<PAGE>
FORM 10-Q
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the Quarterly Period Ended July 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission File Number 0-25296
PlayNet Technologies, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 11-2706304
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
One Maritime Plaza, San Francisco, California 94111
- --------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(415) 217-3600
----------------------------------------------------
(Registrant's telephone number, including area code)
Aristo International Corporation
-----------------------------------------------------
(Former name, former address, and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at August 8, 1997
----------------------------- -----------------------------
Common Stock, $.001 par value 20,662,170
<PAGE>
PLAYNET TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY ARISTO INTERNATIONAL CORPORATION)
(A DEVELOPMENT STAGE ENTERPRISE)
INDEX
Part I - FINANCIAL INFORMATION
Item 1 Consolidated Balance Sheets as of July 31,
1997 and October 31, 1996. . . . . . . . . . . . . . . . .
Consolidated Statements of Operations for the
Three Months Ended July 31, 1997 and 1996; for the
Nine Months Ended July 31, 1997 and 1996;
and for the Cumulative Period June 4, 1990
(inception) to July 31, 1997 . . . . . . . . . . . . . . .
Consolidated Statements of Stockholders'
Equity for the Fiscal Years Ended October 31, 1991, 1992
1993, 1994, 1995, 1996 and for the Cumulative Period
June 4, 1990 (inception) to July 31, 1997. . . . . . . . .
Consolidated Statements of Cash Flows for the
Nine Months Ended July 31, 1997 and 1996 and
for the Cumulative Period June 4, 1990
(inception) to July 31, 1997 . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . .
Management's Discussion and Analysis of Financial
Conditions and Results of Operations . . . . . . . . . . .
Part II - OTHER INFORMATION
Item 1 Legal Proceedings. . . . . . . . . . . . . . . . . . . . .
Item 2 Regulatory Matters . . . . . . . . . . . . . . . . . . . .
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
<PAGE>
PLAYNET TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY ARISTO INTERNATIONAL CORPORATION)
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS July 31, October 31,
1997 1996
------------- -------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 442,686 $ 2,331,761
Restricted cash 250,000 250,000
Inventory 2,343,187 -
Prepaid expenses and other current assets 13,779 15,200
------------ ------------
Total current assets 3,049,652 2,596,961
Equipment, net 761,095 695,784
Capitalized software, net 2,529,669 4,940,528
Goodwill, net 862,349 991,697
Restricted cash - noncurrent 89,039 89,039
Other assets 361,905 355,672
------------ ------------
Total assets $ 7,653,709 $ 9,669,681
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 7,873,575 $ 2,439,666
Notes payable - bank 406,000 406,000
Notes payable - bridge financing (net of deferred
financing charges) 2,045,886 -
Notes payable - all others (net of deferred
financing charges) 4,077,975
Convertible term loans - stockholders 776,500
Payable to stockholder 270,000
Capital leases 144,799 121,166
------------ ------------
Total current liabilities 14,648,235 4,013,332
Convertible term loans - stockholders 330,000 1,330,000
Capital leases - long term 155,696 151,693
Deferred rent 134,715 145,076
------------ ------------
Total liabilities 15,268,646 5,640,101
Commitments and contingencies - -
Stockholders' equity:
Preferred stock, $.001 par value; authorized
1,000,000 shares; issued and outstanding
none at 1997 and 1996. - -
Common stock, $.001 par value; authorized
39,000,000 shares; issued and outstanding
20,662,170 and 20,675,734, respectively 18,725 14,967
Additional paid in-capital 38,249,181 31,736,496
Deficit accumulated during the development stage (45,882,843) (27,721,883)
------------ ------------
Total stockholders' equity (7,614,937) 4,029,580
------------ ------------
Total liabilities and
stockholders' equity $ 7,653,709 $ 9,669,681
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
PLAYNET TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY ARISTO INTERNATIONAL CORPORATION)
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH PERIOD ENDED JULY 31,1997 AND 1996;
FOR THE NINE MONTH PERIOD ENDED JULY 31,1997 AND 1996;
AND FOR THE CUMULATIVE PERIOD FROM JUNE 4, 1990 (INCEPTION)
TO JULY 31, 1997
<TABLE>
<CAPTION>
(UNAUDITED)
Cumulative
Three Months ended Nine Months ended Since
July 31, July 31, June 4, 1990
---------------------------- --------------------------- (inception) to
1997 1996 1997 1996 July 31, 1997 *
------------- ----------- ------------ ------------- ---------------
<S> <C> <C> <C> <C> <C>
Sales - Net $ - $ - $ 340,740 $ - $ 340,740
Royalty revenue 3,853 2,800 13,080 6,002 138,507
Production revenue - 9,511 - 192,347 340,647
------------- ----------- ------------ ----------- ------------
Total revenue 3,853 12,311 353,820 198,349 819,894
Costs of sales - - (990,455) - (990,455)
------------- ----------- ------------ ----------- ------------
Gross profit (loss) 3,853 12,311 (636,635) 198,349 (170,561)
Selling, general and administrative expenses (2,212,589) (1,971,831) (5,962,066) (3,969,500) (23,271,516)
Research and development expenses (3,100,074) (1,267,725) (7,120,196) (2,781,019) (13,493,573)
Amortization of capitalized software costs
(including impairment write downs) (673,896) (288,813) (2,410,859) (866,439) (5,780,341)
Interest and other income (expense) (1,061,641) (60,358) (2,031,204) (128,777) (2,351,643)
------------- ----------- ------------ ----------- ------------
Net loss (7,044,347) (3,576,416) (18,160,960) (7,547,386) (45,067,634)
Dividends on preferred stock - - - (15,219) (19,804)
------------- ----------- ------------ ----------- ------------
Net loss applicable to common stockholders $ (7,044,347) $(3,576,416) $(18,160,960) $(7,562,605) $(45,087,438)
------------- ----------- ------------ ----------- ------------
------------- ----------- ------------ ----------- ------------
Weighted average number of common
shares outstanding 20,662,170 13,554,091 20,662,170 13,551,091
------------- ----------- ------------ -----------
------------- ----------- ------------ -----------
Net loss per share $(0.34) $(0.26) $(0.88) $(0.56)
------------- ----------- ------------ -----------
------------- ----------- ------------ -----------
</TABLE>
* Excludes cumulative losses of The Astro-Stream Corporation of $795,405 at
the time of the merger.
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
PLAYNET TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY ARISTO INTERNATIONAL CORPORATION)
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTH PERIOD ENDED JULY 31,1997 AND 1996
AND FOR THE CUMULATIVE PERIOD FROM JUNE 4, 1990 (INCEPTION)
TO JULY 31, 1997
<TABLE>
<CAPTION>
(UNAUDITED)
Cumulative
Nine Months ended Since
July 31, June 4, 1990
-------------------------- (inception) to
1997 1996 July 31, 1997
------------ ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss during development stage $(18,160,960) $(7,547,386) $(45,067,634)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 2,492,549 1,094,480 4,498,927
Expenses paid by issuance of common stock 5,500 231,977 1,931,163
Deferred rent (10,362) (10,361) 134,714
Deferred financing costs 872,379 - 872,379
Loss on disposal of fixed asset - 19,200
Net realized loss on sale of marketable securities 38 51,845
Net unrealized gain on marketable securities (7,713)
Write down of capitalized software 389,171 - 2,314,588
Charges related to issuance of warrants 5,822 - 1,411,412
Impairment of patents - 71,306
Reserve for bad debt - 132,538
Changes in assets and liabilities:
(Increase) in prepaid expenses, other current
assets and other assets (5,156) (17,112) (139,255)
(Increase) in inventory (2,343,187) (2,343,187)
Increase in accounts payable and accrued expenses 5,433,188 1,511,157 7,736,069
------------ ----------- ------------
Net cash used in operating activities (11,321,056) (4,737,207) (28,383,648)
------------ ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Borta, Inc., net of cash acquired - (238,615)
Expenditures for equipment, leasehold
improvements, patents and -
organization costs (277,748) (342,896) (1,032,304)
Purchase of marketable securities - (1,517,601)
Sales of marketable securities 1,462 1,473,469
Purchase of computer software - (110,000)
Increase (decrease) in other assets (13,737) (170,639)
Increase in restricted cash (3,738) (339,039)
------------ ----------- ------------
Net cash used in investing activities (277,748) (358,909) (1,934,729)
------------ ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (repayments) from notes payable - bank - 359,857
Proceeds from notes payable - stockholders - 793,500
Repayments of notes payable - stockholders (270,000) (75,000) (843,500)
Proceeds of notes payable - other 8,543,500 8,543,500
Repayments of notes payable - other (582,500) - (582,500)
Proceeds from notes payable - bridge financing 1,750,000 - 1,750,000
Proceeds acquired in connection with the
Astro-Stream merger - 59,494
Proceeds from issuance of preferred stock 220,000 320,050
Proceeds from issuance of common stock 355,000 3,283,643 17,215,237
Proceeds from convertible term loans 1,686,500 3,761,500
Repayments of convertible term loans (450,000)
Reduction of capital lease obligations (86,271) (86,271)
Purchase of treasury stock - (60,000)
Dividends on preferred stock (15,219) (19,804)
------------ ----------- ------------
Net cash provided by financing activities 9,709,729 5,099,924 30,761,063
------------ ----------- ------------
Net (decrease) increase in cash and
cash equivalents (1,889,075) 3,808 442,686
Cash and cash equivalents, beginning of period 2,331,761 540,296 -
------------ ----------- ------------
Cash and cash equivalents, end of period $ 442,686 $ 544,104 $ 442,686
------------ ----------- ------------
------------ ----------- ------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 64,892 $ 82,268 $ 236,641
