain forward-looking
statements that are subject to a number of risks and uncertainties, many of
which are beyond our control. We have based these forward-looking statements on
our current expectations and projections about future events. These
forward-looking statements include, but are not limited to, statements about
our:
- business strategy;
- ability to introduce new or enhanced services and the anticipated growth
in revenue from these services;
- uncertainty regarding our future operating results; and
- plans, objectives, expectations and intentions contained in this
prospectus that are not historical.
All statements, other than statements of historical fact included in this
prospectus, regarding our strategy, future operations, financial position,
estimated revenues and losses, projected costs, prospects, plans and objectives
of management are forward-looking statements. When used in this prospectus, the
words "will," "believe," "anticipate," "intend," "estimate," "expect," "project"
and similar expressions are intended to identify forward-looking statements,
although not all forward-looking statements contain these identifying words. All
forward-looking statements speak only as of the date of this prospectus. You
should not place undue reliance on these forward-looking statements. Although we
believe that our plans, intentions and expectations reflected in or suggested by
the forward-looking statements we make in this prospectus are reasonable, we can
give no assurance that these plans, intentions or expectations will be achieved.
We disclose important factors that could cause our actual results to differ
materially from our expectations under "Risk Factors," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and elsewhere in
this prospectus. These cautionary statements qualify all forward-looking
statements attributable to us or persons acting on our behalf.
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USE OF PROCEEDS
We estimate that we will receive net proceeds of approximately $21.0 million
from the sale of 2,300,000 shares of our common stock in this offering, based
upon an assumed initial public offering price of $11.00 per share, the midpoint
of the offering range shown on the cover of this prospectus, and after deducting
underwriting discounts and commissions and estimated offering expenses payable
by us. If the underwriters' over-allotment option is exercised in full, we
estimate that our net proceeds will be approximately $24.4 million.
We intend to:
- use a portion of the net proceeds from this offering to repay in full the
$5,000,000 principal amount of, plus accrued and unpaid interest on, our
12% senior secured promissory note. We issued this promissory note on
April 3, 2000 and have been using the proceeds for working capital
purposes. Interest on the promissory note is payable quarterly at our
option and the promissory note matures on the earlier of March 28, 2001
and the consummation of this offering;
- use approximately $3,000,000 of the net proceeds to fund our
NEXTBIGSTAR.COM joint venture;
- use $1,000,000 of the net proceeds in connection with the settlement of
the CMI litigation described under "Business--Legal Proceedings;" and
- use the balance of the net proceeds for general corporate purposes,
including meeting our working capital requirements. These purposes also
include expanding our television and Internet programming and identifying
and acquiring or investing in motion picture and television libraries,
television production and distribution companies and complementary and/or
Internet-based businesses, although we have no current plans, agreements
or commitments with respect to any acquisition of this type, and we are
not currently engaged in any negotiations with respect to any transaction
of this type.
Although we do not contemplate any changes in our use of proceeds, we may
reprioritize the uses listed above, or use some proceeds for other purposes in
the event extra proceeds are available or the specified uses require less
capital than expected. Accordingly, our management will have broad discretion in
applying the net proceeds from this offering.
The amounts and timing of our actual expenditures will depend upon numerous
factors, including the status of our product development efforts, marketing and
sales activities, the amount of cash generated by our operations and
competition. Actual expenditures may vary substantially from these estimates. We
may find it necessary or advisable to use portions of the net proceeds for other
purposes.
We intend to invest the net proceeds from this offering in short-term,
investment grade securities pending the uses described above.
DIVIDEND POLICY
We have never declared or paid cash dividends on our common stock and do not
anticipate paying any cash dividends on our common stock in the foreseeable
future. We currently intend to retain future earnings, if any, to finance the
expansion of our business and for general corporate purposes. There can be no
assurance that we will pay dividends in the future. Our future dividend policy
is within the discretion of our board of directors and will depend upon various
factors, including our results of operations, financial condition, capital
requirements and investment opportunities.
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CAPITALIZATION
The following table shows our capitalization as of March 31, 2000:
- on an actual basis;
- on a pro forma basis to reflect our issuance of a promissory note in the
amount of $5,000,000 on April 3, 2000; and
- on a pro forma as adjusted basis to give effect to:
- the sale of the 2,300,000 shares of our common stock in this offering
at an assumed initial public offering price of $11.00 per share, the
midpoint of the offering range shown on the cover of this prospectus,
after deducting underwriting discounts and commissions and estimated
offering expenses payable by us;
- the payment of $1,000,000 in cash and the issuance of 160,428 shares of
common stock, determined by dividing $1,764,708 by the assumed public
offering price of $11.00 per share, the midpoint of the range shown on
the cover of this prospectus, in settlement of our $2,745,417 notes
payable and accrued interest in connection with the resolution of the
CMI litigation; and
- the repayment of the $5,000,000 promissory note, net of financing costs
of $670,000.
You should read this table in conjunction with our consolidated financial
statements and the notes to those financial statements included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt--notes payable.............................. $ 2,000 $ 6,330 $ --
Shareholders' equity (capital deficit):
Preferred Stock: $.001 par value, 20,000,000 shares
authorized; none issued actual, pro forma and pro forma
as adjusted............................................. -- -- --
Common Stock: $.001 par value; 50,000,000 shares
authorized; 10,017,625 shares issued and outstanding
actual and pro forma; 12,478,053 shares issued and
outstanding pro forma as adjusted....................... 10 10 12
Additional paid-in capital................................ 27,706 27,706 50,445
Unearned compensation..................................... (10,952) (10,952) (10,952)
Accumulated deficit....................................... (18,589) (18,589) (19,259)
-------- -------- -------
Total shareholders' equity (capital deficit)............ (1,825) (1,825) 20,246
-------- -------- -------
Total capitalization.................................... $ 175 $ 4,505 $20,246
======== ======== =======
</TABLE>
The table above excludes, as of March 31, 2000, 4,244,866 shares of common
stock issuable upon the exercise of outstanding warrants and 405,000 shares
issuable upon the exercise of outstanding stock options.
18
<PAGE>
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between our tangible assets and our liabilities,
divided by the number of shares of common stock outstanding upon completion of
this offering. For purchasers of our common stock in this offering, dilution in
net tangible book value per share represents the difference between the initial
public offering price of our common stock in this offering and the net tangible
book value of our common stock immediately after completing this offering.
As of March 31, 2000, our net tangible book value (deficit) was
$(2,070,240), or $(.21) per share of our common stock. After giving effect to
the sale of 2,300,000 shares of common stock in this offering and to the
issuance of 160,428 shares of common stock in connection with the settlement of
the CMI litigation, assuming an initial public offering price of $11.00 per
share, the midpoint of the offering range shown on the cover of this prospectus,
and after deducting underwriting discounts and commissions and estimated
offering expenses, our net tangible book value as of March 31, 2000 would have
been $20,670,468, or $1.66 per share of our common stock. This represents an
immediate increase in our net tangible book value of $1.87 per share to current
shareholders and an immediate dilution of $9.34 per share to new investors
purchasing our common stock in this offering. The following table illustrates
the foregoing information as of March 31, 2000 with respect to dilution to new
investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $11.00
Net tangible book value (deficit) per share at March 31,
2000.................................................... $ (.21)
Increase in net tangible book value per share attributable
to new investors and to issuance of shares to CMI....... 1.87
------
Net tangible book value per share after this offering....... 1.66
------
Dilution per share to new investors......................... $ 9.34
======
</TABLE>
The following table summarizes, after giving effect to this offering, as of
March 31, 2000, the differences between the total number of shares of our common
stock purchased from us, the total consideration paid and the average price per
share paid by existing shareholders and new investors purchasing shares of our
common stock in this offering based upon an assumed initial public offering
price of $11.00 per share, the midpoint of the offering range shown on the cover
of this prospectus:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- -------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders.................... 10,017,625 80.3% $11,628,002 30.1% $ 1.16
CMI issuance............................. 160,428 1.3 1,764,708 4.5 11.00
New investors............................ 2,300,000 18.4 $25,300,000 65.4 11.00
---------- ----- ----------- -----
Total................................ 12,478,053 100.0% $38,692,710 100.0%
========== ===== =========== =====
</TABLE>
The table above excludes 4,224,866 shares of common stock issuable upon the
exercise of outstanding warrants as of March 31, 2000 at a weighted average
exercise price of $6.38 per share and 405,000 shares issuable upon the exercise
of outstanding stock options as of March 31, 2000 at a weighted average price of
$0.47. To the extent that any of these options or warrants with an exercise
price of less than net tangible book value per share at the time of exercise are
exercised, there will be further dilution to new investors.
19
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
You should read the selected historical financial data shown below together
with the financial statements and the notes to those financial statements
included elsewhere in this prospectus.
The following table summarizes:
- the statements of operations of Lightpoint Entertainment, Inc., our
predecessor, for the period from July 31, 1997 (Lightpoint's date of
inception) through June 30, 1998 and for the fiscal year ended June 30,
1999;
- the unaudited financial statements of Lightpoint for the nine months ended
March 31, 1999; and
- our unaudited consolidated statement of operations for the nine months
ended March 31, 2000 (which includes the results of Lightpoint for the
entire period).
The table below does not include our results of operations from May 27, 1999
(the date of our inception) through June 30, 1999, since that information is not
considered meaningful for purposes of this presentation as we had minimal
activity. Diluted net loss per share does not differ from basic net loss per
share since the effect of potential common shares is anti-dilutive.
<TABLE>
<CAPTION>
LIGHTPOINT (OUR PREDECESSOR) VICTORY
----------------------------------------------------------------- --------------------
FOR THE PERIOD FROM
JULY 31, 1997 THROUGH FOR THE YEAR ENDED FOR THE NINE MONTHS FOR THE NINE MONTHS
JUNE 30, 1998 JUNE 30, 1999 ENDED MARCH 31, 1999 ENDED MARCH 31, 2000
--------------------- ------------------ -------------------- --------------------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA
Revenues................ $ 579 $ 222 $ 101 $ 118
Expenses:
Operating............. 860 1,335 1,033 2,848
General and
administrative...... 1,248 3,039 2,187 3,373
Common stock, options
and warrants issued
for general and
administrative
services............ -- 2,875 710 2,257
Depreciation and
amortization........ 137 348 254 274
Abandonment of
software............ 150 -- -- --
Loss on disposal of
equipment........... -- 8 -- 8
------- ------- ------- -------
Total expenses........ 2,395 7,605 4,184 8,760
------- ------- ------- -------
Loss from operations.... (1,816) (7,383) (4,083) (8,642)
Interest expense, net... 194 357 272 197
------- ------- ------- -------
Net loss................ $(2,010) $(7,740) $(4,355) $(8,839)
======= ======= ======= =======
Net loss per
share--basic and
diluted............... $(19.01) $ (5.05) $ (5.10) $ (.96)
======= ======= ======= =======
Weighted average common
shares--basic and
diluted............... 106 1,534 854 9,175
======= ======= ======= =======
</TABLE>
20
<PAGE>
The following table summarizes:
- the historical balance sheets of Lightpoint Entertainment, Inc., our
predecessor, as of June 30, 1998 and June 30, 1999;
- our unaudited historical consolidated balance sheet as of March 31, 2000;
- our unaudited pro forma consolidated balance sheet as of March 31, 2000 to
reflect our issuance of a promissory note in the amount of $5,000,000 net
of financing costs of $670,000 on April 3, 2000; and
- our unaudited consolidated balance sheet as of March 31, 2000 on a pro
forma as adjusted basis to give effect to the sale of 2,300,000 shares of
common stock by us in this offering, after deducting the underwriting
discounts and commissions and estimated offering expenses; the repayment
of the $5,000,000 promissory note from the proceeds of this offering; and
the payment of $1,000,000 in cash and the issuance of 160,428 shares of
common stock in settlement of our $2,745,417 notes payable and accrued
interest upon consummation of the offering in connection with the
resolution of the CMI litigation, assuming a public offering price of
$11.00, the midpoint of the range shown on the cover of this prospectus.
The table below does not show our historical balance sheet at June 30, 1999,
since that information is not meaningful for purposes of this presentation
as we had minimal activity.
<TABLE>
<CAPTION>
LIGHTPOINT (OUR PREDECESSOR) VICTORY
----------------------------- ----------------------------------
AS OF MARCH 31, 2000
----------------------------------
AS OF AS OF PRO FORMA
JUNE 30, 1998 JUNE 30, 1999 ACTUAL PRO FORMA AS ADJUSTED
------------- ------------- -------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents............. $ 9 $ 460 $ 148 $ 4,478 $ 20,124
Working capital (deficit)............. (2,837) (3,493) (2,799) (2,799) 19,922
Total assets.......................... 1,133 1,607 1,376 5,706 21,352
Short-term debt....................... 2,000 2,000 2,000 6,330 --
Total liabilities..................... 2,983 3,996 3,201 7,531 456
Total stockholders' equity
(deficit)........................... (1,850) (2,389) (1,825) (1,825) 20,246
</TABLE>
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS TOGETHER WITH THE
FINANCIAL STATEMENTS AND THE NOTES TO THOSE FINANCIAL STATEMENTS AND THE OTHER
FINANCIAL INFORMATION INCLUDED ELSEWHERE IN THIS PROSPECTUS. YOU SHOULD ALSO
REVIEW CAREFULLY AND CONSIDER THE VARIOUS DISCLOSURES MADE BY US ELSEWHERE IN
THIS PROSPECTUS RELATING TO OUR BUSINESS, INCLUDING UNDER THE CAPTIONS "RISK
FACTORS" AND "BUSINESS." FOR THE PURPOSES OF THIS SECTION OF THIS PROSPECTUS,
"VICTORY" REFERS TO VICTORY ENTERTAINMENT CORP. AND NOT ITS SUBSIDIARIES.
IN THE FOLLOWING DISCUSSION AND ANALYSIS, THE RESULTS FOR THE NINE MONTHS
ENDED MARCH 31, 2000 REFLECT OUR CONSOLIDATED OPERATIONS. THE RESULTS OF
OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 1999, THE YEAR ENDED JUNE 30,
1999 AND THE PERIOD FROM JULY 31, 1997 THROUGH JUNE 30, 1998 REFLECT THE
OPERATIONS OF OUR PREDECESSOR.
OVERVIEW
Victory is an early stage holding company engaged through its subsidiaries
in the development, production and worldwide distribution of television and
Internet programming, the development and production of state-of-the-art
animation and special effects and the licensing and marketing of branded
consumer merchandise.
Our animation and special effects studio provides animation and special
effects for our projects and performs work for third parties on a
project-by-project basis. Revenues for these projects are recognized as the work
is performed. Our animation and special effects projects accounted for
substantially all of our revenues for the nine months ended March 31, 2000 and
the year ended June 30, 1999.
We expect to receive revenues as a producer of television programming
through domestic network and cable cash licensing fees and domestic first run
syndication fees (other than for THE DOOLEY AND PALS SHOW). Domestic first run
syndication fees are generally paid in cash or as barter based on a portion of
the national advertising revenues from a project. We expect to receive revenues
as a distributor of our television programming through international
distribution fees and domestic re-run fees. Television series initially produced
for the networks and first run syndication are generally licensed to domestic
and foreign markets concurrently. The more successful series are later
syndicated in domestic markets and in certain foreign markets. The length of the
revenue cycle for television series will vary depending on the number of seasons
a series remains in active production. Revenues arising from television license
agreements are recognized in the period that the films or television series are
available for telecast and therefore may cause fluctuation in operating results.
For the programs we produce, we will incur development and marketing costs prior
to entering into production arrangements under which a third party would cover
all or part of the production expenses of our programs. For programming that we
will distribute for other producers, we will enter into arrangements with third
parties to cover all or part of the production of those programs. For example,
we are developing VAMPS and will seek a third party producer before we incur any
significant production costs, and we plan to enter into similar arrangements for
future projects.
We expect to receive revenues from Internet advertising on our websites,
cross-promotional agreements with other websites, direct sales of our products
online, and, for our NEXTBIGSTAR.COM website, an integrated Internet and
television advertising package including Internet and television commercials,
category specific sponsorship packages, banner ads, tags and website links.
Revenues from Internet sponsorship and advertising on our websites and from
cross-promotional agreements with other websites are typically recognized
ratably over the term of the underlying contract, and revenues from direct sales
of our products online are typically recognized upon shipment of goods to the
customer. We have completed our first round of NEXTBIGSTAR.COM competition and
have begun to enter
22
<PAGE>
into sponsorship and advertising arrangements for NEXTBIGSTAR.COM. We anticipate
NEXTBIGSTAR.COM will be the primary source of revenues for our Internet
programming for the foreseeable future.
We expect to receive revenues from the licensing, marketing and distribution
of our program-related merchandise, which are expected to include toys, CDs and
interactive CD-Roms, board games, apparel and home videos. Our program-related
merchandise will be manufactured and distributed by third parties with whom we
have entered or intend to enter into licensing agreements. Generally, these
manufacturers are compensated by receiving a percentage of the profits received
from the sale of these products. For example, we have entered into agreements
relating to THE DOOLEY AND PALS SHOW for toddler and infant clothing, giant
helium parade balloons, school supplies and party products.
Since our inception, we have incurred significant operating losses. These
losses primarily result from development costs associated with building our 3-D
animation facilities, pre-production in the earlier phases of THE DOOLEY AND
PALS SHOW and other selling, general and administrative expenses. As a result,
we reported a net loss of $8,839,000 for the nine months ended March 31, 2000
and Lightpoint, our predecessor, reported a net loss of $7,740,000 for the year
ended June 30, 1999. As of March 31, 2000, we had an accumulated deficit of
approximately $18,589,000. As we expand our business, we believe that our
operating expenses will increase significantly, primarily due to additional
production costs of THE DOOLEY AND PALS SHOW, expansion costs associated with
NEXTBIGSTAR.COM, development of a significant Internet presence, related
marketing, advertising and promotional expenses, strategic partnerships and
additional depreciation related to capital expenditures. As a result, we expect
to incur operating and net losses and negative cash flow from operations for the
foreseeable future.
Our recent results of operations, including the decrease in revenues from
service animation and special effects work during the year ended June 30, 1999
described in the comparisons below, are primarily attributable to our strategy
of creating television programming and characters which we own and control,
thereby implementing a business plan based upon the creation and ownership of
assets rather than the short-term business strategy of service-based
entertainment companies. We believe that an asset-based company is better
positioned to achieve substantially higher operating revenue and cash flow over
the long term than service-based entertainment companies. It will also enable us
to retain the distribution and ancillary rights to our programming as well as
acquire distribution rights from third parties. Distribution has historically
generated substantially higher operating margins than fees generated solely from
production. However, our strategy of creating programming and characters which
we own will not prevent us from continuing to provide, when appropriate, our
traditional services, particularly in connection with animation and special
effects projects for third parties.
During the nine months ended March 31, 2000 and the year ended June 30,
1999, we recorded compensation expenses of $3,275,000 and $2,300,000,
respectively, of which $2,257,000 and $874,000 was non-cash compensation,
respectively. We anticipate that additional compensation expense of
approximately $2,903,000 will be recorded in connection with 270,000 outstanding
options to purchase common stock at an exercise price of $0.25 per share which
vest upon the successful completion of this offering, based on an assumed
initial public offering price of $11.00 per share, the midpoint of the offering
range shown on the cover of this prospectus, which will be recorded in our first
fiscal quarter completed following the consummation of this offering.
On July 1, 1999, Victory acquired the capital stock of Lightpoint
Entertainment, Inc. in a merger whereby Lightpoint merged with a wholly owned
subsidiary of Victory. As part of the merger, 2,072,600 shares of common stock
and 2,239,841 warrants to purchase common stock of Lightpoint were exchanged for
an equal number of common shares and warrants to purchase common shares of
Victory and the majority stockholder of Lightpoint surrendered 1,900,000 shares
of Lightpoint common stock. The transaction was accounted for as a
recapitalization of Lightpoint and a tax-free reorganization for Federal income
tax purposes.
23
<PAGE>
Victory is a holding company which was incorporated under the laws of the
State of Florida on May 27, 1999. Victory's primary subsidiaries are:
- Victory Distribution, Inc., which oversees all distribution and
exploitation of Victory's television and Internet programming properties
and acquired distribution rights from third party producers and the sale
of branded merchandise;
- Victory Television, Inc., which develops and produces television series,
specials and made-for-television and made-for-cable movies;
- Victory Internet Productions, or VIP, which produces and distributes
Internet programming. On January 18, 2000, VIP entered into an agreement
with McMahon Communications, Inc., or MMCI, under which both VIP and MMCI
hold a 50% membership interest in Next Big Star, LLC, a joint venture,
which we include in our consolidated financial statements since VIP
maintains voting control, which developed and launched NEXTBIGSTAR.COM, an
online talent search devoted to discovering and promoting future
entertainment talent and producing specials which will be telecast on
broadcast television and the Internet;
- Victory Animation Studios, Inc., which also operates as Victory f/x, which
develops and produces animated series and long-form animated programs,
such as television movies, and produces state-of-the-art special effects
for Victory-produced programs and for third parties, including segments of
major motion pictures; and
- Lightpoint Entertainment, Inc., which produces THE DOOLEY AND PALS SHOW, a
children's television production that will be distributed by Victory
Distribution.
