<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 3, 1998
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
METRO GLOBAL MEDIA, INC.
------------------------
(Name of small business issuer in its charter)
DELAWARE 7812 65-0025871
- ------------------------- -------------------- ---------------------
(State or jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Identification No.)
organization) Classification
Code Number)
1060 PARK AVENUE, CRANSTON, RHODE ISLAND 02910 (401)-942-7876
---------------------------------------------------------------
(Address and telephone number of principal executive offices)
A. DANIEL GERIBO, PRESIDENT
METRO GLOBAL MEDIA, INC.
1060 PARK AVENUE
CRANSTON, RHODE ISLAND 02910
(401) 942-7876
(Name, Address and telephone number of agent for service)
With copy to:
ERIC LITTMAN, ESQUIRE
7695 SW 104TH STREET, SUITE 210, MIAMI, FLORIDA 33156 (305)-663-3333
--------------------------------------------------------------------
Approximate date of proposed sale to the public:
As soon as practicable after the registration statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. ( )
If this Form is a post-effective amendment filed pursuant to Rule 462 under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement of
the same offering. ( )
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. ( )
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
TITLE OF EACH PROPOSED PROPOSED
CLASS OF MAXIMUM MAXIMUM
SECURITIES AMOUNT OFFERING AGGREGATE AMOUNT OF
TO BE TO BE PRICE OFFERING REGISTRATION
REGISTERED(1) REGISTERED PER SHARE PRICE FEE
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock (1) 509,000 $2.844 $1,447,596 $480
Common Stock 150,000 $2.844 $ 426,600 $140
</TABLE>
(1) Shares registered pursuant to this Registration Statement represent the
maximum number of shares that may be issued upon conversion of the Company's 8%
convertible debentures and/or upon exercise of warrants to purchase shares of
the Corporation's common stock in reliance on Section 4(2) of the Securities Act
of 1933.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE>
CROSS-REFERENCE
<TABLE>
<CAPTION>
REGISTRATION STATEMENT ITEM NUMBER AND HEADING LOCATION OR CAPTION IN PROSPECTUS
<S> <C>
1. Front of Registration Statement and Outside Outside Front Cover of Prospectus
Front Cover Page of Prospectus....................
2. Inside Front and Outside Back Cover Pages Inside Front and Outside Back Cover
of Prospectus .................................... Pages of Prospectus
3. Summary Information ant Risk Factors ................ Prospectus Summary, the Company,
Risk Factors
4. Use of Proceeds ..................................... Not Applicable
5. Determination of Offering Price ..................... Determination of Offering Price
6. Dilution ............................................ Not Applicable
7. Selling Security Holders ............................ Security Holders
8. Plan of Distribution................................. Outside Front Cover Page; Plan of
Distribution
9. Legal Proceedings.................................... Legal Proceedings
10. Directors, Executive Officers, Promoters and Directors, Executive Officers, Promoters
Control Persons................................... and Control Persons
11. Security Ownership of Certain Beneficial Security Ownership of Certain Beneficial
Owners and Management............................. Owners and Management
12. Description of Securities............................ Description of Securities
13. Interest of Named Experts and Counsel................ Interest of Named Experts and Counsel
14. Description of Business.............................. Description of Business
15. Management's Discussion and Analysis Management's Discussion and
or Plan of Operation.............................. Analysis
16. Description of Property.............................. Description of Properties
17. Certain Relationships and Related Certain Relationships and Related
Transactions...................................... Transactions
18. Executive Compensation............................... Executive Compensation
19. Financial Statements................................. Financial Statements
</TABLE>
<PAGE>
PROSPECTUS
METRO GLOBAL MEDIA, INC.
659,000 SHARES OF COMMON STOCK
OFFERED BY CERTAIN SELLING SECURITY HOLDERS
__________________________________
This Prospectus relates to the sale of 509,000 shares of common stock,
$.0001 par value (the "Common Stock"), of Metro Global Media, Inc., (the
"Company"), which shares represent the maximum number of shares that may be
issued upon conversion of the Company's 8% convertible debentures or upon
exercise of warrants issued in connection with the sale of such debentures.
This Prospectus also relates to the sale of 150,000 shares of Common Stock
issued as partial consideration in connection with a financing transaction by
and between the Company and its lender (see "Selling Security Holders"), all of
which are offered by the holders identified as "Selling Security Holders" in
this Prospectus. See "SELLING SECURITY HOLDERS."
The Company will not receive any proceeds from the sale of shares of Common
Stock by the Selling Security Holders. Sales of shares of Common Stock may be
made from time to time (in transactions which may include block transactions) by
or for the account of the Selling Security Holders in the over-the-counter
market or in negotiated transactions, or otherwise, at market prices prevailing
at the time of sale or at negotiated prices. The Company has informed the
Selling Security Holders that the anti-manipulative rules under the Securities
Exchange Act of 1934, Regulation M, may apply to their sales and has furnished
each of the Selling Stockholders with a copy of these Rules. The Company has
also informed the Selling Security Holders of the need for delivery of copies of
this Prospectus. See "SELLING SECURITY HOLDERS" and "PLAN OF DISTRIBUTION."
________________________
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD PURCHASE SHARES
ONLY IF YOU CAN AFFORD A COMPLETE LOSS. SEE RISK FACTORS.
<TABLE>
<CAPTION>
PROCEEDS TO
PROPOSED UNDERWRITING PROCEEDS TO THE SELLING
CLASS OF SECURITY OFFERING PRICE DISCOUNTS THE COMPANY SECURITY HOLDERS/(2)/
----------------------------------------- -------------- ------------- ----------- ---------------------
<S> <C> <C> <C> <C>
Shares of Common Stock/(1)/ $2.844 N/A $0 $1,874,196
</TABLE>
/(1)/ Represents the anticipated sale price by the Selling Security
Holders. On November 25, 1998, the closing bid and asked prices were $2-27/32
and 2-15/16, respectively. There can be no assurances, however, that the Selling
Security Holders will be able to sell their shares of Common Stock at this
price, or that a liquid market will exist for the Company's Common Stock.
/(2)/ Does not give effect to ordinary brokerage commissions or to the
costs of sale that will be borne solely by the Selling Security Holders.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
The date of this Prospectus is December 2, 1998.
1
<PAGE>
INSIDE FRONT COVER
Available Information
The Company is subject to the reporting requirements of the Securities and
Exchange Act of 1934, as amended (the "Exchange Act"), and provides quarterly
and annual reports to the Securities and Exchange Commission. The Company's
annual report on Form 10-KSB contains audited financial statements. The reports
and other information filed by the Company may be inspected and copied at the
public reference facilities of the Securities and Exchange Commission (SEC) in
Washington, D. C., and at some of its Regional Offices, and copies of such
material can be obtained from the Public Reference Section of the SEC,
Washington, DC20549 at prescribed rates. The Company is an electronic filer and
the SEC maintains a Web site that contains reports, proxy and information
statements and other information regarding issuers that file electronically. The
SEC Web site address is http://www.sec.gov.
The Company will provide a report to stockholders, at least annually, which
report will include audited financial statements of the Company.
Incorporation of Documents by Reference.
All materials incorporated by reference herein are available (not including
exhibits to the information that is incorporated by reference unless the
exhibits are themselves specifically incorporated by reference) without charge
from the Company to each person who receives a Prospectus, upon written or oral
request of such person. Any request for such material should be directed to the
Corporate Secretary, if in writing, to 1060 Park Avenue, Cranston, Rhode Island
02910.
The Registrant is subject to the informational and reporting requirements
of Sections 13(a), 13 and 14 and 15(d) of the Securities and Exchange Act of
1934, as amended (the "Exchange Act") and in accordance therewith, files
reports, proxy statements and other information with the Securities and Exchange
Commission ("SEC"). The following documents, which were filed by the Company
with the SEC pursuant to the Exchange Act, are incorporated by reference into
this Prospectus (Commission File No. 0-21634):
1. The Company's Quarterly Report on Form 10-QSB for the quarter ended
August 29, 1998.
2. The Company's Form 8-K filed with the Commission on August 15,
1998.
3. The Company's Annual Report on Form 10-KSB for the fiscal year
ended May 30, 1998.
4. All documents filed by the Company with the SEC pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act, after the
date of this Prospectus and prior to the termination of the
offering to which this Prospectus relates, shall be deemed to be
incorporated by reference into this Prospectus from the date of
filing, except as to any portion of any future annual or Quarterly
Report to Shareholders which is not deemed to be filed under such
provisions.
2
<PAGE>
For the purposes of this Prospectus, any statement in a document
incorporated by reference shall be deemed to be modified or superseded to
the extent that a statement contained in this Prospectus modifies or
supersedes the statement in such document. Any statements so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Company will provide, without charge to each person to whom a copy
of this Prospectus has been delivered, on the written or oral request of
such person, a copy of any or all of the dcouments referred to above which
have been or may be incorporated in this Prospectus by reference, other
than exhibits to such documents. Any written or oral request should be
directed to the principal executive office of the Company at 1060 Park
Avenue, Cranston, Rhode Island 02910; telephone number (401) 942-7876.
3
<PAGE>
PROSPECTUS SUMMARY
The following Summary is qualified in its entirety by other more detailed
information throughout this Registration Statement. Statements in this document
which are not purely historical facts, including statements regarding
anticipations, beliefs, expectations, hopes, intentions or strategies for the
future, may be forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21.E of the Securities
Exchange Act of 1934, as amended. All forward-looking statements within this
document are based upon information available to the Company on the date of this
Registration Statement. Any forward-looking statements involve risks and
uncertainties that could cause actual events or results to differ materially
from the events or results described in the forward-looking statements,
including the timing and nature of independent test results; the nature of
changes in laws and regulations that govern various aspects of the Company's
business; the market acceptance of the Company's licensed technologies;
retention and productivity of key employees; the availability of acquisition
candidates and proprietary technologies at prices the Company believes to be
fair market; the direction and success of competitors; management retention; and
unanticipated market changes. The Company undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. Readers are cautioned not to place
undue reliance on these forward-looking statements.
The Company
Metro Global Media, Inc. (the "Company" or "Metro") was incorporated, under
the name South Pointe Enterprises, Inc., in Florida in November 1987. In
February 1996, the Company changed its name from South Pointe Enterprises, Inc.,
to Metro Global Media, Inc.
In November 1996, the Company merged into an inactive subsidiary (Metro
Sub, Inc.), under the laws of the State of Delaware and simultaneously changed
its name back to Metro Global Media, Inc. The Company's principal executive
offices are located at 1060 Park Avenue, Cranston, Rhode Island 02910.
Metro owns, produces and distributes adult motion picture entertainment.
This includes the production and financing of feature films (full length motion
pictures produced on film), feature videos (full length motion pictures produced
on videotape), and video compilations, distributed primarily on video cassettes;
the distribution of pay television and cable programming; and the ownership and
administration of film copyrights. Metro digitizes selected titles from its
existing file library to the CD-rom format. Metro's motion picture productions
feature men and women in a variety of erotic and adult sexual situations.
Metro also publishes and distributes a variety of adult magazines and
paperback books. Metro publishes several special interest magazines under
various trade names which it distributes through wholesalers located throughout
the United States, Canada and Europe.
4
<PAGE>
Additionally, Airborne For Men, Ltd.(TM) ("Airborne for Men") a wholly-
owned subsidiary of the Company, engages in (i) the retail sale of adult
entertainment products through company-owned Airborne For Men retail stores and
(ii) the scale of franchises to operate Airborne For Men retail stores.
In 1998, the Company launched AmazingOnline.Com website and Amazing Direct
Mail Order. Amazing Online and Amazing Direct allow the Company's customers to
access an adult shopping, live shows, photo galleries and to purchase the
Company's products by mail order.
The Company's principal executive offices are located at 1060 Park Avenue,
Cranston, Rhode Island 02910. The Company's telephone number is (401) 942-7876.
5
<PAGE>
THE OFFERING
Securities Being Offered: This Prospectus relates to the sale of 659,000
shares of Common Stock by the holders hereof,
identified as "Selling Security Holders" in this
Prospectus. See "SELLING SECURITY HOLDERS."
The shares of Common Stock offered by the
Selling Security Holders may be offered for sale
from time to time by the holders in regular
brokerage transactions, either directly or through
brokers or to dealers, in private sales or
negotiated transactions, or otherwise, at prices
related to then prevailing market prices.
The Company will not receive any proceeds from
the sale of shares of Common Stock by the Selling
Security Holders. All expenses of the registration
of such securities are, however, being borne by
the Company.
The Selling Security Holders, and not the
Company, will pay or assume such brokerage
commissions as may be incurred in the sale of
their securities.
The Common Stock is traded on the over-the-
counter market and quoted on the NASDAQ Small Cap
Market. On November 25, 1998, the closing bid
price was $2-27/32.
Total number of shares of
Common Stock
outstanding 6,192,805
Total number of shares of
Common Stock being
Offered by Selling
Security Holders 659,000
Risk Factors The Common Stock offered hereby involves a high
degree of risk and you should consider carefully
the factors specified under "Risk Factors" before
electing to invest. See "RISK FACTORS."
Trading Symbol Common Stock MGMA
6
<PAGE>
RISK FACTORS
The securities offered hereby involve a high degree of risk and each
prospective investor should consider certain risks and speculative features
inherent in and affecting the business of the Company before purchasing any of
the securities offered hereby. In considering the following risk and
speculative factors, a prospective purchaser should realize that there is a
substantial risk of losing his entire investment. Among these speculative
factors which management considers pose the greatest risk to prospective
investors include the following:
Should the Company be successful in the registration of the Shares
described herein, such an event may have a depressive effect on the then trading
price of the Company's common shares.
COMPETITION
-----------
The production and distribution of home video and cable television
products are highly competitive, as each competes with the other as well as with
other forms of entertainment. Furthermore, there is increased competition in
the television industry evidenced by the increasing number and variety of basic
cable and pay television services now available. Revenues for motion picture
entertainment product depends in part upon general economic conditions, but the
competitive position of a producer or distributor is still greatly affected by
the quality of, and public response to, the entertainment product it makes
available to the marketplace. There is strong competition throughout the home
video industry, both from home video subsidiaries of several major motion
picture studios and from independent companies. Nearly all of Metro's products
compete with other products and services that utilize leisure time or disposable
income.
Additionally, the Company is in direct competition with other
publishers of adult magazines and paperback books as well as all other forms of
print media adult entertainment, including several more well-known national
publications with substantially larger circulation than those of Metro's.
GOVERNMENT REGULATION
---------------------
Although the right to distribute adult videocassettes, magazines and
CD-ROM products is protected by the First and Fourteenth Amendments to the
United States Constitution, the First and Fourteenth Amendments, however, do not
protect the dissemination of obscene material, and several states and
communities in which Metro's products are distributed have enacted laws
regulating the distribution of obscene material with some offenses designed as
misdemeanors and others as felonies, depending on numerous factors. The
consequences for violating the state statutes are as varied as the number of
states enacting them. Similarly, 18 U.S.C.(S)1460 - 1469 contain the federal
prohibitions with respect to the dissemination of obscene material, and the
potential penalties for individuals (including corporate directors, officers and
employees) violating the federal obscenity laws include fines, community
service, probation, forfeiture of assets and incarceration. The range of
possible sentences require calculations under the Federal Sentencing Guidelines,
and the amount of the fine and the length of the period of the incarceration
under those guidelines are calculated based upon the retail value of the
unprotected materials. Also taken
7
<PAGE>
into account in determining the amount of the fine, length of incarceration or
other possible penalty are whether the person accepts responsibility for his or
her actions, whether the person was a minimal or minor participant in the
criminal activity, whether the person was an organizer, leader, manager or
supervisor, whether multiple counts were involved, whether the person provided
substantial assistance to the government, and whether the person has a prior
criminal history. In addition federal law provides for the forfeiture of: (1)
any obscene material produced, transported, mailed, shipped or received in
violation of the obscenity laws; (2) any property, real or personal,
constituting or traceable to gross profits or other proceeds obtained from such
offense; and (3) any property, real or personal, used or intended to be used to
commit or to promote the commission of such offense, if the court in its
discretion so determines, taking into consideration the nature, scope and
proportionality of the use of the property in the offense.
Because the Company is engaged primarily in the wholesale distribution
of its products to other wholesalers and/or retailers, the Company believes it
can regulate the communities to which it distributes its products. Management
has taken steps to ensure compliance with all federal, state and local
regulations regulating the content of its motion pictures and print products, by
staying abreast of all legal developments in the areas in which its motion
pictures and print products are distributed and by specifically avoiding
distribution of its motion pictures and print products in areas wherethe local
standards clearly or potentially prohibit these products. Moreover, the Company
requires that certain video material be reviewed by an independent advisory
panel comprised of two psychologists, a certified sex therapist, licensed
marriage and family therapist, a certified sex educator and a licensed
independent clinical social worker. Their review is directed to aspects of
serious scientific value as set forth in the Miller test, because that aspect of
the test is not limited by community standards but is concerned with whether a
reasonable person would find such value in the material, taken as a whole.
Although the Company undertakes to review, regulate and restrict the
distribution of its materials in order to comply with all applicable statutes
and regulations, there can be no assurance that the Company'sefforts will be
successful in ensuring that the Company complies with all applicable state and
federal statutes and regulations.
ZONING MATTERS
--------------
Many of the communities in the areas in which Airborne intends to
offer Airborne For Men franchises have enacted zoning ordinances restricting the
retail sale of adult entertainment products. Airborne intends to open Airborne
For Men stores and to permit the opening of Airborne For Men franchises only in
locations where the retail sale of adult entertainment products is permitted.
Naturally, there can be no assurances that the Company or its potential
franchisees will be successful in obtaining suitable locations where the retail
sale of adult entertainment products is permitted.
Distribution rights to video cassettes, magazines and CD-ROM products
are also granted legal protection under the copyright laws of the United States
and most foreign countries, which provide substantial civil and criminal
sanctions for unauthorized duplication and exhibition. Metro plans to take all
appropriate and reasonable measures to secure and maintain copyright protection
for all of its products under the laws of all applicable jurisdictions.
8
<PAGE>
COPYRIGHT PROTECTION
--------------------
Distribution rights to video cassettes, magazines and CD-ROM products
are granted legal protection under the copyright laws of the United States and
most foreign countries, which provide substantial civil and criminal sanctions
for unauthorized duplication and exhibition. Although Metro plans to take all
appropriate and reasonable measures to secure and maintain copyright protection
for all of its products under the laws of all applicable jurisdictions, there
can be no assurance that the Company will be successful in securing and
maintaining necessary copyright protection.
USE OF PROCEEDS
The Company will not realize any proceeds from the sale of shares of Common
Stock by the Selling Security Holders. See "SELLING SECURITY HOLDERS."
DETERMINATION OF OFFERING PRICE
The offering price of the securities described herein was not computed
based on the assets, historical operating performance or other conventional
means and should not be construed to indicate any relationship thereto. In
establishing the offering price, the Company relied on the closing "bid" price"
on November 25, 1998, as reflected in the over-the-counter (OTC) marketplace.
SELLING SECURITY HOLDERS
The shares of Common Stock of the Company offered by this Prospectus are
being sold for the account of the Selling Security Holders identified in the
table indicated below (the "Selling Security Holders").
The Selling Security Holders are offering for sale an aggregate of 659,000
shares of Common Stock.
The following table sets forth the number of Shares being held of record or
beneficially (to the extent known by the Company) by such Selling Security
Holders and provides (by footnote reference) any material relationship between
the Company and such Selling Security Holders, all of which is based upon
information currently available to the Company.
NUMBER OF
NUMBER OF SHARES OF NUMBER OF
SHARES OF COMMON STOCK SHARES OF
COMMON STOCK TO BE SOLD IN COMMON STOCK
NAME BEFORE OFFERING OFFERING AFTER OFFERING
---- --------------- ------------- --------------
The Augustine Fund 509,000 509,000 0
Canadian Advantage L.P. 150,000 150,000 0
9
<PAGE>
PLAN OF DISTRIBUTION
SELLING SECURITY HOLDERS
The Selling Security Holders are offering shares of Common Stock for their
own account and not for the account of the Company. The Company will not
receive any proceeds from the sale of the shares of Common Stock by the Selling
Security Holders.
Each Selling Security Holder will, prior to any sales, agree (a) not to
effect any offers or sales of the Common Stock in any manner other than as
specified in this Prospectus, (b) to inform the Company of any sale of Common
Stock at least one business day prior to such sale and not to purchase or induce
others to purchase Common Stock in violation of Regulation M under the Exchange
Act.
The shares of Common Stock may be sold from time to time to purchasers
directly by any of the Selling Security Holders acting as principals for their
own accounts in one or more transactions in the over-the-counter market or in
negotiated transactions at market prices prevailing at the time of sale or at
prices otherwise negotiated. Alternatively, the shares of Common Stock may be
offered from time to time through agents, brokers, dealers or underwriters
designated from time to time, and such agents, brokers, dealers or underwriters
may receive compensation in the form of commissions or concessions from the
Selling Security Holders or the purchasers of the Common Stock.