------------ ----------- ------------
------------ ----------- ------------
Taxes $ 18,089 $ 7,859 $ 37,715
------------ ----------- ------------
------------ ----------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
PLAYNET TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY ARISTO INTERNATIONAL CORPORATION)
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED OCTOBER 31, 1992, 1993, 1994, 1995, 1996
AND FOR THE NINE MONTH PERIOD ENDED JULY 31, 1997 AND FOR THE CUMULATIVE
PERIOD FROM JUNE 4, 1990 (INCEPTION) TO JULY 31, 1997
<TABLE>
<CAPTION>
(UNAUDITED) PREFERRED STOCK COMMON STOCK (1) ADDITIONAL
-------------------- ---------------------- PAID IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- -------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Issuance of common stock for initial capitalization ($0.18 per share) 3,334,780 $ 3,335 $ 596,665
Sale of common stock during November for cash ($0.12 per share) 1,764,099 1,764 218,526
Sale of common stock during October for cash ($1.29 per share) 155,067 155 199,845
Exchange of common stock during October for services at estimated
value ($1.28 per share) 78,367 78 99,922
Net loss for the year ended October 31, 1991
--------- -------- --------- --------- ----------
Balance, October 31, 1991 5,332,313 5,332 1,114,958
--------- -------- --------- --------- ----------
Sale of common stock during the year for cash ($0.85 per share) 1,589,023 1,589 1,348,411
Sale of common stock during the year for cash ($1.17 per share) 235,102 235 274,765
Exchange of common stock during August for services at estimated
value ($1.28 per share) 78,367 78 99,921
Net loss for the year ended October 31, 1992
--------- -------- --------- --------- ----------
Balance, October 31, 1992 7,234,805 7,235 2,838,055
--------- -------- --------- --------- ----------
Sale of common stock during the year for cash ($1.63 per share) 611,932 612 999,388
Sale of common stock during the year for cash ($1.28 per share) 195,085 195 249,805
Exchange of common stock during May for services at
estimated value ($1.29 per share) 116,717 117 149,883
Exchange of common stock during October for services at
estimated value ($1.33 per share) 15,006 15 19,985
Exchange of common stock during October for patent rights at
estimated value ($1.28 per share) 39,184 39 49,961
Purchase of treasury stock for cash ($0.04 per share)
Net loss for the year ended October 31, 1993
--------- -------- --------- --------- ----------
Balance, October 31, 1993 8,212,729 8,213 4,307,077
--------- -------- --------- --------- ----------
Sale of common stock during the year for cash ($1.46 per share) 1,030,447 1,030 1,498,970
Exchange of common stock during January for services at
estimated value ($1.33 per share) 15,007 15 19,985
Exchange of common stock during January for services at
estimated value ($1.46 per share) 34,181 34 49,966
Conversion of note payable and accrued interest into
common stock ($1.53 per share) 171,741 172 261,892
Conversion of note payable into common stock ($1.26 per share) 159,236 159 199,841
Repayment of stock subscription receivable
Retirement of treasury stock during October (1,667,390) (1,667) (58,333)
Net loss for the year ended October 31, 1994
--------- -------- --------- --------- ----------
Balance, October 31, 1994 7,955,951 7,956 6,279,398
--------- -------- --------- --------- ----------
Conversion of notes payable into common stock ($1.23 per share) 834,529 835 1,024,165
Sale of common stock during November for cash ($1.53 per share) 235,936 236 359,764
Sale of common stock during March for cash ($2.22 per share) 450,195 450 999,550
Exchange of common stock in March for graphic illustrations
($2.22 per share) 115,050 115 255,440
Issuance of common stock per anti-dilution provision 38,350 38 (38)
Sale of preferred stock in May for cash ($3.00 per share) 33,350 $ 33 - - 100,017
Equity acquired from the reverse acquisition with Astro-Stream 1,098,997 1,099 806,205
Issuance of common stock as a result of the acquisition of
Borta, Inc. ($4.67 per share) 1,818,182 1,818 8,498,182
Grant of common stock ($5.50 per share) 357,143 357 1,963,929
Sale of common stock during August for cash ($4.50 per share) 66,666 67 299,933
Sale of common stock during August for cash ($5.50 per share) 93,500 94 514,156
<CAPTION>
DEFICIT
ACCUMULATED COMMON STOCK
DURING DEFERRED HELD IN TREASURY STOCK
DEVELOPMENT COMPENSATION ----------------- SUBSCRIPTION
STAGE EXPENSE SHARES AMOUNT RECEIVABLE TOTAL
----------- ------------ -------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock for initial capitalization
($0.18 per share) $ 600,000
Sale of common stock during November for cash ($0.12 per share) 220,290
Sale of common stock during October for cash ($1.29 per share) 200,000
Exchange of common stock during October for services at
estimated value ($1.28 per share) 100,000
Net loss for the year ended October 31, 1991 $(1,478,158) (1,478,158)
------------ ----------- ---------- --------- --------- ------------
Balance, October 31, 1991 (1,478,158) (357,868)
------------ ----------- ---------- --------- --------- ------------
Sale of common stock during the year for cash ($0.85 per share) 1,350,000
Sale of common stock during the year for cash ($1.17 per share) 275,000
Exchange of common stock during August for services at
estimated value ($1.28 per share) 99,999
Net loss for the year ended October 31, 1992 (1,480,812) (1,480,812)
------------ ----------- ---------- --------- --------- ------------
Balance, October 31, 1992 (2,958,970) (113,680)
------------ ----------- ---------- --------- --------- ------------
Sale of common stock during the year for cash ($1.63 per share) $(80,000) 920,000
Sale of common stock during the year for cash ($1.28 per share) 250,000
Exchange of common stock during May for services at
estimated value ($1.29 per share) 150,000
Exchange of common stock during October for services at
estimated value ($1.33 per share) 20,000
Exchange of common stock during October for patent rights at
estimated value ($1.28 per share) 50,000
Purchase of treasury stock for cash ($0.04 per share) (1,667,390) $(60,000) (60,000)
Net loss for the year ended October 31, 1993 (1,636,310) (1,636,310)
------------ ----------- ---------- --------- --------- ------------
Balance, October 31, 1993 (4,595,280) (1,667,390) (60,000) (80,000) (419,990)
------------ ----------- ---------- --------- --------- ------------
Sale of common stock during the year for cash ($1.46 per share) 1,500,000
Exchange of common stock during January for services at
estimated value ($1.33 per share) 20,000
Exchange of common stock during January for services at
estimated value ($1.46 per share) 50,000
Conversion of note payable and accrued interest into common
stock ($1.53 per share) 262,064
Conversion of note payable into common stock ($1.26 per share) 200,000
Repayment of stock subscription receivable 80,000 80,000
Retirement of treasury stock during October 1,667,390 60,000 -
Net loss for the year ended October 31, 1994 (2,228,644) (2,228,644)
------------ ----------- ---------- --------- --------- ------------
Balance, October 31, 1994 (6,823,924) 0 0 0 (536,570)
------------ ----------- ---------- --------- --------- ------------
Conversion of notes payable into common stock ($1.23 per share) 1,025,000
Sale of common stock during November for cash ($1.53 per share) 360,000
Sale of common stock during March for cash ($2.22 per share) 1,000,000
Exchange of common stock in March for graphic
illustrations ($2.22 per share) 255,555
Issuance of common stock per anti-dilution provision -
Sale of preferred stock in May for cash ($3.00 per share) 100,050
Equity acquired from the reverse acquisition with Astro-Stream (795,405) 11,899
Issuance of common stock as a result of the
acquisition of Borta, Inc. ($4.67 per share) 8,500,000
Grant of common stock ($5.50 per share) $(1,964,286) -
Sale of common stock during August for cash ($4.50 per share) 300,000
Sale of common stock during August for cash ($5.50 per share) 514,250
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
PLAYNET TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY ARISTO INTERNATIONAL CORPORATION)
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED OCTOBER 31, 1992, 1993, 1994, 1995, 1996
AND FOR THE NINE MONTH PERIOD ENDED JULY 31, 1997 AND FOR THE CUMULATIVE
PERIOD FROM JUNE 4, 1990 (INCEPTION) TO JULY 31, 1997
<TABLE>
<CAPTION>
(UNAUDITED) PREFERRED STOCK COMMON STOCK (1) ADDITIONAL
-------------------- ---------------------- PAID IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- -------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Exchange of common stock in August for consulting
services ($6.50 per share) 25,000 25 162,475
Exchange of common stock in August for consulting
services ($5.75 per share) 3,687 4 21,196
Exchange of common stock in August for consulting
services ($5.50 per share) 395 - 2,172
Sale of common stock during September for
cash ($5.50 per share) 96,364 96 529,904
Sale of common stock during October for
cash ($5.50 per share) 10,000 10 54,990
Amortization of deferred compensation expense
Dividend on preferred stock
Net loss for the year ended October 31, 1995 -
--------- -------- --------- --------- ----------
Balance, October 31, 1995 33,350 33 13,199,945 13,200 21,871,438
--------- -------- --------- --------- ----------
Sale of common stock during November for cash ($5.50 per share) 60,000 60 329,940
Sale of common stock during December for cash ($5.50 per share) 164,000 164 901,836
Conversion of notes payable into common stock in December
($3.00 per share) 66,667 67 199,933
Sale of preferred stock during January for cash ($5.50 per share) 40,000 40 219,960
Exchange of common stock in January for consulting
services ($5.50 per share) 500 1 2,749
Sale of common stock during February for cash ($5.50 per share) 10,000 10 54,990
Sale of common stock during March for cash ($5.50 per share) 60,000 60 329,940
Sale of common stock during April for cash ($5.50 per share) 56,363 56 309,944
Reversal of prior year deferred compensation expense
