U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB/A
[X] ANNUAL REPORT UNDER SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended May 29, 1999
[] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from to
Commission file number 0-21634
Metro Global Media, Inc.
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(Name of small business issuer in its charter)
Delaware 65-0025871
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1060 Park Avenue, Cranston, Rhode Island 02910
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(Address of principal executive offices) (Zip Code)
(401) 942-7876
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(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
Common Stock
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(Title of class)
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(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
of any amendment to this Form 10-KSB. []
State issuer's revenue for its most recent fiscal year: $23,389,171
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was sold or the average bid and asked price of such common equity, as of
a specified date within the past 60 days. (See definition of affiliate in Rule
12b-2 of the Exchange Act.):
$7,252,618 at September 30, 1999
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Note: If determining whether a person is an affiliate will involve an
unreasonable effort and expense, the Issuer may calculate the aggregate market
value of the common equity held by non-affiliates on the basis of reasonable
assumptions, if the assumptions are stated.
<PAGE>
(ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS)
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes No
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 6,894,529 at September 30,
1999
DOCUMENTS INCORPORATED BY REFERENCE
If the followings documents are incorporated by reference, briefly describe
them and identify the part of the Form 10-KSB (e.g., Part I, Part II, etc.) into
which the document is incorporated: (1) any annual report to security holders;
(2) any proxy or information statement; and (3) any prospectus filed pursuant to
the Rule 424(b) or (c) of the Securities Act of 1993 ("Securities Act"). The
listed documents should be clearly described for identification purposes (e.g.,
annual report to security holders for fiscal year ended December 24, 1990).
Transitional Small Business Disclosure Format (Check one):
Yes No X
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TABLE OF CONTENTS
PART I
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ITEM 1. BUSINESS.............................................................4
ITEM 2. PROPERTIES..........................................................13
ITEM 3. LEGAL PROCEEDINGS...................................................13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................13
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.............................................................14
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS...............................................15
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA..........................19
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES...........................................19
PART III
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ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
ACT.................................................................21
ITEM 10. EXECUTIVE COMPENSATION..............................................22
ITEM 11. SECURTITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.....24
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................25
PART IV
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ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K....................................29
INDEX TO FINANCIAL STATEMENTS...............................................F-0
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PART I
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ITEM 1. BUSINESS
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Metro Global Media, Inc. ("Metro Global") is engaged in the production and
distribution of erotic prerecorded videocassettes, magazines, CD-ROMs, digital
versatile discs ("DVD"), and other products. Metro Global operates through the
following subsidiaries: Metro, Inc ("Metro"), Metro-West Studios, Inc., Metro
International Distributors ("Metro International"), Amazing Direct, Inc., and
Airborne for Men, Ltd. ("Airborne"). Additionally, Metro, through its subsidiary
Rocket Media Group LLC, is a 50% partner in Maxstone Media Group, LLC, a
producer and distributor of newsstand magazines. Metro Global generated
approximately $23,389,000 in revenues from continuing operations during the
fiscal year ended May 29, 1999, approximately 40% of which is attributed to
sales made to Capital Video Corporation ("CVC") owned by a principal shareholder
and the Acting Chief Executive Officer of Metro Global, see "Distribution; Major
Customer" below.
On August 3, 1998, Metro Global purchased Fanzine International, Inc.
("Fanzine"), which through the balance of fiscal 1999 operated the Publishing
Segment, generating revenues of approximately $11,734,000 during the fiscal year
ended May 29, 1999. In September 1999, Metro Global's Board of Directors adopted
a plan to discontinue the operations of Fanzine and the Publishing Segment and
instructed management to divest Fanzine by the end of fiscal 2000. As a result
of the Board's action, Fanzine is reported as a discontinued operation for the
fiscal years ended May 29, 1999 and May 30, 1998, and Metro Global's adult
entertainment business is correspondingly reported as the continuing operations
of Metro Global for such years. On September 29, 1999, Metro Global sold Fanzine
back to its former shareholders and a corporation controlled by them. See
"Discontinued Operations".
Metro Global was incorporated under the name South Pointe Enterprises,
Inc., in Florida in November 1987. In February 1996, Metro Global changed its
name from South Pointe Enterprises, Inc. to Metro Global Media, Inc. In November
1996, Metro Global merged into an inactive subsidiary of Metro Global, Metro
Sub, Inc., which merged entity changed its name to Metro Global Media, Inc.
CONTINUING OPERATIONS
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Film and Video
Metro produces and distributes erotic motion picture entertainment,
commonly referred to in the industry as "adult 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 and DVD; the
distribution of pay television and cable programming; and the ownership and
administration of film copyrights. Metro produces films and videos either
independently 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.
Metro owns or has distribution rights to a library in excess of 3,000
titles primarily available on videocassette. Management believes Metro's 3,000
plus film and video library and extensive still photo archive is one of the most
diverse and extensive libraries in adult entertainment and includes the Cal
Vista line, the Amazing Collection, and eighteen volumes of Taboo, one of
Metro's most popular adult video series. Metro has manufactured and sold
approximately 2,300,000 videocassettes during the fiscal year ended May 29,
1999, primarily to distributors, wholesalers and store chains located in the
United States. Many of Metro's original motion picture programs have been
re-edited and licensed to cable television operators. Approximately 25% 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
U.S. distribution rights, and in some cases limited foreign distribution rights,
to the
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motion picture. Metro continues its efforts 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.
During fiscal 1999, Metro released seven new feature films, one hundred
seven feature videos, and one hundred seventy-eight video compilations. Metro
plans to 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.
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 entered into a variety of exclusive and
non-exclusive licensing arrangements with several cable and pay television
operators for recent feature releases. These relationships include various types
of fee arrangements, including arrangements which permit unlimited showings for
a defined duration in exchange for a one-time lump sum royalty payment,
arrangements for which Metro is paid a fee based on the number of subscribers to
the cable station and the number of times Metro's motion picture is shown, and
arrangements pursuant to which Metro receives a commission based upon the
revenues received by the pay television operators as a result of a showing of
Metro's motion picture. 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.
In July 1998, Metro 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, Metro signed an output agreement with Playboy
Entertainment Group, ("Playboy"). Under the agreement, Metro will supply Playboy
with up to three features per month for two years. During the fiscal year ended
May 29, 1999, Metro contracted to supply Playboy with nineteen features. Playboy
has rights to these features for five years, with an option for another five
years at a fee of 25% of the original licensing fee. CED receives a graded
commission on all placements.
In July 1999, Metro entered into a seven-year licensing and production deal
with New Frontier Media, Inc. ("New Frontier"), a publicly traded adult
satellite network company. New Frontier operates "TeN:The Erotic Network" and
the Extasy Network, which consists of three twenty-four hour direct to home
satellite channels, and the recently launched "Pleasure" channels. The licensing
arrangement allows New Frontier the right to utilize Metro's entire adult film
and video library for all formats of electronic delivery, including but not
limited to dial-up Internet, Broadband Internet, Video-On-Demand, subscription
and pay television, and other video delivery mechanisms.
The production deal calls for Metro to generate more than four hundred
features including a series of high-visibility special programming events for
New Frontier's five adult networks, and Internet sites that are part of a
pending acquisition by New Frontier of Interactive Gallery, Inc. ("I Gallery"),
a leader in Internet-delivered adult entertainment. In addition, Metro plans to
create an original, high-end video line branded by New Frontier for distribution
by Metro to the home video/DVD market.
Metro creates and designs all artwork for promotional items and packaging
and contracts for printing services. Approximately 30% of Metro's videocassettes
are duplicated at Metro's own duplicating facility located in Metro's Los
Angeles, California location, with the balance being contracted to independent
laboratories.
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Metro also is in the business of manufacturing and distributing Video View
Centers where a user can review videos and DVDs before purchase for a fee.
Usually this fee is split 50/50 with the owner of the location. Metro maintains
ownership of all equipment and is responsible for its maintenance. The expansion
of this business is limited as these units can only be installed in locations
where space permits and proper zoning so allows.
In January of 1999, Metro retained STV Communications, Inc. ("STV"), a
privately held company out of Santa Monica, California, to produce a new
Interactive Media Center for Metro's top selling lines of videos and DVDs. STV,
a leader in providing products and services for electronic merchandising and
marketing for major chains, such as Tower Records and Virgin Superstores,
produced the Media Centers that display up to thirty titles with a one to two
minute previews, clips from upcoming titles, advertisements of Metro's Internet
sites and promotions for Metro's other vendors. Management believes that with
the use of such a customer-friendly, captivating, interactive merchandising
display that advertise Metro's Internet sites and products, revenues will
increase over existing traditional marketing techniques.
In June of 1999, Metro rolled out the first one hundred of its Media Center
interactive display units to the adult retail market. Each unit houses a 20"
color monitor and holds up to two hundred forty pieces of video and DVD packaged
for sell-through. Consumers can be assured that the quality of the movie is
consistent with the quality of the packaging by viewing the titles that are on
display. This Media Center is exclusive to Metro and separates us from other
companies marketing adult video and DVD product.
DVD
During 1998, Metro entered the world of Digital Versatile Discs, ("DVD"),
which has grown dramatically since a unified single standard was finalized.
Management believes that this unified DVD format will make serious inroads into
the market shares of the video cassette recorder. DVD has several major
advantages over competing home video delivery technologies: 1) A single 5 1/4"
DVD can hold up to 135 minutes per side of high resolution digital full-motion
video and audio; 2) Instant access is available to a favorite scene; 3) DVD
contains significantly higher image and audio quality than laserdisc and video
tape; 4) Multiple language tracks can be incorporated on one disc; 5) Since DVD
is 100% digital, the cost of replication is comparable to CD-ROM or audio CD;
and 6) A relatively low replication cost will translate to a retail price for
motion picture of under $20.00, giving this medium tremendous mass-market
potential. Experts at Toshiba estimate that the market for DVD software could
exceed $20 billion by the year 2005. The next evolution of the CD-ROM drive, now
standard equipment for all multimedia computer systems, will be the DVD-ROM.
Similar to a CD-ROM in most respects, the DVD-ROM will be capable of holding
more then ten times more information than a CD-ROM.
Metro utilizes third-party designers, artists and programmers to introduce
creative and technically superior products. Metro does not anticipate
experiencing any material difficulties and delays in the manufacture and
packaging of its products. Distribution of DVD products is accomplished through
the same distribution network of wholesalers and retailers to whom Metro
distributes its adult video products both in the United States, Canada and
Europe. Order fulfillment is coordinated through Metro's California distribution
facility.
Many DVD titles features an automated photo gallery, full motion chapter
index, star biographies and behind the scenes footage. Metro was the first to
produce DVDs with True Perspectivetm multiple angle technology which allows the
viewer to watch the same moment in time from two distinctive angles. Metro has
released 9 DVD titles as of May 30, 1998 and 29 titles as of May 29, 1999.
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Magazines
Metro publishes and distributes a variety of adult magazines under various
tradenames, which it distributes through wholesalers located throughout the
United States, Canada and Europe. For example, Metro publishes several magazines
featuring pictures of men and women engaged in erotic and sexually explicit
situations, magazines oriented to readers with specific sexual preferences, and
magazines featuring photographs and short stories contributed by photographers
and writers. Metro currently publishes twelve magazines, which are distributed
on a bi-monthly or quarterly basis.
During fiscal 1999, Maxstone Media Group published seven magazines titles,
including a newly formatted magazine entitled AMAZING. This new format will be
printed in seven languages and Maxstone has entered into distribution agreements
in five European countries, as well as South Africa, Australia and New Zealand.
The North American distribution will be handled by Metro. Maxstone expects that
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.
Production for magazines are created by in-house artists while some are
contracted with independent contractors. Production contracts are entered into
on a series rather than a single title basis and are fixed-price with provisions
for cost of 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
uses three different printers for all of its magazine publication. 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
magazine production and printing activities are coordinated through its facility
located in Cranston, Rhode Island.
Franchise Sales
Airborne engages in the sale of franchises to operate upscale adult
orientated retail stores. In fiscal 1999, 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 twenty-eight states,
including Massachusetts, Pennsylvania and New Jersey, in which registration of
franchise offerings is not required.
Under Airborne's franchising program, Metro Global plans to grant to a
franchise owner the right to develop one or a specified number of retail stores
at an approved location. Prior to the opening of franchise, franchisees would be
required to execute Airborne's standard franchise agreement. Metro Global plans
to begin offering Airborne franchises for sale in the fourth quarter of fiscal
2000. Of course, there can be no assurance that any such franchises will be sold
or that Airborne's franchise program and retail formats will prove successful.
Airborne will assist franchisees by locating, approving and securing
prospective locations. In addition, Airborne would typically provide franchisees
with specifications and layouts for each approved location, an initial training
program, a start-up-marketing program, and on-site consultation and guidance as
requested. Airborne typically provides extensive product and support services to
its franchise owners, and derives income from providing these products and
services. With the possible exception of offering net 30-day 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
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as to who may become a 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 a franchise.
CVC owns and operates five Airborne for Men franchises. Because the Board
of Directors believes that CVC's expertise in the operation of retail stores
will significantly augment the value of the Airborne for Men franchise, Metro
Global did not require CVC to pay the standard franchise fee of $20,000. During
fiscal 1999, Metro Global recorded from CVC $90,569 in royalty income pursuant
to a franchise agreement for the operation of the five Airborne for Men stores
owned and operated by CVC. CVC owns the initial Amazing Superstores opened in
May, 1999 in Providence, Rhode Island.
Airborne is in the process of attempting to franchise a newly designed
franchise format for Airborne's adult entertainment retail stores, the "Amazing
Superstores". The Amazing Superstores differ markedly from traditional adult
retail stores both in product line and presentation. This new concept Superstore
is intended to be more attractive to women and couples. The stores feature
custom fixtures, captivating colors and an integrated lighting and floor plan.
CVC owns the initial Amazing SuperStore which opened in May 1999 in Providence,
Rhode Island.
Airborne plans to offer CVC and the other franchise owner the opportunity
to convert their existing stores into this new unique retailing format. Airborne
plans to aggressively expand the number of franchise locations available on a
national level through acquisition and franchise sales. Metro Global expects to
convert its five existing franchises into Amazing Superstores. Besides creating
franchise fees, management estimates, based on past experience, each franchise
sold to generate approximately $500,000 to $750,000 annually in additional
revenue through its exclusive distribution program.
Internet
Since its inception in early 1998, Metro's amazingonline.com Internet mall
has continued to grow. Due to the growth of the online adult entertainment
consumer population, particularly the female demographic, Metro redesigned and
added more and varied product lines to the site. Amazingonline.com allows
customers to directly purchase thousands of products, including many produced by
Metro. Management believes amazingonline.com's product database of adult videos,
CD-ROMs, DVDs, magazines, adult toys, and lingerie to be one of the worlds
largest available online. The site will offer the user discounted prices on all
products, quick and efficient delivery, with low shipping and handling costs.
Additional discounts will be offered to repeat buyers and members who enter
through the membership site. The mall is free of charge to enter and new product
is updated daily. Additionally, a revenue share program was implemented allowing
webmasters to resell product from amazingonline.com and receive a share of every
sale. A complete online signup form will allow webmasters to offer Metro's
products.
Due to an increase in traffic and business to Metro's e-commerce site
(amazingonline.com) and membership site (amazingsex.com), along with an analysis
of the benefits, increased opportunities and revenue growth of
direct-to-consumer sales, Metro is investing resources in upgrading and adding
to its existing sites. The average number of hits per day on Metro sites has
increased over 300% in the last eight months. A redesign to the back-end
management functionality and an upgrade to Sun Station Unix web servers should
allow Metro easy scalability while increasing speed, reliability and security to
our sites.
During the year, Metro retained Adult Entertainment Group ("AEG"), of Los
Angeles, California, to redesign and upgrade all of its approximately one
hundred domain sites. AEG was the 1998 winner of the Adult Video News award for
Best Graphic Design. By incorporating the latest design and site management
technology, Metro expects to provide a site that is eye catching with easily
navigated interfaces.
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The marketing concept of offering full screen, full motion video in
conjunction with amazingsex.com was implemented by Metro this year with the
production of the Project X 2000 CD-ROM. By combining the interactivity and
accessibility of the Internet with the speed of the CD-ROM, users can now watch,
by linking to projectx2000.com, full screen, full motion video clips while
online at the site. This promotional CD-ROM allows the user to see behind the
scenes footage, view scenes from upcoming releases, pre-order any of these
movies online, and take a virtual tour of the site before joining the membership
site, amazingsex.com.
Metro expects that the first volume of Project X 2000 will be given to
thousands of users free of charge to promote this exciting new format.
Approximately 6,000 users have already requested to be registered to receive
their complimentary CD-ROM, which is scheduled for release in late October 1999.
Metro expects to release a new volume of the CD-ROM bi-monthly to users that
have subscribed to the membership site. Metro plans to offer subscriptions at a
price lower than many competitive sites. With the addition of the Project X 2000
format, management believes this site will stand out above our competitors while
promoting new products for direct sale. Metro has retained patent attorneys who
are reviewing the process Metro is using with the Project X 2000 format for the
possibility of applying for patent protection in the United States and other
countries.
In July 1999, Metro entered into an Internet support and traffic-sharing
agreement with Interactive Telecom Network ("ITN") and Interactive Gallery, Inc.
("IGallery"). Under the terms of the agreement, ITN will provide all technical
support necessary to operate our sites, including hosting, systems
administration and management, network security solutions, customer service, and
fully automated credit card clearing services. ITN offers Internet access and
Service Bureau for automation and systems integration, and specializes in
mass-call processing using state-of-the-art switching, voice response and
computer technology.
The traffic-sharing program of the agreement directs a portion of
IGallery's fifteen million visitors per month to Metro's web sites, along with
exit traffic and qualified traffic to be routed to IGallery sites. As part of
the traffic-sharing program, IGallery will also place banners on its sites
promoting Metro and provide links to its sites from its webmaster portal and its
weekly Tips & Tricks newsletter. In addition, IGallery will send marketing
emails to its database of webmasters promoting Metro's online presence. The
agreement also calls for the creation of a new pay-per-view live feed site,
amazinglive.com, in which both Metro and IGallery will participate in revenues.
This new live feed will also be offered to the thousands of adult webmasters
already contracted with IGallery.
In the coming year, Metro expects to add four to five new "teaser" sites
every month to the hub network. Management believes the increase in Internet
sites will enable Metro to increase its traffic and market share and generate
increasing revenues.
Distribution; Major Customer
Wholesale distribution of Metro's home video and DVD products is
accomplished through a distribution network of wholesalers located throughout
the United States, Canada and Europe. In addition, Metro operates a regional
distributorship for its own motion picture titles as well as the video/DVD
titles of other companies to retail outlets located throughout the upper
Northeast region of the United States. Wholesale distribution of Metro's
publications is accomplished through a distribution network of wholesalers
located throughout the United States and Canada. Metro's New England region
fulfillment activities are conducted from a centralized 64,000 square foot
facility in Cranston, Rhode Island. National distribution is conducted from the
California facility.
Metro Global's wholly owned subsidiary, Metro International, operates an
international sales office in Flensburg, Germany to handle the sales of video
rights in Europe, South America and Australia. In addition to the sale of video
rights, this office sells Metro's videos and DVDs in Europe, South America and
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Australia. In February 1999, Metro International opened a newly expanded
facility in Flensburg, Germany. Metro International generated revenues of
approximately $765,000 or 3% of the consolidated revenue from continuing
operations of Metro Global, during the fiscal year ended May 29, 1999.
In March 1998, Metro acquired an 80% interest in Amazing Direct, a mail
order company. Metro acquired the remaining 20% interest in April, 1999. Metro
expects to build a customer database through advertisement in adult magazines as
well as purchasing or renting customer lists. Brochures are mailed on a
quarterly basis to approximately one hundred and fifty thousand active
customers.
All orders are taken via phone or mail and sent to the Cranston, RI
warehouse for fulfillment. Metro anticipates continued growth during fiscal
2000, as the customer database continues to expand.
CVC, which is wholly-owned by Kenneth Guarino, a principal shareholder and
the Acting Chief Executive Officer of Metro Global and for which Daniel Geribo,
Metro Global's Director, serves as President and sole Director, operates
approximately thirty video and magazine retail stores in the New England and
upstate New York areas and accounted for approximately 40% of Metro's net sales
for the fiscal year ended May 29, 1999 and 47% of Metro's net sales for the
fiscal year ended May 30, 1998. See "Item 12. 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, 1999 and 1998.
Competition
The production and distribution markets of home video, DVD 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 products 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. There are several
competitors of Metro that have already released adult DVD titles. Moreover,
management believes that new competitors are increasing their focus on this new
format, which will result in greater competition for Metro. Nearly all of
Metro's products compete with other products and services that utilize leisure
time or disposable income.
Metro meets with direct competition from other publishers of adult
magazines as well as all other forms of print media adult entertainment,
including several better known national publications with substantially larger
circulation than those of Metro.
Competition in the mail order business is high. Metro competes with such
businesses as Adam and Eve, Leisure Time and Video Age. It is management's
belief that it can continue to penetrate this line of business by continuing to
increase its database.
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
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obscene material with some offenses designed as misdemeanors and others as
felonies, depending on numerous factors. The consequence for violating the state
statutes varies by state. Similarly, 18 U.S.C. Sections '1460 through '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.
Because Metro is engaged primarily in the wholesale distribution of its products
to other wholesalers and/or retailers, Metro 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 light of Metro'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 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.
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.
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 METROtm,
INTROPICStm, CAL VISTAtm, MAGMAtm, ULTRACOLOR PUBLICATIONStm, AMAZINGtm,
TOXXXICtm, METRO PRIME CUTStm, TABOOtm, ONLY THE BESTtm, CASTING CALLtm, BABES
ILLUSTRATEDtm, SOHOtm, ARCUStm, SUPERSHOTStm, RAGEtm and PULSEtm. Metro believes
it has trademark rights in these names and relies on trademark law to protect
such rights. Airborne For Men, Ltd. has filed trademark registration
applications with respect to its AIRBORNE FOR MENtm tradename and logo. Metro
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 Metro's business and
Metro intends to aggressively defend them.
11
<PAGE>
DISCONTINUED OPERATIONS
- -----------------------
Metro Global purchased Fanzine on August 3, 1998. See "Business
Acquisitions and Other Activities" below. Fanzine publishes approximately
eighteen teen oriented and special interest magazines on a semi-monthly, monthly
and bi-monthly basis. The teen oriented magazines include Teen Celebrity, a
seventy-six page monthly magazine that deals with young adult interests, life
style, fashion and clothing. The special interest magazines include Gym and
Burn, which are devoted to men's health, fitness and exercise, and Celebrity
Style - 101 Hair Styles, a one hundred two page all color oversized magazine
containing photographs, information and assistance devoted to various types of
contemporary women's hairstyles and beauty tips. Fanzine also publishes "how to"
digest guides, Farmers Almanacs, Academic Calendars and Diary magazines.
In September 1999, Metro Global's Board of Directors adopted a plan to
discontinue the operations of Fanzine and instructed management to divest
Fanzine and the Publishing Segment by the end of fiscal 2000. Accordingly,
Fanzine is reported herein as a discontinued operation for the year ended May
29, 1999 (see note 17 to financial statements). On September 29, 1999, Metro
Global sold Fanzine back to the former shareholders of Fanzine and a company
controlled by them, for $4,500,000 and the return to Metro Global of the
1,000,000 shares of its Common Stock held by Fanzine's former shareholders. The
cash portion is scheduled to be paid as follows: $1,000,000 by October 31, 1999;
$1,000,000 by November 30, 1999; $1,000,000 by May 31, 2000; and $1,500,000 by
August 31, 2000. The first two scheduled payments are secured by the personal
guarantees of Fanzine's shareholders and all such payments are secured by
Fanzine's assets.
BUSINESS ACQUISITIONS AND OTHER ACTIVITIES
- ------------------------------------------
In August 1997, Rocket Media Group, LLC, a wholly owned subsidiary of Metro
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; each joint venture partner contributed $30,000.
Metro Global has included Maxstone Media's results from operations in the
consolidated financial statements. Minority interest amounted to $53,567 at May
29, 1999.
In March 1998, Metro Global acquired an 80% interest in Amazing Direct, a
Nevada Corporation by purchasing four hundred shares of its outstanding stock at
$2.00 per share. Amazing Direct is a mail order company. In April 1999, Metro
acquired the remaining shares of outstanding stock.
On August 3, 1998, Metro Global acquired 100% of the stock of Fanzine for a
cash purchase price of $4,000,000, plus contingent consideration in a
transaction approved by Metro Global's Board of Directors. The contingent
consideration consisted of one million restricted shares of Metro Global'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. During Fanzine's first year of
operations, Metro Global had the right to call the shares at the greater of
$6.00 per share or 75% of the market price. Metro Global did not call the
shares.
The Fanzine acquisition was accounted for as a purchase. The excess of the
purchase price over the fair market values of net assets acquired, which
included, among others, licenses, trademarks, and distribution rights, was
allocated to goodwill and is being amortized over ten years. The cash portion of
$4,000,000 was financed by a long-term convertible debenture and other
short-term borrowing.
On September 29, 1999, Metro Global sold Fanzine back to the former
shareholders and a company controlled by the former shareholders pursuant to a
Rescission and Purchase Agreement. In consideration for this sale, Metro Global
is scheduled to receive total payments of $4,500,000 and has received back the
12
<PAGE>
1,000,000 shares of its Common Stock held by the former shareholders. The
$4,500,000 will be paid in four installments ending August 31, 2000. The
promissory notes are collateralized by the assets of Fanzine and, in part, by
the personal guarantees of the former shareholders. The operations of Fanzine
have been classified as discontinued operations for fiscal 1999 (see note 17 to
financial statements).
