SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-KSB
(Mark One)
+---+ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
| X | SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
+---+
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
+---+
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
+---+ THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _______________ to ________________
Commission File No. 0-20190
CLASSICS INTERNATIONAL ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-3859518
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
919 North Michigan Avenue, Chicago, IL, 60611
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (312) 664-7852
------------------------------------------------------------------
Securities registered pursuant to Section 12(b) of the Exchange Act:
Name of each exchange on
TITLE OF EACH CLASS WHICH REGISTERED
NONE
Securities registered pursuant to Section 12(g) of the Exchange Act:
COMMON STOCK, $.001 PAR VALUE
<PAGE>
Check whether the Issuer (1) has 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 NO X
Check if there is no disclosure of delinquent filers pursuant
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
or any amendment to this Form 10-KSB.
The Issuer's revenues for its most recent fiscal year ended
December 31, 1998 were $0.
On October 29, 1999, the aggregate market value of the voting
stock of Classics International Entertainment, Inc. (consisting of Common Stock,
$.001 par value) held by non-affiliates of the Registrant was approximately
$9,104,500 (includes all shares) based on the average closing bid and asked
prices for such Common Stock on said date as reported by NASDAQ.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
On October 29, 1999, there were 17,378,916 shares of Common
Stock, $.001 par value, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
--------------------------
<PAGE>
PART I
ITEM 1. BUSINESS
INTRODUCTION
Classics International Entertainment, Inc. (the "Company") was
incorporated under the laws of the State of Delaware on November 20, 1992. The
Company had four subsidiaries: Moondog's, Inc., which on August 5, 1997, filed
for protection under Chapter 7 of the Bankruptcy laws; Dream Factory, Inc.,
which on May 2, 1996, filed for protection under Chapter 7 of the Bankruptcy
Laws; First Classics, Inc., the holder of a license for the exclusive use of the
Classics Illustrated copyrights, trade names and other intangibles, excluding
non-print media rights; and Classics Media Group, Inc., the exclusive licensee
of the Classics Illustrated properties for non-print media purposes. The Dream
Factory, Inc. and Moondog's, Inc. Bankruptcy cases were brought to closure in
September, 1996 and January, 1998, respectively.
GENERAL BUSINESS DEVELOPMENTS DURING LAST FISCAL YEAR
The company essentially has been a non-operating entity since it
discontinued its operations at the end of 1996.
FIRST CLASSICS
First Classics acquired the exclusive license for the use and
republication of the original library of 169 Classics Illustrated graphic novels
and 76 Classics Illustrated Juniors graphic novels in 1988. First Classics also
has the exclusive rights to create new versions of Classics Illustrated and
Classics Illustrated Juniors publications. A graphic novel combines storytelling
in a format which is more complex than that found in comic books and is
accompanied by sophisticated art work in the style of a comic strip. Graphic
novels contain a single continuous story and generally range in length from 48
to 64 pages.
FRAWLEY LICENSE AGREEMENT
In December 1988, First Publishing, a former subsidiary of the Company,
Classics Media and Berkley Publishing Corporation ("Berkley") (collectively, the
"Licensees") entered into an exclusive License Agreement (the "License
Agreement") with Frawley Corporation ("Frawley"). In 1989, the rights of First
Publishing under the License Agreement were assigned to First Classics,
currently a wholly owned subsidiary of the Company. The rights of Berkley under
the License Agreement were assigned to First Classics in 1991. The License
Agreement gives the Licensee(s) the exclusive and perpetual right to use certain
copyrights, trademarks, trade names and other intangible property related to
Classics Illustrated and Classics Illustrated Juniors (the "Property") owned by
Frawley in exchange for royalty payments ranging from three percent (3%) to ten
percent (10%) of the revenues derived from use of the Property by the Licensees.
Since the inception of the License Agreement in December 1988, the Licensees
have paid royalties to Frawley in excess of $95,000. The License Agreement
requires the Licensees to make minimum annual payments of $3,000 in order for
the license to remain in full force and effect. The next minimum payment is due
in December, 1999.
RECENT DEVELOPMENTS
The Company announced in September 1999 tht it had entered into a letter
of understanding to merge with Zideo.com, Inc. ("Zideo"), a wholly owned
subsidiary of DigiByte corporation. Zideo has developed a "player" which plays
all forms of digital entertainment media over the Internet. Zideo is also
developing a handheld version of the player for use with other forms of
entertainment. The merger is subject to various conditions including the
negotiation and execution of a definitive agreement and various other compliance
and regulatory issues. The Company is also required to settle all outstanding
liabilities prior to the merger. Accordingly, there can be no assurance that the
Company will complete any transaction with Zideo.