Write-off of deferred compensation expense (357,143) (357) (1,963,929)
Sale of common stock during May for cash ($5.50 per share) 59,362 59 326,432
Exchange of common stock in May for consulting services
($5.76 per share) 421 - 2,423
Exchange of common stock in May for consulting services
($4.82 per share) 1,100 1 5,302
Conversion of preferred stock into common stock in May (73,350) (73) 58,191 58 15
Sale of common stock during June for cash ($5.50 per share) 57,638 58 316,951
Exchange of common stock in June for consulting
services ($5.50 per share) 1,000 1 5,499
Sale of common stock during July for cash ($5.50 per share) 152,000 152 835,848
Exchange of common stock in July for consulting
services ($5.50 per share) 12,000 12 65,988
Exchange of common stock in August for product
rights ($5.00 per share) 30,000 30 149,970
Sale of common stock in August for cash ($5.00 per share) 700,000 700 3,254,300
Sale of common stock in August for cash ($5.50 per share) 23,636 24 129,976
Sale of common stock in September for cash ($5.00 per share) 80,000 80 371,920
Sale of common stock in September for cash ($5.50 per share) 46,000 46 252,954
Exchange of common stock in September for consulting
services ($5.50 per share) 15,625 16 85,921
Exchange of common stock in September for goods ($5.50 per share) 11,800 12 99,988
Grant of common stock as signing bonuses ($5.50 per share) 51,250 51 281,824
Sale of common stock in October for cash ($5.00 per share) 400,000 400 1,853,600
Sale of common stock in October for cash ($5.50 per share) 6,400 6 35,194
Issuance of warrants in exchange for consulting
services ($8.25 per share) 1,183,942
Issuance of warrants in exchange for consulting
services ($5.50 per share) 221,648
Dividend on preferred stock
Net loss for the fiscal year ended October 31, 1996
--------- -------- --------- --------- ----------
Balance, October 31, 1996 - - 14,966,755 14,967 31,736,496
--------- -------- --------- --------- ----------
Issuance of warrants pursuant to bridge financing
agreements($5.50 per share)-December 1996 736,780
<CAPTION>
DEFICIT
ACCUMULATED COMMON STOCK
DURING DEFERRED HELD IN TREASURY STOCK
DEVELOPMENT COMPENSATION ----------------- SUBSCRIPTION
STAGE EXPENSE SHARES AMOUNT RECEIVABLE TOTAL
----------- ------------ -------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Exchange of common stock in August for consulting
services ($6.50 per share) 162,500
Exchange of common stock in August for consulting
services ($5.75 per share) 21,200
Exchange of common stock in August for consulting
services ($5.50 per share) 2,172
Sale of common stock during September for
cash ($5.50 per share) 530,000
Sale of common stock during October for
cash ($5.50 per share) 55,000
Amortization of deferred compensation expense 117,857 117,857
Dividend on preferred stock (4,585) (4,585)
Net loss for the year ended October 31, 1995 (4,116,457) (4,116,457)
----------- ------------ -------- -------- ------------ -----------
Balance, October 31, 1995 (11,740,371) (1,846,429) - - - 8,297,871
----------- ------------ -------- -------- ------------ -----------
Sale of common stock during November for cash ($5.50 per share) 330,000
Sale of common stock during December for cash ($5.50 per share) 902,000
Conversion of notes payable into common stock in
December ($3.00 per share) 200,000
Sale of preferred stock during January for cash ($5.50 per share) 220,000
Exchange of common stock in January for consulting
services ($5.50 per share) 2,750
Sale of common stock during February for cash ($5.50 per share) 55,000
Sale of common stock during March for cash ($5.50 per share) 330,000
Sale of common stock during April for cash ($5.50 per share) 310,000
Reversal of prior year deferred compensation expense (117,857) (117,857)
Write-off of deferred compensation expense 1,964,286 -
Sale of common stock during May for cash ($5.50 per share) 326,491
Exchange of common stock in May for consulting
services ($5.76 per share) 2,423
Exchange of common stock in May for consulting
services ($4.82 per share) 5,303
Conversion of preferred stock into common stock in May -
Sale of common stock during June for cash ($5.50 per share) 317,009
Exchange of common stock in June for consulting
services ($5.50 per share) 5,500
Sale of common stock during July for cash ($5.50 per share) 836,000
Exchange of common stock in July for consulting
services ($5.50 per share) 66,000
Exchange of common stock in August for product
rights ($5.00 per share) 150,000
Sale of common stock in August for cash ($5.00 per share) 3,255,000
Sale of common stock in August for cash ($5.50 per share) 130,000
Sale of common stock in September for cash ($5.00 per share) 372,000
Sale of common stock in September for cash ($5.50 per share) 253,000
Exchange of common stock in September for consulting
services ($5.50 per share) 85,937
Exchange of common stock in September for goods ($5.50 per share) 100,000
Grant of common stock as signing bonuses ($5.50 per share) 281,875
Sale of common stock in October for cash ($5.00 per share) 1,854,000
Sale of common stock in October for cash ($5.50 per share) 35,200
Issuance of warrants in exchange for consulting
services ($8.25 per share) 1,183,942
Issuance of warrants in exchange for consulting
services ($5.50 per share) 221,648
Dividend on preferred stock (15,219) (15,219)
Net loss for the fiscal year ended October 31, 1996 (15,966,292) (15,966,292)
----------- ------------ -------- -------- ------------ -----------
Balance, October 31, 1996 (27,721,883) - - - - 4,029,580
----------- ------------ -------- -------- ------------ -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
PLAYNET TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY ARISTO INTERNATIONAL CORPORATION)
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED OCTOBER 31, 1992, 1993, 1994, 1995, 1996
AND FOR THE NINE MONTH PERIOD ENDED JULY 31, 1997 AND FOR THE CUMULATIVE
PERIOD FROM JUNE 4, 1990 (INCEPTION) TO JULY 31, 1997
<TABLE>
<CAPTION>
(UNAUDITED) PREFERRED STOCK COMMON STOCK (1) ADDITIONAL
-------------------- ---------------------- PAID IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- -------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Issuance of warrants pursuant to bridge financing
agreements ($5.50 per share)-December 1996 736,780
Issuance of warrants pursuant to bridge financing
agreements ($5.50 per share)-January 1997 366,430
Issuance of warrants pursuant to certain financing
agreements($5.50 per share)-February 1997 365,123
Issuance of warrants pursuant to certain financing
agreements($5.50 per share)-March 1997 361,556
Issuance of warrants pursuant to certain financing
agreements($5.50 per share)-April 1997 294,130
Issuance of warrants in exchange for consulting
services ($5.50 per share)-April 1997 5,822
Exercise of option to purchase 10,000 shares of
common stock ($5.50 per share). 10,000 10 54,990
Issuance of 3,564 shares of common stock
($5.50 per share) to two employees pursuant to
employment agreements. 3,554 3 19,599
Issuance of 600,000 shares of common stock ($0.50 per share) 600,000 600 299,400
Conversion of $4,010,000 of Promissory Notes into
common stock ($1.275 per share) 3,145,098 3,145 4,006,855
Net loss for the nine month period ended July 31, 1997
--------- -------- ---------- --------- -----------
Balance, July 31, 1997 - - 18,725,417 $ 18,725 $38,249,181
--------- -------- ---------- --------- -----------
--------- -------- ---------- --------- -----------
<CAPTION>
DEFICIT
ACCUMULATED COMMON STOCK
DURING DEFERRED HELD IN TREASURY STOCK
DEVELOPMENT COMPENSATION ----------------- SUBSCRIPTION
STAGE EXPENSE SHARES AMOUNT RECEIVABLE TOTAL
----------- ------------ -------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Issuance of warrants pursuant to bridge financing
agreements($5.50 per share)-December 1996 736,780
Issuance of warrants pursuant to bridge financing
agreements ($5.50 per share)-January 1997 367,430
Issuance of warrants pursuant to certain financing
agreements($5.50 per share)-February 1997 366,123
Issuance of warrants pursuant to certain financing
agreements($5.50 per share)-March 1997 361,556
Issuance of warrants pursuant to certain financing
agreements($5.50 per share)-April 1997 294,130
Issuance of warrants in exchange for consulting
services ($5.50 per share)-April 1997 5,822
Exercise of option to purchase 10,000 shares of
common stock ($5.50 per share). 55,000
Issuance of 3,564 shares of common stock
($5.50 per share) to two employees pursuant -
to employment agreements. 19,602
Issuance of 600,000 shares of common stock ($0.50 per share) 300,000
Conversion of $4,010,000 of Promissory Notes into
common stock ($1.275 per share) 4,010,000
Net loss for the nine month period ended July 31, 1997 (18,160,960) (18,160,960)
----------- ------------ -------- -------- ------------ -----------
Balance, July 31, 1997 $(18,160,960) - - - $(7,614,937)
----------- ------------ -------- -------- ------------ -----------
----------- ------------ -------- -------- ------------ -----------
</TABLE>
Note 1. All common shares information has been restated since inception to
reflect conversion of the outstanding shares of PlayNet's (formerly Aristo)
common stock into 90% of the common stock of Astro-Stream pursuant to the
Merger agreement.
<PAGE>
PLAYNET TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY ARISTO INTERNATIONAL CORPORATION)
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(UNAUDITED)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
The Company, on June 4, 1990, issued 3,334,780 shares of common stock in
exchange for technical know-how and patents valued at $600,000.
During October 1993, the Company issued 39,184 shares of common stock in
exchange for the rights to a patent valued at $50,000.
During 1994, notes payable of $250,000 and $12,064 of accrued interest thereon
were converted into 171,741 shares of common stock.
During 1994, a note payable of $200,000 was converted into 159,236 shares of
common stock.
During 1994, the Company retired 1,667,390 shares of treasury stock valued at
$60,000.