EMPLOYEES
As of September 30, 1999, Metro Global and its subsidiaries employed
approximately 145 persons, of which 142 are full-time employees.
ITEM 2. PROPERTIES
- ------------------
Metro's principal administrative office is an approximate 64,000 square
foot office, warehouse and shipping complex located in Cranston, Rhode Island
leased from an entity principally owned by the spouse of Kenneth Guarino, Metro
Global's principal shareholder and Acting Chief Executive Officer. See "Item 12.
Certain Relationships and Related Transactions". This facility houses Metro's
administrative, editorial and operational offices; the data center, customer
service, and warehouse and fulfillment facilities. As of July 15, 1999, Metro
relocated it's California offices to an approximate 35,500 square feet of
office, warehouse, distribution and duplicating laboratory space located in Los
Angeles County, California. This site has a four year, eleven and half month
lease term expiring on June 30, 2004, with a renewable option of one additional
period of sixty months, subject to terms and conditions. Metro International
Distributors has warehouse and office space located in Flensburg, Germany of
approximately 1,700 square feet with a five-year lease term.
Maxstone and Fanzine are located in New York City, New York with an
approximate 3,045 square feet of office space with a five year, two month lease
term expiring on May 30, 2003.
ITEM 3. LEGAL PROCEEDINGS
- -------------------------
There are no material legal proceedings pending against Metro Global or its
subsidiaries other than routine litigation that is incidental to the business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
None
13
<PAGE>
PART II
- -------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- -----------------------------------------------------------------------------
Metro Global's Common Stock is traded in the over-the-counter market and
quoted on the NASDAQ Small Cap Market under the symbol "MGMA". There is a
limited market for Metro Global's Common Stock and no assurances can be given
that any trading market will be sustained. On September 14, 1999, upon Metro
Global's issuance of a press release that it did not timely file its 1999 Annual
Report on Form 10-KSB, the NASDAQ Stock Market halted the trading of Metro
Global's Common Stock. The following table sets forth the high and low bid
prices per share of Metro Global's Common Stock for each quarter within the last
two fiscal years.
<TABLE>
<CAPTION>
COMMON STOCK*
High Bid Low Bid
<S> <C> <C>
Fiscal Year Ended May 29,1999
- -----------------------------
First Quarter $ 4.6250 $2.2810
Second Quarter $ 4.0005 $1.8750
Third Quarter $ 3.7500 $2.3750
Fourth Quarter $ 4.1250 $1.6250
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
</TABLE>
* Such market quotations reflect the high and low prices for Metro Global's
securities as quoted by dealers without retail mark-ups and may not necessarily
represent actual transactions.
At September 30, 1999 there were 420 holders of record of Metro Global's
Common Stock.
Metro Global did not pay any cash dividends during its last two fiscal
years and the Board of Directors does not contemplate doing so in the
foreseeable future. Any decision as to future payment of dividends will depend
on the earnings and financial condition of Metro Global and such other factors
as the Board of Directors deems relevant.
Sales of Unregistered Securities
On July 31, 1998, Metro Global entered into an 8% convertible debenture
with an unrelated third party. In connection with this transaction, Metro Global
issued warrants to purchase 75,000 and 25,000 shares of Common Stock at prices
of $4.11 and $3.29, respectively, expiring on July 31, 2000.
On October 28, 1998, Metro Global entered into a note payable with an
unrelated third party. In consideration of the loan, Metro Global issued the
lender 150,000 restricted shares of Metro Global's Common Stock.
On December 9, 1998, Metro Global entered into a term note with an
unrelated third party. As part of the transaction, Metro Global issued the
lender warrants to purchase 350,000 shares of Common Stock at a price of $3.00,
expiring on December 31, 2001 and 100,000 share of Common Stock.
14
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
- -----------------------------------------------------------------
Results of Continuing Operations - Fiscal 1999 Compared to Fiscal 1998
Metro Global had revenues of $23,389,171 from continuing operations for
fiscal 1999 as compared to revenues of $20,391,134 for fiscal 1998, a 14.7%
increase. Increased revenues are primarily due to (1) increased video and DVD
sales of $1,700,000 as a result of the increased investment made by Metro Global
in new productions; (2) inclusion of revenues from Metro International of
approximately $765,000, compared to none in fiscal 1998; (3) increase in
revenues of approximately $509,000 to $739,000 in fiscal 1999 for Maxstone Media
due to the increased number of publications.
Metro Global's gross profit from continuing operations for fiscal 1999 was
$7,314,720 as compared to $7,222,920 in fiscal 1998. Metro Global's gross margin
decreased to 31.3% in fiscal 1999 from 35.4% in fiscal 1998. The primary reason
for the decrease in gross profit is due to the increase in amortization expense
of the film library of approximately $430,000 due to the increase in the
investment in film, increase in duplicating payroll, increased costs associated
with the production of DVDs and increased costs associated with the production
of additional magazines.
Selling general and administrative costs increased by $2,887,763 to
$9,493,943 in fiscal 1999 as compared to $6,606,180 in 1998, a 43.7% increase.
The increase in selling, general and administrative expenses is primarily due to
(1) increase in payroll and related payroll expenses for Metro of approximately
$550,000 due to the expansion of the west coast operations, (2) approximately
$100,000 in expenses associated with the upgrade and expansion of Metro's
internet sites (3) approximately $271,000 of expenses for Amazing Direct, (4)
approximately $313,600 in expenses for Metro International, for which there was
none in fiscal 1998 (5) additional consulting fees of $350,000 and (6)
amortization of goodwill and acquisition costs associated with the purchase of
Fanzine of $364,071. As a percentage of revenues, selling, general and
administrative expenses were 40.6% in fiscal 1999 as compared to 32.4% in fiscal
1998 due to the foregoing reasons.
Other income (expense) increased $1,245,966 to $2,114,768 in fiscal 1999 as
compared to $868,802 in 1998. This increase is primarily due to an increase in
interest expense from $973,918 at May 30, 1998 to $2,240,488 at May 29, 1999
attributable to the increase in borrowings to finance the acquisition of
Fanzine.
Metro Global recorded a net loss of $4,127,141 from continuing operations
in fiscal 1999 as compared to a net loss from continuing operations of $721,746
in fiscal 1998. This loss is primarily due to the decrease in gross margin, the
increase in selling, general and administrative expenses and the increase in
interest expense, all as discussed above
Liquidity and Capital Resources
Cash amounted to $144,288 at May 29, 1999. Metro Global's primary sources
of cash in fiscal 1999 consisted of: (1)$506,256 in cash provided by operating
activities in fiscal 1999, (2) approximately $1,317,000 in net proceeds from
issuance of preferred stock, (3) proceeds from notes payable of $5,100,000, (4)
proceeds from issuance of convertible debentures of $1,200,000, (5) borrowings
under an accounts receivable line of credit, with a maximum borrowing limit of
$1,000,000 and (6) proceeds from the exercise of warrants of $600,000.
The primary uses of cash for the fiscal year ended May 29, 1999 consisted
of: (1) investments in motion pictures and other films of $2,869,558, (2)
payments on the acquisition of Fanzine of $4,168,860, (3) purchases of property
and equipment of $477,322, (4) purchase of treasury stock of $507,500 and (5)
payments
15
<PAGE>
on notes payable of $875,000. Metro Global had non-cash adjustments of
$5,074,080 at May 29, 1999 primarily from depreciation and amortization and
valuation of issued warrants.
The net increase in accounts receivable of $2,906,281 was primarily due to
the increase of sales for the period and the inclusion of approximately
$1,894,724 of receivables of Fanzine, as compared to zero at May 31, 1998.
Prepaid expenses increased $960,857 predominately due to prepayments made by
Fanzine on paper and printing services for magazines not yet shipped and
prepayment of interest expense. Accounts payable and accrued expenses increased
$3,781,550 due to increased purchasing, increased spending for film production,
the inclusion of payables of Fanzine totaling $2,543,103 and accrued interest
and penalties on various borrowings.
On July 1, 1998, Metro Global entered into a 12% convertible debenture
totaling $200,000 with a related party. See "Item 12" below. The note was due on
July 1, 1999, in either cash or Common Stock, at a conversion rate of $2.25 per
share. Metro Global recorded $60,248 of interest expense relating to the
embedded beneficial conversion feature. Proceeds from the debenture were used
for working capital. On July 1, 1999, the debenture was extended until July 1,
2001. In conjunction with the extension warrants were granted to purchase 50,000
shares of Metro Global's Common Stock for $2.58 per share.
On August 1, 1998, Metro Global entered into notes payable totaling
$1,000,000 with related parties. See "Item 12" below. The notes, which bear
interest at 8%, were due August 1, 1999. Proceeds from the notes were used in
the acquisition of Fanzine. In October 1998, the notes were reduced by $600,000
for the exercise of warrants. On August 1, 1999, the balance of the notes were
extended for one year. In consideration of the extension, the interest rate
increased from 8% to 10% and warrants were issued to purchase up to 115,000
shares of Common Stock at a price of $2.58, exercisable for a term of five
years.
On July 31, 1998, Metro Global entered into an 8% convertible debenture
with an unrelated party for $1,000,000, which is due July 31, 2000 with interest
payable quarterly, which was used in the purchase of Fanzine. In connection with
this transaction, Metro Global issued a warrant for 75,000 shares of Common
Stock at a price of $4.11 and a warrant for 25,000 shares of Common Stock at a
price of $3.29, both exercisable over two years. Metro Global recorded a
discount on the debenture of $157,700 for the valuation of the warrants. Metro
Global amortized $65,708 of the discount to interest expense for the year ended
May 29, 1999.
The debenture was to mature on July 31, 2000. The holder of the debenture
is entitled to convert, after 120 days of the agreement, the principal value
into Metro Global's Common Stock at a discounted market price as is defined in
the agreement. Metro Global has recorded $141,844 of interest expense relating
to the embedded beneficial conversion feature in 1999. Metro Global is in
technical default under the terms of the debenture due to the suspension of
trading of its Common Stock on September 14, 1999.
Beginning in April 1998, Metro offered 5% convertible Preferred Shares
pursuant to Regulation S of the U.S. Securities Act of 1933. Metro Global
received approximately $846,500 and $1,317,000 in net proceeds from the offering
in fiscal 1998 and 1999, respectively. Proceeds from such agreement were used to
fund working capital. Metro Global recognized dividends of $309,248 and $234,502
at May 29, 1999 and May 30, 1998, respectively, for the embedded beneficial
conversion feature. During fiscal 1999, all of the Series A shares and accrued
dividends were converted into 982,120 shares of Metro Global's Common Stock.
In addition to the Series A Shares, Metro Global issued 400,000 warrants to
purchase Metro Global Common Stock at $1.50 per share commencing April 20, 1998
exercisable over 5 years. Metro Global recognized a dividend of $1,212,000 for
the year ended May 30, 1998 for the beneficial conversion feature. In October
1998, all 400,000 warrants were transferred to a related party and exercised.
See "Item 12" below.
16
<PAGE>
On October 28, 1998, Metro Global entered into a note payable with an
unrelated third party for $1,100,000. The note, which bears no interest, was due
in quarterly installments of $275,000 commencing December 31, 1998. In
consideration of the loan and part of an investment banking consultant
agreement, Metro Global issued the lender 150,000 restricted shares of Metro
Global's Common Stock. Metro Global used $507,500 of the proceeds to repurchase
198,242 shares of its outstanding Common Stock from Metro Plus, a company
partially owned by Kenneth Guarino. For the year ended May 29, 1999, Metro
Global made one payment of $275,000. In September 1999, Metro Global and lender
agreed to an extension of the note. Under the terms of the extension, payments
totaling $550,000 are due by September 30, 1999 and the final payment of
$275,000 is due on December 31, 1999. The September 30, 1999 payments are
currently in default. If all payments are not made by January 1, 2000, Metro
Global must issue the lender 100,000 shares of restricted stock as a penalty.
On December 9, 1998, Metro Global entered into a six-month term loan
agreement with an unrelated third party, under which it borrowed $3,000,000 at
an interest rate of 10% per year. The proceeds were used toward the acquisition
of Fanzine and to fund working capital. In connection with this transaction,
Metro Global issued warrants to purchase up to 350,000 shares of Common Stock at
a price of $3.00, expiring on December 31, 2001. Metro Global recorded interest
expense of $577,000 for the valuation of the warrants. Additionally, Metro
Global issued 100,000 shares of Common Stock and recorded $187,500 of interest
expense. In September 1999, Metro Global and the lender agreed to an extension,
under which Metro Global must pay $1.3 million upon closing a prospective
financing with another lender. The other $1,800,000, which includes a $100,000
penalty, will be exchanged for 8% convertible debentures. The debentures are
convertible at a rate of not more than 10% of the total debenture per week, at a
price of 80% of the average closing bids for the five days preceding the
conversion. In consideration of the extension, Metro Global will issue warrants
to purchase up to 100,000 shares of Common Stock at a price of $1.75 per share
with a two-year expiration. In the event that funding is not received on the
prospective financing with Reservoir Capital, Metro Global will remain in
default under the debt obligation.
In June 1997, Metro entered into a line of credit agreement with Finova
Capital Company, under which Metro may borrow up to 75% of assigned accounts
receivable less than 90 days old, up to a maximum of $1,000,000. The balance due
under the line of credit bears interest at the prime rate plus 5% per annum plus
a collateral management fee. The outstanding balance under the line is secured
by accounts receivable of Metro and guaranties of Metro Global and certain
officers/shareholders. The line of credit expired during June 1999. As of May
29, 1999, the balance on the line of credit was $942,298. On June 30, 1999,
Finova did not renew the agreement and is waiting to be repaid from the
Reservoir Capital financing.
In August 1999, Metro Global signed a $4,000,000 commitment letter with
Reservoir Capital Corporation. Pursuant to the terms, Metro may borrow up to 70%
of accounts receivable less than ninety day old, up to a maximum of $3,000,000.
The accounts receivable borrowing base excludes foreign receivables and
receivables where more than 50% of the balance is over ninety days old. Metro's
borrowings on the receivables due from CVC, a related party, are limited to the
lesser of 30% of total accounts receivable or $1,600,000. Additionally, Metro
can borrow 40% of inventory, up to a maximum of $1,000,000.
Borrowings under this loan bear interest at prime rate plus 3.5% per annum.
Additionally, Metro must pay a service fee of .35% per month on the average
daily loan balance. Metro must pay an unused fee of .25% on the amount of the
borrowings under $2,000,000. The loan will be secured by the assets of Metro.
The CVC accounts receivables will be guaranteed by the sole shareholder of CVC.
Additionally, CVC will execute a put on the inventory of Metro in case of
default
Of Metro's total accounts receivable at May 29, 1999, $2,419,990 (40%) as
compared to $2,477,041 (49%) at May 30, 1998 is owed by CVC, a chain of retail
stores, which is wholly-owned by Kenneth Guarino, a principal shareholder and
the
17
<PAGE>
Acting Chief Executive Officer of Metro Global and for which Daniel Geribo,
Metro Global's Director, serves as President and sole Director. Because of the
amount of this receivable, the concentration of business with CVC and as CVC
continues to open new retail locations, this receivable is monitored very
closely and personally guaranteed by the wife of CVC's sole shareholder, Kenneth
Guarino. All amounts due from CVC are predominantly maintained within 60 to 90
day terms. Accordingly, no allowance for related party receivables and no
related party bad debt expense has been recorded in Metro Global's financial
statements.
In fiscal 1999, Metro invested $2,869,558 in new feature films and video.
Metro estimates it will invest approximately $2,500,000 to $3,000,000 in feature
films and video during fiscal 2000. 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.
Capital Expenditures
Capital expenditures for fiscal 1999 amounted to $477,322 as compared to
$105,590 for fiscal 1998. Metro Global anticipates that its capital expenditures
for fiscal 2000 will be approximately $500,000 to $750,000, primarily used for
computer equipment, interactive media center units and other editing and
duplicating equipment. Metro Global has negotiated a $1,000,000 capital lease
line for its use which management believes will be sufficient.
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-KSB Report contains "forward-looking statements," including
statements in "Management's Discussion and Analysis or Plan of Operation," 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 including, without limitation 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. Metro Global has begun to identify, evaluate and implement
changes to its existing computerized business systems. In addition, Metro Global
is communicating with its vendors and other service providers to ensure that
their products and business systems will be Year 2000 compliant. If
modifications and conversions by Metro Global and those it conducts business
with were not made in a timely manner, the Year 2000 problem could have a
material adverse affect on Metro Global's business, financial condition and
results of operations. Most of the systems of Metro Global have already been
identified as Year 2000 compliant, including most financial applications.
Although Metro Global is still quantifying the impact, Metro Global does not
expect to expend more than $50,000 to $100,000. These costs are being expensed
as incurred.
As a contingency plan for the most reasonably likely worst case scenario,
Metro Global has addressed all major elements related to this issue. Metro
Global believes its technology systems will be ready for the Year 2000, but
Metro Global may experience isolated incidences of non-compliance. Metro Global
plans to allocate internal resources and retain consultants and vendor
representatives to be
18
<PAGE>
ready to take action if these events occur. Although Metro Global values its
established relationships with key vendors and other service providers, if
certain vendors are unable to perform on a timely basis due to their own Year
2000 issues, Metro Global believes that substitute products or services are
obtainable from other vendors. Metro Global also recognizes the risks if other
key suppliers in utilities, communications, transportation, banking and
government are not ready for the Year 2000, and is approaching this issue in the
same manner.
Unaudited Restatements of Quarterly Information
In the fourth quarter of fiscal 1999, Metro Global made significant
adjustments to the financial statements which impact previously reported
quarterly results of operations. The adjustments were made for such items as
embedded interest and dividends, valuations of warrants and options and change
in estimates. The following table presents the quarterly results of operations
considering the above mentioned adjustments:
<TABLE>
<CAPTION>
For the Quarters Ended Nine Months
Aug. 28, 1998 Nov. 28, 1998 Feb. 27, 1999 Feb. 27, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue $ 6,520,569 $ 8,503,284 $ 9,567,751 $ 24,591,604
Cost of Revenues 4,374,558 6,445,803 7,063,744 17,884,105
------------ ------------ ------------ ------------
2,146,011 2,057,481 2,504,007 6,707,499
SG&A 2,169,895 2,377,230 2,724,787 7,271,912
Other Income (expense) net (160,011) (231,138) (777,569) (1,168,718)
------------ ------------ ------------ ------------
Income before taxes (183,895) (550,887) (998,349) (1,733,131)
Tax Benefit 6,436 19,280 34,923 60,639
------------ ------------ ------------ ------------
Net Loss $ (177,459) $ (531,607) $ (963,426) $ (1,672,492)
============ ============ ============ ============
</TABLE>
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
- --------------------------------------------------
The consolidated financial statements and supplemental data of Metro Global
and the report of independent auditors thereon set forth at pages F-1 through
F-27 herein are incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- --------------------------------------------------------------------------------
FINANCIAL DISCLOSURES
- ---------------------
On May 10, 1999, Metro Global appointed the accounting firm of Grant
Thornton, LLP as independent accountants for fiscal 1999 to replace Trien
Rosenberg, Rosenberg, Weinberg, Ciullo & Fazzari, LLP, ("Trien"), who were Metro
Global's certifying accountants since 1993, effective with such appointment.
Metro Global's Board of Directors approved the selection of Grant Thornton, LLP
as new independent accountants. Management had not consulted with Grant Thornton
on any accounting, auditing or reporting matter prior to their appointment.
During the two most recent fiscal years and interim period subsequent to May 30,
1998, there had been no disagreements with Trien on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure. Trien's report on the financial statements for the past two years
contained no adverse opinion or disclaimer of opinion and was not qualified or
modified as to uncertainty, audit scope or accounting principles. However, Metro
Global's May 30, 1998, May 31, 1997 and May 31, 1996 financial statements have
been restated (see Item 7 in the accompanying financial statements, note 14).
19
<PAGE>
On June 22, 1999, Grant Thornton resigned. Since Grant Thornton's
appointment, there were no disagreements on any matter of accounting principles
or practices, financial statement disclosure or auditing scope or procedure.
Grant Thornton did not audit Metro Global's May 29, 1999 records nor have they
issued a report on Metro Global's financial statements. In its letter to the
SEC, which is part of the Form 8-K/A filed with the Commission on July 13, 1999,
Grant Thornton stated that it was unwilling to be associated with Metro Global's
financial statements. Grant Thornton stated in its July 8, 1999 letter that it
resigned as Metro Global's auditors because Grant Thornton was of the opinion
that Kenneth F. Guarino had the operating and financial decision making
authority at Metro Global. Mr. Guarino, who is a principal shareholder,
subsequently became Acting Chief Executive Officer in September, 1999 (see "Item
9" below). Mr. Guarino was also the founder and is a former president of Metro
Global, but until September 1999, had not served in such a capacity for 3 years.
The ultimate operating and financial decision making authority rests solely with
Metro Global's Board of Directors. Mr. Guarino is not currently a member of
Metro Global's Board of Directors and does not have the ultimate authority to
make operational or financial decisions on behalf of Metro Global.
On July 16, 1999, Metro Global appointed the accounting firm of Imowitz
Koenig & Co., LLP as independent accountants for fiscal 1999. Metro Global's
Board of Directors approved the selection of Imowitz Koenig & Co., LLP as new
independent accountants. Management did not consult with Imowitz Koenig & Co.,
LLP on any accounting, auditing or reporting matter prior to their appointment.
20
<PAGE>
PART III
- --------
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
- --------------------------------------------------------------------------------
WITH SECTION 16(a) OF THE EXCHANGE ACT
- --------------------------------------
The following table sets forth all of the current directors and executive
officers of Metro Global, their ages and the offices they hold with Metro Global
as of October 4, 1999. Executive officers and employees serve at the discretion
of the Board of Directors. All directors hold office until the next annual
meeting of stockholders of Metro Global and until their successors have been
duly elected and qualified.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Kenneth F. Guarino 50 Acting Chief Executive Officer
Gregory N. Alves 32 Acting President and Director
A. Daniel Geribo 55 Director
Alan S. Casale 50 Director
Janet M. Hoey 36 Treasurer, Secretary and Director
</TABLE>
Kenneth F. Guarino was named Acting Chief Executive Officer in September
1999. Mr. Guarino, Metro Global's founder and former Chief Executive Officer,
was retained by Metro Global in March 1999 as a consultant to advise the Board
of Directors on various matters. When Dan H. Eberly resigned as Metro Global's
President in June 1999, Mr. Guarino was asked to assist the Board in finding a
new Chief Executive Officer. Since Metro Global has, as yet, been unable to
recruit a new Chief Executive Officer, Mr. Guarino assumed the duties of Acting
Chief Executive Officer in September 1999, while Gregory Alves has assumed the
duties of Acting President. Metro Global is continuing its effort to recruit a
permanent Chief Executive Officer. Mr. Guarino previously served as Metro
Global's Chief Executive Officer from October 1995 until October 1996. Mr.
Guarino has served since 1994 as an Executive Consultant to CVC. In 1997, Mr.
Guarino pled guilty in U.S. District Court for the District of Nevada to
participating in a conspiracy to impede the Internal Revenue Service in the
assessment and collection of taxes owned by another individual.
Gregory N. Alves was named Acting President in June 1999. Mr. Alves joined
Metro Global in March 1998 as Vice-President and General Manager of West Coast
operations. From 1996 until joining Metro Global, Mr. Alves served as general
manager of Elegant Angel, a competitor of Metro. Prior to this, Mr. Alves owned
VG Video, located in San Diego. Mr. Alves has extensive experience in the
production, promotion and marketing aspects of the industry. Mr. Alves possesses
an ownership interest in a production company employed by Metro Global, which
received payments of $75,500 from Metro Global during fiscal 1999. Mr. Alves
received his Bachelor's degree in Business Administration from National
University. Mr. Alves was appointed to the Board of Directors in September 1999.
A. Daniel Geribo has served as Metro Global's Secretary from 1997 to 1999
and as a Director since 1995. Mr. Geribo has also served as President,
Treasurer, Secretary and sole Director of Capital Video, which operates a chain
of retail video stores in the New England and upstate New York areas since
November 1994, and from September 1993 to November 1994 served as General
Manager of Capital Video, which is wholly-owned by Kenneth Guarino. From January
1983 to May 1993, Mr. Geribo served as President of Unfinished Furniture House,
Inc., a chain of retail furniture stores. Mr. Geribo was President of Metro from
November 1996 through October 1998.
21
<PAGE>
Alan S. Casale has been a principal in the accounting firm of Casale,
Caliri, and Jeroma since its inception in 1996. Prior to 1996, Mr. Casale was a
principal in the accounting firm of Cardello, Riccitelli & Casale, which he
joined in 1987. Cardello, Riccitelli & Casale were the auditors of record of
Metro Global from December 1992 to February 1993, and audited the financial
statements of Metro global for the years ended May 31, 1992, and May 31, 1991.
Mr. Casale, who specializes in taxation, valuation and litigation services, has
over 25 years of experience in both the private and public sectors. Mr. Casale,
a certified public accountant, received both his Bachelor of Science and Master
of Taxation degrees from Bryant College. Mr. Casale is a member of both the
American Institute and Rhode Island Society of Certified Public Accountants. Mr.
Casale was appointed a Director of Metro Global in 1995.
Janet M. Hoey was elected Treasurer of Metro Global in December 1997. Ms.
Hoey was employed by the accounting firm of Ernst & Young from 1985 through
1990. From 1990 through 1996, Ms. Hoey was employed as controller and financial
consultant by Quantum Resources, a forensic accounting and consulting company.