Under the Exchange Act, and the regulations thereunder, any person
engaged in a distribution of the shares of Common Stock of the Company offered
by this Prospectus may not simultaneously engage in market-making activities
with respect to the Common Stock of the Company during the applicable "cooling
off" periods prior to the commencement of such distribution. In addition, and
without limiting the foregoing, each Selling Security Holder will be subject to
applicable provisions of the Exchange Act and the rules and regulations
thereunder, including, without limitation, Regulation M, which provisions may
limit the timing of purchases and sales of Common Stock by the Selling Security
Holder. There are possible limitations upon trading activities and restrictions
upon broker-dealers effecting transactions in certain securities which may also
materially affect the value of, and an investor's ability to dispose of, the
Company's securities.
The Company will use its best efforts to file, during any period in
which offers or sales are being made, one or more post-effective amendments to
the Registration Statement, of which this Prospectus is a part, to describe any
material information with respect to the plan of distribution not previously
disclosed in this Prospectus or any material change to such information in this
Prospectus.
LEGAL PROCEEDINGS
The Company is not subject to any legal proceedings. The Company is unaware
of any governmental authority that is contemplating any procedure to which the
Company is a participant.
10
<PAGE>
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
The Directors and Executive Officers of the Company are as follows:
Name Age Position
- ---- --- --------
A. Daniel Geribo 53 Director, President and Secretary
Alan S. Casale 48 Director
Dolores Guglielmi 59 Director
Janet M. Hoey 35 Treasurer
Daniel Geribo was elected President in November 1996 and has served as
President, Treasurer, Secretary and sole director of Capital Video Corporation,
which operates a chain of retail video stores in the New England and upstate New
York area since November 1994, and from September 1993 to November 1994 served
as General Manager of Capital Video Corporation. From January 1983 to May 1993,
Mr. Geribo served as President of Unfinished Furniture House, Inc., a chain of
retail furniture stores.
Alan S. Casale is a principal in the accounting firm of Casale, Caliri &
Jeroma since 1987. Mr. Casale was formerly the principal of Cardello,
Riccitelli & Casale who were the auditors of record of the Company from December
1992 to February 1993, and audited the financial statements of Metro for the
years ended May 31, 1992 and May 31, 1991.
Dolores Guglielmi has been a Registered Nurse Anesthetist for Associates in
Anesthesia, Inc. a medical services provider, for more than five years.
Janet M. Hoey was elected Treasurer of the Company in December 1997. Ms.
Hoey was employed by the accounting firm of Ernst and Young from 1985 through
1990. From 1990 through 1996, Ms. Hoey was employed as controller and financial
consultant for Quantum Resources, a forensic accounting and consulting company.
Prior to joining Metro, Ms. Hoey was employed by Barnstable County Supply as its
controller. Ms. Hoey is a certified public accountant.
In addition to the Directors and Executive Officers listed above, Dennis
Nichols is expected to make a significant contribution to the business of the
Company and its subsidiaries. Dennis Nichols has served as President and sole
director of Metro Inc. since its inception in 1990. From March 1992 to November
1994, Mr. Nichols served as President, Treasurer, Secretary and director of
Capital Video Corporation, which operates a chain of retail video stores in the
New England and upstate New York area.
No director or executive officer serves pursuant to any arrangement or
understanding between him or her and any other person(s), other than
arrangements or understandings with directors and officers acting solely in
their capacity, as such.
11
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the Company's
Common Stock beneficially owned as of November 30, 1998, (i) by each person who
is known by the Company to own beneficially more than 5% of the Company's common
stock, (ii) by each of the Company's directors, and by all executive officers
and directors as a group:
<TABLE>
<CAPTION>
NO. OF SHARES OF
COMMON STOCK PERCENTAGE OF
NAME AND ADDRESS BENEFICIALLY OWNED BENEFICIAL OWNERSHIP (1)
<S> <C> <C>
Officers and Directors
- ----------------------
A. Daniel Geribo 10,000 (2) *
788 Reservoir Avenue, Suite 300
Cranston, RI 02910
Alan S. Casale 620 *
1140 Reservoir Avenue
Cranston, RI 02920
Dolores Guglielmi
27 Sherman Avenue
Lincoln, RI 02865 24,600 *
All Executive Officers and
Directors as a group (4 people) 35,220 *
Other 5% Beneficial Owners
- --------------------------
Briana Investment Group, LP 1,492,903 23.35
c/o Helen Adderley, Esquire
Corner House
20 Parliament Street
Hamilton HM DX, Bermuda
Kenneth F. Guarino 545,325 (3) 8.53
50 Fort Avenue
Cranston, RI 02905
Metro Plus 385,000 6.02
1060 Park Avenue
Cranston, RI 02910
</TABLE>
* Beneficial ownership represents less than 1% of the outstanding common
stock.
12
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(1) Assumes 6,192,805 shares of Common Stock issued and outstanding at November
30, 1998, and 200,000 unexercised stock options.
(2) Includes 10,000 unexercised stock options
(3) Includes 200,000 unexercised stock options
DESCRIPTION OF SECURITIES
The Company is authorized to issue up to 10,000,000 shares of Common Stock,
par value $.0001 per share, 2,175 Series A Cumulative Preferred Stock, par value
$.0001 per share, and 2,000,000 shares of Preferred Stock, no par value per
share. As of the date hereof, 875 of the Series A Cumulative Preferred Stock
was issued and outstanding and none of the Preferred Shares were outstanding and
there were 6,192,805 Common Shares outstanding.
Holders of Common Shares are entitled to one vote per Common Share on all
matters to be voted on by Shareholders. The Common Shares do not have cumulative
voting rights. A majority vote is sufficient for most other actions requiring
the vote or concurrence of Shareholders.
All holders of Shares of Common Stock are entitled to share equally in
dividends when and if declared by the Board of Directors out of funds legally
available therefor. It is anticipated that the Company will not pay cash
dividends on its Shares in the foreseeable future. In the event of liquidation
or dissolution of the Company, whether voluntary or involuntary, holders of the
Shares are entitled to share equally in all assets of the Company legally
available for distribution to Shareholders. The holders of Shares have no
preemptive or other subscription rights to acquire authorized but unissued
capital stock of the Company, and there are no conversion rights or redemption
or sinking fund provisions with respect to such Shares. All of the outstanding
Shares and those Shares issued in accordance with this offering will be fully
paid and non-assessable.
INTEREST OF NAMED EXPERTS AND COUNSEL
No such interest.
DESCRIPTION OF BUSINESS.
Metro Global Media, Inc. (the "Company" or "Metro") was incorporated,
under the name South Pointe Enterprises, Inc. in Florida in November 1987. In
February 1996, the Company changed its name from South Pointe Enterprises, Inc.
to Metro Global Media, Inc.
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In November 1996, the Company merged into an inactive subsidiary (Metro
Sub, Inc.) under the laws of the state of Delaware and simultaneously changed
its name back to Metro Global Media, Inc.
MOTION PICTURE PRODUCTION AND DISTRIBUTION.
Metro produces and distributes adult motion picture entertainment. This
includes the production and financing of feature films (full-length motion
pictures produced on film), feature videos (full-length motion pictures produced
on videotape), and video compilations, distributed primarily on videocassettes;
the distribution of pay television and cable programming; and the ownership and
administration of film copyrights. Metro's motion picture productions feature
men and women in a variety of erotic and adult sexual situations. The
Classification and Rating Administration of the Motion Picture Association of
America (the "MPAA"), a motion picture industry trade association, assigns
ratings for age group suitability for theatrical and home video distribution of
motion pictures. Submission of a motion picture to the MPAA for rating is
voluntary, and Metro does not submit its motion pictures to the MPAA for review.
However, with the exception of several titles which have been re-edited for
cable television, most of the films and videos distributed by Metro, if so
rated, would most likely fall into the "NC-17 --No Children Under 17
Admitted"/1/ rating category because of depiction of nudity and their sexually
explicit content.
Metro owns or has distribution rights to a library in excess of 3,000
titles available on videocassette. The Company has sold approximately 2,100,000
video cassettes during the fiscal year ended May 30, 1998, primarily to retail
stores and wholesalers located in the United States. Many of Metro's original
motion picture programs have been re-edited and licensed to cable television
operators. Several of the titles in Metro's motion picture library have been
obtained from third parties under distribution agreements pursuant to which
Metro has acquired perpetual distribution rights, and in some cases limited
foreign distribution rights, to the motion picture. Metro continues to expand
its video distribution into international markets and has entered into license
agreements with international distributors granting distribution rights to
several of its motion picture titles in several countries outside the United
States. Metro is in the process of converting its top-selling films and videos
into the DVD format, which is expected to be the format of the future. Sales of
DVD releases have surpassed the sales of the videocassettes on a title-by-title
basis, and are expected to continually increase.
During fiscal 1998, the Company released 3 new feature films, 75 feature
videos, and 200 video compilations. During 1999, the Company expects to release
9 feature films, 138 feature videos, including 36 Magma titles, and 240
compilations, a 39% increase over fiscal 1998. The Company will continue to
actively seek to acquire distribution rights to additional titles produced by
third parties, and increase its efforts to distribute its library and new titles
into domestic cable and satellite television markets as well as new
international markets. See "Management Discussion and Analysis of Financial
Condition and Results of Operations."
________________________________
/1/"NC-17: No Children Under 17 Admitted" is a registered trademark of the
Classification and Rating Administration of the Motion Picture Association of
America, Inc.
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PRODUCTION
- ----------
Metro produces films and videos either solely or under arrangements with
other producers, and is generally the principal source of financing for these
motion pictures. In addition, Metro purchases outright, or licenses for
distribution, completed films and videos produced by others. Acquired
distribution rights may be limited to specified territories, specified media
and/or particular periods of time.
Motion pictures shot on film generally offer better production quality,
utilize more elaborate production techniques and incur higher production costs
than motion pictures shot on videotape. Many of Metro's new feature film
releases are edited into several versions, depending on the media through which
they are distributed. Metro has licensed several of its films and videos for
showing on the Playboy Channel, a cable television channel produced by the
publishers of Playboy Magazine/2/, as well as pay-per-view television. In
general, versions of the films edited for cable or pay-per-view television are
less sexually explicit than the versions edited for home video distribution. The
Company has negotiated a variety of exclusive and non-exclusive licensing
arrangements with several cable and pay television operators for several of its
feature releases that have been produced during the past two fiscal years,
including arrangements which permit unlimited showings for a defined duration in
exchange for a one-time lump sum royalty payment, arrangements for which the
Company is paid a fee based on the number of subscribers to the cable station
and the number of times the Company's motion picture is shown, and arrangements
pursuant to which the Company receives a commission based upon the revenues
received by the pay television operators as a result of a showing of the
Company's motion picture.
In May 1998, the Company entered into a licensing deal with New Frontier
Media, Inc. ("New Frontier"), a publicly traded adult satellite network company.
New Frontier, through its wholly-owned subsidiary, Colorado Satellite
Broadcasting ("CSB") launched "TeN: The Erotic Network" in August of 1998. New
Frontier also owns the Ecstasy Network which consists of three 24-hour direct to
home satellite channels. Metro will produce films and videos on a continuing
basis to be broadcast on these networks. This deal involves the licensing of
titles from the Company's library as well as new release titles.
Additionally, in July 1998, the Company signed an agreement with Cable
Entertainment Distributors ("CED") to represent Metro for adult programming
through cable, television, satellite and stand-alone systems throughout the
United States. As part of the agreement, the Company signed an output agreement
with Playboy Entertainment Group. Under the agreement, the Company will supply
Playboy with a minimum guarantee of 175 titles, of which 103 will be selected
from Metro's existing film library and the balance from new productions over the
next two years.
_______________________________
/2/"Playboy" is a registered trademark of Playboy Enterprises, Inc.
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DISTRIBUTION
- ------------
Metro distributes, for home video use, pre-recorded video cassettes, CD-
ROM, video CD and DVD products, containing motion pictures owned or licensed by
Metro. Wholesale distribution of Metro's home video products is accomplished
through a distribution network of wholesalers located throughout the United
States and Europe. Metro has contracted with video distributors in many major
cities throughout the United States and Europe for the distribution of its home
video products.
In addition, Metro operates a regional distributorship for its own motion
picture titles as well as the motion picture titles of other companies to retail
outlets located throughout New England and upstate New York. Metro's New England
region fulfillment activities are conducted from a centralized 64,000 sq. ft.
facility in Cranston, Rhode Island.
In January 1996, the Company entered into a Distributorship Agreement with
Phantasm Video Productions, BV of Holland ("Phantasm"), one of the largest
distributors of adult entertainment products in Europe. Pursuant to the
Distributorship Agreement, Metro will provide Phantasm with a minimum average of
12 new titles per month during the term of the Agreement, and Phantasm shall
serve as the exclusive distributor throughout Europe for those titles purchased
by Phantasm for a 3-year period from release date. Under the Distributorship
Agreement, Phantasm is required to purchase a minimum of 75,000 units during
each six-month period during the term of the Agreement. In August 1996, the
Company acquired the option to purchase all of the operating subsidiaries of
Phantasm Holdings, BV of Holland. Under the terms of the Option Agreement, the
Company has the option to acquire, at any time prior to July 31, 1999, the stock
of Phantasm Video productions, B.V. Holland, Malibu Video productions GmbH of
Germany, and Phantasm Video productions SARL of France, at a purchase price to
be determined based on a multiple of earnings of these companies for the two
years prior to the date of exercise of the option. Phantasm breeched the
distribution agreement and was not in compliance with the terms of the Option
Agreement. During fiscal 1998, the Company terminated the Agreement.
In July 1996, the Company opened an international sales office in
Flensburg, Germany. This sales office handles the sales of video rights
throughout the world. This office also handles all international sales of CD-
ROM, video CD, DVD products and magazines. Due to the termination of the
agreement with Phantasm, this office will now handle the sale and distribution
of Metro's finished goods product throughout Europe. The sales office was
incorporated as a Gmbh in August 1998 and will be consolidated in the financial
statements of Metro beginning in the first quarter of fiscal 1999.
DUPLICATION AND FULFILLMENT
- ---------------------------
Metro creates and designs all artwork for promotional items and packaging
and contracts for printing services. Over 50% of all videocassettes are
duplicated at Metro's own duplicating facility located in Los Angeles County,
California, with the remaining being contracted to independent laboratories.
Metro markets and sells completed cassettes to distributors, retailers and mail
order outlets in the United States. All international orders are handled from
Metro's sales offices in Flensburg, Germany.
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MAGAZINE PUBLISHING AND DISTRIBUTION
- ------------------------------------
Metro publishes and distributes a variety of adult magazines and paperback
books. Metro publishes several special interest magazines under various trade
names which it distributes through wholesalers located throughout the United
States, Canada and Europe. For example, the Company publishes several magazines
featuring pictures of men and women engaged in erotic and sexually situations,
magazines oriented to readers with specific sexual preferences, and magazines
featuring photographs and short stories contributed by photographers and
writers. Metro currently publishes 10 magazines which are distributed on a bi-
monthly or quarterly basis.
During fiscal 1998, Maxstone Media Group ("Maxstone") published four
magazines under the AMATEURS EXTRA title. Distribution of this title was
handled by outside distributors. Beginning in fiscal 1999, Maxstone will
publish 12 magazine titles including a newly formatted magazine entitled
AMAZING. This new format will be printed in seven languages and distribution
agreements have been committed in all European countries as well as South
Africa, Australia and New Zealand. The North American distribution will be
handled by Metro. Each of the planned new publications will contain exclusive
photos from Metro's extensive film and video library in an effort to cross-
promote the product line in countries where Metro's video products are currently
distributed.
On July 31, 1998, the Company acquired Fanzine International, Inc.
("Fanzine"), a publishing company which produces a line of event driven,
mainstream magazines, which are translated into seven languages and distributed
to over twenty different nations. During fiscal 1998, Fanzine released Hit
Sensations and Hit Sensations Specials on music, television, sports and
Hollywood celebrities. Since inception, in the summer of 1997, consumers have
spent over $20 million in purchases of better than 90 Fanzine domestic and
foreign releases.
Fanzine intends to expand its product base with a line of high-quality
academic calendars as well as the launch of four major new monthly celebrity
magazines, CELEBRITY STYLE, TEEN CELEBRITY, GYM and BURN.
CELEBRITY STYLE and TEEN CELEBRITY (two of the largest launches in the
entire magazine industry in 1998) will each distribute more than 700,000 copies
on newsstands throughout the United States and Canada beginning in October of
1998. Both publications take advantage of the heightened interest in
entertainment celebrities and their lifestyles. Competitive sales data indicates
that this genre is currently hotter than any other. GYM and BURN will offer
practical health, fitness and nutritional advice for today's male reader. Like
CELEBRITY STYLE and TEEN CELEBRITY, GYM and BURN will feature strong editorial
content as well as exceptional packaging quality. They are scheduled to hit
newsstands during the first quarter of 1999, with projected distributions of
250,000 each.
PRODUCTION AND FULFILLMENT
- --------------------------
Production for Metro is carried out by several independent companies.
Production contracts are entered into on a series rather than a single title
basis and are fixed-price with provisions for cost of
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labor, material and specification adjustments. These contracts, subject to
certain limitations, may be terminated by Metro or the production company.
All of Metro's publications are printed by independent third parties.
Metro has had a longstanding relationship with a printer in the United States,
who is also a printer of other magazines that compete with Metro. Nonetheless,
Metro believes that generally there is an adequate supply of printing services
available to Metro at competitive prices, should the need arise. All of Metro's
production and printing activities are coordinated through its facility located
in Los Angeles County, California.
Wholesale distribution of Metro's publications is accomplished through a
distribution network of wholesalers located throughout the United States and
Canada. Metro has contracted with magazine distributors in many major cities
throughout the United States for the distribution of its publications.
During fiscal 1999, the Company entered into consulting agreements with two
individuals with expertise in the areas of production, marketing, sale and
distribution of magazines and other periodicals. The consultants shall provide
such services as reasonably necessary to promote and further the appointment of
Metro as a secondary national distributor of periodicals for publishers and
distributors that Metro is not presently servicing. The consultants will
coordinate with publishers and distributors for the appointment of Metro as a
secondary distributor and establish and maintain, for Metro, a customer base for
such periodicals.
In addition, Metro operates a regional distributorship for its own
publications as well as adult magazines produced by other parties to retail
outlets located throughout New England and upstate New York. Metro's New
England and New York 's region fulfillment activities are conducted from a
centralized facility in Cranston, Rhode Island.
Fanzine's extensive group of publications utilizes the services of multiple
printers, all of whom perform their services on terms which are extremely
beneficial to the Company. The on-going relationships with these printers allow
the Company a flexibility of options that few others can match. Distribution for
the Fanzine line is realized through mass market circulation to supermarkets,
drugstores, convenience stores, discount/department, newsstands and
transportation centers. Additionally, Fanzine has direct-to-retail
relationships with many major North American bookstore chains.
COMPETITION
- -----------
Metro meets with direct competition from other publishers of adult
magazines and paperback books as well as all other forms of print media adult
entertainment, including several more well-known national publications with
substantially larger circulation than those of Metro.
RETAIL AND FRANCHISE SALES
- --------------------------
In May 1994, the Company formed Airborne For Men, Ltd. ("Airborne for Men"),
a wholly-owned subsidiary which engaged in (i) the retail sale of adult
entertainment products through company-owned
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Airborne For Men(TM) retail stores and (ii) the sale of franchises to operate
Airborne For Men(TM) retail stores. Airborne For Men(TM) stores are upscale,
adult-oriented establishments decorated in a aviation-theme motif, and represent
a complete departure from traditional outlets for adult entertainment products.
Airborne For Men(TM) stores differ markedly from traditional adult video
retailers, both in product line and presentation. In addition to selling adult
video and magazine products, each Airborne For Men(TM) store sells nationally
recognized name brand men's casual clothing and accessories, such as leather
bomber jackets, footwear, underwear and shaving supplies.
In September 1994, Airborne For Men completed the acquisition of 100% of
the outstanding capital stock of Eastern Sales, Inc., a Rhode Island
corporation. See "Certain Relationships and Related Transactions." Eastern
Sales, Inc. operates a retail adult video and book store in Johnston, Rhode
Island, which opened as the first Company-owned Airborne For Men(TM) retail
store in October 1994. The exterior of the Johnston, Rhode Island, store has a
building-wide mural reflecting Airborne's military/aviation motif, with a
Quonset-hut style entrance and a World War II vintage jeep projecting from the
facade. In April 1995, the Company's first Airborne For Men(TM) franchise opened
in Providence, Rhode Island. The Company opened a second Airborne For Men(TM)
store in East Providence, Rhode Island, in March 1995, and a third Airborne For
Men store in Northboro, Massachusetts, in May 1995.
Effective January 31, 1996, Airborne for Men sold to Capital Video
Corporation the stock of its wholly-owned subsidiary, A.F.M. Limited, and,
effective November 30, 1995, Airborne for Men sold to Capital Video Corporation
the stock of its wholly-owned subsidiaries, Eastern Sales, Inc., a Rhode Island
corporation, and Airoldco, Inc. (formerly known as Airborne East, Inc.), a Rhode
Island corporation.