During 1995, convertible term loans of $1,025,000 were converted into 834,529
shares of common stock.
During 1995, the Company issued 115,050 shares of common stock in exchange for
original graphic illustrations valued at $255,555.
In connection with the Merger with Astro-Stream, the Company assumed
liabilities of $47,595 and acquired cash of $59,494.
The Company purchased all of the capital stock of Borta, Inc. The details of
the business acquired are as follows:
Fair value of current assets acquired $ 67,418
Fair value of fixed assets acquired 43,258
Intangible assets of business acquired:
Capitalized software 8,086,750
Excess of cost over net assets acquired (goodwill) 5,008,049
Deferred tax liability (3,800,772)
Liabilities assumed (104,703)
Intercompany payable to the Company (50,000)
-----------
Total purchase price consideration 9,250,000
Common stock issued 8,500,000
-----------
Total cash to be paid to sellers 750,000
Liabilities to former stockholder 500,000
-----------
Cash paid to sellers at closing of the acquisition 250,000
Less, cash acquired 11,385
-----------
Net cash payment at closing of the acquisition $ 238,615
-----------
-----------
In connection with the purchase of Borta, the Company issued 357,143 shares of
restricted common stock valued at $1,964,286 to the president of Borta as
deferred compensation. These shares are subject to forfeiture.
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
PLAYNET TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY ARISTO INTERNATIONAL CORPORATION)
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(UNAUDITED)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During 1995, the Company issued 25,000 shares of common stock in exchange for
consulting services valued at $162,500.
During 1995, the Company issued 4,082 shares of common stock in exchange for
consulting services valued at $23,372.
During December 1995, convertible term loans of $200,000 were converted into
66,667 shares of common stock.
During 1996, the Company issued 42,446 shares of common stock in exchange for
consulting services valued at $267,915.
During 1996, the Company issued 58,191 shares of common stock in exchange for
the 73,350 outstanding shares of preferred stock.
During 1996, the Company issued 30,000 shares of common stock in exchange for
product rights valued at $150,000.
During 1996, the Company issued 51,250 shares of common stock as signing
bonuses pursuant to employment agreements to two key personnel valued at
$281,875.
During 1996, pursuant to a Settlement Agreement with the former president of
Borta, Inc. the Company canceled 357,143 shares of common stock originally
issued as deferred compensation.
In connection with warrants issued in 1996 in exchange for consulting services,
the Company recorded charges of $1,405,590.
In the first quarter of fiscal year 1997, the Company issued warrants in
connection with bridge financing and recorded deferred charges of $1,104,210.
In the second quarter of fiscal year 1997, the Company issued warrants in
connection with certain financing transactions and recorded deferred financing
charges in the aggregate amount of $381,365.
In the second quarter of fiscal year 1997, the Company issued warrants in
connection with financial consulting services rendered and recorded an expense
of $5,822.
In the second quarter of fiscal year 1997, the Company issued 3,564 shares of
Common Stock at a price of $5.50 per share to two former employees pursuant to
employment agreements for an aggregate amount of $19,602.
Sale of 600,000 shares of Common Stock in July for Cash ($0.50 per share) of
$300,000.
In the third quarter of fiscal year 1997, $4,010,000 of Promissory Notes were
converted into a total of an aggregate of 3,145,000 shares of Common Stock
at a price of $1.275 per share.
The accompanying notes are an integral part of these consolidated financial
statements.
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The interim consolidated financial statements reflect adjustments, consisting
only of normal recurring accruals, which are, in the opinion of management,
necessary for a fair presentation of the financial position and results of
operations for the periods presented. Sales and the net loss for any interim
period are not necessarily indicative of the results for a full year. These
consolidated financial statements should be read in conjunction with the
Company's annual report Form 10-KSB for the fiscal year ended October 31,
1996 and the related audited financial statements included therein. The
financial statements have been prepared on a going-concern basis, which
contemplates realization of assets and liquidation of liabilities in the
normal course of business. The Company, as of July 31, 1997, has a working
capital deficit of $14,608,583. Several of the Company's loan facilities are
in default (see note 4), the Company is a defendant in a number of collection
actions, the Company's stock has been de-listed from the Nasdaq Small Cap
Market (see note 7) and the Company has not funded certain employee benefit
obligations. In addition, the Company expects to incur substantial costs and
expenses during the ensuing twelve months as the Company continues to develop
products and re-commence sales of its PLAYNET WEB networked entertainment
terminals. The foregoing raises substantial doubt as to the ability of the
Company to continue as a going concern. Since inception through July 31,
1997, the Company raised approximately $30,000,000 through the private
placement of stock and convertible and promissory notes. The Company intends
to continue to fund operations through equity and/or debt financing together
with available funds and cash flows expected to be generated by sales. The
Company is presently negotiating the restructuring of its principal loan
facilities. If additional funds are raised through the issuance of equity
securities, the percentage of ownership of the then current stockholders of
the Company may be reduced and such equity securities may have rights,
preferences or privileges senior to those of the holders of the Company's
common stock. There can be no assurance that additional financing will be
available on terms favorable to the Company.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION POLICY-
Effective February 1997, the Company commenced shipping its PLAYNET WEB
terminals, the first of its product line, to domestic distributors who will
resell them to operators for installation in bars and restaurants in the United
States. As the PLAYNET WEB is a new product in the market without proven
acceptance or performance, and has yet to resume full scale operation since
cessation in April 1997, the Company has elected to implement a conservative
revenue recognition policy. As the PLAYNET WEB gains acceptance in the market,
the Company will analyze actual results of sales and adjust its policy
accordingly.
Hardware Sales:
The Company will recognize revenue from the sale of its PLAYNET WEB product
upon shipment to the end customer and when financing is completed and payment
has been received. Under certain circumstances, the Company may be required
to sell its product on a recourse basis. Revenue is recognized for
transactions involving recourse financing arrangements in the same manner as
non-recourse transactions. However, in connection therewith, the Company has
recorded a reserve against its recourse sales, especially in the light of the
Company's current restructuring program. The reserve will be adjusted as the
contingency surrounding the sale is reduced. When terminals sales are
resumed, the Company will assess its experience with the recourse
transactions and adjust its reserve policy accordingly.
Warranty Reserve on Hardware:
The PLAYNET WEB terminals carry a 90-day warranty covering parts and service.
The Company has established a warranty reserve account based on 2% of the sales
price of each unit sold. The Company will assess its warranty experience and
adjust the warranty reserve based on actual experience, when terminal sales
are resumed.
10
<PAGE>
Usage Revenues:
Upon the installation of the PLAYNET WEB terminals at the operators' locations
and connection to the Internet Service Provider, the terminals features will
become fully functional. At this point the Company will begin to generate
revenues through an agreement with the operators of the PLAYNET WEB terminals.
This agreement provides for the Company to receive a percentage of the revenues
that are generated by certain of the functions and content on the terminals.
The terminals are programmed to transmit activity data to the Company's
accounting system, which will generate on a monthly basis machine detail
statements reporting the revenues by feature, as well as, invoices to the
operators for PlayNet's share of the earnings. The Company will recognize the
revenues from its share of the terminals' earnings upon invoicing the customer.
However, the Company will estimate and record a provision for uncollectible
receivables and will periodically assess the provision based upon actual
collection experience. No usage revenues have been recorded to date, as the
Company has shipped no further terminals since the April 1997 system failure.
In the interim, while the Company has certain terminals in the field
connected, it views all such collections and usage revenues as being of a
test nature.
NOTE 3 - INVENTORIES
Inventory is stated at the lower of cost or market. At July 31, 1997,
inventory consisted of $1,267,407 in finished goods, $938,280 in components
and assembly costs and $137,500 in completed units used for demonstration and
test purposes for the Company's PLAYNET WEB networked entertainment terminals
(see Note 5).
NOTE 4 - FINANCING
On December 30, 1996, the Company entered into a bridge financing agreement
with Allen & Company Incorporated ("Allen") pursuant to which Allen acted as
the Company's placement agent in the sale of senior secured notes for
aggregate gross proceeds of up to $18,000,000, subject to achievement of
certain prescribed operating targets. Through July 31, 1997 the Company had
received gross proceeds of $3,250,000. The promissory notes related thereto
bear interest at a rate of 12% per annum payable on the maturity date of the
note. As partial consideration for the issuance of these notes, the ten
holders of these notes were granted warrants to purchase an aggregate of
650,000 shares of the Company's common stock at an exercise price of between
$5.00 and $7.50 per share and exercisable six months from the date of the
note through December 21, 1997. The Company has been served notice of a
technical default under the terms of the agreement. It is unlikely that the
Company will draw down on the balance of the funds available under this
agreement.
On March 6, 1997, the Company entered into a short term revolving line of
credit for the total principal sum of $850,000 subject to a draw down and
repayment schedule bearing a repayment premium of 15%. As of July 31, 1997,
the Company had received the total $850,000 in draw down payments and made
principal repayments in the amount of $582,500, pursuant to the terms of the
line of credit. As consideration for this line of credit, the holder received a
security interest in certain purchase orders for the PLAYNET WEB product and
warrants to purchase 66,000 shares of the Company's common stock at an exercise
price of $8.625 per share, the closing price per share of the Company's common
stock as quoted on the Nasdaq Small Cap Market. On July 31, 1997, the
repayment schedule of this instrument was extended and, in consideration
thereof, the holder shall receive an additional 5% premium on the outstanding
balance and additional warrants to purchase 20,000 shares of the Company's
common stock at an exercise price of $7.50 per share.
In April 1997, the Company also raised an additional $1,750,000 through the
issuance of short-term promissory notes which bear interest at the rate of 10%
per annum and are due and payable on the earlier of (i) the closing of an
Offering, as defined, or (ii) June 30, 1997. Certain of the Company's purchase
orders for its PlayNet Web terminals collateralize these notes. As partial
consideration for the issuance of the notes, the holders also received warrants
to purchase an aggregate of 175,000 shares of the Company's Common Stock.
