<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-KSB/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED OCTOBER 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________ TO
Commission File No. 0-25296
PLAYNET TECHNOLOGIES, INC.
(Name of small business issuer in its charter)
Delaware 11-2706304
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
152 West 57th Street, 29th Floor, New York, New York 10019
(Address of principal executive offices) (Zip Code)
(212) 586-2400
(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Securities Exchange Act: None
Securities registered under Section 12(g) of the Securities Exchange Act:
Common Stock, par value $0.001 per share
(Title of Class)
Check whether the issuer has (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or
for such period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No ___
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year were $200,775.
As of February 11, 1997, the aggregate market value of the issuer's Common
Stock (the only class of voting stock) held by non-affiliates was approximately
$73,717,609.
The number of shares of the issuer's Common Stock (the only class of common
equity) outstanding on February 11, 1997 was 14,966,755
Transitional Small Business Disclosure Format (check one): Yes __ No X
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ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto contained in Item 7, as
well as the other information contained elsewhere herein this Form 10-KSB/A and
in the Form 10-KSB as filed on February 13, 1997.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
A number of statements contained herein 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 Form
10-KSB as filed on February 13, 1997.
BUSINESS OVERVIEW
The Company designs, develops and intends to sell location-based, pay-per-play
electronic game and entertainment system terminals and music juke boxes which
are networked over the Internet. In 1997, the Company plans to introduce its
three primary products: the PlayNet Web(R) electronic game system, the PlayNet
Music(R) juke box and the PlayNet Team(R) electronic game system. All three
products run on Microsoft Windows NT platform networked by IBM Global Services.
These products are designed to accept both cash and credit cards, have touch
screens and user-friendly interfacing, and come pre-loaded with the Company's
proprietary software and other licensed content. The Company's products also
offer replacement content through downloading over the Internet. The terminals
are aimed at frequenters of bars and sports bars, hotel chains, restaurant
chains and eateries, coffee cafes, theme parks, studio stores, gyms, airport
lounges and new "cyber" establishments.
The Company's products are designed to utilize the Internet as a communications
network and an entertainment medium in a social setting, thus enhancing the
traditional video game products and juke box experience through innovations such
as linking multiple players in remote locations thereby allowing users to play
networked games and compete in local or national tournaments and contests
offering tournament prize play for sports, strategy and video game enthusiasts,
browse the World Wide Web, participate in chat room discussions and use credit
cards to purchase CDs and other merchandise.
The marketplace for Internet-enabled, location-based entertainment products is
new, subject to rapid technological change and, therefore, very competitive.
Many of the Company's current and potential competitors have longer operating
histories and possess substantially greater technical, marketing and financial
resources than it does. Such competition could have a material adverse impact on
the Company's results of operations or financial condition.
COMPANY BACKGROUND
On October 29, 1996, the stockholders at their Annual Meeting approved a
resolution to amend the Company's Amended Certificate of Incorporation to change
the name of the company from Aristo International Corporation to PlayNet
Technologies, Inc., which change was effected on November 6, 1996. On November
19, 1996, the Company's Common Stock trading symbol on the NASDAQ SmallCap
Market was changed to "PLNT."
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The Company was incorporated in the state of Delaware on July 12, 1984, under
the name "The Astro-Stream Corporation." On May 3, 1995, Aristo International
Corporation, a New York corporation (the "Merging Corporation"), was merged (the
"Merger") with and into the Company, with the Company being the surviving
corporation. Pursuant to the Merger, the name of the Company was changed to
"Aristo International Corporation" and the former stockholders of the Merging
Corporation became the owners of 90% of the issued and outstanding common stock
of the Company. Prior to the Merger, the Company had no operations. The "Merging
Corporation" was incorporated in 1990 to invest in licensable and patentable
consumer products for the mass market. Since late 1994 the Company has focused
on the digital entertainment business.
On July 31, 1995, the Company acquired 100% of the stock of Borta, Inc.
("Borta"), an entertainment software engineering and development company (the
"Acquisition"), whose existing technology included various computer software
products (e.g., games and tournament play software engines) which operated on
the Microsoft Windows NT platform. At time of the Acquisition, these products
had proven technological feasibility, were marketable in existing delivery
vehicles or formats and were essential elements of the products that were the
core of the Company's business plan at that time. Accordingly, the Company
allocated a portion of the purchase price to an intangible asset (capitalized
software costs) in accordance with Accounting Principle Board Opinion No. 16 and
Financial Accounting Standards No. 86 ("FAS"), Accounting for the Costs of
Computer Software to Be Sold, Leased, Otherwise Marketed, paragraph 7, based
upon the anticipated discounted after - tax cash flows that reflected
management's estimates of future gross revenue streams based upon the
assumptions and projections for then relevant PlayNet products. In accordance
with paragraph 8 of FAS 86, the Company established an amortization policy by
using the greater of the straight-line method over the remaining estimated
economic life of the product or the ratio that current gross revenues for a
product bear to the total of current and anticipated future gross revenues for
that product.
Following the Acquisition, the Company directed its efforts toward the marketing
and manufacturing of these products and, accordingly, began to amortize the
costs of capitalized software based upon its previously determined estimated
economic life. In the second quarter of fiscal year 1996, management determined
that the original business plan involving the capitalized software focused on a
market that had become saturated quicker than expected and, consequently, would
not provide the desired return on investment. However, since management had
continued to explore other business opportunities, it was able to quickly devise
a strategy that integrated the capitalized software into another delivery
vehicle which it had been developing.
The new business concept involved a shift of the Company's focus from the
development of a delivery vehicle using the acquired software engines for CD-Rom
products to be used on home-based personal computers to the development of a
delivery vehicle for products to be marketed in hospitality based venues using
the same acquired Microsoft NT based codes to be integrated with existing
software. Once proven in the out-of-home market place, it was the Company's
strategy to market CD-Rom versions of its software for personal computers. In
accordance with FAS 86, paragraph 5, the Company thereafter expensed all costs
related to the integration and refinement of the new vehicle through and
including market testing of its prototypes. Based upon this change in delivery
platform, management prepared new business plans and projections based upon
anticipated future gross revenues for its new product line. These projections,
based upon information available at that time, reflected revenue streams that
supported maintaining the estimates and valuation of the capitalized software
asset.
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During the fourth quarter of fiscal year 1996, certain significant events
occurred resulting in additional information being collected that was not
available to the Company's management in prior quarters. The Company recruited a
number of key management personnel with extensive industry background for
strategic finance, operations and marketing positions. Also, the Company
unveiled working prototypes of its three primary products at a significant
industry trade show, demonstrating the integration of the software and hardware
into a commercial product. Further, management met with significant distributors
from within the industry to plan launch activities. As a result,
management was able to assess the competition relative to its own products and
their useful lives, as well as reassess its future anticipated revenues (based
upon the preliminary orders received). The Company began to develop its first
long-range product development schedule covering enhancements, upgrades and new
products. Accordingly, the Company determined that its current products had a 12
to 18 month lead over competing companies within the industry and that by 1998
new software would have to be available to meet expected competition. Based upon
these events and conclusions, the Company determined that the estimated economic
life of the capitalized software asset should be reduced to reflect an estimated
life of three years from date of acquisition and, accordingly, recorded an
adjustment in the fourth quarter of fiscal year 1996 in the amount of
$1,925,417.
As of October 31, 1996 (the balance sheet date) the Company, as part of its
normal accounting procedures, performed a review of its unamortized capitalized
software cost (post adjustment) and compared these costs to projected future
revenue streams and financial results (which are consistent with financial
results provided to our investment bankers) for each of the products noted
above. This evaluation is based upon a review of the marketplace, competition
and comparable products, product lifecycles, discussions with potential
customers and distributors, sales projections based upon the presentation of the
products at various trade shows and industry events, as well as the associated
financial projections compiled from the above analysis. However, it is
reasonably possible that as operations fully commence the estimate of
anticipated future gross revenues, and the remaining estimated economic life of
the product or both will be significantly reduced in the near term.
Consequently, amortization of the capitalized software costs could be
accelerated in the near term, which would have a material adverse effect on the
Company's results of operations for the affected periods.
The Company's revenues historically have been comprised of software development
fees. Salaries of the software programmers, networking specialists, engineers
and graphic artists, as well as depreciation of the fixed assets used in the
development of hardware and software, have been included in research and
development. During the next twelve months, the Company expects to launch its
initial product line intended to consist of the three primary products discussed
above. To achieve its operational objectives the Company has entered into a one
year, annually renewable agreement with an unaffiliated vendor to manufacture
the PlayNet Web(R) units, production of which began in January 1997.
The Company plans to commence shipments of its PlayNet Web networked
entertainment terminals late in February 1997. The Company's distribution
strategies include the traditional location-based game distribution channels. In
addition, the Company is in negotiations with major fast food and hotel chains
to provide additional channels of distribution for its products.
As of October 31, 1996, the Company had available unused net operating
loss-carry forwards of approximately $22,000,000, which may provide future tax
benefits, expiring in various years from 2006 to 2011. The Company has fully
reserved for the potential future tax benefits that may result from the
utilization of these net operating loss carry-forwards.
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COMPARISON OF THE FISCAL YEAR ENDED OCTOBER 31, 1996 VS. OCTOBER 31, 1995
Consolidated revenues for the twelve months ended October 31, 1996 were
$200,775, an increase of approximately $43,000 as compared to the same period in
1995. Revenues from the development of software represented 96% and 94% of the
1996 and 1995 revenues, respectively. Royalties on the Company's consumer
products represented 4% of revenues in 1996 compared to 6% of revenues in 1995.
Selling, general and administrative expenses for the twelve months ended October
31, 1996 increased to $7,852,019 as compared to $3,678,823 for the twelve months
ended October 31, 1995. Of the total selling, general and administrative
expenses 54% or $2,001,000 for 1996 related to salaries and benefits as compared
to approximately $600,000 for the prior period. This increase was attributable
to an increase in personnel to 64 as of October 31, 1996 from 22 as of October
31, 1995, an increase of 42. The increase in headcount is primarily a result of
the development of the infrastructure necessary to permit the Company to achieve
its business objectives in product development and marketing.
Occupancy expense for the current period amounted to $404,762 as compared to
$251,303 for the same period in 1995. This increase is related to twelve months
of expense for the Borta facility as compared to one month for the same period
in 1995 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 5% and 7% for the twelve months period in
1996 and 1995, respectively.
Amortization and depreciation expenses totaled $49,502 and $37,762,
respectively, for the twelve months ended October 31, 1996 and 1995. The
increase of approximately $11,700 resulted from the capital expenditures in
fiscal year 1996 related to the acquisition of equipment and leasehold
improvements in the development of an infrastructure necessary achieve the
Company's business objectives.
Other selling, general and administrative expenses for the 1996 period of
approximately $5,100,000 include $808,000 for legal and auditing services and
$2,660,000 paid to consultants for services related to developing business
plans, market strategies and funding of the Company. The balance of
approximately $1,632,000 is primarily attributable to increased travel
expenditures of $595,000 and certain other expenses, such as stationary and
supplies, and telephone, related to the increased headcount and corporate
activity.
In 1996 the Company recorded amortization expense of $1,155,252 related to its
Capitalized Software asset and a write down charge of $1,925,417 in connection
with a change in accounting estimates. Also in 1996 the Company recorded a
charge of $71,306 in connection with the write off of the unamortized balance of
its Patents.
Research and development costs for the twelve months ended October 31, 1996
increased to $5,039,337 as compared to $314,320 for the comparable period in
1995, which was primarily attributable to expenses related to prototypes and
final test products and the purchase of certain licenses related to a
discontinued product development. For 1996 other elements of these costs
include: salaries and related expenses of $2,261,202 (45%); travel and related
expenditures totaled $156,078 or 3%; amortization expense totaling $172,464 (3%)
related to the goodwill realized from the Borta acquisition; and depreciation
and amortization of computer and related expenses amounting to approximately
$88,558 (2%), attributable to the design and development of hardware and
software systems to support the Company's products. Also included in research
and development costs is approximately $1,000,000 related to an abandoned
business venture.