Prior to joining Metro Global, Ms. Hoey was employed by Barnstable County Supply
as its controller. Ms. Hoey, a certified public accountant, is a graduate of
Providence College. Ms. Hoey was appointed to the Board of Directors and elected
Secretary of Metro Global in September 1999.
In addition to the Directors and Executive Officers listed above, Dennis
Nichols is expected to make a significant contribution to the business of Metro
Global and its subsidiaries. Dennis Nichols, 50, has served as President and
sole Director of Metro 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 and is wholly-owned by Kenneth Guarino.
No director or executive officer serves pursuant to any arrangement or
understanding between him or her and any other person(s), other than arrangement
or understandings with directors and officers acting solely in their capacity as
such. There are no family relationships among directors and executive officers
of Metro Global.
Compliance with Section 16(a) of the Securities Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires Metro
Global's Officers and Director, and persons who own more than 10% of a
registered class of Metro Global's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers, Directors and greater then 10% stockholders are required by the
Securities and Exchange Commission regulations to furnish Metro Global with
copies of all Section 16(a) forms they file.
Based solely on a review of the copies of such forms furnished to Metro
Global, or written representations that no Forms 5 were required, Metro Global
believes that, during fiscal 1999, all Section 16(a) filing requirements were
complied with in regards to its officers, directors and greater then 10%
beneficial owners except that Briana Investment Group, LLP, Kenneth Guarino, A.
Daniel Geribo and Alan Casale are late in filing Form 5 statements with respect
to the fiscal year ended May 29, 1999. In addition, Gregory Alves and Janet Hoey
are late in filing their initial statements of beneficial ownership on Form 3.
ITEM 10. EXECUTIVE COMPENSATION
- -------------------------------
The following table summarizes all compensation paid to the three persons
who served as President of Metro Global during the fiscal year ended May 29,
1999 (the "Named Executive Officers"). No other executive officer earned
compensation and bonus exceeding $100,000 during the fiscal year ended May 29,
1999.
22
<PAGE>
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
- ---------------------------------------------------------------------------------------------------------
Name and Principal Other Securities All
Position Fiscal Annual Underlying Other
Year Salary Bonus Comp. Awards Options Payouts Comp.
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
Dan Eberly 1999 $50,000 - - - - - -
President (1)
- ---------------------------------------------------------------------------------------------------------
Gregory N. Alves 1999 $75,000 - - - - - -
President (2) 1998 $18,750 - - - - - -
- ---------------------------------------------------------------------------------------------------------
A. Daniel 1998 $30,000 - - - - - -
Geribo 1997 $15,000 - - - - - -
President (3)
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(1) Mr. Eberly was President of Metro Global from October 1998 to May 1999.
(2) Mr. Alves was elected Acting President of Metro Global in June 1999. Mr.
Alves possesses an ownership interest in a production company employed by Metro
Global, which received payments of $75,500 from Metro Global during fiscal 1999.
See "Item 12. Certain Relationships and Related Transactions."
(3) Mr. Geribo was elected President of Metro Global in November 1996 and served
as President until October 1998.
Options Granted in Last Fiscal Year
Metro Global did not grant stock options to any of the Named Executive
Officers during the fiscal year ended May 29, 1999.
Option Exercises in Last Fiscal Year and Fiscal Year-End Value of Unexercised
Options
None of the Named Executive Officers exercised any options for stock of
Metro Global during the fiscal year ended May 29, 1999. The following table sets
forth information with respect to the Named Executive Officers with respect to
the unexercised options held by them as of the end of the fiscal year ended May
29, 1999.
<TABLE>
<CAPTION>
Aggregated Options/SAR Exercises in Last Fiscal Year and fiscal year-end Option
- -------------------------------------------------------------------------------
/SAR Values
- -----------
Number of Value of Unexercised
Securities In-the-Money
Underlying Options/SARs at
Unexercised FY-end
Options/SARs at
FY-End
Shares Value
Acquired on Realized ($) Exercisable / Exercisable /
Name exercise (#) Unexercisable Unexercisable
<S> <C> <C> <C> <C>
- -------------------- ---------------- ------------- -------------------- ----------------------
A. Daniel Geribo 0 - 20,600/30,000 22,947/33,750
- -------------------- ---------------- ------------- -------------------- ----------------------
</TABLE>
(1) Based upon the difference between the closing price of Metro Global's Common
Stock on May 29, 1999 of $3.125 and the option exercise price.
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, Metro Global granted Mr.
Guarino
23
<PAGE>
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.
In March 1999, the Board of Directors entered into a one year consulting
agreement with Mr. Guarino. In consideration of his services, Metro Global will
pay Mr. Guarino $10,000 per month. In addition, Metro Global granted Mr. Guarino
options to purchase up to 100,000 shares of Common Stock at a price of $2.00 per
share, exercisable for a period of 5 years.
Compensation of Directors
Metro Global does not currently pay or intend to pay cash compensation to
its directors for their services in that capacity; however, directors who are
not employees are reimbursed for out-of-pocket expenses incurred in connection
with their attendance at Board of Directors or committee meetings.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
The following table sets forth certain information regarding Metro Global's
Common Stock beneficially owned as of September 30, 1999 (i) by each person who
is known by Metro Global to own beneficially more than 5% of Metro Global's
Common Stock and (ii) by each of Metro Global's directors, Named Executive
Officers and by all executive officers and directors as a group.
<TABLE>
<CAPTION>
No. of Shares of Percentage of
Common Stock Beneficial Ownership
Name and Address Beneficially Owned (1)
- -------------------------------------- ------------------------ ------ ------------------------
Named Executive Officers and
Directors
<S> <C> <C> <C>
- -------------------------------------- ------------------------ ------ ------------------------
Janet Hoey 0
268 Wilson Road
Fall River, MA 02720
- -------------------------------------- ------------------------ ------ ------------------------
A. Daniel Geribo
788 Reservoir Avenue, Suite 300 50,600 (2) *
Cranston, RI 02910
- -------------------------------------- ------------------------ ------ ------------------------
Alan S. Casale
1140 Reservoir Avenue 1,220 (3) *
Cranston, RI 02920
- -------------------------------------- ------------------------ ------ ------------------------
Gregory N. Alves 78,955 (4) *
5150 Avenida Hacienda
Tarzana, CA 91356
- -------------------------------------- ------------------------ ------ ------------------------
All executive officers and directors
as a group (5 people) 2,750,176 39.89
- -------------------------------------- ------------------------ ------ ------------------------
5% Beneficial Owners
- -------------------------------------- ------------------------ ------ ------------------------
Briana Investment Group, LP
c/o Helen Adderley, Esquire 1,745,318 25.31
Corner House
20 Parliament Street
Hamilton HM DX, Bermuda
- -------------------------------------- ------------------------ ------ ------------------------
Kenneth F. Guarino 2,619,401 (5) 37.99
50 Fort Avenue
Cranston, RI 02905
- -------------------------------------- ------------------------ ------ ------------------------
Metro Plus
1060 Park Avenue 186,758 2.71
Cranston, RI 02910
- -------------------------------------- ------------------------ ------ ------------------------
</TABLE>
24
<PAGE>
* Beneficial ownership represents less than 1% of Metro Global's outstanding
Common Stock.
(1) Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission, and includes generally voting power
and/or investment power with respect to securities. Shares of Common Stock
which may be acquired upon exercise or conversion of warrants or Preferred
Stock which are currently exercisable or exercisable within 60 days of
September 30, 1999, are deemed outstanding for computing the beneficial
ownership percentage of the person holding such securities but are not
deemed outstanding for computing the beneficial ownership percentage of any
other person. Except as indicated by footnote, to the knowledge of Metro
Global, the persons named in the table above have the sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them.
(2) Represents unexercised stock options.
(3) Includes 600 unexercised stock options.
(4) Includes 76,555 shares held by Mr. Alves' mother, with respect to which he
disclaims beneficial ownership.
(5) Includes 300,000 unexercised stock options, 1,745,318 shares held by Briana
Investment Group, LP, a trust established for the benefit of Mr. Guarino's
spouse and children, and he has investment and voting power with respect to
these shares, and 186,758 shares held by Metro Plus, a company partially
owned by Kenneth Guarino.
ITEM 12. 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, CVC, which
operates a chain of retail video stores in the New England and upstate New York
area. CVC accounted for $9,358,002 (40%) and $9,952,316 (47%) of the revenues of
Metro for the fiscal years ended May 29, 1999 and May 30, 1998. At May 29, 1999,
$2,419,990 (40%) of Metro's outstanding accounts receivable were due from CVC.
At May 30, 1998, $2,477,041 (49%) of Metro's outstanding accounts receivable
were due. Payment of CVC's accounts receivable (a) is secured by CVC's
inventory, which security interest is evidenced by that certain security
agreement dated September 1993 and (b) is guaranteed by a personal guarantee
executed by Mr. Guarino's spouse. The aging of the accounts receivable from CVC
is as follows:
<TABLE>
<CAPTION>
------------------- --------------- --------------- -------------- ---------------
Current 30-60 days 60-90 days Over 90 days
<S> <C> <C> <C> <C>
------------------- --------------- --------------- -------------- ---------------
May 29, 1999 $ 684,339 $ 599,408 $ 561,475 $ 574,768
------------------- --------------- --------------- -------------- ---------------
May 30, 1998 $ 998,408 $ 1,328,941 $ 149,692 $ 0
------------------- --------------- --------------- -------------- ---------------
</TABLE>
While in the past, Metro Global did not allow CVC receivables to age beyond
90 days, Metro Global's management has determined that extending CVC's payment
terms is reasonable and in the best interests of Metro Global because of the
volume of business CVC has historically provided to Metro Global, the value of
the inventory securing the payment of the accounts receivable, and the guarantee
executed by Mrs. Guarino. During the year ended May 29, 1999, Metro Global
billed CVC $187,498 for services rendered for distribution and sales analysis
cost incurred by Metro Global.
CVC owns and operates five Airborne for Men franchises. Because the Board
of Directors believes that CVC's expertise in the operation of retail stores
will significantly augment the value of the Airborne for Men franchise, Metro
Global did not require CVC to pay the standard franchise fee of $20,000. During
fiscal 1999,
25
<PAGE>
Metro Global recorded from CVC $90,569 in royalty income pursuant to a franchise
agreement for the operation of the five Airborne for Men stores owned and
operated by CVC. CVC owns the initial Amazing Superstores opened in May, 1999 in
Providence, Rhode Island.
Effective May 1, 1993, Metro entered into a lease with Castle Properties,
L.L.C., an entity principally owned by Mr. Guarino's spouse, for an
approximately 50,000 square foot office, warehouse and shipping complex located
in Cranston, Rhode Island. This 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 ten
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 six through ten and the rent for the renewal terms, if the lease is
extended, shall be increased based on consumer price index. In fiscal 1998,
Metro was granted a rent reduction of $81,733, which is being amortized over the
remaining term of the lease. Approximately 7,500 square feet of the facility is
sublet to CVC under an oral, month-to-month lease agreement for $4,000 per
month.
Metro Global pays property taxes on real property located at 1060 Park
Avenue, Cranston, RI. This property is being leased by CVC from Centurion
Financial Group, L.L.C., a company principally owned by a trust, the principal
beneficiaries of which, are Mr. Guarino's children. For the year ended May 29,
1999, Metro Global incurred approximately $6,000 of expense.
On December 3, 1997, Metro Global's Board of Directors awarded Kenneth
Guarino 100,000 shares restricted and 100,000 shares unrestricted of Metro
Global's Common Stock in consideration of certain consulting services. On that
date, Metro Global's Common Stock was trading at $1.50 per share. Metro Global
recorded $278,000 of consulting expense related to this transaction.
On March 23, 1998, Metro Global entered into a one year 12% convertible
debenture with Centurion Investment Group, Inc. for $250,000. Centurion
Investment Group, Inc. is a Rhode Island company owned by a trust, the primary
beneficiaries of which are Mr. Guarino's children. The debenture is convertible
into Metro Global's Common Stock at a rate of $2.25 per share. On March 23,
1999, the debenture was extended for one year. In consideration therefore, the
face value of the debenture was increased from $250,000 to $280,000
(representing accrued interest). Interest expense attributable to a beneficial
conversion feature of the debenture of $62,556 was recorded by Metro Global
during 1998.
On March 23, 1998, Metro Global entered into a one year 12% convertible
debenture with Cal Vista, Inc. for $250,000. Cal Vista is a trust established
for the benefit of Mr. Guarino's spouse and children. The debenture is
convertible at a rate of $2.25 per share. On March 23, 1999, the debenture was
extended for one year. In consideration therefore, the face value of the
debenture was increased from $250,000 to $280,000 (representing accrued
interest). Interest expense attributable to a beneficial conversion feature of
the debenture of $62,556 was recorded by Metro Global during 1998.
On May 27, 1998, notes payable and accrued interest totaling $136,536 due
to Kenneth Guarino were converted into 91,025 restricted shares of Metro
Global's Common Stock. On that date, Metro Global's Common Stock was trading at
$2.50 per share. On May 27, 1998, notes payable and accrued interest totaling
$577,501 due to Metro Plus, a company partially owned by Kenneth Guarino, were
converted into 385,000 restricted shares of Metro Global's Common Stock. Metro
Global recorded additional interest expense of $499,826 for the year ended May
30, 1998.
On July 1, 1998, Metro Global entered into a one year 12% convertible
debenture with Cal Vista, Inc. Cal Vista is a trust established for the benefit
of Mr. Guarino's spouse and children. The debenture has a face value of $200,000
and is convertible at a rate of $2.25 per share. On July 1, 1999, the debenture
was extended for one year. In consideration therefore, the face value of the
debenture was increased from $250,000 to $280,000 (representing accrued
interest) and
26
<PAGE>
Centurion Investment Group was granted warrants to purchase 50,000 shares of
Metro Global's common stock for $2.58 per share. Interest expense attributable
to a beneficial conversion feature of the debenture of $60,248 was recorded by
Metro Global during 1999.
On August 1, 1998, Metro Global issued its one-year promissory note in the
principal amount of $250,000 bearing interest at 8% to Dennis Nichols, President
of Metro. On August 1, 1999, the term of the note was extended for one year. In
consideration for the extension, the interest rate was adjusted from 8% to 10%,
the principal amount of the note was increased to $270,000 and Mr. Nichols was
granted warrants to purchase 75,000 shares of Metro Global's Common Stock for
$2.58 per share.
On August 1, 1998, Metro Global entered into a one-year promissory note for
$750,000 at 8% interest with Briana Investment Group ("Briana"). Briana is a
trust established for the benefit of Mr. Guarino's wife and children. On August
1, 1999, the note was extended for one year and the interest rate was increased
to from 8% to 10% and Briana was granted warrants to purchase 40,000 shares of
Metro Global's Common Stock for $2.58 per share. In October 1998, an unrelated
party holding 400,000 warrants issued in conjunction with the Series A Preferred
stock transferred the warrants to Briana. In October 1999, Briana exercised the
warrant, and the note payable was reduced from $750,000 to $150,000.
On June 2, 1998, Messrs. Guarino and Nichols acquired from Priority
Trading, Ltd. options to purchase an aggregate of 250,000 shares of Common Stock
at an exercise price of $1.25 per share. Priority Trading had originally
purchased the options from Metro Global on February 12, 1998 and had transferred
them to Messrs. Guarino and Nichols on May 30, 1998. Messrs. Guarino and Nichols
exercised the options on June 2, 1998 and both executed indemnification
agreements with Metro Global in connection with their exercise of the warrants.
On the date of exercise, Metro Global's Common Stock was being traded at the
price of $2.65 per share. As a result of this transaction, Metro Global recorded
$364,062 of consulting expense in fiscal 1998.
In October 1998, Metro Global repurchased 198,242 shares of its outstanding
Common Stock from Metro Plus, a company partially owned by Mr. Guarino. Metro
Global paid $2.56 per share, which was the market price on the date of the
transaction.
On March 19, 1999, Metro Global entered into a one year consulting
agreement effective April 1, 1999 with Kenneth Guarino, pursuant to which Metro
Global will pay Mr. Guarino a fee of $10,000 per month. In addition, Metro
Global granted Mr. Guarino options to purchase up to 100,000 shares of Common
Stock at a price of $2.00 per share, exercisable for a period of 5 years. On
that Date, Metro Global's Common Stock was trading at $2.063 per share. Since
the date of the consulting agreement, Metro Global recorded consulting expense
of $21,333 in connection with the issuance of the warrants and reimbursed Mr.
Guarino for approximately $70,000 in expenses he has incurred in connection with
his activities for Metro Global.
Greg Alves, a director and Acting President of Metro Global, possesses an
ownership interest in a production company that is employed by Metro Global or
its subsidiaries. The production company received payments of $75,500 from Metro
during fiscal 1999 and approximately $50,000 during fiscal 1998.
Conflicts of Interest
Of necessity, some inherent conflict of interest is involved whenever
Officers, Directors and others acting on behalf of Metro Global supply services
or goods to Metro Global for compensation. Additional conflicts may arise in the
future when Company Officers, Directors or significant shareholders are involved
in the management of any other company with which Metro Global 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.
27
<PAGE>
Many of the persons who perform services as Officers and Directors to Metro
Global are actively, and in the future will be, involved in businesses from
which they derive income, other than Metro Global. 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 Metro Global.
Although the Board of Directors believes that members of management will be
of great assistance to Metro Global in the fulfillment of its corporate mission,
some transactions may and will occur where Metro Global 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 Metro Global. However, it is intended that, in accordance with
legal principals applicable to corporations, Metro Global's action will be
determined whenever possible by a disinterested majority of the Board of
Directors.
It is Metro Global'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 Metro Global than Metro Global would grant to or obtain from a
independent third-party in an arms-length transaction. Because a majority of the
Board of Directors are not affiliated with CVC, all transactions between Metro
Global or Metro and CVC have been, and all future transactions will be, approved
and/or ratified by a disinterested majority of the Board of Directors.
28
<PAGE>
PART IV
- -------
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
Exhibits marked with an asterisk are filed herewith. The remainder of the
exhibits have heretofore been filed with the Commission and are incorporated
herein by reference.
(A) 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.
2.2 Rescission and Purchase Agreement dated September 29, 1999 by and among
Metro Global Media, Inc., Metro, Inc., Fanzine International, Inc.,
Goldtree Publishing, Inc., Robert Maiello, Philip P. Salvatore, Bart
Senior and Michael Levine as filed with the Commission on October
4,1999 as exhibit 2.1 on Form 8-K and incorporated herein by reference.
2.3 Security Agreement dated September 29, 1999 between Fanzine
International, Inc. and Metro Global Media, Inc. as filed with the
Commission on October 4, 1999 as exhibit 2.2 on Form 8-K and
incorporated herein by reference.
2.4 Security Agreement dated September 29, 1999 between Fanzine
International, Inc. and Metro Global Media, Inc. as filed with the
Commission on October 4, 1999 as exhibit 2.3 on Form 8-K and
incorporated herein by reference.
2.5 Promissory Note dated September 29, 1999 from Robert Maiello, Michael
Levine, Bart Senior and Philip P. Salvatore to Metro Global Media, Inc.
as filed with the Commission on October 4, 1999 as exhibit 2.4 on Form
8-K and incorporated herein by reference.
2.6 Promissory Note dated September 29, 1999 from Goldtree Publishing, Inc.
to Metro Global Media, Inc. as filed with the Commission on October 4,
1999 as exhibit 2.5 on Form 8-K and incorporated herein by reference.
2.7 Personal Guarantee of Michael Levine dated September 29, 1999 as filed
with the Commission on October 4, 1999 as exhibit 2.6 on Form
8-K and incorporated herein by reference.
2.8 Personal Guarantee of Robert Maiello dated September 29, 1999 as filed
with the Commission on October 4, 1999 as exhibit 2.7 on Form
8-K and incorporated herein by reference.
2.9 Personal Guarantee of Philip P. Salvatore dated September 29, 1999 as
filed with the Commission on October 4, 1999 as exhibit 2.8 on Form 8-K
and incorporated herein by reference.
2.10 Personal Guarantee of Bart Senior dated September 29, 1999 as filed
with the Commission on October 4, 1999 as exhibit 2.9 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.
29
<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 Form 10-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.
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 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.
10.5 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.
10.6 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.
10.7 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.
10.8 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.
10.9 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.
10.10 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.
30
<PAGE>
10.11 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.
10.12 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.
10.13 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.
10.14 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.
10.15 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.
10.16 Employment Agreement dated July 31, 1998 between Robert Maiello and
Metro Global Media, Inc. as filed with the Commission on August 15,
1998 as Exhibit (2) on Form 8-K and incorporated herein by reference.
10.17 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.
10.18 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.
10.19 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.
* 10.20 Consulting Agreement dated March 19, 1999 between Metro Global Media,
Inc. and Kenneth F. Guarino.
* 10.21 License Agreement dated July 21, 1999 between Colorado Satellite
Broadcasting, Inc. and Metro Global Media, Inc. on behalf of itself and
its wholly owned subsidiary, Metro, Inc.
* 10.22 Amendment to No. 1 Business Consulting Agreement dated September 10,
1999 between Metro Global Media, Inc. and Kenneth F. Guarino.
* 10.23 Loan and Security Agreement dated September 30, 1999 by and between
Metro Global Media, Inc.,Metro, Inc. and Reservoir Capital Corporation.
21 Subsidiaries of the Registrant:
Metro, Inc.
Metro West Studios, Inc.
Rocket Media Group, LLC
Airborne for Men, Ltd.
Metro International Distributors
Amazing Direct, Inc.
Fanzine International, Inc.
31
<PAGE>
99.1 Letter from Ellis L. Levin, Director of Ten Eyck Associates, Inc., dated
March 5, 1998 as filed with the Commission on April 13, 1998 as Exhibit
(1) on Form 8-KA and incorporated herein by reference.
99.2 Letter from Trien Rosenberg, Rosenberg, Weinberg, Ciullo & Fazzari LLP,
dated March 18, 1998 as filed with the Commission on April 13, 1998 as
Exhibit (2) on Form 8-KA and incorporated herein by reference.
* 27.1 Financial Data Schedule for 1999
* 27.2 Restated Financial Data Schedule for 1998
(B) REPORTS ON FORM 8-K
1. Report on Form 8-K, filed May 14, 1999, as amended by Report on Form 8-K/A,
filed May 19, 1999 and Report on Form 8-K/A, filed May 28, 1999, reporting,
under Item 4: Changes in Registrant's Certifying Accountant, that on May
10, 1999, Metro Global appointed the accounting firm of Grant Thornton, LLP
as independent accountants for fiscal 1999 to replace Trien Rosenberg,
Rosenberg, Weingerg, Ciullo & Fazzari, LLP.
32
<PAGE>
S I G N A T U R E S
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused the amendement to be signed
on its behalf by the undersigned, thereunto duly authorized.
Metro Global Media, Inc.
By: /s/ Gregory N. Alves
------------------------
Gregory N. Alves,
Acting President
Date: October 5, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Kenneth F. Guarino Acting Chief Executive Officer October 5, 1999
- ---------------------- (principal executive officer)
Kenneth F. Guarino
/s/ Gregory N. Alves Acting President and Director October 5, 1999
- --------------------
Gregory N. Alves
/s/ A. Daniel Geribo Director October 5, 1999
- --------------------
A. Daniel Geribo
/s/ Janet M. Hoey Treasurer (principal October 5, 1999
- ----------------- financial and accounting Officer)
Janet M. Hoey , Secretary and Director
/s/ Alan S. Casale Director October 5, 1999
- ------------------
Alan S. Casale
33
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report...........................................F-1
Consolidated Balance Sheet.............................................F-2
Consolidated Statements of Operations..................................F-4
Consolidated Statements of Shareholders' Equity........................F-5
Consolidated Statements of Cash Flows..................................F-6
Notes to Consolidated Financial Statements.............................F-9 - F27
F-0
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Metro Global Media, Inc. and Subsidiaries
Cranston, Rhode Island
We have audited the accompanying consolidated balance sheet of Metro Global
Media, Inc. and Subsidiaries (the "Company") as of May 29, 1999, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the years in the two-year period ended May 29, 1999. 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 29, 1999 and the results of their operations and
their cash flows for each of the years in the two-year period ended May 29,
1999, in conformity with generally accepted accounting principles.