Warrants to purchase 125,000 shares have an exercise price per share of $7.50
and warrants to purchase 50,000 shares have an exercise price of $7.00 per
share. Under agreements of July 30, 1997 these notes were converted into the
Common Stock of the Company at a price of $1.275 per share.
11
<PAGE>
To the current date, the Company has recorded an aggregate deferred charge of
$2,126,020 related to the issuance of warrants to purchase an aggregate of
911,000 shares of its common stock pursuant to the bridge financing arrangement
between the Company and senior secured note holders and other short term line
of credit note holders. Through July 31, 1997, the Company recorded $872,379
of interest expense in connection with the amortization of these deferred
charges.
In May 1997, the Company issued and sold to Southbrook International
Investments, Ltd. ("Southbrook") 10% Convertible Debentures (the
"Debentures") in the aggregate principal amount of $4,000,000 at a purchase
price equal to 90% of par to yield gross proceeds of $3,600,000. Of such
amount, Southbrook retained $250,000, which will become payable to the
Company on the earliest to occur of the dates on which either (i) the Form
S-1 Registration Statement, originally filed on October 16, 1996, becomes
effective; (ii) a certain stockholder of the Company delivers a lock-up
agreement to Southbrook; or (iii) Southbrook no longer holds any of the
Debentures. Interest on the Debentures accrues daily at the rate of 10% per
annum on the principal amount thereof and is payable quarterly, or at the
Company's option, subject to certain conditions, in shares of its Common
Stock. The Debentures mature on May 20, 1998, subject to prior conversion or
repayment. The Company may, at its option, (a) prior to September 17, 1997,
repay all, but not less than all, of the outstanding Debentures at a price
equal to the aggregate principal amount thereof, together with all interest
accrued but unpaid thereon, and an amount equal to the product of $6,666.66
and the number of days elapsed after June 20, 1997 until the date of
repayment, and (b) at any time on or after May 21, 1997, repay all or any
portion of the outstanding Debentures at a price equal to 110% of the
aggregate principal amount of the Debentures so repaid, together with all
interest accrued but unpaid thereon.
On or after September 17, 1997 and until maturity, the Debentures are
convertible at the option of the holders thereof into shares of Common Stock at
a conversion price equal to the lesser of (a) 95% of the average per Share
Market Value (as defined) for the ten (10) trading days preceding the
conversion date and (b) the average of the five lowest per Share Market Values
over the 90 trading days preceding the conversion date. The Company is
required to pay each holder of Debentures that does not so convert the
Debentures before November 16, 1997 on such date and at the end of each 30-day
period thereafter a bonus equal to .75% of the aggregate principal amount not
so converted. Such bonus shall be paid in cash, except that after May 20,
1998, the Company may, at its option, pay such bonus in shares of Common Stock.
If any Debentures remain outstanding on or after September 17, 1997 the Company
will issue to the holders thereof warrants to purchase 152,381 shares of Common
Stock at an exercise price of $5.25 per share.
The Company has also granted to Southbrook a right of first refusal until
November 17, 1997 to undertake certain financing of the Company, if any,
involving the sale of securities of the Company at a discount to market price
or fair market value.
(a) EQUITY TRANSACTIONS
In July, 1997 the Company received a total of $300,000 in investment capital
from an existing shareholder for the purchase of 600,000 shares of PlayNet
Common Stock at $0.50 per share.
On July 29, 1997, the Company entered into an agreement with Access America,
Inc. of New Orleans, Louisiana for the broadcast of advertising material
promoting the Company's products in exchange for the issuance of convertible
preferred shares convertible into the Company's Common Stock amounting to
$12,500,000. This agreement terminated automatically on August 5, 1997, on
the delisting of the company's Common Stock from the Nasdaq SmallCap Market.
12
<PAGE>
(b) CONVERSION OF PROMISSORY NOTES
Under agreements of July 30, 1997, $4,010,000 of Promissory Notes were
converted into a total of an aggregate of 3,145,000 shares of Common Stock at
$1.275 per share. These Promissory Notes included $1,500,000 of Purchase
Order Financing Promissory Notes, and $1,750,000 of Senior Secured Notes.
(c) STOCK SUBSCRIPTION AGREEMENTS
On July 30, 1997, the Company had received a $2,000,000 capital investment
commitment from an unrelated third party through the private sale of its
securities in transactions exempt from the registration requirements of the
Securities Act of 1933. Due in large part to the delisting of the Company's
securities from the Nasdaq SmallCap Market, the prospective investor did not
advance the capital in the time required under the commitment and the Company
did not proceed with the transaction.
On July 18, 1997, the Company engaged Intercontinental Holding Company, Ltd.
as an advisor with respect to a $2,000,000 Convertible Preferred Stock
Offering. Due in large part to the delisting of the Company's securities from
the Nasdaq SmallCap Market, discussions with potential investors were
unsuccessful and the Company did not proceeds with these Private Placements.
On August 20, 1997, the Company consummated a $625,000 One Year Senior
Subordinated 12% Convertible Redeemable Debenture Offering with Arcadia
Mutual Fund, Inc. for a subscription price of $500,000.
NEGOTIATIONS WITH DEBENTURE HOLDER--SOUTHBROOK
The Company is in active restructuring negotiations at this time with the
holder of a $3,750,000 Convertible Debenture. These negotiations encompass
the withdrawal of a notice of default under the terms of the Debenture.
NEGOTIATIONS WITH SENIOR SECURED PROMISSORY NOTES HOLDER--ALLEN AND COMPANY
The Company is in active restructuring negotiations at this time with the
holder of $1,500,000 of Senior Secured Promissory Notes. These negotiations
encompass the withdrawal or agreement to waive a notice of technical default
under the terms of these Notes.
NEGOTIATIONS WITH LENDER OF SECURED LINE OF CREDIT--COMLEASE
The company is in active restructuring negotiations at this time with the
lender of a $850,000 Line of Credit under which $623,000 is currently
outstanding.
NOTE 5 - HARDWARE SALES
On February 22, 1997, the Company launched its PLAYNET WEB networked
entertainment terminals. Through July 31, 1997, the Company had shipped 537
PLAYNET WEB terminals. Of these, the Company recorded net sales totaling
$340,740 representing 152 units, consistent with its revenue recognition
policy, for which payment had been received or for which financing had been
completed. The remaining 385 shipped units require refurbishment,
and no further revenue has been recognized to date. As part of the recognition
of the restructuring and refurbishment program, the Company has taken an
additional $300,000 provision through the Consolidated Statement of Operations
for the Quarter ending July 31, 1997.
NOTE 6 - COMMITMENTS
(a) INTERNET SERVICE PROVIDER
In February 1997 the Company finalized a one-year renewable agreement with IBM
Global Services ("IBM") for delivery of Internet dial up access services.
Negotiations with IBM for a long-term commitment for the delivery of server
farm management services and increased dial up access services are still in
process. In connection therewith, the Company agreed, that in the event the
parties do not enter into an agreement relating to the services contemplated,
it will reimburse IBM for reasonable, documented costs and expenses actually
incurred by IBM in an effort to implement the services in accordance with the
Company's scheduled timeline, the amount of which is not to exceed $500,000.
Payment terms and amortization periods related thereto are to be determined as
part of the negotiation process. As of July 31, 1997, IBM had substantially
completed the delivery of the contracted Internet dial up access services and,
in connection, therewith, the Company recorded a charge of $500,000 for network
services. IBM is actively working with the Company on its restructuring and
re-launch program.
13
<PAGE>
(b) FINANCIAL SERVICES AGREEMENT
On April 29, 1997, the Company engaged LKB Financial LLC ("LKB") to provide
financial advisory services, including identifying and introducing the Company
to prospective investors and assisting in the negotiations of the terms of any
resulting financial transaction. Through LKB, the Company contacted and, on
May 20, 1997, closed a financing transaction with Southbrook International
Investments, Ltd. ("Southbrook") as described below (the "Southbrook
Transaction"). As compensation for its services in connection with the
Southbrook Transaction, the Company paid a $400,000 cash fee to LKB and
issued to LKB warrants to purchase 200,000 shares of Common Stock at an
exercise price of $6.88 per share (subject to certain adjustments) at any time
between May 20, 1998 and April 1, 2000. (See Note 4.)
NOTE 7 - DELISTING FROM NASDAQ SMALLCAP MARKET
On July 31, 1997, the Company submitted a Form 8K to Nasdaq as filed with the
SEC on August 1, 1997, as evidence that the Company had met the required
terms of the limited time listing exception to the capital and surplus
requirements set forth in NASD rule 4310 (c)(03) as granted by a Nasdaq
Listing Hearing Panel on July 11, 1997. On August 5, 1997, the Nasdaq Panel
determined not to accept that the Company had met those terms, and the
Company's securities were subsequently delisted from the Nasdaq SmallCap
Market effective with the close of business on that day. The Common Stock of
the Company continues to be traded on the Over The Counter Market.
NOTE 8 - CAPITALIZED SOFTWARE
In connection with its quarterly review procedures, management evaluates the
recoverability of its intangible assets based on projected future revenue
streams and financial results for each of the related products. In early
April 1997, the Company experienced system failure based on unexpected
software incompatibility, which has subsequently been corrected. As a result
of this system failure, management revised its revenue projections for the
PLAYNET WEB product. In connection therewith, the Company recorded a charge
in the amount of $389,171 to reflect the impairment of this asset. The
Company continuously reviews the need for any provisions or charges relating
to the recovery of capitalized software costs.
