U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended May 27, 2000
[] 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: $27,789,050
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.):
$2,924,350 at August 24, 2000
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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: 8,630,223 at August 18, 2000
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...........................................................12
ITEM 3. LEGAL PROCEEDINGS....................................................12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................12
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS..............................................................13
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................14
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA...........................17
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES................................................17
PART III
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ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT....................18
ITEM 10. EXECUTIVE COMPENSATION...............................................19
ITEM 11. SECURTITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......21
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................22
PART IV
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ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.....................................25
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. The year 2000 resulted in strong
gains through business operations and increased sales. Metro Global recognized a
sales gain of 19% or approximately $4,000,000 for the year ended May 27, 2000.
Additionally, gross profit increased approximately $2,500,000 or 33.5%, and
gross margin increased 3.8% to 35.1% of revenues. Metro Global operates through
its wholly-owned subsidiaries and operating divisions: Metro West Studios, Inc.,
Metro, Inc. - West Coast Division ("Metro West"), Metro International
Distributors ("Metro International"), Amazing Media Group, Inc. ("Amazing
Media"), Amazing Direct.com, Amazing On-Line, Metro, Inc. - East Coast Division
("Metro"), Airborne for Men, LTD. ("Airborne"). Additionally, Metro, through its
subsidiary Rocket Media Group LLC, is a 50% partner in Maxstone Media Group,
LLC. ("Maxstone"), a producer and distributor of newsstand magazines.
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. 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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Metro West Studios, Inc.:
Film and Video Production
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/satellite 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 3,500
titles primarily available on videocassette. Management believes Metro's 3,500
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 nineteen volumes of Taboo, one of
Metro's most popular adult video series. Metro has manufactured and sold
approximately 3,000,000 videocassettes during the fiscal year ended May 27,
2000, 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
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pursuant to which Metro has acquired perpetual U.S. distribution rights, and in
some cases limited foreign distribution rights, to the 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
entire library of films and videos into the DVD format.
During fiscal 2000, Metro released six new feature films, ninety-one
feature videos, and one hundred sixty-seven 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.
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 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 27, 2000, Metro contracted to supply Playboy with twenty-eight 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. Metro and CED extended the contract in July 2000
for an additional two years.
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 certain rights on Metro's
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 over seven years, including a series of high-visibility special
programming events for New Frontier's five adult networks, and Internet sites
that are part of an 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.
The production and distribution market of cable and satellite broadcast
products is highly competitive, competing with each other as well as with other
forms of adult entertainment. Furthermore, there is increasing competition from
the cable and television industry evidenced by the increasing channel selections
and variety of basic cable and pay television options now available. Revenues
for motion picture entertainment products depends in-part on general economic
conditions, but the competitive position of a producer or distributor is still
greatly effected by the quality of and public response to the entertainment
product it makes available to the market place. There is strong competition in
adult cable and satallite distribution. Metro is confident that with their many
years of knowledge, experience and availability of top directors, they will
continue to release top selling production in this field. Because of
distribution contracts with Playboy, the Spice channel and multi-channel "New
Frontier Media," along with foreign out-put agreements, Metro will continue to
be a leader in this field.
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Metro Inc. - West Coast division:
Metro's West Coast division, located in Chatsworth, CA, duplicated,
manufactures, warehouses and distributes exclusively all of its production on
VHS and DVD formats.
During 1998, Metro introduced its first 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 significant mass-market
potential. Experts at Toshiba estimate that the market for DVD software could
exceed $20 billion by the year 2005. Metro believes that 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 feature 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 98 DVD titles as of May 27, 2000, up from 29 titles as of May 29, 1999.
Metro Global anticipates releasing in excess of 200 titles in fiscal 2001.
Metro creates and designs all artwork for promotional items and packaging
and contracts for printing services. Approximately 20% 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.
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 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.
There is a strong competition throughout the home video and DVD industry.
Several of Metro's competitors release titles on both video and DVD formats.
Nearly all of Metro's products compete with other products and services that
utilize leisure time or disposable income. Metro meets the direct competition
from other distributors and has a competitive advantage over most because of
Metro's extensive library, large on-hand inventory, and experienced customer
service departments. Metro is confident that their competitive edge will
continue. Metro also beleives that its name, image, and reputation, as well as
quality of its distribution, provides a significant advantage over many other
competitors seeking to establish an adult distibution business.
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Metro International, Inc.:
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
Australia. In February 1999, Metro International opened a newly expanded
facility in Flensburg, Germany. Metro International generated revenues of
approximately $919,083 or 3% of the consolidated revenue from continuing
operations of Metro Global, during the fiscal year ended May 27, 2000.
Foreign distribution, especially throughout Europe, is highly competitive.
Most countries have producers and distributors that release product
entertainment from local talent and in their native language. The demand for
American produced product has always been high in the foreign marketplace and
competition from other American suppliers is strong. The focus of Metro
International is to increase distribution through cable and satellite broadcast
and to increase their library and inventory of DVD titles as DVD continues its
extraordinary growth throughout the foreign marketplace. Management believes
that none of its competitors have larger worldwide distribution or has as
diverse a library as Metro.
Amazing Media Group, Inc.:
Publishing
Metro, through its Amazing Media subsidiary, publishes and distributes a
variety of adult magazines under various tradenames, which it distributes
through wholesalers located throughout the United States, Canada and Europe.
Metro capitalizes on its extensive library by reproducing stills, frames, or
other duplicable mediums and transfers the content onto a printed publication
thereby maximizing the product costs incurred in producing films and videos.
Amazing Media also benefits Metro by extending the Metro trade name and
increases the awareness of the various Metro products through this cost
effective cross promotional technique. Amazing Media currently publishes
twenty-four magazines, which are distributed on a bi-monthly or quarterly basis.
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.
The publishing and distribution of adult magazines is highly competitive,
as each competes with the other as well as with other forms of entertainment.
There is increased competition in the publishing industry as evidenced by the
increasing number of publications released monthly. Metro's magazines are well
established, of high quality printing and are unique in their format. To meet
with direct competition from other publishers of adult magazines as well as from
all other forms of adult entertainment, Metro will continue to expand its
publishing division while utilizing its magazines to cross promote Metro's
Internet sites and entire adult entertainment product line.
Amazing Direct.com:
E-Commerce
AmazingDirect.com, Metro's E-Commerce and mail order business.
AmazingDirect.com which allows customers to directly purchase from Metro's
approximate 10,000 items inventory, including many produced by Metro.
Management believes AmazingDirect.com's product database of adult videos,
CD-ROMs, DVDs, magazines, novelties, and lingerie to be one of the world's
largest available online. 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,
EarnBigBucks.com, is being implemented allowing webmasters to resell product
from AmazingDirect.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
(AmazingDirect.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. 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. Backend software
and computer upgrades are currently being completed prior to launching the
affiliate program which is expected to be completed by November 1, 2000. These
backend upgrades will allow Metro to handle up to 5,000 orders daily.
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Competition in mail order and e-commerce distribution is very high. Metro
competes with numerous mail order houses that specialize in adult product
distribution. With Metro's extensive library and large on-hand inventory of
other producer's product lines, they intend to focus on e-commerce sales and
distribution. It is management's belief that by adding proper marketing and
backend structuring, Metro will become a leader in e-commerce distribution of
adult products. In addition to intended expansion of e-commerce, the company is
planning to achieve growth through acquisition of similar existing business
enterprises that are unable to compete against major companies such as Metro.
Amazing Online - Internet division:
The marketing concept of offering full screen, full motion video in
conjunction with amazingsex.com was implemented by Metro during fiscal 1999 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.
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 has placed 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.
During fiscal 2000, Metro added four additional sites which cross promote
all other sites. Metro is currently building a database of all customers to be
used for mass mailings to continue to promote the sites with notifications of
specials and new updates made to the sites. Management believes the increase in
Internet sites will enable Metro to increase its traffic and market share and
generate increasing revenues.
There is strong competition throughout the Internet via electronic
distribution of adult media. There are currently over 30,000 adult web sites
offering a range of content from free material to monthly memberships, including
sites similar to Metro's. Metro meets with direct competition on the Internet by
utilizing its extensive exclusive video and still photo library, along with the
ability to promote new productions prior to their release. Since a key component
of marketing on the Internet is building traffic, Metro feels that it's cross
promotion agreement with I-Gallery will result in a significant increase in
traffic to its membership sites.
Metro, Inc - East Coast division:
Located in Cranston, Rhode Island, Metro is the largest distributor of
adult products in the Northeast, servicing over 500 retail outlets throughout
the Northeast and Midatlantic regions. the northeast region is considered to be
the #1 martketplace in the US for retail locations and adult consumers. A 64,000
square foot warehouse holds an inventory of over one hundred thousand items and
company owned trucks deliver products throughout the Northeast.