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Interest expense for the twelve months ended October 31, 1996 was $244,793, an
increase of approximately $139,400 as compared to the same period in the prior
year. This increase was primarily attributable to interest paid in connection
with convertible notes.
COMPARISON OF FISCAL YEAR ENDED OCTOBER 31, 1995 VS. OCTOBER 31, 1994
Consolidated revenues for 1995 were $157,627, an increase of $141,622 as
compared to 1994. Revenues from the development of software represented 94% of
revenues in 1995. Royalties on the Company's consumer products represented 6% of
revenues in 1995 compared to 100% of revenues in 1994.
Selling, general and administrative expenses for the period ended October 31,
1995 increased to $3,678,823 from $2,141,400 for the period ended October 31,
1994. Approximately 13%, or $194,339, of the increase in selling, general and
administrative expense was due to an increase in travel and entertainment
expenses. This increase was the result of visits to potential digital
entertainment acquisition targets. An additional 43% of the increase was due to
professional and consulting fees. Accounting expenses increased $131,644,
primarily due to services relating to the Merger, including an audit for the
three fiscal years ended October 31, 1994. Consulting expenses increased
$365,505 primarily due to costs associated with designing and developing a
strategic plan for the digital entertainment market. Legal fees increased
$160,710 primarily due to services relating to the Merger as well as increased
legal services relating to transactions in the digital entertainment
marketplace. Selling, general and administrative expenses increased $99,325 and
deferred compensation expense increased $117,857 as a result of the Acquisition.
Salaries and benefits increased $219,238 as a result of hiring additional staff.
Research and development expenses increased to $603,133 for the year ended
October 31, 1995 from $47,205 for the year ended October 31, 1994. The increase
is attributable to the development of networked game technology and design of
multiplayer games.
Interest and other income (expense)--net increased to $7,872 from ($56,044) in
1994 due to the gain on the settlement of a lawsuit recorded in 1995, in the
amount of $76,466 offset by an increase in interest expense on convertible term
loans. The gain on the lawsuit represents the judgment by the Supreme Court of
the State of New York, County of New York on January 30, 1995 in favor of the
Company and further provides that the Company be paid interest from February 6,
1992. Additionally, interest accrued through the date of the judgment of $21,425
has been recorded.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a revolving credit facility with The Merchants Bank of New York
in an amount up to $500,000. The facility expires on May 20, 1997. As of October
31, 1996, $406,000 had been drawn upon, of which $250,000 is collateralized by a
certificate of deposit.
As of October 31, 1996, the Company had outstanding notes, issued between
December 29, 1995 and July 31, 1996, in the aggregate principal amount of
$1,590,000 of which $590,000 is due on February 28, 1997 and the balance is due
on March 31, 1997. One promissory note, in the principal amount of $260,000,
requires quarterly payments of interest each in the amount of $13,000 beginning
on April 1, 1996; two promissory notes, each in the principal amount of
$500,000, bear interest at a rate of 10% per annum and 12% per annum,
respectively; and the remaining promissory note, in the principal amount of
$330,000, bears interest at the prime rate. The holder of one promissory note is
also entitled to receive a 12.5% participation in certain license royalties
(but, to date, no amount has been paid or accrued with respect thereto), subject
to the Company's right to terminate such participation and, in lieu thereof,
issue warrants
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to purchase shares of Common Stock. 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). Three of such holders have given notice to the
Company of their intention to receive shares of Common Stock in payment of the
entire principal amount of the promissory note held by it, although no such
holder is legally obligated to do so by reason of such notice. The holders of
two of the promissory notes were also granted options to purchase a total of
232,717 additional shares of Common Stock at a price of $5.50. In addition, the
Company has borrowed $516,500 from certain lenders, each of whom has the right
to receive shares of Common Stock in payment of the principal amount of the loan
(based on a price of $6.50 per share or, as to $55,000 principal amount of one
note, $5.50 per share). Accordingly, the Company expects to issue 370,091 shares
of Common Stock with respect to such promissory notes and loans, although no
such holders or lenders is legally obligated to receive such shares.
Between August and October 1996, the Company sold in private placements
1,256,400 shares of Common Stock, of which 1,180,000 were sold at a price of
$5.00 per share and 76,400 were sold at a price of $5.50 per share, from which
the Company received aggregate net proceeds (after deduction of related selling
expenses, including agency commissions) of approximately $5,880,645.
Prospectively, as its primary means of financing capital needs, the Company
intends to complete its public offering of 2,000,000 shares of its Common Stock
which was initiated with the filing of a registration statement in October,
1996. For the interim period until such public offering can be completed,
subsequent to the end of its last fiscal year, the Company entered into a bridge
financing arrangement with Allen & Company Incorporated ("Allen") pursuant to
which Allen will act as the Company's placement agent in 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. Through
February 12, 1997, based on its significant progress with respect to those
operating targets to such date, the Company has received gross proceeds of
$2,500,000 and Allen is obligated to use its best efforts to obtain a third
party purchaser for an additional $750,000 in senior secured notes on or before
the end of February, 1997.
The Company believes that the net proceeds from the bridge financing and its
public offering, together with available funds and cash flows expected to be
generated by operations, will be sufficient to meet its anticipated cash needs
for working capital and capital expenditures for at least the next twelve
months. In the event the Company's plans change, its assumptions change or prove
to be inaccurate or if the proceeds of the bridge financing and the public
offering or cash flows prove to be insufficient to fund operations, the Company
may find it necessary or desirable to reallocate a portion of the proceeds
within the above described categories, seek additional financing or curtail its
activities. There can be no assurance that additional financing will be
available on terms favorable to the Company, or at all. If adequate funds are
not available or are not available on acceptable terms, the Company may not be
able to take advantage of unanticipated opportunities, develop new products or
otherwise respond to unanticipated competitive pressures. Such inability could
have a material effect on the Company's business, financial condition and
results of operations.
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ITEM 7 FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Accountants 8
Consolidated Balance Sheets at October 31, 1996 and 1995 9
Consolidated Statements of Operations for the fiscal years ended October 31,
1996, 1995 and 1994 and the cumulative
period from June 4, 1990 (inception) to October 31, 1996 10
Consolidated Statement of Stockholders' Equity for the fiscal years ended
October 31, 1992, 1993, 1994, 1995, 1996 and
the cumulative period from June 4, 1990 (inception) to October 31, 1996 11 - 13
Consolidated Statements of Cash Flows for the fiscal years ended October 31,
1996 and 1995 and the cumulative
period from June 4, 1990 (inception) to October 31, 1996 14 - 17
Notes to the Consolidated Financial Statements 18 - 38
</TABLE>
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of
PlayNet Technologies, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of PlayNet
Technologies, Inc. and Subsidiaries, formerly Aristo International Corporation
and Subsidiaries (a development stage enterprise) as of October 31, 1996 and
1995, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three fiscal years in the period ended
October 31, 1996 and the cumulative period from June 4, 1990 (inception) to
October 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of PlayNet
Technologies, Inc. and Subsidiaries as of October 31, 1996 and 1995, and the
consolidated results of their operations and their consolidated cash flows for
each of the three fiscal years in the period ended October 31, 1996 and the
cumulative period from June 4, 1990 (inception) to October 31, 1996, in
conformity with generally accepted accounting principles.
New York, New York
February 12, 1997
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PLAYNET TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY ARISTO INTERNATIONAL CORPORATION)
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
October 31, 1996 and 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,331,761 $ 540,297
Restricted cash 250,000 355,599
Subscriptions receivable
Marketable securities -- 1,500
Prepaid expenses and other current assets 15,200 236,319
------------ ------------
Total current assets 2,596,961 1,133,715
Equipment, net 695,784 252,456
Patents, net -- 77,034
Capitalized software, net 4,940,528 7,907,937
Goodwill, net 991,697 1,164,161
Restricted cash - noncurrent 89,039 86,831
Other assets 355,672 426,195
============ ============
Total assets $ 9,669,681 $ 11,048,329
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,439,666 $ 661,045
Notes payable - bank 406,000 406,000
Convertible term loans - stockholders 776,500 375,000
Payable to stockholder 270,000 500,000
Capital leases - current 121,166 25,313
------------ ------------
------------ ------------
Total current liabilities 4,013,332 1,967,358
Convertible term loans - stockholders 1,330,000 565,000
Capital leases - long term 151,693 59,209
Deferred rent 145,076 158,891
------------ ------------
Total liabilities 5,640,101 2,750,458
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock, $.001 par value; authorized
1,000,000 shares; issued and outstanding
none in 1996 and 33,350 in 1995 -- 33
Common stock, $.001 par value; authorized
39,000,000 shares; issued and outstanding
14,966,755 and 13,199,945, respectively 14,967 13,200
Additional paid in-capital 31,736,496 21,871,438
Deferred compensation expense -- (1,846,429)
Deficit accumulated during the development stage (27,721,883) (11,740,371)
------------ ------------
Total stockholders' equity 4,029,580 8,297,871
============ ============
Total liabilities and stockholders' equity $ 9,669,681 $ 11,048,329
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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PLAYNET TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY ARISTO INTERNATIONAL CORPORATION)
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Fiscal Years ended October 31, 1996, 1995 and 1994
and for the Cumulative Period from June 4, 1990 (inception)
to October 31, 1996
<TABLE>
<CAPTION>
Cumulative
Since
June 4, 1990
(inception) to
October 31, 1996
1996 1995 1994 (See Note 1(a))
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Royalty revenue $ 8,428 $ 9,327 $ 16,005 $ 8,428
Production revenue 192,347 148,300 -- 192,347
------------ ------------ ------------ ------------
Total revenue 200,775 157,627 16,005 200,775
Selling, general and administrative expenses (7,852,019) (3,678,823) (2,141,400) (7,852,019)
Research and development expenses (5,039,337) (314,320) (47,205) (5,039,337)
Interest expense (245,144) (101,237) (46,525) (245,144)
Amortization of capitalized software costs
(including 1996 write down) (3,080,669) (288,813) -- (3,080,669)
Interest and other income (expense) 50,101 109,109 (9,519) 50,101
------------ ------------ ------------ ------------
Net loss (15,966,293) (4,116,457) (2,228,644) (15,966,293)
Dividends on preferred stock (15,219) (4,585) -- (15,219)
------------ ------------ ------------ ------------
Net loss per common share $(15,981,512) $ (4,121,042) $ (2,228,644) $(15,981,512)
============ ============ ============ ============
Weighted average number of common
shares outstanding 13,517,920 10,388,926 9,244,593
============ ============ ============
Net loss per share $ (1.18) $ (0.40) $ (0.24)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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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 and 1996 and for
the period from June 4, 1990 (inception) to October 31, 1996
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK(1)
--------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------
<S> <C> <C> <C> <C>
Issuance of common stock for initial capitalization ($0.18 per share) 3,334,780 $ 3,335
Sale of common stock during November for cash ($0.12 per share) 1,764,099 1,764
Sale of common stock during October for cash ($1.29 per share) 155,067 155
Exchange of common stock during October for services at estimated value
($1.28 per share) 78,367 78
Net loss for the year ended October 31, 1991
--------------------------------------------
Balance, October 31, 1991 5,332,313 5,332
--------------------------------------------
Sale of common stock during the year for cash ($0.85 per share) 1,589,023 1,589
Sale of common stock during the year for cash ($1.17 per share) 235,102 235
Exchange of common stock during August for services at estimated value
($1.28 per share) 78,367 78
Net loss for the year ended October 31, 1992
--------------------------------------------
Balance, October 31, 1992 7,234,805 7,235
--------------------------------------------
Sale of common stock during the year for cash ($1.63 per share) 611,932 612
Sale of common stock during the year for cash ($1.28 per share) 195,085 195
Exchange of common stock during May for services at estimated value
($1.29 per share) 116,717 117
Exchange of common stock during October for services at estimated value
($1.33 per share) 15,006 15
Exchange of common stock during October for patent rights at estimated value
($1.28 per share) 39,184 39
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
--------------------------------------------
Sale of common stock during the year for cash ($1.46 per share) 1,030,447 1,030
Exchange of common stock during January for services at estimated value
($1.33 per share) 15,007 15
Exchange of common stock during January for services at estimated value
($1.46 per share) 34,181 34
Conversion of note payable and accrued interest into common stock
($1.53 per share) 171,741 172
Conversion of note payable into common stock ($1.26 per share) 159,236 159
Repayment of stock subscription receivable
Retirement of treasury stock during October (1,667,390) (1,667)
Net loss for the year ended October 31, 1994
--------------------------------------------
Balance, October 31, 1994 7,955,951 7,956
--------------------------------------------
Conversion of notes payable into common stock ($1.23 per share) 834,529 835
Sale of common stock during November for cash ($1.53 per share) 235,936 236
Sale of common stock during March for cash ($2.22 per share) 450,195 450
Exchange of common stock in March for graphic illustrations ($2.22 per share) 115,050 115
Issuance of common stock per anti-dilution provision 38,350 38
Sale of preferred stock in May for cash ($3.00 per share) 33,350 $ 33 - -
Equity acquired from the reverse acquisition with Astro-Stream 1,098,997 1,099
Issuance of common stock as a result of the acquisition of Borta, Inc.