RESULTS OF OPERATIONS
THE NINE MONTHS ENDED MARCH 31, 2000 COMPARED WITH THE NINE MONTHS ENDED
MARCH 31, 1999
REVENUES. Revenues were $118,000 for the nine months ended March 31, 2000,
compared to revenues of $101,000 for the nine months ended March 31, 1999, an
increase of $17,000, or 16.8%. We derived revenues during this period from
service animation and special effects work performed for various clients, the
most significant of which was Disney i.d.e.a.s., the commercial post-production
facility located at Disney MGM Studios in Lake Buena Vista, Florida. The
increase in revenues results from an increase in animation and special effects
service work from Disney i.d.e.a.s. following the Lightpoint merger and the
related change of management. Prior to July 1999, Lightpoint provided animation
and special effect services to Disney i.d.e.a.s. under a license agreement.
Following the termination of this agreement in July 1999, we continue to provide
these services to Disney i.d.e.a.s. on a transaction by transaction basis.
Revenues from Disney i.d.e.a.s. accounted for 76% of total revenues for the nine
months ended March 31, 2000, which followed termination of our licensing
agreement, and 58% for the nine months ended March 31, 1999, which was prior to
the termination of the licensing agreement.
OPERATING EXPENSES. Operating expenses were $2,848,000 for the nine months
ended March 31, 2000, compared to $1,033,000 for the nine months ended
March 31, 1999, an increase of $1,815,000, or 175.7%. Operating expenses include
all costs of production and development, as well as the direct cost of revenues.
This increase is due primarily to expenses associated with the production of THE
DOOLEY AND PALS SHOW. Our pilot episode of THE DOOLEY AND PALS SHOW was produced
in September 1999 at a cost of $400,000 and the series began production in
December 1999 at an average cost of $100,000 per episode. We produced nineteen
episodes of THE DOOLEY AND PALS SHOW as of March 31, 2000.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $3,373,000 for the nine months ended March 31, 2000, compared to $2,187,000
for the nine months ended March 31, 1999, an increase of $1,186,000, or 54.2%.
General and administrative expenses include payroll and
24
<PAGE>
related expenses for executive, accounting and administrative personnel. This
increase is due to additional financial consulting fees and legal fees of
$273,000 in connection with the restructuring of our business following the
Lightpoint merger of $786,000.
COMMON STOCK, OPTIONS AND WARRANTS ISSUED FOR GENERAL AND ADMINISTRATIVE
SERVICES. Common stock, options and warrants issued for general and
administrative services was $2,257,000 for the nine months ended March 31, 2000
as compared to $710,000 for the nine months ended March 31, 1999, an increase of
$1,547,000. The increase was due to amortization of unearned compensation for
common stock issued to our founder and some of our directors on May 27, 1999 and
June 9, 1999.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses for the nine months ended March 31, 2000 were $274,000, compared with
$254,000 for the nine months ended March 31, 1999, an increase of $20,000, or
7.9%. This increase is primarily due to the acquisition of property and
equipment used for animation purposes.
INTEREST EXPENSE. Interest expense for the nine months ended March 31, 2000
was $226,000, compared to $272,000 for the nine months ended March 31, 1999, a
decrease of $46,000, or 16.9%. This decrease was due to the repayment of
factored receivables and the withdrawal of an outstanding letter of credit.
NET LOSS. Our net loss was approximately $8,839,000 for the nine months
ended March 31, 2000, compared to $4,356,000 for the nine months ended
March 31, 1999, an increase of $4,483,000, or 102.9%. This increase was due to
the factors described above. Because of the uncertainty regarding our future
profitability, the future tax benefits of our losses have been fully reserved
for and, therefore, no benefit for the net operating loss has been recorded.
Under Section 382 of the Internal Revenue Code, this operating loss may be
limited due to ownership changes.
THE YEAR ENDED JUNE 30, 1999 COMPARED WITH THE PERIOD FROM JULY 31, 1997
(LIGHTPOINT'S DATE OF INCEPTION) THROUGH JUNE 30, 1998
REVENUES. Revenues were $222,000 for the year ended June 30, 1999, compared
to revenues of $579,000 for the period from July 31, 1997 to June 30, 1998, a
decrease of $357,000, or 61.7%. The decrease in revenues from service animation
and special effects work is partly attributable to our increasing pursuit of
long format television and film productions both internally, such as THE DOOLEY
AND PALS SHOW, and externally. Revenues from Disney i.d.e.a.s. accounted for 76%
and 62% of total revenues for the year ended June 30, 1999 and for the period
from July 31, 1997 to June 30, 1998, respectively.
OPERATING EXPENSES. For the year ended June 30, 1999, operating expenses
were $1,335,000, compared to $860,000 for the period from July 31, 1997 to
June 30, 1998, an increase of $475,000, or 55.2%. Operating expenses include all
costs of production and development, as well as the direct costs of revenues.
This increase is due primarily to expenses associated with the development of
THE DOOLEY AND PALS SHOW.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the year ended June 30, 1999 were $3,039,000, compared to $1,248,000 for the
period from July 31, 1997 to June 30, 1998, an increase of $1,791,000 or 143.5%.
This increase was primarily due to increased consulting fees of $687,000 in
connection with financial and business advisory services and increased salaries
and wages of $1,070,000 due to the growth of our business.
COMMON STOCK, OPTIONS AND WARRANTS ISSUED FOR GENERAL AND ADMINISTRATIVE
SERVICES. Common stock, options and warrants issued for general and
administrative services was $2,875,000 for the year ended June 30, 1999 compared
to zero for the period from July 31, 1997 to June 30, 1998. This
25
<PAGE>
increase was due to common stock issued to some of our directors, consultants
and legal advisors during fiscal 1999.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses for the year ended June 30, 1999 were $348,000 compared to $137,000,
for the period July 31, 1997 to June 30, 1998, an increase of $211,000, or 154%.
This increase is due primarily to the acquisition of property and equipment used
for animation purposes.
INTEREST EXPENSE. Interest expense for the year ended June 30, 1999 was
$357,000, compared to $194,000 for the period from July 31, 1997 to June 30,
1998, an increase of $163,000, or 84.0%. This increase was due to interest
attributable to interest which accrued on outstanding promissory notes which
were outstanding for the entire year ended June 30, 1999 but for only a portion
of the period from July 31, 1997 to June 30, 1998.
NET LOSS. For the year ended June 30, 1999, our net loss was $7,740,000,
compared to $2,010,000 for the period from July 31, 1997 to June 30, 1998, an
increase of $5,730,000, or 285.1%. This increase was due to the factors
discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception and the inception of our predecessor, Lightpoint, we
have funded our operating cash requirements primarily through sales of privately
placed common stock and warrants and a private placement of a unit that
consisted of notes and warrants. From July 1998 to July 15, 1999, Lightpoint
raised $4,736,000 in a private placement of 1,915,000 shares of common stock and
1,915,000 warrants, and, from July 28, 1999 to December 17, 1999, Victory raised
$6,822,000 in a private placement of 1,948,625 shares of common stock and
1,948,625 warrants. At March 31, 2000, we had cash available for operations of
$148,000.
In October and December of 1998, Lightpoint LLC, an affiliate of Lightpoint,
issued two promissory notes in the aggregate amount of $2,000,000 which were
used to fund the operations of Lightpoint. Lightpoint is currently subject to
litigation for amounts alleged to be due under those notes as discussed further
under "Business--Legal Proceedings".
On April 3, 2000, Victory received net proceeds in the amount of $4,392,000
from a private placement of a note payable and warrants. The note payable is
evidenced by a promissory note due the earlier of completion of this offering or
March 28, 2001, with interest at 12% per annum. The warrants are exercisable for
800,000 shares of common stock at an exercise price of $7.00 or, if this
offering is consummated, 85% of the public offering price per share within three
years of issuance. The placement agent for this private placement also received
80,000 warrants, exercisable at $7.00 per share or, if this offering is
consummated, 125% of the public offering price per share within five years of
issuance.
For the nine months ended March 31, 2000, net cash used in operating
activities of $7,105,000 was primarily attributable to our net loss of
$8,839,000. The loss was offset by depreciation and amortization expenses of
$274,000 and stock issued for services of $2,257,000. Additional uses of cash
were due to the net decrease of accounts payable, accrued expenses and other
liabilities of $795,000.
For the year ended June 30, 1999, net cash used in operating activities of
$3,402,000 was primarily attributable to our net loss of $7,740,000, offset by
non-cash compensation in the form of warrants and shares of common stock of
$2,875,000 and an increase in accounts payable, accrued expenses and other
liabilities of $1,013,000. Additional operating sources of cash were the
decrease in accounts receivable and prepaid expenses of $94,000.
For the period from July 31, 1997 to June 30, 1998, net cash used in
operating activities of $877,000 was primarily due to our net loss of
$2,010,000, offset by an increase in accounts payable and
26
<PAGE>
accrued expenses of $983,000. Additional operating uses of cash were the
increase in accounts receivable and prepaid expenses of $137,000.
Net cash provided by investing activities for the nine months ended
March 31, 2000 of $232,000 included primarily cash acquired from our acquisition
of Lightpoint. Net cash used in investing activities for the year ended
June 30, 1999 and 1998 of $473,000 and $1,274,000, respectively, was used
primarily for purchases of production and office equipment and intellectual
property associated with THE DOOLEY AND PALS SHOW.
Net cash provided by financing activities for the nine months ended
March 31, 2000 and the years ended June 30, 1999 and June 30, 1998 were
$7,021,000, $4,326,000 and $2,160,000, respectively, due primarily to our
private placements of securities and issuance of notes payable.
At March 31, 2000 and June 30, 1999, our current liabilities of $3,201,000
and $3,996,000, respectively, consisted primarily of obligations for notes
payable with applicable interest, accounts payable and accrued expenses.
We have no material commitments for capital expenditures but anticipate
future expenditures of approximately $1,500,000 for THE DOOLEY AND PALS SHOW and
$3,000,000 for NEXTBIGSTAR.COM during the next 12 months. The on-going funding
of these projects is expected to be provided by the proceeds of this offering.
The report of our independent auditors on Lightpoint's financial statements
for the year ended June 30, 1999, included elsewhere in this prospectus,
includes an explanatory paragraph which states that our recurring losses,
working capital deficit and alleged defaults on our notes payable raise
substantial doubt about our ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
We believe our ability to continue as a going concern is dependent on the
success of THE DOOLEY AND PALS SHOW and the NEXTBIGSTAR.COM joint venture and
our ability to complete this offering. However, there can be no assurance that
THE DOOLEY AND PALS SHOW and the NEXTBIGSTAR.COM joint venture will yield
positive operating results in the future. In the event that this offering is not
consummated on a timely basis, we will need to seek additional financing from
another source. We do not anticipate that our revenues from operating activities
during the next 12 months will be sufficient to support our operations during
that period. There can be no assurance that we will be able to find alternative
financing on a timely basis, if at all.
We believe that these resources, together with the net proceeds from this
offering, will be sufficient to sustain our operations for the next 24 months.
If, however, we expand more rapidly than currently anticipated, if our working
capital needs exceed our current expectations or if we make acquisitions, we
will need to raise additional capital from equity or debt sources. Our future
liquidity and capital requirements will depend upon numerous factors, including
our ability to generate cash from advertising and distribution of our television
programming, from advertising, sponsorship and e-commerce opportunities related
to our Internet programming and our ability to generate significant licensing
and merchandising revenues. In addition, we will, from time to time consider the
acquisition of or investment in complementary businesses, services and
technologies, which might increase our liquidity requirements or cause us to
issue additional equity or debt securities.
YEAR 2000 COMPLIANCE
The year 2000 issue is the result of computer programs being written using
two digits rather than four digits to define the applicable year. Computer
programs that have time sensitive software may recognize a date using "00" as
the year 1900 rather than 2000. As the year 2000 approached, the international
business community faced uncertainty regarding potential systems failure or
miscalculation causing disruptions of operations and temporary inability to
process transactions, send invoices or
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engage in normal business activities. As of the date of this discussion, Victory
has experienced no effects of the "Y2K problem" in the hardware or software of
any of its automated systems, including those used for animation, finance or
administration.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 requires companies to recognize
all derivative contracts as either assets or liabilities in the balance sheet
and to measure them at fair value. SFAS 133, as amended by SFAS 137, is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
Historically, we have not entered into derivative contracts and do not expect to
have any hedging activities in the future. Accordingly SFAS 133 is not expected
to affect our financial statements.
In October 1998, the FASB released an exposure draft of the proposed
statement on "Rescission of FASB Statement No. 53, Financial Reporting by
Producers and Distributors of Motion Picture Films" ("SFAS 53"). An entity that
previously was subject to the requirements of SFAS 53 would follow the guidance
in a proposed Statement of Position, "Accounting by Producers and Distributors
of Films." This proposed Statement of Position would be effective for financial
statements for fiscal years beginning after December 15, 2000 and we have not
yet evaluated the impact on our financial statements.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN 44"), Accounting for Certain Transactions Involving
Stock Compensation, an Interpretation of APB Opinion No. 25. FIN 44 clarifies
the application of Opinion No. 25 for (a) the definition of employee for
purposes of applying Opinion No. 25, (b) the criteria for determining whether a
plan qualifies as a noncompensatory plan, (c) the accounting consequences of
various modifications to the terms of a previously fixed stock option or award,
and (d) the accounting for an exchange of stock compensation awards in a
business combination. FIN 44 is effective July 2, 2000, but certain conclusions
cover specific events that occur after either December 15, 1998 or January 12,
2000. We believe that the impact of FIN 44 will not have a material effect on
our financial position or results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market rate risk for changes in interest rates relates
primarily to our investments in short- or medium-term, interest bearing,
investment grade securities and commercial paper.
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BUSINESS
We are an integrated entertainment company specializing in television and
Internet programming. In addition to developing, producing and distributing
television and Internet programming, we license and market program-related
branded merchandise. We operate a state-of-the-art 3-D computer and animation
special effects studio where we develop and produce our in-house projects and
produce programming for third parties. Our current projects include the
production and distribution of THE DOOLEY AND PALS SHOW, a children's television
series; the development of VAMPS, a sci-fi dramatic series, and EXTREME TEAM and
SK8RATZ, two animated shows for children; and the production, through a joint
venture with television personality Ed McMahon, of NEXTBIGSTAR.COM, an online
entertainment talent search. We believe that the experience of our management
and our strategic relationships will enable us to enhance our position in our
primary business areas--television programming and distribution, Internet
programming, animation and special effects and branded merchandising.
We were formed in May 1999 by our President and Chief Executive Officer,
Michael Gerber. On July 1, 1999, we acquired Lightpoint, which was founded in
July 1997 and which is now our wholly owned subsidiary. In January 2000, we
formed our NEXTBIGSTAR.COM joint venture, through our Victory Internet
Productions subsidiary, which oversees our Internet programming. We have also
established subsidiaries which are responsible for our television programming,
brand merchandising and distribution, and animation and special effects business
areas.
TELEVISION PROGRAMMING AND DISTRIBUTION
We develop, produce and distribute television series, animated series,
specials and made-for-television movies. Development involves the
conceptualization and creation of a project. Production includes overseeing all
principal creative and business aspects of each television project, including
the hiring of production personnel and obtaining studio space, budgeting,
casting, scripting and, where applicable, animation and special effects.
Distribution involves the marketing and sales of, and the licensing of rights
to, program-related materials. Our television programming focus will be on
episodic, or series programming, and made-for-television movies. Additionally,
we are currently developing a number of dramatic and animated projects which are
specifically designed to showcase our in-house talent, technology and management
expertise in developing and producing 3-D computer animation and
state-of-the-art special effects.
Recent developments in the television industry have created significant
opportunities for businesses engaged in the development, production and
distribution of television programming, both domestically and internationally.
In the United States, the proliferation of cable and satellite networks has
driven a demand for new programming and provided expanded markets for
programming targeted at specific demographic groups, such as children and
science fiction enthusiasts. According to Nielsen Media Research, the average
American watches 28 hours and 13 minutes of television per week and the average
American household watches approximately seven hours of television a day. The
international television market continues to expand as well, as advancements in
technology in existing and emerging markets provide a huge potential audience
for programming with broad cross-cultural appeal, such as animation and
action/adventure. We believe that this expanded market will provide us
opportunities to market and distribute our television-related merchandise.
We expect to generate revenues from our television programming and
distribution through a combination of producer fees, international distribution
fees, domestic re-run fees and net profit sharing.
We expect to earn producer fees for the projects we produce or co-produce
through either cash licensing fees from a network or cable station or, if the
project is sold into first run syndication, through a combination of cash and
barter fees based on a portion of the national advertising revenues
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from the project. We currently plan to co-produce VAMPS and the two animated
series in association with Fred Silverman Productions described below, as well
as other future projects.
We plan to earn international distribution fees from the first-run sale of
projects in markets outside of the United States and domestic re-run fees for
projects following their initial network, cable or syndication commitments,
which are typically three to five years after the initial broadcast. We plan to
enter into these distribution arrangements both for projects we produce, such as
THE DOOLEY AND PALS SHOW and VAMPS, and for projects produced by third parties
which we will acquire rights to distribute. In addition, we own rights to a
feature film and 22 completed episodes of SALTY THE SEA LION, a live action
children's adventure series originally produced in 1972. We plan to distribute
television programming in virtually all media, including television, home video,
DVD, music publishing and e-commerce, but excluding theatrical distribution.
Additionally, we plan to earn our share of the net profits of a successful
project that we develop, produce or distribute or for which we provide animation
and special effects. Net profits are typically profits attributable to a project
after the payment of fees and the recoupment of advances and expenses.
THE DOOLEY AND PALS SHOW
We currently produce THE DOOLEY AND PALS SHOW, a children's television
series, and we have obtained commitments from public broadcasting stations that
reach over 60% of households in the United States to air THE DOOLEY AND PALS
SHOW. The theme of THE DOOLEY AND PALS SHOW is continuous adventure blending
education and entertainment and targeting the pre-school market for children
five years of age and under. Each episode uses creative and imaginative elements
to stimulate basic motor skills, develop problem solving skills and engage the
minds of children. The objective of the show is to provide a framework to
explore fundamental educational and moral values while involving and addressing
life-lessons for pre-school audiences from the beginning to the end of each
episode. THE DOOLEY AND PALS SHOW incorporates proprietary songs, dance and
settings with vibrant colors to capture the imagination of its audience. The
lead character named "DOOLEY" is a warm, engaging creature from a star "far, far
away" who loves to sing songs, play games, dance and learn. In addition to the
costume characters, each episode will include a talented cast of children,
positive adult role models and our own 3-D animation.
The production of the pilot for THE DOOLEY AND PALS SHOW was completed in
September 1999 and we have completed the production of 37 of the 39 episodes
comprising our first broadcast season, the remaining two episodes are scheduled
for completion in September 2000. The series is being filmed at the Disney/MGM
Studios in Orlando, Florida. The show made its television debut in April 2000
and continues to premiere on local broadcasting stations on a staggered basis.
In December 1997, Lightpoint acquired the rights associated with THE DOOLEY
AND PALS SHOW from a third party. These rights include all copyrights, trademark
rights, adoption rights, licensing rights, music rights, broadcasting rights,
video rights and all rights of distribution, display and performance by any
means or methods whether now known or hereafter invented.
OUR AGREEMENT FOR DISTRIBUTION OF THE DOOLEY AND PALS SHOW WITH SOUTH CAROLINA
EDUCATIONAL TV
We have an agreement with an affiliate of South Carolina Educational TV,
which we refer to as SC ETV. Under the agreement, we have granted SC ETV
exclusive rights in the United States and Canada, as well as in Puerto Rico, the
Virgin Islands and Guam, to broadcast THE DOOLEY AND PALS SHOW on SC ETV and to
sublicense THE DOOLEY AND PALS SHOW for broadcast on public broadcasting
stations for a period ending five years after we deliver the last episode of our
first broadcast season, which we anticipate will be in September 2000.
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Under the agreement, we have agreed to produce at least 39 and up to 52
half-hour episodes of the series. We have the right to terminate the agreement
after the third broadcast season if THE DOOLEY AND PALS SHOW is not airing or is
not committed to air on at least 80% of the Public Broadcasting System stations
in the United States, Canada, Puerto Rico, the Virgin Islands and Guam.
Under the agreement, SC ETV, our public broadcasting presenting station,
promotes and distributes THE DOOLEY AND PALS SHOW on our behalf to other public
broadcasting stations. SC ETV has provided us with non-binding guidelines
relating to its commitment as our public broadcasting presenting station,
including to support the series launch and provide ongoing support, to conduct a
series of promotional activities, educational outreach activities and conference
activities and to provide research and packaging.
We will receive no revenues from our arrangement with SC ETV and will be
required to pay up to $250,000 in expenses of SC ETV that are not covered by
third parties, such as outreach expenses covering educational materials for
daycare centers, pre-schools and elementary schools, including teachers' guides
and workbooks. In addition, we will be required to pay 5% of the net profits we
receive in connection with THE DOOLEY AND PALS SHOW in the territory, including
from merchandising. SC ETV can terminate the agreement at any time if we fail to
comply with any material terms. In addition, under a separate agreement, we are
obligated to Gary Ziedenstein, the creator of THE DOOLEY AND PALS SHOW, an
additional 8% of the gross profits, which are defined in that agreement to mean
gross profits, including profits received from the sale of merchandise we
receive from THE DOOLEY AND PALS SHOW, less fees and expenses, which include
customary production, distribution, sales and licensing and merchandising agent
fees, professional fees, taxes, and intellectual property registration and
enforcement costs.
We believe that our agreement with SC ETV will enable THE DOOLEY AND PALS
SHOW to become a popular children's television program and will create an
opportunity for us to sell our branded merchandise. We believe public
broadcasting has an excellent record in selecting children's programs, as has
been demonstrated by such comparable shows as BARNEY, THE MAGIC SCHOOL BUS,
SESAME STREET and ARTHUR. Public broadcasting also has achieved a reputation for
airing high quality children's programming, which we believe will enhance our
ability to successfully license and market THE DOOLEY AND PALS SHOW.