COMPETITION
There currently is only a minimal market for the Company's products.
EMPLOYEES
The Company currently has no employees.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company's offices are located at 919 North Michigan Avenue,
Chicago, IL, 60611
ITEM 3. LEGAL PROCEEDINGS
In July, 1994, the Company discharged for cause, four officers of its Dream
Factory subsidiary. The officers who were discharged commenced an action against
the Company seeking approximately $19,000,000 arising out of the alleged
wrongful termination of their employment. The Company subsequently settled the
claims of two of these four officers in return for a payment obligation of
$600,000, which represented approximately $2,000,000 of the original claim.
While the Company believes that it has good and sufficient defenses and
counter claims in the forgoing legal matter, the Company would be adversely
affected to the extent of the damages recovered should the plaintiffs prevail.
However, the ultimate outcome of the litigation cannot presently be determined.
Accordingly, excepting for having previously recorded the $600,000 settlement,
no additional provision for any liability that may result upon adjudication has
been made in the accompanying consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRINCIPAL MARKET
Upon the effectiveness of the Company's initial public offering on
October 19, 1993, the Company's Common Stock commenced trading in the
over-the-counter market and listed on the Small Cap Market of the NASDAQ Stock
Market ("NASDAQ") under the symbol "CIEI." Effective June 30, 1996, the company
was delisted, and has subsequently traded on the NASDAQ bulletin board.
Effective September 20, 1999, the Company was notified by NASDAQ of a potential
delisting from the bulletin board due to non-filing of required reports. Since
September 23, 1999 the Company's stock has traded under the symbol "CIEIE." The
following is the range of high and low bid prices for the Company's stock for
the periods indicated below:
COMMON STOCK HIGH LOW
Fiscal Year 1997:
1st Quarter .22 .06
2nd Quarter .105 .05
3rd Quarter .07 .06
4th Quarter .08 .04
Fiscal Year 1998:
1st Quarter .04 .03
2nd Quarter .03 .02
3rd Quarter .02 .01
4th Quarter .01 .005
Fiscal Year 1999:
1st Quarter .29 .005
2nd Quarter .235 .16
3rd Quarter .71 .07
The above quotations represent prices between dealers; do not include
retail mark-ups, mark-downs, or commissions; and do not necessarily represent
actual transactions.
APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
The approximate number of record holders of the Company's Common Stock
is 172. Such number of record owners was determined from the Company's
stockholder records, and does not include beneficial owners of the Company's
Common Stock whose shares are held in the names of various security holders,
dealers and clearing agencies. The Company believes there are more than 2,100
beneficial holders of the Company's Common Stock.
To date, the Company has not paid dividends on its Common Stock and
does not anticipate paying dividends in the foreseeable future. Future profits,
if any, will be used to fund the growth of the business.
To date, the Company has paid $138,375 of dividends on the Series A
preferred stock, however, the amounts which were due for the quarter ended
December 31, 1995, and all subsequent amounts have not yet been declared or
paid, nor have any amounts to date relating to the Series B and C preferred
stock been declared or paid.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Financial Statements and the Notes thereto appearing in this report.
BUSINESS
Since 1996, the Company has essentially been a non-operating entity
with no business activity conducted through its Classics Media Group subsidiary,
and only minimal business activity conducted through its First Classics, Inc.
subsidiary.
The value of the Company is driven by its being a pubic "shell," with a
substantial tax loss carry-forward, a substantial number of shareholders and in
excess of 20 market makers.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
LOSS FROM CONTINUING OPERATIONS
The Company discontinued its operations at the end of 1996 Accordingly,
no losses from continuing operations were reportable in the years ended
December 31, 1998 and 1997.
LOSS FROM DISCONTINUED OPERATIONS
The loss from discontinued operations was $21,882 for the year ended
December 31, 1998 and $251,197 for the year ended December 31, 1997.
EXTRAORDINARY GAIN - CANCELLATION OF DEBT
The extraordinary gain resulting from the cancellation of debt was
$218,515 for the year ended December 31, 1998 compared to no such gain for the
year ended December 31, 1997.
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK
Net income applicable to common stock was $32,833 for the year ended
December 31, 1998 compared to a net loss of $414,997 for the year ended December
31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the company had working capital and total
capital deficiencies of $2,438,970.
These conditions raise substantial doubt about the Company's ability to
continue as a going concern.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
CLASSICS INTERNATIONAL ENTERTAINMENT, INC.
AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS F-1
INDEPENDENT AUDITORS' REPORT F-2 - F-3
CONSOLIDATED BALANCE SHEET F-4
CONSOLIDATED STATEMENTS OF OPERATIONS F-5
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' DEFICIT F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8 - F-12
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Classics International Entertainment, Inc.
and Subsidiaries
Chicago, Illinois
We have audited the accompanying consolidated balance sheet of
Classics International Entertainment, Inc. and Subsidiaries as of December 31,
1998 and the related consolidated statements of operations, changes in
stockholders' deficit and cash flows for the years ended December 31, 1998 and
1997. 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 audit.
We conducted our audit 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 also 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects the financial position of Classics
International Entertainment Inc. and Subsidiaries as of December 31, 1998 and
the results of their operations and cash flows for the years ended December 31,
1998 and 1997 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
2 to the financial statements, the Company incurred significant operating losses
of $22,000 and $251,000 in 1998 and 1997, respectively. Additionally, the
Company has working capital and total capital deficiencies in excess of
$2,400,000 each at December 31, 1998. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
with respect to these matters are also described in Note 2 to the financial
statements.
F-2
<PAGE>
The accompanying financial statements do not include any
adjustments that might result should the Company be unable to continue as a
going concern.
As discussed in Note 12 to the consolidated financial
statements, the Company is a defendant in litigation relating to an action
brought by former corporate officers alleging wrongful termination of their
employment contracts. The ultimate outcome of the litigation cannot presently be
determined. Accordingly, no provision for any liability that may result upon
adjudication has been made in the accompanying consolidated financial
statements.
\S\ Feldman Sherb Horowitz & Co., P.C.
Certified Public Accountants
New York , NY
October 27, 1999
F-3
<PAGE>
CLASSICS INTERNATIONAL ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
ASSETS
CURRENT ASSETS $ 0
OTHER ASSETS 0
-----------------
$ 0
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 1,414,511
Dividends payable 488,850
Accrued liabilities 333,764
Stockholder loans and other notes payable 201,845
-----------------
TOTAL CURRENT LIABILITIES 2,438,970
-----------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Preferred stock $ 2,012,488
Common stock, $.001 par value, 30,000,000
Shares authorized; 17,378,916 shares issued 17,379
and outstanding
Additional paid-in capital 12,493,490
Stock subscription receivable (44,500)
Accumulated deficit (16,917,827)
-----------------
TOTAL STOCKHOLDERS' DEFICIT (2,438,970)
-----------------
$ 0
See notes to the consolidated financial statements
F-4
<PAGE>
CLASSICS INTERNATIONAL ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1997
--------------- ----------------
Loss from continuing operations $ 0 $ 0
Loss from discontinued operations (21,882) (251,197)
--------------- ----------------
Loss before extraordinary gain (21,882) (251,197)
Extraordinary gain - cancellation of debt 218,515 0
--------------- ----------------
Net income (loss) 196,633 (251,197)
Preferred stock dividends (163,800) (163,800)
--------------- ----------------
Net income (loss) applicable
to common stock $ 32,833 $ (414,997)
=============== ================
Basic and Diluted Income (Loss) Per Common Share:
Loss from continuing operations $ 0 $ 0
Loss from discontinued operations 0 (0.01)
Extraordinary gain 0.01 0
Preferred stock dividends (0.01) (0.01)
--------------- ----------------
Net income (loss) per common
share - basic and diluted $ 0 $ (0.02)
=============== ================
Average common shares outstanding 17,378,916 17,378,916
=============== ================
F-5
See notes to the consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
CLASSICS INTERNATIONAL ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
Additional
Preferred Common Stock Paid-in Subscription Accumulated
Stock Shares Amount Capital Receivable Deficit Total
-------------- ---------- --------- -------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE - JANUARY 1, 1997 $ 2,012,488 17,378,916 $ 17,379 $ 12,493,490 $ (44,500) $ (16,535,663) $ (2,056,806)
Preferred dividends (163,800) (163,800)
Net loss (251,197) (251,197)
-------------- ---------- --------- -------------- ----------- ------------- -------------
BALANCE - DECEMBER 31, 1997 2,012,488 17,378,916 17,379 12,493,490 (44,500) (16,950,660) (2,471,803)
Preferred dividends (163,800) (163,800)
Net loss 196,633 196,633
-------------- ---------- --------- -------------- ----------- ------------- -------------
BALANCE - DECEMBER 31, 1998 $ 2,012,488 17,378,916 $ 17,379 $ 12,493,490 $ (44,500) $ (16,917,827) $ (2,438,970)
============== ========== ========= ============== =========== ============= =============
</TABLE>
F-6
<PAGE>
CLASSICS INTERNATIONAL ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
----------------------------
1998 1997
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 196,633 $ (251,197)
Adjustments to reconcile net income
(loss) to net cash used in operations:
Loss from discontinued operations 21,882 251,197
Extraordinary gain - cancellation of debt (218,515)
------------ -------------
NET CASH USED IN OPERATING ACTIVITIES 0 0
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES: 0 0
CASH FLOWS FROM FINANCING ACTIVITIES: 0 0
NET DECREASE IN CASH 0 0
CASH AT BEGINNING OF YEAR 0 0
------------ -------------
CASH AT END OF YEAR $ 0 $ 0
============ =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest
and income taxes 0 0
============ =============
F-7
<PAGE>
CLASSICS INTERNATIONAL ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
1. THE COMPANY
Classics International Entertainment, Inc. (the "Company")
was incorporated in Delaware on November 20, 1992. On December 31,
1992, the Company acquired Dream Factory, Inc. ("Dream Factory"),
First Classics, Inc. ("First Classics") and Classics Media Group, Inc.