Imowitz Koenig & Co., LLP
New York, New York
September 17, 1999, except for note
17, as to which the date is October 5, 1999
F-1
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MAY 29, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets
------
<S> <C>
Current Assets
- --------------
Cash $ 144,288
Accounts receivable, less allowance for doubtful accounts
of $237,100 5,504,476
Accounts receivable, related party 2,419,990
Inventory 4,104,080
Recoverable income tax 339,000
Prepaid expenses and other current assets 995,426
-----------
Total Current Assets 13,507,260
- --------------------- -----------
Motion pictures and other films at cost, less accumulated
amortization of $8,734,633 4,853,527
Property and equipment at cost, less accumulated
Depreciation of $2,194,911 2,027,274
Goodwill, net of accumulated
amortization of $364,071 3,804,789
Other assets 267,556
-----------
Total Assets $24,460,406
- ------------ ===========
</TABLE>
See Notes to Consolidated Financial Statements
F2
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MAY 29, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Liabilities and Shareholders' Equity
------------------------------------
<S> <C>
Current liabilities
- -------------------
Current portion of capital lease obligations $ 273,521
Short-term borrowings 4,767,298
Related party convertible debentures 560,000
Convertible debentures 908,008
Accounts payable and accrued expenses 7,700,217
Income taxes payable 458,769
-----------
Total current liabilities 14,667,813
- -------------------------
Notes payable to related parties 600,000
Capital lease obligations, less current portion 315,851
-----------
Total liabilities 15,583,664
- ----------------- -----------
Minority interest 53,467
Commitments and Contingencies
Shareholders' equity
- --------------------
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 6,542,198 shares and outstanding,
6,343,956 shares 654
Additional paid in capital 15,456,612
Accumulated deficit (5,759,509)
Accumulated other comprehensive loss - foreign exchange (6,765)
-----------
9,690,992
Unearned compensation (360,217)
Less cost of Treasury Stock (198,242 common shares) (507,500)
-----------
Total shareholders' equity 8,823,275
- -------------------------- -----------
Total liabilities and shareholders' equity $24,460,406
- ------------------------------------------ ===========
</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 29, 1999 AND MAY 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998
1999 as restated
---- -----------
<S> <C> <C>
Revenues $ 23,389,171 $ 20,391,134
Cost of revenues, including amortization of
motion pictures and other films of
$1,757,722 and $1,327,856, respectively 16,074,451 13,168,214
------------ ------------
7,314,720 7,222,920
Selling, general and administrative expenses
(including $108,333 and $278,000 to related
parties in 1999 and 1998, respectively) 9,493,943 6,606,180
------------ ------------
(2,179,223) 616,740
------------ ------------
Other income and (expenses)
- ---------------------------
Interest expense (including $175,575 and $562,133
to related parties in 1999 and 1998, respectively) (2,240,488) (973,918)
Royalty income 130,145 127,206
Miscellaneous income(expense) 822 (3,870)
Minority interest (5,247) (18,220)
------------ ------------
(2,114,768) (868,802)
------------ ------------
Loss from continuing operations (4,293,991) (252,062)
Provision (benefit) for income taxes (166,850) 469,684
------------ ------------
Loss from continuing operations (4,127,141) (721,746)
Income from discontinued operations (net of tax) 150,201
------------ ------------
Net loss $ (3,976,940) $ (721,746)
============ ============
Loss Per Share:
Loss from continuing operations:
Basic and Diluted $ (0.80) $ (0.60)
Income from discontinued operations:
Basic and Diluted $ 0.03 $ 0.00
Net loss:
Basic and Diluted $ (0.77) $ (0.60)
Weighted average number of shares:
Basic and Diluted 5,511,084 3,662,719
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MAY 29, 1999 AND MAY 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retained
Series A Additional Earnings
Preferred Stock Common Stock Treasury Paid-in (accumulated Unearned
Shares Amt Shares Amt Stock Capital deficit) Compensation Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at May 31, 1997 (as restated) 3,558,168 $356 -0- $5,714,557 $1,202,777 $ -0- $6,917,690
Adjustments (see note 14) 137,500 (496,371) (358,871)
--------- ---- --- ---------- ---------- --------- ----------
Balance at May 31, 1997 (as restated) 3,558,168 $356 -0- $5,852,057 $ 706,406 $ -0- $6,558,819
Shares issued:
as compensation 211,000 21 678,576 (64,375) 614,222
in connection with conversion
of related party notes payable,
accrued interest and extinguishment 1,213,816 1,213,863
of debt 476,025 47
upon issuance of Series A
Preferred stock (less offering
costs of $11,500) 2,175 2,163,500 2,163,500
Embedded interest on
convertible debentures 125,112 125,112
Subscription receivable on Series
A Preferred Stock (1,320)(1,317,000) (1,317,000)
Dividends on Series A Preferred Stock 11,479 1,446,502 (1,457,981)
Net Loss (721,746) (721,746)
--- ---------- --------- ---- --- ---------- ----------- --------- ----------
Balance at May 30, 1998 (as restated) 855 $ 857,979 4,245,193 $424 -0- $9,316,063 $(1,473,321) $(64,375) $8,636,770
Shares issued:
as compensation 414,885 42 1,037,550 (415,380) 622,212
in connection with conversion of
Series A Preferred Stock (855)(857,979) 982,120 98 2,174,902 1,317,021
as interest cost on borrowings 250,000 25 569,975 570,000
upon exercise of warrants 400,000 40 599,960 600,000
upon exercise of option 250,000 25 299,975 300,000
Embedded interest on
convertible debentures 202,092 202,092
Dividends on Series A Preferred Stock 309,248 (309,248)
Purchase of Treasury Stock (507,500) (507,500)
Issuance of unexercised warrants 818,847 818,847
Issuance of unexercised options 128,000 (128,000)
Amortization of unearned compensation
-stock 247,538 247,538
Net Loss (3,976,940) (3,976,940)
--- --- --------- ---- --------------------- ------------ --------- ----------
Balance, May 29, 1999 -0- -0- 6,542,198 $654 $(507,500)$15,456,612 $(5,759,509) $(360,217) $8,830,040
=== === ========= ==== ===================== ============ ========= ==========
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MAY 29, 1999 AND MAY 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998
1999 as restated
---- -----------
Cash flows from operating activities:
<S> <C> <C>
Net loss $(3,976,940) $ (721,746)
----------- -----------
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation Expense 513,773 385,226
Amortization of motion pictures and other films 1,757,722 1,327,856
Amortization of deferred rent (14,011) (14,011)
Amortization of unearned compensation 247,538 --
Amortization of goodwill 364,071 --
Amortization of discount on debenture 65,708 --
Accrued interest added to note payable principal 60,000 --
Discount on issuance of convertible debenture (157,700) --
Interest expense on extinguishment of related party
debt -- 499,826
Allowance for doubtful accounts 74,070 140,948
Embedded interest on convertible debentures 202,092 125,112
Common Stock issued for consulting services 573,478 607,372
Common Stock issued for compensation -- 6,850
Common Stock issued for interest expense 570,000 --
Issuance of warrants 818,847 --
Minority interest 5,247 18,220
Foreign exchange (6,765) --
(Increase) decrease in assets:
Accounts receivable (2,906,281) (1,152,172)
Inventory (377,117) (42,462)
Prepaid expenses and other current assets (960,857) (37,291)
Other assets (93,819) 37,395
Recoverable income tax (134,000) 287,000
Deferred income taxes -- 165,650
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 3,781,550 220,511
Income taxes payable 99,650 (4,018)
Deferred income taxes -- (35,700)
----------- -----------
Total adjustments 4,483,196 2,536,312
----------- -----------
Net cash provided by operating activities $ 506,256 $ 1,814,566
----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED MAY 29, 1999 AND MAY 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998
1999 as restated
---- -----------
Cash flows from investing activities:
<S> <C> <C>
Acquisition of Fanzine (4,000,000) --
Acquisition costs (168,860) --
Investments in motion pictures and other films (2,869,558) (2,279,676)
Purchase of property and equipment (477,322) (105,590)
---------- ----------
Net cash used in investing activities (7,515,740) (2,385,266)
- ------------------------------------- ---------- ----------
Cash flows from financing activities:
Proceeds from the issuance of Series A
convertible Preferred Stock 1,317,021 846,500
Purchase of Treasury Stock (507,500) --
Proceeds from issuance of common stock 48,734 --
Proceeds from exercise of warrants 600,000 --
Proceeds from issuance of convertible debentures 1,200,000 500,000
Net proceeds from (payments on) line of credit 412,026 (366,975)
Proceeds on notes payable 5,100,000 --
Principal payments on notes payable (875,000) --
Principal payments on capital lease obligations (356,504) (281,554)
Contribution from joint venture partner 30,000 --
--------- ----------
Net cash provided by financing activities 6,968,777 697,971
- ----------------------------------------- --------- ----------
Net increase (decrease) in cash (40,707) 127,271
Cash, beginning of year 184,995 57,724
--------- ----------
Cash, end of year $ 144,288 $ 184,995
========= ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 236,728 $ 278,248
========= ==========
Income taxes $ - $ 29,637
========= ==========
</TABLE>
See Notes to Consolidated Financial Statements
F-7
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED MAY 29, 1999 and MAY 30, 1998
- --------------------------------------------------------------------------------
Supplemental schedule of non-cash investing and financing activities:
During the year ended May 29, 1999, a payable of $300,000 was converted
into 250,000 restricted shares of Metro Global's Common Stock by a related party
(see note 11).
During the year ended May 29, 1999, 2,175 shares of Series A preferred
stock plus accrued dividends of $35,247 were converted into 982,120 shares of
Metro Global's Common Stock. Metro Global recognized total dividends of $543,750
relating to the beneficial conversion feature of this stock. As of May 29, 1999
all shares have now been converted.
During the year ended May 30, 1998, notes payable and accrued interest
totaling $714,037 were converted into 476,025 restricted shares of Metro
Global's Common Stock.
Capital lease obligations of $230,382 and $412,495 were incurred during the
years 1999 and 1998, respectively, when Metro Global 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 29, 1999 AND MAY 30, 1998
- --------------------------------------------------------------------------------
1. Nature of Business and Summary of Significant Accounting Policies
Nature of Business
Metro Global Media, Inc. ("Metro Global"), which was incorporated in
November 1987, produces and distributes, predominantly in the United States,
motion pictures and other entertainment products (including magazines, videos
and novelties) and related ancillary products to wholesalers and retailers
oriented to the adult entertainment market.
On August 3, 1998, Metro Global purchased 100% of the outstanding stock of
Fanzine International, Inc. ("Fanzine"). Fanzine publishes a series of monthly,
bi-monthly and event-driven magazines, as well as calendars and "how-to"
digests. On September 29, 1999, Metro Global sold Fanzine back to the former
shareholders and a company controlled by the former shareholders. Accordingly,
Metro Global has accounted for the Fanzine segment as discontinued operations
(see notes 17 and 18) in the accompanying financial statements.
Plan of Operation
As described in the following footnotes, Metro Global is in default under
certain debt agreements. Metro Global has arranged for alternative financing,
however, funding has not yet occurred. Proceeds of the loan will be utilized to
cure the defaulted debt. In the event that proceeds are not received from this
loan, Metro Global will remain in default under its debt obligations.
As described in Note 17, Metro Global has sold Fanzine, its publishing
segment, and expects to utilize a substantial portion of the proceeds to retire
debt.
In addition, on September 14, 1999, the NASDAQ Stock Market halted the
trading of Metro Global's common stock due to Metro Global's late filing of its
fiscal 1999 Annual Report on Form 10-KSB.
Year-end
Beginning May 31, 1997, Metro Global changed its fiscal year end to a 4-4-5
week format, which results in Metro Global'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
and its majority-owned and controlled subsidiaries. All intercompany balances
and transactions have been eliminated in consolidation.
Recognition of Revenues
Revenue is recognized at the time Metro, Inc. ("Metro"), a wholly owned
subsidiary of Metro Global, sells motion pictures and other products to
customers. 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.
Sales of magazines and estimated sales returns are recorded when each issue
is shipped to the distributor.
F-9
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 29, 1999 AND MAY 30, 1998
- --------------------------------------------------------------------------------
1. Nature of Business and Summary of Significant Accounting Policies (Continued)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates based on
management's knowledge and experience. Due to their prospective nature, it is
reasonable to expect actual results to differ from those estimates.
Accounts Receivable
Accounts receivable for Fanzine are recorded net of estimated returns of
magazines, credits and allowances. Retail sellers of magazines retain the right
to return magazines for a number of months after the date the magazine is
"off-sale," accordingly, the allowance for returns is normally a high percentage
of the gross receivables in the magazine publishing industry. When actual
returns are received or documented, the corresponding receivable and allowance
are reduced. The allowance for returns at May 29, 1999 totals $10,505,195.
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.
Foreign Currency Translation
The financial statements of the subsidiary outside the United States is
measured using the local currency as the functional currency. Metro Global
translates the assets and liabilities of its foreign subsidiary at the exchange
rate in effect at year-end. Net revenues and expenses are translated using
average exchange rates in effect during the year. Gains and losses from foreign
currency translation (which constitute other comprehensive income or loss) are
credited or charged to stockholders' equity in the accompanying consolidated
balance sheet. Transaction gains or losses are recorded in selling, general and
administrative expense and are not material.
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 five to ten
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 videocassettes, video libraries, video
rights, CD-ROMs and DVDs are reflected at the lower of amortized cost or net
realizable value. The cost of motion picture films is charged to operations in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 53,
Financial Reporting by Producers and Distributors of Motion Picture Films.
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
F-10
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 29, 1999 AND MAY 30, 1998
- --------------------------------------------------------------------------------
1. Nature of Business and Summary of Significant Accounting Policies (Continued)
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 70% of film costs are expected to be amortized in the
first three years commencing upon the release of the respective motion picture
films.
Earnings per Share
During the year ended May 30, 1998, Metro Global 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 (loss) per share is computed by dividing net loss
attributable to common stockholders (net income (loss) reduced (increased) by
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; however, such calculations are ignored if
they are antidilutive.
Reclassification
Certain items in the financial statements for the year ended May 30, 1998
have been reclassified to conform with the current year presentation.
Deferred Income Taxes
Metro Global 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.
Goodwill and Acquisition Costs
Goodwill and acquisition costs are being amortized on a straight-line basis
over ten years. Amortization expense amounted to $333,333 for goodwill and
$30,738 for acquisition costs for the year ended May 29, 1999.
Comprehensive Income (loss)
In 1999, Metro Global adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130") which requires the
display of comprehensive income (loss) and its components in the financial
statements. Comprehensive income (loss) includes net earnings and unrealized
gains and losses from currency translation, available for sale marketable
securities and minimum pension liability adjustments. Metro Global's single
component of comprehensive loss as of May 29, 1999 consists of a current period
charge of $(6,765) in foreign currency translation.
F-11
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 29, 1999 AND MAY 30, 1998
- --------------------------------------------------------------------------------
1. Nature of Business and Summary of Significant Accounting Policies (Continued)
New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). The
Statement establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting.
SFAS 133 is effective for fiscal years beginning after June 15, 1999. A
company may also implement the Statement as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and
thereafter). SFAS 133 cannot be applied retroactively. SFAS 133 must be applied
to (a) derivative, instruments and (b) certain derivative instruments embedded
in hybrid contracts that were issued, acquired, or substantively modified after
December 31, 1997. The adoption of SFAS 133 will have no effect on the financial
statements of Metro Global, as Metro Global has no derivative activity.
2. Acquisitions
Amazing Direct
In March 1998, Metro Global acquired an 80% interest in Amazing Direct, a
Nevada Corporation by purchasing four hundred shares of its outstanding stock at
$2.00 per share. Amazing Direct is a mail order company. In March 1999, Metro
Global acquired the remaining 100 shares outstanding.
Maxstone Media
In August 1997, Rocket Media Group, LLC, a wholly owned subsidiary of Metro
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. Each joint venture partner contributed $30,000.
Metro Global, which effectively controls Maxstone Media, has included Maxstone
Media's results from operations in the consolidated financial statements.
Minority interest amounted to $53,467 at May 29, 1999.
Fanzine International, Inc.
On August 3, 1998, Metro Global acquired 100% of the stock of Fanzine
International, Inc. ("Fanzine") for a cash purchase price of $4,000,000, plus
contingent consideration. Fanzine, which began operations on August 1, 1997,
publishes event driven, mainstream magazines translated into seven languages and
distributed worldwide. The contingent consideration consisted of 1,000,000
restricted shares of Metro Global'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. During
Fanzine's first year of operations, Metro Global had the right to call the
shares
F-12
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 29, 1999 AND MAY 30, 1998
- --------------------------------------------------------------------------------
2. Acquisitions (Continued)
at the greater of $6.00 per share or 75% of the market price. Metro Global did
not call the shares. The acquisition agreement also provided for a reduction in
purchase price if Fanzine's results of operations did not meet certain minimum
earnings.
The acquisition was accounted for as a purchase. The excess of the purchase
price over the fair market values of net assets acquired, which included, among
others, licences, trademarks, and distribution rights, was allocated to goodwill
and amortized over ten years. The cash portion of $4,000,000 was financed by a
long-term convertible debenture and other short-term borrowings. On September
29, 1999, Metro Global sold Fanzine's stock back to the selling shareholders
(see note 17).
3. Property and Equipment
<TABLE>
<CAPTION>
Property and equipment consists of the following at May 29, 1999,
<S> <C>
Machinery and equipment $2,328,984
Furniture and fixtures 603,505
Office equipment 928,429
Automobiles 73,125
Leasehold improvements 288,142
----------
4,222,185
Less: Accumulated depreciation 2,194,911
----------
Total $2,027,274
==========
</TABLE>
4. Motion Pictures and Other Films
<TABLE>
<CAPTION>
Motion pictures and other films consists of the following at May 29, 1999,
<S> <C>
Motion picture films produced and released $ 9,217,850
Rights acquired to release motion pictures
and other films 2,161,854
CD-ROM/DVD 500,878
Motion picture films in process 1,707,578
-----------
13,588,160
Less: Accumulated amortization 8,734,633
-----------
TOTAL $ 4,853,527
===========
</TABLE>
F-13
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 29, 1999 AND MAY 30, 1998
- --------------------------------------------------------------------------------
5. Debt
During the year ended May 30, 1998 certain notes payable due to related
parties (see note 11) with principal and accrued interest of $714,037 were
converted into 476,025 shares of Metro Global's Common Stock. Metro Global
recognized additional interest expense of $499,826 on this transaction.
On August 1, 1998, Metro Global entered into notes payable totaling
$1,000,000 with related parties. The notes, which bear interest at 8%, were due
August 1, 1999. Proceeds from the notes were used in the acquisition of Fanzine.
In October 1998, $600,000 of debt was converted into 400,000 shares of Metro
Global's Common Stock (see note 11). On August 1, 1999, the balance of the notes
were extended for one year. In consideration of the extension, the interest rate
increased from 8% to 10% and warrants were issued to purchase up to 115,000
shares of Common Stock at a price of $2.58, exercisable for a term of five
years.
On October 28, 1998, Metro Global entered into a note payable with an
unrelated third party for $1,100,000. The note, which bears no interest, was due
in quarterly installments of $275,000 commencing December 31, 1998. In
consideration of the loan and part of an investment banking consultant
agreement, Metro Global issued the lender 150,000 restricted shares of Metro
Global's Common Stock. Metro Global recorded interest expense of $243,412 in
1999 in connection with the issuance of the restricted stock. Metro Global used
$507,500 of the proceeds to repurchase 198,242 shares of its outstanding Common
Stock from Metro Plus, a company partially owned by Kenneth Guarino, Acting
Chief Executive Officer of Metro Global and a significant shareholder (see note
11). For the year ended May 29, 1999, Metro Global made one payment of $275,000.
As a result, default interest at 11% per annum has been accrued on this note. In
September 1999, Metro Global and the lender agreed to an extension of the note.
Under the terms of the extension, payments totaling $550,000 were due by
September 30, 1999 and the final payment of $275,000 is due on December 31,
1999. The September 30, 1999 payments are currently in default. If all payments
are not made by January 1, 2000, Metro Global must issue the lender 100,000
shares of restricted stock as a penalty.
On December 9, 1998, Metro Global entered into a six-month term loan
agreement with an unrelated third party. Under the terms of the agreement, Metro
Global borrowed $3,000,000 at an interest rate of 10% per year. The proceeds
were used toward the acquisition of Fanzine and to fund working capital. In
connection with this transaction, Metro Global issued warrants to purchase up to
350,000 shares of Common Stock at a price of $3.00, expiring on December 31,
2001. Metro Global recorded interest expense of $577,000 in connection with the
issuance of the warrants during 1999. Additionally, Metro Global issued 100,000
shares of Common Stock and recorded $187,500 of interest expense relating to the
issuance of these shares during 1999.
In September 1999, Metro Global and the lender agreed to an extension.
Under the terms of the extension, Metro Global must pay $1.3 million upon the
closing of the prospective financing with Reservoir Capital a new unrelated
third party lender (see notes 7 and 17). The balance of the note of $1,800,000,
which includes a $100,000 penalty, will be exchanged for an 8% convertible
debenture. The debenture is convertible at a rate of not more than 10% of the
total debenture per week, at a price of 80% of the average closing bids for the
five days preceding the conversion. In consideration of the extension, Metro
Global will issue warrants to purchase up to 100,000 shares of Common Stock at a
price of $1.75 per share with a two-year expiration. In the event that funding
is not received on the prospective financing with Reservoir Capital, Metro
Global will remain in default under the debt obligation.
F-14
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 29, 1999 AND MAY 30, 1998
- --------------------------------------------------------------------------------
Capital Lease Obligations
Metro Global leases office equipment, machinery and equipment and furniture
and fixtures under noncancellable capital leases. The leases expire at various
times through 2004 and bear interest at annual rates ranging from approximately
10% to 21%. All leases are secured by the respective assets acquired.
Annual Payments under capital lease obligations are due as follows:
<TABLE>
<CAPTION>
Years ended Amount
------------ ------
<S> <C>
2000 $273,521
2001 181,185
2002 84,379
2003 43,641
2004 6,646
---- --------
Total $589,372
========
</TABLE>
6. Convertible Debentures
On July 31, 1998, Metro Global entered into an 8% convertible debenture
with an unrelated party in the amount of $1,000,000, which was used in the
purchase of Fanzine. In connection with this transaction, Metro Global issued a
warrant for 75,000 shares at a price of $4.11 and a warrant for 25,000 shares at
a price of $3.29, both exercisable over two years. Metro Global recorded a
discount on the debenture of $157,700 for the value of the warrants. Metro
Global amortized $65,708 of the discount to interest expense during the year
ended May 29, 1999.
The $1,000,000 debenture was to mature 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 Metro
Global's Common Stock at a discounted market price as is defined in the
agreement. Metro Global has recorded $141,844 of interest expense relating to
the embedded beneficial conversion feature in 1999. Metro Global is in technical
default under the terms of the debenture due to the suspension of trading of its
Common Stock on September 14, 1999.
On March 23, 1998, Metro Global entered into two 12% convertible debentures
totaling $500,000 with related parties. Both notes were due on March 23, 1999,
in either cash or Common Stock, at a conversion rate of $2.25 per share. Metro
Global recorded $125,112 of interest expense relating to the embedded beneficial
conversion feature. Proceeds from the debentures were used for working capital.
In March 1999, the debentures, including accrued interest of $60,000 (which was
added to the note principal), were extended until March 23, 2000. In conjunction
with the extension, warrants were granted to purchase 50,000 shares of Metro
Global's Common Stock for $2.58 per share.
On July 1, 1998, Metro Global entered into a 12% convertible debenture
totaling $200,000 with a related party. The note was due on July 1, 1999, in
either cash or Common Stock, at a conversion rate of $2.25 per share. Metro
Global recorded $60,248 of interest expense relating to the embedded beneficial
conversion feature. Proceeds from the debenture were used for working capital.
On July 1, 1999, the debenture was extended until July 1, 2001. In conjunction
with the extension, warrants were granted to purchase 50,000 shares of Metro
Global's Common Stock for $2.58 per share.
F-15
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 29, 1999 AND MAY 30, 1998
- --------------------------------------------------------------------------------
7. Short-Term Borrowings
Pursuant to a line of credit agreement with Finova Capital, Metro Global's
subsidiary, Metro, may borrow up to 75% of assigned accounts receivable less
than 90 days old, up to a maximum of $1,000,000. 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 guarantee of Metro Global. As of May 29,
1999, short-term borrowings under the line of credit totaled $942,298. On June
30, 1999, Finova did not renew the agreement and is waiting to be repaid from
the Reservoir Capital financing.
In August 1999, Metro Global signed a $4,000,000 commitment letter with
Reservoir Capital Corporation. Pursuant to the terms, Metro may borrow up to 70%
of accounts receivable less than ninety day old, up to a maximum of $3,000,000.
The accounts receivable borrowing base excludes foreign receivables and
receivables where more than 50% of the balance is over ninety days old. The
borrowings on accounts receivable from Capital Video Corporation ("CVC"), a
related party (see note 11), are limited to the lesser of 30% of total accounts
receivable or $1,600,000. Additionally, Metro can borrow 40% of inventory, up to
a maximum of $1,000,000.
Borrowings under this loan bear interest at prime rate plus 3.5% per annum.
Additionally, Metro must pay a service fee of .35% per month on the average
daily loan balance. Metro must pay an unused fee of .25% on the amount of the
borrowings under $2,000,000. The loan will be secured by the assets of Metro.
The CVC accounts receivables will be guaranteed to the lender by the sole
shareholder of CVC. Additionally, CVC will execute a put on the inventory of
Metro in case of default (see note 17).
8. Income Taxes
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Current provision (benefit)
Federal $(140,622) $304,000
State and local (26,228) 35,734
--------- --------
(166,850) 339,734
========= ========
Deferred provision (benefit)
Federal - 85,600
State and local - 44,350
--------- --------
- 129,950
--------- --------
Total $(166,850) $469,684
========= ========
</TABLE>
The following table is a reconciliation of the income tax / provision
(benefit)at the U.S. statutory rate to that in the financial statements:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Taxes (benefit) computed at 34% $(1,459,957) $(85,701)
Valuation allowance 582,485 343,312
Permanent differences 500,023 63,882
Other 210,599 148,191
----------- --------
$ (166,850) $469,684
=========== ========
</TABLE>
F-16
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 29, 1999 AND MAY 30, 1998
- --------------------------------------------------------------------------------
8. Income Taxes (Continued)
Deferred income taxes result from temporary differences in the financial
bases and tax bases of assets and liabilities. The significant components of
Metro Global's deferred income tax assets and liabilities as follow:
<TABLE>
<CAPTION>
1999 1998
Asset Asset
(Liability) (Liability)
----------- -----------
<S> <C> <C>
Excess depreciation $(200,000) $(197,490)
Unearned management compensation 122,000 122,000
Allowance for doubtful accounts 96,000 72,042
Inventory capitalization 175,000 164,158
State net operating loss carry forward 200,000 12,300
Other Net deferred assets (21,000) 16,190
-------- --------
Less valuation allowance 372,000 189,200
Net deferred tax asset (372,000) (189,200)
-------- --------
-0- -0-
======== ========
</TABLE>
A valuation allowance equal to 100% of the net deferred tax assets has been
established due to the uncertainty of taxable income in future years.