VAMPS
We are developing VAMPS, a sci-fi dramatic series. VAMPS centers around
three attractive female vampires who protect innocent humans from the predators
of the night. The dramatic situations these characters are involved in during
the day are carried over and resolved at night. VAMPS is currently targeted at a
wide audience, including adult men and women. In addition to utilizing live
actors, VAMPS incorporates the work of our in-house animation and special
effects studio to create effects that enhance the mystique and special powers of
the VAMPS characters, such as providing them with the ability to climb walls,
morph into animals or turn into mist and disintegrate their enemies.
We have produced a demo tape and other promotional materials related to
VAMPS. We anticipate that a portion of the production financing will be borne by
the licensee or first run syndicator of VAMPS and that we will commence
production of VAMPS upon receipt of commitment for that funding. We have entered
into a number of agreements in connection with our development of VAMPS,
including an agreement with Creative Artists Agency, or CAA, to serve as our
agent to help us market VAMPS to networks, cable stations and first run
syndicators, as well as assist us in casting and engaging other creative
personnel who may be engaged to perform services.
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PROJECTS IN ASSOCIATION WITH FRED SILVERMAN PRODUCTIONS
We are currently developing two animated series targeted for the
six-to-twelve year-old market, EXTREME TEAM and SK8RATZ, in association with
Fred Silverman Productions. EXTREME TEAM centers around a retired mechanic who
builds hot-rod cars that have special powers, which the children in his suburban
neighborhood use to fight crime. SK8RATZ focuses on seven children in an urban
area who are dedicated to skateboarding and have transformed their skate boards
in order to use them in their battle against crime.
Mr. Silverman is currently President of Fred Silverman Productions, a
multi-faceted production entity which is involved in product development for the
entertainment industry. Over the course of his career, Mr. Silverman has
directed the television programming of all three major television networks.
Mr. Silverman was responsible for the programming of many popular weekly
television shows, including THE PERRY MASON MOVIES, ROOTS, THE LOVE BOAT, HILL
STREET BLUES, CHARLIE'S ANGELS, SCOOBY-DOO, FAT ALBERT and THE SMURFS.
Our arrangement with Fred Silverman Productions provides for a mutual
working relationship aimed at developing, producing and distributing new
television programs. This arrangement contemplates equal ownership of these
programs and all other rights derived from these programs, including music
publishing, merchandising, publications and sequels.
SALTY THE SEA LION
We own rights to and plan to distribute a feature film and 22 television
episodes for SALTY THE SEA LION, a live-action children's television program
produced in 1972. Those rights consist of the following:
- Domestic television distribution, including video, of the original film
and series, and any new live action series that may be produced during the
term of the agreement;
- Worldwide television distribution, including video, of any new animated
series that may be produced during the term of the agreement; and
- Worldwide licensing of any branded merchandise stemming from the animated
series.
INTERNET PROGRAMMING
We develop and produce Internet programming. Our Internet programming
involves the creation, design and publishing of interactive websites. As
Internet broadcast quality approaches that of the television, we expect demand
for Internet programming to continue to increase and eventually lead to the
convergence of television, the Internet and other digital media.
The Internet has emerged as a significant global communications medium,
enabling millions of people to access information and conduct commerce
electronically. According to International Data Corporation, the total number of
Internet users worldwide will increase from approximately 196 million in 1999 to
502 million by 2003. The Internet provides advertisers and merchants with an
attractive means of marketing and selling products and services either to a mass
audience or to a targeted demographic segment. International Data Corporation
estimates that the total value of products and services sold over the Internet
will increase from approximately $111.4 billion in 1999 to approximately $1.3
trillion by 2003. According to Forrester Research, advertising spending on the
Internet is projected to increase from $2.8 billion in 1999 to approximately
$17.2 billion in 2003. We intend to capitalize on this trend through the
production of Internet programming, including NEXTBIGSTAR.COM.
NEXTBIGSTAR.COM
Together with television personality Ed McMahon, we produce NEXTBIGSTAR.COM,
an online entertainment talent search, where viewers vote for contestants in a
series of competitive rounds in
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18 talent categories, including comedy, modeling, children's dancing and
singing, music and pet tricks. The online talent search will be divided into
four competitions per year, each competition consisting of preliminary rounds,
quarter final rounds, semifinal rounds and a final round of competition which
will be telecast on broadcast television and the Internet. Winners will be
chosen through online voting. We have engaged Mark Anthony Entertainment, Inc.
to assist us in selling the first run syndication for the final round telecasts
beginning in October 2000 and for other promotional services. We are
contemplating the production and distribution of NEXTBIGSTAR.COM as a weekly
television series, in addition to expanding our website operations to offer a
variety of entertainment information, including celebrity chats and quizzes. Our
first cycle of competition began on April 15, 2000 and the winners of the final
rounds were selected during the week of July 15, 2000. The first finals
competition was broadcast live on the NEXTBIGSTAR.COM website on July 22, 2000.
We attract contestants and viewers to our website through traditional means
of advertising, cross promotional alliances with other websites and by utilizing
the name recognition of our partner, television personality Ed McMahon. In the
spring of 2000, Mr. McMahon conducted a bus tour of 40 U.S. cities in 40 days,
where we conducted live auditions. Mr. McMahon also participated in more than
160 television appearances, including such shows as LARRY KING LIVE,
ENTERTAINMENT TONIGHT and THE TONIGHT SHOW WITH JAY LENO, and over 400 radio
interviews in order to promote the website. Currently, our NEXTBIGSTAR.COM
website receives over 18,000 visitors per day.
Contestants on NEXTBIGSTAR.COM submit their entries on a videotape, many of
which are transformed by our in-house technical staff into Internet programming,
which enables our viewers to watch these performances on our website. Our
viewers then vote online for their favorite performance in each category. The
contestants receiving the most votes advance to the next round of a tournament
style competition. The winners of the final round in each talent category for
each of our four competitions per year can win up to a total of $1 million
dollars in cash and prizes.
We will receive revenues for NEXTBIGSTAR.COM through an integrated Internet
and television advertising package, including Internet and television
commercials, and through the direct sales of our products on our website. We
will offer our sponsors a package including Internet and television commercials,
banner ads, tags and links that provide a seamless transition to our sponsors'
websites and the opportunity to be the exclusive sponsor of a talent category
that is related to the sponsor's business.
OUR AGREEMENT WITH MCMAHON COMMUNICATIONS REGARDING NEXTBIGSTAR.COM
Our agreement with Ed McMahon provides that each of Victory and McMahon
Communications, Inc., which we refer to as MMCI, will have a 50% membership
interest in the NEXTBIGSTAR.COM joint venture, which is structured as a limited
liability company. These arrangements are set out in an operating agreement and
a related agreement among members, each dated January 14, 2000, between Victory
and MMCI. Michael Gerber, our founder and chief executive officer, and
Mr. McMahon are the managers of NEXTBIGSTAR.COM. Our voting arrangements with
NEXTBIGSTAR.COM provide that, while Michael Gerber is employed by Victory,
Victory will maintain voting control over the operations of NEXTBIGSTAR.COM.
Victory and MMCI have agreed that Victory will be responsible for the
day-to-day operations of the NEXTBIGSTAR.COM website and Victory and MMCI will
be jointly responsible for the content of the Internet programming on the
website. After the launch of the NEXTBIGSTAR.COM website, which occurred on
January 28, 2000, the joint venture commenced the development of television
specials, for which Victory and MMCI will serve as co-producers.
We will receive a management fee of 10% of the gross revenues received from
the NEXTBIGSTAR.COM website in the form of fees, advances, royalties or profit
participations. In addition, we will act as worldwide distributor for all media
related to NEXTBIGSTAR.COM, for which we will receive customary fees
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and expenses. Beginning April 15, 2000, MMCI receives an annual payment of
$500,000 which is paid on a monthly basis from our working capital.
Under the operating agreement, net profits of NEXTBIGSTAR.COM are allocated
to the members evenly on a pro rata basis and net losses are allocated solely to
Victory. Since Victory maintains voting control over the operations of
NEXTBIGSTAR.COM under a voting arrangement, the financial statements of
NEXTBIGSTAR.COM are included in Victory's consolidated financial statements. In
the event Mr. McMahon is unable to continue to carry out his duties, due to
death or otherwise, MMCI will sell its interests back to the joint venture
unless, under limited circumstances, an acceptable successor can be found.
STRATEGIC RELATIONSHIPS RELATING TO NEXTBIGSTAR.COM
In order to operate NEXTBIGSTAR.COM and to enhance the capabilities of and
generate traffic to the NEXTBIGSTAR.COM website, we have established strategic
relationships with:
- MICROSOFT CORPORATION--WINDOWS MEDIA PLAYER. NEXTBIGSTAR.COM has entered
into a strategic alliance with Microsoft under which NEXTBIGSTAR.COM uses
Microsoft's Media Player software in exchange for our permitting Microsoft
to advertise NEXTBIGSTAR.COM'S use of its product. Microsoft's Media
Player enables us to provide streaming video and high quality sound on our
websites.
- MICROSOFT NETWORK (MSN). NEXTBIGSTAR.COM has entered into a second
agreement with Microsoft under which MSN Entertainment Channel promotes
NEXTBIGSTAR.COM on its entertainment page and celebrity page. In addition,
the agreement provides for links between pages located on the MSN
Entertainment Channel and NEXTBIGSTAR.COM and NEXTBIGSTAR.COM'S promotion
of MSN.
- EXODUS COMMUNICATIONS, INC. Exodus has agreed to maintain and operate the
hardware to run our NEXTBIGSTAR.COM website.
- IBEAM BROADCASTING CORPORATION. iBEAM will provide us with broadcasting
and bandwidth services through its proprietary streaming audio and video
Internet delivery network.
ANIMATION AND SPECIAL EFFECTS
We produce state-of-the-art animation and special effects, including
multimedia 3-D graphics and animation, for our own programming as well as
programming for third parties. Our animation and special effects team is led by
Art David, a member of the special effects team for the feature motion picture
THE MATRIX. Many of our competitors for the development and production of
television and Internet programming do not have in-house animation and special
effects studios or staff, and are thus compelled to contract with third parties
for those services, which may result in higher production cost and lower quality
control.
Our animation and special effects team transforms a concept for an animated
program into the lively three dimensional characters that appear in our animated
programming. Our concept artists design the characters and environments that
appear in our programs. Through the use of storyboards, an episode is then
created. Our characters are then modeled into three dimensional characters. Once
the animated segments are completed, they are sent to our rendering specialist,
who adds lighting and shadows to the animated scenes, in order to produce the
finished product that will appear on a television screen. Our animation and
special effects team currently provides animation for THE DOOLEY AND PALS SHOW
and is developing EXTREME TEAM and SK8RATZ.
We believe that the use of special effects has become an integral component
of television and movie production. We will continue to produce state-of-the-art
special effects work for our own in-house television projects, as well as for
third party projects, including major motion pictures. Our ability to offer
in-house animation and special effects together with our television programming
and
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distribution and Internet programming will allow us to maximize synergies when
developing and producing our projects and projects for third parties, which may
provide us with a competitive advantage.
We receive revenues from Disney i.d.e.a.s. for animation and special effects
services which accounted for 76%, 76% and 62% of our total revenue for the nine
months ended March 31, 2000, the year ended June 30, 1999 and the period from
July 31, 1997 through June 30, 1998, respectively. Revenues from our animation
and special effects projects accounted for substantially all of our revenues for
each of these periods.
BRANDED MERCHANDISE
Through public television exposure and worldwide licensing arrangements, we
intend to position DOOLEY and character-related products from THE DOOLEY AND
PALS SHOW to capitalize on the market for branded children's television
products. Successful marketing campaigns for branded children's television
characters, such as BARNEY and TELETUBBIES, have generated significant revenues
for the holders of the associated merchandising and licensing rights. We intend
to generate similar opportunities for our other television and Internet
programming projects, which we will target to the appropriate audiences.
We will offer a wide variety of branded, retail merchandise through both a
domestic and international licensing program and a direct sales effort. We and
our licensees will market our merchandise worldwide through a variety of
distribution channels, including mass market and specialty retailers, our
television programs and Internet sites.
We intend to build a video library containing programming from our
television shows as well as programs specifically designed for home video use.
Our original music for our programming includes theme songs for our performers.
Music is an integral part of the entertainment experience in our television
programs. Additional revenue may also be generated from the home video market
and from music publishing, songbooks and records.
We will receive revenues from the licensing, marketing and distribution and
direct sales of our program-related merchandise, including toys, CDs and
interactive CD-Roms, board games, apparel and home videos.
LICENSING AND MARKETING RELATIONSHIPS
Images of our characters will appear on numbers of retail products,
including various types of apparel, toys and video games, and a wide assortment
of other items. We intend to retain creative approval over all licensed
products.
Under a five year agreement with Stalwart Productions, which extends through
June 2004, we have granted Stalwart an exclusive worldwide license, except in
Asia, to procure licensing agreements with third parties for the manufacture,
advertising, distribution and sale of products and merchandise based on the
names, characters and visual representations used in THE DOOLEY AND PALS SHOW.
Under this agreement, we retain the right to pre-approve the type, quality and
style of any product to be distributed.
Our licensing agreements for DOOLEY-related products include our agreement
with Allison Manufacturing Co. for the manufacturing, distribution, sale and
advertising in the U.S. for toddler and infant clothing in mid-tier and mass
market distribution channels and an agreement with Starbound Entertainment to
manufacture giant helium parade balloons. We have also entered into an agreement
with Pyramid Accessories for the manufacture, sale and distribution of
DOOLEY-related products including backpacks, lunch kits, rain coats and paper
notebooks and an agreement with Unique Industries for the manufacture, sale and
distribution of DOOLEY-related paper plates and party products.
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COMPETITION
The areas in which we operate are highly competitive, and many of the
companies with which we compete are substantially larger, have better name
recognition and have more substantial and lengthy operating histories,
backgrounds, experience, and records of successful operations. They also have
significantly greater financial, technical, marketing, production, distribution
and other resources than we now have, or that we will have in the foreseeable
future.
TELEVISION PROGRAMMING AND DISTRIBUTION. Our projects will compete for air
time, time slots and ratings against current shows that have established viewer
loyalty and against new shows that may have significantly greater financial
resources than we do. In addition, we will compete on the basis of relationships
and pricing for access to a limited supply of facilities and talented creative
personnel to produce our projects. Competitors include television producers and
distributors such as PARAMOUNT TELEVISION, PEARSON ALL AMERICAN, SABAN
ENTERTAINMENT, NELVANA ENTERPRISES, NEW LINE TELEVISION, TWENTIETH CENTURY
TELEVISION, MGM TELEVISION, WARNER BROS. TELEVISION, CBS BROADCAST
INTERNATIONAL, COLUMBIA TRISTAR TELEVISION, BUENA VISTA TELEVISION and UNIVERSAL
TELEVISION GROUP.
INTERNET PROGRAMMING. With respect to our Internet programming, we compete
with:
- other online talent search websites, such as Dick Clark's
YOURBIGBREAK.COM, and other general entertainment websites, such as
MTV.COM and LAUNCH.COM, to attract viewers; and
- online content providers as well as traditional media such as television,
radio and print, for a share of advertisers' total advertising budgets.
ANIMATION AND SPECIAL EFFECTS. We compete with specialty animation and
special effects boutiques, such as Pixar and Industrial Light and Magic.
BRANDED MERCHANDISE. We compete with the holders of rights to marketable
shows and characters, such as BARNEY, BLUES CLUES and TELETUBBIES.
There can be no assurance that we will be able to compete successfully, or
that the competitive pressures faced by us will not harm our business.
INTELLECTUAL PROPERTY
To protect our intellectual property, we rely on a combination of copyright,
trademark and service mark law, trade secret protections and confidentiality and
non-disclosure agreements and other contractual arrangements with our employees
and third parties. We file for copyright protection for our programming and
characters. In addition, "DOOLEY" is our registered trademark, and we have
applied for federal registration of the marks "DOOLEY AND PALS," "THE DOOLEY AND
PALS SHOW," "NEXTBIGSTAR.COM," "NEXTBIGSTAR.COM" design and
"THENEXTBIGSTAR.COM." We cannot assure you that the steps we have taken to
protect our intellectual property rights will be adequate or that third parties
will not infringe or misappropriate our proprietary rights. Effective trademark,
copyright and trade secret protection may not be available in every country in
which we operate to the extent available in the United States.
We believe that intellectual property protection is most applicable in the
entertainment industry for characters like DOOLEY and shows like THE DOOLEY AND
PALS SHOW that generate marketing and licensing opportunities. While we intend
to vigilantly police and protect our intellectual property against
misappropriation by others, we may be unable to detect this unauthorized use or
take appropriate steps to enforce our intellectual property rights. Defending
our intellectual property rights could also result in the expenditure of
significant financial and managerial resources, which could harm our business.
We may license some of our proprietary rights, such as our trademarked or
copyrighted material, to third parties. Some of our licensees may take actions
or fail to take actions, which actions or failure
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to act may adversely affect the value of our proprietary rights or reputation,
which could harm our business.
Although we believe that our proprietary rights do not infringe on the
intellectual property rights of others, other parties may assert claims against
us that we have misappropriated a trade secret or infringed a patent, copyright,
trademark or other proprietary right belonging to them. As described under
"--Legal Proceedings," a third party has alleged that NEXTBIGSTAR.COM infringes
on its trademark. Any infringement or related claims, even if not meritorious,
could be costly and time consuming to litigate, may distract management from
other tasks of operating our business and may result in the loss of significant
rights and the loss of our ability to operate our business.
LEGAL PROCEEDINGS
On May 12, 1999, Lightpoint was sued by CMI International Holdings Limited,
or CMI, in the Circuit Court of the Ninth Judicial Circuit in the State of
Florida for its alleged failure to pay $2.0 million principal plus accrued
interest on two outstanding promissory notes. Following dismissal of the suit on
July 16, 1999, CMI filed an amended complaint naming Lightpoint, LLC, an entity
which was under common control with Lightpoint prior to our acquisition, as well
as the two former Lightpoint officers who executed the promissory notes, as
parties to the suit. The amended complaint also included additional charges,
including a charge of unjust enrichment. Lightpoint filed a motion to dismiss
the amended complaint on July 23, 1999 on the grounds of failure to provide
evidence that the requisite documentary stamp taxes were paid. We currently show
a liability of $2.7 million for notes payable and accrued interest relating to
these promissory notes on our balance sheet.
In July 2000, we reached an agreement in principle to settle this litigation
upon consummation of this offering through the payment to CMI of $1,000,000 in
cash and the issuance to CMI of the number of shares of our common stock
determined by dividing $1,500,000 by 85% of the public offering price per share
of our common stock, or 160,428 shares assuming a public offering price of
$11.00 per share, the midpoint of the range shown on the cover of this
prospectus. In connection with the settlement, CMI will also relinquish any
rights it may have under a distribution agreement entered into between CMI and
Lightpoint relating to Asia. The settlement is contingent upon the successful
completion of this offering.
On February 8, 2000, we were sued in United States District Court by Big
Star Entertainment, Inc., alleging trademark infringement, unfair competition,
federal trademark dilution, common law unfair competition in violation of
applicable New York general business law and unjust enrichment. The allegation
is that our NEXTBIGSTAR.COM joint venture infringes on their name. Big Star
Entertainment, Inc.'s application for injunctive relief, based on allegations
that our NEXTBIGSTAR.COM joint venture violated trademark and related rights,
was denied in its entirety in a Decision and Order dated April 17, 2000. In
rejecting plaintiff's contentions, the Court, in its factual findings and legal
conclusions, supported opposition to the motion. Big Star Entertainment, Inc.
has appealed from the Decision and Order. Pursuant to a further order, the
parties are to conduct and complete discovery no later than August 31, 2000.
From time to time, we are subject to other claims and suits arising in the
course of our business, none of which we believe is likely to materially harm
our business.
EMPLOYEES
As of June 30, 2000, we had 30 full-time employees, including six employees
of NEXTBIGSTAR.COM. We consider our relationships with our employees to be good.
None of our employees are covered by collective bargaining agreements. We have
never experienced an employment-related work stoppage. We intend to recruit and
employ additional staff as we implement our growth plan and as working
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capital permits. We also retain various consultants on a contractual basis as
needed for management, legal, accounting, development, distribution and
production services.
FACILITIES
Our corporate offices are located in approximately 12,000 square feet of
office space at Universal Studios in Orlando, Florida 32819. This lease expires
on December 31, 2000.
In order to accommodate our expansion plans for our animation and special
effects studios, we have rented a 5,000 square foot facility in Orlando,
Florida. This lease expires on September 30, 2003. Our animation and special
effects studios are now strategically located within an entertainment-based
complex which includes post-production facilities and commercial production and
graphic design companies.
We have entered into a productions facilities agreement with Disney
Production Services for the production of THE DOOLEY AND PALS SHOW at Disney's
production facilities in Orlando, Florida, which provides for facilities,
equipment and staffing. The agreement has been extended through the end of our
production for our first broadcast season for THE DOOLEY AND PALS SHOW, which we
anticipate will be in August 2000.
We occupy additional space of approximately 1,500 square feet to house our
NEXTBIGSTAR.COM operations in Orlando, Florida under a six month arrangement.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our directors and executive officers are as follows.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- -------- --------------------------------------------------
<S> <C> <C>
Michael H. Gerber...................... 56 Chairman of the Board, President and Chief
Executive Officer and President of Victory
Internet Productions
Edgar N. Millington, Jr................ 36 Chief Financial Officer, Vice President, Treasurer
and Secretary and Interim President and Secretary
of Lightpoint
Art David.............................. 41 President of Victory Animation Studios
Jacob (Kobi) Jaeger.................... 61 President of Victory Television, Inc.