Metro is the exclusive distibutor of all Metro West products as well as
having distribution agreements with other best selling video producers such as
Vivid Video, Wicked Pictures, VCA Pictures, Private Video, Adam and Eve, and
Hustler Video. Additionally, Metro represents national novelty and adult toy
manufactures such as Doc Johnson Enterprises, California Exotic Novelties, Wet
International, and Topco, which currently represents Hustler, Penthouse, and
Spice adult toy lines.
Metro also distributes adult newspapers and magazines from all the major
publishers such as LFP (Hustler Group), Playboy, Penthouse, Score Group, and
Metro Global's own publishing division, Amazing Media Group, Inc.
The warehouse has recently been refitted to accommodate order fulfillment
of all of Metro Global's E-Commerce traffic from its online superstore, Amazing
Direct.com and its direct to consumer mail order business.
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Metro also is in the business of manufacturing and distributing Video
Viewing Centers where a user can review videos and DVDs before purchase for a
fee. Generally, 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.
The distribution markets of home video, DVD and adult products are highly
competitive. There are numerous full line distributors thoughout the United
States that compete directly with Metro. Metro, the largest distributor in the
Northeast region of the United States, meets with direct competition by carrying
a large selection of inventory along with an outstanding distribution network.
The company intends, that during the next twelve months, it will expand
distribution by increasing its product lines and its sales force.
Airborne for Men, LTD.:
Amazing SuperStore
Franchise/Licensing Subsidiary
Airborne engages in the sale of franchise and licensing to operate upscale
adult orientated retail stores. Each franchise/licensed operation carries all of
the products distributed by Metro. During fiscal 1999, Airborne introduced it's
Amazing SuperStore strategy designed to strengthen the "Amazing" brandname. In
May 1999, the first Amazing SuperStore was opened in Providence, RI. With its
success, CVC converted its five existing Airborne for Men stores, as well as
other existing stores, into Amazing SuperStores or Amazing Express stores.
Airborne currently operates one franchise and has licensing agreements with
seventeen stores. Airborne intends on licensing twenty more stores in the next
twelve months. A licensing agreement includes the use of the "Amazing" name and
logo trademark along with an exclusive product line distribution agreement. The
franchising agreement includes the same plus a management training and marketing
fee.
Airborne is in the process of reviewing a syndication program for expansion
of the Amazing SuperStore format and intends on aggressively expanding this
concept.
Competition in the adult retail store business is very high. There is no
competition in franchising and licensing of adult stores. The company intends to
focus over the next twelve months on licensing the "Amazing Superstore" program
thoughout the United States. The company feels that it would be more effective
to re-license adult video stores instead of utilizing franchising methods, which
is costly and time prohibitive due to site development and local zoning
requirements. Licensing of existing locations allows stores to utilize our
proven and successful marketing, merchandising and distribution programs.
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 itsown 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 and
international distribution is conducted through Metro's subsidiary, Metro
International, located in Flensburg, Germany.
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,
hits on its Internet sites, as well as purchasing or renting customer lists.
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.
Capital Video Corporation ("CVC"), which is wholly-owned by Kenneth
Guarino, a principal shareholder of Metro Global, operates approximately thirty
video and magazine retail stores in the New England and upstate New York areas
and accounted for approximately 41% of Metro's net sales for the fiscal year
ended May 27, 2000 and 40% of Metro's net sales for the fiscal year ended May
29, 1999. See "Item 12. Certain Relationships and Related Transactions". During
fiscal 2000, no other customer accounted for more than 10% of Metro Global's
net sales.
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Government Regulation
The right to distribute adult videocassettes, magazines and CD-ROM products
is protected by the First and Fourteenth Amendments to the United States
Constitution, which prohibit Congress or the various states from passing any law
abridging the freedom of speech.
The First and Fourteenth Amendments, however, do not protect the
dissemination of obscene material, and several states and communities in which
Metro's products are distributed have enacted laws regulating the distribution
of obscene material with some offenses designed as misdemeanors and others as
felonies, depending on numerous factors. The 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
Amazing SuperStores franchises and licensing have enacted zoning ordinances
restricting the retail sale of adult entertainment products. Airborne intends to
open Amazing SuperStores and to permit the opening of Amazing SuperStores
franchises and licensing 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.
10
<PAGE>
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, AMAZING MEDIA GROUPtm, 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. 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.
DISCONTINUED OPERATIONS
-----------------------
Metro Global purchased Fanzine on August 3, 1998. See "Business
Acquisitions and Other Activities" below.
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 years ended May
27, 2000 and 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 restricted shares of its Common Stock held by Fanzine's former
shareholders. The cash portion has been paid as follows: $1,000,000 paid on
October 31, 1999; $1,000,000 paid on November 30, 1999; $1,000,000 paid on June
1, 2000; and $1,500,000 is to be paid by August 31, 2000. The payments are
secured by Fanzine's assets.
Metro Global is currently winding down the Maxstone operation and
accordingly has accounted for Maxstone as discontinued operations in the
accompanying financial statements
BUSINESS ACQUISITIONS AND OTHER ACTIVITIES
------------------------------------------
In August 1997, Rocket Media Group, LLC. ("Rocket"), a wholly-owned
subsidiary of Metro entered into a joint venture with Salmill Enterprises, Inc.
("Salmill") 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; each joint venture
partner contributed $30,000. Metro Global has included Maxstone's results from
operations in the consolidated financial statements. Minority interest amounted
to $(56,044) at May 27, 2000.
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.
11
<PAGE>
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. The operations of Fanzine have been
classified as discontinued operations for fiscal 2000 and fiscal 1999. See
"Discontinued Operations" above.
EMPLOYEES
As of May 27, 2000, Metro Global and its subsidiaries employed
approximately 146 persons, of which 137 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. 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 its 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 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. The lease was assumed by Fanzine effective
September 29, 1999 upon the sale of Fanzine.
ITEM 3. LEGAL PROCEEDINGS
-------------------------
George Kinney v. Metro Global Media, Inc., et al.
C.A. No. 99-579 (U.S.D.C.,D.R.I.)
On November 22, 1999, George Kinney, on behalf of himself and all other
similarly situated, commenced a putative class action in the United States
District Court for the District of Rhode Island against Metro Global and certain
of its present or former officers and directors. Plaintiff seeks to represent a
class of all person who acquired securities of Metro Global between September
13, 1996 and September 13, 1999. The Complaint alleges claim based on alleged
violations of section 10(b) of the Securities Exchange Act of 1934. Plaintiff
alleges that the defendants made a series of false and misleading statements
concerning Metro Global's reported financial results during the class period
that violated generally accepted accounting principles and ultimately caused
Metro Global to restate certain financial statements. On March 15, 2000, Metro
Global and certain defendants filed a motion to dismiss the complaint. The
plaintiffs filed an amended complaint dated May 15, 2000 and Metro Global moved
to dismiss the amended complaint on July 5, 2000. Plaintiffs filed an opposition
to Metro Global's motion to dismiss on August 15, 2000. Metro Global's reply to
the plaintiffs opposition is due September 1, 2000. Metro Global believes it has
meritorious defenses and intends to vigorously defend this action.
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
12
<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 via
the pink sheets under the symbol "MGBL". There is a very limited market for
Metro Global's Common Stock and no assurances can be given that any active
trading market will develop. 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. On December 7, 1999, Metro Global's Common Stock was delisted from the
NASDAQ Small Cap Market. 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 27, 2000
------------------------------
First Quarter $ 3.2500 $ 1.7190
Second Quarter $ 1.7500 $ 1.5310
Third Quarter $ 0.9300 $ 0.3200
Fourth Quarter $ 0.9600 $ 0.4100
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
</TABLE>
* Such market quotations reflect the high and low prices for Metro Global's
securities as quoted by dealers without retail mark-ups, mark-downs or
commisions, and may not necessarily represent actual transactions.
At May 27, 2000 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, all of which expired 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 shares of Common Stock.
On July 21, 1999, Metro Global entered into a seven year licensing
agreement with New Frontier Media, Inc. ("New Frontier"). In exchange for
certain services, Metro Global issued New Frontier 250,000 restricted shares of
its Common Stock and warrants to purchase 50,000 shares of Common Stock per year
for five years.