Metro Global's state net operating loss carry forward of approximately
$2,000,000 expires at various times through year 2014.
9. Shareholders' Equity
Series A Convertible Preferred Stock
During April 1998, Metro Global 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, Metro
Global issued 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, Metro Global received proceeds
of $846,500, net of offering costs representing 855 shares. Substantially all of
the proceeds for the remaining 1320 shares were received in fiscal 1999.
The Series A Shares were convertible at a rate of 100 shares plus accrued
dividends per week at 80% of the 15 day average closing bid price. These Shares
were subject to a twenty-four month mandatory conversion feature. Metro Global
recognized dividends of $309,248 and $234,502 at May 29, 1999 and May 30, 1998,
respectively, for the embedded beneficial conversion feature. During 1999, all
of the Series A shares and accrued dividends were converted into 982,120 shares
of Metro Global's Common Stock.
In addition to the Series A Shares, Metro Global issued 400,000 detachable
warrants to purchase Metro Global's Common Stock at $1.50 per share commencing
April 20, 1998 exercisable over 5 years. Metro Global recognized a dividend of
$1,212,000 for the year ended May 30, 1998 for the beneficial conversion
feature. In October 1998, all 400,000 warrants were transferred to a related
party of Metro Global and exercised (see note 11).
F-17
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 29, 1999 AND MAY 30, 1998
- --------------------------------------------------------------------------------
9. Shareholders' Equity (Continued)
Consultant Stock Compensation Plan
Metro Global's Consultant Stock Compensation Plan allows Metro Global to
compensate consultants and certain other persons who have provided service to
Metro Global through the award of 500,000 shares of Metro Global's Common Stock.
In June 1998, Metro Global added 500,000 shares of Common Stock to the plan.
During the year ended May 30, 1998, Metro Global issued 206,000 shares of
Common Stock valued at $307,685 of which $62,500 was unearned as of May 30,
1998. In addition, Metro Global issued 250,000 shares of Common Stock in 1999
relating to 1998 for $300,000. During the year ended May 29, 1999, Metro Global
issued 390,092 shares of Common Stock valued at $988,858. As of May 29, 1999,
151,908 shares are available under this plan.
Equity Incentive Plan
During the year ended May 31, 1997, Metro Global adopted an Equity
Incentive Plan (the 'Plan') which allows Metro Global to compensate key
employees and directors who have provided service to Metro Global through the
award of 500,000 shares of Metro Global'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. During the year ended May 29, 1999, options
to purchase 20,000 shares of Common Stock were exercised. There are 390,800
shares available under this Plan as of May 29, 1999 (see note 12).
Employee Stock Purchase Plan
During the year ended May 31, 1997, Metro Global adopted an Employee Stock
Purchase Plan. This Plan allows employees of Metro Global to purchase up to
600,000 shares of Metro Global'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 29, 1999, 4,793 shares were awarded under this
plan. Compensation cost of $8,721 was charged to compensation. There are 595,207
shares available under this plan as of May 29, 1999.
Debt Conversion
During the year ended May 30, 1998, Metro Global converted a note payable
to Metro Plus Company, a company partially owned by Kenneth Guarino, with a
principal balance plus accrued interest totaling $577,501 into 385,000 shares of
Common Stock. Additionally, Metro Global converted a note payable to Kenneth
Guarino with a principal balance and accrued interest totaling $136,536 into
91,025 shares of Common Stock. Metro Global recognized additional interest
expense to related parties of $499,546 on the transaction.
F-18
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 29, 1999 AND MAY 30, 1998
- --------------------------------------------------------------------------------
9. Shareholders' Equity (Continued)
Exercise of Options
On June 2, 1998 related parties exercised options for 250,000 shares of
common stock at $1.25 per share, that they had acquired from an unrelated third
party who had purchased the options on February 12, 1998. As a result of this
transaction, Metro Global recorded consulting expense of $364,062 in fiscal 1998
(see note 11).
Stock Options
Pursuant to an employment agreement, Kenneth Guarino was granted options to
purchase 200,000 shares of Metro Global'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. Metro Global recognized $137,500 of
additional expense in fiscal 1997 for the extension (see notes 11 and 14).
Effective April 1, 1999, Metro Global entered into a one year consulting
agreement with Kenneth Guarino. Under the agreement, the former executive was
given options to purchase up to 100,000 shares of Metro Global's Common Stock at
a price of $2.00 per share, exercisable over five years. Metro Global recorded
unearned compensation of $128,000 for the value of the option and amortized
$21,333 to consulting expense for the year ended May 29, 1999.
All options remain outstanding. The Black-Scholes Method was utilized to
value the options.
10. Commitments and Contingencies
Operating Leases
Metro Global is obligated under long-term operating leases, which require
minimum annual rentals as follows:
<TABLE>
<CAPTION>
Office Machinery
Warehouse and
Year Total Premises Vehicles Equipment
---- ----- --------- -------- ---------
<S> <C> <C> <C> <C>
2000 $ 865,987 $ 608,172 $23,791 $234,024
2001 624,607 591,126 7,615 25,866
2002 611,024 591,126 2,538 17,360
2003 578,847 570,407 8,440
2004 283,909 276,264 7,645
---------- ---------- ------- --------
Total $2,964,374 $2,637,095 $33,944 $293,335
========== ========== ======= ========
</TABLE>
The lease on the Rhode Island warehouse and office facilities (see note 11)
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 $20,719. On June 1, 1997,
Metro Global was granted a rent reduction of $81,733, which is being amortized
over the remaining term of the lease.
Metro Global had three leases on California buildings which expired on July
1, 1999. On July 15, 1999, Metro Global signed a lease for new space in
California. The lease has a term of four years and eleven and one half months
expiring on June 30, 2004, with a renewable option for sixty months.
F-19
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 29, 1999 AND MAY 30, 1998
- --------------------------------------------------------------------------------
10. Commitments and Contingencies
The lease on the New York City space, which houses Fanzine and Maxstone,
expires on May 30, 2003.
Rent expense under office and warehouse operating leases totaled $458,897
and $412,122 during the years 1999 and 1998, respectively
Uninsured Cash
Metro Global 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.
Other Matters/Major Customer
Metro Global is a defendant in 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 Metro Global's
financial position.
Metro Global used one vendor in 1998 and three vendors in 1999 to provide
all substantial printing services (magazines, video boxes and promotional
material). Management of Metro Global believes that other suppliers could
provide similar services at comparable terms.
CVC accounted for approximately 40% and 47% of Metro Global's sales (from
continuing operations) during the years ended May 29, 1999 and May 30, 1998,
respectively.
During the year ended May 29, 1999, one distributor accounted for
approximately 87% of Fanzine's revenues.
11. Related Party Transactions
Metro Global has significant tenant, borrower and customer relationships
with companies owned and managed by Officers/shareholders of Metro Global (see
Notes 5 and 9). Significant related party transactions for the years 1999 and
1998 are summarized below:
Capital Video Corporation ("CVC"), which is owned by Kenneth Guarino,
acting chief executive officer of Metro Global and a significant shareholder,
operates approximately thirty video and magazine retail stores in the New
England and New York areas and accounted for approximately 40% and 47% of Metro
Global sales for the years May 29, 1999 and May 30, 1998, respectively. Metro
Global accounts receivables include $2,419,990 due from CVC at May 30, 1999. No
allowance for doubtful related party receivables and no related party bad debt
expense has been recorded in the accompanying 1999 and 1998 consolidated
financial statements. During the year ended May 29, 1999 and 1998, Metro Global
billed CVC $187,498 and $120,000 ,respectively, for services rendered for
distribution and sales analysis costs incurred by Metro Global. During fiscal
1999 and 1998, Metro Global recorded from CVC $90,569 in royalty income pursuant
to a franchise agreement for the operation of the Airborne for Men stores owned
by CVC. Daniel Geribo, a Director of Metro Global, serves as the sole Officer
and Director of CVC.
F-20
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 29, 1999 AND MAY 30, 1998
- --------------------------------------------------------------------------------
11. Related Party Transactions (Continued)
Metro leases its Rhode Island warehouse and office facilities from Castle
Properties, L.L.C., an affiliate, for its Rhode Island operations. Castle
Properties is principally owned by Mr. Guarino's wife. 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 1999 and 1998 totaled $48,000 each year.
During the year ended May 30, 1998, Castle Properties granted Metro Global 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 29, 1999 and 1998 was $200,061 and $177,478, respectively. The
corporate offices of Metro Global are located with the corporate offices of CVC.
Although Metro Global does not pay rent, Metro Global pays property taxes on
certain assets. For the year ended May 29, 1999, Metro Global incurred
approximately $6,000 of expense.
On December 3, 1997, Metro Global's Board of Directors awarded Kenneth
Guarino 100,000 restricted shares and 100,000 shares unrestricted of Metro
Global's Common Stock in consideration of certain consulting services. Metro
Global recorded $278,000 of consulting expense related to this transaction.
On March 23, 1998, Metro Global entered into a one year 12% convertible
debenture with Centurion Investment Group, Inc for $250,000. Centurion
Investment Group, Inc. is a Rhode Island company principally owned by a trust
for the benefit of Mr. Guarino's children. The debenture is convertible at a
rate of $2.25 per share. On March 23, 1999, the debenture was extended for one
year and its face value was increased by $30,000 of accrued interest, to
$280,000. Interest expense attributable to a beneficial conversion feature of
the debenture of $62,556 was recorded by Metro Global during 1998 (see note 14).
On March 23, 1998, Metro Global entered into a one year 12% convertible
debenture with Cal Vista, Inc for $250,000. Cal Vista is a trust established for
the benefit of Mr. Guarino's spouse and children. The debenture is convertible
at a rate of $2.25 per share. On March 23, 1999, the debenture was extended for
one year and its face value was increased by $30,000 of accrued interest, to
$280,000. Interest expense attributable to a beneficial conversion feature of
the debenture of $62,556 was recorded by Metro Global during 1998 (see note 14).
On May 27, 1998, notes payable and accrued interest totaling $136,536 due
to Kenneth Guarino were converted into 91,025 restricted shares of Metro
Global's Common Stock. On May 27, 1998, notes payable and accrued interest
totaling $577,501 due to Metro Plus, a related company partially owned by Mr.
Guarino, were converted into 385,000 restricted shares of Metro Global's Common
Stock. Metro Global recorded additional interest expense of $499,826 for the
year ended May 30, 1998 (see Notes 9 and 14).
On July 1, 1998, Metro Global entered into a one year 12%, $200,000
convertible debenture with Cal Vista, Inc. Cal Vista is a trust established for
the benefit of Mr. Guarino's spouse and children. The debenture is convertible
at a rate of $2.25 per share. On July 1, 1999, the debenture was extended for
one year. In conjunction with the extension, CalVista was granted warrants to
purchase 50,000 shares of Metro Global's Common Stock for $2.58 per share.
Interest expense attributable to a beneficial conversion feature of the
debenture of $60,248 was recorded by Metro Global during 1999.
F-21
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 29, 1999 AND MAY 30, 1998
- --------------------------------------------------------------------------------
11. Related Party Transactions (Continued)
On August 1, 1998, Metro Global issued a one-year promissory note in the
principal amount of $250,000, bearing interest at 8% to Dennis Nichols,
President of Metro. On August 1, 1999, the term of the note was extended for one
year. In consideration for the extension, the interest rate was adjusted from 8%
to 10%, the principal amount of the note was increased to $270,000 (representing
the accrued interest) and Mr. Nichols was granted warrants to purchase 75,000
shares of Metro Global's common Stock for $2.58 per share.
On August 1, 1998, Metro Global entered into a one-year promissory note for
$750,000 at 8% interest with Briana Investment Group ("Briana"). Briana is a
trust established for the benefit of Mr. Guarino's wife and children. In October
1998, the holder of the 400,000 warrants issued in conjunction with the Series A
Preferred stock transferred the warrants to Briana (see note 9). Briana
exercised the warrants, and the note payable was reduced from $750,000 to
$150,000. On August 1, 1999, the note was extended for one year. In
consideration for the extension, the interest rate was adjusted from 8% to 10%,
the principal amount was increased to $174,000 (representing accrued interest)
and Briana was granted warrants to purchase 40,000 shares of Metro Global's
Common Stock for $2.58 per share.
On June 2, 1998, Messrs. Guarino and Nichols acquired from Priority
Trading, Ltd. options to purchase an aggregate of 250,000 shares of common Stock
at an exercise price of $1.25 per share. Priority Trading had originally
purchased the options from Metro Global on February 12, 1998 and had transferred
them to Messrs. Guarino and Nichols on May 30, 1998. Messrs. Guarino and Nichols
exercised the options on June 2, 1998 and both executed indemnification
agreements with Metro Global in connection with their exercise of the warrants.
As a result of this transaction, Metro Global recorded $364,062 of consulting
expense in fiscal 1998.
On March 19, 1999, Metro Global entered into a one year consulting
agreement effective April 1, 1999 with Kenneth Guarino. In consideration of the
services, Metro Global will pay Mr. Guarino $10,000 per month. In addition,
Metro Global granted Mr. Guarino options to purchase up to 100,000 shares of
Metro Global's Common Stock at a price of $2.00 per share, exercisable for a
period of 5 years. Metro Global recorded consulting expense of $21,333 in
connection with the issuance of the warrants and reimbursed approximately
$70,000 of expenses to Mr. Guarino during the year ended May 29, 1999.
In October 1998, Metro Global repurchased 198,242 shares of its outstanding
Common Stock from Metro Plus, a company partially owned by Mr. Guarino. Metro
Global paid $2.56 per share, which was the market price on the date of the
transaction.
A film production owned by Mr. Alves, The Acting President of Metro Global
was paid approximately $75,500 during fiscal 1999.
F-22
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 29, 1999 AND MAY 30, 1998
- --------------------------------------------------------------------------------
12. Accounting for Stock Based Compensation
Metro Global applies APB Opinion 25 and related interpretations in
accounting for its stock options issued to employees. Accordingly, under the
intrinsic value method, no compensation cost for options issued to employees,
has been recognized for the years May 29, 1999 and May 30, 1998 (see note 9).
In October 1995, the Financial Accounting Standards Board issued Statement
(SFAS) No. 123, Accounting for Stock Based Compensation, which became 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 to employees, as
if the fair value based method of accounting pursuant to SFAS No. 123 had been
applied.
Metro Global has stock option plans which reserves shares of Common Stock
for issuance to executives, employees, and directors. Metro Global 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 Metro Global's stock option plans been determined based on the fair
value at the grant date for awards during the years ended May 29, 1999 and May
30, 1998 consistent with the provisions of SFAS No. 123, Metro Global's net
income (loss) and earning (loss) per share would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net loss - as reported $(3,976,940) $(721,746)
Net loss - pro forma $(4,003,940) $(778,746)
Basic loss per share - as reported (.77) (.60)
Basic loss per share - pro forma (.78) (.61)
Diluted loss per share - as reported (.77) (.60)
Diluted loss per share - as pro forma (.78) (.61)
</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 the year ended May 30, 1998: dividend yield
0.00%, expected volatility 58.08%, risk free interest rate of 7.50%, and
expected lives of ten years. No options were granted during the year ended May
29, 1999.
The pro forma effect of applying SFAS 123 may not be representative of the
effects on reported net income and earnings per share for future years since
options vest over varying periods.
F-23
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 29, 1999 AND MAY 30, 1998
- --------------------------------------------------------------------------------
13. Fair Values of Financial Instruments
Statement of Financial Accounting Standards (SFAS) No. 107, as amended by
SFAS No. 119, "Disclosures about Fair Value of Financial Instruments", requires
that Metro Global 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 Metro Global 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 Metro Global estimates that all financial instruments of
Metro Global, 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 and 119.
14. Restatements
Metro Global has restated the financial statements for fiscal 1996, 1997
and 1998.
In fiscal 1996, Metro Global recorded a gain on the disposal of certain
assets to an affiliated company in the amount of $171,795. Metro Global has
reclassified the gain from retained earnings into additional paid-in capital.
The effect of the reclassification was a reduction of net income from $525,675
to $353,880 and a reduction in basic earnings per share from $.17 to $.12, and
diluted earnings per share from $.17 to $.11.
For fiscal 1997, Metro Global adjusted for an error in calculating the
amortization of the film library by increasing amortization expense by $563,872.
Additionally, Metro Global recorded $137,500 of consulting expense for the
extension of stock options to Kenneth Guarino (see Note 11). The effect of these
adjustments resulted in an increase in net loss from $207,158 to $705,536 and an
increase in basic and diluted loss per share from $(.06) to $(.20).
In addition, Metro Global changed its estimates in accounting for the
amortization of film costs during 1997. Film costs had previously been fully
amortized after three years. Approximately 73% of film costs are currently
amortized after three years. The effect of the change in estimated amortization
for 1997 was a decrease in net loss of approximately $200,000 or $.06 per share.
In Fiscal 1998, Metro Global restated its financial statements to record
dividends of $1,446,502 relating to the embedded beneficial conversion features
of the Series A Preferred Stock and the value of detachable warrants issued.
Metro Global recognized $125,112 of interest expense for the embedded beneficial
conversion feature on convertible debentures (see notes 6 and 11). Metro Global
recorded $499,826 of interest expense on the conversion of debt to stock (see
notes 9 and 11). Additionally, Metro Global recorded an expense of $364,062 on
the issuance of stock options and $22,811 on the issuance of stock for
consulting services (see note 11). Partially offsetting these amounts is a
$162,584 decrease
F-24
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 29, 1999 AND MAY 30, 1998
- --------------------------------------------------------------------------------
14. Restatements (Continued)
in amortization expense, which results from correction of the error in 1997. The
effect of this restatement was a decrease in 1998 income from $349,681 to a net
loss of $721,746 and a per share decrease from earnings of $.09 per share to a
loss of $(.60) per share.
15. Earnings Per Share
The computation of basic and diluted earnings per share from continuing
operations is as follows:
<TABLE>
<CAPTION>
May 29, 1999 May 30, 1998
------------ ------------
<S> <C> <C>
Loss from continuing operations $(4,127,141) $ (721,746)
Preferred Stock dividends (309,248) (1,457,981)
----------- -----------
Loss from continuing operations
attributable to common shareholders $(4,436,389) $(2,179,727)
=========== ===========
Basic and Diluted EPS:
Basic and Diluted common shares 5,511,084 3,662,719
Basic and Diluted EPS from continuing
operations $ (0.80) $ (0.60)
</TABLE>
The weighted average shares attributable to the dilutive instruments listed
below were not included in the computation of diluted earnings per share because
to do so would have been antidilutive for the periods presented:
<TABLE>
<CAPTION>
May 29, 1999 May 30, 1998
------------ ------------
<S> <C> <C>
Stock Options 106,187 83,449
Warrants - 24,761
Series A Preferred Stock - 80,951
12% convertible debentures 338,736 42,009
8% convertible debentures 317,460 -
</TABLE>
At May 29, 1999, warrants to purchase 550,000 shares of Common Stock are
not listed in the above analysis since the exercise price is greater than the
average market price of the common shares.
16. Operating Segment Information
Effective in 1999, Metro Global adopted SFAS 131, " Disclosures About
Segments of an Enterprise and Related Information." This statement introduced a
new model for segment recording, called the "management approach". The
management approach is based on the way the chief operating decision-maker
organizes segments within a company for making operating decisions and assessing
performance.
The accounting policies of the segments are the same as those described in
note 1, Summary of Significant Accounting Policies. Metro Global evaluates
segment performance based on operating earnings before allocations of corporate
overhead costs. Intersegement net sales and eliminations are not material.
F-25
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 29, 1999 AND MAY 30, 1998
- --------------------------------------------------------------------------------
16. Operating Segment Information (Continued)
Metro Global was comprised of two segments: the Adult Entertainment Segment
and the Publishing Segment (Fanzine). However, on September 29, 1999, Metro
Global sold the Publishing Segment and is accounting for the segment as
discontinued operations (see note 18) in the accompanying financial statements.
Foreign sales totaled $764,931 at May 29, 1999. There was no concentration
of sales to any one country. Foreign assets are immaterial at May 29, 1999.
17. Subsequent Events
On September 29, 1999, Metro Global signed a Rescission and Purchase
Agreement with the selling shareholders of Fanzine and a company controlled by
them. In consideration of this sale of Fanzine's stock, Metro Global will
receive payments totaling $4,500,000 and the 1,000,000 contingent shares of
Common Stock originally given to the selling shareholders. Payment of the
$4,500,000 is secured by the assets of Fanzine and partly secured by the
personal guarantees of the former Fanzine shareholders. Metro Global will
receive payments of $1,000,000 by October 31, 1999, $1,000,000 by November 30,
1999, $1,000,000 by May 31, 2000 and $1,500,000 by August 31, 2000. The
operations of Fanzine have been classified as discontinued operations in the
accompanying financial statements (see note 18).
On October 5, 1999, Metro Global signed a working capital line of credit
agreement with Reservoir Capital under essentially the same terms as is in the
commitment letter described in note 7. Actual funding is expected to take place
shortly. Proceeds of the loan will be utilized for a partial pay down of debt
currently in default (as described in note 5). In the event that proceeds are
not received from this loan, Metro Global will remain in default under its debt
obligations.
18. Discontinued Operations
In September 1999, Metro Global adopted a plan of disposition for Fanzine,
which was sold on September 29, 1999 for approximately $4,500,000 in notes
payable and the return of 1,000,000 shares of Metro Global's Common Stock. The
following table is a summary of the results of discontinued operations for the
year ended May 29, 1999:
<TABLE>
<CAPTION>
May 29, 1999
------------
<S> <C>
Revenues $11,733,545
Cost of revenues 10,127,236
-----------
1,606,309
Other expenses 1,321,608
-----------
Income before income taxes 284,701
Income taxes (134,500)
-----------
Income from discontinued operations $ 150,201
===========
</TABLE>
Income from discontinued operations before income taxes does not include an
allocation of corporate interest expense or amortization of goodwill. At May 29,
1999, Fanzine has current assets of $2,638,932, other assets of $167,760 and
current liabilities of $2,656,491.
F-26
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 29, 1999 AND MAY 30, 1998
- --------------------------------------------------------------------------------
19. Unaudited Restatements of Quarterly Information
In the fourth quarter of fiscal 1999, Metro Global made significant
adjustments to its financial statements which impact previously reported
quarterly results of operations. The adjustments were made for such items as
embedded interest and dividends, valuations of warrants and options and change
in estimates. The following table presents the quarterly results of operations
considering the above mentioned adjustments:
<TABLE>
<CAPTION>
For the Quarters Ended Nine Months
Aug. 28, 1998 Nov. 28, 1998 Feb. 27, 1999 Feb. 27, 1999
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue .................. $ 6,520,569 $ 8,503,284 $ 9,567,751 $ 24,591,604
Cost of Revenues ......... 4,374,558 6,445,803 7,063,744 17,884,105
------------ ------------ ------------ ------------
2,146,011 2,057,481 2,504,007 6,707,499
SG&A ..................... 2,169,895 2,377,230 2,724,787 7,271,912
Other Income (expense) net (160,011) (231,138) (777,569) (1,168,718)
------------ ----------- ----------- ------------
Income before taxes ...... (183,895) (550,887) (998,349) (1,733,131)
Tax Benefit .............. 6,436 19,280 34,923 60,639
------------ ------------ ------------ ------------
Net Loss ................. $ (177,459) $ (531,607) $ (963,426) $ (1,672,492)
============ ============ ============ ============
</TABLE>
F-27
Exhibit 10.20
BUSINESS CONSULTING AGREEMENT
AGREEMENT, made as of this 19th day of March 1999 by and between METRO
GLOBAL MEDIA, INC., a Rhode Island corporation having is principal place of
business at 1060 Park Avenue, Cranston, Rhode Island 02910, hereinafter the
"Company," and KENNETH F. GUARINO, residing at 50 Fort Avenue, Cranston, Rhode
Island 02905, hereinafter the "Consultant".
WHEREAS, the Company is a public company required to file reports pursuant
to the Securities Exchange Act of 1934, as amended, and is current in its
reporting requirements; and
WHEREAS, the Consultant is in the business of providing management
consulting services and his services have been used in the past on a
deal-to-deal basis; and
WHEREAS, the Company desires to retain the Consultant to perform management
consulting services in connection with the Company's business affairs on a
non-exclusive basis, and the Consultant is willing to undertake to provide such
services on that basis and as hereinafter set forth.
NOW, THEREFORE, the parties agree as follows:
1. TERM: The term of this Agreement shall be one (1) years from April 1,
1999 through March 31, 2000.
2. NATURE OF SERVICES: The Consultant will use his best efforts and render
advice and assistance to the Company on business-related matters (all of which
services are hereinafter collectively referred to as the "Program"), and in
connection therewith, the Consultant shall:
a. Attend meetings of the Company's Board of Directors, Executive
Committee, and Financial Committee(s) when so requested by the Company.
b. Attend meetings and at the request of the Company, review, analyze and
report on proposed business opportunities. These meetings are to include
operations and production meetings when the Company deems necessary.
c. Consult with the Company concerning on-going strategic corporate
planning and long-term investment policies, including any revisions of the
Company's business plan.
d. Consult with and advise the Company with regard to potential mergers and
acquisitions, whether the Company is the acquiring company or the target of
acquisitions.
<PAGE>
e. Assist in the preparation and distribution of press releases when so
requested by the Company to be distributed to the press, news services,
customers, suppliers, selected NASD broker/dealers, financial institutions and
the Company's shareholders.
f. Consultant has no authority to bind the Company and his sole duties are
to report recommendations to the Company's Board of Directors.