Judy Gold.............................. 49 Vice President--International Sales
Michael Collyer........................ 58 Director
Charles Wilner......................... 34 Director
Paul Henderson......................... 41 Director
</TABLE>
MICHAEL H. GERBER is our founder and has served as our Chairman of the
Board, Chief Executive Officer and President since our inception in May 1999.
Mr. Gerber has also served as the President of Victory Internet Productions
since January 2000 and served as President of Victory Television, Inc., from
June 1999 through July 2000.
From September 1992 through January 1999, Mr. Gerber operated Gerber
Entertainment Group, which he formed to develop and package television programs
and feature films. Projects include the special THE MYSTERY OF THE SPHINX (NBC)
and THE MYSTERIOUS ORIGINS OF MAN (NBC), both hosted by Charlton Heston;
LIBERATION OF THE NAZI CONCENTRATION CAMPS for The Discovery Channel; THE NEWZ,
a late night sketch comedy for Columbia Tristar Television; programming and
marketing consultant to numerous production and financial companies, including:
Simitar Entertainment, Seventeen Magazine, The Kentucky Derby, The Epic
Adventures of Tarzan, Grosso-Jacobson Entertainment, The Salkind/ Chaplin
Company, Towers of London, Small Business 2000 (PBS), New Networks, Inc., and
The Lewis Horwitz Organization, a division of Imperial Bank. Mr. Gerber is the
producer of the documentary entitled STORIES OF THE HOLOCAUST IN ASSOCIATION
WITH THE ANTI-DEFAMATION LEAGUE, hosted by Hector Elizondo.
Between 1980 and 1992, Mr. Gerber held a variety of senior level positions
with Viacom Enterprises, rising from Vice President-Business Affairs in 1980 to
President of the television division in 1988, with primary responsibility over
first run development, production, marketing and sales, all international
distribution activities and all program acquisitions. At Viacom, Mr. Gerber was
responsible for the acquisition of more than 750 feature films, including:
AMADEUS; THE AFRICAN QUEEN; DEATH WISH II, III and IV; THE DELTA FORCE; HELTER
SKELTER; PETER THE GREAT; SUPERMAN III AND IV; CONAN; KENNY ROGERS AS THE
GAMBLER; and SANTA CLAUS: THE MOVIE. In the off-network area, Mr. Gerber was
responsible for such acquisitions as: ROSEANNE from Carsey-Werner, THE
HONEYMOONERS, LOST EPISODES from Jackie Gleason and THE GARY SHANDLING SHOW. In
the first-run area, Mr. Gerber oversaw the launch and marketing of such series
as THE MONTEL WILLIAMS SHOW, MTV VIDEO MUSIC AWARDS, DOUBLE DARE (NICKELODEON)
and the ADVENTURES OF SUPERBOY. During Mr. Gerber's tenure at Viacom, the
company acquired over $250 million of programming and generated over $2 billion
in sales, including the launch of THE COSBY SHOW for more than $1 billion in
syndicated sales.
Between 1973 and 1979, Mr. Gerber held various senior level positions with
Allied Artists Pictures Corporation, with primary responsibility for the
negotiation and structure of production, financing and distribution agreements
for such motion pictures as CABARET, PAPILLON and THE MAN WHO WOULD BE KING.
From 1971 to 1973, Mr. Gerber served as assistant general counsel of Columbia
Pictures Industries, the
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parent of Columbia Pictures Television. From 1969 to 1971, Mr. Gerber was in the
law department of Columbia Pictures Television. Mr. Gerber has a B.A. in
Economics from St. John's University and a J.D. from St. John's University
School of Law.
EDGAR N. MILLINGTON, JR. has served as our Vice President, Treasurer and
Secretary since July 1999 and as Chief Financial Officer since February 2000.
Mr. Millington has also served as the Interim President and Secretary of
Lightpoint since July 1999. From September 1998 to June 1999, Mr. Millington
served as Controller of Lightpoint. From July 1996 to September 1998,
Mr. Millington served as a finance manager and assistant controller for the
American Security Insurance Company. From June 1992 to July 1996,
Mr. Millington ran a private accounting practice. Mr. Millington has a B.A. from
the Georgia Institute of Technology, College of Management. Mr. Millington is a
certified public accountant licensed in the state of Georgia since 1988.
ART DAVID has served as President of Victory Animation Studios, Inc., one of
our subsidiaries, since June 1999. From January 1995 to June 1999, Mr. David
formed and operated Wavelight Digital Images, a special effects studio, which
created the special effects for such films as DIE HARD 3, JUDGE DREDD, CONTACT,
STARSHIP TROOPERS and THE MATRIX. From November 1989 to January 1995, he was at
Disney/Post Group designing and executing visual effects and graphic production.
From November 1984 to November 1989, Mr. David was an editor at Turner
Broadcasting System. Mr. David has a B.A. in television and radio production
from Florida State University.
JACOB (KOBI) JAEGER has served as President of Victory Television, Inc., one
of our subsidiaries, since June 2000. From February 1999 through June 2000,
Mr. Jaeger worked as an independent consultant. From June 1994 through January
1999, Mr. Jaeger served as General Manager and co-chairman of Declare Holdings,
Inc., a developer of television and motion pictures, through its audiovisual
production center in St. Maarten. From January 1989 through May 1994,
Mr. Jaeger served as President of Santa Anna Productions and EuroPanda S.R.L. in
Milan, Italy. From February 1986 to June 1990, Mr. Jaeger served in various
international co-production partnerships through his releasing company Franklin
Media and his own production company, Kobi Jaeger, Inc. From November 1980 to
January, 1986, Mr. Jaeger served as President of News Group Productions, a
subsidiary of News Ltd. Group, a Rupert Murdoch company. Mr. Jaeger's production
credits include Kafka's THE TRIAL starring Anthony Hopkins and Kyle MacLachlan
and written by Harold Pinter, FRANKENSTEIN UNBOUND starring Joan Hurt and Raul
Julia and the TV series TV STAR, the precursor of the long-running CURRENT
AFFAIRS TV program. Mr. Jaeger also produced the feature film SALTY for
Twentieth Century Fox and the ensuing TV series SALTY THE SEA LION for ABC.
JUDY GOLD has served as our Vice President--International Sales since
April 2000. From December 1998 to February 2000, Ms. Gold served as Vice
President of International Television at Cinetel Films. From March 1996 to
December 1998, Ms. Gold served as Vice President of International Television at
NuImage/Millenium Films. From February 1991 to March 1996, Ms. Gold ran a
private business, Choice Communications Group, through which she sold television
products created by third parties to both domestic and international television
stations. Ms. Gold attended NYU and studied business administration.
MICHAEL COLLYER has served as a director since July 1999. Mr. Collyer is a
partner at the law firm Kay Collyer & Boose LLP, where he practices in the
entertainment area. From 1966 to 1969, Mr. Collyer taught business law at
Columbia University. Mr. Collyer is on the board and serves as the National
Chairman of the National Academy of Television Arts and Sciences. He is the
author of MOTION PICTURES AND TELEVISION UNDER THE NEW COPYRIGHT STATUTE and is
the author of chapters on Television and Television Program Development for the
New York State Bar Association's book ENTERTAINMENT LAW. Mr. Collyer is also a
member of the Committee on Entertainment Law of the Association of the Bar of
the City of New York and a member of the New York City Mayor's Advisory Council
on Film and Broadcasting. He is a frequent lecturer and/or panelist at N.Y.U.
Film School,
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Brooklyn Law School, NAPTE, MIP-TV, MIPCOM and Banff Television Film Festival.
Mr. Collyer has a B.A. from Williams College and a LL.B. from Columbia
University.
PAUL HENDERSON has served as a director since January 2000. Mr. Henderson
has been the Chairman and Chief Executive Officer of Interbanc Mortgage
Services, Inc., a mortgage banking firm located in Orlando, since April 1991.
Mr. Henderson attended the University of Rhode Island and studied business
administration.
CHARLES WILNER has served as a director since July 1999. Mr. Wilner has been
the General Manager and Compliance Officer for Galleon Merchant Banking, Inc.
since March 1999. From April 1998 to December 1999, Mr. Wilner served as the
Manager of Merit Advisors Group, Inc., a financial consulting firm. From
September 1997 to April 1998, Mr. Wilner served as an independent financial
consultant. From September 1995 to September 1997, Mr. Wilner was an operations
manager for Borders & Accents, Inc. Mr. Wilner is also an adjunct professor at
Barry University, where he teaches undergraduate business courses. Mr. Wilner
received a B.A. in Economics from the University of Connecticut and an M.B.A.
from Barry University.
BOARD OF DIRECTORS
Our board of directors currently consists of four individuals. Our directors
are elected at our annual shareholders meeting. The term of each director ends
at the next annual meeting of shareholders. Our articles of incorporation and
bylaws provide that directors can be removed with or without cause by a majority
of the shareholders. Our arrangement with Weatherly Securities Corp., the lead
underwriter of this offering, provides Weatherly with the right to designate one
nominee to our board of directors for a period of three years. Officers are
chosen by and serve at the discretion of the board of directors.
COMMITTEES OF THE BOARD OF DIRECTORS. We have two standing committees, an
audit committee and a compensation committee. Messrs. Collyer and Wilner have
been appointed as the initial members of the audit and compensation committees.
As additional persons join our board of directors following this offering, we
expect that the membership of these committees will be modified.
AUDIT COMMITTEE. The audit committee reviews our auditing, accounting,
financial reporting and internal control functions and makes recommendations to
the board for the selection of independent accountants. In addition, the
committee monitors the quality of our accounting principles and financial
reporting, as well as the independence of our independent accountants. Following
the consummation of this offering, our audit committee will be comprised of
three independent directors in accordance with requirements of The Nasdaq
National Market. In discharging its duties, the audit committee:
- reviews and approves the scope of the annual audit and the independent
accountant's fees;
- meets independently with our internal auditing staff, our independent
accountants and our senior management; and
- reviews the general scope of our accounting, financial reporting, annual
audit and internal audit program, matters relating to our internal control
systems and the results of the annual audit.
COMPENSATION COMMITTEE. The compensation committee determines the
compensation for employee directors and, after receiving and considering the
recommendations of our President, all of our officers and any other employee
that the committee may designate from time to time. In addition, the committee
approves and administers employee benefit plans.
OTHER COMMITTEES. Our board of directors may establish other committees
from time to time to facilitate the management of our business and affairs.
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<PAGE>
DIRECTOR COMPENSATION. Directors do not receive any cash compensation for
their service as members of the board of directors, but they are reimbursed for
reasonable out-of-pocket expenses incurred in connection with their attendance
at meetings of the board of directors and committee meetings. Directors are
eligible to receive options to purchase common stock under our stock option
plan. On January 10, 2000, we issued warrants to purchase 50,000 shares of our
common stock to Mr. Henderson at an exercise price of $7.00 per share and
granted options to purchase 100,000 shares of our common stock to him at an
exercise price of $.001 per share for services as director, 50,000 of which
vested immediately and 50,000 of which will vest after one year if
Mr. Henderson remains on our board of directors. On April 18, 2000, we granted
to Messrs. Collyer and Wilner options to purchase 35,000 and 10,000 shares of
our common stock, respectively, at an exercise price of $3.50 per share, for
services as directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. Our
compensation committee currently consists of Messrs. Collyer and Wilner. None of
our executive officers has served as a director or member of the compensation
committee of any other entity whose executive officers served on our board of
directors or compensation committee.
EXECUTIVE OFFICER COMPENSATION
SUMMARY COMPENSATION
The table below shows information regarding the annual and long-term
compensation for our chief executive officer for our fiscal year ended June 30,
1999. Each of our other executive officers joined Victory after June 30, 1999,
and thus none of our executive officers who held office as of June 30, 1999 met
the definition of "highly compensated" within the meaning of the SEC's executive
compensation disclosure rules.
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
-------------------------------------- ------------------------ ----------
SECURITIES
RESTRICTED UNDERLYING
OTHER ANNUAL STOCK OPTIONS/ LTIP
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) AWARD(S)($) SARS(#) PAYOUTS($)
--------------------------- -------- --------- -------- --------------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Michael H. Gerber......... 1999 (1) -- -- -- -- --
Chief Executive Officer,
President and Chairman of
the Board
<CAPTION>
ALL OTHER
NAME AND PRINCIPAL POSITION COMPENSATION($)
--------------------------- ---------------
<S> <C>
Michael H. Gerber......... $2,550(2)
Chief Executive Officer,
President and Chairman of
the Board
</TABLE>
------------------------
(1) Mr. Gerber commenced his employment on May 27, 1999. Mr. Gerber's annualized
salary for the fiscal year ended June 30, 1999 was $225,000.
(2) Consists of car rental and residence lease payments. Does not include
5,000,000 founder shares of our common stock purchased by Mr. Gerber at par
value on May 27, 1999. The value of these shares at a price per share of
$11.00, the midpoint of the range shown on the cover of this prospectus, is
$55,000,000.
OPTION/SAR GRANTS IN FISCAL 1999
The table below shows information regarding stock options and freestanding
stock appreciation rights, or SARS, granted to our chief executive officer
during the fiscal year ended June 30, 1999. The assumed rates of appreciation of
5% and 10% are hypothetical rates of stock price appreciation selected by the
SEC and are not intended to, and do not, forecast or assume actual future stock
prices. We believe that stock price appreciation, if any, is unpredictable, and
we are not aware of any formula that will determine with any reasonable accuracy
the present value of stock options. No gain to optionees is possible without an
appreciation in stock prices, and any increase will benefit all
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<PAGE>
shareholders commensurately. We cannot assure you that the amounts reflected in
this table will be achieved.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL
RATES OF STOCK PRICE
APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
-------------------------------------------------------------------------------------- ---------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
---- ------------ ------------ ----------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Michael H. Gerber............. -- -- -- -- -- --
</TABLE>
AGGREGATED OPTION/SAR EXERCISES AND FISCAL YEAR END OPTION/SAR VALUES
The table below shows information concerning the exercise of stock options
and freestanding SARs during the fiscal year ended June 30, 1999 by our chief
executive officer and the value of unexercised stock options and freestanding
SARs held by him as of June 30, 1999. The value of unexercised in the money
options/SARS at fiscal year end is determined by subtracting the exercise price
from the fair market value of the common stock based on an assumed initial
offering price of $11.00 per share, the midpoint of the range shown on the cover
of this prospectus, multiplied by the number of shares underlying the options.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS/SARS OPTIONS/SARS
SHARES AT FISCAL YEAR END (#) AT FISCAL YEAR END ($)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE (#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael H. Gerber.................. -- -- -- -- -- --
</TABLE>
EMPLOYMENT CONTRACTS
MICHAEL H. GERBER. We have entered into an amended and restated five year
employment agreement with Michael H. Gerber, our Chief Executive Officer and
President, which commenced July 1, 2000. Upon its expiration, the agreement will
automatically renew for successive one year terms unless we or Mr. Gerber decide
not to renew and provide a written notice to the other party at least 90 days
prior to the scheduled expiration date.
The agreement provides that Mr. Gerber will be the most senior executive
reporting to our board of directors and requires Mr. Gerber to devote his full
time and attention to us. Mr. Gerber's initial annual base salary of $250,000 is
subject to a minimum increase of 15% per year in base salary and a 25% increase
in base salary in the first year that we achieve a positive cash flow from
operations. Mr. Gerber will also receive an annual bonus based on his and
Victory's performance as determined by our board of directors. The agreement
also provides for customary benefits, perquisites, expense reimbursement and
indemnification.
Mr. Gerber's employment agreement provides that if he is terminated by us
without cause or if he terminates his agreement for good reason, he is entitled
to severance benefits of two times his base salary plus additional compensation.
Mr. Gerber can terminate his agreement for good reason if his position, duties
or responsibilities are diminished, if he is removed from the board of
directors, if his salary is reduced, if he is relocated, if Victory is in breach
of the agreement or upon a change of control. Mr. Gerber's agreement provides
that we will be responsible for any excise tax imposed under Section 4999 of the
Internal Revenue Code upon Mr. Gerber's termination.
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The agreement also contains a non-competition provision that precludes
Mr. Gerber from competing with us during the period of his employment and for
six months after the termination of his employment unless he is terminated
without cause or he terminates for good reason. The agreement also contains
customary confidentiality provisions.
ART DAVID. We have entered into an employment agreement with Art David,
President of Victory Animation Studios, Inc., which commenced on July 12, 1999
and which is currently scheduled to expire on July 12, 2001. The agreement can
be automatically renewed by us for an additional one year period by written
notice to Mr. David at least 60 days prior to its scheduled expiration.
Under his employment agreement, as amended, Mr. David's annual salary will
be $150,000 during the first year, $175,000 during the second year and as
amended $200,000 during the third year of his employment. Mr. David's employment
agreement also provides for the issuance of 50,000 shares of common stock and
the grant of options to purchase 50,000 shares of our common stock at an
exercise price of $0.25 per share, which can be exercised 60 days after the
consummation of this offering for a period of one year.
The agreement also contains a non-competition provision that precludes
Mr. David from competing with us during the period of his employment or during
the twelve months following our last payment of compensation to Mr. David and
non-disclosure and confidentiality provisions providing that Mr. David not
disclose any confidential information owned by us made known to Mr. David during
the term of his employment by us.
JACOB (KOBI) JAEGER. We have entered into an employment agreement with
Jacob (Kobi) Jaeger, President of Victory Television, Inc., which commenced on
June 19, 2000 and which is currently scheduled to expire on June 18, 2001. The
agreement can be automatically renewed by us for two additional one year periods
by written notice to Mr. Jaeger at least 60 days prior to its scheduled
expiration.
Under his employment agreement, Mr. Jaeger's annual salary will be $150,000
during the first year, $175,000 during the second year and $200,000 during the
third year of his employment. Mr. Jaeger's employment agreement also provides
for the grant of options to purchase 25,000 shares of our common stock under and
in accordance with our 2000 Long Term Incentive and Share Award Plan.
The agreement also contains a non-competition provision that precludes
Mr. Jaeger from competing with us during the period of his employment or during
the twelve months following our last payment of compensation to Mr. Jaeger and
non-disclosure and confidentiality provisions providing that Mr. Jaeger not
disclose any confidential information owned by us made known to Mr. Jaeger
during the term of his employment by us.
2000 LONG TERM INCENTIVE AND SHARE AWARD PLAN
Our 2000 Long Term Incentive and Share Award Plan, which we refer to as our
stock option plan, was adopted by our board of directors in April 2000 and
approved by written consent of our shareholders in June 2000. The stock option
plan provides for the grant of stock options, stock appreciation rights and
other share-based awards to employees, officers, directors, consultants and
independent contractors of Victory or any of its affiliates.
The stock option plan authorizes the granting of up to 500,000 shares of our
common stock. The stock option plan may be administered by our board of
directors or by a committee of the board of directors. The stock option plan
provides that the administrator has the authority to determine from time to time
the eligible participants to whom stock options are to be granted, the number of
shares of common stock for which options are exercisable and the purchase price
of the shares, and all other terms and conditions of the options or other
share-based awards.
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Options granted under the stock option plan may be incentive stock options,
or ISOs, that are intended to meet all of the requirements of an incentive stock
option as defined in Section 422 of the Internal Revenue Code or nonqualified
stock options, NQSOs, that are not intended to so qualify.
The price at which shares may be purchased upon exercise of an option shall
be fixed by the administrator, in its sole discretion. The option price of an
NQSO may be greater than, equal to or less than the fair market value of the
underlying shares of common stock on the date of grant. The option price of any
ISO will not be less than the fair market value of the underlying shares of
common stock on the date of grant. The administrator will also determine the
term of each option, provided that the exercise period may not exceed ten years
from the date of grant. An optionee may pay the exercise price in cash, by
delivering shares of common stock already owned by the optionee and having a
fair market value on the date of exercise equal to the option price, or by any
other method as the committee may approve. The optionee must pay applicable
withholding taxes upon exercise of the option as a condition to receiving the
shares. The administrator may impose vesting and other conditions on grants of
options. Options may be exercised while the optionee is an employee, officer,
director, consultant or advisor or within a specified period after termination
of the optionee's employment or services.
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PRINCIPAL SHAREHOLDERS
The following table shows information as of June 30, 2000 with respect to
the beneficial ownership of our common stock by:
- each person known by us to beneficially own more than 5% of our common
stock;
- each of our directors;
- our chief executive officer and our two other most highly compensated
executive officers; and
- all of our directors and executive officers as a group.
The amounts and percentages of common stock beneficially owned are reported
on the basis of regulations of the SEC governing the determination of beneficial
ownership of securities. Under the rules of the SEC, a person is deemed to be a
beneficial owner of a security if that person has or shares voting power, which
includes the power to vote or to direct the voting of the security, or
investment power, which includes the power to dispose of or to direct the
disposition of the security. Unless otherwise indicated below, each beneficial
owner named in the table below has sole voting and sole investment power with
respect to all shares beneficially owned, subject to community property laws
where applicable. In computing the number of shares beneficially owned by a
person and the percentage ownership of that person, shares of common stock
subject to options or warrants held by that person that are currently
exercisable or that are or may become exercisable within 60 days of June 30,
2000 are deemed outstanding. These shares, however, are not deemed outstanding
for the purposes of computing the percentage ownership of any other person.
Subject to the two preceding sentences, percentage of beneficial ownership of
common stock is based on 10,031,911 shares of common stock outstanding before
this offering and 12,492,339 shares outstanding following this offering. The
information shown in the following table excludes any shares which may be
purchased in this offering by the respective beneficial owner. Unless otherwise
stated, the address for each person listed below is 1000 Universal Studios
Plaza, Building 22A, Orlando, Florida 32819.