As a result of the transaction, Airborne for Men has a total of 6
franchisee-owned Airborne for Men(TM) retail stores (of which five are owned by
Capital Video Corporation) as of May 30, 1997. The transaction reflected
Airborne's desire to shift its focus from retail store management to franchise
development, thereby permitting the Company to open Airborne for Men locations
without incurring the start-up expenses associated with completing the store
build out and compiling an opening inventory. The transaction improved the
Company's overall cash flow because it significantly reduced the Company's debt
service requirements and dramatically reduced the Company's debt-to-equity
ratio.
In connection with the November 30, 1995, transaction, Capital Video
Corporation agreed to assume indebtedness of Airborne to Kenneth F. Guarino and
the indebtedness of Metro, Inc. to Metro Equipment Company and a portion of the
indebtedness of Metro, Inc. to Metro Equipment Company for a total of $622,928
plus accrued interest of $103,656.
In connection with the January 31, 1996, transaction, Capital Video
Corporation agreed to assume the balance of indebtedness of Metro, Inc. to
Northstar, as well as a portion of the indebtedness of Metro, Inc. to Metro Plus
Company totaling $350,361.
Capital Video Corporation, which operates a chain of 34 retail video and
magazine stores throughout New England and upstate New York, of which 5 are
Airborne for Men(TM) franchises, and Airborne For Men agreed to waive the
standard Airborne for Men(TM) franchise fees. Because of Capital
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Video Corporation's extensive retail experience in the industry, Airborne
anticipates that it will be required to provide less management, inventory
control and marketing services to Capital Video Corporation than it would to a
less experienced franchisee; accordingly, Airborne agreed to reduce by 50% its
standard Airborne for Men royalty fees. In connection with the acquisition of
A.F.M., Limited, Capital Video Corporation and Airborne For Men agreed that the
store owned by A.F. M. Limited would constitute the first of Capital Video
Corporation's four (4) conversion stores and that Capital would be permitted to
satisfy its remaining three store obligation either by converting existing
Capital Video Corporation locations or opening new Airborne For Men(TM)
locations on or before December 1996. No franchise fees were recognized for
fiscal year May 1997.
To enhance Airborne's growth opportunities, the Company has employed a
strategy of pursuing franchised Airborne For Men(TM) retail stores. The extent
to which a prospective market will be developed, will be determined by
evaluating a number of different criteria, including available resources and the
interest generated by prospective franchisees. Airborne retained a franchise
development consultant to assist in the preparation of a retail store franchise
package, and has completed registration of its Franchise Offering Circular in
the States of Rhode Island, New York, California and Connecticut, and has
received an exemption from the registration requirements in the State of
Florida. In addition, as a result of its franchise registration in Rhode Island,
Airborne is permitted to offer franchises in approximately 28 states, including
Massachusetts, Pennsylvania and New Jersey, in which registration of franchise
offerings is not required.
Under Airborne's franchising program, the Company will grant to a franchise
owner the right to develop one or a specified number of Airborne For Men(TM)
retail stores at an approved location. Prior to the opening of an Airborne For
Men(TM) franchise, franchisees will be required to execute Airborne's standard
franchise agreement. This form of agreement governs the operation of a single
Airborne For Men store for a period of ten years. Airborne For Men(TM)
franchisees will be required to pay Airborne an initial franchise fee of
$20,000, plus an additional $10,000 if the Company selects the sight, a signed
lease expense of $6,000 to $10,000, weekly royalties ranging from 5% to 8% of
gross sales, and weekly advertising fees of 1% of gross sales. Each franchise
owner will have the sole responsibility for all financial commitments relating
to the opening and operation of an Airborne For Men(TM) franchise, including
rent, utilities, payroll and other incidental expenses. In addition, franchisees
will be required to purchase all of its video and magazine inventory from Metro
and all of its men's casual wear and accessories from approved vendors, and will
be required to expend an additional 2% of gross sales on advertising expenses.
The estimated total initial investment per franchise will range from
approximately $165,000 to $230,000, depending on the amount of leasehold
improvements, inventory and other start-up expenses required for the proposed
franchise location.
Airborne will assist franchisees by approving prospective Airborne For
Men(TM) locations and, if necessary, by finding and securing appropriate
Airborne For Men(TM) locations. In addition, Airborne will provide franchisees
with specifications and layouts for each approved Airborne For Ment(TM)
location, an initial training program, a start-up marketing program, and on-site
consultation and guidance, as requested. Airborne will provide extensive product
and support services to its franchise owners, and will derive income from
providing these products and services. With the possible exception of offering
net 30-day
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terms on sales of inventory to credit-worthy franchisees, Airborne does not
intend to provide financing to prospective franchisees. Airborne has not set
specific requirements as to who may become an Airborne for Men(TM) franchisee;
rather, franchisees will be approved by Airborne based upon management's
assessment of the prospective franchisee's net worth, available working capital,
business acumen and financial ability to successfully operate an Airborne For
Men(TM) franchise.
To date, the Company has financed its investment in Airborne's franchise
operations through cash flow from operations. (See "Management's Discussion and
Analysis of Financial Condition and Results of Operations "). The Company
anticipates that the revenues derived from the sale of franchises will offset
the costs associated with offering and assisting franchisees in opening Airborne
For Men franchises.
The Company is in the process of re-evaluating the Airborne concept. The
Company is working with CVC in the launching of a new concept that will be
geared towards women and couples. The Company has retained top designers and
marketing specialists to assist in the creation of this futuristic store. CVC
has selected the flagship site and construction is underway. The new store,
located in Rhode Island, is scheduled to open in January 1999. It is Metro's
intention to market this new store concept to attract new franchises.
COMPETITION
- -----------
Although the Company has distinguished Airborne For Men(TM) stores from
traditional adult video retailers in product line and presentation, both
Company-owned and franchised Airborne For Men(TM) stores compete with existing
adult video retailers who may be situated in better locations. Airborne's
franchise operation also competes with many well-established and successful
franchisers in the sale of franchises.
ARCUS MEDIA GROUP, INC.
- -----------------------
In October 1994, the Company formed Arcus Media Group, Inc. ("Arcus"), a
wholly-owned subsidiary. In November 1994, Arcus acquired certain assets,
including equipment and key technical personnel, of Innovative Data Concepts
Incorporated, a Pennsylvania corporation previously engaged in computer software
development. During the fourth quarter of fiscal 1995, Arcus determined that it
would be more efficient and cost-effective to engage independent contractors to
digitize and convert the Company's motion pictures into the CD-ROM format, and
to acquire distribution rights to CD-ROM interactive games authorized by
independent software developers. Accordingly, Arcus reduced its in-house
technical workforce and relocated its sales and marketing operation to the
Company's Rhode Island facility, and the approximately $419,000 in unamortized
cost allocated to the previously capitalized employment contract was expended at
May 30, 1995. In May 1995, Arcus filed suit against IDC alleging
misrepresentation in connection with the transaction. On May 30, 1996, the suit
filed by Arcus against IDC was settled. As a result of the settlement, the
Company received from IDC 75,000 shares of the 160,000 shares of the Company
originally issued to IDC as part of the November 10, 1994, Asset Purchase
Agreement. Effective May 30, 1997, Arcus Media Group was liquidated and has
become a division of Metro, Inc. which will continue CD-ROM product sales and
development under the trade name Arcus
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Media Group.
Metro has and intends to continue to digitize and convert selected titles
from the Company's existing film library to the CD-ROM format, under the Arcus
trade name. Arcus has and will continue to develop technically sophisticated
products on the most popular personal computer platforms, currently Microsoft
Windows/3/ and Apple Macintosh CD-ROM, primarily for use in home personal
computers. Arcus has released 35 full-length CD-ROM titles in the hybrid
Windows/ Macintosh platform as of May 31, 1998. To capture international sales
opportunities, Arcus expects to release these CD-ROM titles utilizing Video CD
technology, which will permit playback on both the CDI and MPEG platforms.
Future product releases by Arcus will be dependent on the continued market
acceptance of its initial product releases.
Arcus' CD-ROM products enable viewers to enjoy full-screen, full-motion (30
frames per second) CD-ROM visual display. Arcus' product development process
includes design, prototyping, programming, computer graphic design, animation,
sound and video recordings and quality assurance. Arcus has and expects to
continue to utilize third-party designers, artists and programmers to introduce
creative and technically superior products. The success of software product
development is unpredictable due to the technological complexity, inherent
uncertainty in anticipating technological developments, the need for coordinated
efforts of numerous technical personnel in such development and the difficulties
in identifying and eliminating errors prior to product release.
Preparation of master CD-ROM discs, user manuals and promotional materials
as well as duplication of the CD-ROM discs and printing of the user manuals and
packaging has been and will be performed by outside developers to Arcus'
specifications. Arcus does not anticipate experiencing any material
difficulties and delays in the manufacture and packaging of its products.
Distribution of Arcus' CD-ROM products is accomplished through the same
distribution network of wholesalers and retailers to whom Metro distributes its
adult video products and computer software distributors and retailers. Order
fulfillment is coordinated through Metro's Rhode Island distribution facility.
Sales of consumer software are highly dependent on the availability of
relatively inexpensive personal computers. Major computer manufactures have
continued to enhance their lower-end product offerings to consumers by
increasing the power and speed of these machines without significantly
increasing the price. The inclusion of CD-ROM technology in home personal
computers and the decline in prices for CD-ROM hardware will contribute to the
demand for CD-ROM software products that can utilize the graphics, sound and
data capabilities of the latest hardware technology.
Although Arcus intends to focus on digitizing selected titles from the
Company's existing film library for the foreseeable future, Arcus also intends
to engage in the distribution of other adult-theme digital multimedia projects
such as interactive games. The Company launched its first CD-ROM inter-active
game in July of 1995, Virtual Valerie II, which has been quite successful. The
revenue
______________________________
/3/Microsoft and Windows are registered trademarks of Microsoft
Corporation. Macintosh is a registered trademark of Apple Computer Inc.
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generated by Virtual Valerie II since its release through the fiscal year ended
May 30, 1998, is in excess of $1,000,000. Based on the success of its first CD-
ROM inter-active game offering, Arcus is continuing to look for other
opportunities in this arena. Arcus' ability to successfully market these
products will depend on continued market acceptance of its initial products and
the availability of independently produced adult CD-ROM interactive games.
During 1998, the Company created the "Amazing Interactive Digizine", a
magazine style format on a CD-ROM. The Digizine features film clips and photos
of new release adult films, video centerfolds, fiction and product reviews.
Agreements have been put in place to release future issues of the Digizine
through established mass media distribution channels. With its special
packaging, it will be available at newsstands, bookstores, video stores and
computer stores.
In November 1997, Arcus Media Group released the first adult related full
featured Digital Versatile Disk ("DVD") title, "Zazel". "Zazel", an award
winning movie, featuring an automated photo gallery, full motion chapter index
and star biographies captured the adult entertainment audience. After
completing four titles, Arcus Media Group released "Red Vibe Diaries", another
first in technology advancements. Fully automated menu icons drew the attention
of "Forbes" magazine and "U.S. News" for technological design advancements.
With the Arcus development team leading the new revolution in home video DVD,
another first in technological design breakthrough was at hand. True Perspective
multiple angle was introduced on "Taboo #17" and was immediately recognized by
major motion picture studios at the premier of the Las Vegas V.S.D.A. Show. True
Perspective technology allows the viewer to watch the same moment in time from
two distinctive angles.
Additional features, never done before in the adult arena, were introduced
into the "Director's Cut" edition with director's narration, exclusive behind
the scenes footage and future DVD preview releases. The Company plans to release
the DVDs with multiple language selection to enable immediate international
distribution to a pre-existing European market. Metro has released 9 DVD titles
as of May 30, 1998, and 36 titles are currently being developed.
With funding planned for additional titles and incredible demand for this
high quality video format, Arcus continues to push the limits of DVD technology.
According to Adult Video News ("AVN") the industry's leading publication,
"Metro's DVD is a breakthrough in digital video and their CD-ROM technologies
are distinctive and groundbreaking. The DVD is a step ahead of the rest, and
the Amazing Digizine is something to look forward to".
The Company has no way of accurately assessing the amount of capital
resources that will be required to develop future projects, or the amount and
extent of financing that will be available to meet these requirements. The
Company, in connection with the development of Arcus products, incurred
approximately $200,000 to $250,000 of operating costs during fiscal 1998. The
Company has financed, and will continue to finance, its investment in Arcus
brand products through cash flow from the Company's operations.
23
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COMPETITION
- -----------
There are several competitors of Arcus that have already released adult CD-
ROM and DVD titles and interactive games, many of whom have significantly
greater financial, technical and marketing resources than those of Arcus.
Moreover, Arcus believes that new competitors are increasing their focus on the
consumer software market which will result in greater competition for Arcus.
WWW.AMAZINGONLINE.COM
- ---------------------
With the launch of amazingonline.com website and the continued demand from
our members for information about purchasing our products, the launch of the
world's largest adult shopping mall was inevitable. From design inception,
creating a full featured, user friendly shopping interface was the first
priority. Customer identification with childproof functions were incorporated
into the design parameters. Other features include order tracking, previous
customer billing and shipping information to simplify future purchases for the
consumer. With all major video, novelty and lingerie manufactures' products
available and new release pre-ordering capabilities, future growth of online
purchasing is assured to be a substantial revenue source for years to come. The
on-line mall commenced operations on July 1, 1998, and the user base has been
increasing weekly.
At amazingonline.com, there are 2 separate sections available to the
public. One section is created for visitors who wish to peruse the site and the
other is for those who are members who subscribe to the site for a monthly or
bi-monthly fee. The members' section allows them to take full advantage of (a)
live shows; (b) 10 % discount on items advertised on our Shopping Mall; viewing
access to exclusive star biographies; (d) an extensive photo gallery and (e)
video clips & previews and much more.
In addition to our Shopping Mall, another area of concentration is our
"People Connection". In this area of the site, developed from our Contact
Magazines, members have access to browse advertisements from real people in any
geographical area and contact them directly.
Our site also allows members the opportunity to download movie clips and
erotic stories, view live video and join adult chats. Due to the way
amazingonline.com was created, this site offers a fully interactive online
experience.
DIRECT MAIL ORDER
- -----------------
Amazing Direct was formed in March 1998, as a direct mail order company.
The Company plans to build a customer data base through advertisement in adult
magazines as well as purchasing or renting customer lists. Brochures are mailed
on a quarterly basis to approximately 150,000 active customers. The company had
one mailing during fiscal 1998. All orders are taken via phone or mail and sent
to the Cranston, RI, warehouse for fulfillment.
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The Company anticipates over 100% growth during fiscal 1999, as the
customer database continues to expand. Amazing Direct is currently matching
phone numbers and addresses from its audiotext business to target these
customers on the next catalog mailing.
COMPETITION
- -----------
Competition in the mail order business is high. The Company competes with
such businesses as Adam and Eve, Leisure Time and Video Age. It is the
Company's belief that it can continue to penetrate this line of business by
continuing to increase its database.
MAJOR CUSTOMERS
- ---------------
Capital Video Corporation operates approximately 34 video and magazine
retail stores in the New England and upstate New York areas and accounted for
approximately 47% of Metro's net sales for the fiscal year ended May 30, 1998,
39% of Metro's net sales for the fiscal year ended May 31, 1997, and 32% of
Metro's net sales for the fiscal year ended May 31, 1996. See "Certain
Relationships and Related Transactions". No other customer accounted for more
than 10% of Metro's net sales for the fiscal years ended May 30, 1998, 1997 and
1996.
TRADEMARKS AND TRADE NAMES
- --------------------------
Metro owns or licenses numerous trademarks and copyrights that it uses in
its video and magazine businesses. Its most important trademarks are METRO(TM),
INTROPICS(TM), CAL VISTA(TM), MAGMA(TM), ULTRACOLOR PUBLICATIONS(TM),
AMAZING(TM), TOXXXIC(TM), METRO PRIME CUTS(TM), TABOO(TM), ONLY THE BEST(TM),
CASTING CALL(TM), BABES ILLUSTRATED(TM), SOHO(TM), ARCUS(TM), SUPERSHOTS(TM),
RAGE(TM) and PULSE(TM). Airborne For Men has filed trademark registration
applications with respect to its AIRBORNE FOR MEN tradename and logo. The
Company believes that the name recognition and image that it has developed in
each of its markets significantly enhance customer response to its sales
promotions. Accordingly, trademarks and copyrights are important to the
Company's business and the Company intends to aggressively defend them.
The Company acquired the trademarks HIT SENSATIONS, CELEBRITY STYLE and
TEEN CELEBRITY through its acquisition of Fanzine.
BUSINESS ACQUISITIONS AND OTHER ACTIVITIES.
- -------------------------------------------
In August 1997, Rocket Media Group, LLC, a wholly-owned subsidiary of
Metro, Inc., entered into a joint venture with Salmill Enterprises, Inc. for the
purpose of magazine publishing. Under the terms of the agreement, Rocket
contributed a sub-license agreement for the rights to certain titles, names and
materials and Salmill contributed its publishing and circulation expertise into
a newly-formed entity, Maxstone Media, LLC. The Company recorded its capital
contributions at zero and included Maxstone Media's results from operations in
the consolidated financial statements. Minority interest amounted to $18,220 at
May 30, 1998.
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<PAGE>
In March 1998, the Company acquired an 80% interest in Amazing Direct, a
Nevada Corporation, by purchasing 400 shares of its outstanding stock at $2.00
per share. Amazing Direct, a mail order company, has rights to a licensing
agreement to distribute certain products under the Hustler name.
On July 31, 1998, the Company acquired 100% of the stock of Fanzine
International, Inc. ("Fanzine") for a preliminary purchase price of $7,500,000
in a transaction approved of by the Company's Board of Directors. Fanzine,
which began operations on August 1, 1997, publishes event driven, mainstream
magazines translated into seven languages and distributed worldwide. The
acquisition price consists of $4,000,000 cash, and 1,000,000 restricted shares
of the Company's common stock with put option rights at $8.00 per share to be
exercised by the selling shareholder's during the second year on a quarterly
basis, if certain minimum earnings, as defined, are met. However, during
Fanzines' first year of operations, the Company has the right to call the shares
at the greater of $6.00 per share or 75% of the market price. The acquisition
agreement also provides for a reduction in purchase price if Fanzine's results
of operations do not meet certain minimum earnings.
Management is presently obtaining an independent valuation to finalize the
preliminary estimated purchase price of $7,500,000. The Company's right to
redeem its shares during the first year and on the selling shareholder's right
to put the shares to the Company in the second year could result in an estimated
increase in purchase price ranging from $2,500,000 to $4,500,000. These
adjustments to the purchase price could have a material impact on the pro-forma
information, as presented below, and to the future consolidated results.
The acquisition will be accounted for as a purchase. The excess of the
purchase price over the fair market values of net assets acquired, which
include, among others, licences, trademarks, and distribution rights, will be
allocated principally to goodwill and amortized over fifteen years.
The cash portion of $4,000,000 is being financed by a long-term convertible
debenture. Management anticipates financing the contingent consideration, if
any, to be paid in the near future through Fanzine's cash flow resulting from
profitable operations.
As the acquired company (Fanzine) financial statements only include eleven
months of operations from inception through June 30, 1998, the following
selected unaudited pro-forma information is being provided to present a summary
of the continued results of the Company and Fanzine as if the acquisition had
occurred on August 1, 1997:
26
<PAGE>
Pro-Forma information (Unaudited)
(In thousands, except per share data)
YEAR ENDED MAY 30, 1998 (ONLY)
------------------------------
Net sales $30,137
Net Income 1,140
Earnings Per Share:
Basic .25
Diluted .20
The pro-forma results include amortization of the intangibles and interest
expense on debt issued to finance the purchase. The pro-forma results are not
necessarily indicative of what actually would have occurred if the acquisition
had been completed as of the beginning of the fiscal period presented, nor are
they necessarily indicative of future consolidated results.
GOVERNMENT REGULATION
- ---------------------
The right to distribute adult videocassettes, magazines and CD-ROM products
is protected by the First and Fourteenth Amendments to the United States
Constitution, which prohibit Congress or the various states from passing any law
abridging the freedom of speech.
The First and Fourteenth Amendments, however, do not protect the
dissemination of obscene material, and several states and communities in which
Metro's products are distributed have enacted laws regulating the distribution
of obscene material with some offenses designed as misdemeanors and others as
felonies, depending on numerous factors. The consequences for violating the
state statutes are as varied as the number of states enacting them. Similarly,
18 U.S.C.(S)1460 - 1469 contain the federal prohibitions with respect to the
dissemination of obscene material, and the potential penalties for individuals
(including corporate directors, officers and employees) violating the federal
obscenity laws include fines, community service, probation, forfeiture of assets
and incarceration. The range of possible sentences require calculations under
the Federal Sentencing Guidelines, and the amount of the fine and the length of
the period of the incarceration under those guidelines are calculated based
upon the retail value of the unprotected materials. Also taken into account in
determining the amount of the fine, length of incarceration or other possible
penalty are whether the person accepts responsibility for his or her actions,
whether the person was a minimal or minor participant in the criminal activity,
whether the person was an organizer, leader, manager or supervisor, whether
multiple counts were involved, whether the person provided substantial
assistance to the government, and whether the person has a prior criminal
history. In addition, federal law provides for the forfeiture of: (1) any
obscene material produced, transported, mailed, shipped or received in violation
of the obscenity laws; (2) any property, real or personal, constituting or
traceable to gross profits or other proceeds obtained from such offense; and (3)
any property, real or personal, used or intended to be used to commit or to
promote the commission of such offense, if the court in its discretion so
determines, taking into consideration the nature, scope and proportionality of
the use of the property in the offense.