Anything to the contrary herein notwithstanding, it is recognized and
agreed that the Consultant's services will not include any service that
constitutes the rendering of legal opinions, performance of work that is in the
ordinary purview of a certified public accountant, or any work that is in the
ordinary purview of a registered securities broker/dealer.
3. COMPENSATION: As full payment for his services set forth above, the
Consultant shall receive One Hundred Twenty Thousand Dollars ($120,000), payable
in increments of Ten Thousand Dollars ($10,000) per month beginning April 1,
1999.
In addition, the Company shall issue to the Consultant options to purchase
100,000 shares of the Company's free-trading, common stock (the "Option") which
shall be exercisable for a period of five (5) years from the date of this
agreement at $2.00 per share (the average 10-day closing price prior to the date
of this Business Consulting Agreement).
Upon issuance of the Option, the Company shall prepare and file a
registration statement on Form S-8 (the "Registration Statement") with the
Securities and Exchange Commission registering the shares to be issued upon
exercise of the Option (the "Shares").
a. The Company and the Consultant hereby agree that, notwithstanding the
fact that the Option and Shares are being registered in the S-8 Registration
Statement in the name of the Consultant, in light of the Company's agreement to
file the S-8 Registration Statement, the Consultant hereby consents to delay the
delivery of the Option until the filing of the S-8.
b. Once delivery of the Option is made, the Option delivered shall be
deemed the sole and exclusive property of the Consultant, and the Company shall
be obligated to deliver the Shares upon exercise. The Option is not transferable
without the prior written consent of the Company.
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY:
The Company represents and warrants to Consultant each such representation
and warranty being deemed to be material, that:
a. The Company will cooperate fully and timely with the Consultant to
enable the Consultant to perform his activities and obligations under the
Agreement.
2
<PAGE>
b. The execution and performance of this Agreement by the Company has been
authorized by the Board of Directors of the Company in accordance with
applicable law.
c. The entry into and the performance by the Company of this Agreement will
not violate any applicable court decree, law or regulation, nor will it violate
any provision of the organizational documents of the Company or any contractual
obligation to which the Company may be bound.
d. Since the Consultant will rely upon information being supplied him by
the Company, all such information shall be true, accurate, complete and not
misleading, in all material respects.
e. The Shares, when issued upon the exercise of the Option, will be duly
and validly issued, fully paid and non-assessable with no personal liability to
the ownership thereof.
f. The Company will act diligently and promptly in reviewing materials
submitted to it by the Consultant to enhance the timely distribution of such
materials and will inform the Consultant of any material inaccuracies contained
therein prior to dissemination.
g. The Company will initiate and complete a registration statement on Form
S-8 and will fully comply with any and all applicable provisions of the Federal
and State Securities Laws. In the event law prohibits the Company from
registering securities on Form S-8, the Company will register Consultant's
shares pursuant to an alternative registration method.
5. REPRESENTATIONS AND WARRANTIES OF CONSULTANT: By virtue of his execution
hereof, and in order to induce the Company to enter into this Agreement, the
Consultant hereby represents and warrants to the Company as follows:
a. The Consultant has full power and authority to enter into this
Agreement, to enter into a consulting relationship with the Company as provided
for and described herein, and to otherwise perform this Agreement in the time
and manner contemplated.
b. The Consultant has the requisite skill and experience to perform the
services contemplated by this Agreement, to create and implement the Program,
and to carry out and fulfill his duties and obligations hereunder.
c. The Consultant is not an officer, director, shareholder, control person,
principal or affiliate of any underwriter, broker or finders which is doing or
has done business with or on behalf of the Company.
d. The Consultant hereby acknowledges, agrees and accepts that pending
delivery of the Option and thereafter during and throughout the entire term of
this Agreement, he shall be exclusively responsible for the payment of any
3
<PAGE>
expenses relating to the Program, at the sole expense of the Consultant unless
otherwise approved by the Company.
e. The Consultant will make no representation that he has the authority to
bind the Company in any matter whatsoever.
6. LIABILITY OF CONSULTANT: In furnishing the Company with management
advice and other services as herein provided, neither the Consultant, nor any
employee or agent thereof, shall be liable to the Company or its creditors for
error of judgment or for anything except malfeasance, bad faith or gross
negligence in the performance of his duties, or reckless disregard of his
obligations and duties under this Agreement.
It is further understood and agreed that Consultant may rely upon
information furnished to him by the Company reasonably believed to be accurate
and reliable and that, except as herein provided, the Consultant shall not be
accountable for any loss suffered by the Company by reason of the Company's
action or non-action on the basis of any advice, recommendation or approval of
the Consultant, his employees or agents.
The parties further acknowledge that the Consultant undertakes no
responsibility for the accuracy of any statement made by management contained in
press releases or other communications, including, but not limited to, filings
with the Securities and Exchange Commission and the National Association of
Securities Dealers, Inc.
7. STATUS OF CONSULTANT: The Consultant is an independent contractor and
has no authority to bind the Company without the approval from the Board of
Directors. The Consultant shall not have, nor be deemed to have, any fiduciary
obligation or duties to the Company.
8. OTHER ACTIVITIES OF CONSULTANT: The Company recognizes that the
Consultant now renders, and may continue to render, consulting and advisory
services to other companies which may or may not have policies and conduct
activities similar to those of the Company. The Consultant shall be free to
pursue, conduct and carry on for the Consultant's own account (or for the
account of others) such activities, employment, ventures, businesses and other
pursuits as the Consultant in his sole, absolute and unfettered discretion, may
elect, provided the Consultant and any such activities by him or on his behalf
do not violate Paragraph 10 of this Agreement, or any other provision hereof.
9. DISCLAIMER BY CONSULTANT: The Consultant will prepare certain materials
for the Company. Consultant makes no representation that his services will
result in any enhancement of the Company.
10. CONFIDENTIALITY: Until such time as it may be publicly disclosed, the
Consultant agrees that any information, materials or documents provided by the
Company will not be revealed or disclosed to the public or any third person,
except in the performance of this Agreement and with the Company's consent. Upon
4
<PAGE>
completion of the term of this Agreement and at the written request of the
Company, the Consultant will return any original documentation provided by the
Company to the Consultant. The Consultant will require similar confidentiality
agreements from his employees and/or agents where he reasonably believes they
will come in contact with confidential material.
11. MISCELLANEOUS:
a. The Company shall make all final decisions with respect to consultation,
advice and services rendered by the Consultant.
b. This Agreement contains the entire agreement of the parties hereto and
there are no agreements, representations or warranties other than those
contained herein. Neither party may modify this Agreement unless in writing and
signed by both parties.
c. This Agreement shall be governed by and construed in accordance with the
laws of the State of Rhode Island.
d. Any controversy or claim under, arising out of, or related to this
Agreement shall be settled by arbitration in accordance with the rules and under
the auspices of the American Arbitration Association to be conducted in Rhode
Island.
e. This Agreement shall supersede and replace all previous agreements
between the parties, both written and oral.
12. NOTICES: All notices and other communications hereunder shall be in
writing and shall be deemed to have been given if delivered in person or sent by
prepaid first class registered or certified mail, return receipt requested to
the last known address of any party hereto.
5
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement effective
as of the day and year first above written.
METRO GLOBAL MEDIA, INC.
By: /s/ A. Daniel Geribo /s/ Kenneth F. Guarino
- ------------------------ ----------------------
A. DANIEL GERIBO KENNETH F. GUARINO
Board Member
By: /s/ Alan Casale
- -------------------
ALAN CASALE
Board Member
6
Exhibit 10.21
LICENSE AGREEMENT
THIS LICENSE AGREEMENT ("Agreement") is entered into as of the 21st day of
July, 1999, by and between COLORADO SATELLITE BROADCASTING, INC., 27357 Valley
Center Road, Valley Center, California 92082 (hereinafter referred to as "CSB"
or "Licensee") and METRO GLOBAL MEDIA, INC. on behalf of itself and its wholly
owned subsidiary. METRO, INC., 1060 Park Avenue, Cranston, Rhode Island 02920
(hereinafter collectively referred to as "Licensor").
W I T N E S S E T H
WHEREAS, CSB owns and operates networks for exhibition of audio visual
material over all forms of cable or satellite television, including basic cable
television, pay and subscription television, pay-per-view and satellite
transmission. Additionally, CSB is in the process of developing networks for
exhibition or transmission over various forms of Internet or so-called Worldwide
Web for access by television or personal computers;
WHEREAS, Licensor is and for many years has been in the business of
producing and distributing motion pictures intended primari1y for the adult
market. Licensor currently owns the rights granted hereunder with respect to an
inventory of approximately 3,234 motion pictures which have been acquired and/or
produced by Licensor, or its affiliate companies; and
WHEREAS, it is the intention of the parties to enter into this Agreement
relating to all Catalog Pictures and New Releases (as defined below). The
Catalog Pictures and New Releases are collectively referred to as the Pictures.
The term "Internet", as used herein, shall refer to information transmitted via
a global computer network which is accessed via Internet Protocol (IP) codes and
viewed by an Internet browser.
IN CONSIDERATION of the mutual covenants herein contained, and for other
good and valuable consideration, the receipt and sufficiency of which are
acknowledged, the parties agree as follows:
1. DEFINITIONS
1.1. As used in this Agreement, certain capitalized terms not otherwise
defined in the body of the Agreement shall have the meaning as specifically set
forth in Addendum "A", which is incorporated herein by this reference.
2. GRANT OF RIGHTS
To the extent the grant by Licensor to CSB does not conflict with the
rights previously granted or reserved to a third party, and subject to the terms
and conditions hereof, and as set forth below, as to each and every Picture,
Licensor hereby grants to CSB the right and license under copyright to
broadcast, exhibit and/or display any and all versions of the Pictures over any
form of cable or satellite television and/or by way of any form of Internet
transmission, whether known or hereafter discovered. As used herein, the term
"versions(s)" shall describe the different editing of each Picture set forth in
the third sentence of Section 2.5 below:
CSB is hereby granted the following rights, the exclusivity or
non-exclusivity thereof to be determined as set forth in Section 6 below:
2.1. The right to distribute and publish the Pictures using all forms of
satellite, cable or Internet transmission to television sets, computer monitors
or other devices intended to receive exhibit audio visual images, whether now
known or hereafter discovered, including any and all forms of pay-television and
pay per view television, including CATV or cable television, any form of pay
television, pay-over-the-air television system, closed
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circuit system, video on demand system, satellite master antenna television
system, DBS system (including, without limitation, KU-Band), hotel/motel system,
and any and all other Pay Television systems which exhibit motion pictures as
part of a Pay or Pay-Per-View Service. Such systems include, without limitation,
hotels, motels, inns, lodges, hospitals, nursing homes, convalescent homes,
offices, military bases, prisons, ships, oil rigs, dormitories and the like
carrying Pay or Pay Per View Service via satellite, cable or Internet
transmission. Notwithstanding the foregoing, it is acknowledged and agreed that
neither CSB nor any affiliate may sell or distribute copies of the Pictures as
standalone products to an OnCommand or Spectravision type service.
2.2. The method of exhibition of motion pictures and other programs over
television receivers where consumers purchase the right to view such motion
pictures or other programs on a fee-per-exhibition basis, in: (i)
non-residential institutions (including, without limitation, hotel or motel
rooms or hospital rooms or in other non-common or non-public areas of other
institutions, with transmission via either satellite, cable or Internet) is
referred to as "Non-Residential Pay-Per-View", and (ii) homes is referred to as
"Residential Pay-Per-View." The term "Pay-Per-View" when used herein shall
include both Residential Pay-Per-View and Non-Residential Pay-Per-View.
2.3. The rights to distribute and publish the Pictures via a "narrow band"
Internet service (i.e., below 56k "dial up" modem connections) and via a
"broadband" Internet service (i.e., 56k or above "dial up" modem connections)
and all forms of Internet transmission whether now known or hereafter discovered
(herein, the "Internet Rights").
2.4. The Television, Pay-Per-View and Internet Rights granted hereunder
include the rights to exhibit, broadcast, display and radio simulcast, all or
any portions of the Picture(s), including excerpts therefrom, and, to
subdistribute such rights, in all versions in and throughout the Territory;
provided that CSB may not, under any circumstances relicense individual Pictures
to third parties; and,
2.5. The right to make such edits, changes, alterations and modifications
in the Pictures, including changing the title of any Picture, as CSB, determines
in its sole discretion, is appropriate or necessary for time restrictions, to
comply with any applicable censorship requirements, to create new versions to
accommodate CSB's marketing plans or to take advantage of new opportunities to
market and exploit new and different versions of adult motion pictures in and
throughout the Territory in the media licensed to CSB hereunder; provided, that
CSB will not create any compilations of the Pictures for separate exhibition,
other than for promotional purposes or in connection with a multi-channel
Internet feed. Licensor shall deliver to CSB, the masters of all existing
versions of the Picture(s) plus any and all existing outtakes or cover shots,
wrap-arounds, director's cuts, interviews, production stills, artwork, etc., as
may be available, all in accordance with CSB's delivery requirements as set
forth in the addenda attached hereto. Licensor shall also provide CSB with
"behind the scenes" videos from the sets of the New Releases (as hereinafter
defined) during their production, in accordance with CSB's reasonable requests.
In all events, the masters to be delivered to CSB shall include at least a
fully-edited so-called XXX and a fully-edited so-called soft or cable versions,
if such version has been produced. In the event new versions are created
Licensor after delivery to CSB of XXX and Cable versions, including any versions
into any foreign language, Licensor agrees to immediately furnish CSB with
masters of such new or dubbed versions in accordance with the delivery
specifications set forth in the addenda attached hereto.
2.6. The rights granted to CSB hereunder shall include the right to create,
at its sole cost and expense, new, and different versions of the Pictures for
exhibition via satellite, cable or the Internet, as contemplated above. Such
derivative versions may constitute separately copyrightable derivative works of
Licensor and may include material only from the respective Pictures' XXX
versions, cable versions, outtakes and cover shots furnished by Licensor;
provided, that CSB will not create any compilations of the Pictures for separate
exhibition, other than for promotional purposes or in connection with a
multi-channel Internet feed. Such versions shall include so-called XX versions
to conform to the current standards of TEN (the erotic network), one of CSB's
affiliated systems. Such new versions shall be delivered to Licensor only upon
the termination of CSB's rights to such
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Pictures under this License Agreement and in such format as conforms to the
technical specifications set forth in the addenda attached hereto, and Licensor
shall pay CSB one dollar ($1.00) for each such picture. Other than the license
rights set forth herein, CSB shall have no rights to the derivative works so
produced.
2.7. The right to translate and dub the title and soundtrack of any and all
versions of the Pictures in any languages, and to distribute such dubbed
versions throughout the Territory.
2.8. The right to copy, in any form or medium which CSB determines
appropriate, the Pictures and to distribute such copies in the normal course of
CSB's satellite, cable or Internet business, such copies may be used for example
as screening cassettes, duplicate masters furnished to one or more television,
Pay-Per-View or Internet systems or copies to be used as promotional or
marketing materials in connection with CSB's business activities or those of its
licensees. Such copies may not be sold or distributed by CSB or any affiliate or
licensee of CSB to the public as a separate product, such as a VHS cassette,
CD-ROM or DVD disc.
2.9. The right to advertise and publicize the Pictures, their exhibition
and/or any exploitation of the Pictures contemplated hereunder. This right shall
include the right to use all or any portion of the Pictures in any medium or by
any means to advertise or publicize any of CSB's business activities.
2.10. In addition, whether or not any new video or film produced by
Licensor is licensed hereunder by CSB for satellite, cable or DBS broadcast, CSB
shall have exclusive Internet Rights (as detailed in Sections 2.1. and 2.3.
above) for all new videos and films produced by Licensor during the next five
(5) years, which rights shall commence upon the release of the respective video
or film and continue for five (5) years thereafter, subject only to Licensor's
right to use the pictures on its own web sites and Internet mall (which shall
also be exclusive to licensor for the 90-day period referred to in Section 6
below); and the further limitation that the Internet rights for all
non-heterosexual titles and the titles currently under license to Playboy
Enterprises shall be non-exclusive.
Hereinafter, all of the rights granted under this Section may be referred
to collectively as the "Rights."
3. TERM
3.1. This Agreement shall have a term of seven (7) years commencing on the
date of delivery of the first Picture to CSB pursuant thereto. Thereafter, CSB's
rights to the Catalog Pictures may be renewed on a non-exclusive basis for a
term of seven (7) additional years upon CSB's payment to Licensor of $400,000 in
cash or New Frontier common stock.
3.2. Notwithstanding the provisions of paragraph 3.1. hereof, as to New
Releases such Rights shall continue for a term of five (5) years commencing upon
the earlier of the date of the first exhibition of the Picture by CSB or ninety
(90) days after delivery of each such New Release to CSB. In addition, CSB shall
have the right to renew its rights for any of the New Releases for a term of
five (5) additional years upon payment to Licensor of an amount equal to twenty
five percent (25%) of the license fee paid hereunder for such Pictures.
4. TERRITORY
The territory in which Licensor may exercise each and all of the rights
granted herein shall be the territory of North, Central and South America
("Territory"), except that due to the nature of the Internet, the Internet
Rights granted herein are worldwide in scope. CSB's rights may be exercised in
any country in. and throughout the Territory, including their respective
territories and possessions.
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5. DELIVERY OF PICTURES TO CSB
5.1. All motion pictures released and still photographs published by
Licensor on or prior to June 30, 1999 are referred to herein as the "Catalog
Pictures". A list of 3,234 of those motion pictures setting forth their titles
is set forth on Exhibit A hereto. Licensor agrees to update the attached list
within 90 days to indicate therein the titles of all of the Catalog Pictures,
the dates on which they are expected to become available for use by CSB, their
dates of production and such other information as may be reasonably requested by
CSB. Any motion pictures acquired by Licensor on an individual or bulk purchase
basis (from and after July 1, 1999) shall not be considered "Catalog Pictures"
or "New Releases". In addition, Licensor will deliver such screening cassettes,
editing masters or other material as may be requested by CSB, to permit CSB to
evaluate and use the Catalog Pictures. CSB shall have the right to select as
many Catalog Pictures as it desires to exploit in the Territory.
5.2. Commencing in August 1999, CSB shall, to the extent available,
pre-select, on a monthly basis, as Pictures hereunder, up to three (3) new
motion pictures hereafter produced by Licensor or its affiliated companies each
month throughout the Term hereof, and Licensor shall make available to CSB for
such pre-selection no less than six (6) new motion pictures at a license fee of
$12,500 per title, which three (3) new motion pictures shall be in addition to
the two (2) "premier" titles which CSB has been licensing per month from
Licensor's "Gonzo", "Amazing", "Toxxxic" or similar collections at a license fee
of $3,000 to $5,000 a title. In addition, at such time as Licensor's existing
license agreement with Playboy Enterprises is terminated prior to its term, CSB
agrees to pre-select two (2) additional new motion pictures, to the extent then
available, at a license fee of $14,000 per title; provided, that: (i) at least
one of the two (2) additional new motion pictures is shot on film (as opposed to
video); and (ii) the two (2) additional new motion pictures are reasonably
visually distinctive from the other new motion pictures delivered to CSB that
month (e.g., have different directors, different stars, different story lines
and a different general look from the other delivered movies). If the Playboy
Enterprises contract expires pursuant to its terms, CSB agrees that its
obligation to pre-select additional new motion pictures shall relate to an
additional three (3), not two (2), additional new motion pictures, and all
references in the preceding sentence "two (2) additional new motion pictures"
shall be deemed to refer to "three (3) additional new motion pictures". All such
new motion pictures provided by Licensor to CSB are hereinafter referred to as
the "New Releases".
5.3. Upon receipt of delivery materials relating to each Picture hereunder,
including each New Release, CSB shall have a period of 3O days within which to
evaluate all such materials and determine whether they are acceptable to CSB.
CSB shall have the absolute right to reject any films submitted for technical
reasons or for reasons related to CSB's editing standards. If CSB's rejection is
for technical reasons, CSB shall promptly notify Licensor of the technical
defects in the material delivered and Licensor will remedy any and all such
defects, at no cost to CSB, within ten (10) days of receipt of such notice. If
CSB's rejection is for reasons related to its editing standards, Licensor will
replace the rejected Picture(s) within thirty (30) days after Licensor receives
notice of such rejection, with another Picture(s) in the same category as that
of the Picture rejected. It is acknowledged and agreed that to the extent that
any of the Pictures are of a general quality equivalent to Licensor`s current
CalVisa line of motion pictures, such Pictures shall be deemed to meet CSB`s
general quality standards.
6. EXCLUSIVITY
Except with respect to the pre-existing rights of third parties to the
Catalog Pictures, all still photographs within the "Catalog Pictures" and for
Licensor's rights relating to the Internet and Kiosk Transmission Service, as
further described below, each and all of the Rights granted to CSB hereunder
shall be exclusive to CSB during the Term and Licensor agrees to take all action
necessary to ensure that CSB is accorded the right to exploit such Rights
without interference from any third party.
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Licensor will retain exclusive Internet rights over the New Releases during
the first ninety (90) days following the release date of all New Releases,
except that CSB may use the New Releases on the Internet for promotional
purposes only (and not for commercial use or in connection with a multiple
channel feed). Thereafter, CSB shall have exclusive Internet Rights to the New
Releases for seven (7) years, subject only to Licensor's right to continue to
use the New Releases on its own web site and Internet mall. Notwithstanding the
foregoing, the Internet Rights granted to CSB shall be non-exclusive for the
non-heterosexual and Playboy Enterprises movies described in Section 2.10.
above; and, provided, further, that Licensor shall not be permitted to use the
Pictures to license or distribute to any independent third party provider of
Internet content a thousand channel or similar multiple feed or video on demand
product. Licensor may however, develop and market a Kiosk Transmission Service,
utilizing the Pictures wherein a retail customer selects a purchase of a Picture
in a recorded medium from a retail establishment's booth facility.
7. PAYMENT BY CSB
In full consideration of all of the Rights granted hereunder and each of
the terms and conditions of this Agreement, and conditioned upon Licensor's full
and faithful performance of all obligations to be performed hereunder, CSB
agrees to pay Licensor as follows:
7.1. CSB agrees to deliver to Licensor a total of 500,000 shares (the
"Catalog Shares") of restricted common stock of New Frontier Media, Inc. ("New
Frontier"), the parent company of CSB, and to cause the issue to Licensor
warrants to purchase an additional 100,000 shares of common stock of New
Frontier at Market (as hereinafter defined) or the date this Agreement is
executed, in the form attached hereto. In addition, and in further consideration
of the rights granted to CSB under Section 2.10. above, CSB and New Frontier
agree to issue to Licensor warrants to purchase an additional 100,000 shares of
common stock of New Frontier at Market on the first, second, third and fourth
anniversary of the execution date of this Agreement, in the form attached hereto
(for a total of 500,000 warrant shares). For the purpose of this Agreement, the
term "at Market" shall mean the average closing price for shares of common stock
of either New Frontier or Licensor, as applicable, for the ten (10) day period
immediately preceding the date such determination is made.
7.2. With respect to each New Release delivered to CSB hereunder and
accepted by CSB, CSB shall pay Licensor 25% of the license fee then due upon the
acceptance of the master for each such New Release and the balance within
seventy five (75) days thereafter.
7.3. In consideration of CSB's other obligations to Licensor hereunder, to
wit the delivery of IGallery's services pursuant to Section 14.3. below,
Licensor shall issue to New Frontier 250,000 restricted shares of its common
stock and warrants to purchase 50,000 restricted shares of its common stock at
Market (as defined above) on the date of execution of this Agreement. In
addition, on each of the first, second, third and fourth anniversaries of the
execution date Licensor shall issue to New Frontier warrants to purchase an
additional 50,000 shares of its common stock at Market (for a total of 250,000
warrant shares).
8. COSTS AND EXPENSES
8.1. Licensor shall he responsible for paying all production costs related
to the production of the Pictures.
8.2. As between Licensor and CSB, CSB shall be responsible for all
scanning, editing and duplication costs and making all payments which may be
required to be paid on account of CSB's exercise of its rights hereunder, except
to the extent such payments are the responsibility of Licensor, as set forth in
Section 8.1. above. Licensor shall lend CSB edit copies of the Pictures (for
which those produced after 12/96 shall conform to the technical specifications
attached hereto), which edit copies will be returned to Licensor after
duplication.
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9. CONFIDENTIALITY
Neither Licensor nor CSB shall disclose to any third party (other than
their respective employees, agents or representatives in their capacity as
such), any information with respect to the financial terms and provisions of
this Agreement except: (i) to the extent necessary to comply with law or the
valid order of a court of competent jurisdiction, in which event, the party
making such disclosure shall so notify the other, in writing, within five (5)
days, and shall seek confidential treatment of such information, (ii) as part of
its normal reporting or review procedure to its parent company, its auditors and
its attorneys, provided, however, that such parent company, auditors, and
attorney's agree to be bound by the provisions of this paragraph 9, (iii) in
order to enforce its rights pursuant to this Agreement, and (vi) to any bona
fide prospective purchaser of the stock or assets of such party.
10. REPRESENTATIONS AND WARRANTIES OF CSB
CSB hereby represents and warrants that it has the full power and authority
to enter into this agreement and to fully perform its obligations under this
Agreement, that the agreement is an enforceable and binding agreement, and that
it does not conflict with any other agreement or obligation of CSB. New Frontier
Media, Inc. has executed this Agreement for the limited purpose of acknowledging
its consent to the issuance of its restricted common stock and warrants to
Licensor.