13
<PAGE>
During the year ended May 27, 2000, various notes payable totaling $580,000
plus accrued interest of $38,075 were converted into 1,716,875 restricted shares
of Common Stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
-----------------------------------------------------------------
Results of Continuing Operations - Fiscal 2000 as Compared to Fiscal 1999
Metro Global had revenues of $27,789,050 from continuing operations for
fiscal 2000 as compared to revenues of $23,389,171 for fiscal 1999, a 19%
increase. Increased revenues are primarily due to: (1) an increase in video and
DVD sales of approximately $3,200,000 as a result of the increased investment
made by Metro Global in new productions and DVD conversions; (2) an increase in
cable and foreign film rights revenue of approximately $360,000; (3) an increase
in inclusion of revenues from Metro International of approximately $919,083 in
fiscal 2000 as compared to $765,000 in fiscal 1999; and (4) revenue from
licensing of Metro's film library of approximately $570,000.
Metro Global's gross profit from continuing operations for fiscal 2000 was
$9,765,727 as compared to $7,314,720 in fiscal 1999. Metro Global's gross margin
increased to 35.1% in fiscal 2000 from 31.3% in fiscal 1999. The primary reason
for the increase in gross margin is due to the increase in revenues from cable
and film rights sold and revenues from licensing Metro's film library, with
relatively low associated costs.
Selling, general and administrative costs increased by $1,284,015 to
$10,777,958 in fiscal 2000 as compared to $9,493,943 in 1999, a 14% increase.
The increase in selling, general and administrative expenses is primarily due
to: (1) an increase in payroll and related payroll expenses for Metro of
approximately $650,000 due to the expansion of the west coast operations,
magazine department and the Internet and mail order department; (2) an increase
of approximately $200,000 in expenses associated with the upgrade and expansion
of Metro's internet sites; (3) an increase of approximately $230,000 in Metro's
depreciation expense; (4) an increase in rent and relocation costs of $150,000
due to the move of the West Coast facility; and (5) an increase in marketing and
promotional costs of approximately $75,000. As a percentage of revenues,
selling, general and administrative expenses were 38.8% in fiscal 2000, as
compared to 40.6% in fiscal 1999.
Other income and expenses decreased $1,359,651 to $755,117 in fiscal 2000
as compared to $2,114,768 in 1999. This decrease is primarily due to a decrease
in interest expense from $2,240,488 at May 29, 1999 to $1,093,912 at May 27,
2000, attributable to the decrease in Metro Global's outstanding debt.
Metro Global recorded a net loss of $1,455,743 from continuing operations
in fiscal 2000 as compared to a net loss from continuing operations of
$4,127,141 in fiscal 1999. The decrease in loss is primarily attributable to the
increase in gross margin and a decrease in interest expense.
Liquidity and Capital Resources
Cash amounted to $361,539 at May 27, 2000. Metro Global's primary sources
of cash in fiscal 2000 consisted of $2,299,583 in cash provided by operating
activities and net proceeds from a line of credit of $2,187,155.
The primary uses of cash for the fiscal year ended May 27, 2000 consisted
of: (1) investments in motion pictures and other films of $2,892,892; (2)
purchases of property and equipment of $384,745; (3) payments on notes payable
of $2,325,000; and (4) payments on capital lease obligations of $373,834. Metro
Global had non-cash adjustments of $3,048,227 at May 27, 2000, primarily from
depreciation and amortization and valuation of issued warrants.
14
<PAGE>
The net increase in accounts receivable of $336,749 was primarily due to
the increase of sales for the period. Accounts payable and accrued expenses
increased $1,551,895 due to increased purchasing, increased spending for film
production and increased costs associated with DVD authoring and duplication.
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.
Proceeds from the debentures were used for working capital. In March 1999, the
debentures' due dates, including accrued interest of $60,000 (which was added to
the notes principal), were extended until March 23, 2000. On December 31, 1999,
one of the debentures, including the accrued interest due under such debenture,
was converted into 847,778 restricted shares of Metro Global's Common Stock. The
second debenture and accrued interest was assumed by CVC and the accounts
receivable due from CVC was reduced accordingly.
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's due date 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. Metro Global recorded
interest expense of $52,000 in connection with the issuance of the warrants in
fiscal 2000. On December 31, 1999, the debenture and accrued interest were
assumed by CVC, Metro Global's principal customer which is wholly-owned by Metro
Global's principal shareholder, and the accounts receivable due from CVC was
reduced accordingly.
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, the notes were reduced by $600,000 for the exercise of
warrants. On August 1, 1999, the notes' due dates 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. Metro Global recognized interest
expense of $100,050 in connection with the issuance of the warrants. On December
31, 1999, one of the notes and accrued interest of $281,250 was converted into
781,250 shares of Metro Global's Common Stock. On December 31, 1999, the other
note and accrued interest totaling $183,250 was assumed by CVC and the accounts
receivable due from CVC was reduced accordingly.
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 expiring on July 31, 2000.
Metro Global recorded a discount on the debenture of $157,700 for the value of
the warrants. Metro Global amortized $78,850 and $65,708 of the discount to
interest expense for fiscal 2000 and 1999, respectively.
The $1,000,000 debenture was to mature on July 31, 2000. Interest was
payable on a quarterly basis. The holder of the debenture was entitled to
convert the principal value into Metro Global's Common Stock at a discounted
market price as is defined in the debenture agreement. For fiscal 2000, $105,000
of convertible debentures plus accrued interest and penalties were converted
into 83,888 restricted shares of Metro Global's Common Stock. On February 25,
2000, Metro Global entered into a Forbearance and Modification Agreement with
the lender. Under the terms of the agreement, Metro Global made a payment of
$150,000 upon execution of the agreement. The remaining balance of $850,000 is
due in two installments of $425,000 each, due on July 1, 2000 and October 1,
2000. The restructured note payable is secured by 200,000 restricted shares of
New Frontier common stock owned by Metro Global. On June 30, 2000, Metro Global
made the first $425,000 payment and 125,000 shares of stock were returned by the
lender.
15
<PAGE>
On October 28, 1998, Metro Global entered into a note payable with a 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 owned by a majority
stockholder. For fiscal 1999, Metro Global made one payment of $275,000. In
September 1999, Metro Global and lender agreed to a preliminary extension of the
note. In October 1999, Metro Global made a $275,000 payment. Effective August 8,
2000, Metro Global renegotiated the terms for the final $550,000 due on the note
payable. Under the terms of the Forbearance and Modification agreement, Metro
Global must make monthly payments of $50,000.
On December 9, 1998, Metro Global entered into a six-month term loan
agreement with a 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 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 this lender
agreed to an extension, under which Metro Global paid $1.3 million upon closing
a financing with Reservoir Capital Corporation. In November 1999, Metro Global
paid the lender an additional $600,000 from the proceeds of the sale of Fanzine.
The final payment of $1.2 million (which includes $100,000 of interest) will be
paid directly from the proceeds of the final payment from the sale of Fanzine,
which is due on August 31, 2000. In connection with the restructuring of the two
notes payable, Metro Global recognized $337,475 of extraordinary income for the
forgiveness of interest and penalties.
On June 30, 1999, Metro Global entered into a one-year note payable at an
interest rate of 10% with a related party for $30,000. Proceeds from the note
were used for working capital. On December 31, 1999, the note payable and
accrued interest was converted into 87,847 restricted shares of Metro Global's
Common Stock.
In September 1999, Metro Global signed a $4,000,000 Loan and Security
Agreement 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. Also, the borrowings on accounts receivable owned be Capital Video
Corporation ("CVC") 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 is secured by the assets
of Metro. The CVC accounts receivable are guaranteed by the sole shareholder of
CVC, who is a principal shareholder of Metro Global. Additionally, CVC has
executed a put on the inventory of Metro in case of default. As of May 27, 2000,
borrowings under the line of credit totaled $3,129,453.
On September 30, 1999, Metro Global sold Fanzine for $4,500,000, payable in
four installments. During the year ended May 27, 2000, Metro Global received
payments of $2,000,000. The balance as of May 27, 2000 is $2,465,649.
Of Metro's total accounts receivable at May 27, 2000, $2,440,548 (45%), as
compared to $2,419,990 (40%) at May 29, 1999, is owed by CVC, a chain of retail
stores, which is wholly-owned by a principal shareholder of Metro Global.
Because of the amount of this receivable and the concentration of business with
CVC, this
16
<PAGE>
receivable is monitored very closely. All amounts due from CVC are within terms
given by Metro, and are maintained within 60 to 90 days. 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 2000, Metro invested $2,892,892 in new feature films and videos.
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 2000 amounted to $384,745 as compared to
$477,322 for fiscal 1999. Metro Global anticipates that its capital expenditures
for fiscal 2001 will be approximately $250,000 to $500,000 primarily used for
computer equipment for the expanding Internet department.
Management believes that funds provided by operations, existing and new
lines 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.
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-26 herein are incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
--------------------------------------------------------------------------------
FINANCIAL DISCLOSURES
---------------------
None
17
<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 August 18, 2000. 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>
Gregory N. Alves 33 President and Director
Alan S. Casale 51 Director
Janet M. Hoey 37 Treasurer, Secretary and Director
</TABLE>
Gregory N. Alves is currently the President of Metro Global. 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 approximately $110,000 and $76,000 from Metro
Global during fiscal 2000 and 1999, respectively. 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.