($4.67 per share) 1,818,182 1,818
Grant of common stock ($5.50 per share) 357,143 357
Sale of common stock during August for cash ($4.50 per share) 66,666 67
Sale of common stock during August for cash ($5.50 per share) 93,500 94
<CAPTION>
DEFICIT
ADDITIONAL ACCUMULATED
PAID IN DURING DEFERRED
CAPITAL DEVELOPMENT COMPENSATION
STAGE EXPENSE
----------------------------------------------
<S> <C> <C> <C>
Issuance of common stock for initial capitalization ($0.18 per share) $ 596,665
Sale of common stock during November for cash ($0.12 per share) 218,526
Sale of common stock during October for cash ($1.29 per share) 199,845
Exchange of common stock during October for services at estimated value
($1.28 per share) 99,922
Net loss for the year ended October 31, 1991 $ (1,478,158)
---------------------------------------------
Balance, October 31, 1991 1,114,958 (1,478,158)
---------------------------------------------
Sale of common stock during the year for cash ($0.85 per share) 1,348,411
Sale of common stock during the year for cash ($1.17 per share) 274,765
Exchange of common stock during August for services at estimated value
($1.28 per share) 99,921
Net loss for the year ended October 31, 1992 (1,480,812)
---------------------------------------------
Balance, October 31, 1992 2,838,055 (2,958,970)
---------------------------------------------
Sale of common stock during the year for cash ($1.63 per share) 999,388
Sale of common stock during the year for cash ($1.28 per share) 249,805
Exchange of common stock during May for services at estimated value
($1.29 per share) 149,883
Exchange of common stock during October for services at estimated value
($1.33 per share) 19,985
Exchange of common stock during October for patent rights at estimated value
($1.28 per share) 49,961
Purchase of treasury stock for cash ($0.04 per share)
Net loss for the year ended October 31, 1993 (1,636,310)
---------------------------------------------
Balance, October 31, 1993 4,307,077 (4,595,280)
---------------------------------------------
Sale of common stock during the year for cash ($1.46 per share) 1,498,970
Exchange of common stock during January for services at estimated value
($1.33 per share) 19,985
Exchange of common stock during January for services at estimated value
($1.46 per share) 49,966
Conversion of note payable and accrued interest into common stock
($1.53 per share) 261,892
Conversion of note payable into common stock ($1.26 per share) 199,841
Repayment of stock subscription receivable
Retirement of treasury stock during October (58,333)
Net loss for the year ended October 31, 1994 (2,228,644)
---------------------------------------------
Balance, October 31, 1994 6,279,398 (6,823,924)
---------------------------------------------
Conversion of notes payable into common stock ($1.23 per share) 1,024,165
Sale of common stock during November for cash ($1.53 per share) 359,764
Sale of common stock during March for cash ($2.22 per share) 999,550
Exchange of common stock in March for graphic illustrations ($2.22 per share) 255,440
Issuance of common stock per anti-dilution provision (38)
Sale of preferred stock in May for cash ($3.00 per share) 100,017
Equity acquired from the reverse acquisition with Astro-Stream 806,205 (795,405)
Issuance of common stock as a result of the acquisition of Borta, Inc.
($4.67 per share) 8,498,182
Grant of common stock ($5.50 per share) 1,963,929 $(1,964,286)
Sale of common stock during August for cash ($4.50 per share) 299,933
Sale of common stock during August for cash ($5.50 per share) 514,156
<CAPTION>
STOCK
SUBSCRIPTION
RECEIVABLE
COMMON STOCK HELD IN TREASURY TOTAL
--------------------------------------------------------
SHARES AMOUNT
-------------------------
<S> <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)
--------------------------------------------------------
Balance, October 31, 1991 (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)
--------------------------------------------------------
Balance, October 31, 1992 (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)
--------------------------------------------------------
Balance, October 31, 1993 (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)
--------------------------------------------------------
Balance, October 31, 1994 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 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) --
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.
11
<PAGE> 13
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 and 1996 and for
the period from June 4, 1990 (inception) to October 31, 1996
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK(1)
-----------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------
<S> <C> <C> <C> <C>
Exchange of common stock in August for consulting services ($6.50 per share) 25,000 25
Exchange of common stock in August for consulting services ($5.75 per share) 3,687 4
Exchange of common stock in August for consulting services ($5.50 per share) 395 --
Sale of common stock during September for cash ($5.50 per share) 96,364 96
Sale of common stock during October for cash ($5.50 per share) 10,000 10
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
-----------------------------------------------
Sale of common stock during November for cash ($5.50 per share) 60,000 60
Sale of common stock during December for cash ($5.50 per share) 164,000 164
Conversion of notes payable into common stock in December ($3.00 per share) 66,667 67
Sale of preferred stock during January for cash ($5.50 per share) 40,000 40
Exchange of common stock in January for consulting services ($5.50 per share) 500 1
Sale of common stock during February for cash ($5.50 per share) 10,000 10
Sale of common stock during March for cash ($5.50 per share) 60,000 60
Sale of common stock during April for cash ($5.50 per share) 56,363 56
Reversal of prior year deferred compensation expense
Write-off of deferred compensation expense (357,143) (357)
Sale of common stock during May for cash ($5.50 per share) 59,362 59
Exchange of common stock in May for consulting services ($5.76 per share) 421 --
Exchange of common stock in May for consulting services ($4.82 per share) 1,100 1
Conversion of preferred stock into common stock in May (73,350) (73) 58,191 58
Sale of common stock during June for cash ($5.50 per share) 57,638 58
Exchange of common stock in June for consulting services ($5.50 per share) 1,000 1
Sale of common stock during July for cash ($5.50 per share) 152,000 152
Exchange of common stock in July for consulting services ($5.50 per share) 12,000 12
Exchange of common stock in August for product rights ($5.00 per share) 30,000 30
Sale of common stock in August for cash ($5.00 per share) 700,000 700
Sale of common stock in August for cash ($5.50 per share) 23,636 24
Sale of common stock in September for cash ($5.00 per share) 80,000 80
Sale of common stock in September for cash ($5.50 per share) 46,000 46
Exchange of common stock in September for consulting services
($5.50 per share) 15,625 16
Exchange of common stock in September for goods ($5.50 per share) 11,800 12
Grant of common stock as signing bonuses ($5.50 per share) 51,250 51
Sale of common stock in October for cash ($5.00 per share) 400,000 400
Sale of common stock in October for cash ($5.50 per share) 6,400 6
Issuance of warrants in exchange for consulting services ($8.25 per share)
Issuance of warrants in exchange for consulting services ($5.50 per share)
Dividend on preferred stock
Net loss for the fiscal year ended October 31, 1996
---------- -------- ------------ -------
Balance, October 31, 1996 -- $ -- 14,966,755 $14,967
========== ======== ============ =======
</TABLE>
<TABLE>
<CAPTION>
DEFICIT
ADDITIONAL ACCUMULATED
PAID IN DURING DEFERRED
CAPITAL DEVELOPMENT COMPENSATION
STAGE EXPENSE
-----------------------------------------
<S> <C> <C> <C>
Exchange of common stock in August for consulting services ($6.50 per share) 162,475
Exchange of common stock in August for consulting services ($5.75 per share) 21,196
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) 529,904
Sale of common stock during October for cash ($5.50 per share) 54,990
Amortization of deferred compensation expense 117,857
Dividend on preferred stock (4,585)
Net loss for the year ended October 31, 1995 (4,116,457)
-----------------------------------------
Balance, October 31, 1995 21,871,438 (11,740,371) (1,846,429)
-----------------------------------------
Sale of common stock during November for cash ($5.50 per share) 329,940
Sale of common stock during December for cash ($5.50 per share) 901,836
Conversion of notes payable into common stock in December ($3.00 per share) 199,933
Sale of preferred stock during January for cash ($5.50 per share) 219,960
Exchange of common stock in January for consulting services ($5.50 per share) 2,749
Sale of common stock during February for cash ($5.50 per share) 54,990
Sale of common stock during March for cash ($5.50 per share) 329,940
Sale of common stock during April for cash ($5.50 per share) 309,944
Reversal of prior year deferred compensation expense (117,857)
Write-off of deferred compensation expense (1,963,929) 1,964,286
Sale of common stock during May for cash ($5.50 per share) 326,432
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) 5,302
Conversion of preferred stock into common stock in May 15
Sale of common stock during June for cash ($5.50 per share) 316,951
Exchange of common stock in June for consulting services ($5.50 per share) 5,499
Sale of common stock during July for cash ($5.50 per share) 835,848
Exchange of common stock in July for consulting services ($5.50 per share) 65,988
Exchange of common stock in August for product rights ($5.00 per share) 149,970
Sale of common stock in August for cash ($5.00 per share) 3,254,300
Sale of common stock in August for cash ($5.50 per share) 129,976
Sale of common stock in September for cash ($5.00 per share) 371,920
Sale of common stock in September for cash ($5.50 per share) 252,954
Exchange of common stock in September for consulting services
($5.50 per share) 85,921
Exchange of common stock in September for goods ($5.50 per share) 99,988
Grant of common stock as signing bonuses ($5.50 per share) 281,824
Sale of common stock in October for cash ($5.00 per share) 1,853,600
Sale of common stock in October for cash ($5.50 per share) 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 (15,219)
Net loss for the fiscal year ended October 31, 1996 (15,966,292)
----------- ------------- -------------
Balance, October 31, 1996 $31,736,496 $(27,721,883) $ --
=========== ============= =============
</TABLE>
<TABLE>
<CAPTION>
STOCK
SUBSCRIPTION
RECEIVABLE
COMMON STOCK HELD IN TREASURY
----------------------------------------------------
SHARES AMOUNT
---------------------------------
<S> <C> <C> <C>
Exchange of common stock in August for consulting services ($6.50 per share)
Exchange of common stock in August for consulting services ($5.75 per share)
Exchange of common stock in August for consulting services ($5.50 per share)
Sale of common stock during September for cash ($5.50 per share)
Sale of common stock during October for cash ($5.50 per share)
Amortization of deferred compensation expense
Dividend on preferred stock
Net loss for the year ended October 31, 1995
----------------------------------------------------
Balance, October 31, 1995 -- -- --
----------------------------------------------------
Sale of common stock during November for cash ($5.50 per share)
Sale of common stock during December for cash ($5.50 per share)
Conversion of notes payable into common stock in December ($3.00 per share)
Sale of preferred stock during January for cash ($5.50 per share)
Exchange of common stock in January for consulting services ($5.50 per share)
Sale of common stock during February for cash ($5.50 per share)
Sale of common stock during March for cash ($5.50 per share)
Sale of common stock during April for cash ($5.50 per share)
Reversal of prior year deferred compensation expense
Write-off of deferred compensation expense
Sale of common stock during May for cash ($5.50 per share)
Exchange of common stock in May for consulting services ($5.76 per share)
Exchange of common stock in May for consulting services ($4.82 per share)
Conversion of preferred stock into common stock in May
Sale of common stock during June for cash ($5.50 per share)
Exchange of common stock in June for consulting services ($5.50 per share)
Sale of common stock during July for cash ($5.50 per share)
Exchange of common stock in July for consulting services ($5.50 per share)
Exchange of common stock in August for product rights ($5.00 per share)
Sale of common stock in August for cash ($5.00 per share)
Sale of common stock in August for cash ($5.50 per share)
Sale of common stock in September for cash ($5.00 per share)
Sale of common stock in September for cash ($5.50 per share)
Exchange of common stock in September for consulting services
($5.50 per share)
Exchange of common stock in September for goods ($5.50 per share)
Grant of common stock as signing bonuses ($5.50 per share)
Sale of common stock in October for cash ($5.00 per share)
Sale of common stock in October for cash ($5.50 per share)
Issuance of warrants in exchange for consulting services ($8.25 per share)
Issuance of warrants in exchange for consulting services ($5.50 per share)
Dividend on preferred stock
Net loss for the fiscal year ended October 31, 1996
-------------- ----------------- -----------------
Balance, October 31, 1996 -- $ -- $ --
============== ================= =================
</TABLE>
<TABLE>
<CAPTION>
TOTAL
----------------------
<S> <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
Dividend on preferred stock (4,585)
Net loss for the year ended October 31, 1995 (4,116,457)
----------------------
Balance, October 31, 1995 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)
Write-off of deferred compensation expense --
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)
Net loss for the fiscal year ended October 31, 1996 (15,966,292)
----------------------
Balance, October 31, 1996 $ 4,029,580
======================
</TABLE>
Note 1. All common shares information has been restated since inception to
reflect conversion of the outstanding shares of Play Net's (formerly Aristo's)
common stock into 90% of the common stock of Astro-Stream pursuant to the
Merger agreement.