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<PAGE>
Because the Company is engaged primarily in the wholesale distribution
of its products to other wholesalers and/or retailers, the Company can regulate
the communities to which it distributes its products. Management has taken steps
to ensure compliance with all federal, state and local regulations regulating
the content of its motion pictures and print products, by staying abreast of all
legal developments in the areas in which its motion pictures and print products
are distributed and by specifically avoiding distribution of its motion pictures
and print products in areas where the local standards clearly or potentially
prohibit these products. In addition, the Company requires that certain video
material be reviewed by an independent advisory panel comprised of two
psychologists, a certified sex therapist, a licensed marriage and family
therapist, a certified sex educator and a licensed independent clinical social
worker. Their review is directed to aspects of serious scientific value as set
forth in the Miller test, because that aspect of the test is not limited by
community standards but is concerned with whether a reasonable person would find
such value in the material, taken as a whole. In light of the Company's efforts
to review, regulate and restrict the distribution of its materials, management
believes that the distribution of Metro's products does not violate any statutes
or regulations.
Many of the communities in the areas in which Airborne intends to offer
Airborne For Men(TM) franchises have enacted zoning ordinances restricting the
retail sale of adult entertainment products. Airborne intends to open Airborne
For Men(TM) stores and to permit the opening of Airborne For Men(TM) franchises
only in locations where the retail sale of adult entertainment products is
permitted.
Distribution rights to video-cassettes, magazines and CD-ROM products are
also granted legal protection under the copyright laws of the United States and
most foreign countries, which provide substantial civil and criminal sanctions
for unauthorized duplication and exhibition. Metro plans to take all
appropriate and reasonable measures to secure and maintain copyright protection
for all of its products under the laws of all applicable jurisdictions.
EMPLOYEES
- ---------
As of May 30, 1998, the Company and its subsidiaries employed approximately
130 persons. It is projected that the Company and its subsidiaries will employ
approximately 150 persons by the end of fiscal 1999.
DESCRIPTION OF PROPERTIES
- -------------------------
The Company's principal administrative offices, consisting of approximately
a 64,000 square- foot office, warehouse and shipping complex, is located in
Cranston, Rhode Island. See "Certain Relationships and Related Transactions".
This facility, which is leased by the Company, houses Metro's administrative,
editorial and operational offices; the data center, customer service, and
warehouse and fulfillment facilities. Metro also leases approximately 32,000
square feet of warehouse space in Los Angeles County, California. This site
also houses Metro's duplicating laboratory. Because Metro's Rhode Island
warehouse facility is not yet at full productive capacity, management of the
Company believes that its current facility is suitable and adequate for the
foreseeable future. The Company also leases approximately 500 square feet in
Felnsburg, Germany, for its international sales.
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<PAGE>
The Company's principal executive offices, which are leased by the Company,
consists of approximately 2,500 square-feet, and are located in Cranston, Rhode
Island. See "Certain Relationships and Related Transactions".
LEGAL PROCEEDINGS
- -----------------
The Company is not subject to any legal proceedings. The Company is unaware
of any governmental authority that is contemplating any procedure to which the
Company is a participant.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
- --------------------------------------------------------------------------
OPERATIONS
- ----------
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED AUGUST 29, 1998 VERSUS THREE
MONTHS ENDED AUGUST 30, 1997.
The Company's revenues increased $2,968,847 to $7,065,068, for the three
months ended August 29, 1998. This represents a 72% increase from revenues of
$4,096,221 for the three months ended August 30, 1997. Revenues consist
principally of sales of prerecorded videocassettes, magazines, electronic
software products and related items. The increase in revenue is primarily
attributable to: (1) revenue of Fanzine ( a newly acquired subsidiary) of
$1,981,736, (2) revenue of Maxstone of $150,331 and (3) an increase in revenue
of Metro, Inc. of $741,285. For the quarter ended August 29, 1998 Fanzine
distributed 14 products, comprised of magazines, posters and calendars. Revenue
is expected to greatly increase in the second quarter due to the release of
Celebrity Style, a new monthly magazine. Revenues for Metro, Inc. increased
$741,285 over the comparable prior period due to increased sales of videos, DVDs
and novelties. For the quarter ended August 29,1998, the Company released 21
feature videocassettes, 55 video compilations, and 3 video packs as compared to
17 feature videocassettes and 36 video compilations, an increase of 49%.
Costs of revenues (including amortization of film costs) for the three month
period ended August 29, 1998 increased to $4,153,050 from $2,846,207 for the
corresponding period in the prior year. Costs of revenues as a percentage of
revenues in the first quarter of fiscal 1998 was 59% as compared to 69.5% in the
first quarter of fiscal 1997. The primary reason for this increase in the cost
of revenue was the following: (1) cost of revenue associated with Fanzine of
$821,920 and (2) increase in cost of revenue of Metro, Inc. of $332,505 due to
the increase in sales. The improvement in the gross margin of 41% for the
quarter ended August 29, 1998 as compared to a gross margin of 31% for the
quarter ended August 30, 1997 is primarily attributable to the gross margin of
Fanzine of 59%.
Selling, general and administrative (SG&A) expenses for the three months
ended August 29, 1998, increased 24% to $1,891,774 from $1,527,257 for the three
months ended August 30, 1997. Selling, general, and administrative expenses, as
a percentage of revenue, improved to 27% in 1998 as compared to 37.1% in the
three months ended August 30, 1997. The primary reason for the improvement in
the percentage is due to Fanzine having $21,556 in selling, general and
administrative expenses on revenue of $1,981,736.
29
<PAGE>
Operating income for the three month period ended August 29, 1998 was
$1,020,244 as compared to operating loss of $(277,243) for the corresponding
period in the prior year. Net income for the quarter ended August 29, 1998 was
$577,508 as compared to a net loss of $(228,458) for the quarter ended August
30, 1997, resulting in a basic earning (loss) per share of $.10 for the quarter
ended August 29, 1998 and ($.06) for the quarter ended August 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES AT AUGUST 29, 1998
Cash and cash equivalents amounted to $423,988 at quarter-end. Cash used in
operating activities amounted to $195,574 for the three months ended August 29,
1998, whereas net cash of $415,842 was provided by operations for the same
period in the prior fiscal year. The Company's primary sources of cash in
fiscal 1998 consisted of: (1) proceeds from issuance of preferred stock of
$1,317,000, (2) proceeds from notes payable of $1,200,000 and (3) proceeds from
issuance of convertible debentures of $1,000,000. The primary uses of cash for
the quarter ended August 29, 1998 consisted of: (1) cash used in operating
activities of $195,574, (2) investments in motion pictures and other films of
$856,627, (3) acquisition of Fanzine for $2,000,000 and (4) purchases of
property and equipment of $179,106.
Working capital amounted to $2,447,481 in August, 1998 as compared to
$3,378,438 in May, 1998. The net increase in accounts receivable of $1,782,164
was primarily due to the increase of sales for the quarter. Inventory increased
$604,113 due to the increase in purchasing to support the increase in sales.
Accounts payable and accrued expenses increased $464,681 due to increase
purchasing and increased spending for film production.
During 1998, notes payable totaling $300,000 were converted into 250,000 of
the Company's restricted common stock.
On July 1, 1998, the Company entered into an 8% convertible debenture
totaling $200,000. The note is due on July 1, 1999, in either cash or common
stock, at a conversion rate of $2.25 per share. Proceeds from the debenture were
used for working capital.
On August 1, 1998, the Company entered into notes payable totaling
$1,000,000. The notes, which bear interest at 8%, are due August 1, 1999.
Proceeds from the notes were used in the acquisition of Fanzine.
On July 31, 1998, the Company entered into an 8% convertible debenture with a
total offering of $7,000,000. The Company received proceeds of $1,000,000 in
August, 1998 which was used in the purchase of Fanzine. The remaining
$6,000,000 of the offering will be sold at the Company's option at calls of
$500,000 each for a period of two years following the date of this agreement.
The $1,000,000 debenture matures on July 31, 2000. Interest is payable on a
quarterly basis. The holder of the debenture is entitled to convert, after 120
days of the agreement, the principal value into the Company's common stock at a
discounted market price.
During 1998, the Company entered into an Offshore Securities Subscription
Agreement for
30
<PAGE>
convertible Preferred Shares pursuant to regulation S of the U.S. Securities Act
of 1933. Under the terms of the agreement, the Company is to issue 2,175 shares
of 1998 Series A Convertible Preferred Stock ("Series A Shares") at a price of
$1,000 per share with a 5% cumulative dividend payable in common stock at
conversion. For the quarter ended August 29, 1998, the Company received
proceeds of $1,317,000, net of offering costs. The Company received proceeds of
$846,500 during the quarter ended May 30, 1998. Proceeds from such agreement
were used to fund working capital.
The Series A Shares are convertible at a rate of 100 shares plus accrued
dividends per week at 80% of the 15 day average closing bid price. These shares
are subject to a 24 month mandatory conversion feature. For the quarter ended
August 29, 1998, 700 shares and accrued dividends were converted into 280,059
shares of the Company's common stock.
In addition to the Series A Shares the Company issued 400,000 warrants to
purchase the Company's common stock at $1.50 per share commencing April 20, 1998
exercisable over 5 years.
Of Metro's total accounts receivable at August 29, 1998, $2,280,072 (33%) as
compared to $2,477,041 (49%) at May 30, 1998 is owed by Capital Video
Corporation ("CVC"), a chain of retail stores of which a former
officer/shareholder of the Company is the sole shareholder. Because of the
amount of this receivable and the concentration of business with CVC, this
receivable is monitored very closely. Metro has the personal guaranty of its one
shareholder. Accordingly, no allowance for related party receivables and no
related party bad debt expense has been recorded in the Company's financial
statements.
At August 29, 1998 the Company estimates 90 new feature films and videos
which will be released during fiscal 1999. The completion of these movies will
require approximately $2,500,000 to $3,000,000. Financing for these activities
has been and will continue to be generated through operating cash flows as well
as funds received from its line of credit.
During June 1997, Metro, Inc. entered into a line of credit agreement with a
finance company. Under the agreement, Metro, Inc. may borrow up to 75% of
assigned accounts receivable less than 90 days old, up to a maximum of
$1,500,000. The balance due under the line of credit bears interest at the
prime rate plus 5% per annum. In addition, Metro, Inc. shall pay the finance
company a collateral management or notification fee equal to 3/4 of 1% of sales
submitted to the finance company for inclusion in the net security value of
accounts receivable, but no more than $7,500 per month. The outstanding balance
under the line is secured by accounts receivable of Metro, Inc and guaranties of
the Company and certain officers/shareholders. The line of credit expires
during June, 1999, but includes an option for an additional year. As of August
29, 1998, the balance on the line of credit was $548,438.
Capital Expenditures: Capital expenditures in the first quarter ended August 29,
1998 amounted to $179,106 as compared to $56,044 for the quarter ended August
30, 1997. The Company anticipates that its capital expenditures for 1999 will
be approximately $150,000 to $200,000 primarily used for computer equipment,
duplicating and editing equipment. The company currently has a $150,000
remaining on a lease line available for its use which management believes is
sufficient.
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<PAGE>
Management believes that funds provided by operations, existing and new line of
credit, are adequate to meet the anticipated short-term and long-term capital
needs. Management believes that inflation has not had a material effect on its
operations.
Forward-Looking Statements
This Form 10-QSB Report contains "forward-looking statements," including
statements in "Management's Discussion and Analysis of Financial Condition and
Results of Operations," as to expectations, beliefs, plans, objectives and
future financial performance, and assumptions underlying or concerning the
foregoing. Such forward-looking statements involve risks and uncertainties
which could cause actual results or outcomes to differ materially from those
expressed in the forward-looking statements. One such factor that could cause
actual results or outcomes to differ materially from those discussed in the
forward-looking statements would be government actions or initiatives, such as
attempts to limit or otherwise regulate the sale of adult-oriented materials,
including print, video and online materials.
FISCAL YEAR ENDED MAY 30 , 1998
COMPARED TO FISCAL YEAR ENDED MAY 31, 1997
The Company had revenues of $20,391,134 for fiscal year 1998 as compared to
revenues of $18,355,868 for fiscal year 1997, an 11% increase. Revenues consist
principally of sales of pre-recorded video cassettes, magazines, novelties, CD's
and DVD's. Increased revenues are primarily due to (1) increased video sales of
$1,403,000; (2) increased sales of novelties of $587,000 and; (3) increased
machine income of $128,000. These increases were partially offset by a decrease
in magazine revenue of $455,000 due to the elimination of unprofitable issues
and a consolidation of that product line in fiscal 1997. Additionally, the
Company recognized $255,595 of revenue in fiscal 1998 from its interest in
Maxstone Media.
The Company released 3 new feature films, 75 feature videos, 200 video
compilations and 20 video packs in fiscal 1998, an increase of 46.8% over the
prior fiscal year. The Company intends to further increase its release schedule
in fiscal 1999 to 9 feature films, 138 feature videos and 240 video compilations
(a 39% increase) to accommodate recent licensing agreements which the Company
has entered into with New Frontier Media, Inc. and its subsidiaries, Cable
Entertainment Distributors and Playboy Entertainment.
Cost of revenues (including amortization of film costs) increased 15.3% to
$13,330,798 in fiscal 1998, as compared to $11,564,466 in fiscal 1997. Cost of
revenues as a percentage of revenues increased to 65.4% in 1998, as compared to
63% in fiscal 1997. The principal reason for the increase in cost of revenues is
due to the increase in film amortization from $707,522 in 1997 to $1,490,440 in
1998, an increase of over 100%. This increase in film amortization was a result
of the 46.8% increase in the new release schedule as well as an adjustment to
the amortization schedule based on revised estimates of revenues over their
expected useful lives. Cost of revenues as a percentage of revenue, excluding
revenues from Maxstone and film amortization costs, remained constant at 59%
with the prior year.
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<PAGE>
Selling, general and administrative costs decreased by $807,637 or 11.5% to
$6,219,307 in 1998, as compared to $7,026,944 in 1997. As a percentage of
revenues, selling, general and administrative expenses were 30.5% in 1998, as
compared to 38.3% in 1997. The primary reasons for the decrease in the expenses
are as follows: (1) decrease in advertising by $154,000 due to more concentrated
advertising; (2) decrease in artwork by 109,000; (3) decrease in bad debt
expense of $154,000 as there were no unusual charge-offs in 1998; (4) decrease
in repairs and maintenance by $103,000 as repair work in California was
completed in 1997 and; (5) a decrease in legal of $233,000 as there was no
material litigation in 1998.
Other income (expense) increased ($156,406) to ($243,864) in 1998 as
compared to ($87,458) in 1997. This increase is primarily due to a gain on
settlement of litigation in 1997 of $113,000 for which there is none in 1998,
and ($18,220) for the minority interest in the Maxstone joint venture in 1998.
Net income increased $556,839 from a net loss of ($207,158) in 1997 to net
income of $349,681 in 1998. As a result, the Company's earning per share
increased to $.09 per share for 1998 as compared to $(.06) in 1997,
notwithstanding the increase in weighted average shares outstanding as a result
of debt conversion and shares issued to consultants for compensation.
FISCAL YEAR ENDED MAY 31, 1997
COMPARED TO FISCAL YEAR ENDED MAY 31, 1996
The Company had revenues of $18,355,868 the fiscal year ended May 31, 1997,
a 6% decrease over revenues of $19,526,010 for the fiscal year ended May 31,
1996. Revenues consist principally of sales of prerecorded video-cassettes,
magazines, novelties and CDS. Lower revenues were primarily the result of the
following factors: (1) the sale of the Airborne retail stores in fiscal 1996
which accounted for approximately $600,000 in revenue vs zero in fiscal 1997;
(2) a reduction in magazine sales of approximately $610,000 due to the
elimination of unprofitable issues and a consolidation of that product line; (3)
a reduction in the sales of CD ROMs of approximately $723,000 which principally
reflects the decrease in sales of the Company's Virtual Valerie II interactive
game. These reductions were partially offset by an increase of approximately
$867,000 in the sale of cable and foreign film rights of some of the titles
contained in the Company's film and video library.
The Company released 2 new feature films, 50 feature videos, 151 video
compilations and titles in fiscal 1997, an 22.2% decrease from the prior year.
This was the result of the complete reorganization and restructuring of the
Company's west coast operation. The Company's new release schedule for the
fiscal year ended May 31, 1997, was significantly impacted.
Cost of revenues (including amortization of film costs) for fiscal 1997
decreased 3.1% to $11,564,466 from $11,939,031 for fiscal 1996, corresponding to
the decrease in revenues for the year. Cost of revenues, as a percentage of
gross revenues, increased in 1997 to 63%, as compared to 61.1% in 1996. The
primary reason for the decrease was the reduced sales of the Company's own video
product resulting from the aforementioned reduced video production schedule,
substantially all of the revenue was replaced by sale of other vendor's video
product at lower margins. Amortization of film costs decreased 62.2% to $707,522
in 1997 versus $1,873,761 in fiscal 1996, principally because of a decrease in
new
33
<PAGE>
releases during 1997.
Selling, general and administrative expenses for the fiscal year ended May
31, 1997, increased $279,562 or 4.1% to $7,026,944 from $6,747,382 for the
fiscal year ended May 31, 1996. As a percentage of sales, selling, general and
administrative expenses were 38.3% of the revenues in 1997 as compared to 34.6%
in 1996, an increase of 3.7%. The primary reason for the increase in selling,
general and administrative expenses is as follows: (1) $(42,200) of reduced
advertising costs due to less films and videos being released, better discounts
and more concentrated advertising; (2) increased bad debt expense of $290,000,
including the write-off of the sale of foreign film rights of $211,000; (3)
increased equipment rental of duplicating and editing equipment of $136,800; (4)
increased freight due to a greater volume of smaller shipments of $60,900; (5)
increased payroll costs due to the restructuring of the Company's west coast
operation of $135,000; all of which were offset partially by a $(312,500)
reduction in professional fees, consisting mainly of reduced legal costs.
Other income (expense) increased $(66,106) to $(87,158) in 1997 as compared
to ($21,352) in 1996. The increase was primarily due to the following factors:
(1) a gain on settlement of litigation of $113,000 relating to the sale of
foreign film rights of a portion of the titles contained in the Company's film
library; (2) royalty income of $128,100 received from the Company's Airborne
franchises and; 3) interest expense of $(340,900) in fiscal 1997, as compared to
$(396,200) in fiscal 1996, which was lower, due to the following: (a) the debt
assumption of approximately $973,000 in the sale of the Company's retail
Airborne stores; (b) a reduction in debt to a previous owner due to
indemnification of $200,000 and lastly; (c) lower interest rates.
As a result of the factors detailed above, net income decreased $732,833 or
139.4% to $(207,158) in 1997 or $(.06) per share, from the net income of
$525,675 in 1996, or $0.17 per share. The Company's earnings per share decreased
$.24 to $(.06) for the fiscal year ended May 31, 1997, versus $.17 per share for
fiscal 1996, notwithstanding an increase in weighted average number of shares as
a result of the warrant exercise and debt conversion discussed below.
FISCAL YEAR ENDED MAY 30, 1998
COMPARED TO FISCAL YEAR ENDED MAY 31, 1997
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial position improved during fiscal 1998. Cash amounted
to $184,995 at May 30, 1998, as compared to $57,724 at May 31, 1997. Cash
provided by operating activities amounted to $1,814,566 in 1998 and $1,027,435
in 1997. Sources of cash during 1998 are attributed to: (1) cash provided by
operations of $1,814,566, (2) net proceeds of $846,500 for the issuance of
Series A Convertible Preferred Stock and (3) proceeds of $500,000 on the
issuance of two convertible debentures. The primary uses of cash in fiscal 1998
consisted of: (1) investments in motion pictures and other films of $2,279,676,
(2) payments on short term borrowings of $366,975, (3) payments on capital lease
obligations of $281,554, and (4) purchases of property and equipment of
$105,590.
34
<PAGE>
Working capital improved to $3,378,438 at May 30, 1998, as compared to
$2,489,792 at May 31, 1997. The net increase in accounts receivable of
$1,188,427 is due to increased sales in fiscal 1998. Inventory increased
slightly by $42,462. Accounts payable and accrued expenses increased by
$206,500, due to increased purchasing to support the increase in sales.
During 1998, notes payable and accrued interest, totaling $714,037, were
converted into 476,025 of the Company's common stock.
On March 23, 1998, the Company entered into two 8% convertible debentures
totaling $500,000. Both notes are due on March 23, 1999, in either cash or
common stock, at a conversion rate of $2.25 per share. Proceeds from the
debentures were used for working capital .