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, 51, 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.
18
<PAGE>
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 Directors, 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 2000, all Section 16(a) filing requirements were
complied with in regards to its officers, directors and greater than 10%
beneficial owners except that: (1) Briana Investment Group, LLP, Kenneth
Guarino, and Alan Casale are late in filing Form 5 statements with respect to
the fiscal year ended May 27, 2000, and (2) 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 person who
served as President of Metro Global during the fiscal year ended May 27, 2000
(the "Named Executive Officers"). No other executive officer earned compensation
and bonus exceeding $100,000 during the fiscal year ended May 27, 2000.
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
---------------------------------------------------------------------------------------------------------
Other Securities All
Name and Principal Fiscal Annual Underlying Other
Position Year Salary Bonus Comp. Awards Options Payouts Comp.
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gregory N. Alves 2000 $ 75,000 - - - - - -
President (1) 1999 $ 75,000 - - - - - -
---------------------------------------------------------------------------------------------------------
</TABLE>
(1) Mr. Alves possesses an ownership interest in a production company employed
by Metro Global, which received payments of $110,000 and $76,000 from Metro
Global during fiscal 2000 and 1999, respectively. See "Item 12. Certain
Relationships and Related Transactions."
Options Granted in Last Fiscal Year
Metro Global did not grant stock options to any of the Named Executive
Officers during the fiscal year ended May 27, 2000.
19
<PAGE>
Option Exercises in Last Fiscal Year and Fiscal Year-End Value of Unexercised
Options
None of the Named Executive Officers exercised any options for stock of
Metro Global during the fiscal year ended May 27, 2000. The following table sets
forth information with respect to the Named Executive Officers with respect to
the unexercised options held by them as of the end of the fiscal year ended May
27, 2000.
<TABLE>
<CAPTION>
Aggregated Options / SAR Exercises in Last Fiscal Year and fiscal year-end Option / SAR Values
----------------------------------------------------------------------------------------------
Number of Value of Unexercised
Securities In-the-Money
Underlying Options/SARs at
Unexercised FY-end
Options/SARs at
FY-End
Shares Value
Acquired on Realized ($) Exercisable / Exercisable /
Name exercise (#) Unexercisable Unexercisable
-------------------- ---------------- ------------- -------------------- ----------------------
<S> <C> <C> <C> <C>
None -0- -0- -0- -0-
-------------------- ---------------- ------------- -------------------- ----------------------
</TABLE>
In September 1993, a disinterested majority of the Board of Directors
authorized the execution of an Employment Agreement with Kenneth F. Guarino,
effective as of January 1, 1993. By mutual agreement, the employment agreement
was terminated on December 31, 1996. In addition, Metro Global granted Mr.
Guarino stock options to purchase up to 200,000 shares of Common Stock at a
purchase price of $1.50 per share, exercisable in four annual installments of
50,000 shares commencing January 1, 1994. In January 1997 the term of the
options was extended to December 31, 2006. The requirement that the options be
exercised within 30 days after termination of employment was deleted.
In March 1999, the Board of Directors entered into a one year consulting
agreement with Mr. Guarino. In consideration of his services, Metro Global paid
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. The consulting agreement was
terminated in October 1999.
Compensation of Directors
Metro Global does not currently pay 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.
20
<PAGE>
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 May 27, 2000 (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
-------------------------------------- ------------------------ ------ ------------------------
Alan S. Casale
1140 Reservoir Avenue 1,220 (2) *
Cranston, RI 02920
-------------------------------------- ------------------------ ------ ------------------------
Gregory N. Alves 88,180 (3) *
5150 Avenida Hacienda
Tarzana, CA 91356
-------------------------------------- ------------------------ ------ ------------------------
All executive officers and directors
as a group (5 people) 89,400 *
-------------------------------------- ------------------------ ------ ------------------------
5% Beneficial Owners
-------------------------------------- ------------------------ ------ ------------------------
Briana Investment Group, LP
c/o Helen Adderley, Esquire 1,745,318 22.22
Corner House
20 Parliament Street
Hamilton HM DX, Bermuda
-------------------------------------- ------------------------ ------ ------------------------
Kenneth F. Guarino 2,619,401 (4) 30.35
50 Fort Avenue
Cranston, RI 02905
-------------------------------------- ------------------------ ------ ------------------------
Metro Plus
1060 Park Avenue 186,758 2.16
Cranston, RI 02910
-------------------------------------- ------------------------ ------ ------------------------
</TABLE>
* 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) Includes 600 unexercised stock options.
(3) Includes 85,780 shares held by Mr. Alves' mother, with respect to which he
disclaims beneficial ownership.
21
<PAGE>
(4) 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 no 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
-------------------------------------------------------
Mr. Guarino 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 $11,494,896 (41%) and $9,358,002 (40%) of the
revenues of Metro for the fiscal years ended May 27, 2000 and May 29, 1999. At
May 27, 2000, $2,440,548 (45%) of Metro's outstanding accounts receivable were
due from CVC. At May 29, 1999, $2,419,990 (40%) of Metro's outstanding accounts
receivable were due. Payment of CVC's accounts receivable is secured by CVC's
inventory, which security interest is evidenced by that certain security
agreement dated September 1993. 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 27, 2000 $ 1,009,961 $ 991,775 $ 438,812 $ -0-
------------------- --------------- --------------- -------------- ---------------
May 29, 1999 $ 684,339 $ 599,408 $ 561,475 $ 574,768
------------------- --------------- --------------- -------------- ---------------
</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, and the value
of the inventory securing the payment of the accounts receivable.
CVC owns and operates five Amazing SuperStore licensing operations. During
fiscal 2000, Metro Global recorded from CVC $105,777 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 December 31, 1999, the franchise
agreements were terminated as CVC converted the Airborne for Men stores into
Amazing SuperStores.
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 64,000 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, 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, in lieu of rent, 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 years
ended May 27, 2000 and May 29, 1999, Metro Global incurred approximately $13,493
and $6,000 of expense, respectively. As of January 1, 2000, Metro Global
relocated its corporate offices to Chatsworth, CA.
22
<PAGE>
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.
Proceeds from the debentures were used for working capital. In March 1999, the
debentures' due dates, including accrued interest of $60,000 (which was added to
the notes principal), were extended until March 23, 2000. On December 31, 1999,
one of the debentures, including the accrued interest due under such debenture,
was converted into 847,778 restricted shares of Metro Global's Common Stock. The
second debenture and accrued interest was assumed by CVC and the accounts
receivable due from CVC was reduced accordingly.
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's due date 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. Metro Global recorded
interest expense of $52,000 in connection with the issuance of the warrants. On
December 31, 1999, the debenture and accrued interest were assumed by CVC and
the accounts receivable due from CVC was reduced accordingly.
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, L.L.C. ("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 warrants, and the note payable was reduced from $750,000 to
$150,000.
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 paid 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 $106,667
and $21,333 in connection with the issuance of the warrants and reimbursed Mr.
Guarino for approximately $82,000 and $70,000 of expenses incurred in connection
with his activities for Metro Global during the years ended May 27, 2000 and May
29, 1999, respectively. The consulting agreement was terminated in October 1999.
Greg Alves, a director and 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 $110,000 from
Metro during fiscal 2000 and approximately $76,000 during fiscal 1999.
Dennis Nichols, President of Metro, received 100,000 shares of Metro
Global's Common Stock, valued at $43,000, during the year ended May 27, 2000.
23
<PAGE>
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. For example, Metro Global's largest customer, CVC, is wholly-owned by
Kenneth Guarino, a principal shareholder of Metro Global. Conflicts may also
arise with respect to opportunities, which come to the attention of such
persons. Conflicts may also arise with respect to the amount of time and effort
devoted to respective businesses and opportunities.
Many of the persons who perform services as Officers and Directors to 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.
24
<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.
25
<PAGE>
3.3 Articles of Amendment of Articles of Incorporation of the Registrant, as
filed with the Commission on January 17, 1995 as Exhibit 3.3 to the
Quarterly Report on Form10-QSB for the fiscal quarter ended November 30,
1994 and incorporated herein by reference.
3.4 Amendment to Bylaws of the Registrant, as filed with the Commission on
January 17, 1995 as Exhibit 3.4 to the Quarterly Report on Form 10-QSB for
the fiscal quarter ended November 30, 1994 and incorporated herein by
reference.
3.5 Articles of Amendment of Articles of Incorporation of the Registrant, as
filed with the Commission on August 28, 1996as 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.
10.10Amendment 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.
26
<PAGE>
10.11Amendment 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.