NOTE 9 - EVENTS SUBSEQUENT TO JULY 31, 1997
On October 13, 1997, Mr. Mark S. Lewis resigned as a Director of the Company.
Mr. Lewis cited the pressure of his other professional commitments as the
reason for his resignation.
Between October 9, 1997, and November 3, 1997, the Company received $255,000
in investment capital in five separate transactions for the purchase of
PlayNet Common Stock at $0.30 to $0.40 per share.
On October 4, 1997, the Line of Credit facilities with Merchants Bank of New
York were closed out, and the principal outstanding of $406,000 and all
accrued interest paid off in full from deposits held in Merchants Bank of
New York.
CHANGES IN OFFICERS OF THE COMPANY
On September 3, 1997, Mr. Shmuel Cohen, Chairman of the Board Of Directors,
President and Chief Executive Officer of the Company, recommended to the
Board of Directors that Nolan K. Bushnell be appointed Chief Executive
Officer of the Company. At the same meeting, the Board of Directors approved
the appointment of Mr. Bushnell, but Mr. Bushnell subsequently decided to
remain as Director of Strategic Planning. Mr. Cohen will, at the request of
the Board of Directors, remain as Chief Executive Officer of the Company. At
the same September 3, 1997 meeting, the Board of Directors also confirmed the
appointment of Mr. Stuart Aarons as acting Vice President - Finance,
following the resignation on July 30, 1997 of Mr. Glenn P. Sblendorio as
Executive Vice President and Chief Financial Officer.
CONTINGENCY FOR CLOSING NEW YORK CITY HEADQUARTERS OFFICE
Effective June 30, 1997, the Company located its corporate headquarters to
its California facility to maximize the use of its assets and more
efficiently manage the business. At that time the New York City headquarter
offices were closed. In connection with this decision, in the second quarter
of fiscal 1997 the Company recorded a charge in the amount of $394,477
related to moving expenses, lease settlements and severance payments.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain significant
factors which have affected the Company's financial position and operating
results during the periods included in the accompanying consolidated financial
statements.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
A number of statements contained in this report are forward-looking within the
meaning of the Private Securities Litigation Reform Act of 1995 that involve
risks and uncertainties that could cause actual results to differ materially
from those expressed or implied herein. These risks and uncertainties include
but are not limited to the recent development and commencement of operations;
dependence on new products; risks related to technological factors; dependence
on certain third party vendors and on the Internet; and other risks described
in the Company's Registration Statement on Form S-1 filed on October 16,
1996. Notice of withdrawal of this Registration Statement has been filed with
the SEC.
OVERVIEW
The Company designs, develops and sells entertainment systems which include
pay-per-play electronic game, entertainment and music juke box terminals
networked over the Internet. The Company's primary product, PLAYNET WEB,
is designed to accept both cash and credit cards, has touch screens,
user-friendly interfacing and comes pre-loaded with the Company's proprietary
software and other licensed content. The market for the Company's products
includes bars, theme bars and restaurants, hotel and restaurant chains,
coffee cafes, theme parks, studio stores, gyms, airport lounges and new
"cyber" establishments. The products are intended to run on MICROSOFT
WINDOWS NT platform networked by IBM GLOBAL SERVICES.
CURRENT OPERATIONS
Through July 1997, the Company shipped 537 PLAYNET WEB entertainment
terminals. The 537 units aggregated potential revenues of approximately $1.15
million, to be accounted for in accordance with the Company's revenue
recognition policy. Additionally, the Company currently has purchase orders
outstanding for the shipment of another 3,156 terminals, which is expected to
generate sales of approximately $7.1 million. However, in early April 1997
the Company experienced system failure based on unexpected software
incompatibility, the malfunction being triggered by the daylight savings time
change. To date, this malfunction has been corrected, but terminal sales
have yet to be resumed.
On May 20, 1997, the Company entered into a non-binding agreement with
Tournament Associates, Inc. ("TAI") relating to a joint venture that will
operate computerized poker tournaments through retail locations in
Pennsylvania. This agreement has subsequently lapsed, and the Company does
not anticipate attempting to renew this agreement.
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Effective June 30, 1997, the Company relocated its corporate headquarters to
its California facility to maximize the use of its assets and more efficiently
manage the business. At that time the New York City headquarter offices was
closed. In connection with this relocation, the Company recorded a one-time
charge of $394,477 in the second quarter for expenditures related to the
closing of the New York office.
Subsequent to July 31, 1997, as part of its overall operational
re-organization, the Company experienced two substantial rounds of full time
employee law-offs, laying off more than half of the existing personnel after
the New York office closure. The Company is presently evaluating its
full and part time and future employee requirements.
COMPARISON OF THE NINE MONTH PERIOD ENDED JULY 31, 1997 VS. JULY 31, 1996
Consolidated net revenues for the nine months ended July 31, 1997 were $353,820
as compared to revenues of $198,349 for the same period in 1996. In 1997
revenues were primarily attributable to the sale of the PLAYNET WEB terminals,
which was initially shipped in February 1997. For the same period in 1996 the
Company received revenues primarily from its software development activities.
Royalties on the Company's consumer products represented 4% and 3% of total
revenues in 1997 and 1996, respectively.
In connection with the sales of the PLAYNET WEB terminals in the period ended
July 31, 1997, the Company recorded costs of goods sold in the amount of
$990,455, which resulted in a gross loss on sales of $636,635. The cost of
each unit sold is recorded using a standard cost method. Inventories are
reconciled quarterly and variances are recorded to a costs of sales variance
account. Approximately $513,000 of the costs of goods sold is directly
attributable to the costs of the units shipped, including the costs of parts,
assembly and software licenses. Approximately $300,000 is related to non-
production charges incurred from the manufacturer for minimum production levels
that were not achieved. In connection with the physical count of the inventory
at July 31, 1997, the Company recorded a charge to the costs of sales variance
account of approximately $ 169,000. Pursuant to the Company's revenue
recognition policy and in connection with the sale of 152 PLAYNET WEB
terminals, a warranty reserve of $7,585, representing 2% of gross sales, was
recorded. The Company has recorded a $300,000 provision during the quarter
ended July 31, 1997 to reflect the impairment to the terminal sales program.
Selling, general and administrative expenses for the nine months ended July 31,
1997 increased to $5,962,066 as compared to $3,969,500 for the nine months
ended July 31, 1996. Of the total selling, general and administrative expenses
for 1997, $1,984,497 or 35% related to salaries and benefits as compared to
approximately $990,715 or 25% for the prior period. This increase was
attributable to an increase of 40 personnel from July 31, 1997 as compared to
July 31, 1996, the increase being primarily executive and professional staff,
to support the Company's preparations for the development and commercial launch
of its networked entertainment terminal products.
Occupancy expense for the current period amounted to $470,062 as compared to
$257,127 for the same period in 1996. This increase is related to the leasing
of additional office space in the Company's New York office and an engineering
and design facility in California, which was occupied beginning in April 1996.
Of the total selling, general and administrative expenses, occupancy expense
represents 8% and 6% for the nine months period under review in 1997 and 1996,
respectively.
Amortization and depreciation expenses related to equipment and furniture
totaled $106,810 and $45,895 respectively, for the nine months ended July 31,
1997 and 1996. The increase of approximately $61,000 resulted primarily from
the capital expenditures in fiscal years 1997 and 1996 related to the
acquisition of equipment and leasehold improvements as the Company developed
the infrastructure necessary to achieve its business objectives.
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Other selling, general and administrative expenses for the 1997 period under
review total approximately $3,100,000 as compared to approximately $2,675,000
for the same period in 1996. Included in these other expenses is $1,078,454
related to professional and consulting services, of which $734,560 was for
financial consulting services and $343,894 was for legal and accounting
services, primarily related to the financing of the Company. In the same
period of 1996, other expenses related to professional fees totaled
approximately $ 925,000 of which $380,000 was primarily attributable to the
acquisition of Borta and the development of related business plans and funding.
Travel and entertainment expenditures decreased in 1997 to $385,000 as compared
to $621,000 in 1996. This decrease in travel and related expenditures is due
to the development of the Company's infrastructure in its California and
Virginia offices. Insurance expenses increased to $241,816 in 1997 as compared
to $93,257 in 1996. This is attributable to the additional coverage necessary
to insure the additional facilities, equipment and personnel of the business as
it has grown significantly from the period under review in 1996 versus the same
period in 1997. In the nine months ended July 31, 1997 the Company incurred
expenses totaling approximately $387,000 related to its marketing activities.
Also in the period ended July 31, 1997, the Company recorded one-time charges
in the amount of $394,477 related to the relocation of its New York offices and
in the amount $178,000 related to the settlement of certain vendor disputes.
In the period ended July 31, 1996, the Company recorded a one-time
reorganization charge in the amount of $200,000. The balance of approximately
$322,000 of other expenses for the 1997 period under review are primarily
attributable to the increase in office and related expenses necessary to
support the increase in the general corporate activity.
Research and development costs for the nine months ended July 31, 1997
increased to $7,120,196 as compared to $2,781,019 for the comparable period in
1996. This increase was attributable to (i) an increase in payroll expenses
from approximately $1,510,000 in 1996 to $3,725,000 in 1997, reflecting an
increase in personnel to 75 as of July 31, 1997 from 35 as of July 31, 1996;
(ii) $548,000 attributable to network development, of which $500,000 is related
to the commitment to IBM for Internet access services; and (iii) increased
travel and related expenditures in the amount of $404,000 for testing of
prototypes, exhibition at trade shows and the development of distribution
networks. In addition for the nine months ended July 31, 1997, the Company
recorded $313,000 of amortization and depreciation expenses primarily for
additional equipment and furniture acquisitions, an increase of approximately
$169,000 over the comparable period in 1996. Approximately $398,000 of
expenditures for outside services, such as personnel placement agencies,
independent contractors for programming and writing manuals was recorded for
the nine months period ended July 31, 1997. There were also expenditures of
approximately $82,000 for hardware and software requirements in the current
period under review. Additionally, approximately $400,000 of other
expenditures related to the increased number of personnel and facilities, such
as telephone services, office supplies and services was recorded in the current
period.