11. REPRESENTATIONS AND WARRANTIES OF THE LICENSOR
Licensor hereby warrants and represents to CSB as follows:
11.1. Licensor owns all appropriate and necessary rights in and to the
Pictures which are the subject hereof to permit CSB to peacefully exercise each
of the Rights granted hereunder without interference from any third party and
without claim that such exercise constitutes a violation of the rights of any
third party, except for the pre-existing rights of certain third parties with
respect to cable and satellite distribution and certain identified Pictures for
which Licensor may not have acquired the Internet Rights. Licensor represents
and warrants that when it delivers to CSB the updated schedule of Pictures
contemplated by Section 5.1. above, the schedule will contain a listing of all
available rights and that it will indicate that no less than 2,250 Pictures
shall have been licensed hereunder to CSB with complete video on demand and
Internet Rights. The Licensor guarantees to CSB that each of the Pictures was
produced in compliance with all applicable laws, that all actors and actresses
in the Pictures were over 18 years of age when they rendered their performance,
and that all Documentation, including but not limited to, proper age/consent
documents are maintained on file as required by law and may he inspected by CSB
or its designated agent during normal business hours upon request with 24-hour
notice.
11.2. Licensor is the sole owner of all Rights granted to Licensee
hereunder; Licensor has not previously assigned, pledged, or otherwise
encumbered the same; the Pictures do not violate any rights of privacy; the
Pictures are not defamatory; neither the Titles, the documentation, nor an parts
thereof, nor any materials contained therein or synchronized therewith, nor the
exercise of any right, violated or will violate, or will infringe, any
trademark, trade name, contract, agreement, copyright (whether common law or
statutory), patent, literary, artistic, dramatic, personal, private, civil, or
other property right or right of privacy or any similar law or regulation or
other right whatsoever of, or slanders or libels, any person, firm, corporation,
or association whatsoever. Notwithstanding the foregoing, Licensor makes no
representation or warranties with respect to the laws or regulations of any
state, country or territory outside of the United States and/or the States of
Alabama, Kentucky, Mississippi, Oklahoma, Utah, North Carolina, South Carolina,
Tennessee or West Virginia, or Northern Florida, or any other jurisdiction
hereinafter adopting laws or regulations similar to the laws of such named
states.
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12. INDEMNITY
12.1. Each party hereto shall at times defend, indemnify and hold harmless
the other and their parent, subsidiary and affiliated companies, successors,
licensees and assigns and their respective officers, directors, employees and
agents (herein, the "Indemnified Parties"), against and from any and all claims,
damages, liabilities, costs and expenses, including reasonable counsel lees
(collectively "claims") arising out of any breach by such party (herein, the
"Indemnitor") of any representation, warranty, covenant or other provision
hereof. The Indemnified Parties shall notify the Indemnitor in writing of each
such claim, and shall have the right to defend such claims through counsel of
its own choosing.
12.2. The Indemnified Parties shall afford the Indemnitor the opportunity
to participate in any compromise, settlement, litigation or other resolution of
a third party claim, or, in the event the Indemnitor elects not to defend such
claim, the Indemnified Parties may assume the defense of any such claim or
litigation, at Indenmitor's cost and expense, with counsel of Indemnified
Parties' own choosing. In the event the Indemnitor elects to assume the defense,
the Indemnitor shall afford Indemnified Parties the opportunity to participate
fully in such defense at Indemnified Parties' expense.
12.3. Neither party shall compromise, settle or otherwise resolve any such
claim or litigation without the other party's prior written consent, which shall
not be unreasonably withheld; provided, however, that failure to respond within
five (5) business days following receipt of written notice of such proposed
compromise shall constitute consent to the proposed compromise, settlement or
resolution.
12.4. All representations, warranties and indemnities contained in this
Agreement shall survive an independent investigation made by Indemnified Parties
and the suspension or the termination of this Agreement.
13. SEVERABILITY
Subject to this section, if any provision of this Agreement or the
application thereof to any party of circumstance shall, to any extent, be
invalid and/or enforceable, the remainder of this Agreement and the application
of such provision to any other parties or circumstances other than those as to
which it is held invalid and/or unenforceable, shall not be affected thereby,
and each such other term and provision of this Agreement shall be valid and be
enforceable to the fullest extent permitted by law.
14. OTHER AGREEMENTS
14.1. The Licensor and CSB shall promptly execute, acknowledge, and deliver
or promptly procure the execution, acknowledgement and delivery of any and all
further assignments, agreements and instruments which may be deemed reasonably
necessary or expedient to effectuate the purposes of this Agreement.
14.2. For five (5) years, Licensor shall use its reasonable commercial
efforts to promote CSB's stations and affiliated web sites in all its
publications, videos and, products, etc. in accordance with CSB's reasonable
requests, including, but not limited to, providing free advertising space
therein for CSB's stations and web sites and permitting CSB to use, at its sole
cost and expense, female cast members from Licensor's motion pictures as
promotional spokespersons for CSB's Stations and affiliated web sites. In
addition, the parties shall discuss in good faith the feasibility of
establishing a 5O/50 joint venture to distribute and produce live Internet feeds
for broadcast on Licensor's and CSB's web sites. Licensor and CSB shall also
explore areas in which they can assist each other, such as in the launch of a
new CSB channel.
14.3. For five (5) years, CSB shall use its reasonable commercial efforts
to promote Licensor's Pictures and web sites on all CSB stations and affiliated
web sites, in accordance with Licensor's reasonable requests, including, but not
limited to, placing banners in reasonanly prominent areas on the Interactive
Gallery, Inc. ("IGallery") sites. In this record, IGallery will send marketing
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e-mails to its database of webmasters, place links in its webmaster portal
(http:\\www.igallery.net) and place links on its IGallery Tips & Tricks
newsletter. In addition, during this period Licensor and IGallary each agree to
direct a portion of their exit traffic from and to their respective Internet
sites upon discounted-to-actua1 cost rates, subject to the conversion ratios for
such traffic being reasonably in line with industry averages. IGallery will
cause Interactive Telecom Network, Inc. ("ITN") to offer to assist Licensor in
back-end technical management of the Licensor's web sites, including, offering
competitive rates for co-location of servers, dedicated Internet access, systems
administration and website management, the streaming of media products, network
security solutions, DNS management, server-rack rental, customer service and
credit card clearing services, all as may be more particularly described and set
forth in a separate agreement between ITN and Licensor. IGallery has executed
this Agreement for the limited purpose of being bound to the obligations set
forth in this Section 14.3.
14.4. CSB covenants and agrees to adhere to the Licensor's reasonable
practices and policies with respect to protecting the copyrights owned by
Licensor in the licensed Pictures.
15. WAIVERS
No vaiver by either party of any breach or default under this Agreement
shall be deemed to be a waiver of any proceeding or subsequent breach or
default.
16. NOTICES
All notices or remittances which either party may wish to serve and/or may
be required to serve on the other under this Agreement, shall be in writing and
shall be served by personal delivery thereof or by prepaid certified mail,
return receipt requested, or by prepaid overnight air express delivery,
addressed to the respective parties at their addresses herein above set forth.
17. RELATIONSHIP OF THE PARTIES
Nothing in this Agreement contained shall be deemed to constitute either of
the parties being an agent of the other. Neither party shall hold itself out
contrary to the terms of this Agreement and neither party shall become liable by
reason of any representation, act or omission of the other contrary, to the
provisions hereof. Licensor is in all respects acting an independent contractor.
18. TERMINATION
This Agreement may be terminated by either party upon written notice to the
other party if such other party shall make a general assignment for the benefit
of creditors, or shall admit in writing its inability to pay its debts as they
become due, or any proceeding is commenced by or against such party (or in the
case of CSB, by or against New Frontier) under any provision of the U.S.
Bankruptcy Code or under other bankruptcy or insolvency law, including
assignment for the benefit of creditors (and in the case of an involuntary
proceeding, such proceeding is not dismissed within 60 days or the filing
thereof), or any such party's securities are delisted from Nasdaq. In addition,
Licensor may terminate this Agreement upon no less than three (3) business days
prior notice if CSB shall be in arrears to Licensor for license fees due to it
hereunder in an amount equal to or in excess of $200,000, and CSB shall not have
cured such breach within two (2) business days of its receipt of such notice.
Moreover, Licensor may terminate this Agreement should CSB fail to pre-select 36
new motion pictures, as described in Section 5.1. above, over any consecutive 15
month period commencing after January 1, 2000. Should Licensor terminate this
Agreement by reason of an action or conduct of CSB proscribed under this Section
18, all rights herein granted CSB shall forthwith terminate and revert to
Licensor.
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19. ENTIRE AGREEMENT
This Agreement contains the full and complete understanding between the
parties hereto and supersedes all prior understandings, whether written or oral,
pertaining to the subject matter hereof and cannot be modified except by a
written instrument signied by the parties hereto. In this regard, that certain
Program Supply Agreement, dated July 22, 1998 between the parties is hereby
terminated.
20. APPLICABLE LAWS
This Agreement shall be governed by the laws of the State of California and
the federal laws of the United States of America applicable therein.
21. ASSIGNMENT
This Agreement may not he assigned by either party hereto, by operation of
law or otherwise without the express written consent of the other, which consent
shall not be unreasonably withheld, delayed or conditioned.
22. COUNTERPARTS
This Agreements may be executed in counterparts, each of which shall
constitute an orginal and all of which, when taken together, shall constitute
one agreement.
23. PARTIES BOUND BY AGREEMENT
This Agreement is binding upon the parties hereto and upon their respective
successors and permitted assigns.
24. ARBITRATION.
Any dispute or claim arising under or with respect to this Agreement which
is incapable of resolution by the parties hereto will be resolved by arbitration
before one (1) arbitrator in Los Angeles, California in accordance with the
Rules for Commercial Arbitration of the American Arbitration Association
("AAA"). The appointing agency shall be the AAA. The decision or award of the
arbitrator shall be final and binding upon the parties. Any arbitrage award may
be entered as a judgment or order in an court of competent jurisdiction.
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25. HEADINGS
Headings or captions contained in this Agreement are for reference purpose
only and shall not affect in any way the meaning or interpretation of this
Agreement.
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this Agreement as of the date first herein above.
LICENSEE:
COLORADA SATELLITE BROADCASTING, INC. ATTEST:
/s/ Michael Weiner
- ------------------ -----------------
By: Michael Weiner, Executive VP and Secretary
LICENSOR:
METRO GLOBAL MEDIA, INC. ATTEST:
/s/ Janet Hoey
- -------------- ------------------
By: Janet Hoey, Treasurer
METRO, INC. ATTEST:
/s/ Greg Alves
- -------------- -------------------
By: Greg Alves, Vice-President
NEW FRONTIER MEDIA, INC. hereby guarantees the obligations of its subsidiary,
Colorado Satellite Broadcasting, Inc. hereunder and shall be bound to the
provisions of Section 7 regarding the issuance of its Common Stock and warrants
therefor.
NEW FRONTIER MEDIA, INC. ATTEST:
/s/ Micharl Weiner
- ------------------ --------------------
By: Michael Weiner, Executive Vice President
ACKNOWLEDGEED AND AGREED with respect to the provisions of the last sentence of
Section 14.3. only:
INTERACTIVE GALLERY, INC. ATTEST:
/s/ Gregory Dumas
- ----------------- --------------------
By: Gregory Dumas, President
10
Exhibit 10.22
Amendment No. 1 Business Consulting Agreement
This Amendment No. 1 to Business Consulting Agreement ("Amendment") is made
and entered as of September 10, 1999 by and between Metro Global Media, Inc., a
Rhode Island corporation (the "Company") and Kenneth F. Guarino (the
"Consultant") with reference to the following facts:
A. The Company and the Consultant have entered into that certain Business
Consulting Agreement, dated March 19, 1999 (the "Agreement").
B. The parties now desire to amend the Agreement on the terms set forth
herein.
NOW, THEREFORE. For and in consideration of the mutual promises and
agreements contained herein, the parties agree as follows:
1. Section 2 is hereby replaced in its entirety with the following:
"2. NATURE OF SERVICES: The Consultant will use his best efforts and render
advise and assistance to the Company on business-related matters (all of which
services are hereinafter collectively referred to as the "Program"), and in
connection therewith, the Consultant shall:
a. Attend meetings of the Company's Board of Directors, Executive Committee
and Financial Committee(s) when so requested by the Board of Directors.
b. Attend meetings and at the request of the Board of Directors, review,
analyze and report on proposed business opportunities. These meetings are to
include operations and production meetings when the Board of Directors deems
necessary.
c. Consult with the Board of Directors concerning on-going strategic
corporate planning and long-term investment policies, including any revisions of
the Company's business plan.
d. Consult with and advise the Board of Directors with regard to potential
mergers and acquisitions, whether the Company is the acquiring company or the
target of acquisitions.
e. Assist in the preparation and distribution of press releases when so
requested by the Board of Directors to be distributed to the press, news
services, customers, supplies, selected NASD brokers/dealers, financial
institutions and the Company's shareholders.
In addition, the Consultant shall serve as the acting Chief Executive
Officer of the Company until such time as a full-time Chief Executive Officer
has been appointed. As acting Chief Executive Officer, Consultant shall assist
and advise the Company in its efforts to recruit a qualified permanent,
full-time Chief Executive Officer as soon as practicable and, pending such a
<PAGE>
recruitment, shall perform all duties that are customary for an officer of a
corporation holding such office and without limiting the generality of the
foregoing, shall do and perform all services, acts and things necessary or
advisable to manage and conduct the business of the Company, subject to the
instructions of and policies and limitations set by the Board of Directors;
provided, however, that Consultant shall at no time have any authority to bind
the Company without prior approval of the Company's Board of Directors and his
sole duties shall be to report recommendations to the Company's Board of
Directors.
Anything to the contrary herein notwithstanding, it is recognized and
agreed that the Consultant's services will not include any service that
constitutes the rendering of legal opinions, performance of work that is in the
ordinary purview of a certified public accountant, or any work that s in the
ordinary purview of a registered securities broker/dealer."
2. The following is added to the end of Section 3 (Compensation):
"Additionally, the Consultant is authorized to incur reasonable expenses
for promoting and conducting the business of the Company, including expenditures
for entertainment and travel, and the Company shall reimburse the Consultant
monthly for all such business expenses upon the presentation of reasonable
documentation establishing the amount and nature of the expenses."
3. Except as provided herein, the terms and conditions of the Agreement
shall remain unchanged and in full force and effect.
4. This Amendment may be executed by facsimile in one or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have duly executed this Amendment as of the
date first above written.
COMPANY:
Metro Global Media, Inc.
By: /s/ Janet Hoey
---------------------
JANET HOEY,
TREASURER
CONSULTANT:
By: /s/ Kenneth Guarino
-------------------------
KENNETH GUARINO
2
Exhibit 10.23
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT ("this Agreement") is made this 30th day
of September, 1999, by and between the Borrower, Metro Global Media, Inc.
(parent) and Metro, Inc. (sub) (referred to throughout this Agreement as "you",
"your" and "yours"), and the Lender, RESERVOIR CAPITAL CORPORATION (referred to
throughout this Agreement as "we", "us", "our" and "ours").
1. Accounts Receivable Loans.
1.1. Loans against Accounts. From time to time during the term of this
Agreement, we may make such advances (each a "Receivables Loan") against your
Eligible Accounts (as herein defined) as you may from time to time request and
we, in our sole discretion, may elect to make upon the terms, conditions and
provisions of this Agreement. At any one time, the aggregate outstanding amount
of all Receivables Loans shall not be greater than the lesser of (a) the amount
determined by applying the Receivables Advance Rate (as herein defined) to the
Eligible Accounts or (b) $3,000,000.00. Nothing contained in this Agreement
shall be construed as obligating or committing us to make any particular
Receivables Loan.
1.2. Eligible Accounts. The term "Eligible Accounts" as used herein shall
mean, collectively, accounts, contract rights and other forms of obligation
arising in the ordinary course of business from the sale of goods or rendition
of services (with reserves for such items as accounts which have aged more than
90 days from the billing or invoice date, accounts where the Account Debtor (as
herein defined) is bankrupt, insolvent or otherwise unacceptable to us from a
credit risk standpoint, intercompany accounts, contra accounts, foreign
accounts, finance charges and such other items as we may determine from time to
time in our sole discretion; provided, however, that no Account from any given
Account Debtor, shall be an Eligible Account, if fifty percent (50%) or more of
the total of all Accounts due from such Account Debtor remain unpaid 90 days or
more after their date of issue.)
1.3. Receivables Advance Rate. The term "Receivables Advance Rate" as used
herein shall mean seventy percent (70%) of Eligible Accounts, provided that we
may, in our sole discretion, unilaterally decrease the Receivables Advance Rate
in the event of any breach of the representations and warranties set forth in
Paragraph 2.2 below or any other Default (as herein defined) under this
Agreement.
1.4. Interest Rate. The outstanding balance of all Receivables Loans shall
bear interest at the monthly rate of interest as set out in the rate sheet
attached hereto as Exhibit B from the date on which each such Receivables Loan
is made to and including the date on which payment on such Receivables Loan is
received. You also agree to pay to us a .35% monthly service fee on the average
daily loan balance. If the average monthly outstanding loan balance falls below
$2,000,000.00, an unused line fee of .25% will be charged on the differential
between the $2,000,000.00 and the average loan balance for the particular month.
<PAGE>
1.5. Repayment of Receivables Loans. Interest on all Receivables Loans
shall be due and payable on demand or, if not previously demanded, on the first
day of each month. The principal balance of all Receivables Loans shall be due
and payable on demand or, if not previously demanded, upon termination of this
Agreement. Notwithstanding the foregoing, (a) you shall repay such portion of
the Receivables Loans as is necessary from time to time to prevent the aggregate
amount of all Receivables Loans from exceeding the maximum amount determined
pursuant to Paragraph 1.1 on demand or, if not previously demanded, within five
(5) business days of the date on which the aggregate amount of all Receivables
Loans exceeds the maximum amount determined pursuant to Paragraph 1.1, and (b)
we shall apply all proceeds of Accounts received by us pursuant to Paragraph 1.6
to the repayment, in whole or in part, of Receivables Loans and Inventory Loans
in such order or manner as we in our sole discretion determine. Subject to the
provisions of Paragraphs 8.3 and 8.5 of this Agreement, you may repay all or any
portion of the Receivables Loans at any time without penalty, [provided that you
may not make more than four (4) partial payments in any calendar month (unless
required to comply with the provisions of subsection (a) of the preceding
sentence)].
1.6. Payments on Accounts. You shall, and we may, immediately notify all
persons obligated to make payments with respect to Accounts (collectively,
"Account Debtors") to make all payments on or with respect to Accounts directly
into a special banking account over which we have exclusive dominion, control,
and power of access and withdrawal (the "Collection Account"). In connection
therewith, you agree to reference our payment instructions on all invoices
submitted to Account Debtors. In addition, if any Account Debtor is an agency,
department, or instrumentality of the United States Government, you shall
execute such forms of notice and assignment, and shall conform to all applicable
procedures (including making any necessary contract modifications), as may be
required pursuant to the Federal Assignment of Claims Act of 1940, as amended,
in order to perfect our rights to directly receive payments with respect to the
Accounts of such Account Debtor. To facilitate our collection and receipt of
payments from Account Debtors, you hereby irrevocably constitute and appoint us,
or any of our agents or employees, as your lawful attorney-in-fact (coupled with
an interest) to exercise at any time any of the following powers: (i) to
receive, endorse and deposit all payments from Account Debtors; (ii) to transmit
to any party notice that you have granted to us a security interest in the
Accounts; (iii) to institute any proceedings deemed by us necessary to effect
collection of Accounts; (iv) to settle, compromise or litigate any dispute
concerning any Account; and (v) to sign your name on any financing statements or
any amendment or continuation statement relating thereto with respect to any
Collateral (as herein defined). You will notify us promptly of and, if requested
by us, will settle all disputes concerning any Account, at your sole cost and
expense. However, you shall not, without our prior written consent, settle,
compromise or adjust any Account or grant any additional discounts, allowances
or credits thereon. We may, but are not required to, attempt to settle,
compromise or litigate the dispute upon such terms as we in our sole discretion
deem advisable, for your account and risk and at your sole expense. Any act of
ours as your lawful attorney-in-fact shall not render us liable for any acts of
omission or commission, nor for any error of judgment or mistake of fact or law.
Alternatively, you hereby authorize us to collect and receive payments from
Account Debtors in our own name. If you receive any payment on any Account, you
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shall promptly remit such payment in the form received (with any necessary
endorsement) directly to us. Until so remitted, you will hold such payment in
trust for us separate and apart from all of your other funds.
1A. Inventory Loans.
1A.1. Loans against Inventory. From time to time during the term of this
Agreement, we may make such advances (each an "Inventory Loan") against your
Eligible Inventory (as herein defined) as you may from time to time request and
we, in our sole discretion, may elect to make upon the terms, conditions and
provisions of this Agreement. [You agree not to request more than four (4)
Inventory Loans in any calendar month.] At any one time, the aggregate
outstanding amount of all Inventory Loans shall not be greater than the lesser
of (a) two (2) months' sales valued at the cost of goods sold based on a rolling
three (3) month average, (b) the amount determined by applying the Inventory
Advance Rate (as herein defined) to the Eligible Inventory (c) 60% of Loans
against Accounts or (d) $1,000,000.00. Nothing contained in this Agreement shall
be construed as obligating or committing us to make any particular Inventory
Loan.
1A.2. Eligible Inventory. The term "Eligible Inventory" as used herein
shall mean raw materials and finished goods inventories (with reserves for such
items as damaged and obsolete items and such other items as we may determine
from time to time in our sole discretion) valued at the lower of cost or market
value of such inventories determined in accordance with generally accepted
accounting principles (or on such other basis to which the parties may agree)
consistently applied.
1A.3. Inventory Advance Rate. The term "Inventory Advance Rate" as used
herein shall mean forty percent (40%) of Eligible Inventory which constitutes
raw materials and forty percent (40%) of Eligible Inventory which constitutes
finished goods up to the $1,000,000.00 cap provided that we may, in our sole
discretion, unilaterally decrease the Inventory Advance Rate in the event of any
breach of the representations and warranties set forth in Paragraph 2.5 below or
any other Default under this Agreement.
1A.4. Interest Rate. The outstanding balance of all Inventory Loans shall
bear interest at the monthly rate of interest as set out in the rate sheet
attached hereto as Exhibit B from the date on which each such Inventory Loan is
made to and including the date on which payment on such Inventory Loan is
received.
1A.5. Repayment of Inventory Loans. Interest on all Inventory Loans shall
be due and payable on demand or, if not previously demanded, on the first day of
each month. The principal balance of all Inventory Loans shall be due and
payable on demand or, if not previously demanded, upon termination of this
Agreement. Notwithstanding the foregoing, (a) you shall repay such portion of
the Inventory Loans as is necessary from time to time to prevent the aggregate
amount of all Inventory Loans from exceeding the maximum amount determined
pursuant to Paragraph 1A.1 above on demand or, if not previously demanded,
within five (5) business days of the date on which the aggregate amount of all
Inventory Loans exceeds the maximum amount determined pursuant to Paragraph
1A.1, (b) you
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shall immediately apply any cash proceeds from the sale of inventory to the
repayment of Inventory Loans, and (c) we shall apply all proceeds of Accounts
received by us pursuant to Paragraph 1.6 to the repayment, in whole or in part,
of Inventory Loans and Receivables Loans in such order or manner as we in our
sole discretion determine. Subject to the provisions of Paragraphs 8.3 and 8.5
of this Agreement, you may repay all or any portion of the Inventory Loans at
any time without penalty, [provided that you may not make more than four (4)
partial payments in any calendar month (unless required to comply with the
provisions of subsections (a) or (b) of the preceding sentence)].
1B. Loan Request and Borrowing Base Certificate. At such time or times as
you request a loan or loans, pursuant to sub-paragraphs 1.1 and 1A.1 above, you
shall make such requests using such a form or forms and we may require.
Initially in making all such requests you shall use a form identical to Exhibit
A.
2. Representations, Warranties and Promises. To induce us to make
Receivables Loans and Inventory Loans from time to time, you make the following
representations, warranties and promises, each of which survives the execution
and delivery of this Agreement and is deemed to be incorporated by reference in
each request for a Receivables Loan or an Inventory Loan:
2.1. Power and Authority. You have all requisite power and authority to
execute, deliver and perform this Agreement and each request for a Receivables
Loan or an Inventory Loan, and such performance does not contravene your
articles of incorporation, by-laws, or partnership agreement, as applicable, or
any other agreement by which you are bound.
2.2. Representations and Warranties with Respect to Accounts. With respect
to each Account: (a) your principal place of business and your books and records
relating to the Accounts are located at the address set forth at the end of this
Agreement; (b) you are the sole owner of each Account and have the right to
grant to us a lien on and security interest in the Accounts, and the Accounts
are free and clear of all liens and encumbrances (including liens and
encumbrances subordinate to our lien and security interest), except for those
created by this Agreement or permitted by us in writing, and you will not
assign, sell, transfer, pledge, grant a security interest in or encumber or
otherwise dispose of or abandon any part or all of the Accounts; (c) you have
made proper entries in your books disclosing the grant of a security interest in
Accounts to us; (d) each of your Account Debtors has legal capacity to contract
and is indebted to you in the amount indicated in your books and records; (e)
each Account is valid, legally enforceable, and represents a bona fide
undisputed indebtedness; (f) no Account is subject to any valid defense, offset,
counterclaim or allowance or is contingent; (g) each Account Debtor is solvent,
and each Account will be paid in full on or before its due date; (h) no
agreement for any deduction or allowance of any kind exists or will be made by
you; (i) all information appearing in your books and records relating to each
Account is true and correct in all respects; and (j) all signatures and
endorsements appearing on the invoices and documents relating to the Accounts
are genuine, and all signatories and endorsers have full capacity and authority
and were fully authorized to contract for the purchase or lease of the goods
and/or services giving rise to the Accounts.