<TABLE>
<CAPTION>
PERCENT BENEFICIALLY OWNED
NUMBER OF SHARES --------------------------------
NAME BENEFICIALLY OWNED BEFORE OFFERING AFTER OFFERING
---- ------------------ --------------- --------------
<S> <C> <C> <C>
5% OR GREATER SHAREHOLDERS, EXECUTIVE OFFICERS AND
DIRECTORS:
Wardley Investments Limited (1)................... 800,000 7.4% 6.0%
Michael H. Gerber................................. 5,000,000 49.8 40.0
Edgar Millington.................................. 20,000 * *
Art David......................................... 50,000 * *
Michael Collyer (2)............................... 35,000 * *
Charles Wilner (3)................................ 10,000 * *
Paul Henderson (4)................................ 592,000 5.7 4.6
All directors and executive officers as a group
(eight persons)................................. 5,707,000 55.0 44.5
</TABLE>
------------------------
* Represents beneficial ownership of less than 1%.
(1) Consists of warrants to purchase 800,000 shares of common stock at an
exercise price of $7.00 per share or, in the event that this offering is
consummated, 85% of the initial public offering price. The address for
Wardley Investments Limited is Havilland Hall, Vaciquiedor, Saint Andrew
Guernsey, Channel Islands GY68TP.
(2) Consists of options to purchase 35,000 shares of common stock exercisable
within 60 days of June 30, 2000 at an exercise price of $3.50 per share.
46
<PAGE>
(3) Consists of options to purchase 10,000 shares of common stock exercisable
within 60 days of June 30, 2000 at an exercise price of $3.50 per share.
(4) Includes warrants to purchase 50,000 shares of common stock exercisable
within 60 days at an exercise price of $7.00 per share, options to purchase
50,000 shares of common stock exercisable within 60 days of June 30, 2000 at
an exercise price of $.001 per share, 298,500 shares of common stock held in
the name of Interbanc Mortgage Services, Inc. and warrants to purchase
193,500 shares of common stock at an exercise price of $7.00 per share held
in the name of Interbanc Mortgage Services, Inc.
RELATED PARTY TRANSACTIONS
In our private placement of common stock completed on December 17, 1999,
Paul M. Henderson, a member of our board of directors, purchased 143,500 shares
of our common stock at a purchase price of $3.50 per share and warrants to
purchase 143,500 shares of our common stock at an exercise price of $7.00 per
share. Mr. Henderson funded this purchase with an interest free promissory note
for $502,250. Mr. Henderson has since repaid the promissory note in full.
Michael Collyer, a member of our board of directors, is a partner at the law
firm of Kay, Collyer & Boose LLP, which provides various legal services for
Victory. In the nine months ended March 31, 2000, we paid Mr. Collyer's firm
approximately $48,000 for legal services, a substantial portion of which are
attributable to litigation relating to NEXTBIGSTAR.COM described under
"Business--Legal Proceedings."
Until December 31, 1999, Charles M. Wilner, a member of our board of
directors, was a manager of Merit Advisers Group, Inc., a financial advisory
firm. For the nine months ended March 31, 2000 and for the year ended June 30,
1999, Victory paid approximately $1,391,000 and $968,000, respectively, to Merit
Advisors Group, Inc. and its affiliates for business consulting and advisory
services. In addition, during the year ended June 30, 1999, Lightpoint issued
warrants to purchase 341,241 shares of common stock to Merit Advisors
Group, Inc. at an exercise price of $0.25 per share.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our articles of incorporation authorize the issuance of up to 50,000,000
shares of common stock and 20,000,000 shares of preferred stock, the rights and
preferences of which may be established from time to time by our board of
directors. As of June 30, 2000, 10,031,911 shares of our common stock were
issued and outstanding and no shares of preferred stock were issued and
outstanding. As of June 30, 2000, we had 436 shareholders.
COMMON STOCK
Holders of our common stock are entitled to one vote for each share held on
all matters submitted to a vote of shareholders and do not have cumulative
voting rights. Thus, holders of a majority of the shares of our common stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of our common stock are entitled to receive
ratably any dividends that may be declared by the board of directors out of
funds legally available, subject to any preferential dividend rights of
outstanding preferred stock. Upon our liquidation, dissolution or winding up,
the holders of our common stock are entitled to receive ratably the net assets
available after the payment of all debts and other liabilities, subject to the
prior rights of any outstanding preferred stock. Holders of our common stock
have no preemptive, subscription, redemption or conversion rights.
PREFERRED STOCK
Under our articles of incorporation, our board of directors is authorized,
subject to limitations prescribed by law, without further shareholder approval,
from time to time to issue up to an aggregate of 20,000,000 shares of preferred
stock in one or more series and to fix or alter the designations, preferences
and rights, and any qualifications, limitations or restrictions, of the shares
of each of these series, including the number of shares constituting any of
these series and dividend rights, dividend rates, conversion rights, voting
rights, terms of reduction, including sinking fund provisions, if any,
redemption price or prices and liquidation preferences. The issuance of
preferred stock may have the effect of delaying, deferring or preventing a
change of control. We have no present plans to issue any shares of preferred
stock.
WARRANTS
SUBSCRIPTION WARRANTS. As of June 30, 2000, we had subscription warrants
outstanding to purchase an aggregate of 3,621,625 shares of our common stock at
an exercise price of $7.00 per share and subscription warrants outstanding to
purchase 110,000 shares of our common stock at an exercise price of $4.00 per
share. Of these warrants, warrants to purchase 1,818,000 shares of our common
stock expire on July 1, 2001 and warrants to purchase 1,913,625 shares of our
common stock expire on December 17, 2001. These warrants are exercisable by the
holders at any time, and we have the right to call these warrants for redemption
at any time at a redemption price of $0.10 for each underlying share. As of
June 30, 2000, we redeemed 122,000 of these warrants for an aggregate redemption
price of $12,200.
INVESTOR WARRANTS. On April 3, 2000, in connection with the issuance of a
$5,000,000 senior secured promissory note, we issued to the investor warrants to
purchase 800,000 shares of our common stock at an exercise price of $7.00 or, in
the event this offering is consummated, 85% of the initial public offering
price. These warrants are exercisable at any time, expire on March 28, 2003 and
may be exercised on a "cashless" basis.
PLACEMENT AGENT WARRANTS. On April 3, 2000, we issued to Weatherly
Securities Corp., the placement agent in connection with the issuance of our
$5,000,000 senior secured promissory note and the lead underwriter of this
offering, warrants to purchase 80,000 shares of our common stock at an exercise
price $7.00 or, in the event this offering is consummated, 125% of the initial
public offering
48
<PAGE>
price per share, in a private offering of our securities. These warrants are
exercisable at any time, expire on March 28, 2005 and may be exercised on a
"cashless" basis.
CONSULTANT WARRANTS. On November 30, 1998, Lightpoint issued to Merit
Advisors Group, Inc., for consulting services to Lightpoint, warrants to
purchase 341,241 shares of common stock of Lightpoint at an exercise price of
$0.25 per share, which were exchanged for warrants to purchase 341,241 shares of
our common stock at the same exercise price upon our acquisition of Lightpoint.
DIRECTOR WARRANTS. On January 10, 2000, we issued Paul Henderson, one of
our directors, warrants to purchase 50,000 shares of common stock at an exercise
price of $7.00 per share.
OPTIONS. In addition, other than options issued under our stock option
plan, as of June 30, 2000, we had issued options to purchase 500,000 shares of
our common stock, comprised of options to purchase 150,000 shares of common
stock granted as of July 1, 1999 at an exercise price of $0.25 per share to
former officers of Lightpoint, which vest upon consummation of this offering;
options to purchase 120,000 shares of common stock granted as of June 9, 1999 to
individuals designated to become officers of Victory at an exercise price of
$0.25 per share, which vest upon consummation of this offering; options to
purchase 100,000 shares to a director granted as of January 10, 2000 at an
exercise price of $.001 per share, 50% of which vested upon issuance and 50% of
which vest in one year if the grantee remains on our board of directors; options
to purchase 35,000 shares of common stock granted as of February 8, 2000 to an
officer of Next Big Star LLC at an exercise price of $3.50 per share, which vest
upon consummation of this offering; options to purchase 45,000 shares to two
directors granted as of April 18, 2000 at an exercise price of $3.50 per share,
which vested upon issuance; and options to purchase 50,000 shares of common
stock to Ed McMahon on April 18, 2000 at an exercise price of $3.50 per share,
which vested upon issuance.
REGISTRATION RIGHTS. The holder of the investor warrants and the holder of
the placement agent warrants described above each have the right, following this
offering, to demand once, at our expense, that we register their underlying
shares of common stock with the SEC, and each of these holders, and the holders
of the consultant warrants described above, also have the right to have their
shares included in any registration statement that we file with the SEC after
the consummation of this offering, subject to limited and customary exceptions.
Both the holder of the investor warrants and the holder of the private placement
warrants have agreed not to sell or otherwise dispose of their warrants or the
shares underlying their warrants for a period of 180 days after the date of this
prospectus, subject to limited early release if our stock price reaches certain
levels, and the holders of the other warrants described above have agreed not to
sell or otherwise dispose of their warrants for a period of one year after the
date of this prospectus, subject to limited exceptions.
We are going to file a shelf registration statement registering the shares
underlying the investor warrants and the placement agent warrants for resale
upon the expiration of the applicable "lock-up" period referred to in the
previous paragraph.
LIMITATION OF DIRECTOR AND OFFICER LIABILITY AND INDEMNIFICATION
As permitted by Florida law, our articles of incorporation provide that our
directors shall not be personally liable to us or our shareholders for monetary
damages for breach of fiduciary duty as a director, except for liability:
- for any breach of the director's duty of loyalty to us or our
shareholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law; or
- for any transaction from which the director derives an improper personal
benefit.
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<PAGE>
As a result of this provision, we and our shareholders may be unable to
obtain monetary damages from a director for breach of duty of care.
Our articles of incorporation and bylaws also provide for the
indemnification of our directors and officers to the fullest extent authorized
by Florida law, except that we will indemnify a director or officer in
connection with an action initiated by that person only if the action initiated
by that person was authorized by our board of directors. The indemnification
provided under our articles of incorporation and bylaws includes the right to be
paid expenses in advance of any proceeding for which indemnification may be had,
PROVIDED that the payment of these expenses incurred by a director or officer in
advance of the final disposition of a proceeding may be made only upon delivery
to us of an undertaking by or on behalf of the director or officer to repay all
amounts paid in advance if it is ultimately determined that the director or
officer is not entitled to be indemnified.
Under Florida law, we have the power to purchase and maintain insurance on
behalf of any person who is or was one of our directors, officers, employees or
agents, or is it was serving at our request as a director, officer, employee,
partner or agent of another corporation or of a partnership, joint venture,
limited liability company, trust or other enterprise, against any liability
asserted against the person or incurred by the person in any of these
capacities, or arising out of the person's fulfilling one of these capacities.
The insurance will also cover any expenses fulfilling one of these capacities.
The insurance will also cover any expenses related to the liability. The
insurance coverage is available to these persons whether or not we would have
the power to indemnify the person against the claim under the provisions of
Florida law. Prior to the completion of this offering, we intend to obtain a
directors and officers insurance policy.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is Florida Atlantic
Stock Transfer, Inc.
ARTICLES OF INCORPORATION AND BYLAWS
Under the Florida Business Corporation Act, our board of directors may
propose amendments to our articles of incorporation which, other than for
enumerated ministerial amendments, then require shareholder approval for
adoption. Our bylaws provide that both our shareholders and our board of
directors have the power to amend or repeal the provisions in our bylaws. Our
bylaws also entitle our shareholders to remove directors with or without cause.
In addition, our bylaws also provide that annual meetings of our shareholders
may only be called by our board of directors or our officers. We may amend our
articles of incorporation or bylaws prior to the consummation of this offering
to provide for additional customary provisions, including provisions which may
deter takeover attempts of Victory by third parties.
50
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have 12,492,339 shares of common
stock outstanding, assuming no exercise of the underwriters' over-allotment
option and no exercise of outstanding warrants and options. Of these shares, the
2,300,000 shares sold in this offering will be freely transferable without
restriction or further registration under the Securities Act, except for any
shares held by any of our "affiliates," as that term is defined in Rule 144
under the Securities Act. For purposes of Rule 144, an affiliate of ours is a
person that, directly or indirectly through one or more intermediaries,
controls, or is controlled by or is under common control with us. Any shares
held by one of our affiliates will be subject to the resale limitations
described below on "restricted" securities, as that term is defined in
Rule 144.
RULE 144
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 of our common stock for at least one year is entitled to sell, within any
three-month period, a number of shares that is not more than the greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately 1,249,234 shares immediately after this offering; or
- the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks before a notice the sale on
Form 144 is filed.
Sales under Rule 144 must also comply with manner of sale provisions and
notice requirements and to the availability of current public information about
us.
RULE 701
Subject to limitations on the aggregate offering price of a transaction and
other conditions, Rule 701 under the Securities Act may be relied upon regarding
the resale of securities originally purchased from us by our employees,
directors, officers, consultants or advisors before the date we become subject
to the reporting requirements of the Exchange Act, under written compensatory
benefit plans or written contracts relating to compensation of those persons. In
addition, the SEC has indicated that Rule 701 will apply to the typical stock
options granted by an issuer before it becomes subject to the reporting
requirements of the Exchange Act, along with the shares acquired upon exercise
of these options, including exercises after the date of this prospectus.
Securities described above, beginning 90 days after the date of this prospectus,
may be sold (1) by persons other than affiliates, subject only to the manner of
sale provisions of Rule 144, and (2) by affiliates under Rule 144 without
compliance with its one-year holding period requirement.
Beginning 90 days after the date of this prospectus, and without
consideration of the contractual restrictions described below, shares of
our common stock will become eligible for sale in reliance upon Rule 144 and
Rule 701.
RULE 144(K)
Under Rule 144(k), a person who has not been one of our affiliates at any
time during the 90 days before a sale, and who has beneficially owned the
restricted shares for at least two years, is entitled to sell the shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144. Upon consummation of this offering, no shares of
our common stock will be eligible for immediate sale in the public market
without restriction pursuant to Rule 144(k).
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<PAGE>
LOCK-UPS
Our officers, directors and shareholders who hold in the aggregate 9,800,625
of the 10,031,891 shares of our common stock outstanding on June 30, 2000 have
agreed not to sell any shares of common stock for one year after the date of
this prospectus without our prior written consent and the prior written consent
of Weatherly Securities Corp., subject to various limited exceptions. As a
result of these contractual restrictions and subject to the provisions to
Rules 144 and 701, all of these shares will be eligible for sale upon expiration
of these agreements.
In addition, as of June 30, 2000 we had issued options and warrants to
purchase 5,670,866 shares of our common stock. Holders of 4,690,836 of these
options and warrants have agreed not to sell their options or warrants or the
underlying shares of common stock for a period of one year without our prior
written consent and the prior written consent of Weatherly Securities Corp.,
subject to limited exceptions, and holders of 880,000 warrants and the holders
of 160,428 shares of common stock to be issued upon the consummation of this
offering in connection with the resolution of the CMI litigation have agreed not
to sell those securities, and in the case of the warrants, the underlying
shares, for a period of 180 days without our prior written consent, subjected to
limited exceptions.
We have agreed not to offer, sell or dispose of any shares of common stock
or any securities convertible into or exercisable or exchangeable for common
stock or any rights to acquire common stock for a period of one year after the
date of this prospectus without the prior written consent of Weatherly
Securities Corp., subject to various limited exceptions.
REGISTRATION RIGHTS
The holders of warrants to purchase 880,000 shares of our common stock are
parties to agreements that provide these holders with the right to require us to
register the sale of shares underlying those warrants concurrent with this
offering. The holder of the 160,428 shares to be issued in the settlement of the
CMI litigation also will have registration rights. Registration of these shares
of our common stock would permit the sale of these shares without regard to the
restrictions of Rule 144. We are going to file a shelf registration statement
registering the shares underlying these warrants and the 160,428 shares for
resale. We cannot predict the timing of these sales or the effect these sales
may have on the market price of our common stock.
SHARES ISSUABLE UPON EXERCISE OF OPTIONS UNDER OUR STOCK OPTION PLAN
We intend to file one or more registration statements under the Securities
Act to register all shares of common stock issued, issuable or reserved for
issuance under our stock option plan. These registration statements are expected
to be filed as soon as practicable after the date of this prospectus and will
automatically become effective upon filing. Following this filing, shares
registered under these registration statements will, subject to the 180-day
lock-up agreements described above and Rule 144 volume limitations applicable to
affiliates, be available for sale in the open market.
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<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement, which is filed as an exhibit to the registration statement relating
to this prospectus, the underwriters of the offering named below, for whom
Weatherly Securities Corp. and M.R. Beal & Company are acting as
representatives, have each agreed to purchase from us the respective number of
shares of common stock shown opposing its name below:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
<S> <C>
Weatherly Securities Corp...................................
M.R. Beal & Company.........................................
---------
Total....................................................... 2,300,000
=========
</TABLE>
The underwriting agreement provides that the underwriters' obligations to
purchase shares of common stock depend on the satisfaction of the conditions
contained in the underwriting agreement, and that if any of the shares of common
stock are purchased by the underwriters under the underwriting agreement, then
all of the shares of common stock that the underwriters have agreed to purchase
under the underwriting agreement must be purchased. The conditions contained in
the underwriting agreement include the requirement that the representations and
warranties made by us to the underwriters are true, that there is no material
change in the financial markets and that we deliver to the underwriters
customary closing documents.
The following table shows the per share and total underwriting discounts and
commissions to be paid to the underwriters by us. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase 345,000 additional shares described below.
<TABLE>
<CAPTION>
PAID BY US NO EXERCISE FULL EXERCISE
---------- ----------- -------------
<S> <C> <C>
Per share............................................ $ $
Total................................................ $ $
</TABLE>
The representatives have advised us that the underwriters propose to offer
the shares of common stock directly to the public at the initial public offering
price shown on the cover page of this prospectus, and to dealers, who may
include the underwriters, at the initial public offering prices less a selling
concession not in excess of $ per share. The underwriters may allow, and the
dealers may reallow, a concession not in excess of $ per share to brokers and
dealers. After the offering, the underwriters may change the offering price and
other selling terms.
We have granted to the underwriters an option to purchase up to an aggregate
of 345,000 additional shares of common stock, exercisable solely to cover
over-allotments, if any, at the initial public offering price less the
underwriting discounts and commissions shown on the cover of this prospectus.
The underwriters may exercise this option at any time until 45 days after the
date of the underwriting agreement. If this option is exercised, each
underwriter will be committed, so long as the conditions of the underwriting
agreement are satisfied, to purchase a number of additional shares of common
stock proportionate to the underwriter's initial commitment as indicated in the
preceding table, and we will be obligated under the over-allotment option to
sell the shares of common stock to the underwriters.
We, our executive officers and directors and persons who hold more than
9,800,625 shares of our outstanding common stock and 4,690,836 shares issuable
upon the exercise of outstanding options and warrants have agreed not to
directly or indirectly, subject to limited exceptions, do any of the following,
whether any transaction described below is to be settled by delivery of common
stock or other securities, in cash or otherwise, in each case without our prior
written consent and the consent of
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<PAGE>
Weatherly Securities Corp. on behalf of the underwriters, for a period of one
year after the date of this prospectus, subject to limited exceptions:
- offer, sell or otherwise dispose of, or enter into any transaction or
arrangement that is designed or could be expected to, result in the
disposition or purchase by any person at any time in the future of, any
shares of common stock or securities convertible into or exchangeable for
common stock or substantially similar securities;
- enter into any swap or other agreement that transfers to another, in whole
or in part, any of the economic consequences of ownership of the common
stock; or
- sell or grant options, rights or warrants with respect to any shares of
our common stock or securities convertible into or exchangeable for our
common stock or substantially similar securities, other than the grant of
options under the option plan existing on the date hereof.
The restrictions described in the previous paragraph do not apply to:
- the common stock sold under this prospectus or acquired in the open market
following the commencement of this offering
- shares of common stock issued in connection with the settlement of the CMI
litigation; or
- shares of common stock we issue under employee benefit plans, our stock
option plan or other employee compensation plans existing on the date of
this prospectus or under currently outstanding options, warrants or
rights.
In addition, holders of an additional 880,000 shares underlying warrants and
the holder of 160,428 shares of common stock to be issued upon consummation of
this offering in connection with the resolution of the CMI litigation have
agreed, except in limited circumstances, not to sell those securities, and in
the case of the warrants, the underlying shares, for a period of 180 days after
the completion of this offering without our consent, subject to limited
exceptions.
Prior to the offering, there has been no public market for the shares of our
common stock. The initial public offering price will be negotiated between the
representatives and us. In determining the initial public offering price of the
common stock, the representatives will consider, among other things and in
addition to prevailing market conditions:
- our historical performance and capital structure;
- estimates of our business potential and earnings prospectus;
- an overall assessment of our management;
- our lack of historical results of operations; and
- the consideration of the above factors in relation to market valuation of
companies in related businesses.
We have applied for quotation of our common stock on the Nasdaq National
Market under the symbol VICT.
We have agreed to indemnify the underwriters against liabilities, including
liabilities under the Securities Act, or to contribute to payments that the
underwriters may be required to make for these liabilities.
We estimate that the total expenses of the offering, excluding underwriting
discounts and commissions, will be approximately $2.3 million.