10.12Indemnification 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.
10.13Termination 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.
10.14Description 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.
10.15Registration 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.
10.16Employment 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.
10.17Employment 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.
10.18Employment 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.
10.19Employment 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.
10.20Consulting Agreement dated March 19, 1999 between Metro Global Media, Inc.
and Kenneth F. Guarino.
10.21License 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.
10.22Amendment to No. 1 Business Consulting Agreement dated September 10, 1999
between Metro Global Media, Inc. and Kenneth F. Guarino.
10.23Loan 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.com
Amazing Media Group, Inc.
Fanzine International, Inc.
27
<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.
*27.1Financial Data Schedule
(B) REPORTS ON FORM 8-K
None
28
<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 report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Metro Global Media, Inc.
By:/s/ Gregory N. Alves
-----------------------
Gregory N. Alves,
President
Date: August 25, 2000
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/ Gregory N. Alves President and Director August 25, 2000
--------------------
Gregory N. Alves
/s/ Janet M. Hoey Treasurer (principal August 25, 2000
----------------- financial and accounting Officer)
Janet M. Hoey , Secretary and Director
/s/ Alan S. Casale Director August 25, 2000
------------------
Alan S. Casale
29
<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-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-10 - F26
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 27, 2000, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the years in the two-year period ended May 27, 2000. 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 27, 2000 and the results of their operations and
their cash flows for each of the years in the two-year period ended May 27,
2000, in conformity with generally accepted accounting principles.
Imowitz Koenig & Co., LLP
New York, New York
August 16, 2000
F-1
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MAY 27, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets
------
Current Assets
--------------
<S> <C>
Cash $ 361,539
Accounts receivable, less allowance for doubtful
accounts of $205,755 2,991,057
Accounts receivable, related party 2,440,548
Note Receivable 2,465,649
Inventory 4,908,890
Recoverable income tax 339,000
Prepaid expenses and other current assets 365,025
-----------
Total Current Assets 13,871,708
-------------------- -----------
Motion pictures and other films at cost, less accumulated
amortization of $11,024,411 5,456,641
Property and equipment at cost, less accumulated
depreciation of $2,850,211 2,125,424
Investment in securities 4,523,724
Deferred taxes 900,000
Other assets 149,056
-----------
Total Assets $27,026,553
------------ ===========
</TABLE>
See Notes to Consolidated Financial Statements
F2
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MAY 27, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities
-------------------
<S> <C>
Current portion of capital lease obligations $ 300,435
Short-term borrowings 5,716,311
Accounts payable and accrued expenses 6,398,536
Income taxes payable 946,289
-----------
Total current liabilities 13,361,571
-------------------------
Deferred revenue 4,217,537
Capital lease obligations, less current portion 326,902
-----------
Total liabilities 17,906,010
----------------- -----------
Minority interest (56,044)
Commitments and contingencies
Shareholders' equity
--------------------
Preferred Stock, no par value; authorized 2,000,000 shares;
issued and outstanding, none -0-
Common stock, $.0001 par value; authorized 10,000,000
shares; issued 8,828,465 shares and outstanding,
8,630,223 shares 883
Additional paid in capital 16,647,184
Accumulated deficit (6,680,432)
Accumulated other comprehensive loss (283,048)
-----------
9,684,587
Unearned compensation (500)
Less cost of Treasury Stock (198,242 common shares) (507,500)
-----------
Total shareholders' equity 9,176,587
-------------------------- -----------
Total liabilities and shareholders' equity $27,026,553
------------------------------------------ ===========
</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 27, 2000 AND MAY 29, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Revenues (including $11,494,896 and $9,358,002 to related
parties in fiscal 2000 and 1999,
respectively) $27,789,050 $23,389,171
Cost of revenues, including amortization of
motion pictures and other films of
$2,289,778 and $1,757,722, respectively 18,023,323 16,074,451
----------- -----------
9,765,727 7,314,720
Selling, general and administrative expenses
(including $106,667 and $108,333 to related parties
in 2000 and 1999, respectively) 10,777,958 9,493,943
----------- -----------
(1,012,231) (2,179,223)
----------- -----------
Other income and (expenses)
Interest expense (including $232,523 and $175,575 to
related parties in 2000 and 1999, respectively) (1,093,912) (2,240,488)
Interest income 195,320 -0-
Other income 143,475 125,720
----------- -----------
(755,117) (2,114,768)
----------- -----------
Loss from continuing operations before income taxes (1,767,348) (4,293,991)
Benefit from income taxes (311,605) (166,850)
----------- -----------
Loss from continuing operations (1,455,743) (4,127,141)
Extraordinary gain on debt restructuring (net of taxes of
$137,015) 200,460 -0-
Gain on sale of discontinued operations (net of taxes of
$469,756) 687,279 -0-
Income (loss) from discontinued operations (net of taxes
(benefit) of $(241,220) and $134,500 in fiscal 2000 and 1999,
respectively) (352,919) 150,201
----------- -----------
Net loss $ (920,923) $(3,976,940)
=========== ===========
Comprehensive Loss
------------------
Net loss $ (920,923) $(3,976,940)
Other comprehensive loss (276,283) (6,765)
----------- -----------
Net other comprehensive loss $(1,197,206) $(3,983,705)
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (continued)
FOR THE YEARS ENDED MAY 27, 2000 AND MAY 29, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Loss Per Share:
<S> <C> <C>
Loss from continuing operations: $ (0.21) $ (0.80)
Basic and Diluted
Extraordinary gain on debt restructuring: $ 0.03 $ -0-
Basic and Diluted
Gain on sale of discontinued operations: $ 0.10 $ -0-
Basic and Diluted
Income (Loss) from discontinued operations: $ (0.05) $ 0.03
Basic and Diluted
Net loss: $ (0.13) $ (0.77)
Basic and Diluted
Weighted average number of shares: 7,119,146 5,511,084
Basic and Diluted
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MAY 27, 2000 AND MAY 29, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Series A Additional Retained Other
Preferred Stock Common Stock Treasury Paid-in Earnings Comprehensive Unearned
Shares Amt Shares Amt Stock Capital (accumulated Loss Compensation Total
deficit)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at May 30, 1998 (as
restated) 855 $857,979 4,245,193 $424 $ -0- $ 9,316,063 $(1,473,321) $ -0- $(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)
Other comprehensive loss (6,765) (6,765)
--- -------- --------- ---- --------- ----------- ----------- --------- -------- ----------
Balance, May 29, 1999 -0- -0- 6,542,198 654 (507,500) 15,456,612 (5,759,509) (6,765) (360,217) 8,823,275
--- -------- --------- ---- --------- ----------- ----------- --------- -------- ----------
Shares issued:
as compensation 235,504 24 141,354 141,378
for services 250,000 25 531,225 531,250
upon conversion of debt 1,800,763 180 753,940 754,120
Issuance of unexercised
warrants 361,347 361,347
Amortization of unearned
compensation - stock 359,717
Unamortized cost of services (597,294) (597,294)
Net Loss (920,923) 359,717 (920,923)
Other comprehensive loss (276,283) (276,283)
--- -------- --------- ---- --------- ----------- ----------- --------- --------- ----------
Balance, May 27, 2000 -0- -0- 8,828,465 $883 $(507,500) $16,647,184 $(6,680,432) $(283,048) $ (500) $9,176,587
--- -------- --------- ---- --------- ----------- ----------- --------- --------- ----------
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MAY 27, 2000 AND MAY 29, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (920,923) $(3,976,940)
----------- -----------
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation Expense 655,300 513,773
Amortization of motion pictures and other films 2,289,778 1,757,722
Amortization of deferred rent (14,011) (14,011)
Amortization of unearned compensation 359,717 247,538
Amortization of goodwill 145,624 364,071
Amortization of discount on debenture 78,850 65,708
Amortization of deferred revenue (569,937) -0-
Amortization of deferred expense 119,458 -0-
Accrued interest and penalties added to note payable principal 273,000 60,000
Discount on issuance of convertible debenture -0- (157,700)
Allowance for doubtful accounts (31,345) 74,070
Embedded interest on convertible debentures -0- 202,092
Gain on sale of discontinued operation (453,385) -0-
Common Stock issued for consulting services 98,378 573,478
Common Stock issued for compensation 43,000 -0-
Common Stock issued for interest expense -0- 570,000
Issuance of warrants 175,844 818,847
Minority interest (109,511) 5,247
Foreign exchange (12,533) (6,765)
(Increase) decrease in assets:
Accounts receivable (336,749) (2,906,281)
Inventory (804,810) (377,117)
Prepaid expenses and other current assets 70,264 (960,857)
Other assets (30,341) (93,819)
Recoverable income tax -0- (134,000)
Deferred income taxes (900,000) -0-
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 1,551,895 3,781,550
Income taxes payable 622,020 99,650
----------- -----------
Total adjustments 3,220,506 4,483,196
----------------- ----------- -----------
Net cash provided by operating activities 2,299,583 506,256
----------------------------------------- ----------- -----------
</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 27, 2000 AND MAY 29, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
---- ----
Cash flows from investing activities:
<S> <C> <C>
Acquisition of Fanzine -0- (4,000,000)
Acquisition costs -0- (168,860)
Notes Receivable 1,821,272 -0-
Investments in motion pictures and other films (2,892,892) (2,869,558)
Purchase of property and equipment (384,745) (477,322)
----------- -----------
Net cash used in investing activities (1,456,365) (7,515,740)
------------------------------------- ----------- ------------
Cash flows from financing activities:
Proceeds from the issuance of Series A convertible Preferred
Stock -0- 1,317,021
Purchase of Treasury Stock -0- (507,500)
Proceeds from issuance of common stock -0- 48,734
Proceeds from exercise of warrants -0- 600,000
Proceeds from issuance of convertible debentures -0- 1,200,000
Net proceeds from line of credit 2,187,155 412,026
Proceeds on notes payable 30,000 5,100,000
Principal payments on notes payable (2,325,000) (875,000)
Principal payments on capital lease obligations (373,834) (356,504)
Contribution from joint venture partner -0- 30,000
----------- -----------
Net cash (used in) provided by financing activities (481,679) 6,968,777
--------------------------------------------------- ----------- -----------
Net increase (decrease) in cash 361,539 (40,707)
Cash, beginning of year (-0-) 184,995
Adjustment for discontinued operations -0- (144,288)
----------- -----------
Cash, end of year $ 361,539 $ -0-
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 474,360 $ 236,728
=========== ===========
Income taxes $ 240,000 $ -0-
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
F-8
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED MAY 27, 2000 and MAY 29, 1999
--------------------------------------------------------------------------------
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 12).