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2.3. Books and Records; Inspections. You will maintain books and records in
accordance with generally accepted accounting principles consistently applied.
We shall have full access to, and the right to audit and make copies from, your
books and records relating to the Collateral or this Agreement. You will furnish
to us such financial statements and other information regarding your business
affairs as we may request.
2.4. Affiliates. You have no subsidiaries or other affiliates other than
those disclosed in writing to us prior to the date of this Agreement, and no
additional subsidiaries or other affiliates shall be created on or after the
date of this Agreement without our prior written consent, which consent may be
withheld in our absolute discretion or conditioned upon any such subsidiary or
other affiliate entering into a financing agreement similar to this Agreement
with us.
2.5. Representations and Warranties with Respect to Collateral Other than
Accounts. You are the sole owner of the Collateral (other than the Accounts,
which are covered by Paragraph 2.2 above) and have the right to grant to us a
lien on and security interest in such Collateral; and the Collateral is, or will
be when acquired by you, free and clear of all liens and encumbrances (including
liens and encumbrances subordinate to our lien and security interest), except
for those created by this Agreement or permitted by us in writing. With respect
to inventory which is included in the Collateral, (a) such inventory is not
located outside the United States or Canada; (b) such inventory is in your
actual possession; (c) such inventory is not in the possession of a bailee,
warehouseman, consignee or similar third party; (d) such inventory does not
constitute goods the sale or other disposition of which has given rise to an
Account; (e) such inventory meets all standards and requirements imposed by any
governmental authority over such goods, their production, storage, use or sale;
(f) such inventory does not constitute work-in-process or supplies; and (g) such
inventory is in good condition and is not defective, unmerchantable,
post-seasonal, slow moving or obsolete.
2.6. Insurance on Collateral Other than Accounts. During the term of this
Agreement, you shall maintain with financially sound, well rated and reputable
insurance companies comprehensive fire and extended coverage insurance on your
inventory against such risks, with such loss deductible amounts and in such
amounts not less than those which may be satisfactory to us but in all events
conforming to prudent business practices and in such minimum amounts that you
will not be deemed a co-insurer under applicable insurance laws, regulations,
policies and practices. Each policy of such insurance covering your inventory
shall contain a provision or endorsement satisfactory to us naming us as loss
payee and providing that (a) such policy may not be canceled or altered and we
may not be removed as loss payee without at least thirty (30) days' prior
written notice to us, and (b) no act or default of you or any other person shall
affect our right to recover under such policy. You will pay, when due, all
premiums on such insurance and will furnish to us, upon request, evidence of
payment of such premiums and other information as to the insurance carried by
you. You hereby irrevocably (x) assign and grant to us a security interest in
any and all proceeds of each such insurance policy covering your inventory, (y)
direct each insurance company to pay all such proceeds directly to us, and (z)
constitute and appoint us, or any of our agents or employees, as your lawful
attorney-in-fact
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(coupled with an interest) with authority and power on your behalf to make,
adjust, settle or compromise all claims under each such insurance policy and to
endorse any check, draft or instrument for such proceeds. Any proceeds of such
insurance received by us (less the amount of any reasonable costs of settlement
of such losses) shall be held and applied, at our option, to the Obligations
(whether matured or unmatured) in such manner and at such times as we may
determine in our sole discretion or to the replacement of the damaged or
destroyed inventory upon terms and conditions reasonably satisfactory in all
material respects to us.
2.7. Collateral Reports. You agree to provide to us (a) at the time you
request each Receivables Loan or Inventory Loan, a Borrowing Base Certificate in
the form of Exhibit C, (b) so long as any Receivables Loans remain outstanding,
by the 15th day of each month (or at such other more frequent interval as we may
require), a report reflecting [a detailed aging of your Accounts], in form and
detail satisfactory to us, together with a Borrowing Base Certificate, and (c)
so long as any Inventory Loans remain outstanding, by the [fifteenth (15th)] day
of each [month] (or at such other more frequent interval as we may require), a
report reflecting the quantities, cost and value of your inventory, in form and
detail satisfactory to us, together with a Borrowing Base Certificate. All such
information shall be true, accurate and complete in all material respects and
shall contain no knowingly false, incomplete or misleading statements or omit
any material information.
2.8. Compliance with Laws, Etc. You are in compliance in all material
respects with all applicable federal, state and local laws, statutes, orders,
rules, regulations and judgments.
2.9. No Material Adverse Change. There has been no material adverse change
in your management, financial condition or business prospects or in the personal
financial condition of any guarantor of your Obligations under this Agreement
from that represented in any application, financial statement or other
information provided to us prior to the date of this Agreement.
2.10. Shareholder Distributions. You will not (a) declare or pay any
dividends on your capital stock, make any distribution in respect thereof or
purchase, redeem or otherwise acquire any of your shares of stock, (b) make any
other payments to shareholders, whether as commissions, salaries, bonuses, loan
payments or otherwise, or (c) make any payments to affiliates or members of the
immediate family of any shareholder, whether as commissions, salaries, bonuses,
loan payments, payments for goods or services or otherwise, in each case without
our prior written consent. Nothing herein shall prohibit you from selling
inventory in the ordinary course of business to Capital Video Corporation.
2.11. Financial Statements. Within forty-five (45) days following the end
of each fiscal quarter, you will provide to us a copy of the 10-Q report filed
with the Securities and Excahnge Commission, complete with a balance sheet,
income statement, and statement of cash flow, prepared in accordance with
generally accepted accounting principles. Within one hundred twenty (120) days
following the end of each fiscal year, you will provide to us financial
statements for such fiscal year prepared by an independent accountant acceptable
to us, which financial statements shall (a) be in a form acceptable to us, (b)
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be prepared in accordance with generally accepted accounting principles, (c)
include a balance sheet, income statement, and a statement of cash flows, and
(d) be certified without qualification by an independent certified public
accountant acceptable to us. A copy of the 10-K report filed with the Securities
and Exchange Commission shall also be provided to us within the 120 day
reporting period.
2.12 Year 2000 Compliance. You warrant and represent that the advent of the
year 2000 shall not adversely affect your operations or the performance of your
information technology or any other technology. Without in any way limiting the
generality of the forgoing, you specifically represent and warrant that: (a)
your hardware and software is designed to be used prior to, during and after the
year 2000 A.D., and such hardware and software will operate during such periods
without error relating to date data, specifically including any error relating
to, or the conduct of date data which represents or references different
centuries or more than one century, (b) the hardware and software you utilize
will not abnormally end their function or functions or provide invalid or
incorrect results as a result of date data, and (c) and the hardware and
software you utilize has been designed to ensure year 2000 A.D. compatibility,
including date data, century recognition, leap year recognition, calculations
which accommodate same century and multi century formulas and date values and
date data interface values that reflect the century.
3. Security Interest in Collateral.
3.1. Grant of Security Interest; Collateral Defined. To secure payment and
performance of all of your obligations under this Agreement, including, without
limitation, Receivables Loans, Inventory Loans, interest, fees, costs and
expenses (collectively, the "Obligations"), you pledge, assign and grant to us a
continuing lien and security interest in the following property, both now owned
and existing and hereafter created, acquired and arising, regardless of where
located (collectively, the "Collateral"):
(1) all of your Accounts (whether arising before or after termination of
this Agreement);
(2) all of your present and future instruments, documents, chattel paper
and general intangibles (as those terms are defined in the Uniform Commercial
Code);
(3) all reserves, balances, deposits, credits, moneys, securities, and
other property at any time owing or belonging to you which are now or hereafter
in the possession of, or in transit to, us, whether for safekeeping, pledge or
otherwise;
(4) all of your inventory, including, without limitation, all goods,
merchandise or other personal property, wherever located and whether or not in
transit, which is or may at any time be held for sale or lease or furnished or
to be furnished under contracts of service and goods, merchandise or other
personal property which are raw materials, work in process or materials used or
consumed in your business, together with a license of all intellectual property
rights under which you manufacture and sell such inventory;
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(5) all of your claims against us at any time existing to the extent of the
Obligations;
(6) all books and records and other property relating to the Collateral and
your Obligations; and
(7) all cash and non-cash proceeds and products of any of the foregoing,
including any claim against third parties in any way related to the foregoing.
You will not create or permit any security interests in or other
encumbrances upon the Collateral, which are junior to ours in priority, without
our prior written consent. We are irrevocably authorized at any time to charge
your account (and any credit balance on our books in your favor) for the amount
of any or all of your Obligations.
3.2. Perfection of Security Interest. You shall execute and deliver to us
such documents and instruments, including, without limitation, Uniform
Commercial Code ("UCC") financing statements, as we may request from time to
time in order to evidence and perfect our security interest in the Collateral.
3.3. Future Advances. The security interest granted by you shall secure all
current and all future advances made by us to the extent such current and future
advances constitute Obligations, and we may advance or readvance upon repayment
by you all or any portion of the sums loaned to you under this Agreement and any
such advancement or readvancement shall be fully secured by the security
interest created by this Agreement.
3.4. Landlords' Waivers. At any time and from time to time, we may require
you, in our sole discretion, to provide to us appropriate landlords' waivers, in
form, content and substance satisfactory to us, in our sole discretion for the
location of any of the Collateral or your chief executive office where your
original entry books of account are maintained, which landlords' waivers shall
acknowledge our priority lien security interest in the Collateral and shall
contain an express subordination of any rights which the landlord might attempt
to assert against such Collateral to our rights.
4. No Agency. Nothing in this Agreement shall be construed to constitute us
as your agent or to obligate us to assume any of your obligations with respect
to any Account. We will not have any liability for any error or omission or
delay occurring in the settlement, collection or payment of any Account.
Notwithstanding the foregoing, if you fail to perform any obligation you are
required to perform in order to maintain the obligation of an Account Debtor to
make payments on an Account, we may (but shall be under no obligation to)
perform, or retain others to perform, such obligation, at your sole expense, and
such expense (together with interest thereon from the date incurred to the date
paid at the rate of ten percent (10%) per annum) shall constitute part of your
Obligations; upon demand by us, you agree to immediately reimburse for any such
expense (and accrued interest thereon) we incur.
5. Costs and Expenses. You shall reimburse us on demand for all fees, costs
and expenses (including reasonable attorneys' fees), of any kind and
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nature, which we may incur in (a) preparing or negotiating this Agreement or
otherwise incurred by us in connection with our entering into or administering
this Agreement, (b) filing financing statements, (c) lock box charges, (d)
making lien or title examinations, (e) protecting, maintaining, preserving or
enforcing Accounts or other Collateral, (f) defending or prosecuting any actions
or proceedings related to this Agreement, or (g) defending or prosecuting any
action, claim or demand arising after the termination of this Agreement but
which relates to or arises out of this Agreement shall be added to and deemed
part of your Obligations. In addition, in the absence of a Default under
Paragraph 6 below, you shall be responsible for the fees, costs and expenses
(not to exceed $2,400 per audit)of up to four such field examinations per
calendar year performed during the term of this Agreement, in addition to the
initial field examination performed prior to the date of this Agreement.
6. Default. All of your Obligations shall, at our option, be and become
immediately due and payable without notice or demand for monetary defaults, and
with ten days notice for non-monetary defaults, upon the occurrence of any one
or more of the following events (each a "Default"): (i) if you fail to pay, when
due and payable, any of your Obligations; (ii) if any of your representations or
warranties are false or misleading in any material respect; (iii) if you fail to
perform or otherwise comply with any promise contained in this Agreement or any
request for a Receivables Loan or an Inventory Loan; (iv) if your present
business operation is discontinued or suspended, or if you become insolvent or
unable to meet your debts as they mature, or if any proceeding is commenced by
or against you for relief under any provision of any federal or state
bankruptcy, insolvency or other similar law, or if any injunction, attachment,
judgment or lien is issued or filed against you or any of your property, or if a
receiver, custodian or trustee of any kind is appointed for you or any of your
property; or (v) if a default occurs under any Guaranty Agreement executed in
conjunction with this Agreement and is not cured within any applicable grace
period. Notwithstanding the foregoing, you acknowledge and agree that all
Receivables Loans and all Inventory Loans which we may make to you are due and
payable on demand, even in the absence of a Default under this Agreement.
7. Remedies.
7.1. Our Rights. Upon the occurrence of any Default, without further notice
to you except tin the case of a non-monetary default where we shall give fifteen
days notice, we shall have the right to (i) decrease the Receivables Advance
Rate and/or the Inventory Advance Rate pursuant to Paragraphs 1.3 and 1A.3
above; (ii) cease making Receivables Loans and Inventory Loans (notwithstanding
the provisions of this clause (ii), you acknowledge that the making of
Receivables Loans and Inventory Loans by us is in our sole discretion, whether
or not a Default shall have occurred); (iii) terminate this Agreement and
enforce the liquidated damages provisions of Paragraph 8.5; (iv) enforce against
you immediate payment of all of your Obligations, including all Receivables
Loans and all Inventory Loans for which payment in full has not previously been
received; (v) collect all amounts due and owing on all Accounts; (vi) require
you to assemble the Collateral and make it available to us at a place designated
by us; (vii) enter upon your premises to take possession of the Collateral; and
(viii) appropriate, set off and apply the Collateral to the payment of your
9
<PAGE>
Obligations in such order and manner as we in our sole discretion shall
determine, or settle, compromise or release, in whole or in part, any amounts
owing on the Collateral, or prosecute any proceeding with respect to the
Collateral, or extend the time of payment of any or all of the Collateral, or
issue credits regarding the Collateral, or sell, assign and deliver the
Collateral (or any part thereof), at public or private sale and apply the net
cash proceeds resulting from the exercise of any of the foregoing rights or
remedies to the payment of your Obligations in such order as we in our sole
discretion may elect, and you shall remain liable to us for any deficiency. 7.2.
Confession of Judgment. Deleted.
7.3. Application of Collections; Deficiency. All collections we receive
from realizing upon the Collateral, less expenses of collection (including,
without limitation, reasonable attorneys' fees and court costs) incurred by us,
shall be applied to your Obligations. If for any reason collections received by
us exceed your Obligations, we will account to you for the surplus. However, if
the collections we receive are insufficient to pay all of your Obligations, you
shall be liable to us for the deficiency.
7.4. Remedies Cumulative. Each right, power, and remedy provided for herein
or otherwise existing shall be cumulative and concurrent and shall be in
addition to every other right, power and remedy existing hereunder, by law or
otherwise. The exercise by us of any one or more such rights, powers or remedies
shall not preclude the simultaneous or later exercise by us of any or all such
other rights, powers or remedies.
8. Term of Agreement and Termination.
8.1. Initial Term; Renewal. The initial term of this Agreement shall be one
(1) year, commencing with the date of the first Receivables Loan or Inventory
Loan under this Agreement. Unless terminated in accordance with this Paragraph
8, the provisions of this Agreement shall automatically renew for successive one
(1) year periods without any notice or action on the part of either party
hereto. During the term of this Agreement, you shall deal exclusively with us in
the financing of Accounts and inventory.
8.2. Facility Fee. On the date of this Agreement and on each one (1) year
anniversary thereof, you will pay to us a facility fee of one percent (1.0%) of
the $4,000,000.00 maximum aggregate financing arrangement permitted under this
Agreement.
8.3. Termination in Absence of Default. This Agreement may be terminated
(a) by our giving you written notice at any time stating a termination date not
less than ten (10) days after the date such notice is mailed or dispatched, or
(b) by your giving us written notice not less than sixty (60) days prior to the
end of the initial or a renewal term. In the event that you elect to terminate
this Agreement on a date other than the end of the initial or a renewal term,
you shall pay to us a termination fee in an amount equal to $20,000.00 for each
month or portion of a month remaining in the initial or renewal term. However,
if you obtain commercial bank financing after six months from the signing of
this Agreement you may terminate this Agreement without a termination fee. The
parties expressly recognize and agree that the termination
10
<PAGE>
fee hereunder is a reasonable fee negotiated at arm's length in consideration
for which we will allow you to terminate this Agreement prior to the end of the
applicable term, provided that you fulfill all of your obligations under this
Agreement. The termination fee is not, and shall not be construed to be,
liquidated damages.
8.4. Effect of Termination. Notwithstanding any termination, all of our
rights and interests, all of your Obligations, and all of the terms, conditions,
and provisions hereof shall continue in full force and effect until all
transactions entered into prior to the effective date of termination have been
fully concluded and all of your Obligations have been paid in full. After
termination of this Agreement, you shall pay to us on demand the amount of your
Obligations then outstanding and any of your Obligations arising thereafter.
8.5. Termination After Default; Liquidated Damages. If a Default occurs
hereunder, we shall have the right at our sole option to terminate this
Agreement at any time thereafter without notice to you. If we exercise such
option, in addition to all other rights and remedies we may have, and in
addition to all of your other Obligations, you agree to pay to us upon demand as
liquidated damages for our lost interest and fee earnings, a sum equal to
$20,000.00 for each month or portion of a month remaining in the initial or
renewal term of this Agreement. The liquidated damages contemplated under this
Paragraph 8.5 are expressly recognized by you as being reasonably related to the
damages we would suffer by reason of the termination of this Agreement after a
Default and is the product of a good faith effort of the parties to estimate
actual damages that would ensue as a result of any such termination.
9. Notices. Notices shall be deemed given when sent or dispatched by
certified or registered mail or private overnight express mail, postage or
charges prepaid, or by facsimile copy to the parties at their respective
addresses set forth below.
10. Binding Effect; Complete Agreement. This Agreement will bind you and
your successors and assigns, and will inure to the benefit of us and our
successors and assigns, and sets forth the complete agreement between the
parties.
11. Waiver. No delay or failure by us in exercising any of our rights or
remedies shall operate as a waiver of such or of any other right or remedy, and
no waiver shall be valid unless in writing signed by us and then only to the
extent therein set forth.
12. Tombstone. You authorize us to make appropriate announcements of the
financial arrangement entered into by and between you and us, which
announcements are popularly known as Tombstones, subject to your prior approval
which shall not be unreasonably withheld or delayed. You further authorize us to
issue and publish the Tombstones, in such manner and/or such publications and to
such selected parties as we shall in its sole discretion deem appropriate.
13. Governing Law, Etc. This Agreement shall be governed by and interpreted
according to the laws of the State of Maryland. You consent to and acknowledge
the right of all courts, administrative agencies, boards and/or
11
<PAGE>
quasi-judicial bodies in the State of Maryland, including without limitation the
District Courts of Maryland, the Circuit Courts of Maryland, the United States
District Court for the District of Maryland and the United States Bankruptcy
Court for the District of Maryland, to exercise personal jurisdiction over you
with respect to any dispute or controversy between you and us relating to this
Agreement or to any transaction in connection herewith, whether arising during
the term of this Agreement or after its termination, except as otherwise
provided in Paragraph 13 below. Further, you waive personal service of the
summons and complaint or other process to be issued and agree that service of
such summons and complaint or other process may be made by registered or
certified mail addressed to you at your address appearing herein, whether
arising during the term of this Agreement or after its termination. You agree
that any action which you initiate against us, whether initiated during the term
of this Agreement or after its termination, will only be filed in the courts of
the State of Maryland or the federal courts located in the State of Maryland,
that is, in the District Courts of Maryland, the Circuit Courts of Maryland, the
United States District Court for the District of Maryland or the United States
Bankruptcy Court for the District of Maryland, consistent with the subject
matter jurisdiction requirements of those courts.
14. Arbitration of Certain Claims. You and we each agree that any claim or
demand arising out of any alleged breach of this Agreement or arising out of any
dispute or controversy under or relating to this Agreement, other than any
confession of judgment proceedings brought pursuant to Paragraph 7.2 above, in
which the amount claimed or demanded is $100,000 or less, will be decided by a
single arbitrator under the Rules of the American Arbitration Association and
the decision of that arbitrator shall be final and binding. You and we further
agree than any dispute as to whether the amount of any claim or demand is
$100,000 or less shall be decided by a single arbitrator under the Rules of the
American Arbitration Association. You and we agree that any arbitration shall
take place in Baltimore City, Maryland, or in some other mutually agreed upon
location. You and we agree that the prevailing party, as determined by the
arbitrator, shall be awarded reasonable attorneys' fees incurred by the
prevailing party in connection with the arbitration and any post-arbitration
proceedings. You and we agree that the prevailing party shall be awarded the
costs of the arbitration, including all arbitration fees and expenses of the
arbitrator and all other expenses reasonably incurred in conducting the
arbitration as determined by the arbitrator.
15. Situs of Contract. You understand and agree, for all purposes, that the
situs of the making and performance of this Agreement is and shall be construed
to be the State of Maryland.
16. Waiver of Jury Trial. You and we each agree that any suit, action or
proceeding, whether claim or counterclaim, brought or instituted by either party
hereto or any successor or assign of any party under or with respect to this
Agreement or which in any way relates, directly or indirectly, to this Agreement
or any event, transaction or occurrence arising out of or in any way connected
with this Agreement, or the dealings of the parties with respect thereto, shall
be tried only by a court and not by a jury. EACH PARTY HEREBY WAIVES ANY RIGHT
TO A TRIAL BY JURY IN ANY SUCH SUIT, ACTION OR PROCEEDING.
12
<PAGE>
17. Legal Counsel. You have had the opportunity to obtain legal counsel,
and you agree that you fully understand the terms, provisions and legal
consequences of this Agreement.
IN WITNESS WHEREOF, this Agreement is executed and delivered under seal as
of the date first above written.
BORROWER: LENDER:
METRO GLOBAL MEDIA, INC. (parent) RESERVOIR CAPITAL CORPORATION
and METRO, INC. (sub)
By:/s/ Janet M. Hoey By:/s/ John Fox
- ------------------------ --------------------------
Title: Janet M. Hoey, CFO and Treasurer Title: John Fox, President
Address: One Metro Park Drive Address: 100 Painters Mill Road,
Cranston, Rhode Island 02910 Suite 700
Owings Mills, Maryland 21117
Facsimile No.: (401) 941-3798 Facsimile No.: (410) 902-2420
Address of Chief Executive Office,
if different:_________________________
State of (________________)
TO WIT:
County of (______________)
I HEREBY CERTIFY, that on this 30th day of September, 1999, before me, a
Notary Public of said State, personally appeared Janet M. Hoey, known to me (or
satisfactorily proven) to be the person whose name is subscribed to the
foregoing Agreement and acknowledged that she executed the same for the purposes
therein contained.
WITNESS my hand and Notarial Seal.
---------------------------------
Notary Public
My Commission Expires:
13
<PAGE>
EXHIBIT A
[FORM OF LOAN REQUEST]
14
<PAGE>
EXHIBIT B
RATE SHEET
------------------------------------
The interest rate payable by Metro Global Media, Inc. (parent) and Metro,
Inc. (sub) (the "Borrower") under the Loan and Security Agreement between the
Borrower and Reservoir Capital Corporation (the "Lender") on all Receivables
Loans shall be calculated at an annual rate equal to the Prime Rate of interest,
as defined below) plus three and one half of one percent (3.5%) from the date on
which each such Receivables Loan is made to and including the date which is five
(5) business days from when payment on such Receivables Loan is received, such
rate to be applied to each Receivables Loan and calculated on the basis of
actual days elapsed and a year of three hundred sixty (360) days. The term
"Prime Rate" shall mean the prime rate of interest as published in The Wall
Street Journal or if The Wall Street Journal should not publish then as
published in a comparable publication on the last business day of the preceding
calendar month, and any change in the Prime Rate shall be effective on the first
business day of the month following the month in which such change was first
published, provided that we may from time to time alternatively elect to have
any change in the Prime Rate effective contemporaneously with the publication of
such change.
The interest rate payable by Assignor under the Loan and Security Agreement
on all Inventory Loans shall be calculated at a monthly rate equal to three and
one half of one percent (3.5%) from the date on which each such Inventory Loan
is made to and including the date on which payment on such Inventory Loan is
received, such rate to be applied to each Inventory Loan and calculated on the
basis of actual days elapsed and a year of 360 days.
15
<PAGE>
EXHIBIT C
BORROWING BASE CERTIFICATE
16
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-29-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> MAY-29-1999
<CASH> 144,288
<SECURITIES> 0
<RECEIVABLES> 7,924,466
<ALLOWANCES> 0
<INVENTORY> 4,104,080
<CURRENT-ASSETS> 13,507,260
<PP&E> 2,027,274
<DEPRECIATION> 0
<TOTAL-ASSETS> 24,460,406
<CURRENT-LIABILITIES> 14,667,813
<BONDS> 0
0
0
<COMMON> 654
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 24,460,406
<SALES> 0
<TOTAL-REVENUES> 23,389,171
<CGS> 16,074,451
<TOTAL-COSTS> 9,493,943<F1>
<OTHER-EXPENSES> 125,720
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,240,488)
<INCOME-PRETAX> (4,293,991)
<INCOME-TAX> (166,850)
<INCOME-CONTINUING> (4,127,141)
<DISCONTINUED> 150,201
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,976,940)
<EPS-BASIC> (.77)
<EPS-DILUTED> (.77)
<FN>
<F1>SG&A
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-30-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> MAY-30-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 20,391,134
<CGS> 13,168,214
<TOTAL-COSTS> 6,606,180<F1>
<OTHER-EXPENSES> 105,116
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (973,918)
<INCOME-PRETAX> (252,062)
<INCOME-TAX> 469,684
<INCOME-CONTINUING> (721,746)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (721,746)
<EPS-BASIC> (.60)
<EPS-DILUTED> (.60)
<FN>
<F1>SG&A
</FN>
</TABLE>