During 1998, the Company entered into an Offshore Securities Subscription
Agreement for convertible Preferred Shares pursuant to Regulation S of the U.S.
Securities Act of 1933. Under the terms of the agreement, the Company is to
issue 2,175 shares of 1998 Series A Convertible Preferred Stock ("Series A
Shares") at a price of $1,000 per share with a 5% cumulative dividend payable in
common stock at conversion. At May 30, 1998, the Company received proceeds of
$846,500, net of offering costs representing 855 shares. Proceeds from such
agreement were used to fund working capital. Substantially all of the proceeds
for the remaining 1320 shares were subsequently received.
The Series A Shares are convertible at a rate of 100 shares plus accrued
dividends per week at 80% of the 15-day average closing bid price. These Shares
are subject to a 24-month mandatory conversion feature. Management is presently
obtaining fair values of the embedded beneficial conversion feature and warrants
which is expected to be reallocated out of the proceeds after May 30, 1998. Such
values will be recognized as dividends and amortized over the mandatory
conversion period of two years beginning in June of 1998.
In addition to the Series A Shares, the Company issued 400,000 warrants to
purchase the Company's common stock at $1.50 per share commencing April 20,
1998, exercisable over 5 years.
Of Metro's total accounts receivable at May 30, 1998, and May 31, 1997,
$2,477,041 (48.6%) and $1,711,443 (41.9%), respectively, is owed by Capital
Video Corporation ("CVC"), a chain of retail stores of which a former
officer/shareholder of the Company is the sole shareholder. Because of the
amount of this receivable and the concentration of business with CVC, this
receivable is monitored very closely. Metro has the personal guarantee of its
one shareholder. Accordingly, no allowance for related party receivables and no
related party bad debt expense has been recorded in the Company's financial
statements.
At May 30, 1998, the Company's film and video release schedule for fiscal
1999 included 111 new film and video titles. The completion of these movies will
require approximately $3,600,000 to $4,000,000. Financing for these activities
will continue to be financed through operating cash flows, as well as funds
borrowed under its line of credit.
35
<PAGE>
The Company funds its working capital requirements on a short-term basis
through funds generated by operations and borrowings under its line of credit
agreement. Pursuant to a line of credit agreement with a finance company, the
Company's subsidiary, Metro, Inc., may borrow up to 75% of assigned accounts
receivable less than 90 days old, up to a maximum of $1,500,000. The balance due
under the line of credit bears interest at the prime rate plus 5% per annum. In
addition, Metro pays the finance company a management fee equal to 3/4 of 1% of
sales submitted for inclusion in the net security value of the accounts
receivable, but not more than $7,500 per month. The outstanding balance under
the line is secured by the accounts receivable of Metro, and the guarantees of
the Company and certain officer/shareholders. As of May 30, 1998, short-term
borrowings under the line of credit totaled $530,272.
CAPITAL EXPENDITURES:
Capital expenditures in fiscal 1998 amounted to $105,590, as compared to
$147,726 in fiscal 1997. The Company anticipates that its capital expenditures
for 1999 will be approximately $100,000 to $150,000, primarily used for computer
equipment, duplicating and editing equipment. The Company currently has a
$500,000 lease line available, of which approximately $350,000 was used during
1998. The Company believes the $150,000 remaining on the lease line is
sufficient for its anticipated needs.
Management believes that funds provided by operations, existing and new
line of credit, are adequate to meet the anticipated short-term and long-term
capital needs. Management believes that inflation has not had a material effect
on its operations.
FISCAL YEAR ENDED MAY 31, 1997
COMPARED TO FISCAL YEAR ENDED MAY 31, 1996
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's financial position remains sound. Cash and cash equivalents
amounted to $57,724 at year-end. Cash provided by operating activities amounted
to $1,027,435 in fiscal 1997, $1,326,785 in fiscal 1996, and $1,557,928 in
fiscal 1995. The Company's primary sources of cash in fiscal 1997 consisted of:
(1) funds provided from operations of $1,027,435, and (2) net proceeds from
short-term borrowings of $391,186. The primary uses of cash in fiscal 1998
consisted of: (1) investments in motion pictures and other films of $1,402,883;
(2) payments on capital lease obligations of $177,708; and (3) purchases of
property and equipment of $147,726.
Working capital amounted to $2,489,792 in fiscal 1997, as compared to
$3,332,590 in fiscal 1996. The net increase in accounts receivable of $870,852
was primarily due to the increase of sales in April and May 1997. Inventory
decreased by $362,023, due to better inventory management. Accounts payable and
accrued expenses increased by $802,883, due to improved vendor terms from tape
supplies and the inclusion of a $100,000 litigation settlement liability due
November 1997. Increased spending for film production is another factor of the
increase in accounts payable.
36
<PAGE>
Of Metro's total accounts receivable at May 30, 1997, and 1996, $1,711,443
(41.9%) and $662,807, (21.0%), respectively, are owed by Capital Video
Corporation ("CVC"), a chain of retail stores of which a former
officer/shareholder of the Company is the sole shareholder. Because of the
amount of this receivable and the concentration of business with CVC, this
receivable is monitored very closely. Metro has the personal guaranty of its one
shareholder. Accordingly, no allowance for related party receivables and no
related party bad debt expense has been recorded in the Company's financial
statements.
FORWARD-LOOKING STATEMENTS
This Prospectus contains "forward-looking statements," including statements
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations," as to expectations, beliefs, plans, objectives and future financial
performance, and assumptions underlying or concerning the foregoing. Such
forward-looking statements involve risks and uncertainties which could cause
actual results or outcomes to differ materially from those expressed in the
forward-looking statements. One such factor that could cause actual results or
outcomes to differ materially from those discussed in the forward-looking
statements would be government actions or initiatives, such as attempts to limit
or otherwise regulate the sale of adult-oriented materials, including print,
video and online materials.
YEAR 2000 COMPLIANCE
As the year 2000 approaches, an issue has emerged regarding how existing
application software programs and operating systems can accommodate this date
value. Failure to adequately address this issue could have potentially serious
repercussions. The Company is in the process of working with the service
providers to prepare for the year 2000. Based on information currently
available, the Company does not expect that it will incur significant operating
expenses or be required to incur material costs to year 2000 compliant.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
A. Daniel Geribo serves as the sole officer and director of, and Mr.
Guarino also serves as the operations manager and is 100% owner of, Capital
Video Corporation ("CVC") which operates a chain of retail video stores in the
New England and upstate New York area. Capital Video Corporation accounted for
$9,952,316 (47%), $7,134,774 (39%), and $6,297,550 (32%) of the net sales of
Metro, Inc. for the fiscal years ended May 30, 1998, 1997, and 1996,
respectively. At May 30, 1998, $2,447,041 (47.1%) of Metro's outstanding
accounts receivable were due from Capital Video Corporation. At May 31, 1997,
$1,711,443 (41.9%) of Metro's outstanding accounts receivable were due from
Capital Video Corporation, secured by a security interest in all of the
inventory of Capital Video Corporation and the personal guaranty of Mr.
Guarino's wife. At May 30, 1996, $662,807 (21%) of Metro's outstanding accounts
receivable were due from Capital Video Corporation. The age of the accounts
receivable from CVC is as follows:
37
<PAGE>
<TABLE>
<CAPTION>
Current 30-60 days 60-90 days Over 90 days
-------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
May 31, 1998 $998,408 $1,328,941 $149,692 $0
May 30, 1997 $814,473 $ 612,796 $284,174 $0
May 30, 1996 $566,033 $ 96,774 $ 0 $0
</TABLE>
The significant increase in Metro's accounts receivable from Capital Video
is the result of increased sales due to Capital opening new stores, and a
reflection of Capital's excellent payment history with Metro. Metro has
permitted CVC to return to the previous net 60 day payment terms. Management of
the Company has determined that, given the volume of business Capital Video has
historically provided to Metro, the value of the CVC inventory (which is
monitored by Metro and in which Metro retains a security interest), such aging
is reasonable and in the best interests of the Company.
Effective May 1, 1993, Metro entered into a lease with Castle Properties,
L.L.C. for an approximately 50,000 square-foot office, warehouse and shipping
complex located in Cranston, Rhode Island. This new facility houses Metro's
executive, administrative, editorial and operational offices, the data center
and customer service, warehouse and fulfillment facilities. The lease is for a
term of 10 years with two five-year renewal options, and provides for a fixed
annual rent of $245,200 for the first five years, triple net. The annual rent
for lease years 6 through 10, as well as the rent for the renewal terms, if any,
shall be adjusted based on increases in the consumer price index. Approximately
7,500 square feet of the facility is sublet to Capital Video Corporation under
an oral, month-to-month lease agreement for $9,000 per month for June 1997 and
$4,000 per month thereafter. Castle Properties, L.L.C., is a Rhode Island
limited liability company, principally owned by Mr. Guarino's wife. In fiscal
1998, the Company was granted a rent reduction of $81,733 which is being
amortized over the remaining term of the lease.
On January 13, 1996, the Company entered into a lease agreement with
Centurion Financial Group, L.L.C., for approximately 5,000 square feet of office
space in Cranston, Rhode Island, with a monthly rent of $5,833.33, effective
June 1, 1994. The lease is for a term of 5 years, with a 5-year renewal option.
Centurion Financial Group, L.L.C., is a Rhode Island limited liability company,
principally owned by a trust for the benefit of Mr. Guarino's children. This
lease was terminated by mutual agreement of the parties during the year ended
May 30, 1997.
Effective May 8, 1997, Briana Investment Group, a British Virgin Island
limited partnership acquired 730,863 shares of common stock of the Registrant
from Capital Video Corporation and 742,050 shares of common stock of the
Registrant from Zeon Corporation. In connection with the transaction, the
Registrant entered into a Registration Rights Agreement.
38
<PAGE>
CONFLICTS OF INTEREST
- ---------------------
Of necessity, some inherent conflict of interest is involved whenever
officers, directors and others acting on behalf of the Company supply services
or goods to the Company for compensation. Additional conflicts and non-arm's
length transactions may arise in the future when Company officers or directors
are involved in the management of any other company with which the Company
transacts business. Conflicts may also arise with respect to opportunities which
come to the attention of such persons. Conflicts may also arise with respect to
the amount of time and effort devoted to respective businesses and
opportunities.
Many of the persons who perform services as officers, and directors to the
Company are actively, and in the future will be, involved in businesses from
which they derive income, other than the Company. Their activities may include
information and management of business ventures, the legal profession, purchase
and sale of real estate and pursuit of other opportunities. It is expected that
these persons will continue their separate business activities in conjunction
with their activities at the Company.
Although the Board of Directors believes that members of Management will be
of great assistance to the Company in the fulfillment of its corporate mission,
some transactions may and will occur where the Company and a member of
Management will have conflicts in particular respects. Prospective investors are
specifically cautioned that such conflicts will occur as a routine matter in the
operation of the Company. However, it is intended that, in accordance with legal
principals applicable to corporations, Company action will be determined
whenever possible by a disinterested majority of the Board of Directors.
It is the Company's policy that all transactions in which an officer,
director or 5% shareholder has a direct or indirect interest be on terms no less
favorable to the Company than the Company would grant to or obtain from a
independent third-party in a arm's-length transaction. Because a majority of the
Board of Directors are not affiliated with Capital Video Corporation, all
transactions between the Company or Metro and Capital Video Corporation have
been, and all future transactions will be, approved and/or ratified by a
disinterested majority of the Board of Directors.
39
<PAGE>
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded in the over-the-counter market and
quoted on the NASDAQ Small Cap Market. There is a limited market for the
Company's Common Stock and no assurances can be given that any trading market
will be sustained.
<TABLE>
<CAPTION>
COMMON STOCK*
HIGH BID LOW BID
<S> <C> <C>
Fiscal Year Ending May 30, 1999
- -------------------------------
First Quarter $4.6250 $2.2810
Fiscal Year Ended May 30, 1998
- -------------------------------
First Quarter $2.0000 $1.2500
Second Quarter $1.5625 $1.1250
Third Quarter $6.9690 $1.1250
Fourth Quarter $5.0000 $1.8750
Fiscal Year Ended May 30, 1997
- -------------------------------
First Quarter $2.8125 $1.8750
Second Quarter $3.6250 $1.6250
Third Quarter $2.6250 $1.1250
Fourth Quarter $2.1250 $1.0000
Fiscal Year Ended May 30, 1996
- -------------------------------
First Quarter $7.3750 $4.7500
Second Quarter $4.7500 $2.7500
Third Quarter $3.6250 $2.0000
Fourth Quarter $3.4375 $2.2500
</TABLE>
* Such market quotations reflect the high and low prices for the Company's
securities as quoted by dealers without retail mark-ups and may not necessarily
represent actual transactions.
At November 30, 1998, there were in excess of 1,000 holders of record of
the Company's Common Stock.
The Company did not pay any cash dividends during its last fiscal year and
the Board of Directors does not contemplate doing so in the near future. Any
decision as to future payment of dividends will depend on the earnings and
financial condition of the Company and such other factors as the Board of
Directors deems relevant.
40
<PAGE>
EXECUTIVE COMPENSATION
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------- -----------------------------
OTHER
NAME AND PRINCIPAL FISCAL ANNUAL ALL OTHER
POSITION YEAR SALARY BONUS COMP. AWARDS PAYOUTS COMP.
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
A. DANIEL GERIBO 1998 $ - - $30,000 - - -
PRESIDENT 1997 $ - - $15,000
KENNETH F. GUARINO 1997 $74,200 -
PRESIDENT (2) 1996 $83,798 -
</TABLE>
(1) Mr. Geribo was elected President of the Company in November 1996. His
services are valued at $30,000 per year.
(2) Mr. Guarino was elected President of Metro effective October 31, 1995 and he
resigned effective October 31, 1996.
Aggregated Options / SAR Exercises in Last Fiscal Year and fiscal year-end
--------------------------------------------------------------------------
Option / SAR Values
-------------------
<TABLE>
<CAPTION>
Number of
Securities
Underlying Value of Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs at
FY-End FY-end
Name Shares Acquired Value Exercisable / Exercisable /
on exercise (#) Realized ($) Unexercisable Unexercisable
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kenneth Guarino 0 - 200,000/0 -
A. Daniel Geribo 0 - 10,000/0 -
</TABLE>
In September 1993, a disinterested majority of the Board of Directors
authorized the execution of an Employment Agreement with Kenneth F. Guarino,
effective as of January 1, 1993. By mutual agreement, the employment agreement
was terminated on December 31, 1996. In addition, the Company granted Mr.
Guarino stock options to purchase up to 200,000 shares of Common Stock at a
purchase price of $1.50 per share, exercisable in four annual installments of
50,000 shares, commencing January 1, 1994. In January 1997, the term of the
options was extended to December 31, 2006. The requirement that the options be
exercised within 30 days after termination of employment was deleted. Except as
set forth above, no other executive officer received salary and bonus exceeding
$100,000 in any of the last three fiscal years.
The Company does not compensate its directors for their participation. The
Company does not
41
<PAGE>
provide for agreements with any of its executive officers. However, the Company
may, in the future, need to compete for the services of its executive officers,
at which time, the Board of Directors may adopt and require its executive
officers to execute employment agreements.
FINANCIAL STATEMENTS
The following is the Auditor's Report and accompanying consolidated balance
sheets of Metro Global Media, Inc., and subsidiaries as of May 30, 1998, and May
31, 1997, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the years in the three-year period ended May
30, 1998, and the unaudited consolidated balance sheet and related consolidated
statement of operations of the first quarter for the Fiscal Year ending May 30,
1999.
42
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditor's Report F-2
Consolidated Balance Sheets for the Years Ended
May 30, 1998 and May 31, 1997 F-3
Consolidated Statements of Operations for the Years Ended
May 30, 1998, May 31, 1997 and 1996 F-4
Consolidated Statements of Shareholder's Equity F-5
Consolidated Statements of Cash Flows for the Years Ended
May 30, 1998, May 31, 1997 and 1996 F-6
Notes to Consolidated Financial Statements F-9
Consolidated Balance Sheets for the Three Months
ended August 29, 1998 (Unaudited) and the Year Ended
May 30, 1998 F-23
Consolidated Statements of Income for the Three Months
ended August 29, 1998 and August 30, 1997 (Unaudited) F-24
Consolidated Statement of Cash Flows for the Three Months
ended August 29, 1998 and August 30, 1997 (Unaudited) F-25
Notes to Consolidated Financial Statements F-30
</TABLE>
F-1
<PAGE>
To the Board of Directors and Shareholders of
Metro Global Media, Inc. and Subsidiaries
Cranston, Rhode Island
We have audited the accompanying consolidated balance sheets of Metro Global
Media, Inc. andSubsidiaries as of May 30, 1998 and May 31, 1997, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the years in the three-year period ended May 30, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Metro Global
Media, Inc. and Subsidiaries as of May 30, 1998 and May 31, 1997 and the results
of their operations and their cash flows for each of the years in the three-year
period ended May 30, 1998, in conformity with generally accepted accounting
principles.
TRIEN, ROSENBERG, ROSENBERG,
WEINBERG, CIULLO, & FAZZARI, LLP
Morristown, New Jersey
July 24, 1998, except for
Note 13, as to which the
date is July 31, 1998
F-2
<PAGE>
<TABLE>
<CAPTION>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
FOR THE YEARS ENDED MAY 30, 1998 AND MAY 31, 1997
- ---------------------------------------------------------------------------------------------------------------------
Assets
1998 1997
---- ----
<S> <C> <C>
Current assets
- --------------
Cash $ 184,995 $ 57,724
Accounts receivable, less allowance for doubtful accounts of
$163,030 and $22,082, respectively 5,092,255 4,081,031
Inventory 3,726,963 3,684,501
Recoverable income tax - 287,000
Deferred income taxes 248,500 165,650
Prepaid expenses and other current assets 78,751 41,460
----------- -----------
Total current assets 9,331,464 8,317,366
--------------------
Motion pictures and other films at cost, less accumulated
amortization of $6,575,623 and $5,085,183, respectively 4,142,979 3,353,743
Property and equipment at cost, less accumulated depreciation and
amortization of $1,681,138 and $1,303,939, respectively 1,479,426 1,575,199
Other assets 483,472 292,235
----------- -----------
Total assets $15,437,341 $13,538,543
------------ =========== ===========
Liabilities and Shareholders' Equity
------------------------------------
1998 1997
---- ----
Current liabilities
- -------------------
Current portion of long-term debt $ - $ 137,651
Current portion of capital lease obligations 363,956 222,962
Short-term borrowings 1,030,272 897,247
Accounts payable and accrued expenses 4,232,679 4,206,577
Income taxes payable 326,119 363,137
----------- -----------
Total current liabilities 5,953,026 5,827,574
-------------------------
Long-term debt, less current portion 395,988
Capital lease obligations, less current portion 351,538 361,591
Deferred income taxes 59,300 35,700
----------- -----------
Total liabilities 6,363,864 6,620,853
----------------- ----------- -----------
Minority interest 18,220 -
----------- -----------
Commitments and contingencies
Shareholders' equity
- --------------------
Series A 5% cumulative convertible preferred stock, $.0001 par value, $1,000
stated value, authorized, issued and outstanding 2,175 shares less 1.320
shares outstanding subscriptions
receivable. 857,979 -
Preferred stock, no par value; authorized 2,000,000 shares; issued
and outstanding, none - -
Common stock, $.0001 par value; authorized 10,000,000 shares;
issued and outstanding, 4,245,193 and 3,558,168 shares,
respectively 424 356
Additional paid in capital 6,546,580 5,542,762
Retained earnings 1,712,774 1,374,572
----------- -----------
9,117,757 6,917,690
Unearned compensation (62,500) -
----------- -----------
Total shareholders' equity 9,055,257 6,917,690
-------------------------- ----------- -----------
Total liabilities and shareholders' equity $15,437,341 $13,538,543
- --------------------------------------------------- =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MAY 30, 1998, MAY 31, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues $20,391,134 $18,355,868 $19,526,010
Cost of revenues, including amortization of motion
pictures and other films of $1,490,440
and $707,522, and $1,823,759, respectively 13,330,798 11,564,466 11,939,031
----------- ----------- -----------
7,060,336 6,791,402 7,586,979
Selling, general and administrative expenses 6,219,307 7,026,944 6,747,382
----------- ----------- -----------
Income (loss) from operations 841,029 (235,542) 839,597
----------------------------- ----------- ----------- -----------
Other income and expenses
- -------------------------
Interest expense (348,980) (340,864) (396,170)
Royalty income 127,206 128,091 -
Gain on sale of subsidiaries - - 171,795
Gain on settlement of litigation - 113,000 196,400
Miscellaneous (expense) income (3,870) 12,315 6,623
Minority interest (18,220) - -
----------- ----------- -----------
(243,864) (87,458) (21,352)
----------- ----------- -----------
Income (loss) before provision for income taxes 597,165 (323,000) 818,245
-----------------------------------------------
Provision (benefit) for income taxes 247,484 (115,842) 292,570
----------- ----------- -----------
Net income (loss) 349,681 $ (207,158) $ 525,675
----------------- =========== =========== ===========
Basic earnings (loss) per common share $.09 $(.06) $.17
Diluted earnings (loss) per common share .09 (.06) .17
Weighted average number of shares outstanding
Basic 3,661,994 3,503,565 3,014,437
Diluted 3,812,213 3,553,565 3,163,675
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Series A
Preferred Stock
Shares Amt.