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 had been converted.
Capital lease obligations of $411,799 and $230,382 were incurred during the
fiscal years 2000 and 1999, respectively, when Metro Global entered into
capitalized leases for office equipment and machinery and equipment.
On July 21, 1999, Metro Global entered into a seven year Licensing
Agreement with New Frontier Media, Inc. Metro Global received 500,000 restricted
shares of New Frontier common stock plus warrants to purchase an additional
100,000 shares of New Frontier common stock per year for five years. Metro
Global valued the common stock and warrants at $4,787,474. The deferred revenue
is being amortized over seven years. At May 27, 2000, Metro Global reserved
$263,750 against the investment for a change in market valuation.
As part of the Licensing Agreement, in consideration of certain services,
Metro Global issued New Frontier 250,000 restricted shares of its Common Stock
and warrants to purchase 50,000 shares of Common Stock per year for five years.
Metro Global valued the Common Stock and warrants at $716,752. The deferred
expense is being amortized over five years.
During the year ended May 27, 2000, $105,000 of convertible debentures and
accrued interest and penalties of $31,045 were converted into 83,888 restricted
shares of Common Stock.
During the year ended May 27, 2000, various notes payable to related
parties totaling $580,000 plus accrued interest of $38,075 were converted into
1,716,875 restricted shares of Common Stock.
During the year ended May 27, 2000, various payables and debt due to
related parties totaling $966,231 were assumed by Capital Video Corp, Inc.
("CVC"). The accounts receivable from CVC was reduced accordingly.
On September 30, 1999, Metro Global sold Fanzine for a note receivable of
$4,500,000 and the return of 1,000,000 restricted shares of Metro Global's
Common Stock.
See Notes to Consolidated Financial Statements
F-9
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 27, 2000 AND MAY 29, 1999
--------------------------------------------------------------------------------
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"), a publishing company. 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 note 17) in the
accompanying financial statements.
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. Revenue is recognized
over the life of the agreement.
Sales of magazines and estimated sales returns are recorded when each issue
is shipped to the distributor.
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.
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.
F-10
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 27, 2000 AND MAY 29, 1999
--------------------------------------------------------------------------------
1. Nature of Business and Summary of Significant Accounting Policies (continued)
Foreign Currency Translation
The financial statements of the subsidiary located 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 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
Basic earnings (loss) per share is computed by dividing net income (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.
F-11
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 27, 2000 AND MAY 29, 1999
--------------------------------------------------------------------------------
1. Nature of Business and Summary of Significant Accounting Policies (continued)
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 $133,333 and $333,333 for
goodwill and $12,295 and $30,738 for acquisition costs for the year ended May
27, 2000 and May 29, 1999, respectively. Goodwill was written off with the sale
of Fanzine (see notes 2 and 17).
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 components
of comprehensive loss as of May 27, 2000 consists of a current period charge of
$(12,533) in foreign currency translation and $(263,750) in market valuation
from investment in securities.
Advertising Costs
The cost of advertising is expensed as incurred. For the years ended May
27, 2000 and May 29, 1999, Metro incurred advertising expense of $237,964 and
$283,273, respectively.
Technology and Content
Technology and content expenses consist principally of payroll and related
expenses for development, editorial, systems and telecommunication operations
personnel and consultants, system and telecommunications infrastructure and
costs of acquired content.
Technology and content costs are generally expensed as incurred, except for
certain costs relating to the development of internal-use software, including
those relating to Metro's web sites, that are capitalized and depreciated over
estimated useful lives.
New Accounting Pronouncement
In June 1998, and subsequently amended in 1999 and 2000, 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
F-12
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 27, 2000 AND MAY 29, 1999
--------------------------------------------------------------------------------
1. Nature of Business and Summary of Significant Accounting Policies (continued)
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, 2000. 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.
In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
("SAB No. 101"), which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements. SAB No. 101 did not impact Metro
Global's revenue recognition policies.
In June 2000, Metro adopted Statement of Position 00-2, "Accounting by
Producers and Distributors of Films" ("SOP 00-2"). SOP 00-2 established new film
accounting standards, including changes in revenue recognition and accounting
for advertising, development and overhead costs. Specifically, SOP 00-2 requires
advertising costs for theatrical and television product to be expensed as
incurred. In addition, SOP 00-2 requires development costs for abandoned
projects and certain indirect overhead costs to be charged directly to expense,
instead of those costs being capitalized to film costs, which was required under
the previous accounting model. SOP 00-2 also requires all film costs to be
classified in the balance sheet as noncurrent assets. Provisions of SOP 00-2 in
other areas, such as revenue recognition, generally are consistent with Metro's
existing accounting policies. The effect of SOP 00-2 will be immaterial to the
financial statements.
2. Acquisitions / Dispositions
Maxstone Media
In August 1997, Rocket Media Group, LLC, ("Rocket") a wholly-owned
subsidiary of Metro entered into a joint venture with Salmill Enterprises, Inc.
("Salmill") 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
("Maxstone"). Each joint venture partner contributed $30,000. Metro Global,
which effectively controls Maxstone, has included Maxstone's results from
operations in the consolidated financial statements. Minority interest amounted
to $(56,044) at May 27, 2000. Metro Global is in the process of dissolving this
company, and has classified results as discontinued operations in the
accompanying financial statements.
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. 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.
F-13
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 27, 2000 AND MAY 29, 1999
--------------------------------------------------------------------------------
2. Acquisitions / Dispositions (continued)
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. For the year ended May 27, 2000, Metro
Global received payments of $2,000,000. Metro Global received a payment of
$1,000,000 on May 31, 2000 and will receive a payment of $1,500,000 by August
31, 2000. The operations of Fanzine have been classified as discontinued
operations in the accompanying financial statements (see note 17).
<TABLE>
<CAPTION>
3. Property and Equipment
Property and equipment consists of the following at May 27, 2000,
<S> <C>
Machinery and equipment $ 2,418,085
Furniture and fixtures 1,098,332
Office equipment 818,260
Automobiles 98,932
Leasehold improvements 542,026
-----------
4,975,635
Less: Accumulated depreciation 2,850,211
-----------
Total $ 2,125,424
===========
</TABLE>
<TABLE>
<CAPTION>
4. Motion Pictures and Other Films
Motion pictures and other films consist of the following at May 27, 2000,
<S> <C>
Motion picture films produced and released $11,999,873
Rights acquired to release motion pictures
and other films 2,161,854
CD-ROM 471,478
DVD 288,704
Motion picture films in process 1,559,143
-----------
16,481,052
Less: Accumulated amortization 11,024,411
-----------
TOTAL $ 5,456,641
===========
</TABLE>
F-14
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 27, 2000 AND MAY 29, 1999
--------------------------------------------------------------------------------
5. Investment in securities
On July 21, 1999, Metro Global entered into a seven year Licensing
Agreement with New Frontier Media, Inc. ("New Frontier"). Metro Global received
500,000 restricted shares of New Frontier common stock plus warrants to purchase
an additional 100,000 shares of New Frontier common stock per year for five
years. Metro Global valued the common stock and warrants at $4,787,474. The
deferred revenue is being amortized over seven years. Metro accounts for the
stock received as securities available for sale, in accordance with SFAS 115. At
May 27, 2000, Metro Global recorded a comprehensive loss of $263,750 on the
investment. Both the stock and the warrants are periodically reviewed for
permanent impairment.