The accompanying notes are an integral part of these consolidated financial
statements.
12
<PAGE> 14
PLAYNET TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY ARISTO INTERNATIONAL CORPORATION)
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For Fiscal Years ended October 31, 1996, 1995 and 1994 and for the
Cumulative period from June 4, 1990 (inception) to October 31, 1996
<TABLE>
<CAPTION>
Cumulative
Since
June 4, 1990
(inception) to
October 31, 1996
1996 1995 1994 (See Note 1(a))
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss during development stage $(15,966,293) $ (4,116,457) $ (2,228,644) $(26,906,674)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,583,633 363,960 21,407 2,006,378
Expenses paid by issuance of common stock 699,790 185,873 70,000 1,925,663
Deferred royalty income --
Deferred compensation expense (117,857) 117,857 -- --
Deferred royalty income -- -- (8,333) --
Deferred rent (13,815) (13,814) 29,600 145,076
Loss on disposal of fixed asset -- -- -- 19,200
Net realized loss on sale of marketable securities -- 20,753 31,092 51,845
Net unrealized gain on marketable securities -- (1,000) (6,713) (7,713)
Write down of capitalized software 1,925,417 -- -- 1,925,417
Charges related to issuance of warrants 1,405,590
Impairment of Patents 71,306 -- -- 71,306
Reserve for bad debt 132,538 -- -- 132,538
Changes in assets and liabilities:
Increase in subscriptions receivable --
Increase in prepaid expenses and other current assets 46,187 (159,573) (16,408) (134,099)
Increase in accounts payable and accrued expenses 1,785,927 232,427 (122,091) 2,302,881
------------ ------------ ------------ ------------
Net cash used in operating activities (8,447,577) (3,369,974) (2,230,090) (18,468,182)
------------ ------------ ------------ ------------
Cash flows from investing activities:
Investment in Borta, Inc., net of cash acquired -- (238,615) -- (238,615)
Expenditures for equipment, leasehold improvements,
patents and organization costs (492,831) (71,920) (41,203) (754,556)
Purchase of marketable securities -- (1,103,085) (414,516) (1,517,601)
Sales of marketable securities 1,500 1,147,832 324,137 1,473,469
Purchase of computer software -- (110,000) -- (110,000)
Increase (decrease) in other assets -- 80,602 (232,119) (170,639)
(Increase) decrease in restricted cash 103,391 (105,599) (339,039)
------------ ------------ ------------ ------------
Net cash used in investing activities (387,940) (400,785) (363,701) (1,656,981)
------------ ------------ ------------ ------------
Cash flows from financing activities:
Net proceeds (repayments) from notes payable - bank -- (46,143) (39,500) 359,857
Proceeds from notes payable - stockholders -- -- -- 793,500
Repayments of notes payable - stockholders (230,000) -- (160,000) (573,500)
Convertible term loans converted to equity --
Proceeds acquired in connection with the Astro-Stream merger -- 59,494 -- 59,494
Proceeds from issuance of preferred stock 220,000 100,050 -- 320,050
Proceeds from issuance of common stock 9,305,700 2,759,247 1,580,000 16,860,237
Proceeds from convertible term loans 1,796,500 940,000 1,025,000 3,761,500
Repayments of convertible term loans (450,000) -- -- (450,000)
Purchase of treasury stock -- -- -- (60,000)
Dividends on preferred stock (15,219) (4,585) -- (19,804)
------------ ------------ ------------ ------------
Net cash provided by financing activities 10,626,981 3,808,063 2,405,500 21,051,334
------------ ------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents 1,791,464 37,304 (188,291) 926,171
Cash and cash equivalents, beginning of period 540,297 502,993 691,284 --
============ ============ ============ ============
Cash and cash equivalents, end of period $ 2,331,761 $ 540,297 $ 502,993 $ 926,171
============ ============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 244,793 $ 101,237 $ 63,629 $ 416,542
============ ============ ============ ============
Taxes $ 33,215 $ 5,178 $ 6,031 $ 52,841
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
13
<PAGE> 15
PLAYNET TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY ARISTO INTERNATIONAL CORPORATION)
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
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:
<TABLE>
<S> <C>
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
</TABLE>
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 (see Notes 9 and
11).
14
<PAGE> 16
PLAYNET TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY ARISTO INTERNATIONAL CORPORATION)
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
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. (See Notes 9 and 11.)
In connection with warrants issued in 1996 in exchange for consulting services,
the Company recorded charges of $1,405,590, their fair value.
Capital lease obligations of $242,191, $86,992 and $-0- were incurred by the
Company and its subsidiaries in 1996, 1995 and 1994, respectively.
The accompanying notes are an integral part of these consolidated financial
statements.
15
<PAGE> 17
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND BUSINESS
(a) Organization and Business -
Pursuant to a resolution approved by the stockholders at its Annual Meeting held
on October 29, 1996, Aristo International Corporation ("Aristo" or the
"Company") amended its Certificate of Incorporation (i) to change the name of
the Company to PlayNet Technologies, Inc. ("PlayNet"), which was effective on
November 6, 1996, and (ii) to increase the number of shares of stock that the
Company is authorized to issue to 40,000,000, consisting of 1,000,000 shares of
Preferred Stock and 39,000,000 shares of Common Stock. Further, effective
January 22, 1997, the names of Aristo Games, Inc. and Borta, Inc., both wholly
owned subsidiaries of Aristo, were also changed to PlayNet Productions, Inc. and
PlayNet Studios, Inc., respectively.
Aristo International Corporation, incorporated in New York on June 4, 1990, was
formed to invest in licensable and patentable consumer products for the mass
market.
On May 3, 1995, the Astro-Stream Corporation ("Astro-Stream") acquired all of
the outstanding common stock of Aristo through the issuance of 9,889,477 shares
of Astro-Stream's common stock, par value $.001, constituting 90% of
Astro-Stream's issued and outstanding common stock immediately following the
merger of Aristo into Astro-Stream (the "Merger"). Prior to the Merger,
Astro-Stream was an inactive company engaged in seeking out a suitable business
for acquisition or merger. Astro-Stream, a Delaware corporation, was the
surviving corporation in the Merger. Pursuant to the Merger agreement,
Astro-Stream changed its name to Aristo International Corporation. The New York
corporation was dissolved.
For accounting purposes, the Merger was treated as a recapitalization of Aristo
with Aristo as the acquirer (reverse acquisition). All common stock of Aristo
was retroactively restated to reflect the equivalent number of Astro-Stream
shares that were deemed to be issued by Aristo in the transaction. The
cumulative loss of Astro-Stream at the time of the merger amounted to $795,405
and is included in the deficit accumulated during the development stage of the
Company.
Pursuant to the Merger, the Company committed to obtain NASDAQ SmallCap listing
for the surviving corporation. The SmallCap listing was obtained on September
29, 1995. (See Note 6(c).)
These consolidated financial statements include the accounts of PlayNet and its
wholly-owned subsidiaries (collectively, the "Company"). As a development stage
enterprise, the Company has devoted all of its efforts through October 31, 1996
to research and development, raising capital, acquiring equipment, financial
planning, opening new markets and finding strategic partners. Since late 1994
the Company has focused on the design and development of location-based,
pay-per-play electronic entertainment products and music juke boxes which are
networked through the Internet. In September 1996, the Company introduced
prototypes of its products at a significant industry trade exposition, and since
that time has moved towards a commercial launch.
(b) Acquisition -
On July 31, 1995, the Company, through its newly formed wholly owned subsidiary
BAIC Acquisition Corp., purchased all of the outstanding stock of Borta, Inc.
("Borta"), an entertainment software engineering and development company, for
consideration aggregating $9,250,000 (the
16
<PAGE> 18
"Acquisition"). The consideration consisted of $8,500,000 (1,818,182 shares) of
newly issued common stock and $750,000 in cash. Of the $750,000 in cash
payments, $480,000 had been paid as of October 31, 1996 and the remaining
$270,000 was paid on December 31, 1996 (see Note 9(a)).
The Acquisition was accounted for using the purchase method of accounting and,
accordingly, the results of operations of Borta are included in these financial
statements from the date of the Acquisition. The Acquisition cost has been
allocated to the assets acquired and liabilities assumed, based upon their fair
value at the acquisition date, including $87,285 to net current liabilities,
$43,258 to fixed assets, $8,086,750 to capitalized software and $1,207,277 to
excess of cost over net assets acquired (goodwill). The value assigned to the
capitalized software was determined based upon anticipated discounted after-tax
cash flows for the period estimated to encompass the remaining life of the
technology existing at the Acquisition date. (See Notes 2(e) and 3.)
Following are the pro forma results of operations for the year ended October 31,
1995, as if the Acquisition had occurred as of the beginning of the fiscal year.
The unaudited pro forma results of operations do not purport to represent what
the Company's results of operations would have actually been if the Acquisition
had, in fact, occurred on that date. The pro forma consolidated results of
operations for the twelve months ended October 31, 1994 are not material to the
financial statements and are, therefore, not presented.
<TABLE>
<CAPTION>
Year ended
October 31, 1995
-----------
<S> <C>
Revenue ............................................. $ 352,391
Operating expenses .................................. 4,605,914
-----------
Net loss ............................................ $(4,253,523)
===========
Loss per share ...................................... $ (0.41)
===========
</TABLE>
(c) Financing during the development stage-
Since its inception, the Company has been engaged primarily in product
development. As the Company's networked entertainment products are still being
developed and have not yet been marketed by the Company, no significant revenues
have been generated by the Company. The Company has incurred net losses since
inception and, as of October 31, 1996, the Company had an accumulated deficit of
$27,721,883 and a working capital deficit of $1,416,371.
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 and/or to
complete and distribute new commercially successful entertainment software
products. The Company intends to continue to fund its operations until the
commercial launch of its products through equity and/or debt financing. From
inception through October 31, 1995, the Company raised approximately $9,559,600
through the private placement of stock and convertible notes. From November 1,
1995 through October 31, 1996, the Company financed its operations through the
private sale of stock and convertible notes for cash aggregating approximately
$10,872,200 and in exchange for products and service totaling approximately
$699,790.
Prospectively, as its primary means of financing capital needs, the Company
intends to complete its public offering of 2,000,000 shares of its Common Stock
which was initiated with the filing of a registration statement in October 1996.
For the interim period until such public offering can be
17
<PAGE> 19
completed, subsequent to the end of its last fiscal year, the Company entered
into a bridge financing arrangement with Allen & Company Incorporated ("Allen")
pursuant to which Allen will act as the Company's placement agent in 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.