---------------------
<S> <C> <C>
Balance, May 31, 1995
Shares issued:
as compensation for services rendered by consultants
in connection with the conversion of a $1,000,000
note payable
in connection with the "IDC" settlement of litigation
Upon exercise of warrants
Upon exercise of options
Amortization of unearned compensation
Net income
Balance, May 31, 1996
Shares issued:
as compensation for services rendered by consultants
as compensation for directors and employees
Stock dividend pursuant to a private placement
Upon exercise of options
Amortization of unearned compensation
Net loss
Balance, May 31, 1997
Shares issued:
as compensation for services rendered by consultants
as compensation for directors and employees
in connection with conversion of notes payable and
accrued interest of $714,037
upon issuance of Series A Preferred stock (less
offering cost of $11,500) 2,175 2,163,500
Subscription receivable on Series A Preferred stock
($645,000 held in escrow cash) (1,320) (1,317,000)
Dividends on Series A Preferred stock 11,479
Unamortized compensation - restricted stock
Net income
------ -----------
Balance, May 30, 1998 855 $ 857,979
====== ===========
</TABLE>
<TABLE>
Additional
Common Stock Paid-in Retained
Shares Amt. Capital Earnings
------------------- ----------- ----------
<S> <C> <C> <C> <C>
Balance, May 31, 1995 2,344,884 $234 $3,376,276 $1,109,534
Shares issued:
as compensation for services rendered by consultants 55,666 6 298,657
in connection with the conversion of a $1,000,000
note payable 730,568 73 1,095,793
in connection with the "IDC" settlement of litigation (75,000) (8) (224,992)
Upon exercise of warrants 306,916 31 460,493
Upon exercise of options 45,000 5 181,871
Amortization of unearned compensation 525,675
Net income --------- ---- ----------- ----------
Balance, May 31, 1996 3,408,034 341 5,179,098 1,635,209
Shares issued:
as compensation for services rendered by consultants 100,000 10 243,790
as compensation for directors and employees 12,400 1 13,949
Stock dividend pursuant to a private placement 17,734 2 53,477 (53,479)
Upon exercise of options 20,000 2 52,448
Amortization of unearned compensation (207,158)
Net loss --------- ---- ----------- ----------
Balance, May 31, 1997 3,558,168 356 5,542,762 1,374,572
Shares issued:
as compensation for services rendered by consultants 206,000 20 282,979
as compensation for directors and employees 5,000 1 6,849
in connection with conversion of notes payable and
accrued interest of $714,037 476,025 47 713,990
upon issuance of Series A Preferred stock (less
offering cost of $11,500)
Susscription receivable on Series A Preferred stock
($645,000 held in escrow cash)
Dividends on Series A Preferred stock
Unamortized compensation - restricted stock (11,479)
Net income 349,681
--------- ---- ----------- ----------
Balance, May 30, 1998 4,245,193 $424 $6,546,580 $1,712,774
========= ==== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
Unearned
Compensation Total
------------ -----
<S> <C> <C>
Balance, May 31, 1995 $(118,750) $4,367,294
Shares issued:
as compensation for services rendered by consultants 289,663
in connection with the conversion of a $1,000,000
note payable 1,095,866
in connection with the "IDC" settlement of litigation (225,000)
Upon exercise of warrants 460,524
Upon exercise of options 181,876
Amortization of unearned compensation 75,000 75,000
Net income 525,675
---------- -----------
Balance, May 31, 1996 (43,750) 6,770,898
Shares issued:
as compensation for services rendered by consultants 243,800
as compensation for directors and employees 13,950
Stock dividend pursuant to a private placement
Upon exercise of options 52,450
Amortization of unearned compensation 43,750 43,750
Net loss (207,158)
---------- ------------
Balance, May 31, 1997 0 6,917,690
Shares issued:
as compensation for services rendered by consultants 282,999
as compensation for directors and employees 6,850
in connection with conversion of notes payable and
accrued interest of $714,037 714,037
upon issuance of Series A Preferred stock (less
offering cost of $11,500) 2,163,500
Susscription receivable on Series A Preferred stock
($645,000 held in escrow cash) (1,317,000)
Dividends on Series A Preferred stock
Unamortized compensation - restricted stock (62,500) (62,500)
Net income 349,681
----------- ------------
Balance, May 30, 1998 $ (62,500) $ 9,055,257
=========== ============
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
FOR THE YEARS ENDED MAY 30, 1998, MAY 31, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 349,681 $ (207,158) $ 525,675
----------- ----------- -----------
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 1,875,666 1,051,493 2,152,026
Bad debt expense 177,203 331,000 -
Loss on abandonment of equipment - - 16,389
Gain on sale of equipment - (2,927) -
Gain on sale of subsidiaries - - (171,795)
Gain on settlement of litigation - (113,000) (196,400)
Amortization of unearned compensation - 43,750 75,000
Amortization of goodwill - - 12,666
Common stock issued for consulting services 220,499 - 289,663
Common stock issued for compensation 6,850 27,700 -
Minority interest 18,220 - -
(Increase) decrease in assets:
Accounts receivable (1,188,427) (1,201,852) (483,777)
Inventory (42,462) 362,023 (567,989)
Prepaid expenses and other current assets (37,291) 60,733 (49,321)
Other assets 37,395 136,746 (208,912)
Recoverable income tax 287,000 (287,000) -
Deferred income taxes (82,850) (87,150) -
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 206,500 832,683 (212,054)
Income taxes payable (37,018) 86,694 196,257
Deferred income taxes payable 23,600 (6,300) (50,643)
----------- ----------- -----------
Total adjustments 1,464,885 1,234,593 801,110
----------------- ----------- ----------- -----------
Net cash provided by operating activities 1,814,566 1,027,435 1,326,785
----------------------------------------- ----------- ----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
INCREASE (DECREASE) IN CASH
FOR THE YEARS ENDED MAY 30, 1998, MAY 31, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment - 11,000 -
Investments in motion pictures and other films (2,279,676) (1,402,883) (1,803,999)
Purchase of property and equipment (105,590) (147,726) (301,793)
Cash transferred in connection with sale of
subsidiaries - - (52,906)
----------- ------------ ----------
Net cash used in investing activities (2,385,266) (1,539,609) (2,158,698)
------------------------------------- ----------- ------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of Series A
convertible preferred stock 846,500 - -
Proceeds from issuance of common stock - 26,250 642,399
Net proceeds (payments) from line of credit (366,975) 391,186 506,061
Increase in notes payable 500,000 - 122,447
Principal payments on notes payable - (30,501) (38,133)
Principal payments on capital lease obligations (281,554) (177,708) (107,247)
----------- ------------ ---------
Net cash provided by financing activities 697,971 209,227 1,125,527
----------------------------------------- ----------- ------------ ---------
Net increase (decrease) in cash 127,271 (302,947) 293,614
Cash, beginning of year 57,724 360,671 67,057
----------- ------------ ----------
CASH, END OF YEAR $ 184,995 $ 57,724 $ 360,671
=========== ============ ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 278,248 $ 253,517 $ 235,066
=========== ============= ==========
Income taxes $ 29,637 $ 290,556 $ 147,478
=========== ============= ==========
</TABLE>
See Notes to Consolidated Financial Statements
F-7
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
INCREASE (DECREASE) IN CASH
FOR THE YEARS ENDED MAY 30, 1998, MAY 31, 1997 AND 1996
- --------------------------------------------------------------------------------
Supplemental schedule of non-cash investing and financing activities:
During the year ended May 30, 1998, notes payable and accrued interest
totaling $714,037 were converted into 476,025 restricted shares of the
Company's common stock.
During the year ended May 31, 1997, accounts payable with a value of
$230,000 was converted into 90,000 shares of the Company's common stock.
During the year ended May 31, 1997, under the terms of a prior year private
placement, the company issued a stock dividend valued at $52,450 (17,734
shares of common stock) to such applicable stockholders.
During the year ended May 31, 1997, the Company settled a pending litigation
by agreeing to pay a fine of $200,200. Since the Company was indemnified,
the related indebtedness was reduced by $200,200.
During the year ended May 31, 1996, the Company sold three of its
subsidiaries for an aggregate price of $1,076,947. As payment, the buyer
assumed the Company's debt and accrued interest of $1,076,947. The
subsidiaries' net assets over net liabilities (excluding cash transferred of
$52,906) in connection with the sale amounted to $852,246 resulting in a
gain of $171,795.
During the year ended May 31, 1996, machinery and equipment of approximately
$159,000, was returned to vendor and the related capital lease obligation
for $159,252 was canceled.
During the year ended May 31, 1996, in connection with a litigation
settlement, the Company received back its common stock valued at $225,000
reflected as a reduction in stockholders' equity (see Note 3 ).
During the year ended May 31, 1996, note payable plus accrued interest for
$1,095,866 was converted into 730,568 shares of the Company's common stock
for the year ended May 31, 1996.
Capital lease obligations of $412,495, $584,554, and $150,564, were incurred
during the years 1998, 1997 and 1996, respectively, when the Company entered
into capitalized leases for office equipment and machinery and equipment.
See Notes to Consolidated Financial Statements
F-8
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 30, 1998, MAY 31, 1997 AND 1996
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
The Company produces and distributes, predominantly in the United States, motion
pictures and other entertaining products (including magazines, videos and
novelties) and related ancillary products to wholesalers and retailers oriented
to the adult entertainment market.
Name Change and Merger
In November 1996 Metro Global Media, Inc. (the "Company") merged into an
inactive subsidiary (Metro Sub, Inc.) under the laws of the state of Delaware
and simultaneously changed its name back to Metro Global Media, Inc. This
transaction was accounted in a manner similar to that used in pooling of
interest accounting and had no effect on authorized, issued, and outstanding
shares of the Company or to the financial statements presented herein.
Year-end
Beginning May 31, 1997, the Company changed its fiscal year end to a 4-4-5 week
format which results in the Company's year end to be on the last Saturday in May
of each year.
Principles of Consolidation
The consolidated financial statements include the accounts of Metro Global
Media, Inc. ("Metro Global") and its majority-owned and controlled subsidiaries
(collectively the "Company"). All intercompany balances and transactions have
been eliminated in consolidation.
Recognition of Revenues
Revenue is recognized at the time the Company sells motion pictures and other
products to customers. Substantially all products returned to the Company can
either be exchanged for similar products or returned by the Company to its
vendors.
Fees collected from motion pictures licensed as television program material are
recognized as revenue when the license period begins and the licensee is able to
exercise rights under the agreement.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principals requires the use of estimates based on management
knowledge and experience. Due to their prospective nature, actual results could
differ from those estimates.
F-9
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 30, 1998, MAY 31, 1997 AND 1996
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Inventory
Inventory is valued at the lower of cost (first-in, first-out method) or market
and consists principally of motion picture films, magazines and novelty items
held for resale.
Property and Equipment
The cost of property and equipment, including leasehold improvements, is charged
to operations over the estimated useful lives of the respective assets using
depreciation computed by the straight-line method ranging from 5 to 10 years.
Amortization of assets held under capital leases is included in depreciation
expense. Maintenance and minor repairs and replacements are charged directly to
operations. Major renewals and improvements are capitalized. Costs and
accumulated depreciation applicable to assets sold are removed from the accounts
and any gain or loss on disposal is charged or credited to income.
Motion Picture and Other Films
Motion picture films, including video cassettes, video libraries, video rights,
and CD-ROMs are reflected at the lower of amortized cost or net realizable
value. The cost of motion picture films is charged to operations using the
individual film forecast computation method, which amortizes film costs in the
same ratio as current gross revenues to anticipated total gross revenues.
Estimated future revenues are periodically reviewed and, revisions may be made
to amortization rates or write-downs made to the film's net realizable value as
a result of significant changes in future revenue estimates. Net realizable
value is the estimated selling price in the ordinary course of business, less
estimated costs to complete and exploit in a manner consistent with realization
of that income. More than 75% of film costs are expected to be amortized over
three years commencing upon the release of the respective motion picture films.
Deferred Income Taxes
The Company follows Statements of Financial Accounting Standards No. 109,
"Accounting for Income Taxes". This statement requires a liability approach for
measuring deferred taxes based on temporary differences between the financial
statement and tax bases of assets and liabilities existing at each balance sheet
date using enacted tax rates for years which taxes are expected to be paid or
recovered.
Earnings Per Share
During the year ended May 30, 1998, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share", which replaces primary and
fully diluted earnings per share with basic and diluted earnings per share.
Under the new requirements the dilutive effect of certain common stock
equivalents is excluded from the computation of basic earnings per share.
Diluted earnings per share is calculated similarly to fully diluted earnings per
share as required under APB 15. All prior period earnings per share data
presented have been restated to conform to the provisions of this statement.
F-10
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 30, 1998, MAY 31, 1997 AND 1996
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Basic earnings per share is computed by dividing net income available to common
stockholders (net income less preferred stock dividends) divided by the weighted
average number of shares outstanding during the year. Diluted earnings per share
is consistent with basic earnings per share while giving effect to all dilutive
potential common shares that would have been outstanding if the dilutive
potential common shares had been issued, while adding back to income any
preferred dividend or interest expense on convertible securities.
2. ACQUISITIONS/DISPOSITIONS
Amazing Direct
In March, 1998, the Company acquired an 80% interest in Amazing Direct, a Nevada
Corporation by purchasing 400 shares of its outstanding stock at $2.00 per
share. Amazing Direct, a mail order company, has rights to a licensing agreement
to distribute certain products under the Hustler name. For the period ended May
30, 1998, Amazing Direct incurred a loss of approximately $98,000 of which the
Company absorbed approximately $19,600 attributed to the minority interest. The
loss was attributed to startup expenses such as printing costs associated with
mail order brochures.
Maxstone Media
In August, 1997, Rocket Media Group, LLC, a wholly owned subsidiary of Metro,
Inc. entered into a joint venture with Salmill Enterprises, Inc. for the purpose
of magazine publishing. Under the terms of the agreement, Rocket contributed a
sub-license agreement for the rights to certain titles, names and materials and
Salmill contributed its publishing and circulation expertise into a newly formed
entity Maxstone Media, LLC. The Company recorded its capital contributions at
zero and included Maxstone Media's results from operations in the consolidated
financial statements. Minority interest amounted to $18,220 at May 30, 1998.
Arcus Media Group, Inc.
During the year ended May 31, 1995 the Company formed Arcus Media Group, Inc.
("Arcus"), a wholly owned subsidiary, to develop and distribute computer
software products oriented to the adult entertainment market.
F-11
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 30, 1998, MAY 31, 1997 AND 1996
- --------------------------------------------------------------------------------
In November, 1994, Arcus acquired certain assets, including equipment and key
technical personnel of Innovative Data Concepts ("IDC") for 160,000 restricted
shares of the Company's common stock, having a fair value of $480,000. Costs
allocated to the purchase of employment contracts of $419,000 were expensed
during the year ended May 31, 1995. In May, 1995, Arcus filed suit against IDC
and its principals alleging fraud in connection with the transaction and
requesting recission and damages. On May 31, 1996 the suit filed by Arcus
against IDC and its principals was settled. As a result of the settlement, the
Company received from IDC 75,000 shares of its restricted common stock valued at
$225,000, of the 160,000 shares originally transferred by Arcus to IDC as part
of the November 10, 1994 Asset Purchase Agreement which was reflected as a
reduction in stockholders' equity. The 75,000 common shares were retired on
effective May 31, 1996. As a result of the settlement of the suit the Company
wrote-off its machinery and equipment by $28,600, and a gain on settlement of
litigation was recognized for $196,400 in the financial statements for the year
ended May 31, 1996. Effective May 31, 1997 Arcus was dissolved.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Machinery and equipment $1,756,828 $1,611,773
Furniture and fixtures 448,129 442,661
Office equipment 699,520 615,477
Automobiles 15,574
Leasehold improvements 256,087 193,653
---------- ----------
3,160,564 2,879,138
Less accumulated depreciation
and amortization 1,681,138 1,303,939
---------- ----------
$1,479,426 $1,575,199
========== ==========
</TABLE>
4. Motion Pictures and Other Films
Motion pictures and other films consist of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Motion picture films produced and released $6,900,008 $ 5,551,301
Rights acquired to release motion pictures and other films 2,153,454 1,727,654
CD-Rom 414,565 313,807
Motion picture films in process 1,250,575 846,164
---------- -----------
10,718,602 8,438,926
Less accumulated amortization 6,575,623 5,085,183
---------- -----------
$4,142,979 $ 3,353,743
========== ===========
</TABLE>
F-12
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 30, 1998, MAY 31, 1997 AND 1996
- --------------------------------------------------------------------------------
5. LONG-TERM DEBT
During the year ended May 30, 1998 certain notes payable due to related parties
with principal amount of $533,639 plus accrued interest of $180,398 were
converted into 476,025 shares of the Company's common stock.
Capital Lease Obligations
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
The Company leases office equipment ($456,798 less accumulated
depreciation of $210,772 at May 30, 1998 and $404,052, less
accumulated depreciation of $143,308 at May 31, 1997) and,
machinery and equipment ($507,187 less accumulated depreciation
of $118,296 at May 30, 1998 and $377,305, less accumulated
depreciation of $53,715 at May 31, 1997) and, furniture and
fixtures ($185,339 less accumulated depreciation of $94,953 at
May 30, 1998 and $185,339, less accumulated depreciation of
$68,476 at May 31, 1997) under noncancellable capital leases.
The leases, which expire at various times through 2003 bearing
interest at annual rates ranging from 10.895% to 20.783% provide
for aggregate monthly payments averaging $35,400. All leases are
secured by the respective assets acquired.
Less current portion $715,494 $584,553
363,956 222,962
--------- ---------
$351,538 $361,591
========= =========
</TABLE>
Annual payments under capital lease obligations are due as follows:
<TABLE>
<CAPTION>
Years ended Amount
----------- --------
<S> <C>
1999 $427,738
2000 247,055
2001 96,247
2002 44,304
2003 18,025
--------
833,369
Less deferred interest 117,875
--------
$715,494
========
</TABLE>
F-13
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 30, 1998, MAY 31, 1997 AND 1996
- --------------------------------------------------------------------------------
6. SHORT-TERM BORROWINGS
Pursuant to a line of credit agreement with a finance company, the Company's
subsidiary, Metro, Inc. may borrow up to 75% of assigned accounts receivable
less than 90 days old, up to a maximum of $1,500,000. The balance due under the
line of credit bears interest at the prime rate plus 5% per annum. In addition,
Metro pays the finance company a management fee equal to 3/4 of 1% of sales
submitted for inclusion in the net security value of the accounts receivable,
but not more than $7,500 per month. The outstanding balance under the line is
secured by the accounts receivable of Metro, and the guarantees of the Company
and certain officer/shareholders. As of May 30, 1998, short-term borrowings
under the line of credit totaled $530,272.
During the year ended May 30, 1998, the Company issued two separate 12%
convertible debentures totaling $500,000 due March 23, 1999. These debentures
are convertible into common stock at $2.25 per share
7. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current provision (benefit)
Federal $ 275,000 $ (59,704) $262,001
State and local 31,734 37,312 41,217
--------- --------- --------
306,734 (22,392) 303,218
========= ========= ========
Deferred provision (benefit)
Federal (46,700) (58,100) (3,037)
State and local (12,550) (35,350) (7,611
--------- --------- --------
(59,250) (93,450) (10,648)
Total $247,484 $(115,842) $292,570
----- ======== ========= ========
</TABLE>
The following is a reconciliation of the statutory federal income tax rate to
the actual effective income tax rate:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate 34.0% (34.0)% 34.0 %
State income taxes, net of federal benefit 3.5% 7.0 % 3.2 %
Net change attributable to temporary differences (2.8)% 0.0 % (1.5)%
Net change attributable to permanent differences 6.7% (8.9)% .3%
------ ------ ------
41.4% (35.9)% 36.0%
====== ====== ======
</TABLE>
Deferred income taxes result from temporary differences in the financial bases
and tax bases of assets and liabilities. The significant components of the
Company's deferred income tax assets and liabilities as follow:
F-14
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 30, 1998, MAY 31, 1997 AND 1996
- --------------------------------------------------------------------------------
7. INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
1998 1997
---- ----
Asset Asset
(Liability) (Liability)
--------- ---------
<S> <C> <C>
Excess depreciation $(197,490) $(157,650)
Unearned management compensation 121,950 121,950
Allowance for doubtful account 72,042 8,943
Inventory capitalization 164,158 127,844
State net operating loss carryforward 12,300 16,700
Other expenses 16,240 12,163
--------- ---------
Net deferred assets $ 189,200 $ 129,950
========= =========
</TABLE>
The Company's state net operating loss carryforward of approximately $122,000
expires in year 2005.
8. SHAREHOLDERS' EQUITY
Series A Convertible Preferred Stock
During 1998, the Company entered into an Offshore Securities Subscription
Agreement for convertible Preferred Shares pursuant to regulation S of the U.S.