As part of the Licensing Agreement, in consideration of certain services,
Metro Global issued New Frontier 250,000 restricted shares of its Common Stock
and warrants to purchase 50,000 shares of Common Stock per year for five years.
Metro Global valued the Common Stock and warrants at $716,752. The deferred
expense is being amortized over five years.
6. Debt
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. On August 1, 1999, the balance of the notes' due dates
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. Metro Global recorded interest expense of $100,050 in connection with the
issuance of the warrants. On December 31, 1999, one of the notes and accrued
interest of $281,250 was converted into 781,250 shares of Metro Global's Common
Stock. On December 31, 1999, the other note and accrued interest totaling
$183,250 was assumed by CVC and the accounts receivable due from CVC was reduced
accordingly.
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 a significant shareholder.
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 a preliminary extension of
the note. Metro Global made a payment of $275,000 in October 1999. Effective
August 8, 2000, Metro Global, renegotiated the terms for the final $550,000 due
on the note payable. Under the terms of the Forbearance and Modification
agreement, Metro Global must make monthly payments of $50,000.
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
F-15
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 27, 2000 AND MAY 29, 1999
--------------------------------------------------------------------------------
6. Debt (continued)
shares during 1999. In September 1999, Metro Global and the lender agreed to an
extension. Under the terms of the extension, Metro Global paid $1.3 million upon
the closing of the financing with Reservoir Capital Corporation, a new unrelated
third party lender. In November 1999, Metro Global paid the lender an additional
$600,000 from the proceeds of the sale of Fanzine. The final payment of $1.2
million (which includes $100,000 of interest) will be paid directly from the
proceeds of the final payment from the sale of Fanzine. In connection with the
restructuring of the two notes payable, Metro Global recognized $337,475 of
extraordinary income on the forgiveness of interest and penalties.
On June 30, 1999, Metro Global entered into a one-year note payable at an
interest rate of 10% with a related party for $30,000. Proceeds from the note
were used for working capital. On December 31, 1999, the note payable and
accrued interest was converted into 87,847 restricted shares of Metro Global's
Common Stock.
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 2005 and bear interest at annual rates ranging from approximately
10% to 21%. All leases are secured by the respective assets acquired.
<TABLE>
<CAPTION>
Annual Payments under capital lease obligations are due as follows:
Years ended Amount
----------- ------
<S> <C>
2001 $ 300,435
2002 216,534
2003 96,123
2004 11,140
2005 3,105
---------
Total $ 627,337
=========
</TABLE>
F-16
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 27, 2000 AND MAY 29, 1999
--------------------------------------------------------------------------------
7. 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 $78,850 and $65,708 of the discount to interest expense during
fiscal 2000 and 1999, respectively.
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
the principal value into Metro Global's Common Stock at a discounted market
price as is defined in the debenture agreement. During fiscal 2000, $105,000 of
convertible debentures plus accrued interest and penalties were converted into
83,888 restricted shares of Metro Global's Common Stock. On February 25, 2000,
Metro Global entered into a Forbearance and Modification Agreement with the
lender. Under the terms of the agreement, Metro Global made a payment of
$150,000 upon execution of the agreement. The remaining balance of $850,000 is
due in two installments of $425,000 each, due on July 1, 2000 and October 1,
2000. The restructured note payable is secured by 200,000 restricted shares of
New Frontier common stock owned by Metro Global. On June 30, 2000, Metro Global
made the first $425,000 payment and 125,000 shares were returned by the lender.
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.
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. On December 31, 1999, one of the
debentures, including the accrued interest due under such debenture, was
converted into 847,778 restricted shares of Metro Global's Common Stock. The
second debenture and accrued interest was assumed by CVC and the accounts
receivable due from CVC was reduced accordingly.
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 in fiscal 1999. Proceeds from the debenture were used for
working capital. On July 1, 1999, the debenture's due date 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. Metro
Global recorded interest expense of $52,000 in connection with the issuance of
the warrants in fiscal 2000. On December 31, 1999, the debenture and accrued
interest were assumed by CVC and the accounts receivable due from CVC was
reduced accordingly.
8. Short-Term Borrowings
Pursuant to a line of credit agreement with Finova Capital, Metro Global's
subsidiary, Metro, was able to borrow up to 75% of assigned accounts receivable
less than 90 days old, up to a maximum of $1,000,000 at an interest rate of
prime plus 5% per annum. The outstanding balance under the line was secured by
the accounts receivable of Metro, and the guarantee of Metro Global. On November
11, 1999, the outstanding balance on the line of credit was repaid with proceeds
from the line of credit with Reservoir Capital Corporation described below.
F-17
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 27, 2000 AND MAY 29, 1999
--------------------------------------------------------------------------------
8. Short-Term Borrowings (continued)
In September 1999, Metro Global signed a $4,000,000 Loan and Security
Agreement with Reservoir Capital Corporation. Pursuant to the terms, Metro may
borrow up to 70% of accounts receivable less than ninety days 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 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 is secured by the assets of Metro. The CVC
accounts receivable are guaranteed to the lender by the sole shareholder of CVC,
who is a principal shareholder of Metro Global. Additionally, CVC has executed a
put on the inventory of Metro in case of default. As of May 27, 2000, borrowings
under the line of credit totaled $3,129,453.
<TABLE>
<CAPTION>
9. Income Taxes
The provision (benefit) for income taxes consists of the following:
2000 1999
---- ----
Current provision (benefit)
<S> <C> <C>
Federal $ 492,034 $ (140,622)
State and local 96,361 (26,228)
---------- -----------
588,395 (166,850)
---------- -----------
Deferred (benefit)
Federal (679,000) -0-
State and local (221,000) -0-
---------- -----------
(900,000) -0-
---------- -----------
Total $ (311,605) $ (166,850)
========== ===========
</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>
2000 1999
---- ----
<S> <C> <C>
Taxes (benefit) computed at 34% $ (600,898) $(1,459,957)
Valuation allowance 118,636 582,485
Permanent differences 121,837 500,023
Other 48,820 210,599
---------- -----------
$ (311,605) $ (166,850)
========== ===========
</TABLE>
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:
F-18
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 27, 2000 AND MAY 29, 1999
--------------------------------------------------------------------------------
9. Income Taxes (continued)
<TABLE>
<CAPTION>
2000 1999
Asset Asset
(Liability) (Liability)
----------- -----------
<S> <C> <C>
Excess depreciation $ (187,000) $ (200,000)
Unearned management compensation 122,000 122,000
Allowance for doubtful accounts 83,000 96,000
Inventory capitalization 156,000 175,000
State net operating loss carry forward 132,000 200,000
Other net deferred assets 1,712,000 (21,000)
--------- -----------
2,018,000 372,000
Less valuation allowance (1,118,000) (372,000)
---------- -----------
Net deferred tax asset $ 900,000 -0-
========== ===========
</TABLE>
A valuation allowance has been established due to the uncertainty of
taxable income in future years.
10. 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 1,320 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 at May 29, 1999, 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. In October 1998, all 400,000 warrants
were transferred to a related party of Metro Global and exercised (see note 12).
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 29, 1999, Metro Global issued 390,092 shares of
Common Stock valued at $988,858. During the year ended May 27, 2000, Metro
Global issued 135,504 shares of Common Stock valued at $98,378. As of May 27,
2000, 16,404 shares are available under this plan.
\
F-19
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 27, 2000 AND MAY 29, 1999
--------------------------------------------------------------------------------
10. Shareholders' Equity (Continued)
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 120,000 shares have been returned to the
plan.
During the year ended May 29, 1999, options to purchase 20,000 shares of
Common Stock were exercised. During the year ended May 27, 2000, Metro Global
awarded 100,000 shares of Common Stock to the President of Metro (see note 12).
There are 310,800 shares available under this Plan as of May 27, 2000.
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. As of May 27,
2000, the plan ended and 595,207 shares remain unawarded.
Stock Options
Pursuant to an employment agreement, Kenneth Guarino, a significant
shareholder and owner of CVC, 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 note 12).
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 and $106,667 for
the year ended May 27, 2000. The consulting agreement was terminated effective
October 25, 1999.