The increase of $1,544,420 in amortization of capitalized software costs
expense from the comparable period in 1996 to 1997 is related to the change
(reduction) in the estimated life of the Company's capitalized software asset,
which occurred at October 31, 1996 and has resulted in a higher monthly
amortization. Also, in the second quarter of 1997, the Company recorded an
additional impairment of its capitalized software asset in the amount of
$389,171, as a result of an unexpected software incompatibility with the
PLAYNET WEB terminals. (See Current Operations.)
Interest expense net of interest and other income for the nine months ended
July 31, 1997 was $2,031,204 as compared to $128,777 for the same period in the
prior year. This increase is primarily attributable to interest recorded in
connection with the convertible, promissory, and bridge financing notes in the
amount of $755,836 and to the amortization of deferred financing charges
related to the issuance of warrants in the amount of $1,272,379.
COMPARISON OF THE QUARTER ENDED JULY 31, 1997 VS. JULY 31, 1996
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Consolidated revenues for the three months ended July 31, 1997 were $3,853 as
compared to revenues of $12,311 for the same period in 1996. In the three
month period, shipments of the Company's PlayNet Web terminals due to the
software problems experienced in late April, 1997. For the same period in 1996
the Company received revenues primarily from the its software development
activities. Royalties on the Company's consumer products represented 100% and
29% of total revenues in 1997 and 1996, respectively.
Selling, general and administrative expenses for the three months ended July
31, 1997 increased to $2,212,589 as compared to $1,971,831 for the three
months ended July 31, 1996. Of the total selling, general and administrative
expenses for 1997, $602,703 or 32% related to salaries and benefits as
compared to $410,644 or 21% for the prior period under review. This includes
a $300,000 provision taken by the Company to reflect the impairment to the
terminal sales program. This increase in payroll expense was attributable to
an increase of 40 personnel from July 31, 1997 as compared to July 31, 1996,
the increase being primarily executive and professional staff, to support the
Company's preparations for the development and commercial launch of its
networked entertainment terminal products.
Occupancy expense for the current period amounted to $170,025 as compared to
$91,744 for the same period in 1996. This increase is related to the
additional office space in the Company's New York office which was occupied
through June 1997. Of the total selling, general and administrative expenses,
occupancy expense represents 9% and 5% for the three months period under review
in 1997 and 1996, respectively.
Amortization and depreciation expenses related to equipment and furniture
totaled $60,121 and $13,132 respectively, for the three months ended July 31,
1997 and 1996. While there was an increase in the capital expenditures in
fiscal years 1997 and 1996 related to the acquisition of equipment and
leasehold improvements required to develop the infrastructure necessary for the
Company to achieve its business objectives, certain assets were fully
depreciated within the periods under review and certain assets were
reclassified in subsequent periods to better reflect the nature of those
assets.
Other selling, general and administrative expenses for the three month period
ended July 31, 1997 total approximately $1,080,000,000 as compared to
approximately $1,456,000 for the same period in 1996. Included in these other
expenses is approximately $550,000 related to professional and consulting
services, of which $425,000 was for financial consulting services and $125,000
was for legal and accounting services, primarily related to the financing of
the Company. In the same period of 1996, other expenses related to
professional fees totaled approximately $925,000, of which $173,000 was
primarily attributable to the acquisition of borta and the development of
related business plans and funding. Travel and entertainment expenditures
decreased in 1997 to $164,000 as compared to $276,000 in 1996. This decrease
in travel and related expenditures is due to the development of the Company's
infrastructure in its California and Virginia offices. Insurance expenses
increased to $87,228 in 1997 as compared to $20,905 in 1996. This is
attributable to the additional coverage necessary to insure the additional
facilities, equipment and personnel of the business as it has grown
significantly from the period under review in 1996 versus the same period in
1997. In the three months ended July 31, 1997 the Company incurred expenses
totaling approximately $126,000 related to its marketing activities. Also in
the period ended July 31,
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<PAGE>
1997, the Company recorded one-time charges of $78,000 related to the
settlement of certain vendor disputes. The balance of approximately $73,000
of other expenses for the 1997 period under review are primarily attributable
to the increase in office supplies and related expenses necessary to support
the increase in the general corporate activity.
Research and development costs for the three months ended July 31, 1997
increased to $3,110,074 as compared to $1,267,725 for the comparable period in
1996. This increase was attributable to (i) an increase in payroll expenses
from approximately $704,000 in 1996 to $1,558,000 in 1997, reflecting an
increase in personnel to 75 as of July 31, 1997 from 35 as of July 31, 1996;
(ii) recruiting fees related to the increase in personnel; and (iii) increased
travel and related expenditures in the amount of $110,000 for testing of
prototypes, exhibition at trade shows and the development of distribution
networks. In addition for the three months ended July 31, 1997, the Company
recorded $137,000 of amortization and depreciation expenses primarily for
additional equipment and furniture acquisitions, an increase of approximately
$114,000 over the comparable period in 1996. Approximately $200,000 of
expenditures for outside services, such as personnel placement agencies,
independent contractors for programming and writing manuals was recorded for
the three months period ended July 31, 1997. There were also expenditures of
approximately $82,000 for hardware and software requirements in the current
period under review. Additionally, approximately $351,000 of other
expenditures related to the increased number of personnel and facilities, such
as telephone services, office supplies and services, was recorded in the
current period under review.
The increase to $673,896 in amortization of capitalized software costs expense
from $288,813 for the comparable period in 1996 to 1997 is related to the
change (reduction) in the estimated life of the Company's capitalized software
asset, which occurred at October 31, 1996 and has resulted in a higher monthly
amortization.
Interest expense net of interest and other income for the three months ended
July 31, 1997 was $1,061,641 as compared to $60,358 for the same period in the
prior year. This increase was primarily attributable to interest recorded in
connection with the convertible, promissory, and bridge financing notes in the
amount of $410,390 and to the amortization of deferred financing charges
related to the issuance of warrants in the amount of $658,187.
LIQUIDITY AND CAPITAL RESOURCES
Since inception the Company has funded its operations primarily through cash
generated from private placements of debt and equity securities and bank
financing. In February 1997, the Company commenced commercial operations and
began shipping one of its products, the PLAYNET WEB terminals. The Company is
expected to begin to generate cash from its operations as the distributors and
owners (i) complete the financing of the terminals through an arrangement with
independent third party financing sources or (ii) pay within the terms agreed
to by the Company and its customer.
The Company has two revolving credit facilities with The Merchants Bank of New
York in an aggregate amount of up to $500,000. As of July 31, 1997, the Company
had drawn $406,000 upon these, of which $250,000 is collateralized by a
certificate of deposit. Both of these facilities have been renewed for a one-
year term expiring on May 20, 1998 and bearing interest at rates of 7% and 1.5%
over the prime rate (10%) per annum. Both of these facilities were closed in
October, 1997. All interest and principal were paid off in full from deposits
held in The Merchants Bank of New York.
As of July 31, 1997, the Company had outstanding notes in the aggregate
principal amount of $2,106,500 which matured on May 30, 1997, were
subsequently extended to July 31, 1997. One promissory note, in the
principal amount of $260,000, requires quarterly payments of interest each in
the amount of $13,000 on April 1, July 1, October 1 and January 1; one
promissory note in the principal amount of $500,000, bears interest at a rate
of 10% per annum; one promissory note in the principal amount of $500,000,
bears interest at a rate of 12% per annum; five refundable options to
purchase Common Stock in the amount off $516,500 bearing interest at a rate
of 12% per annum. Under agreements of July 30, 1997 the two $500,000
promissory notes were converted into the Company's Common Stock at $1.275 per
share.
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payable on demand; and one promissory note, in the principal amount of
$330,000, bears interest at the prime rate. The Company has agreed, if a
holder of any of the forgoing notes so elects, to issue shares of common
stock in full payment (in lieu of cash) of the principal amount of each of
these notes, based on a price of $5.50 per share, representing an aggregate
of 383,000 shares. Under agreements of July 30, 1997 $1,000,000 in principal
of these notes were converted into the Company's Common Stock at a price of
$1.275 per share. The holders of two of the promissory notes that have been
paid in full earlier were granted options to purchase a total of 101,818
additional shares of Common Stock at an exercise price of $5.50 per share.
The holder of one promissory note was also granted an option to purchase
60,000 additional shares of Common Stock at an exercise price of $5.50 per
share.
In December 1996, the Company entered into a bridge financing arrangement
with Allen & Company Incorporated (Allen) pursuant to which Allen acted as
the Company's placement agent in connection with the sale of senior secured
notes and warrants for aggregate gross proceeds of up to $18,000,000, subject
to the achievement of certain prescribed operating targets. The Company had
received gross proceeds of $3,250,000 pursuant to the conditions of the
Bridge financing. These Bridge Notes bear interest at the rate of 12% per
annum and become due and payable on the earlier of (i) the closing of any
public offering of common stock with gross proceeds of at least $15,000,000
or any privately arranged financing transaction or series of transactions
raising aggregate proceeds of at least $15,000,000 or (ii) one year from the
date of each Bridge Note. As partial consideration for the issuance of these
notes, the ten holders also received warrants to purchase an aggregate of
650,000 shares of the Company's Common Stock at an exercise price of between
$5.00 and $7.50 per share and exercisable six months from the date of the
note through December 31, 1997. In the event that Allen is unsuccessful in
completing the bridge financing or if the Company does not achieve its
targets, the Company has received a commitment from a principal stockholder
to fund a minimum of an additional $4,900,000 of capital and/or convertible
debt during 1997, of which $1,500,000 has been received through July 31,
1997. The Company is currently in negotiations with Allen regarding a
restructuring of this arrangement.