("Classics Media"). On April 11, 1997, the Company acquired the
business and certain assets of Moondog's Inc. ("Moondog's") .
As of December 31, 1995, Dream Factory and Moondog's owned and
operated eleven retail stores and four departments which specialized in
the sale of pop culture wares. First Classics currently holds the
license in perpetuity for the exclusive use of the Classics Illustrated
copyrights, trade names and other intangibles excluding media rights.
Classics Media is the exclusive licensee of the Classics Illustrated
trademarks for non-print media.
In January 1996, nine of the retail stores were closed. The
Company discontinued its operations at the end of 1996. In May 1996,
Dream Factory filed for protection under Chapter 7 of the Bankruptcy
Act; Moondog's followed suit in August, 1997. The respective cases of
the above entities were brought to closure in September 1996 and
January 1998.
2. GOING CONCERN
The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. The Company
incurred operating losses of $22,000 and $251,000 in 1998 and 1997,
respectively. Additionally, the Company had working capital and total
capital deficiencies of $2,400,000 each at December 31, 1998. These
conditions raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans with respect to these
matters include restructuring its existing debt, raising additional
capital through future issuances of stock and debentures and ultimately
acquiring a viable business. The accompanying financial statements do
not include any adjustments that might be necessary should the Company
be unable to continue as a going concern.
F-8
<PAGE>
3. SIGNIFICANT ACCOUNTING POLICIES
A. PRINCIPLES OF CONSOLIDATION - The accompanying consolidated
financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All intercompany transactions and
balances have been eliminated in consolidation.
B. USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
amounts reported in the financial statements and disclosure of
contingent assets and liabilities at the date of the financial
statements. Actual results could differ from these estimates.
C. NET INCOME (LOSS) PER SHARE - Basic earnings (loss) per share was
computed using the weighted average number of shares of
outstanding common stock. Diluted per share amounts when
applicable also include the effect of dilutive common stock
equivalents from the assumed exercise of stock options.
D. INCOME TAXES - Income taxes are accounted for under Statement of
Financial Accounting Standards No. 109, "Accounting for Income
Taxes", which is an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been
recognized in the Company's financial statements or tax returns.
4. ACCRUED LIABILITIES
At December 31, 1998, accrued liabilities consisted of the
following:
Consulting fees ........................................ $134,583
Interest ............................................... 100,710
OTHER .................................................. 98,471
---------
$333,764
=========
F-9
<PAGE>
5. STOCKHOLDER LOANS AND OTHER NOTES PAYABLE
At December 31, 1998, stockholder loans and other notes
payable consisted of the following:
Stockholder loans, interest free, unsecured and
payable on demand ............................................. $ 59,845
Notes payable with interest at 12% per annum,
unsecured and payable on demand ............................... 142,000
----------
$201,845
==========
6. PREFERRED STOCK
At December 31, 1998, Preferred Stock consisted of 5,000,000
authorized shares of $.001 par value of which the following were issued
and outstanding:
Common Shares
Issuable on
AMOUNT CONVERSION
------- ----------
Series A, 9% cumulative, convertible, redeemable;
220,000 shares issued and outstanding $1,100,000 220,000
Series B, 9% cumulative, convertible, redeemable;
412,500 shares issued and outstanding 529,988 577,400
Series C, 4% cumulative, convertible, redeemable;
500 shares issued and outstanding 382,500 1,142,857
------- ---------
$2,012,488 1,940,257
========= =========
7. COMMON STOCK
At December 31, 1998, the Company had common stock reserved of
5,333,114 common shares for issuance upon exercise of 3,392,857
outstanding common stock warrants and the balance for the
conversion of Preferred Stock.