Through February 12, 1997, the Company has received gross proceeds of $2,500,000
and Allen is obligated to use its best efforts to obtain a third party purchaser
for an additional $750,000 of senior secured notes on or before the end of
February 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 $5,750,000 of capital and/or convertible term loans during 1997.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation-
The consolidated financial statements include the financial statements of
PlayNet and its wholly owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
(b) Cash and Cash Equivalents -
Cash and cash equivalents includes cash on hand, demand deposits and short-term
investments with original maturities of three months or less.
(c) Concentration of Credit Risk-
The Company maintains its cash with high credit quality financial institutions,
the amount of which may exceed federally insured limits. The amount on deposit
in any one institution that exceeds federally insured limits is subject to
credit risk. For the fiscal year ended October 31, 1996, the Company had
$2,677,564, with a financial institution that was subject to credit risk beyond
the federally insured amount. In fiscal year 1995, the Company did not maintain
balances that were in excess of the federally insured limits. Management does
not anticipate any losses in connection with its cash deposits.
(d) Equipment and Depreciation and Amortization -
Fixed assets are stated at cost net of accumulated depreciation and
amortization. Depreciation is computed on the straight line method over the
estimated useful lives of the depreciable assets. Estimated useful lives range
from three to seven years. Assets acquired under capital leases are amortized
using the straight line method over the shorter of the term of the lease or the
estimated useful life. The cost of leasehold improvements considered significant
are capitalized and then amortized using the straight line method over the
shorter of the estimated useful life of the improvement or the remaining term of
the lease. Maintenance and repairs are charged to expense as incurred. (See Note
5.)
(e) Software Development Costs-
The Company accounts for software development costs in accordance with Statement
of Financial Accounting Standards No. 86, "Accounting for Costs of Computer
Software to be Sold, Leased, or Marketed" ("FAS 86"). FAS 86 requires that
certain software product development costs ("Capitalized Costs"), incurred after
technological feasibility has been established, be capitalized and amortized
over the economic life of the software product, commencing upon the general
release of the software product to the Company's customers. Software development
costs incurred prior to reaching technological feasibility are expensed as
incurred. The Company recorded capitalized
18
<PAGE> 20
software in connection with its acquisition of Borta, Inc. on July 31, 1995 and
established an amortization policy by using the greater of (a) the straight line
method over the remaining estimated economic life of the product or (b) the
ratio that current gross revenues for a product bear to the total of current and
anticipated future gross revenues for that product. Management evaluates
quarterly the recoverability of these assets based on projected future revenue
streams and financial results for each of the products. During the first three
quarters of fiscal year 1996, the Company's management was precluded from
completing an in-depth assessment of the recoverability of the asset due to the
circumstances surrounding the marketing and manufacturing of the company's
products that led to a change in the Company's primary product line. In
connection therewith, in the fourth quarter of 1996 due to certain significant
events the Company was able to collect additional information that was not
available to the Company's management in prior quarters. These events included
the recruitment of a number of key management personnel with extensive industry
background, the presentation of its products at a significant industry trade
show, discussions with potential customers and distributors and revised
financial projections. As a result, the Company determined that the estimated
economic life of the capitalized software asset should be reduced and a charge
in the amount of $1,925,417 was recorded to write down the unamortized balance
to reflect the change of estimate. Accumulated amortization amounted to
$1,444,065 and $288,813 for the years ended October 31, 1996 and 1995,
respectively. (See Note 3.)
It is reasonably possible that the estimate of anticipated future gross
revenues, and the remaining estimated economic life of the product or both will
be reduced significantly in the near term. Consequently, amortization of the
capitalized software costs may be accelerated materially in the near term.
(f) Research and Development Costs-
Research and development costs are charged to operations when incurred and
amounted to $5,039,337, $314,320 and $47,205 for fiscal years 1996, 1995 and
1994, respectively.
(g) Goodwill-
Goodwill is the excess of the cost of net assets acquired in business
combinations over their fair market value. The Company evaluates the
recoverability of goodwill at least annually to determine whether later events
or circumstances have resulted in an impairment of the asset. In completing this
evaluation, the Company compares its best estimate of future undiscounted cash
flows with the carrying value of goodwill. The Company recorded goodwill in
connection with its acquisition of Borta, Inc. on July 31, 1995 (see Note 1(b))
and estimated a useful life of seven years. Accumulated amortization at October
31, 1996 and 1995 was $215,580 and $43,116, respectively.
(h) Fair Value of Financial Instruments-
The fair value of all financial instruments approximates their carrying values
based on the interest rates for similar instruments.
(i) Royalty Income-
Royalty income is accrued on the basis of reported transactions of licensees or
the minimum payment requirements pursuant to the license agreements.
(j) Risks and Uncertainties-
In the transition from development stage to the manufacturing stage, the Company
may encounter unforeseen difficulties, some of which may be beyond the Company's
ability to control, related to
19
<PAGE> 21
marketing, product development, manufacturing, regulation and proprietary
technology (including Internet and network services). A significant delay in the
Company's ability to manufacture and/or market its network entertainment
products could have a material adverse effect on the Company's business,
operating results and financial condition in the near term.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect amounts reported in the consolidated financial statements and related
notes to the financial statements. Changes in such estimates may affect amounts
reported in future periods. The most significant estimates and assumptions are
related to the recoverability of software costs, recoverability of goodwill and
income taxes. Actual results could differ from those estimates.
(k) Income Taxes-
Deferred tax liabilities and assets are determined based on the difference
between the financial statement and tax bases of assets and liabilities ("tax
differences") using enacted tax rates in effect for the year in which the
differences are expected to reverse. (See Note 18.)
(l) Reclassifications-
Certain reclassifications were made to prior period amounts to conform to
current period presentation.
(m) Impairment of Long-Lived Assets-
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 121, "Accounting for Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of" ("FAS 121"). FAS 121 requires that
long-lived assets and certain identifiable intangibles held and used by a
company be reviewed for possible impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. FAS 121 also requires that assets and certain identifiable
intangibles held for sale, other than those related to discontinued operations,
be reported at the lower of the carrying amount or fair value less cost to sell.
The Company believes that the adoption of FAS 121 in fiscal 1997 will not have a
material impact on the Company's results of operations or financial position.
(n) Impact of Future Adoption of Recently Issued Accounting Standards-
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS
123"). This new accounting standard requires transactions in which goods or
services are acquired from non-employees in exchange for stock options or other
equity instruments to be accounted for based on the fair value of the
consideration received or the fair value of the equity instruments issued, as
calculated using certain option-pricing models, whichever is more reliably
measured. It encourages, but does not require, companies to recognize
compensation expense for grants of stock, stock options, and other equity
instruments to employees also based on a fair-value method of accounting using
option-pricing models. Companies that do not adopt the new expense recognition
rules will be required to provide pro forma disclosures of the compensation
expense as determined under the provisions of FAS 123, if material. The Company
will be required to adopt the provisions of FAS 123 effective at the beginning
of fiscal year 1997. Management has not fully evaluated the impact the adoption
of FAS 123 will have on its financial position or results of operations at that
time.
20
<PAGE> 22
NOTE 3. CAPITALIZED SOFTWARE
On July 31, 1995, the Company acquired 100% of the stock of Borta, Inc.
("Borta"), an entertainment software engineering and development company (the
"Acquisition"), whose existing technology included various computer software
products (e.g., games and tournament play software engines) which operated on
the Microsoft Windows NT platform. At time of the Acquisition, these products
had proven technological feasibility, were marketable in existing delivery
vehicles or formats and were essential elements of the products that were the
core of the Company's business plan at that time. Following the Acquisition,
the Company directed its efforts toward the marketing and manufacturing of
these products and, accordingly, began to amortize the costs of capitalized
software based upon its then estimated economic life. In the second quarter of
fiscal year 1996, management determined that the original business plan
involving the capitalized software focused on a market that had become
saturated quicker than expected and, consequently, would not provide the
desired return on investment. However, since management had continued to
explore other business opportunities, it was able to devise a strategy to
integrate the capitalized software into another delivery vehicle which it had
been developing. The new business concept involved a change in the Company's
delivery vehicle. In accordance with FAS 86, paragraph 5, the Company
thereafter expensed all costs related to the integration and refinement of the
new vehicle through and including market testing of its prototypes. Based upon
this change in delivery platform and the information that was available at that
time, management prepared new business plans and projections based upon
anticipated future gross revenues for its new product line. These projections
reflected revenue streams that supported maintaining the estimates and
valuation of the capitalized software asset. At that time management was
precluded from performing further assessments of the recoverability of the
asset.
In conjunction with certain developments during the fourth quarter of fiscal
year 1996, which included the recruitment of a number of key members of
management with extensive industry background and the preparation for the launch
of its products, management reviewed and revised its projected future revenues
streams and financial results for each of its core products. This evaluation
further included a review of the marketplace, competition and comparable
products, product lifecycles, and discussions with potential customers and
distributors, as well as sales projections based upon the presentation of the
products at various trade shows and industry events. As a result, the Company
adjusted its assumptions regarding the recoverability of its capitalized
software costs at October 31, 1996, and reduced the estimate of the asset's
remaining useful economic life from seven years to three years. In connection
therewith, the Company recorded a charge of $1,925,417 to the value of its
Capitalized Software Costs asset.
NOTE 4. MARKETABLE SECURITIES
The Company considers its marketable securities to be "available for sale" as
defined by Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". Accordingly, unrealized
gains and losses are reported net of tax in a separate component of
stockholders' equity until such gains or losses are realized. The cost of
securities held at October 31, 1996 and 1995 approximated fair value. For the
years ended October 31, 1996, 1995 and 1994, respectively, net realized losses
were $38; $20,753; and $31,092.
21
<PAGE> 23
NOTE 5. EQUIPMENT
As of October 31, 1996 and 1995, equipment consisted of:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Furniture and fixtures ............................. $ 43,015 $ 33,874
Office equipment and computers ..................... 594,337 172,421
Leasehold improvements ............................. 24,791 22,632
Equipment under capital lease, principally
consisting of:
Furniture ...................................... 49,014 49,014
Office equipment and computers ................. 180,422 37,978
--------- ---------
891,579 315,919
Less: Accumulated depreciation and amortization ... (195,795) (63,463)
--------- ---------
Property and Equipment - Net ....................... $ 695,784 $ 252,456
========= =========
</TABLE>
Depreciation expense for the years ended October 31, 1996, 1995 and 1994 was
$86,246, $29,146, and $12,713, respectively. Amortization expense related to
assets acquired through capital lease transactions totaled $46,086, $2,888, $-0-
for the years ended October 31, 1996, 1995 and 1994, respectively.
NOTE 6. RESTRICTED CASH
(a) Current -
A certificate of deposit in the amount of $250,000 collateralizes a line of
credit expiring on May 20, 1997 with a commercial bank. (See Note 10(a).)
(b) Non-current-
In lieu of a cash security deposit for the leased office space in New York, a
certificate of deposit in the amount of $86,830 with a commercial bank
collateralizes a letter of credit payable to the owner of the facility. This
certificate of deposit is classified as non-current since its term is the same
as the lease for the office space, which expires on March 31, 2002. The
additional balance of $2,209 represents interest earned on the account. (See
Note 8(b).)
(c) Disposition of Certain Restricted Cash-
Pursuant to the Merger, the Company committed to obtain NASDAQ SmallCap Listing
for the surviving corporation. To secure that commitment, the Company deposited
$100,000 in an escrow account which was to be distributed to former Astro-Stream
stockholders if the listing was not obtained or released to the Company upon
achieving the listing. Both parties contested as to whether the performance by
the Company was timely and whether there was failure on the part of the former
Astro-Stream stockholders in the effort to obtain the listing. In connection
therewith, restricted cash in the amount of $100,000 was held in escrow at
October 31, 1995. In August 1996 the parties entered into a Stipulation of
Discontinuance pursuant to which the Company waived its rights to receive any of
the escrow funds. A dividend of $.0932 was paid to stockholders of record on May
5, 1995, on which date a total of 1,072,958 shares were outstanding.
Accordingly, the Company recorded a charge of $100,000 in the 1996 fiscal year.