Until the distribution of the common stock is completed, rules of the
Commission may limit the ability of the underwriters and selling group members
to bid for and purchase shares of common stock.
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<PAGE>
As an exception to these rules, the representatives are permitted to engage in
transactions that stabilize the price of the common stock. These transactions
may consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the common stock.
The underwriters may create a short position in the common stock in
connection with the offering, which means that they sell more shares than are
shown on the cover of this prospectus. If the underwriters create a short
position, then the representatives may reduce that short position by purchasing
common stock in the open market. The representatives also may elect to reduce
any short position by exercising all or part of the over-allotment option.
The underwriters have informed us that they do not intend to confirm sales
to discretionary accounts that exceed five percent of the total number of shares
of common stock offered by them.
The representatives also may impose a penalty bid on underwriters and
selling group members. This means that if the representatives purchase shares of
common stock in the open market to reduce the underwriters' short position or to
stabilize the price of the common stock, they may reclaim the amount of the
selling concession from the underwriters and selling group members who sold
those shares as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of those purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it was to discourage resales of the security by purchasers in an
offering.
Neither we nor any of the underwriters make any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the price of the common stock. In addition, neither we nor any
of the underwriters make any representation that the representatives will engage
in these transactions or that these transactions, once commenced, will not be
discontinued without notice.
Any offers in Canada will be made only under an exemption from the
requirements to file a prospectus in the relevant province of Canada where the
sale is made.
It is expected that delivery of the shares will be made to investors on or
about , 2000.
The representatives and their affiliates may in the future provide
investment banking, financial advisory and other services to us or our
affiliates for which these representatives may receive customary fees and
commissions. Additionally, Weatherly Securities Corp. acted as private placement
agent in connection with an offering of ours which was completed on April 3,
2000, for which it received warrants exercisable for 80,000 shares of our common
stock at an exercise price equal to $7.00 or, in the event this offering is
consummated, 125% of the initial offering price per share to the public of our
common stock under this prospectus following the consummation of this offering.
In connection with this offering, we have agreed to grant Weatherly
Securities Corp. warrants exercisable for 10% of the total number of shares of
our common stock sold in this offering at an exercise price equal to 125% of the
initial offering price per share to the public of our common stock under this
prospectus. In addition, we have agreed to pay Weatherly a non-accountable
expense allowance equal to 3% of the gross proceeds from the sale of our common
stock in this offering.
LEGAL MATTERS
The valid issuance of our common shares offered in this offering will be
passed upon for us by Lowndes, Drosdick, Doster, Kantor & Reed, P.A., Orlando,
Florida. Cahill Gordon & Reindel, New York, New York, is acting as counsel for
Victory and Ruskin, Moscou, Evans & Faltischeck, P.C., Mineola, New York, is
acting as counsel to the underwriters in connection with legal matters relating
to this offering.
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EXPERTS
The financial statements included in this prospectus and in the registration
statement have been audited by BDO Seidman, LLP, independent certified public
accountants, to the extent and for the periods shown in their report appearing
elsewhere in this prospectus and in the registration statement, and are included
in reliance upon such report given upon the authority of said firm as experts in
auditing and accounting.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC under the Securities Act a registration statement
on Form S-1 with respect to shares of the common stock offered hereby. This
prospectus, which constitutes part of the registration statement, does not
contain all the information shown in the registration statement or the exhibits
and schedules which are part of the registration statement, portions of which
are omitted as permitted by the rules and regulations of the SEC. Statements
made in this prospectus regarding the contents of any contract or other document
referred to are not necessarily complete, and in each instance reference is made
to the copy of such contract or other document filed as an exhibit to the
registration statement, each such statement being qualified in all respects by
such reference. For further information pertaining to us and the common stock
offered hereby, reference is made to the registration statement, including the
exhibits and schedule thereto, copies of which may be inspected without charge
at the public reference facilities of the SEC at 450 Fifth Street, N.W.,
Washington, DC, 20549 and at the regional offices of the SEC located at 75 Park
Place, New York, New York 10007, and Northwestern Atrium Center, Suite 1400, 500
West Madison Street, Chicago, Illinois 60661. Copies of all or any portion of
the registration statement may be obtained from the SEC at prescribed rates.
Information on the public reference facilities may be obtained by calling the
SEC at 1-800-SEC-0330. In addition, the SEC maintains a website that contains
reports and other information that is filed through the SEC's EDGAR System. The
website can be accessed at HTTP://WWW.SEC.GOV.
We intend to furnish our shareholders with annual reports containing audited
financial statements and quarterly reports containing unaudited interim
financial information for the first three fiscal quarters of each fiscal year.
56
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS.......... F-2
CONSOLIDATED FINANCIAL STATEMENTS
Balance sheets............................................ F-3
Statements of operations.................................. F-4
Statements of capital deficit............................. F-5
Statements of cash flows.................................. F-6
Notes to consolidated financial statements................ F-7 - F-19
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
Victory Entertainment Corp.
We have audited the accompanying balance sheets of the predecessor
corporation, LightPoint Entertainment, Inc., as of June 30, 1998 and 1999, and
the related statements of operations, capital deficit, and cash flows for the
period from inception (July 31, 1997) through June 30, 1998 and for the year
ended June 30, 1999. These financial statements are the responsibility of
Victory Entertainment Corp.'s (the "Company") management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the predecessor corporation,
LightPoint Entertainment, Inc., as of June 30, 1998 and 1999, and the results of
its operations and its cash flows for the period from inception (July 31, 1997)
through June 30, 1998 and for the year ended June 30, 1999 in conformity with
generally accepted accounting principles.
As discussed in Note 2, the predecessor corporation, LightPoint
Entertainment, Inc., entered into an Agreement and Plan of Merger with Premium
Entertainment Corp., a wholly-owned subsidiary of the Company. Upon consummation
of the merger, 2,072,600 shares of the Predecessor's common stock were exchanged
for an equal number of common shares of the Company and the Predecessor's
founding shareholder surrendered 1,900,000 shares of the Predecessor's common
stock.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As described in Note 3 to the
financial statements, the Company's recurring losses from operations, negative
working capital, capital deficit and a default under its notes payable raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are described in Note 3. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
BDO Seidman, LLP
New York, New York
March 21, 2000, except for Note 13,
as to which the date is June 19, 2000
F-2
<PAGE>
VICTORY ENTERTAINMENT CORP. AND PREDECESSOR CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
-------------------------- MARCH 31,
1998 1999 2000
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................... $ 8,661 $ 459,846 $ 147,991
Accounts receivable................................ 33,858 25,798 24,563
Prepaid expenses................................... -- 17,583 28,296
Prepaid license fee (Note 4)....................... 103,571 -- --
Deferred offering costs............................ -- -- 126,100
Short-term investments............................. -- -- 75,000
----------- ------------ ------------
TOTAL CURRENT ASSETS........................... 146,090 503,227 401,950
----------- ------------ ------------
PROPERTY AND EQUIPMENT:
Production equipment and software.................. 826,497 1,229,596 1,389,806
Furniture and equipment............................ 33,116 38,483 38,483
Leasehold improvements............................. 14,227 20,489 --
----------- ------------ ------------
873,840 1,288,568 1,428,289
Less accumulated depreciation and amortization....... 137,246 467,552 699,603
----------- ------------ ------------
NET PROPERTY AND EQUIPMENT..................... 736,594 821,016 728,686
----------- ------------ ------------
INTELLECTUAL PROPERTY, net (Note 5).................. 250,000 275,003 245,538
DEPOSITS............................................. -- 7,500 --
----------- ------------ ------------
$ 1,132,684 $ 1,606,746 $ 1,376,174
=========== ============ ============
LIABILITIES AND CAPITAL DEFICIT
CURRENT LIABILITIES:
Notes payable (Note 6)............................. $ 2,000,000 $ 2,000,000 $ 2,000,000
Accounts payable................................... 578,703 732,059 323,657
License fee payable (Note 4)....................... -- 317,050 --
Accrued payroll and related taxes.................. 218,936 376,695 81,802
Accrued interest................................... 185,417 520,417 745,417
Settlement payable (Note 7)........................ -- 50,000 50,000
----------- ------------ ------------
TOTAL CURRENT LIABILITIES...................... 2,983,056 3,996,221 3,200,876
----------- ------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 5, 6, 11 and
13)................................................ -- -- --
SHAREHOLDERS' EQUITY (CAPITAL DEFICIT) (Notes 8 and
13):
Preferred stock $.001 par value, authorized
20,000,000 shares; none issued................... -- -- --
Common stock $.001 par value, authorized 50,000,000
shares; issued and outstanding 163,800, 7,992,600
and 10,017,625 shares............................ 164 7,993 10,018
Additional paid-in capital......................... 159,336 20,311,184 27,706,447
Common stock notes receivable...................... -- (213,750) --
Unearned compensation.............................. -- (12,744,900) (10,951,938)
Accumulated deficit................................ (2,009,872) (9,750,002) (18,589,229)
----------- ------------ ------------
TOTAL CAPITAL DEFICIT.......................... (1,850,372) (2,389,475) (1,824,702)
----------- ------------ ------------
$ 1,132,684 $ 1,606,746 $ 1,376,174
=========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
VICTORY ENTERTAINMENT CORP. AND PREDECESSOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JULY 31, 1997) NINE MONTHS ENDED MARCH 31,
THROUGH YEAR ENDED ---------------------------
JUNE 30, 1998 JUNE 30, 1999 1999 2000
--------------- ------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES.................................. $ 579,170 $ 221,905 $ 100,637 $ 118,407
EXPENSES:
Operating............................... 860,060 1,335,451 1,033,222 2,847,620
General and administrative.............. 1,247,653 3,038,832 2,186,725 3,373,304
Common stock, options and warrants
issued for general and administrative
services.............................. -- 2,874,563 710,463 2,256,962
Depreciation and amortization........... 137,246 347,516 253,616 274,033
Abandonment of software................. 150,000 -- -- --
Loss on disposal of equipment........... -- 8,490 -- 7,971
----------- ----------- ----------- -----------
Total expenses...................... 2,394,959 7,604,852 4,184,026 8,759,980
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS...................... (1,815,789) (7,382,947) (4,083,389) (8,641,573)
OTHER INCOME (EXPENSES):
Interest expense........................ (194,083) (357,183) (272,232) (226,150)
Interest income......................... -- -- -- 28,496
----------- ----------- ----------- -----------
(194,083) (357,183) (272,232) (197,654)
----------- ----------- ----------- -----------
NET LOSS.................................. $(2,009,872) $(7,740,130) $(4,355,621) $(8,839,227)
=========== =========== =========== ===========
NET LOSS PER COMMON SHARE--BASIC AND
DILUTED................................. $ 19.01 $ (5.05) $ (5.10) $ (.96)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING--BASIC AND DILUTED.......... 105,731 1,533,650 854,459 9,175,175
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
VICTORY ENTERTAINTMENT CORP. AND PREDECESSOR CORPORATION
CONSOLIDATED STATEMENTS OF CAPITAL DEFICIT
(UNAUDITED)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL COMMON
------------------------ --------------------- PAID-IN STOCK NOTES UNEARNED
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE COMPENSATION
---------- ----------- ---------- -------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common to
LightPoint founders on
July 31, 1997......... -- -- 100,000 $ 100 $ (100) $ -- $ --
Sale of common stock and
warrants.............. -- -- 63,800 64 159,436 -- --
Net loss................ -- -- -- -- -- -- --
---------- ----------- ---------- ------- ----------- --------- ------------
BALANCE, JUNE 30,
1998.................. -- -- 163,800 164 159,336 -- --
Sale of common stock and
warrants.............. -- -- 1,858,800 1,859 4,533,355 (208,750) --
Issuance of common stock
warrants for
consulting services... -- -- -- -- 710,463 -- --
Issuance of common stock
for compensation...... -- -- 50,000 50 113,950 -- --
Issuance of common stock
to Victory founder on
May 27, 1999.......... -- -- 5,000,000 5,000 12,495,000 (5,000) (12,495,000)
Issuance of common stock
to Victory officers
and consultants on
June 9, 1999.......... -- -- 920,000 920 2,299,080 -- (249,900)
Net loss................ -- -- -- -- -- -- --
---------- ----------- ---------- ------- ----------- --------- ------------
BALANCE, JUNE 30,
1999.................. -- -- 7,992,600 $ 7,993 $20,311,184 $(213,750) $(12,744,900)
Issuance of common stock
for compensation...... -- -- 50,000 50 113,950 -- --
Sale of common stock and
warrants.............. -- -- 1,965,025 1,965 6,861,323 -- --
Issuance of common stock
options to director... -- -- -- -- 350,000 -- (350,000)
Amortization of unearned
compensation.......... -- -- -- -- -- -- 2,142,962
Exercise of common stock
warrants.............. -- -- 10,000 10 69,990 -- --
Payment on common stock
notes receivable...... -- -- -- -- -- 213,750 --
Net loss................ -- -- -- -- -- -- --
---------- ----------- ---------- ------- ----------- --------- ------------
Balance, March 31,
2000.................. -- $ -- 10,017,625 $10,018 $27,706,447 $ -- $(10,951,938)
========== =========== ========== ======= =========== ========= ============
<CAPTION>
ACCUMULATED
DEFICIT TOTAL
------------ -----------
<S> <C> <C>
Issuance of common to
LightPoint founders on
July 31, 1997......... $ -- $ --
Sale of common stock and
warrants.............. -- 159,500
Net loss................ (2,009,872) (2,009,872)
------------ -----------
BALANCE, JUNE 30,
1998.................. (2,009,872) (1,850,372)
Sale of common stock and
warrants.............. -- 4,326,464
Issuance of common stock
warrants for
consulting services... -- 710,463
Issuance of common stock
for compensation...... -- 114,000
Issuance of common stock
to Victory founder on
May 27, 1999.......... -- --
Issuance of common stock
to Victory officers
and consultants on
June 9, 1999.......... 2,050,100
Net loss................ (7,740,130) (7,740,130)
------------ -----------
BALANCE, JUNE 30,
1999.................. $(9,750,002) $(2,389,475)
Issuance of common stock
for compensation...... -- 114,000
Sale of common stock and
warrants.............. -- 6,863,288
Issuance of common stock
options to director... -- --
Amortization of unearned
compensation.......... -- 2,142,962
Exercise of common stock
warrants.............. -- 70,000
Payment on common stock
notes receivable...... -- 213,750
Net loss................ (8,839,227) (8,839,227)
------------ -----------
Balance, March 31,
2000.................. $(18,589,229) $(1,824,702)
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
VICTORY ENTERTAINMENT CORP. AND PREDECESSOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM NINE MONTHS ENDED
INCEPTION (JULY 31, MARCH 31,
1997) THROUGH YEAR ENDED -------------------------
JUNE 30, 1998 JUNE 30, 1999 1999 2000
------------------- ------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................ $(2,009,872) $(7,740,130) $(4,355,621) $(8,839,227)
Adjustments to reconcile net loss to net cash used
for operating activities:
Depreciation and amortization..................... 137,246 347,516 253,616 274,033
Loss on disposal of equipment..................... -- 8,490 7,971
Abandonment of software........................... 150,000 -- -- --
Common stock, options and warrants issued for
compensation and consulting services............ -- 2,874,563 710,463 2,256,962
Net increase (decrease) in cash flows from changes
in:
Accounts receivable............................. (33,858) 8,060 15,067 1,235
Prepaid expenses................................ -- (17,583) (15,034) (10,713)
Prepaid license fee............................. (103,571) 103,571 103,571 --
Accounts payable................................ 578,703 153,356 284,306 (408,402)
License fee payable............................. -- 317,050 280,524 (317,050)
Accrued payroll and related taxes............... 218,936 157,759 157,759 (294,893)
Accrued interest................................ 185,417 335,000 223,333 225,000
Settlement payable.............................. -- 50,000 50,000 --
----------- ----------- ----------- -----------
Net cash used for operating activities................ (876,999) (3,402,348) (2,292,016) (7,105,084)
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment................. (1,023,840) (440,428) (404,033) (160,329)
Purchase of intellectual property................... (250,000) (25,003) (25,003) --
Cash acquired from acquisition...................... -- -- -- 459,846
Purchase of short-term investments.................. -- -- -- (75,000)
Change in deposits.................................. -- (7,500) (7,500) 7,500
----------- ----------- ----------- -----------
Net cash provided by (used for) investing
activities.......................................... (1,273,840) (472,931) (436,536) 232,017
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of deferred offering costs.................. -- -- -- (126,100)
Proceeds from issuance of notes payable............. 2,000,000 -- -- --
Proceeds from sale of common stock and warrants..... 159,500 4,326,464 2,751,314 6,863,288
Exercise of common stock warrants................... -- -- -- 70,000
Payment on common stock notes receivable............ -- -- -- 213,870
----------- ----------- ----------- -----------
Net cash provided by financing activities............. 2,159,500 4,326,464 2,751,314 7,021,058
----------- ----------- ----------- -----------
Net increase(decrease) in cash and cash equivalents... 8,661 451,185 22,762 147,991
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........ -- 8,661 8,661 --
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD.............. $ 8,661 $ 459,846 $ 31,423 $ 147,991
=========== =========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest.............................. $ 8,666 $ 57,460 $ 48,899 $ 1,150
=========== =========== =========== ===========
Non-cash financing activities:
Issuance of common stock and warrants in exchange
for common stock notes receivable................. $ -- $ 213,750 $ -- $ 5,120
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
VICTORY ENTERTAINMENT CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE NINE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Victory Entertainment Corp. ("Victory" or the "Company") was organized on
May 27, 1999 in the State of Florida and had no significant operations or assets
until it acquired LightPoint Entertainment, Inc. (the predecessor corporation)
in a merger on July 1, 1999 (see Note 2). Victory is an integrated entertainment
company specializing in developing, producing and distributing television and
internet programming through its wholly-owned subsidiaries Victory Television,
Inc.; Victory Animation Studios, Inc.; Victory Internet Productions, Inc.; Vamps
Productions, Inc.; Victory Distribution, Inc. and LightPoint Entertainment, Inc.
The financial statements of Victory from May 27, 1999 (the date of inception)
through June 30, 1999 are not included in these financial statements since that
information is not considered meaningful as Victory had minimal activity.
The predecessor corporation, LightPoint Entertainment, Inc. ("LightPoint"),
was organized on July 31, 1997 in the State of Florida for the purpose of
providing full-service production services specializing in multi-media 3D
graphics and animation and producing children's television programs,
specifically "THE DOOLEY AND PALS SHOW." As discussed in Note 2, LightPoint
entered into a merger agreement effective July 1, 1999, whereby it became a
wholly-owned subsidiary of Victory Entertainment Corp.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements as of March 31, 2000 and for the nine
months then ended include the accounts of Victory, its wholly-owned subsidiaries
and the NEXTBIGSTAR.COM joint venture (see Note 10). All significant
intercompany transactions have been eliminated in consolidation.
INTERIM FINANCIAL INFORMATION
The financial information as of March 31, 2000 and for the nine months ended
March 31, 1999 and 2000 is unaudited. In the opinion of management, such
information contains all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the results for such periods.
Results for interim periods are not necessarily indicative of results to be
expected for an entire year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
F-7
<PAGE>
VICTORY ENTERTAINMENT CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE NINE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED OFFERING COSTS
Fees, costs and expenses related to the proposed public offering are
capitalized and will be charged against the proceeds therefrom. If the proposed
offering is not consummated, the deferred costs will be charged to income.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method over the following estimated useful
lives:
<TABLE>
<S> <C>
Production equipment........................................ 3--10 years
Software.................................................... 3--5 years
Furniture and equipment..................................... 3--7 years
Leasehold improvements...................................... Life of lease
</TABLE>
IMPAIRMENT
Assets are evaluated for impairment when events change or changes in
circumstances indicate that the carrying amounts of the assets may not be
recoverable. When any such impairment exists, the related assets are written
down to fair value.
INTELLECTUAL PROPERTY
Intellectual property represents the costs of acquired rights to certain
intellectual properties associated with THE DOOLEY AND PALS SHOW. Intellectual
property will be amortized on a straight-line basis over the estimated useful
life of THE DOOLEY AND PALS SHOW of seven years. Amortization began on July 1,
1999 when the merger became effective (see Notes 2 and 5).
LOSS PER SHARE
Loss per share is based upon the weighted average number of common shares
outstanding during each period. Diluted loss per share does not differ from
basic loss per share since the effect of potential common shares is
anti-dilutive. Potential common shares as of March 31, 2000 include 405,000
common stock options and 4,244,866 common stock warrants.
REVENUE RECOGNITION
Revenues represent fees for animation graphics services performed by the
Company and are recorded as the work is performed.
CONCENTRATION OF CREDIT RISK
The Company's revenues were generated from animation graphic services
performed for third parties. Revenues from one customer represented 62%, 76%,
58% and 76% of total revenues for the period from inception (July 31, 1997) to
June 30, 1998, the year ended June 30, 1999 and the nine months ended March 31,
1999 and 2000, respectively.
F-8
<PAGE>
VICTORY ENTERTAINMENT CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE NINE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation under the provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). As permitted by SFAS 123, the Company has elected to
continue to follow Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and related interpretations in accounting for
stock-based compensation to employees. Stock options and warrants granted to
nonemployees are valued using a Black-Scholes option pricing model with
appropriate assumptions for risk-free investment rates, expected lives, dividend
yields and volatility factors. The value of options and warrants granted or
issued to nonemployees is charged to appropriate asset or expense accounts when
the options and warrants are granted or issued.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates discussed herein are based upon certain market
assumptions and pertinent information available to management as of June 30,
1999. The respective carrying value of certain on-balance-sheet financial
instruments approximated their fair values. These financial instruments include
cash and cash equivalents, accounts receivable, accounts payable, accrued
expenses and notes payable. Fair values were assumed to approximate carrying
values for these financial instruments since they are short term in nature or
they are receivable or payable on demand.