Securities Act of 1933. Under the terms of the agreement, the Company is to
issue 2,175 shares of 1998 Series A Convertible Preferred Stock ("Series A
Shares") at a price of $1,000 per share with a 5% cumulative dividend payable in
common stock at conversion. At May 30, 1998 the Company received proceeds of
$846,500, net of offering costs representing 855 shares. Substantially all of
the proceeds for the remaining 1320 shares were subsequently received.
The Series A Shares are convertible at a rate of 100 shares plus accrued
dividends per week at 80% of the 15 day average closing bid price. These Shares
are subject to a 24 month mandatory conversion feature. Management is presently
obtaining fair values of the embedded beneficial conversion feature and warrants
which is expected to be reallocated out of the proceeds after May 30, 1998. Such
values will be recognized as dividends and amortized over the mandatory
conversion period of two years beginning in June of 1998.
In addition to the Series A Shares the Company issued 400,000 warrants to
purchase the Company's common stock at $1.50 per share commencing April 20, 1998
exercisable over 5 years.
Consultant Stock Compensation Plan
The Company's Consultant Stock Compensation Plan (the "Plan") allows the Company
to compensate consultants and certain other persons who have provided service to
the Company through the award of 500,000 shares of the Company's common stock.
F-15
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 30, 1998, MAY 31, 1997 AND 1996
-----------------------------------------------------------------------------
8. SHAREHOLDERS' EQUITY (CONTINUED)
During the years ended May 30, 1998 the Company issued 206,000 shares of
common stock valued at $282,999 of which $62,500 will be earned through May,
1999. During the year ended May 31, 1997 the Company issued 100,000 shares
of common stock valued at $243,800. As of May 30, 1998, 77,000 shares are
available under this plan.
Equity Incentive Plan
During the year ended May 31, 1997 the Company adopted an Equity Incentive
Plan (the "Plan") which allows the Company to compensate key employees and
directors who have provided service to the Company through the award of
500,000 shares of the Company's common stock, including qualified and non-
qualified stock options.
During the year ended May 31, 1997 options to purchase 200,000 shares were
awarded to officers and key employees under the Plan. The grants under the
Plan provide for the options to vest 1/5 annually, on the anniversary date of
the grant. The vested options are exercisable through March 2007 at $2.00
per share. Due to the termination of employment 100,000 shares have been
returned to the plan.
During the year ended May 30, 1998, 5,000 shares of common stock valued at
$6,850 were awarded under the plan. There are 395,000 shares available under
this plan as of May 30, 1998.
Employee Stock Purchase Plan
During the year ended May 31, 1997 the Company adopted an Employee Stock
Purchase Plan. This plan allows employees of the Company to purchase up to
600,000 shares of the Company's common stock at a 15% discount to the market
price of the stock on the commencement date or closing date of the plan year,
whichever is lower.
During the year ended May 30, 1998 no shares were awarded under this plan.
Private Placement
The company sold 55,000 common shares (45,000 and 10,000 during the fiscal
years ended May 31, 1995 and 1994, respectively) at a price of $6.00 per
share to a limited number of investors, pursuant to a Private Placement
Memorandum dated May 6, 1994. Pursuant to the offering, original
participants received a stock dividend at .15 shares for each share held as
of the second anniversary of the private placement valued at $52,450 which
resulted in the Company issuing 17,734 additional shares in October, 1996.
F-16
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 30, 1998, MAY 31, 1997 AND 1996
-----------------------------------------------------------------------------
8. SHAREHOLDERS' EQUITY (CONTINUED)
Debt Conversion
During the year ended May 30, 1998, the Company converted a note payable to
Metro Plus Company, a company owned by a shareholder, with a principal
balance plus accrued interest totaling $577,501 into 385,000 shares of common
stock. Additionally, the Company converted a notes payable to a shareholder
with a principal balance and accrued interest totaling $136,536 into 91,025
shares of common stock.
Stock Options
Pursuant to an employment agreement, a former Executive was granted options
to purchase 200,000 shares of the Company's common stock at $1.50 per share
on January 1, 1993. Compensation of $300,000 was charged to operations from
January 1, 1993 to January 1, 1997. As of January 1, 1997 the term to
exercise the options was extended to December 31, 2006.
All options remain outstanding.
9. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company is obligated under long-term operating leases which require
minimum annual rentals as follows:
<TABLE>
<CAPTION>
Office and Machinery
Warehouse and
Year Total Premises Vehicles Equipment
---- ----- ----------- -------- ---------
<S> <C> <C> <C> <C>
1999 $ 691,637 $ 503,086 $69,267 $119,284
2000 383,973 350,121 16,176 17,676
2001 314,351 297,425 16,926
2002 311,405 297,425 13,980
2003 279,289 279,289
------------ ---------
Total $1,980,655 $1,727,346 $85,443 $167,866
----- ========== ============ ======= =========
</TABLE>
The lease on the Rhode Island warehouse and office facilities (Note 10) has a
renewal option for two successive additional terms of five years (through
April, 2008 and April, 2013, respectively), each based on the current annual
rent plus an amount based on the consumer price index one month prior to the
date of renewal. The lease requires monthly rentals of $20,433. On June 1,
1997, the Company was granted a rent reduction of $81,733 which is being
amortized over the remaining term of the lease.
F-17
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 30, 1998, MAY 31, 1997 AND 1996
-----------------------------------------------------------------------------
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The three leases on the California buildings have a renewal option for one
additional term of five years providing for cost of living adjustments
ranging from 4% to 8% beginning on July 1, 1999 and July 1, 2001.
Rent expense under office and warehouse operating leases totaled $412,122,
$364,173 and $424,813 during the years 1998, 1997 and 1996, respectively.
Uninsured Cash
The Company maintains its cash and cash equivalents in various banks.
Accounts at each bank are guaranteed by the Federal Deposit Insurance
Corporation (FDIC) up to $100,000. Uninsured cash and cash equivalents
approximated $152,959 and $-0- at May 30, 1998 and May 31, 1997,
respectively.
Other Matters
The Company is a defendant in three suits relating to matters arising in the
ordinary course of business. The amount of liability, if any, from the
claims cannot be estimated, but management and outside counsel is of the
opinion that the outcome of the claims will not have a material impact on the
Company's financial position. Nevertheless, due to uncertainties in the
settlement process, it is at least reasonably possible that management's view
and outside counsel's view of the outcome will change in the near term.
During the years 1998 and 1997, one vendor provided substantially all
printing services (magazines, video boxes and promotional material) to the
Company. Management of the Company believes that other suppliers could
provide similar services at comparable terms.
10. RELATED PARTY TRANSACTIONS
The Company has significant tenant, borrower and customer relationships with
companies owned and managed by officers/shareholders of the Company (see
Notes 5, 8 and 9). Significant related party transactions for the years
1998, 1997 and 1996 are summarized below:
Capital Video Corporation ("CVC") operates approximately 34 video and
magazine retail stores in the New England and New York areas and accounted
for approximately 47%, 39%, and 32% of the company's sales for the years
1998, May 31, 1997 and 1996, respectively. The Company's accounts
receivables include $2,477,041 and $1,711,443 due from CVC at May 30, 1998
and 1997. The Company has obtained the personal guarantee of the principal
shareholder of CVC. No allowance for doubtful related party receivables and
no related party bad debts expense has been recorded in the accompanying
1998, 1997 and 1996 consolidated financial statements. During the year ended
May 30, 1998, the Company billed CVC $120,000 for services rendered for
distribution and sales analysis costs incurred by the Company. During fiscal
1998 the Company received from CVC $84,592 in royalty income pursuant to a
franchise agreement for the operation of the Airborne for Men stores owned by
CVC.
F-18
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 30, 1998, MAY 31, 1997 AND 1996
-----------------------------------------------------------------------------
10. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company leases its Rhode Island warehouse and office facilities from
Castle Properties, L.L.C., an affiliate, for its Rhode Island operations. A
portion of the facility rented from Castle Properties, L.L.C. is sublet to
CVC on a month-to-month basis. Sublease income during the years 1998, 1997
and 1996 totaled $48,000, $49,000, and $104,000 respectively. During the
year ended May 30, 1998, Castle Properties granted the Company a four month
moratorium amounting to $81,733 which is being amortized over the remaining
lease term. The net rent expense to Castle Properties, L.L.C. for the years
ended May 30, 1998, 1997 and 1996 was $177,478, $196,200, and $141,200,
respectively.
Effective January 31, 1996, Airborne for Men, Ltd. sold to Capital Video
Corporation the stock of its wholly owned subsidiary A.F.M. Limited and
effective November 30, 1995, Airborne for Men, Ltd. sold to CVC the stock of
its wholly owned subsidiaries, Eastern Sales, Inc., a Rhode Island
corporation and Aircoldco, Inc. (formerly known as Airborne East, Inc.), a
Rhode Island corporation. The Company's total gain for the sale of the three
Airborne stores amounted to $171,795 for the year ended May 31, 1996.
11. ACCOUNTING FOR STOCK BASED COMPENSATION
The Company applies APB Opinion 25 and related interpretations in accounting
for its stock option transactions. Accordingly, no compensation cost has
been recognized for the years May 30, 1998, May 31, 1997 and 1996 (see Notes
8 and 9).
In October, 1997, the Financial Accounting Standards Board issued Statement
(SFAS) No. 123, Accounting for Stock Based Compensation, which becomes
effective for transactions entered into in fiscal years beginning after
December 15, 1995. This statement permits an entity to apply the fair value
based method to stock options awarded during 1995 and thereafter in order to
measure the compensation cost at the grant date and recognize it over its
vesting period. This statement also allows an entity to continue to measure
compensation costs for these plans pursuant to APB Opinion 25. Entities
electing to remain with the accounting treatment under APB Opinion 25 must
make proforma disclosures in net income and earnings per share to include the
effects of all awards granted in fiscal years beginning after December 31,
1994, as if the fair value based method of accounting pursuant to SFAS No.
123 had been applied.
The Company has stock option plans which reserves shares of common stock for
issuance to executives, employees, and directors. The Company has adopted
the disclosure only provisions of Statement of Financial Accounting No. 123,
"Accounting for Stock Based Compensation". Accordingly, compensation expense
continues to be recognized under APB Opinion 25 for such plans. Had
compensation cost for the Company's stock option plans been determined based
on the fair value at the grant date for awards during the year ended May 30,
1998 consistent with the provisions of SFAS No. 123, the Company's net income
(loss) and earning (loss) per share would have been reduced to the pro forma
amounts indicated below:
F-19
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 30, 1998, MAY 31, 1997 AND 1996
-----------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
--------- ----------
<S> <C> <C>
Net income (loss) - as reported $349,681 $(207,158)
Net income (loss) - pro forma $292,681 $(311,558)
Basic earnings (loss) per share - as reported .09 (.06)
Basic earnings (loss) per share - pro forma .08 (.09)
Diluted earnings (loss) per share - as reported .09 (.06)
Diluted earnings (loss) per share - as pro forma .08 (.09)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants during May 30, 1998: dividend yield 0.00%,
expected volatility 58.08%, risk free interest rate of 7.50%, and expected
lives of 10 years.
The pro forma effect of applying SFAS 123 may not representative of the
effects on reported net income and earnings per share for future years since
options vest over several years.
12. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards (SFAS) No. 107, "Disclosures
about Fair Value of Financial Instruments", requires that the Company
disclose estimated fair values for its financial instruments. Fair value
estimates are made at a specific point in time, based on relevant market
information and information about the financial instrument. Because no
market exists for a significant portion of the Company's financial
instruments, fair values are based on judgments regarding future expected
loss experience, current economic conditions, risk characteristics of various
financial instruments and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision.
Management of the Company estimates that all financial instruments of the
Company, except long-term liabilities (notes payable) and a certain trade
accounts receivable included in other assets, have a fair value equal to the
carrying value. Regarding the fair value of the long-term liabilities and
certain trade account receivables, it has been determined that fair value
cannot be reasonably estimated since the unique nature, interest rates,
repayment terms, restrictions and all related conditions pertaining to these
instruments do not provide information that would yield a basis for a sound
fair value in accordance with guidelines in SFAS 107.
F-20
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 30, 1998, MAY 31, 1997 AND 1996
-----------------------------------------------------------------------------
13. SUBSEQUENT EVENT (UNAUDITED)
Acquisition - Fanzine
On July 31, 1998, the Company acquired 100% of the stock of Fanzine
International, Inc. ("Fanzine") for a preliminary purchase price of
$7,500,000. Fanzine, which began operations on August 1, 1997, publishes
event driven, mainstream magazines translated into seven languages and
distributed worldwide. The acquisition price consists of $4,000,000 cash,
and 1,000,000 restricted shares of the Company's common stock with put option
rights at $8.00 per share to be exercised by the selling shareholder's during
the second year on a quarterly basis, if certain minimum earnings, as
defined, are met. However, during Fanzines' first year of operations, the
Company has the right to call the shares at the greater of $6.00 per share or
75% of the market price. The acquisition agreement, also, provides for a
reduction in purchase price if Fanzine's results of operations do not meet
certain minimum earnings.
Management is presently obtaining an independent valuation to finalize the
preliminary estimated purchase price of $7,500,000. The Company's right to
redeem its shares during the first year and the selling shareholders' right
to put the shares to the Company in the second year could result in an
estimated increase in purchase price ranging from $2,500,000 to $4,500,000.
These adjustments to the purchase price could have a material impact on the
pro-forma information, as presented below, and to the future consolidated
results.
The acquisition will be accounted for as a purchase. The excess of the
purchase price over the fair market values of net assets acquired, which
include, among others, licences, trademarks, and distribution rights, will be
allocated principally to goodwill and amortized over fifteen years.
The cash portion of $4,000,000 is being financed by a long-term convertible
debenture. Management anticipates financing the additional consideration to
be paid in the near future, (if any), with Fanzine's cash flow resulting from
profitable operations.
As the acquired company (Fanzine) financial statements only include eleven
months of operations from inception through June 30, 1998, the following
selected unaudited pro-forma information is being provided to present a
summary of the continued results of the Company and Fanzine as if the
acquisition had occurred on August 1, 1997:
Pro-Forma information (Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED MAY 30, 1998 (ONLY)
------------------------------
<S> <C>
Net sales $30,137
Net Income 1,140
Earnings Per Share:
Basic .25
Diluted .20
</TABLE>
F-21
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 30, 1998, MAY 31, 1997 AND 1996
-----------------------------------------------------------------------------
13. SUBSEQUENT EVENT (UNAUDITED) (CONTINUED)
The pro forma results include amortization of the intangibles and interest
expense on debt issued to finance the purchase. The pro forma results are
not necessarily indicative of what actually would have occurred if the
acquisition had been completed as of the beginning of the fiscal period
presented, nor are they necessarily indicative of future consolidated
results.
Employment Agreement
In connection with the Fanzine acquisition on July 31, 1998, each of the four
selling shareholders entered into separate five year employment agreements,
with an option to renew for an additional three years and with automatic
annual renewals.
The employment agreements entitle each selling stockholder to receive
deferred compensation amount equal to six times the Company's pre-tax net
earnings (as defined) multiplied by a rate of 8.164% for the one stockholder
and 13.612 for each other stockholder. The applicable pre-tax earnings are
to be derived from the greater of the Company's pre-tax earnings in year of
termination or the average pre-tax earnings since inception of the
agreement. Fanzine's proforma unaudited applicable pre tax earnings for the
eleven months ended June 30, 1998 approximated $4,665,000.
F-22
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Assets
<TABLE>
<CAPTION>
August 29, May 30,
1998 1998
(Unaudited) (Audited)
--------- -------
<S> <C> <C>
Current assets
- --------------
Cash $ 423,988 $ 184,995
Accounts receivable, less allowance for doubtful accounts of
$193,030 and $163,030, respectively 6,844,419 5,092,255
Inventory 4,331,076 3,726,963
Deferred income taxes 248,500 248,500
Prepaid expenses and other current assets 312,016 78,751
-------------- ------------
Total current assets 12,159,999 9,331,464
--------------------
Motion pictures and other films at cost, less accumulated
amortization of $6,944,101 and $6,575,623, respectively 4,631,128 4,142,979
Property and equipment at cost, less accumulated depreciation and
amortization of $1,787,942 and $1,681,138, respectively 1,967,385 1,479,426
Goodwill, net of accumulated amortization of $35,616 7,464,384
Other assets 207,308 483,472
-------------- ------------
Total assets $ 26,430,204 $ 15,437,341
------------ ============== ============
</TABLE>
Liabilities and Shareholders' Equity
<TABLE>
<CAPTION>
August 29, May 30,
1998 1998
(Unaudited) (Audited)
--------- -------
<S> <C> <C>
Current liabilities
- -------------------
Note payable--selling shareholders $ 2,000,000 $ -
Current portion of capital lease obligations 346,084 363,956
Short-term borrowings 2,248,438 1,030,272
Accounts payable and accrued expenses 4,397,360 4,232,679
Income taxes payable 720,636 326,119
-------------- ------------
Total current liabilities 9,712,518 5,953,026
-------------------------
Convertible debentures 1,000,000 -
Capital lease obligations, less current portion 357,550 351,538
Deferred income taxes 59,300 59,300
-------------- ------------
Total liabilities 11,129,368 6,363,864
----------------- -------------- ------------
Minority interest 60,585 18,220
-------------- ------------
Commitments and contingencies
Shareholders' equity
--------------------
Series A 5% cumulative convertible preferred stock, $.0001 par value,
$1,000 stated value, authorized 2,175, issued and outstanding 1,475 and
2,175 shares less 1,320 shares outstanding subscriptions, respectively 1,489,722 857,979
Preferred stock, no par value; authorized 2,000,000 shares; issued
and outstanding, none - -
Common stock, $.0001 par value; authorized 10,000,000 shares; issued
and outstanding, 5,911,904 and 4,245,193 shares, respectively 591 424
Additional paid in capital 11,510,937 6,546,580
Retained earnings 2,269,582 1,712,774
Foreign exchange 669 -
-------------- ------------
15,271,501 9,117,757
Unearned compensation (31,250) (62,500)
-------------- ------------
Total shareholders' equity 15,240,251 9,055,257
-------------------------- -------------- ------------
Total liabilities and shareholders' equity $ 26,430,204 $ 15,437,341
------------------------------------------ ============== ============
</TABLE>
See Notes to Consolidated Financial Statements
F-23
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED
AUGUST 29, 1998 AND AUGUST 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Revenues $ 7,065,068 $4,096,221
Costs of revenues, including amortization of motion pictures
and other films 4,153,050 2,846,207
----------- ----------
2,912,018 1,250,014
Selling, general and administrative expenses 1,891,774 1,527,257
----------- ----------
Income (loss) from operations 1,020,244 (277,243)
-----------------------------
Other income (expense), net (57,731) (123,560)
----------- ----------
Income (loss) before income taxes 962,513 (400,803)
---------------------------------
Income tax expense (benefit) 385,005 (172,345)
----------- ----------
Net income (loss) $ 577,508 $ (228,458)
---------------- =========== ===========
Basic earnings (loss) per common share $ 0.10 $ (0.06)
=========== ===========
Weighted average number of shares outstanding 5,911,904 3,758,168
</TABLE>
See notes to consolidated financial statements.
F-24
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED AUGUST 29, 1998
AND AUGUST 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from (used by) operating activities:
Net income (loss) $ 577,508 $ (228,458)
---------- ------------
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 475,282 303,995
Amortization of unearned compensation 31,250 -
Bad debt expense 30,000 -
Amortization of goodwill 35,616 -
Common stock issued for consulting services 449,833 -
Minority interest 42,365 -
Foreign exchange 669 -
(Increase) decrease in assets:
Accounts receivable (1,782,164) 612,958
Inventory (604,113) (259,852)
Prepaid expenses and other current assets (233,265) (87,414)
Deferred income taxes - (172,345)
Other assets (77,753) (2,420)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 464,681 268,774
Income taxes payable 394,517 (19,396)
---------- ------------
Total adjustments (773,082) 644,300
----------------- ---------- ------------
Net cash (used) provided by operating activities (195,574) 415,842
------------------------------------------------ ---------- ------------
Cash flows from (used by) investing activities:
Investments in motion pictures and other films (856,627) (479,896)
Purchase of property and equipment (179,106) (56,044)
Acquisition of Fanzine (2,000,000)
---------- ------------
Net cash used by investing activities (3,035,733) (535,940)
------------------------------------- ---------- ------------
</TABLE>
See notes to consolidated financial statements.
F-25
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE THREE MONTHS ENDED AUGUST 29, 1998
AND AUGUST 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from (used by) financing activities:
Proceeds from issuance of Series A convertible preferred stock $1,317,000 $ -
Payments on capital leases (73,600) (55,765)
Net proceeds from line of credit 18,166 221,953
Proceeds from notes payable 1,200,000 -
Proceeds from issuance of common stock 8,734 -
Proceeds from issuance of convertible debenture 1,000,000 -
---------- ----------
Net cash provided by financing activities 3,470,300 166,188
----------------------------------------- ---------- ----------
Increase in cash 238,993 46,090
----------------
Cash, beginning of period 184,995 57,724
---------- ----------
Cash, end of period $ 423,988 $ 103,814
========== ==========
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest $ 49,111 $ 101,869
========== ==========
Income taxes $ - $ 14,210
========== ==========
</TABLE>
Supplemental schedule of non-cash investing and financing activities:
During the quarter ended August 28, 1998, a note payable of $300,000 was
converted into 250,000 restricted shares of the Company's common stock.