22
<PAGE> 24
NOTE 7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
For the fiscal years ended October 31, 1996 and 1995 accounts payable and
accrued expenses consisted of:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Accounts payable ................... $2,037,075 $ 649,045
Accrued payroll .................... 74,852 --
Accrued expenses ................... 221,782 --
Interest payable ................... 65,957 12,000
Deferred revenue ................... 40,000 --
---------- ----------
$2,439,666 $ 661,045
========== ==========
</TABLE>
NOTE 8. LEASE OBLIGATIONS
(a) Capital Leases -
The Company has acquired computer equipment, office equipment and furniture
under various capital lease agreements expiring at dates through 2000. The
assets and liabilities under capital leases are recorded at the lower of the
present value of the minimum lease payments or the fair value of the asset. The
assets are amortized over the lower of their related lease terms or their
estimated productive lives (see Notes 2(d) and 5). The following is a schedule
of the minimum future lease payments related to the various capital leases as of
October 31, 1996 for each of the next five years and in the aggregate.
<TABLE>
<S> <C>
Fiscal year ending October 31,
1997 $ 160,347
1998 127,370
1999 52,687
2000 461
2001 --
---------
Total minimum lease payments 340,865
Less: amount representing interest (68,006)
---------
Present value of net minimum lease payments 272,859
Less: Capital Lease Obligations - current portion (121,166)
---------
Capital Lease Obligations - net of current portion $ 151,693
=========
</TABLE>
(b) Operating Leases -
The Company leases facilities under operating leases expiring in various years
through 2002. The Company leases 4,683 square feet of office space for its
corporate headquarters in New York under a lease agreement with an unaffiliated
third party expiring March 31, 2002. The term of the lease is for ten years and
provides for scheduled increases in base rent and escalations based on increases
in direct operating expenses and real estate taxes. The total amount of the base
rent over the ten year term of the lease aggregates $1,945,791. This amount is
being charged to expense using the straight-line method over the term of the
lease. Additionally, the Company has recorded a deferred credit to reflect the
excess of accrued rent expense over total cash payments since inception of the
lease. In addition, the Company has occupied additional 3,600 square feet of
23
<PAGE> 25
office space at its New York office under a sublet arrangement that expires
October 31, 1997. The additional rent expense for this space amounts to $12,525
per month.
Commencing September 1, 1995 in connection with the Borta acquisition, the
Company entered into a lease agreement, expiring August 31, 1998 for a facility
in Virginia.
Minimum future rental payments under non-cancelable operating leases having
remaining terms in excess of 1 year as of October 31, 1996 for each of the next
five years and in the aggregate are:
<TABLE>
<S> <C>
Fiscal year ending October 31,
1997 $ 319,437
1998 310,283
1999 222,443
2000 222,443
2001 222,443
Subsequent to 2001 92,685
----------
Total minimum future rental payments $1,389,734
==========
</TABLE>
Occupancy expense for the fiscal years ended October 31, 1996, 1995 and 1994 and
the cumulative period from June 4, 1990 (inception) to October 31, 1996 was
$404,762, $213,638, $198,450, and $1,458,733, respectively.
NOTE 9. COMMITMENTS
(a) Employment Agreements -
On May 16, 1996, the Company and Borta's president and Borta's chief operating
officer ("COO") executed an agreement which provided for the resignation of both
Borta's president and the COO as officers and directors of Borta, Inc. and the
termination of their employment agreements (which were to expire on July 31,
1998). In connection therewith, Borta's president and COO surrendered all
options to purchase common stock of the Company previously granted to them under
those agreements. Further, Borta's president surrendered 357,143 of restricted
shares of common stock previously granted, together with any options, incentive
payments or rights related thereto. In connection with the severance benefits
provided for in the May 16, 1996 agreement, the Company agreed to pay Borta's
president and the COO $180,000 in additional compensation through January 15,
1997. The Company accrued this amount in the second quarter of the 1996 fiscal
year. At October 31, 1996, the remaining balance was $58,258, which has been
paid through January 15, 1997.
(b) Amendment to Employment Agreement -
On September 18, 1996, the Company and a key employee agreed to amend his
employment agreement as follows. The term of the agreement was extended from
June 30, 1997 to October 31, 1999. Additionally, the Company issued 50,000
shares of its restricted common stock with a fair market value of $5.50 per
share as a signing bonus and recorded a compensation expense of $275,000,
related thereto. The amendment further provided for the granting of the
1,000,000 stock options under the 1995 Stock Option Plan to this employee
vesting at the rate of 100,000 options per year at the end of each fiscal year
beginning October 31, 1997. The vesting schedule provides for acceleration upon
attaining certain gross revenue targets.
24
<PAGE> 26
NOTE 10. NOTES AND LOANS PAYABLE
(a) Line of Credit -
The Company has borrowed $406,000 under two promissory notes with a commercial
bank both of which are due on May 20, 1997. One note in the amount of $250,000
is collateralized by a certificate of deposit, which bears interest at the rate
of 6.6% per annum. The second note in the amount of $156,000 bears interest at
the rate of 1.5% in excess of the prime commercial rate of the bank per annum
(9.75% and 8.75% at October 31, 1996 and 1995, respectively).
(b) Convertible Term Loans -
On December 29, 1994, the Company issued a convertible promissory note for cash,
to a stockholder for $500,000, which bears interest at 10% per annum, payable on
the last day of each month. The note is payable in one installment on March 31,
1997. The note holder shall have the option to convert the note into 90,909
shares of restricted common stock of the Company at an exercise price of $5.50
per share, in lieu of payment of the principal. On March 6, 1996 the holder of
the note indicated its intent to convert the note into 90,909 shares of the
Company's common stock. Accordingly, the Company has recorded this note as a
non-current obligation on its balance sheet.
On March 29, 1995, the Company issued a convertible promissory note for cash,
due on April 30, 1996 to a stockholder for $200,000 collateralized by certain
patents, bearing interest at 10% per annum payable quarterly. On December 29,
1995, the note holder exercised its right to convert the note into 66,667 shares
of the Company's restricted common stock in lieu of payment of the note's
principal.
On July 31, 1995, the Company issued a $240,000 convertible note ("Original
Note") maturing on December 31, 1995, with interest of $20,000 also payable at
maturity. On December 29, 1995, the Company issued a new note ("New Note") in
the amount of $260,000 (principal and interest of Original Note) that replaced
and superseded the Original Note. Under the terms of the New Note, the principle
of $260,000 is due on February 28, 1997; and interest of $13,000 is payable
quarterly.
On February 12, 1996, the Company executed a $500,000 convertible promissory
note, subsequently amended, bearing interest at 12% per annum, payable at
maturity. The holder of the note has the right and option, until the maturity
date, to convert the note into 90,909 shares of the Company's common stock. The
holder also has a continuing contractual right to receive 12.5% of the earnings
before interest and taxes from the licensing of music and video CD's. As of
October 31, 1996, there were no amounts accrued with respect to this contractual
right as the Company does not currently have nor anticipates having any projects
related to these licenses. The note has been extended to mature on March 31,
1997. On June 12, 1996, the holder of the note indicated its intent to convert
the note into 90,909 shares of common stock. Accordingly, the Company has
recorded this note as a non-current obligation on its balance sheet.
On April 12, 1996, the Company executed a $450,000 promissory note, as amended,
bearing interest at 12% per annum, payable on August 15, 1996. The holder of the
note had the right to convert the note into 81,818 shares of restricted common
stock at any time after the date of the note and prior to December 31, 1996.
However, on August 22, 1996 principal and accrued interest were paid in full. In
connection therewith, the note holder still maintains the rights to
25
<PAGE> 27
options to purchase 81,818 shares of the Company's common stock at a price of
$5.50 per share, which expire on March 31, 1997.
On June 27, 1996, the Company issued a promissory note to a stockholder for
$330,000 in cash, bearing interest at the prime interest rate as published in
The Wall Street Journal (8.25% at October 31, 1996), and payable at maturity.
The Company shall have the right to prepay the aggregate principal amount of the
note, together with accrued interest through the date of the prepayment without
penalty or premium. The stockholder shall have the option to acquire, until
February 28, 1997, 120,000 shares of common stock of the Company for $660,000.
On September 12, 1996, the note holder indicated its intent to convert the note
into common shares.
(c) Refundable Options to Purchase Stock -
The following options to purchase stock contain provisions whereby the option
holder may through February 28, 1997 call for the return of the consideration
paid. Accordingly, these agreements are classified as "Convertible term loans -
stockholders " in the current liabilities section of the Company's balance
sheet.
On May 16, 1996, the Company issued options to purchase an aggregate of 60,000
shares of restricted common stock at $6.50 per share to three separate parties
in consideration of total cash payments of $390,000. The option exercise periods
extended from the date of issuance through February 28, 1997. In the event the
options are not exercised, the holder may call for the option consideration to
be returned at anytime during the period beginning 10 days after the maturity
date of February 28, 1997.
On May 29, 1996, the Company issued options to purchase an aggregate of 21,000
shares of restricted common stock at prices between $5.50 and $6.50 per share to
two parties in consideration for total cash payments of $126,500. The option
exercise period extended from the date of issuance through February 28, 1997. In
the event the options are not exercised, the holder may call for the option
consideration to be returned at anytime during the period beginning 10 days
after the maturity date of February 28, 1997.
NOTE 11. CAPITAL
(a) Capital Transactions -
At its inception (June 4, 1990), the Company issued 3,334,780 shares of common
stock in exchange for technical know-how and patents related to certain consumer
products which were to be developed further by the Company. These shares were
assigned a value of $600,000, which represented the historical cost incurred by
the Company's president and chief executive officer. During the year ended
October 31, 1991, this amount was charged to operations as research and
development.
On April 20, 1994, the Company issued 171,741 shares of common stock to a
stockholder as a result of a conversion of a note payable for $250,000 plus
$12,064 in accrued interest. On September 30, 1994, the Company issued 159,236
shares of common stock to a corporate stockholder as a result of a conversion of
a $200,000 note payable. In addition, at the effective date of the Merger (see
Note 1(a)), the Company issued this stockholder an additional 38,350 shares of
common stock pursuant to an anti-dilutive provision of the convertible note
payable.
On December 12, 1994, the Company issued 834,529 shares of common stock to
stockholders as a result of the conversion of convertible term loans in the
amount of $1,025,000.
26
<PAGE> 28
During March 1995, the Company issued 115,050 shares of common stock to its
chief executive officer in exchange for original graphic illustrations valued at
$255,555. These illustrations were to be used in a screen saver project that was
previously being considered for development by the Company.
During May 1995, the Company issued 33,350 shares of preferred stock for
$100,050 in cash. The preferred stock provides for cumulative monthly dividends,
in arrears, amounting to 10% per annum, starting on June 15, 1995. (See Note
14.) No dividends can be declared or paid on the common stock until any
dividends accrued and unpaid on the preferred stock have been paid. The
preferred shares were converted into 18,191 shares of the Company's restricted
common stock on May 15, 1996.
In connection with the Borta acquisition, the Company issued 1,818,182 shares of
common stock to the former stockholders of Borta. Additionally, the Company
issued 357,143 shares of restricted common stock, which were valued at
$1,964,286 and subject to forfeiture, to the president of Borta as deferred
compensation. On May 16,1996, these shares were canceled. (See Note 9(a).) In
the third quarter of the 1996 fiscal year, the Company reversed the total
deferred compensation, $117,857 of which had been charged to compensation
expense in a prior period. The Company had recorded deferred compensation
expense, representing the fair market value at the date of the grant, as a
separate component of stockholders' equity for the non-vested portion of the
stock granted.
During August 1995, the Company issued 25,000 shares of its common stock valued
at $162,000 as a commission on the Borta acquisition.
Also during August 1995, the Company issued 4,082 shares of its common stock in
exchange for consulting services valued at $23,372.
During the fiscal year ended October 31, 1996, the Company sold in private
placements 1,875,400 shares of common stock, of which 1,180,000 were sold at a
price of $5.00 per share and 695,400 were sold at prices of between $5.00 and
$7.00 per share, from which the Company received net proceeds (after deduction
of related selling expenses, including agency commissions) aggregating
approximately $9,305,700. Additionally, during fiscal year 1996, the Company
issued 72,446 shares of its common stock in exchange for goods and services with
fair market values ranging from approximately $5.00 to $8.50 per share. In
connection therewith, PlayNet recorded expenses aggregating $417,915. The
Company canceled 357,143 shares of its restricted common stock pursuant to a
termination agreement with two former executives of Borta, Inc. (See Note 9(a).)