All options remain outstanding. The Black-Scholes Method was utilized to
value the options.
F-20
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 27, 2000 AND MAY 29, 1999
--------------------------------------------------------------------------------
11. 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>
2001 $ 558,378 $ 524,897 $ 7,615 $ 25,866
2002 544,795 524,897 2,538 17,360
2003 512,618 504,178 -0- 8,440
2004 283,909 276,264 -0- 7,645
2005 -0- -0- -0- -0-
---- ---------- ---------- ------- --------
Total $1,899,700 $1,830,236 $10,153 $ 59,311
========== ========== ======= ========
</TABLE>
The lease on the Rhode Island warehouse and office facilities (see note 12)
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.
The lease on the New York City space, which houses Fanzine and Maxstone,
expires on May 30, 2003. The lease was assumed by Fanzine effective September
29, 1999 upon the sale of Fanzine.
Rent expense under office and warehouse operating leases totaled $557,522
and $458,897 during the years 2000 and 1999, respectively
Uninsured Cash
Metro Global maintains its cash 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 is of the opinion that the outcome of the
claims will not have a material impact on Metro Global's financial position. On
November 22, 1999, George Kinney, on behalf of himself and all other similarly
situated, commenced a putative class action in the United States District Court
for the District of Rhode Island against Metro Global and certain of its present
or former Officers and Directors. Plaintiff seeks to represent a class of all
person who acquired securities of Metro Global between September 13, 1996 and
F-21
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 27, 2000 AND MAY 29, 1999
--------------------------------------------------------------------------------
11. Commitments and Contingencies (continued)
September 13, 1999. The Complaint alleges claim based on alleged violations
of section 10(b) of the Securities Exchange Act of 1934. Plaintiff alleges that
the defendants made a series of false and misleading statements concerning Metro
Global's reported financial results during the class period that violated
generally accepted accounting principles and ultimately caused Metro Global to
restate certain financial statements. On March 15, 2000, Metro Global and
certain defendants filed a motion to dismiss the complaint. The plaintiffs filed
an amended complaint dated May 15, 2000 and Metro Global moved to dismiss the
amended complaint on July 5, 2000. Plaintiffs filed an opposition to Metro
Global's motion to dismiss on August 15, 2000. Metro Global's reply to the
plaintiffs opposition is due September 1, 2000. Metro Global believes it has
meritorious defenses and intends to vigorously defend this action.
Metro Global used three vendor in 2000 to provide substantially all
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 41% and 40% of Metro Global's sales (from
continuing operations) during the years ended May 27, 2000 and May 29, 1999,
respectively.
12. Related Party Transactions
Metro Global has significant tenant, borrower and customer relationships
with companies owned and managed by shareholders of Metro Global (see Notes 6
and 11). Significant related party transactions for the years 2000 and 1999 are
summarized below:
Capital Video Corporation ("CVC"), which is owned by Kenneth Guarino, a
significant shareholder, operates approximately thirty video and magazine retail
stores in the New England and New York areas and accounted for approximately 41%
and 40% of Metro Global sales for the years May 27, 2000 and May 29, 1999,
respectively. Metro Global accounts receivables include $2,440,548 due from CVC
at May 27, 2000. No allowance for doubtful related party receivables and no
related party bad debt expense has been recorded in the accompanying 2000 and
1999 consolidated financial statements. During fiscal 2000 and 1999, Metro
Global recorded from CVC $105,777 and $90,569, respectively, in royalty income
pursuant to a franchise agreement for the operation of the Airborne for Men
stores owned by CVC. Effective January 1, 2000, Metro terminated the franchise
agreement as CVC converted all of their existing Airborne for Men stores into
Amazing SuperStores.
Metro leases its Rhode Island warehouse and office facilities from Castle
Properties, L.L.C. ("Castle"), 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 is sublet to CVC on a month-to-month basis. Sublease
income during the years 2000 and 1999 totaled $48,000 for each year. During the
year ended May 30, 1998, Castle 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 for the years ended May 27, 2000 and 1999 was
$200,633 and $200,061, 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
27, 2000 and May 29, 1999, Metro Global incurred approximately $13,493 and
$6,000 of expense, respectively.
F-22
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 27, 2000 AND MAY 29, 1999
--------------------------------------------------------------------------------
12. Related Party Transactions (continued)
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.
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. On December 31, 1999, one of the
debentures, including the accrued interest due under such debenture, was
converted into 847,778 restricted shares of Metro Global's Common Stock. The
second debenture and accrued interest was assumed by CVC and the accounts
receivable due from CVC was reduced accordingly.
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's due date 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. Metro Global recorded
interest expense of $52,000 in connection with the issuance of the warrants. On
December 31, 1999, the debenture and accrued interest were assumed by CVC and
the accounts receivable due from CVC was reduced accordingly.
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, the notes were reduced by $600,000 for the exercise of
warrants. On August 1, 1999, the notes' due dates 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. Metro Global recognized interest
expense of $100,050 in connection with the issuance of the warrants. On December
31, 1999, one of the notes and accrued interest of $281,250 was converted into
781,250 shares of Metro Global's Common Stock. On December 31, 1999, the other
note and accrued interest totaling $183,250 was assumed by CVC and the accounts
receivable due from CVC was reduced accordingly.
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 paid 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 $106,667 and $21,333 in
connection with the issuance of the warrants and reimbursed approximately
$82,000 and $70,000 of expenses to Mr. Guarino during the years ended May 27,
2000 and May 29, 1999, respectively. In October 1999, the consulting agreement
was terminated.
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 company owned by Mr. Alves, the President of Metro
Global, was paid approximately $110,000 and $76,000 during fiscal 2000 and 1999,
respectively.
During the year ended May 27, 2000, Metro Global awarded Dennis Nichols,
President of Metro, 100,000 shares of Metro Global's Common Stock valued at
$43,000.
F-23
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 27, 2000 AND MAY 29, 1999
--------------------------------------------------------------------------------
13. 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 27, 2000 and May 29, 1999 (see note 10).
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 27, 2000 and May
29, 1999 consistent with the provisions of SFAS No. 123, Metro Global's net
(loss) and (loss) per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Net loss - as reported $(920,923) $(3,976,940)
Net loss - pro forma $(929,923) $(4,003,940)
Basic and diluted loss per share - as reported (0.13) (.77)
Basic and diluted loss per share - pro forma (0.13) (.78)
</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 years ended May
27, 2000 or 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-24
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 27, 2000 AND MAY 29, 1999
--------------------------------------------------------------------------------
14. 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.
15. Earnings Per Share
The computation of basic and diluted earnings per share from continuing
operations is as follows:
<TABLE>
<CAPTION>
May 27, 2000 May 29, 1999
------------ ------------
<S> <C> <C>
Loss from continuing operations $(1,455,743) $(4,127,141)
Preferred Stock dividends -0- (309,248)
----------- -----------
Loss from continuing operations
attributable to common shareholders $(1,455,743) $(4,436,389)
=========== ===========
Basic and Diluted EPS:
Basic and Diluted common shares 7,119,146 5,511,084
Basic and Diluted EPS from continuing
operations $ (0.21) $ (0.80)
</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 27, 2000 May 29, 1999
------------ ------------
<S> <C> <C>
Stock Options -0- 106,187
12% convertible debentures -0- 338,736
8% convertible debentures -0- 317,460
</TABLE>
At May 27, 2000 and May 29, 1999, warrants to purchase 1,200,000 and
550,000, respectively, 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.
F-25
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 27, 2000 AND MAY 29, 1999
--------------------------------------------------------------------------------
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.
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.
Foreign sales totaled $919,083 and $764,931 at May 27, 2000 and May 29,
1999, respectively. There was no concentration of sales to any one country.
Foreign assets are immaterial at May 27, 2000.
17. 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
receivable and the return of 1,000,000 restricted shares of Metro Global's
Common Stock. The following table is a summary of the results of discontinued
operations for the year ended May 27, 2000 and May 29, 1999:
<TABLE>
<CAPTION>
May 27, 2000 May 29, 1999
------------ ------------
<S> <C> <C>
Revenues $ 5,354,250 $11,733,545
Cost of revenues 5,335,696 10,127,236
----------- -----------
18,554 1,606,309
Other expenses 722,204 1,321,608
----------- -----------
Income (Loss) before income taxes (703,650) 284,701
Income tax (expense) / Benefit 285,682 (134,500)
----------- -----------
Income (Loss) from discontinued operations $ (417,968) $ 150,201
=========== ===========
</TABLE>
Income from discontinued operations before income taxes does not include an
allocation of corporate interest expense or amortization of goodwill.
Metro Global is currently winding down Maxstone and accordingly accounted
for Maxstone's income, net of tax of $44,461 as discontinued operations in the
accompanying financial statements.
F-26