SEGMENT INFORMATION
The Company currently does not identify separate operating segments for
management reporting purposes. Separate and discrete financial information of
the various operating subsidiaries is currently not being evaluated regularly by
the chief operating decision maker in deciding how to allocate resources and in
assessing performance. The consolidated results of operations are currently the
basis on which management evaluates operations and makes business decisions.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 requires companies to recognize
all derivative contracts as either assets or liabilities in the balance sheet
and to measure them at fair value. SFAS 133, as amended by SFAS 137, is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
Historically, the Company has not entered into derivative contracts and does not
expect to have any hedging activities in the future. Accordingly SFAS 133 is not
expected to affect the Company's financial statements.
In October 1998, the FASB released an exposure draft of the proposed
statement on "Rescission of FASB Statement No. 53, Financial Reporting by
Producers and Distributors of Motion Picture Films" ("SFAS 53"). An entity that
previously was subject to the requirements of SFAS 53 would follow the guidance
in a proposed Statement of Position, "Accounting by Producers and Distributors
of Films." This proposed Statement of Position would be effective for financial
statements for fiscal years beginning after December 15, 2000, and the Company
has not yet evaluated the impact on its financial statements.
F-9
<PAGE>
VICTORY ENTERTAINMENT CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE NINE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN 44"), Accounting for Certain Transactions Involving
Stock Compensation, an Interpretation of APB Opinion No. 25. FIN 44 clarifies
the application of Opinion No. 25 for (a) the definition of employee for
purposes of applying Opinion No. 25, (b) the criteria for determining whether a
plan qualifies as a noncompensatory plan, (c) the accounting consequences of
various modifications to the terms of a previously fixed stock option or award,
and (d) the accounting for an exchange of stock compensation awards in a
business combination. FIN 44 is effective July 2, 2000, but certain conclusions
cover specific events that occur after either December 15, 1998 or January 12,
2000. The Company believes that the impact of FIN 44 will not have a material
effect on the Company's financial position or results of operations.
2. MERGER AGREEMENT
Effective July 1, 1999, Premium Entertainment Corp. ("Premium"), a
wholly-owned subsidiary of Victory entered into an Agreement and Plan of Merger
("Merger Agreement") with LightPoint. The Merger Agreement provided for a
business combination whereby LightPoint and Premium were merged into a single
corporation, in which LightPoint was the surviving corporation and replaced
Premium as a wholly-owned subsidiary of Victory. As part of this Merger
Agreement, 2,072,600 shares of common stock of LightPoint were exchanged for an
equal number of common shares of Victory and the majority shareholder of
LightPoint surrendered 1,900,000 shares of LightPoint common stock. Furthermore,
warrants to purchase 2,239,841 shares of LightPoint common stock were exchanged
for an equal number of warrants to purchase shares of common stock of Victory.
The transaction was accounted for as a recapitalization of LightPoint.
Accordingly, the 1,900,000 shares surrendered by Lightpoint's majority
shareholder was recorded retroactively to Lightpoint's date of inception.
3. GOING CONCERN
The Company and the Predecessor have experienced recurring losses from
operations, have negative working capital and a capital deficit. In addition,
the Company is currently in litigation in connection with a default under notes
payable amounting to $2,000,000 and is currently involved in litigation related
to such obligations (see Note 6). These matters raise substantial doubt about
the Company's ability to continue as a going concern.
The Company's current projects include the production and distribution of
THE DOOLEY AND PALS SHOW and the production of NEXTBIGSTAR.COM, an online
entertainment talent search hosted by television personality Ed McMahon. The
Company raised $6.8 million from July 28, 1999 through December 17, 1999 in a
private offering which enabled it to commence production of THE DOOLEY AND PALS
SHOW and launch the NEXTBIGSTAR.COM project. Subsequent to March 31, 2000, the
Company received approximately $4.4 million in a private placement of a note
payable and warrants, which was net of expenses of approximately $600,000 (see
Note 13). The Company has determined that public financing should be obtained to
provide for the continued funding of these and additional projects and is
planning for an initial public offering with an anticipated initial filing in
June 2000.
The Company's ability to continue as a going concern remains dependent upon
the success of THE DOOLEY AND PALS SHOW, the NEXTBIGSTAR.COM project and the
ability to complete the proposed initial public
F-10
<PAGE>
VICTORY ENTERTAINMENT CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE NINE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
3. GOING CONCERN (CONTINUED)
offering. However, there can be no assurances that this offering will occur or
that THE DOOLEY AND PALS SHOW and the NEXTBIGSTAR.COM project will yield
positive operating results in the future. In the event that the proposed public
offering is not consummated on a timely basis, the Company will need to seek
additional financing from another source. The Company believes that revenues
from operating activities during the next 12 months will not be sufficient to
support operations during that period. There can be no assurance that the
Company will be able to find alternate financing on a timely basis, if at all.
4. LICENSE AGREEMENT
In August 1997, LightPoint entered into an agreement with Walt Disney World
Co. ("Disney") to operate a 3D graphics department at Disney-MGM Studios for a
term of five years terminating in October 2002. LightPoint agreed to pay Disney
a total of $1,000,000 over the term to operate the graphics department, and
Disney agreed to utilize LightPoint's graphics department for its 3D graphic
production needs and to provide LightPoint with facility space and other office
support on Disney premises. Pursuant to the agreement, a letter of credit in the
amount of $650,000 was required to be posted by the Company and certain property
and equipment was pledged as security. Furthermore, LightPoint agreed to pay
royalties to Disney representing the greater of $150,000 in the first year and
$200,000 annually thereafter, or a percentage of gross revenue derived from
production work generated by the department, as defined in the agreement.
In July 1999, the agreement was effectively terminated, and the original
agreement amount of LightPoint's obligation was reduced to $575,000, of which
$246,429 and $328,571 is included in general and administrative expenses for the
periods ended June 30, 1998 and 1999, respectively. Royalty fees related to this
agreement amounted to $112,500 and $187,500 for the periods ended June 30, 1998
and 1999, respectively. LightPoint prepaid $103,571 of these license and royalty
fees as of June 30, 1998 and accrued $317,050 of these fees as of June 30, 1999.
Furthermore, LightPoint paid Disney a total of $49,500 during a 90-day
period commencing July 9, 1999 for the option to discuss possible restructuring
of the original agreement. A restructuring had not been negotiated as of the end
of the 90-day period, at which time the option was terminated and the Company
had no further obligations to Disney.
5. INTELLECTUAL PROPERTY
Intellectual property represents the costs of acquired rights to certain
intellectual properties associated with the production of THE DOOLEY AND PALS
SHOW. In December 1997, LightPoint acquired the rights in and to the
intellectual property entitled Dooley and ancillary tangible items for $250,000
from a third party. These rights include all copyrights, trademark rights,
adoption rights, licensing rights, music rights, broadcasting rights, video
rights and all rights of distribution, display and performance by any means or
methods whether now known or hereafter invented. Accumulated amortization as of
March 31, 2000 and amortization expense for the nine months then ended was
$29,465.
After the merger, Lightpoint produced a pilot episode of THE DOOLEY AND PALS
SHOW and is currently producing numerous episodes, which are currently airing on
various public broadcasting stations. Although Lightpoint will receive no
revenue from the production of THE DOOLEY AND PALS
F-11
<PAGE>
VICTORY ENTERTAINMENT CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE NINE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
5. INTELLECTUAL PROPERTY (CONTINUED)
SHOW, it anticipates significant revenue from the licensing and sales of
merchandise related to the characters of THE DOOLEY AND PALS SHOW. Lightpoint is
contingently liable to the original seller of the Dooley rights for royalties
equal to 8% of gross profits, as defined in the agreement, generated from the
exploitation of such rights. There have been no royalty expenses incurred
pursuant to this agreement.
6. NOTES PAYABLE
LightPoint Entertainment, LLC, an entity which was under common control with
LightPoint Entertainment, Inc., borrowed $1,000,000 on October 23, 1997 and
$1,000,000 on December 16, 1997 from CMI International Holdings, Ltd. ("CMI"), a
company organized under the laws of Taiwan, ROC. The funds borrowed by
LightPoint Entertainment, LLC were transferred by the lender to the account of
LightPoint Entertainment, Inc. The notes subject to litigation, as described
below, accrue interest at 15% annually. The notes became due on March 25, 1998
and are currently in default.
On May 12, 1999, LightPoint Entertainment, Inc. was sued by CMI in Florida
state court for its alleged failure to pay the $2.0 million principal plus
accrued interest on the above notes payable. Following dismissal of the suit on
July 16, 1999, CMI filed an amended complaint naming LightPoint Entertainment,
LLC, as well as the two former LightPoint officers who executed the promissory
notes, as parties to the suit.
Subsequent to March 31, 2000, the Company reached an agreement in principal
to settle this litigation upon consummation of an initial public offering
through payment to CMI of $1,000,000 in cash from the net proceeds of the
offering and the issuance of 160,428 shares of common stock to CMI, determined
by dividing $1,500,000 by 85% of the assumed public offering price of $11 per
share. In connection with this settlement, CMI will also relinquish any rights
it may have under a distribution agreement entered into between CMI and
Lightpoint relating to merchandising in Asia.
7. SETTLEMENT PAYABLE
On July 7, 1998, a settlement agreement was entered into between LightPoint
and its two shareholders, whereby one shareholder agreed to sell all of his
shares to the other shareholder, to resign as a director and officer of
LightPoint, and to relinquish all rights he had in LightPoint. Pursuant to the
settlement agreement, LightPoint agreed to pay the former shareholder a total of
$225,000. As outlined in the settlement agreement, the payment of the $225,000
was contingent upon certain conditions, including LightPoint's satisfaction of
certain obligations and the achievement of certain financial operating results.
Prior to June 30, 1999, the former shareholder filed suit against LightPoint
and the shareholder to whom the shares were sold for payment of the full
$225,000. On March 20, 2000, a settlement was reached between this shareholder
and the Company for $50,000, which was recorded as compensation expense in 1999
and as a settlement payable as of June 30, 1999.
F-12
<PAGE>
VICTORY ENTERTAINMENT CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE NINE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
8. CAPITAL STOCK
On July 31, 1997, LightPoint was organized by two founding shareholders, who
each received 1,000,000 shares of common stock. On July 7, 1998, one of the
founding shareholders sold all of his shares to the other founding shareholder
(see Note 7).
On July 10, 1998, the sole shareholder of LightPoint approved a change in
the par value of LightPoint's common stock from $1 to $.001 per share and
approved an increase in the number of authorized common shares from 7,500 to
50,000,000 shares. All share information included in the accompanying financial
statements and notes has been retroactively adjusted to give effect to the
change in par value.
In July 1998, LightPoint's board of directors, by resolution, authorized
LightPoint to offer its securities through a private placement memorandum,
pursuant to Rule 506 of Regulation D of the Securities Act of 1933, as amended.
On July 13, 1998, a private placement memorandum was issued by LightPoint,
whereby LightPoint offered to sell 480 units for $12,500 per unit, each unit
consisting of 5,000 shares of common stock and 5,000 warrants. Each warrant
entitled the registered holder to purchase, at any time for a two-year period
from the date of issuance, one share of common stock for $7 as to 1,788,600
warrants and $4 as to 110,000 warrants. The warrants are subject to redemption
by the Company at $.10 per share of which 64,500 were redeemed subsequent to
March 31, 2000 (see Note 13). As of June 30, 1999, 1,898,600 shares of common
stock and 1,898,600 warrants had been sold, of which 777,600 shares of common
stock were not yet issued by LightPoint but are included in outstanding common
stock at June 30, 1999.
Pursuant to subscription warrant agreements dated November 30, 1998,
LightPoint issued 341,241 warrants for consulting services at an exercise price
of $.25 per share. These warrants are exercisable on various dates from November
2003 through March 2004. The fair value of LightPoint's stock over the exercise
price of $710,463 was recorded as consulting expense in 1999 and was based upon
the Black-Scholes option pricing model with the following weighted average
assumptions: no dividend yield, expected volitility of .01% risk free interest
rate of 5% and expected life of five years.
On May 27, 1999, Victory was organized by one founding shareholder who
received 5,000,000 shares of common stock. In addition, on June 9, 1999, Victory
issued 750,000 shares of common stock to non-employee consultants, 120,000
shares of common stock to individuals designated as officers of the Company and
50,000 shares of common stock to its legal counsel. All of these shares were
valued at $2.50 per share, representing the purchase price of the common stock
sold in Lightpoint's private placement in process during the period these shares
were issued. Unearned compensation of $12,495,000 and $249,900 was recorded on
May 27, 1999 and June 9, 1999, respectively, related to employment agreements
with the founding shareholder and two officers which will be amortized over the
life of the agreements of five and two years, respectively. Compensation and
consulting expense of $2,050,100 was recorded on June 9, 1999 relating to the
value of the other issuances to the remaining officers, consultants and legal
counsel.
On June 9, 1999, LightPoint issued 50,000 shares of common stock to an
officer in connection with a termination agreement and recorded $114,000 of
compensation expense during the year ended June 30, 1999 representing the fair
value of the common stock issued.
F-13
<PAGE>
VICTORY ENTERTAINMENT CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE NINE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
8. CAPITAL STOCK (CONTINUED)
On June 9, 1999, by resolution of the board of directors, 120,000 options
were issued to certain officers. On July 1, 1999, the Company issued 50,000
shares of common stock and 50,000 options to a former officer of LightPoint in
connection with a termination agreement and recorded $114,000 of compensation
expense, representing the fair value of the common stock issued. An additional
100,000 options were issued on the same date to another former officer of
LightPoint in connection with a termination agreement. The 270,000 options
issued are exercisable at $.25 per share and are contingent upon the filing of a
registration statement for an initial public offering. The options expire three
years from the date of issuance if an initial public offering has not occurred.
Upon consummation of the initial public offering, the Company will record
$2,902,000 of compensation expense, representing the difference between the
assumed initial public offering price of $11 per share and exercise $.25 per
share in connection with these options.
As described in Note 2, on July 1, 1999, in connection with the merger
between LightPoint and Victory, 2,072,600 shares of common stock of LightPoint
were exchanged for an equal number of common shares of Victory. The majority
shareholder of LightPoint surrendered 1,900,000 shares of LightPoint common
stock, which was recorded retroactively to LightPoint's date of inception.
Furthermore, warrants to purchase 2,239,841 shares of LightPoint common stock
were exchanged for an equal number of warrants to purchase shares of common
stock of Victory.
The Company's board of directors, by resolution, authorized the Company to
offer its securities through a private placement memorandum, pursuant to Rule
506 of Regulation D of the Securities Act of 1933, as amended. On July 26, 1999,
a private placement memorandum was issued by the Company, whereby the Company
offered to sell 500 units for $12,250 per unit, each unit consisting of 3,500
shares of common stock and 3,500 warrants. Each warrant entitled the registered
holder to purchase, at any time for a two year period from the date of issuance,
one share of common stock for $7.00. The warrants are subject to redemption by
the Company at $.10 per share of which 70,000 were redeemed subsequent to March
31, 2000 (see Note 13). The private placement memorandum closed on December 17,
1999 and as of that date 1,948,625 shares of common stock and 1,948,625 warrants
had been sold, of which 170,250 shares of common stock were not yet issued by
the Company, but are included in outstanding common stock at March 31, 2000.
On January 10, 2000, a certain director was issued warrants to purchase
50,000 shares of common stock and granted options to purchase 100,000 shares of
common stock, 50,000 of which vest immediately and 50,000 of which vest after
one year if the director remains with the Company. The warrants are exercisable
at $7.00 per share and the options are exercisable at $.001 per share. The
Company recorded $350,000 of unearned compensation in accordance with APB
Opinion No. 25 in connection with the options, representing the fair value of
the Company's common stock over the exercise price. Had compensation costs for
the options and warrants been determined in accordance with SFAS 123, there
would have been no additional compensation expense. The warrants and options
expire within two years from the date of issuance.
On March 1, 2000, pursuant to an employment agreement, the Chief Operating
Officer of Next Big Star, LLC was issued 35,000 options to purchase common
stock. The options vest and are exercisable over a three-year period beginning
March 1, 2001. The exercise price is the price
F-14
<PAGE>
VICTORY ENTERTAINMENT CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE NINE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
8. CAPITAL STOCK (CONTINUED)
determined at the time of the initial public offering or if the initial public
offering does not occur prior to the vesting date the exercise price shall be
the fair market value as of the vesting date.
9. TAXES ON INCOME
LightPoint was an S corporation from the date of inception (July 31, 1997)
through August 20, 1998, at which time it lost its S corporation status when it
exceeded the maximum number of shareholders as allowable under the Internal
Revenue Code. In lieu of corporate income taxes, the shareholders of an S
corporation are taxed on their proportionate share of LightPoint's taxable
income. As such, for the period from the date of inception through June 30,
1998, the financial statements contain no deferred tax benefit from the losses
incurred through June 30, 1998.
Subsequent to August 20, 1998, LightPoint began to account for income taxes
according to the liability method. At that date, the net deferred tax asset had
a full valuation allowance. Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities. Measurement of deferred income tax is based
on enacted tax rates and laws that will be in effect when the differences are
expected to reverse, with the measurement of deferred income tax assets being
reduced by available tax benefits not expected to be realized.
The components of deferred tax assets and liabilities consisted of the
following:
<TABLE>
<CAPTION>
JUNE 30, 1999 MARCH 31, 2000
------------- --------------
<S> <C> <C>
Deferred tax assets:
Settlement payable.............................. $ 18,800 $ 18,800
Warrants and options issued as compensation..... 267,400 333,200
Net operating loss carryforward................. 1,361,100 3,949,600
Valuation allowance............................. (1,573,500) (4,180,550)
----------- -----------
Deferred tax assets............................... 73,800 121,050
Deferred tax liabilities:
Depreciation and amortization................... (73,800) (121,050)
----------- -----------
Net deferred tax assets........................... $ -- $ --
=========== ===========
</TABLE>
LightPoint's valuation allowance increased by $1,573,500 during the year
ended June 30, 1999. LightPoint and Victory have recorded a valuation allowance
to state its deferred tax assets at estimated net realizable value due to the
uncertainty related to realization of these assets through future taxable
income. At June 30, 1999, LightPoint had an unused net operating loss
carryforward ("NOL") of approximately $3,600,000, which expires in 2018. As a
result of various stock issuances and the merger, the use of these NOLs may be
limited under the provisions of section 382 of the Internal Revenue Code of
1986, as amended.
F-15
<PAGE>
VICTORY ENTERTAINMENT CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE NINE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
10. JOINT VENTURE
On January 14, 2000, Victory Internet Productions, Inc. ("VIP"), a
wholly-owned subsidiary of Victory entered into a joint venture agreement with
McMahon Communications, Inc. ("MCI") in order to develop, produce and exploit
NEXTBIGSTAR.COM, an Internet website, which will function as an online "talent
search." VIP and MCI each own 50% of the outstanding membership interest in Next
Big Star, LLC. The President and Chief Executive Officer of VIP and Ed McMahon
are the managers of Next Big Star, LLC. The voting arrangements provide that
while the current President and Chief Executive Officer is employed by Victory,
VIP will maintain voting control over the operations of Next Big Star, LLC,
operating as NEXTBIGSTAR.COM.
VIP is responsible for the day-to-day management of the website and all
legal and business affairs and related corporate functions. VIP and MCI will be
jointly responsible for the content of the Internet programming on the website.
VIP will receive a monthly management fee equal to 10% of the gross revenues
derived from the website, whether in the form of fees, advances, royalties or
profit participation. MCI will be paid a fee of $10,000 per month during the
development and pre-launch phase commencing January 1, 2000, which will increase
to approximately $42,000 a month on April 15, 2000 commencing with the actual
launch of the website. This fee is an obligation of Next Big Star, LLC and will
cover the on-screen and other website hosting services of Ed McMahon and the
related creative consultant services for the website. In the event the cash flow
of Next Big Star, LLC is insufficient to make the payments to MCI, the payments
will be funded by VIP.
Under the operating agreement, net profits of NEXTBIGSTAR.COM are allocated
to the members evenly on a pro-rata basis and net losses are allocated solely to
VIP. Since VIP maintains voting control over the operations of NEXTBIGSTAR.COM
under a voting arrangement, the financial statements of NEXTBIGSTAR.COM are
included in the consolidated financial statements of the Company.
11. COMMITMENTS AND CONTINGENCIES LEASES
LEASES
The Company leases certain equipment and office space under agreements
accounted for as operating leases, which expire on various dates ranging from
September 1999 to August 2003. As of June 30, 1999, future minimum lease
payments required under operating leases that have initial or remaining
non-cancelable lease terms in excess of one year are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
--------------------
<S> <C>
2000........................................................ $110,800
2001........................................................ 84,200
2002........................................................ 68,600
2003........................................................ 71,000
2004........................................................ 11,900
--------
Total future minimum lease payments..................... $346,500
========
</TABLE>
Rent expense approximated $8,700, $70,200, $48,600 and $125,100 for the
periods ended June 30, 1998 and 1999 and for the nine months ended March 31,
1999 and 2000, respectively.
F-16
<PAGE>
VICTORY ENTERTAINMENT CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE NINE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
11. COMMITMENTS AND CONTINGENCIES LEASES (CONTINUED)
LITIGATION
On February 7, 2000, Big Star Entertainment, Inc. ("Plaintiff") filed an
action against the Company alleging trademark infringement and related claims
under Federal and state law related to NEXTBIGSTAR.COM. Subsequent to March 31,
2000, the judge issued a Decision and Order denying the plaintiff's application
for a preliminary injunction. Plaintiff's counsel appealed the decision of the
Court.