On December 29, 1995, the Company issued 66,667 shares of common stock to
stockholders as a result of a conversion of a convertible term loan in the
amount of $200,000.
During May 1996, the holders of all issued and outstanding shares of the
Company's preferred stock converted their shares of preferred stock into common
stock at a conversion price of $5.50 per share. The 73,350 preferred shares have
been converted into 58,191 shares of common stock.
In September 1996, the Company issued 51,250 shares of its common stock with a
fair market value of $5.50 per share to two executive employees as signing
bonuses. Accordingly, compensation expense in the amount of $281,875 was
recorded.
27
<PAGE> 29
The valuation of all common stock issued in exchange for services, products and
intangibles approximates the value of the common stock sold to third parties for
cash at the time of issuance.
(b) Warrants -
On March 29, 1996, the Company issued warrants to Allen & Company, Inc. to
purchase 448,101 shares of the Company's common stock at an exercise price of
$8.25 share in connection with a retainer agreement dated February 22, 1996
whereby Allen & Company agree to act as the Company's financial advisor. The
warrants are exercisable, by the Holder, in whole or in part at any after the
first anniversary of the date of the grant and prior to the fifth anniversary of
the date of issuance. The Company has recorded a charge of $815,230 in
connection with the agreement.
On June 4, 1996, the Company entered into agreements with two parties to provide
business development services to the Company. In consideration thereof, the
Company granted warrants to purchase an aggregate of 200,000 shares of its
common stock at an exercise price of $8.25. The warrants are exercisable, by the
Holder, in whole or in part at any time and from time to time after the first
anniversary of the date of the grant and prior to the fifth anniversary of the
date of issuance. The Company has recorded a charge of $368,712 in connection
with the agreement.
At October 31, 1996, there were warrants outstanding to purchase a total of
648,101 shares of the Company's common stock.
On January 20, 1997, warrants to purchase an aggregate of 100,000 shares at a
price of $5.50 per share of the Company's common stock were issued to the same
two parties as compensation for services rendered pursuant to the aforementioned
consulting agreements. The warrants are exercisable by the holder at any time
beginning one year from the date of grant through January 20, 2002. In
connection therewith, the Company recorded a charge of $221,648 in fiscal year
1996.
NOTE 12. STOCK OPTIONS
(a) 1994 Stock Option Plan -
On December 9, 1994, the Board of Directors adopted the Company's 1994 Stock
Option Plan (the "1994 Plan") which provides for the granting of options for the
purchase of up to an aggregate of 500,000 shares of common stock to key
employees and to consultants, advisors and directors who are not employees.
Options may either be incentive stock options ("ISO") or non-qualified.
Under the 1994 Plan, the option price shall be established by a compensation
committee of the Board of Directors. The exercise price of the ISO's granted
shall not be less than the fair market value of the shares on the effective date
of the grant or not less than 110% of the fair market value of the shares on the
effective date of the grant if the optionee owns stock possessing more than 10%
of the total combined voting power of all classes of stock of the Company.
Under the 1994 Plan, 428,333 options have been granted as of October 31, 1996,
of which 120,000 options are exercisable at $2.44 per share. The remaining
348,333 options are exercisable at varying times through fiscal 1999 at prices
ranging from $2.44 to $8.00 per share. All options expire 5 years from the date
of grant.
28
<PAGE> 30
(b) 1995 Stock Option Plan -
On July 28, 1995, the Board of Directors adopted the Company's 1995 Stock Option
Plan (the "1995 Plan") which provides for the granting of options for the
purchase of up to an aggregate of 1,000,000 shares of common stock to key
employees and to consultants, advisors and directors who are not employees.
Options may either be incentive stock options ("ISO") or non-qualified.
Under the 1995 Plan, the option price shall be established by a compensation
committee of the Board of Directors. The exercise price of the ISO's granted
shall not be less than the fair market value of the shares on the effective date
of the grant or not less than 110% of the fair market value of the shares on the
effective date of the grant if the optionee owns stock possessing more than 10%
of the total combined voting power of all classes of stock of the Company.
Under the 1995 Plan 400,000 stock options were granted to the former
shareholders of Borta exercisable on October 31, 2000 at a price of $5.50 per
share. The exercise dates may be accelerated if certain earnings performance
milestones (the "Milestones") are achieved for the 1996, 1997 and 1998 fiscal
years, defined as earnings before interest and taxes. An additional 242,859
stock options at an exercise price of $1.00 per share were granted to the former
shareholders of Borta, exercisable on January 31 following the fiscal years
ending October 31, 1996, 1997, and 1998 provided that Borta achieves the
Milestones for each fiscal year, as defined. As of October 31, 1996, none of the
Milestones had been achieved nor was it probable that they would be.
All of the options granted under the 1995 Plan were subsequently canceled.
Options for 1,000,000 shares of common stock were then issued under the 1995
Plan to a key employee pursuant to an amended employment agreement.
(See Note 9(b).)
(c) 1996 Stock Option Plan -
The 1996 Stock Option Plan (the "1996 Plan") was approved by the stockholders at
the Company's Annual Meeting held on October 29, 1996. The 1996 Plan provides
for a maximum of 1,500,000 shares of the Company's common stock to be issued in
connection with stock option grants to key employees and to consultants,
advisors and directors who are not employees. Options may either be incentive
stock options ("ISO") or non-qualified. With respect to ISO's, the exercise
price of the ISO's granted shall not be less than the fair market value of the
shares on the effective date of the grant or not less than 110% of the fair
market value of the shares on the effective date of the grant if the optionee
owns stock possessing more than 10% of the total combined voting power of all
classes of stock of the Company. At October 31, 1996, 1,230,067 options had been
granted under the 1996 Plan at prices ranging from $5.50 to $9.00 per share, of
which, 67,000 are currently exercisable.
29
<PAGE> 31
Transactions involving stock option awards for the three fiscal years ended
October 31, 1996 are summarized below. The total number of options exercisable
at October 31, 1996 was 267,333. As of October 31, 1996, shares available for
future grants under the 1996 Plan, 1995 Plan and 1994 Plan amounted to 269,933,
none, and 71,666, respectively.
<TABLE>
<CAPTION>
1996 1995 1994 Price Per
Plan Plan Plan Share
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Options outstanding at January 1, 1994 -0- -0- -0-
Options granted -- -- 200,000 $ 2.44
Options canceled -- -- --
---------- ---------- -----------
Options outstanding at October 31, 1994 -0- -0- 200,000
Options granted -- -- 100,000 $ 8.00
Options granted -- 400,000 -- $ 5.50
Options granted -- 242,859 -- $ 1.00
Options canceled -- -- --
---------- ---------- -----------
Options outstanding at October 31, 1995 -0- 642,859 300,000
Options granted 212,000 1,000,000 128,333 $ 5.50
Options granted 1,018,067 -- -- $8.00 - 9.00
Options canceled -- (642,859) -- $1.00 - 5.50
---------- ---------- -----------
Options outstanding at October 31, 1996 1,230,067 1,000,000 428,333
========== ========== ===========
</TABLE>
NOTE 13. OTHER EMPLOYEE BENEFIT PLANS
At the January 20,1997 meeting of the Board of Directors, PlayNet adopted a
profit-sharing/savings plan pursuant to Section 401(k) of the Internal Revenue
Code, whereby effective February 1, 1997, eligible employees may contribute on a
tax-deferred basis a percentage of compensation, but not in excess of $9,500,
the maximum allowable amount for 1997. The plan provides for a matching
contribution by the Company up to a maximum level which cannot exceed 3% of the
employees compensation. Company contributions vest over a three year period of
continuous service and employee contributions are fully vested immediately.
NOTE 14. DIVIDENDS ON PREFERRED STOCK
In fiscal year 1996, a total of $15,219 in cash dividends was paid to
shareholders of the Company's 10% Cumulative Preferred Stock. On May 15, 1996
all preferred stock was converted into the Company's Common Stock.
NOTE 15. LOSS PER COMMON SHARE
Loss per common share amounts were computed by dividing the loss after deduction
of preferred stock dividends by the weighted average number of common shares
outstanding for the period. Shares issuable upon the exercise of outstanding
stock options and warrants and the effect of any convertible securities are
excluded from the computation because the effect on the net loss per common
share would be anti-dilutive.
30
<PAGE> 32
NOTE 16. RELATED PARTY TRANSACTIONS
The Company has entered into an agreement with a corporate stockholder and
director to provide consulting services. In consideration for these services,
the corporate stockholder has received fees totaling approximately $130,000;
$75,000; $70,000; and $358,000 during the years ended October 31, 1996, 1995,
1994, and the cumulative period from June 4, 1990 (inception) through October
31, 1996, respectively. In addition, in 1996, this corporate stockholder also
received a cash payment of $364,000 in connection with expenses incurred for
presentations, commissions, tax advisory services and travel expenses related to
securing investments in the Company through subscription agreements and
promissory notes. This stockholder has also been issued a total of 273,451
shares of its common stock in exchange for $350,000 of services during the three
fiscal years ended October 31, 1993. On January 15, 1997 the agreement between
the Company and this corporate stockholder was extended for an additional period
to expire on June 30, 1998 and was amended to provide for reimbursement to the
stockholder for normal and customary "out-of-pocket" expenses incurred in the
performance of its obligations under the agreement
The Company obtained the services of its chief executive officer from another
company of which PlayNet's CEO is the principle stockholder. Fees paid to that
company during the years ended October 31, 1995, 1994, 1993, and the cumulative
period from June 4, 1990 (inception) through October 31, 1995, total
approximately $456,700; $626,000; $327,000; and $2,084,700, respectively. No
such payments were made in the fiscal year ended October 31, 1996.
On December 18, 1996 the Company executed a Promissory Note Receivable in the
amount of $30,000 to a key employee, bearing an interest rate of 9% per annum to
mature on March 18, 1997. The note provides for one extension up to and
including June 18, 1997, at the sole option of the Company.
NOTE 17. LEGAL PROCEEDINGS
An action entitled Ohrbach, Inc. vs. Aristo International Corporation was
commenced in the Supreme Court of the State of New York on October 10, 1996
against the Company by Ohrbach, Inc. seeking monetary damages of $232,500 based
on the alleged breach of a finder's fee agreement. The Company intends to
vigorously defend all aspects of such claim. It is not possible to ascertain at
this time what the ultimate award or settlement will be.
On December 24, 1996 the Company was served with a Demand for Arbitration in
connection with a Development and License Agreement dated August 29, 1995
between Borta, Inc., a wholly owned subsidiary of PlayNet, and an unaffiliated
third party engaged in the marketing of computer sports games. The relief sought
under the Demand is to be determined. The Company and the claimant have been
engaged in settlement discussions and management believes that an agreement can
be reached. However, no assurances can be given that a settlement will be
completed. In the event a settlement cannot be reached and an adverse
determination is made against the Company, payment of a material award could
adversely affect the cash flow of the Company.
31
<PAGE> 33
NOTE 18. INCOME TAXES
There is no provision for federal, state or local income taxes for all periods
presented, since the Company has incurred operating losses since inception. The
Company has paid the minimum state and local taxes during the years, as
required. In addition, the Company has fully reserved for the potential future
tax benefits resulting from the utilization of net operating loss carry-forwards
and the realization of deferred rent.
Deferred tax assets, as of October 31, 1996, consist of the following:
<TABLE>
<S> <C>
Net operating loss carry-forwards $ 10,420,643
Capitalized software (2,322,048)
Other 184,515
------------
Total deferred tax assets 8,283,110
Less: valuation allowance (8,283,110)
------------
Net deferred tax assets $ -0-
============
</TABLE>
As of October 31, 1996, the Company has available unused net operating loss
carry-forwards of approximately $22,000,000 which may provide future tax
benefits, expiring in various years from 2006 to 2011.
32
<PAGE> 34
ITEM 13. EXHIBIT LIST AND REPORTS ON FORM 8-K.
(a) The following Exhibits are filed as part of this Report.