During the quarter ended August 28, 1998, 700 shares of Series A preferred stock
plus accrued dividends of $5,958 were converted into 280,059 shares of the
Company's common stock.
Property and equipment under capital lease obligations of $61,740 were incurred
for the quarter ended August 28, 1998.
On August 3, 1998, the Company acquired 100% of the outstanding stock of Fanzine
International, Inc. for a preliminary purchase price of $7,500,000. The Company
paid cash of $2,000,000, issued 1,000,000 shares of stock valued at $3,500,000
and issued a note payable for $2,000,000.
See notes to consolidated financial statements.
F-26
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 29, 1998 AND 1997
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of Metro Global
Media, Inc. ("Metro Global") and its wholly-owned subsidiaries (collectively
the "Company"). All intercompany balances and transactions have been
eliminated in consolidation.
Financial Statements
The interim financial statements are prepared pursuant to the requirements
for reporting on Form 10-QSB. The May 30, 1998 balance sheet data was derived
from audited financial statements but does not include all disclosures
required by generally accepted accounting principles. The interim financial
information included herein is unaudited; however, such information reflects
all adjustments (consisting solely of normal recurring adjustments) that are,
in the opinion of management, necessary to a fair presentation of the
financial position, results of operation, and changes in financial position
for the interim periods. The interim financial statements and notes thereto
should be read in conjunction with the financial statements and notes
included in the Company's latest annual report. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted. The current period results of operations are not necessarily
indicative of results which ultimately will be reported for the full year
ending May 29, 1999.
Earnings Per Share
During the year ended May 30, 1998, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings per Share", which replaces
primary and fully diluted earnings per share with basic and diluted earnings
per share. Under the new requirements the dilutive effect of certain common
stock equivalents is excluded from the computation of basic earnings per
share. Diluted earnings per share is calculated similarly to fully diluted
earnings per share as required under APB 15. All prior period earnings per
share data presented have been restated to conform to the provisions of this
statement.
Basic earnings per share is computed by dividing net income available to
common stockholders (net income less preferred stock dividends) divided by
the weighted average number of shares outstanding during the year. Diluted
earnings per share is consistent with basic earnings per share while giving
effect to all dilutive potential common shares that would have been
outstanding if the dilutive potential common shares had been issued, while
adding back to income any preferred dividend or interest expense on
convertible securities.
F-27
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 29, 1998 AND 1996
(UNAUDITED)
2. ACQUISITION
On July 31, 1998, the Company acquired 100% of the stock of Fanzine
International, Inc. ("Fanzine") for a preliminary purchase price of
$7,500,000. Fanzine, which began operations on August 1, 1997, publishes
event driven, mainstream magazines translated into seven languages and
distributed worldwide. The acquisition price consists of $4,000,000 cash,
and 1,000,000 restricted shares of the Company's common stock with put option
rights at $8.00 per share to be exercised by the selling shareholder's during
the second year on a quarterly basis, if certain minimum earnings, as
defined, are met. However, during Fanzines' first year of operations, the
Company has the right to call the shares at the greater of $6.00 per share or
75% of the market price. The acquisition agreement, also, provides for a
reduction in purchase price if Fanzine's results of operations do not meet
certain minimum earnings.
Management is presently obtaining an independent valuation to finalize the
preliminary estimated purchase price of $7,500,000. The Company's right to
redeem its shares during the first year and the selling shareholders' right
to put the shares to the Company in the second year could result in an
estimated increase in purchase price ranging from $2,500,000 to $4,500,000.
The acquisition was accounted for as a purchase. The excess of the purchase
price over the fair market values of net assets acquired, which include,
among others, licences, trademarks, and distribution rights, was allocated to
goodwill and is being amortized over fifteen years.
The cash portion of $4,000,000 is being financed by a long-term convertible
debenture. Management anticipates financing the additional consideration to
be paid in the near future, (if any), with Fanzine's cash flow resulting from
profitable operations.
As the consolidated financial statements of the Company only include one
month of operations, the following selected unaudited pro-forma information
is being provided to present a summary of the continued results of the
Company and Fanzine as if the acquisition had occurred on August 1, 1997:
Pro-Forma information (Unaudited)
(In thousands, except per share data)
QUARTER ENDED AUGUST 31, 1997 (ONLY)
------------------------------------
Net sales $4,753
Net Loss (80)
Basic Loss Per Share (.02)
F-28
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 29, 1998 AND 1996
(UNAUDITED)
3. NOTES PAYABLE
During June, 1997, Metro, Inc. entered into a line of credit agreement with a
finance company. Under the agreement, Metro, Inc. may borrow up to 75% of
assigned accounts receivable less than 90 days old, up to a maximum of
$1,500,000. The balance due under the line of credit bears interest at the
prime rate plus 5% per annum. In addition, Metro, Inc. shall pay the finance
company a collateral management or notification fee equal to 3/4 of 1% of
sales submitted to the finance company for inclusion in the net security
value of accounts receivable, but no more than $7,500 per month. The
outstanding balance under the line is secured by accounts receivable of
Metro, Inc and guaranties of the Company and certain officers/shareholders.
The line of credit expires during June, 1999, but includes an option for an
additional year. As of August 29, 1998, the balance on the line of credit
was $548,438 .
On March 23, 1998, the Company entered into two 8% convertible debentures
totaling $500,000. Both notes are due on March 23, 1999, in either cash or
common stock, at a conversion rate of $2.25 per share. Proceeds from the
debentures were used for working capital.
On July 1, 1998, the Company entered into an 8% convertible debenture
totaling $200,000. The note is due on July 1, 1999, in either cash or common
stock, at a conversion rate of $2.25 per share. Proceeds from the debenture
were used for working capital.
On August 1, 1998, the Company entered into notes payable totaling
$1,000,000. The notes, which bear interest at 8%, are due August 1, 1999.
Proceeds from the notes were used in the acquisition of Fanzine.
4. CONVERTIBLE DEBENTURES
On July 31, 1998, the Company entered into an 8% convertible debenture with a
total offering of $7,000,000. The Company received proceeds of $1,000,000 in
August, 1998 which was used in the purchase of Fanzine. The remaining
$6,000,000 of the offering will be sold at the Company's option at calls of
$500,000 each for a period of two years following the date of this agreement.
The $1,000,000 debenture matures on July 31, 2000. Interest is payable on a
quarterly basis. The holder of the debenture is entitled to convert after
120 days of the agreement, the principal value into the Company's common
stock at a discounted market price as is defined in the agreement.
5. SERIES A CONVERTIBLE PREFERRED STOCK
During 1998, the Company entered into an Offshore Securities Subscription
Agreement for convertible Preferred Shares pursuant to regulation S of the
U.S. Securities Act of 1933. Under the terms of the agreement, the Company
is to issue 2,175 shares of 1998 Series A Convertible Preferred Stock
("Series A Shares") at a price of $1,000 per share with a 5% cumulative
dividend payable in common stock at conversion.
F-29
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 29, 1998 AND 1996
(UNAUDITED)
5. SERIES A CONVERTIBLE PREFERRED STOCK (CONTINUED)
The Series A Shares are convertible at a rate of 100 shares plus accrued
dividends per week at 80% of the 15 day average closing bid price. These
Shares are subject to a 24 month mandatory conversion feature. During the
quarter ended August 29, 1998, 700 shares plus accrued dividends of $5,958
were converted into 280,059 shares of the Company's common stock.
In addition to the Series A Shares the Company issued 400,000 warrants to
purchase the Company's common stock at $1.50 per share commencing April 20,
1998 exercisable over 5 years.
F-30
<PAGE>
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's by-laws provide for the indemnification of directors, in that
Directors of the Company shall not be personally liable for monetary damages to
the Company or any other person for any statement, vote, decision or failure to
act, regarding corporate management or policy, by a director, unless the
director breached or failed to perform his duties as director.
The Company's by-laws further provide for the indemnification of officers,
directors, employee and agents of the Company. Such indemnification is available
to any person who was or is a party to any proceeding (other than an action by,
or in the right of, the Company), by reason of the fact that he or she is or was
a director, officer, employee or agent of the Company or is or was serving at
the request of the Company.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions or
otherwise, the small business issuer has been advised that, in the opinion of
the Securities and Exchange Commission, such indemnification is against public
policy, as expressed in the Act and is, therefore, unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<CAPTION>
<S> <C>
Registration fees $ 620
Federal taxes $ 0
State taxes $ 0
Transfer agents' fees $ 0
Costs of printing $ 3,000
Legal $30,000
Accounting $ 3,000
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The Company issued "restricted" securities, as that term is defined in Rule
144, in that all such securities were acquired directly from the Company in
transactions not involving any public offering. All such securities may only be
sold upon compliance with Rule 144, adopted under the Act of 1933.
II-1
<PAGE>
The following table sets forth information with respect to the Company's
sales of unregistered securities, which securities were sold in reliance upon,
among other exemptions, 4(2) of the Securities Act of 1933:
<TABLE>
<CAPTION>
Common Stock
------------
Date Purchaser No. of Shares Price per Share
---- --------- -------------- ---------------
<S> <C> <C> <C>
June 1995 Steve Telsey 15,000 $6.000
August 1995 Steve Telsey 5,000 $3.500
January 1996 Steve Telsey 5,000 $3.500
April 1996 Steve Telsey 5,000 $2.625
May 1996 Steve Telsey 10,000 $2.625
June 1996 Steve Telsey 20,000 $2.625
June 1998 Jennifer St. Cyr 2,013 $1.540
August 1998 Joseph Giarmo 2,780 $1.540
</TABLE>
Series A Preferred Stock
------------------------
<TABLE>
<CAPTION>
Date Purchaser No. of Shares Price per Share
---- --------- ------------- ---------------
<S> <C> <C> <C>
April 1998 Thomson Kernaghan 1,500 $1,000
July 1998 Thomson Kernaghan 675 $1,000
</TABLE>
ITEM 27. EXHIBITS
2.1 Stock Purchase Agreement dated July 31, 1998 by and among Robert
Maiello, Michael Levine, Philip P. Salvatore, Bart Senior and Metro
Global Media, Inc. as filed with the Commission on August 15, 1998 as
Exhibit (1) on Form 8-K and incorporated herein by reference.
3.1 Articles of Incorporation, as filed with the Commission on August 23,
1988 as Exhibit 3.1 to the Registration Statement on Form S-18 and
incorporated herein by reference.
3.2 Bylaws, as filed with the Commission on August 23, 1988 as Exhibit 3.2
to the Registration Statement on Form S-18 and incorporated herein by
reference.
II-2
<PAGE>
3.3 Articles of Amendment of Articles of Incorporation of the Registrant,
as filed with the Commission on January 17, 1995 as Exhibit 3.3 to the
Quarterly Report on Form10-QSB for the fiscal quarter ended November
30, 1994 and incorporated herein by reference.
3.4 Amendment to Bylaws of the Registrant, as filed with the Commission on
January 17, 1995 as Exhibit 3.4 to the Quarterly Report on Form 10-QSB
for the fiscal quarter ended November 30, 1994 and incorporated herein
by reference.
3.5 Articles of Amendment of Articles of Incorporation of the Registrant,
as filed with the Commission on August 28, 1996 as Exhibit 3.5 to the
Form 10-KSB for the fiscal year ended May 30, 1996 and incorporated
herein by reference.
5.1 Opinion of Eric P. Littman, P.A.*
10.1 Stock Option Agreement dated September 9, 1993 between the Registrant
and Kenneth F. Guarino, as filed with the Commission on February 3,
1994 as Exhibit 10.2 to the Annual Report on Form 10-KSB for the
fiscal year ended May 30, 1993 and incorporated herein by reference.
10.2 Lease Agreement dated September 9, 1993 between Castle Properties,
L.L.C. and Metro, Inc., as filed with the Commission on February 3,
1994 as Exhibit 10.4 to the Annual Report on form 10-KSB for the
fiscal year ended May 30, 1993 and incorporated herein by reference.
10.3 Security Agreement dated September 24, 1993 between Metro, Inc. and
Capital Video Corporation, as filed with the Commission on February 3,
1994 as Exhibit 10.5 to the Annual Report on Form 10-KSB for the
fiscal year ended May 30, 1993 and incorporated herein by reference.
10.4 Lease Agreement dated January 13, 1995 between Centurion Financial
Group, LLC and the Registrant, as filed with the Commission on January
17, 1995 as Exhibit 10.13 to the Quarterly Report on Form 10-QSB for
the fiscal quarter ended November 30, 1994 and incorporated herein by
reference.
10.5 Form of Airborne For Men, Ltd. Franchise Agreement, filed as Exhibit
10.15 to the Post-Effective Amendment No. 14 to the Registration
Statement on Form SB-2 and incorporated herein by reference.
II-3
<PAGE>
10.6 Promissory note of Metro, Inc. payable to the order of Kenneth F.
Guarino dated as of May 24, 1995 in the principal amount of $63,393
as filed with the Commission as Exhibit 10.13 to the Form 10-KSB for
the fiscal year ended May 30, 1995 and incorporated herein by
reference.
10.7 Capital Stock Purchase Agreement dated as of November 30, 1995 by and
between Airborne for Men, Ltd. and Capital Video Corporation, as
filed with the Commission on December 10, 1995 as Exhibit 10.1 to
Form 8-K and incorporated herein by reference.
10.8 Debt Conversion Agreement between Capital Video Corporation and the
Registrant, as filed with the Commission on December 11, 1995 as
Exhibit 10.2 to the Form 8-K and incorporated herein by reference.
10.9 Capital Stock Purchase Agreement dated as of January 31, 1996 by and
between Airborne for Men, Ltd. and Capital Video Corporation as filed
with the Commission on May 9, 1996 as Exhibit 10.1 to the Quarterly
Report on Form 10-QSB for the fiscal quarter ended February 28, 1996
and incorporated herein by reference.
10.10 Amendment to Capital Stock Purchase Agreement dated as of November
30, 1996 by and between Airborne For Men, Ltd. and Capital Video
Corporation, as filed with the Commission on August 28, 1996 as
Exhibit 10.16 to the Form 10-KSB for the fiscal year ended May 30,
1996 and incorporated herein by reference.
10.11 Amendment Agreement dated as of December 31, 1995 between Kenneth
Guarino and the Registrant, as filed with the Commission on August
28, 1996 as Exhibit 10.17 to the Form 10-KSB for the fiscal year
ended May 30, 1996 and incorporated herein by reference.
10.12 Amendment to Stock Option Agreement dated January 16, 1997 by and
between Kenneth F. Guarino and the Registrant, as filed with the
Commission on April 15, 1997 as Exhibit 10.1 to the Quarterly Report
on Form 10-QSB for the quarter ended March 1, 1997 and incorporated
herein by reference.
10.13 Indemnification Agreement dated December 3, 1996 by Kenneth F.
Guarino in favor of Registrant as filed with the Commission on April
15, 1997 as Exhibit 10.2 to the Quarterly Report on Form 10-QSB for
the quarter ended March 1, 1997 and incorporated herein by reference.
II-4
<PAGE>
10.14 Termination Agreement dated April 10, 1997 between Capital Video
Corporation, Elvira Famiglietti and Metro, Inc. as filed with the
Commission on April 15, 1997 as Exhibit 10.3 to the Quarterly Report
on Form 10-QSB for the quarter ended March 1, 1997 and incorporated
herein by reference.
10.15 Description of Directors Compensation Arrangement, as filed with the
Commission on April 15, 1997 as Exhibit 10.4 to the Quarterly Report
on Form 10-QSB for the quarter ended March 1, 1997 and incorporated
herein by reference.
10.16 Registration Rights Agreement dated May 8, 1997 between Briana
Investment Group, Ltd. and the Registrant, as filed with the
Commission on May 8, 1997 as Exhibit 10.1 to Form 8-K and
incorporated herein by reference.
10.17 Employment Agreement dated July 31, 1998 between Robert Maiello and
Metro Global Media, Inc. as fnted with the Commission on August 15,
1998 as Exhibit (2) on Form 8-K and incorporated herein by reference.
10.18 Employment Agreement dated July 31, 1998 between Michael Levine and
Metro Global Media, Inc. as filed with the Commission on August 15,
1998 as Exhibit (3) on Form 8-K and incorporated herein by reference.
10.19 Employment Agreement dated July 31, 1998 between Philip P. Salvatore
and Metro Global Media, Inc. as filed with the Commission on August
15, 1998 as Exhibit (4) on Form 8-K and incorporated herein by
reference.
10.20 Employment Agreement dated July 31, 1998 between Bart Senior and
Metro Global Media, Inc. as filed with the Commission on August 15,
1998 as Exhibit (5) on Form 8-K and incorporated herein by reference.
23.1 Consent of Eric P. Littman, P.A. (included in 5.1).
23.2 Consent of Trien, Rosenberg, Rosenberg, Weinberg, Ciullo & Fazzari,
LLP, independent certified public accountants.*
___________________
* Filed herewith
II-5
<PAGE>
Subsidiaries: Metro, Inc. (Rhode Island)
Metro West Studios (California
Airborne for Men Ltd. (Rhode Island)
Metro International Distributors, GMBH (Germany)
Amazing Direct (Nevada)
Fanzine (New York)
Rocket Media, LLC (New York)
ITEM 28. UNDERTAKINGS
The undersigned registrant hereby undertakes that it will:
(1) File, during any period in which it offers or sells
securities, a post-effective amendment to this registration
statement to:
(i) Include any prospectus required by Section
10(a)(3) of the Securities Act;
(ii) Reflect in the prospectus any facts or events
which, individually or together, represent a fundamental change
in the information in the registration statement; and
notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b), if, in the
aggregate, the changes in the volume and price represent no more
than a 20% change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the
effective registration statement.
(iii) Include any additional or changed material
information on the plan of distribution.
(2) For determining liability under the Securities Act,
treat each post-effective amendment as a new registration statement
of the securities offered, and the offering of the securities at
that time to be the initial bona fide offering.
(3) File a post-effective amendment to remove from
registration any of the securities that remain unsold at the end of
the offering.
(4) Insofar as indemnification for liabilities arising
under the Securities Act of 1933 (the "Act") may be permitted to
directors, officers and controlling persons of the Company,
pursuant to the foregoing provisions or otherwise, the Company has
been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as
expressed in the Act and is, therefore,
II-6
<PAGE>
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the undersigned
of expenses incurred or paid by a director, officer or controlling
person of the undersigned in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being
registered, the undersigned will, unless in the opinion of its
counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy, as expressed
in the Securities Act, and will be governed by the final
adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement on Form SB-2 to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Cranston,
Rhode Island, on the 2nd day of December, 1998.
METRO GLOBAL MEDIA, INC.
By: /s/ A. Daniel Geribo
---------------------------------------
A. Daniel Geribo, President
Pursuant to the requirement of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacity and on the
dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ A. Daniel Geribo President December 2, 1998
----------------------------
/s/ Janet Hoey Treasurer December 2, 1998
----------------------------
Chief Financial Officer
II-7
<PAGE>
EXHIBIT 5.1
December 2, 1998
Board of Directors
Metro Global Media, Inc.
1060 Park Avenue
Cranston, RI 02910
Gentlemen:
This firm has acted as counsel for Metro Global Media, Inc., a Delaware
corporation (the "Company") in connection with the registration of
659,000 shares of Common Stock, $.0001 par value of the Company
(the "Shares") which the Company intends to register with the
Securities and Exchange Commission on Form SB-2. (the "Registration
Statement").
In connection with the preparation of this opinion, we have examined originals,
or certified, conformed or reproduction copies, of all such
records, agreements, instruments, and documents pertaining to the
Shares as we have deemed relevant or necessary as the basis of the
opinions hereinafter expressed. In all such examinations, we have
assumed (i) the genuineness of all signatures, (ii) the legal
capacity of natural persons, (iii) the authenticity of all
documents submitted to us as originals and (iv) the conformity to
original documents of all documents submitted to us as copies. As
to various questions of fact relevant to our opinion, we have
relied upon statements or certificates of public officials,
officers or representatives of the Company and others.
Based upon and subject to the foregoing, we are of the opinion that the Shares,
are validly issued, fully paid and non-assessable.
We consent to the use of this opinion in this Registration Statement of Metro
Global Media, Inc. on Form SB-2.
Very truly yours,
/s/ Eric P. Littman
- --------------------
Eric P. Littman
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
-----------------------------
Board of Directors
METRO GLOBAL MEDIA, INC,
We consent to the use in this Registration Statement of Metro Global
Media, Inc. on Form SB-2 of our report dated July 24, 1998 appearing in
Form 10-KSB for the fiscal years ended May 30, 1998 and May 31, 1997
which is incorporated by reference as part of this Registration
Statement.
TRIEN ROSENBERG ROSENBERG
WEINBERG CIULLO & FAZZARI LLP
MORRISTOWN, NEW JERSEY
DECEMBER 1, 1998