As described in Note 6, the Company is also party to a lawsuit filed by CMI
International Holdings Limited ("CMI") in connection with notes payable due CMI
which are currently in default.
The Company from time to time is party to various legal proceedings arising
in the normal course of business. Management believes that the final outcome of
these proceedings will not have a material adverse effect upon the Company's
financial position or results of operations.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements expiring at various dates
through July 2004. As of March 31, 2000, the Company's total noncancelable
obligation under all employment contracts was approximately $902,000.
DISTRIBUTION AGREEMENT
In June 1999, LightPoint entered into a distribution agreement with Victory
Distribution, Inc., a wholly-owned subsidiary of Victory, whereby Victory
Distribution acquired the sole and exclusive rights to finance and distribute
THE DOOLEY AND PALS SHOW for LightPoint. In exchange for such rights, Victory
Distribution will pay LightPoint a fee equal to 10% of the production budget for
THE DOOLEY AND PALS SHOW pilot and a fee equal to 5% of the production budget
for THE DOOLEY AND PALS SHOW series and 20% of the net profits, as defined in
the agreement, derived from these rights.
PRODUCTION AGREEMENTS
In June 1999, LightPoint entered into two contracts approximating $62,000
and $347,000, respectively, with Disney Production Services, Inc. to use certain
areas of the Disney-MGM Studios and/or Walt Disney World Resort for the
production of THE DOOLEY AND PALS SHOW pilot and various other episodes, having
production dates subsequent to June 30, 1999.
CONSULTANT AGREEMENTS
On July 1, 1999, the Company entered into consultant agreements with two
former officers of the Company each for a period of one year. Under the
agreements, the former officers agreed to serve as independent contractors. One
of the officers was to provide consultation, design and other services related
to animation projects and the other officer was to provide corporate support. In
exchange for their services, the Company agreed to pay the officers $125,000 and
$75,000, respectively, for their services in equal installments over a one-year
term. The Company paid approximately $89,000 under the agreements through
November 30, 1999, at which time, the agreement with the officer for $125,000
F-17
<PAGE>
VICTORY ENTERTAINMENT CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE NINE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
11. COMMITMENTS AND CONTINGENCIES LEASES (CONTINUED)
was terminated. The Company may be liable for up to $50,000 of the remaining
outstanding amount to be paid under that agreement depending on the final
outcome as to the cause of termination.
BROADCASTING DISTRIBUTION AGREEMENT
In July 1999, the Company entered into a broadcasting distribution
agreement, which amended a September 25, 1997 agreement, with South Carolina
Educational Communications, Inc. ("Distributor"), whereby the Company is to
produce numerous episodes of THE DOOLEY AND PALS SHOW for Distributor to
distribute to the Public Broadcasting System and/or other affiliates. The
agreement is for a period of five years from the date the last episode is
delivered, provided that the Company may terminate the Distributor's rights
after the end of the third broadcast season unless at least 80% of all PBS
stations in the territory (which is defined as North America, U.S., Canada,
Puerto Rico, the Virgin Islands and Guam) are airing the series or are committed
to do so. In consideration, the Company agreed to pay Distributor 5% of net
profits, derived from the exploitation of THE DOOLEY AND PALS SHOW series during
the term of the five year agreement, commencing on the date the last episode is
delivered, unless terminated earlier. Net profits, as defined in the agreement
represent gross receipts less production costs, distributor costs and fees,
merchandise manufacturing costs and licensing fees and reasonable expenses to
protect and enforce THE DOOLEY AND PALS SHOW trademarks and related intellectual
property. In addition, the Company may be required to reimburse Distributor up
to $250,000 for mutually agreed upon expenditures by Distributor under the terms
of the agreement.
12. TRANSACTIONS WITH RELATED PARTIES
A member of the Company's Board of Directors provided legal services to the
Company of approximately $48,000 during the nine months ended March 31, 2000 of
which a substantial portion was attributable to litigation relating to
NEXTBIGSTAR.COM (see Note 11).
Another member of the Company's Board of Directors was affiliated with an
entity that provided financial advisory services to the Company for which it
received consulting fees of $968,000 and $1,391,000 during the year ended June
30, 1999 and the nine months ended March 31, 2000, respectively. This entity
affiliated with the director also received 341,241 warrants on November 30, 1998
for consulting services (see Note 8).
13. SUBSEQUENT EVENTS
PRIVATE PLACEMENT
On April 3, 2000, Victory received net proceeds in the amount of
approximately $4.4 million from a private placement of a note payable and
warrants. The note payable is due the earlier of the completion of proposed
initial public offering, or March 28, 2001, with interest at 12% per annum.
There was approximately approximately $670,000 of costs incurred in connection
with this private placement, which include legal fees and underwriters' fees and
commissions. All of these costs will be capitalized as loan costs and will be
amortized over one year, the term of the note. If the initial public offering
occurs before one year, the remaining unamortized loan costs will be expensed at
the time of the initial public offering when the loan is repaid.
F-18
<PAGE>
VICTORY ENTERTAINMENT CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE NINE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
13. SUBSEQUENT EVENTS (CONTINUED)
In connection with this private placement, the investor was issued 800,000
warrants, exercisable at $7.00 per share or, if the Company's registration
statement becomes effective, 85% of the per share offering price and expire
March 28, 2003. The fair value of these warrants at the date of issuance was
zero using the Black-Scholes option pricing model. If the proposed initial
public offering occurs, the fair value of these warrants using the Black-Scholes
option pricing model and an assumed initial public offering price of $11 per
share, would be $2,352,000 and would be recorded as interest expense upon
consummation of the initial public offering since the related note payable will
be paid off from the proceeds of this offering. The placement agent for the
offering was issued 80,000 warrants exercisable at a price of $7.00 per share
or, if the Company's registration statement becomes effective, 125% of the per
share offering price and expire March 28, 2005.
CONSULTING AGREEMENT
Subsequent to March 31, 2000, a former employee entered into a consulting
agreement to provide services through June 30, 2001 with a one year renewal
option. The Company is obligated to pay the consultant $180,000 throughout the
term of the agreement.
CAPITAL STOCK TRANSACTIONS
On May 30, 2000, the Company redeemed 122,000 warrants at $.10 per warrant.
These warrants were issued in connection with the LightPoint and Victory private
placement memorandums. In addition, on April 18, 2000, in connection with the
joint venture between Victory Internet Productions and McMahon Communications,
Inc. (see Note 10), the Company issued 50,000 options to Ed McMahon at an
exercise price of $3.50 per share and were fully vested upon issuance and expire
five years from the date of issuance.
In April 2000, the Company's Board of Directors adopted the 2000 Long Term
Incentive and Share Award Plan ("the Plan"). The Plan provides for the granting
of up to 500,000 shares of common stock to employees, officers, directors,
consultants and independent contractors of the Company or any of its affiliates.
The Plan may be administered by the Company's Board of Directors or by a
committee of the Board of Directors. The administrator has the authority to
determine from time to time the eligible participants to whom stock options are
to be granted, the number of shares of common stock for which options are
exercisable and the purchase price of the shares, and all other terms and
conditions of the options. The administrator will determine the term of each
option and the vesting requirements, provided that the exercise period may not
exceed ten years from the date of grant. On May 19, 2000 and June 19, 2000, the
Company issued 143,000 and 25,000 options, respectively, to purchase shares of
common stock to officers and employees under the Plan. The options vest upon
consummation of the proposed initial public offering and are exercisable at the
initial public offering price.
F-19
<PAGE>
[INSIDE BACK COVER.]
[Storyboard frames for "Ed McMahon's NEXTBIGSTAR.COM," "THE DOOLEY AND PALS
SHOW," "VAMPS," "SK8RATZ," and "EXTREME TEAM" depicting various characters for
each of these projects.]
<PAGE>
[LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is a list of the estimated costs and expenses, other than the
underwriting discounts and commissions, to be incurred by Victory Entertainment
Corp. ("Victory" or the "registrant") in connection with the distribution of the
shares of common stock being registered hereby. Except for the Securities and
Exchange Commission Registration Fee, the National Association of Securities
Dealers, Inc. Filing Fee, the Nasdaq National Market Listing Fee and the
Underwriters' non-accountable expense allowance (which assumes no exercise of
the underwriters' overallotment option and assumes a public offering price of
$11.00 per share), all amounts are estimates.
<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 8,380
National Association of Securities Dealers, Inc. Filing
Fee....................................................... 3,674
Nasdaq National Market Listing Fee.......................... 84,875
Underwriters' Non-Accountable Expense Allowance............. 759,000
Printing and Engraving Costs................................ 200,000
Accounting Fees and Expenses................................ 250,000
Legal Fees and Expenses (excluding Blue Sky)................ 600,000
Transfer Agent and Registrar Fees........................... 10,000
Miscellaneous Expenses...................................... 384,071
----------
Total................................................... $2,300,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As permitted by Florida law, our articles of incorporation provide that our
directors shall not be personally liable to us or our shareholders for monetary
damages for breach of fiduciary duty as a director, except for liability:
- for any breach of the director's duty of loyalty to us or our
shareholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law; or
- for any transaction from which the director derives an improper personal
benefit.
As a result of this provisions, we and our shareholders may be unable to
obtain monetary damages from a director for breach of duty of care.
Our articles of incorporation and bylaws also provide for the
indemnification of our directors and officers to the fullest extent authorized
by Florida law, except that we will indemnify a director or officer in
connection with an action initiated by that person only if the action initiated
by that person only if the action was authorized by our board of directors. The
indemnification provided under our articles of incorporation and bylaws includes
the right to be paid expenses in advance of any proceeding for which
indemnification may be had, provided that the payment of these expenses incurred
by a director or officer in advance of any proceeding for which indemnification
may be had, provided that the payment of these expenses incurred by a director
or officer in advance of the final disposition of a proceeding may be made only
upon delivery to us of an undertaking by or on behalf of the director or officer
to repay all amounts paid in advance if it is ultimately determined that the
director or officer is to entitled to be indemnified. Under our bylaws, if we do
not pay a claim for indemnification within 60 days after we have received a
written claim, the director or officer also will be entitled to be paid the
expense of prosecuting the action to recover these unpaid amounts.
II-1
<PAGE>
Under our articles of incorporation and bylaws, we have the power to
purchase and maintain insurance on behalf of any person who is or was one of our
directors, officers, employees or agents, or is it was serving at our request as
a director, officer, employee, partner or agent of another corporation or of a
partnership, joint venture, limited liability company, trust or other
enterprise, against any liability asserted against the person or incurred by the
person in any of these capacities, or arising out of the person's fulfilling one
of these capacities. The insurance will also cover any expenses fulfilling one
of these capacities. The insurance will also cover any expenses related to the
liability. The insurance coverage is available to these persons whether or not
we would have the power to indemnify the person against the claim under the
provisions of Florida law. Prior to the completion of this offering, we intend
to obtain directors and officers insurance policies.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
No securities of the registrant which were not registered under the Act have
been issued or sold by the registrant within the past three years except as
follows:
1. On July 31, 1997, Lightpoint Entertainment, Inc., the registrant's
predecessor ("Lightpoint"), issued 2,000,000 shares of common stock to its
founders (of which 1,900,000 shares were surrendered to Lightpoint prior to the
merger described below).
2. Between July 13, 1998 and July 17, 1999, Lightpoint issued an aggregate
of 1,915,000 shares of its common stock at a purchase price of $2.50 per share
(except for 110,000 shares which were issued at a purchase price of $2.31 per
share) and warrants to purchase 1,805,000 shares of its common stock at an
exercise price of $7.00 per share and warrants to purchase 110,000 shares of its
common stock at an exercise price of $4.00 per share, in a series of offerings
conducted in accordance with Regulation D under the Securities Act.
3. On November 30, 1998, Lightpoint issued warrants to purchase 341,241
shares of common stock to consultants of Lightpoint for consulting services at
an exercise price of $0.25 per share.
4. On May 27, 1999 (the registrant's date of inception), the registrant
issued 5,000,000 shares to the registrant's chief executive officer at par
value.
5. On June 9, 1999, the registrant issued:
- 750,000 shares of common stock to non-employee consultants at par
value;
- 120,000 shares of common stock at par value and options to purchase
120,000 shares of the registrant's common stock, which vest upon
consummation of this offering, at $0.25 per share to individuals
designated to become officers of the registrant following the merger;
and
- 50,000 shares of the registrant's common stock at par value to the
registrant's legal counsel.
6. On June 9, 1999, Lightpoint issued 50,000 shares of its common stock to
an officer in connection with a termination agreement.
7. On June 30, 1999, immediately prior to the merger, Lightpoint issued
24,000 shares of its common stock to employees and other persons associated with
Lightpoint.
8. On July 1, 1999, pursuant to an agreement and plan of merger, Lightpoint
became a wholly owned subsidiary of the registrant, and each outstanding share
of Lightpoint common stock was exchanged for one share of common stock of the
registrant (2,072,600 shares) and each outstanding warrant to purchase shares of
Lightpoint common stock was converted into warrants to purchase a like number of
shares of the registrant's common stock (warrants for 2,239,841 shares).
II-2
<PAGE>
9. In connection with termination agreements entered into on July 1, 1999 by
former officers of Lightpoint, the registrant issued 50,000 shares of common
stock at par value and options to purchase 150,000 shares of the registrant's
common stock, which vest upon consummation of this offering, at an exercise
price of $0.25 per share to former officers of Lightpoint.
10. As of August 16, 1999, the registrant agreed to issue 14,286 shares of
common stock at par value to a vendor of Lightpoint as part of a settlement, and
these shares were issued on May 31, 2000.
11. Between July 28, 1999 and December 17, 1999, the registrant issued an
aggregate of 1,948,625 shares of its common stock at a purchase price of $3.50
per share and warrants to purchase 1,948,625 shares of its common stock at an
exercise price of $7.00 per share, in a series of offerings conducted in
accordance with Regulation D under the Securities Act.
12. On January 10, 2000, the registrant issued warrants to a member of its
board of directors to purchase 50,000 shares of common stock at an exercise
price of $7.00 per share and options to purchase 100,000 shares of the
registrant's common stock, 50,000 of which vested immediately and 50,000 of
which vest after one year if the grantee is still a member of the registrant's
board of directors, at an exercise price of $.001 per share.
13. On February 28, 2000, an investor received 10,000 shares of the
registrant's common stock upon the exercise of warrants at an exercise price of
$7.00 per share.
14. On March 1, 2000, the registrant issued options to purchase 35,000
shares of common stock, which vest over a period of three years, exercisable at
the initial public offering price, or the fair market value at the vesting date
if this offering is not consummated, to an officer of Next Big Star LLC.
15. On April 3, 2000, in connection with a private placement of a note
payable and warrants conducted in accordance with Regulation D of the Securities
Act the registrant issued:
- a $5,000,000 principal 12% Senior Secured Promissory Note;
- investor warrants to purchase 800,000 shares of its common stock at an
exercise price of $7.00 or, in the event this offering is consummated,
85% of the initial public offering price; and
- placement agent warrants to purchase 80,000 shares of our common stock
at an exercise price $7.00 or, in the event this offering is
consummated, 125% of the initial public offering price.
16. On April 18, 2000, the registrant issued fully vested options to
purchase 45,000 shares of its common stock at an exercise price of $3.50 per
share to members of its board of directors.
17. In connection with a joint venture between the registrant and McMahon
Communications, Inc., on April 18, 2000, the registrant issued fully vested
options to purchase 50,000 shares of common stock at an exercise price of $3.50
per share.
18. On May 19, 2000, subject to shareholder approval of the stock option
plan, the registrant issued 143,000 options to purchase shares of common stock
to officers and employees of the registrant under its stock option plan, which
vest over a three year period, exercisable at the initial public offering price.
19. On June 19, 2000, the registrant issued 25,000 options to purchase
shares of common stock to a new officer of the registrant under its stock option
plan, which vest over a three year period, exercisable at the initial public
offering price.
Except as indicated above, the issuance of the securities described above
were deemed to be exempt from registration under the Securities Act in reliance
on Section 4(2) of such Securities Act as
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<PAGE>
transactions by an issuer not involving any public offering. In addition, the
issuances described in Items 18 and 19 were deemed exempt from registration
under the Securities Act in reliance upon Rule 701 promulgated under the
Securities Act. The recipients of securities in each such transaction
represented their intentions to acquire the securities for investment only and
not with a view to or go sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates and warrants issued
in such transactions. All recipients had adequate access, through their
relationships with us, to information about us.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
The following exhibits are filed as part of this registration statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------------------- ------------------------------------------------------------
<C> <S>
1.1* Form of underwriting agreement.
3.1* Form of amended and restated articles of incorporation of
the registrant.
3.2* Form of amended and restated bylaws of the registrant.
4.1* Specimen common stock certificate.
5.1* Opinion of Lowndes, Drosdick, Doster, Kantor & Reed, P.A. as
to the legality of securities being registered.
10.1* Amended and Restated Employment agreement dated as of
July 1, 2000 between the registrant and Michael H. Gerber.
10.2 Employment agreement dated as of July 12, 1999 between the
registrant and Art David, as amended.
10.3 Employment Agreement dated June 19, 2000 between the
registrant and Jacob (Kobi) Jaeger
10.4 Victory Entertainment Corp. 2000 Long Term Incentive and
Share Award Plan.
10.5 Form of Common Stock Subscription Warrant issued in
Lightpoint's private placement.
10.6 Form of Common Stock Subscription Warrant issued in the
registrant's private placement.
10.7 Form of Consultant Warrant issued by Lightpoint to Merit
Advisors Group, Inc.
10.8 Investor Warrant for the Purchase of Shares of Common Stock
issued by the registrant to Wardley Investments Limited.
10.9 Placement Agent Warrant Certificate issued by the registrant
to Weatherly Securities Corp.
10.10 Warrant Agreement dated as of March 28, 2000 between the
registrant and Weatherly Securities Corp.
10.11 Distribution Agreement dated as of July 26, 1999 between
South Carolina Educational Communications, Inc. and
Lightpoint.
10.12 Operating Agreement dated as of January 14, 2000 by and
among Next Big Star, LLC, Victory Internet Productions and
McMahon Communications Inc. and the related Agreement Among
Members, as amended.
10.13 Promotion Agreement dated January 24, 2000 by and between
Next Big Star, LLC and Microsoft Corporation.
10.14 Windows Media Technology Promotion Agreement dated
January 22, 2000 between Microsoft Corporation and Next Big
Star, LLC.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------------------- ------------------------------------------------------------
<C> <S>
10.15 Windows Media ICP Broadband Jumpstart Program Agreement
dated January 22, 2000 between Microsoft Corporation and
Next Big Star, LLC.
10.16++ Master Services Agreement dated January 14, 2000 between
Exodus Communications, Inc. and Next Big Star, LLC.
10.17++ Webcast Distribution Agreement dated January 21, 2000 by and
between iBEAM Broadcasting Corporation and Next Big
Star, LLC.
10.18 Agreement dated April 24, 2000 between the registrant and
Creative Artists Agency.
10.19 Agreement dated April 21, 1999 between Fred Silverman
Productions, Inc. and Lightpoint Entertainment, Inc.
10.20 Distribution Agreement dated May 26, 2000 by and between
Next Big Star, LLC and Mark Anthony Entertainment, Inc.
10.21 Merchandising Agreement dated July 1, 1999 between Victory
Distribution, Inc. and Stalwart Productions.
10.22++ License Agreement dated as of April 1, 2000 between Victory
Distribution, Inc. and Allison Manufacturing Co.
10.23++ License Agreement dated as of May 1, 2000 between Victory
Distribution, Inc. and Unique Industries, Inc.
10.24++ License Agreement dated as of April 1, 2000 between Victory
Distribution, Inc. and Pyramid Accessories.
10.25++ License Agreement dated May 1, 2000 between Victory
Distribution, Inc. and Starbound Entertainment.
21.1 Subsidiaries of the registrant.
23.1* Consent of Lowndes, Drosdick, Doster, Kantor & Reed, P.A.
(included in their opinion filed as Exhibit 5.1).
23.2 Consent of BDO Seidman, LLP.
24.1+ Power of attorney.
27.1+ Financial Data Schedule.
</TABLE>
------------------------
+ Previously filed.
* To be filed by amendment.
++ Confidential treatment is being requested with respect to portions of this
exhibit.
(b) Financial Statement Schedules:
None.
II-5
<PAGE>
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described under Item 14 above, 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 Securities 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
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For the purpose of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Orlando, State of Florida, on July 31, 2000.
<TABLE>
<S> <C> <C>
VICTORY ENTERTAINMENT CORP.
By: /s/ EDGAR N. MILLINGTON, JR.
-----------------------------------------
Name: Edgar N. Millington, Jr.
Title: Chief Financial Officer, Treasurer
and Secretary (principal financial and
accounting officer)
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Chairman of the Board, Chief Executive
------------------------------------- Officer and President
Michael H. Gerber July 31, 2000
/s/ EDGAR N. MILLINGTON Chief Financial Officer, Treasurer and
------------------------------------- Secretary (principal financial and
Edgar N. Millington accounting officer) July 31, 2000
* Director
-------------------------------------
Michael Collyer July 31, 2000
* Director
-------------------------------------
Paul Henderson July 31, 2000
* Director
-------------------------------------
Charles Wilner July 31, 2000
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ EDGAR N. MILLINGTON, JR.
--------------------------------------
ATTORNEY-IN-FACT
</TABLE>
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