<TABLE>
<CAPTION>
Number Description Method of Filing
- ------ ----------- ----------------
<S> <C> <C>
2.1 Merger Agreement between the registrant Incorporated by reference to an Exhibit
and Aristo International Corporation, to the Registrant's Current Report on
dated October 28, 1994. Form 8-K, File No. 33-1260-NY, filed on
November 16, 1994.
2.2 Agreement and Plan of Merger among the Incorporated by reference to an Exhibit
registrant, BAIC Acquisition Corp., Borta, to the Registrant's Current Report on
Inc. and the shareholders of Borta, Inc., Form 8-K, File No. 33-1260-NY, filed on
dated July 28, 1995. August 15, 1995.
3.1 Restated and Amended Certificate of Incorporated by reference to Exhibit 3.1
Incorporation of the Registrant. to the Registrant's Annual Report on Form
10-KSB for the year ended October 31,
1995, filed on January 29, 1996.
3.1A A Certificate of Amendment to the Restated Incorporated by reference to Exhibit 3.1A
and Amended Certificate of Incorporation to the Registrant's Annual Report on Form
of the Registrant, filed on November 6, 10-KSB for the year ended October 31,
1996. 1996, filed on February 13, 1997.
3.2 By-Laws of the Registrant. Incorporated by reference to Exhibit 3.2
to the Registrant's Annual Report on Form
10-KSB for the year ended October 31,
1995, filed on January 29, 1996.
10.1 1994 Stock Option Plan of the Registrant.* Incorporated by reference to Exhibit 10.1
to the Registrant's Annual Report on Form
10-KSB for the year ended October 31,
1995, filed on January 29, 1996.
10.2 1995 Stock Option Plan of the Registrant.* Incorporated by reference to Exhibit 10.2
to the Registrant's Annual Report on Form
10-KSB for the year ended October 31,
1995, filed on January 29, 1996.
10.3 1996 Stock Option Plan of the Registrant Incorporated by reference to Exhibit 10.3
and Form of Stock Option Contract.* to the Registrant's Registration
Statement on Form S-1 (Reg. No.
333-14259), filed on October 16, 1996.
10.4 Employment Agreement between the Incorporated by reference to Exhibit 10.4
Registrant and Shmuel Cohen dated February to the Registrant's Annual Report on Form
1, 1995.* 10-KSB for the year ended October 31,
1995, filed on January 29, 1996.
</TABLE>
33
<PAGE> 35
<TABLE>
<CAPTION>
Number Description Method of Filing
- ------ ----------- ----------------
<S> <C> <C>
10.5 Change in Control Agreement, dated Incorporated by reference to Exhibit 10.5
February 1, 1995, between the registrant to the Registrant's Annual Report on Form
and Shmuel Cohen.* 10-KSB for the year ended October 31,
1995, filed on January 29, 1996
10.6 Consulting Agreement, dated July 1, 1995, Incorporated by reference to Exhibit 10.6
between the registrant and Castellon to the Registrant's Annual Report on Form
Limited.* 10-KSB for the year ended October 31,
1995, filed on January 29, 1996.
10.7 Warrant Certificate Incorporated by reference to Exhibit 10.7
to the Registrant's Registration
Statement on Form S-1 (Reg. No.
333-14259), filed on October 16, 1996.
10.8 Form of Purchase Agreement Incorporated by reference to Exhibit 10.8
to the Registrant's Registration
Statement on Form S-1 (Reg. No.
333-14259), filed on October 16, 1996.
10.9 Engagement Letter Agreement, dated Incorporated by reference to Exhibit 10.9
February 22, 1996, between the registrant to the Registrant's Registration
and Allen & Company Incorporated. Statement on Form S-1 (Reg. No.
333-14259), filed on October 16, 1996.
10.10 Placement Agency Agreement, dated July 31, Incorporated by reference to Exhibit 10.10
1996, between the registrant and Allen & to the Registrant's Registration
Company Incorporated. Statement on Form S-1 (Reg. No.
333-14259), filed on October 16, 1996.
10.11 Form of Subscription Agreement Incorporated by reference to Exhibit 10.11
to the Registrant's Registration
Statement on Form S-1 (Reg. No.
333-14259), filed on October 16, 1996.
10.12 Form of Option Agreement/Convertible Note Incorporated by reference to Exhibit 10.12
to the Registrant's Registration
Statement on Form S-1 (Reg. No.
333-14259), filed on October 16, 1996.
10.13 Employment Agreement, dated April 19, Incorporated by reference to Exhibit 10.13
1996, between the registrant and Nolan to the Registrant's Registration
Bushnell, as amended on September 1996.* Statement on Form S-1 (Reg. No.
333-14259), filed on October 16, 1996.
10.14 Termination Agreement, dated May 13, 1996, Incorporated by reference to Exhibit 10.14
among Ron Borta and Leslie Davis and the to the Registrant's Registration
registrant. Statement on Form S-1 (Reg. No.
333-14259), filed on October 16, 1996.
</TABLE>
34
<PAGE> 36
<TABLE>
<CAPTION>
Number Description Method of Filing
- ------ ----------- ----------------
<S> <C> <C>
10.15 Services Letter Agreement, dated August Incorporated by reference to Exhibit 10.15
17, 1995, between the registrant and to the Registrant's Registration
Michael Katz. Statement on Form S-1 (Reg. No.
333-14259), filed on October 16, 1996.
10.16 Form of Financial Consulting Contract. Incorporated by reference to Exhibit 10.16
to the Registrant's Registration
Statement on Form S-1 (Reg. No.
333-14259), filed on October 16, 1996.
10.17 Letter Agreement, dated June 10, 1996, Incorporated by reference to Exhibit 10.17
between the registrant and P.S.G.S. to the Registrant's Registration
International Real Estate, Ltd. Statement on Form S-1 (Reg. No.
333-14259), filed on October 16, 1996.
10.18 Option Agreement, dated June 10, 1996, Incorporated by reference to Exhibit 10.18
between the registrant and P.S.G.S. to the Registrant's Registration
International Real Estate, Ltd. Statement on Form S-1 (Reg. No.
333-14259), filed on October 16, 1996.
10.19 Services Agreement, dated August 1, 1996, Incorporated by reference to Exhibit 10.19
between the registrant and Owens & to the Registrant's Registration
Associates, Inc. Statement on Form S-1 (Reg. No.
333-14259), filed on October 16, 1996.
10.20 Services Letter Agreement, dated August Incorporated by reference to Exhibit 10.20
20, 1996, between the registrant and to the Registrant's Registration
Copyright Clearinghouse, Inc. Statement on Form S-1 (Reg. No.
333-14259), filed on October 16, 1996.
10.21 Amendment, dated June 28, 1996, to the Incorporated by reference to Exhibit 10.21
Consulting Agreement, dated July 1, 1995, to the Registrant's Registration
between the registrant and Castellon Statement on Form S-1 (Reg. No.
Limited. 333-14259), filed on October 16, 1996.
10.22 AFMA International Disc Distribution Incorporated by reference to Exhibit 10.22
Agreement, dated August 22, 1996, between to the Registrant's Registration
Film Ventures International, Inc. and Statement on Form S-1 (Reg. No.
Aristo entertainment, Inc. 333-14259), filed on October 16, 1996.
10.23 Senior Secured Notes Placement Agreement Incorporated by reference to Exhibit 10.23
dated December 30, 1996 (including to the Registrant's Annual Report on Form
exhibits and schedule of holders.) 10-KSB for the year ended October 31,
1996, filed on February 13, 1997.
10.24 Warrants to Purchase Common Stock issued Incorporated by reference to Exhibit 10.24
January 20, 1997 (with schedule of to the Registrant's Annual Report on Form
holders.) 10-KSB for the year ended October 31,
1996, filed on February 13, 1997.
10.25 Amendment, dated October 30, 1996, to Incorporated by reference to Exhibit 10.25
Common Stock Options (with schedule of to the Registrant's Annual Report on Form
holders.) 10-KSB for the year ended October 31,
1996, filed on February 13, 1997.
</TABLE>
35
<PAGE> 37
<TABLE>
<CAPTION>
Number Description of Exhibit Method of Filing
- ------ ---------------------- ----------------
<S> <C> <C>
10.26 Letter agreements, dated December 5, 1996, Incorporated by reference to Exhibit 10.26
with Zeller Eblagon Financial Services, to the Registrant's Annual Report on Form
Ltd., extending options to purchase Common 10-KSB for the year ended October 31,
Stock. 1996, filed on February 13, 1997.
10.27A First Amendment, dated October 31, 1996, Incorporated by reference to Exhibit 10.27A
to $330,000 Promissory Note payable to NY to the Registrant's Annual Report on Form
Holdings, Limited. 10-KSB for the year ended October 31,
1996, filed on February 13, 1997.
10.27B Second Amendment, dated January 10, 1997, Incorporated by reference to Exhibit 10.27B
to $330,000 Promissory Note payable to NY to the Registrant's Annual Report on Form
Holdings, Limited. 10-KSB for the year ended October 31,
1996, filed on February 13, 1997.
10.29 First Amendment, dated December 5, 1996, Incorporated by reference to Exhibit 10.29
to $500,000 Promissory Note payable to to the Registrant's Annual Report on Form
Zeller Eblagon Leasing, Ltd. 10-KSB for the year ended October 31,
1996, filed on February 13, 1997.
10.30A First Amendment, dated January 1, 1997, to Incorporated by reference to Exhibit 10.30A
$260,000 Promissory Note payable to to the Registrant's Annual Report on Form
Castellon Limited. 10-KSB for the year ended October 31,
1996, filed on February 13, 1997.
10.30B Second Amendment, dated January 10, 1997, Incorporated by reference to Exhibit 10.30B
payable to Castellon Limited. to the Registrant's Annual Report on Form
10-KSB for the year ended October 31,
1996, filed on February 13, 1997.
21.1 Subsidiaries of the Registrant. Incorporated by reference to Exhibit 21.1
to the Registrant's Annual Report on Form
10-KSB for the year ended October 31,
1996, filed on February 13, 1997.
23.1 Consent of Coopers & Lybrand, L.L.P. Incorporated by reference to Exhibit 23.1
to the Registrant's Annual Report on Form
10-KSB for the year ended October 31,
1996, filed on February 13, 1997.
27 Financial Data Schedule Filed herewith.
</TABLE>
- ----------
* Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K.
None
36
<PAGE> 38
SIGNATURES
In accordance with Section 13 or 15(d) 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 authorized.
PLAYNET TECHNOLOGIES, INC.
By:___________________________________
Shmuel Cohen
President and Chief Executive Officer
Dated: May 12, 1997
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
_________________________ President and Chief May 12, 1997
Shmuel Cohen Executive Officer
(Principal Executive
Officer) and Director
_________________________ Executive Vice May 12, 1997
Glenn P. Sblendorio President, Chief
Financial Officer and
Treasurer (Principal
Financial Officer and
Principal Accounting
Officer)
_________________________ Director May 12, 1997
Joseph Ettinger
_________________________ Director May 12, 1997
Yael Cohen
</TABLE>
37
<PAGE> 39
PLAYNET TECHNOLOGIES, INC.
EXHIBIT INDEX
Exhibit Page
Number Description Number
- ------ ----------- ------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORMS 10-KSB
AND 10-KSB/A AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS AND ACCOMPANYING NOTES.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<CASH> 2,331,761
<SECURITIES> 0
<RECEIVABLES> 152,538
<ALLOWANCES> 152,538
<INVENTORY> 0
<CURRENT-ASSETS> 2,596,961
<PP&E> 891,579
<DEPRECIATION> 195,795
<TOTAL-ASSETS> 9,669,681
<CURRENT-LIABILITIES> 4,013,332
<BONDS> 0
0
0
<COMMON> 14,967
<OTHER-SE> 4,014,613
<TOTAL-LIABILITY-AND-EQUITY> 9,669,681
<SALES> 0
<TOTAL-REVENUES> 200,775
<CGS> 0
<TOTAL-COSTS> 16,217,169
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 50,101
<INCOME-PRETAX> (15,966,293)
<INCOME-TAX> 0
<INCOME-CONTINUING> (15,966,293)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,981,512)
<EPS-PRIMARY> (1.18)
<EPS-DILUTED> (1.18)
</TABLE>