On March 6, 1997, the Company entered into a short term revolving line of
credit for a total principal sum of $850,000 subject to a draw down and
repayment schedule bearing a repayment premium of 15%. As of July 31, 1997,
the Company had received $850,000 in draw down payments and made repayments in
the amount of $189,750, pursuant to the terms of the line of credit, of which
$165,000 was the principal. As consideration for this line of credit, the
holder received a security interest in certain purchase orders for the PLAYNET
WEB product and warrants to purchase 66,000 shares of the Company's common
stock at a price per share equal to the closing price of $8.625 of the
Company's common stock as quoted on the Nasdaq Small Cap Market. As
consideration for the extending the maturity date of the line of credit note to
July 31, 1997, the holder shall receive an additional 5% repayment premium and
additional warrants to purchase another 20,000 shares of the Company's Common
Stock at a price of $7.50 per share. The Company is currently in negotiations
with the lender regarding restructuring of this facility.
In April 1997, the Company also raised an additional $1,750,000 through the
issuance of short-term promissory notes which bear interest at the rate of 10%
per annum and were due and payable on June 30, 1997. Certain of the Company's
purchase orders for its PLAYNET WEB terminals collateralize these notes. As
partial consideration for the issuance of the notes, the holders also received
warrants to purchase an aggregate of 175,000 shares of the Company's Common
Stock. Warrants to purchase 125,000 shares have an exercise price per share of
$7.50 and warrants to purchase 50,000 shares have an exercise price of $7.00 per
share. Under agreements of July 30, 1997, these notes were converted into the
Common Stock of the Company at a price of $1.275 per share.
On April 29, 1997, the Company engaged LKB Financial LLC ("LKB") to provide
financial advisory services, including identifying and introducing the Company
to prospective investors and assisting in the negotiation of the terms of any
resulting financial transaction. Through LKB, the Company contacted and, on
May 20, 1997, closed a financing transaction with Southbrook International
Investments, Ltd. ("Southbrook") as described below (the "Southbrook
Transaction"). As compensation for its services in connection with the
Southbrook Transaction, the Company paid a
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$400,000 cash fee to LKB and issued to LKB warrants to purchase 200,000
shares of Common Stock at an exercise price of $6.88 per share (subject to
certain adjustments) at any time between May 20, 1998 and April 1, 2000.
In the Southbrook Transaction, the Company issued and sold to Southbrook 10%
Convertible Debentures (the "Debentures") in the aggregate principal amount of
$4,000,000 at a purchase price equal to 90% of par to yield gross proceeds of
$3,600,000. Of such amount, Southbrook retained $250,000, which will become
payable to the Company on the earliest to occur of the dates on which either
(i) the Form S-1 Registration Statement, originally filed on October 16, 1996,
becomes effective; (ii) a certain stockholder of the Company delivers a lock-up
agreement to Southbrook; or (iii) Southbrook no longer holds any of the
Debentures. Interest on the Debentures accrues daily at the rate of 10% per
annum on the principal amount thereof and is payable quarterly, or at the
Company's option, subject to certain conditions, in shares of its Common Stock.
The Debentures mature on May 20, 1998, subject to prior conversion or
repayment. The Company may, at its option, (a) prior to September 17, 1997,
repay all, but not less than all, of the outstanding Debentures at a price
equal to the aggregate principal amount thereof, together with all interest
accrued but unpaid thereon, and an amount equal to the product of $6,666.66 and
the number of days elapsed after June 20, 1997 until the date of repayment, and
(b) at any time on or after May 21, 1997, repay all or any portion of the
outstanding Debentures at a price equal to 110% of the aggregate principal
amount of the Debentures so repaid, together with all interest accrued but
unpaid thereon.
On or after September 17, 1997 and until maturity, the Debentures are
convertible at the option of the holders thereof into shares of Common Stock at
a conversion price equal to the lesser of (a) 95% of the average per Share
Market Value (as defined) for the ten (10) trading days preceding the
conversion date and (b) the average of the five lowest per Share Market Values
over the 90 trading days preceding the conversion date. The Company is
required to pay each holder of Debentures that does not so convert the
Debentures before November 16, 1997 on such date and at the end of each 30-day
period thereafter a bonus equal to .75% of the aggregate principal amount not
so converted. Such bonus shall be paid in cash, except that after May 20,
1998, the Company may, at its option, pay such bonus in shares of Common Stock.
If any Debentures remain outstanding on or after September 17, 1997 the Company
will issue to the holders thereof warrants to purchase 152,381 shares of Common
Stock at an exercise price of $5.25 per share.
The Company has also granted to Southbrook a right of first refusal until
November 17, 1997 to undertake certain financing of the Company, if any,
involving the sale of securities of the Company at a discount to market price
or fair market value.
The Company is currently in active negotiations with Southbrook for the
restructuring of this financing.
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In July, 1997, the Company received a total of $300,000 in investment capital
from an existing shareholder for the purchase of 600,000 shares of PlayNet
Common Stock at $0.50 per share.
Under agreements of July 30, 1997 $4,010,000 of Promissory Notes, all held by
existing shareholders, were converted into a total of an aggregate of
$3,145,000 shares of Common Stock at $1.275 per share. These Promissory Notes
included $1,500,000 of Purchase Order Financing Promissory Notes, $1,750,000
of Senior Secured Notes, and $760,000 of Unsecured Notes.
The price upon which any options or warrants to purchase additional shares of
the Company's Common Stock associated with these Promissory Notes was
uniformly reduced to $2.00 per share, and the exercise period of any such
options or warrants extended to December 31, 1998.
The Company, as of July 31, 1997, had a working capital deficiency of
$14,608,583. Furthermore, in its continuing transition from the development
stage to the commercial operating stage, the Company's losses are expected to
continue as a result of expenditures required to continue network and
software development efforts and re-commence marketing and sales activities.
The Company has begun a cost reduction program to offset some of the
necessary increases in expenses. The Company has decided to close the New
York City headquarters office. This decision was made primarily in response
to management's belief that it is in the best interest of the organization to
consolidate the functions of each of these facilities at one location.
However, the decision to close the New York City office also addresses the
issue of reducing the cost structure of the organization. It is estimated
that this decision could reduce the general and administrative costs of the
organization approximately $1.0 million annually. The Company's ability to
meet its obligations in the ordinary course of business is dependent upon its
ability to continue to obtain adequate financing.
At the recommendation of its investment bankers, the Company has withdrawn
the filing of its amended Form S-1 due to certain operational issues, as
described earlier. Consequently, the Company is actively pursuing alternative
financing options. The net proceeds from alternative financing options may
not be sufficient to meet its anticipated cash needs for working capital and
capital expenditures for the next twelve months. The delisting of the Company's
securities from the Nasdaq SmallCap Market has significantly increased the
difficulty for the Company in raising additional investment capital. Such
capital is absolutely necessary to meet core operational obligations and
complete the re-launch of the PlayNet Web networked entertainment system.
Despite material overhead reductions, including the closure of the New York
corporate headquarters and two subsequent rounds of employee layoffs, the
Company has continued to face very significant payables pressures. While the
Company has been encouraged by the willingness of certain creditors to consider
payment programs, payment moratoriums, and conversion of portions of debt into
equity, the Company urgently needs additional investment capital to recommence
revenue generating operations and restructure its liabilities. There can be no
assurance that additional capital will be available to the Company on either
an adequate or timely enough basis for the Company to complete its
reorganization, and such unavailability would result in a material adverse
effect on the Company's business, financial condition and results of operations.
22
<PAGE>
PART II OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
(a) On or about May 6, 1997 the Company and Orbach, Inc. reached a settlement
with respect to the legal proceedings commenced in October 1996 by Orbach, Inc.
against the Company alleging breach of a finder's fee agreement and unjust
enrichment. In full settlement thereof, the Company agreed to pay $42,500.00
upon execution of the settlement agreement and $10,000.00 per month beginning
June 16, 1997 and ending October 16, 1997, representing a total settlement
amount of $92,500.00.
(b) The Company and MicroLeague Multimedia, Inc. ("MMI") have begun the
arbitration proceedings related to the demand for arbitration filed by MMI on
or about December 24, 1996 alleging breach of a licensing/co-development
agreement between the parties. The Company and MMI have agreed to a
settlement in principle, and arbitration proceedings will be terminated as
soon as agreement documentation has been executed.
(c) The Company is currently a defendant in a number of collection actions,
the total awards being sought in these actions being $1,034,284.89. The
Company has retained expert Counsel in these matters, but recognizes that
certain payments and payment programs may have to be put into effect to
satisfy potential judgements against the Company.
ITEM 2 - REGULATORY MATTERS
The Company has failed to fund certain employee benefits, including medical
insurance and 401k contributions, in violation of the Federal ERISA laws. The
Company intends to promptly remedy all of these violations, including any and
all penalty payments, on receipt of the capital investment proceeds from
capital investment transactions under negotiation at this time. The Company
has also failed to fund certain payrolls, which is a violation of Federal
Department of Labor Laws.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly signed.
Dated: November 12, 1997
PLAYNET TECHNOLOGIES, INC.
(Formerly known as Aristo International Corporation)
By: \s\ Shmuel Cohen
---------------------------------
Shmuel Cohen
President
By: \s\ Stuart Aarons
---------------------------------
Stuart Aarons
Acting Vice President - Finance
24
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<CHANGES> 0
<NET-INCOME> (18,160,960)
<EPS-PRIMARY> (0.88)
<EPS-DILUTED> (0.96)
</TABLE>