8. EMPLOYEE STOCK OPTION PLAN
In November 1992, the Company adopted the 1992 Employee Stock
Option Plan (the "Option Plan"). The Option Plan provides for the grant
of options to qualified employees (including officers and directors) of
the Company to purchase an aggregate of 1,000,000 shares of Common
Stock. The Option Plan is administered by the Board of Directors or a
committee of the Board of Directors (the "Option Committee") whose
members are not entitled to receive options under the Option Plan. The
Option Committee has complete discretion to select the optionee and to
establish the terms and conditions of each option, subject to the
provisions of the Option Plan. Options granted under the Option Plan
may or may not be "incentive stock options" as defined in Section 422
of the Code ("Incentive Options") depending upon the terms established
by the Option Committee at the time of grant, but the exercise price of
options may not be less than 100% of the fair market value of the
Company's Common Stock as of the date of grant (110% of the fair market
value if the grant is an Incentive Option to an employee who owns more
than 10% of the outstanding Common Stock). Options may not be exercised
more than ten years after the grant. Options granted under the Option
Plan are not transferrable and may be exercised only by the respective
grantees during their lifetimes or by their heirs, executors or
administrators in the event of death. Under the Option Plan, shares
subject to canceled or terminated options are reserved for subsequently
granted options. The number of options outstanding and the exercise
price thereof are subject to adjustment in the case of certain
transactions such as mergers, recapitalizations, stock splits or stock
dividends. No options are outstanding as of December 31, 1998.
9. INCOME TAXES
The following is a reconciliation of income taxes and amounts
computed using the U.S. Federal statutory rate and the effective tax
rate for the years ended December 31, 1998 and 1997:
1998 1997
--------- ---------
CONSOLIDATED PRE-TAX GAIN (LOSS) ...... $ 197,000 $(251,000)
========= =========
Tax (benefit) at Federal statutory rate 69,000 $ (88,000)
Effect of permanent differences ....... -- --
Effect of temporary differences ....... 6,000 26,000
Tax benefit not recognized ............ (75,000) 62,000
--------- ---------
TAXES PER FINANCIAL STATEMENTS ........ $ -- $ --
========== ==========
F-10
<PAGE>
9. INCOME TAXES (CONTINUED)
The Company has adopted Statements of Financial Accounting
Standards No. 109, "Accounting for Income Taxes". Under this standard,
the Company records as an asset its net operating loss carryforward
("NOL") based upon current tax returns, and establishes a valuation
allowance to the extent of any NOL which will not be utilized in the
foreseeable future.
At this time, the Company can not reliably predict future
profitability. Accordingly, the deferred tax asset has been reduced in
its entirety by the valuation allowance.
As of December 31, 1998, the Company had net operating loss
carry forwards of approximately $14,000,000 expiring beginning in the
year 2007. A significant portion of these carry forwards are subject to
limitations on annual utilization due to "equity structure shifts" or
"owner shifts" involving "5 percent stockholders" (as defined in the
Internal Revenue Code), which resulted in more than a 50 percent change
in ownership.
10. RELATED PARTY TRANSACTIONS
The Company is provided with office and administrative
facilities under an informal arrangement with a principal shareholder.
Amounts charged to operations for such services in 1998 and 1997 were
$10,500 and $42,000, respectively.
11. LICENSE AGREEMENTS
The Company has the exclusive and perpetual right to use
certain trade names, copyrights, logos, trademarks and other intangible
property related to Classics Illustrated and Classics Illustrated
Juniors. The Company is obligated to remit royalties ranging from 3
percent to 10 percent, with a minimum of $3,000 per annum, of revenues
derived from such rights.
The Company has also entered into several licensing agreements
with other organizations granting rights to produce publications and
for the use of the Classics Illustrated name in return for royalties
over the term of such agreements.
F-11
<PAGE>
12. LITIGATION
In July 1994, the Company discharged for cause, four officers
of its Dream Factory subsidiary. The officers who were discharged
commenced an action against the Company seeking $19,000,000 arising
out of the alleged wrongful termination of their employment. Prior to
1997 the Company settled the claims of two officers for $600,000 which
represented $2,000,000 of the original claim.
While the Company believes that it has good and sufficient
defenses and counterclaims in the foregoing legal matter, the Company
would be adversely affected to the extent of the damages recovered
should the plaintiffs prevail. No provision for any liability that may
result upon adjudication has been made in the accompanying consolidated
financial statements.
13. EXTRAORDINARY GAIN
In January 1998, Moondog's bankruptcy case was closed
resulting in the cancellation of liabilities of $218,515. The
transaction is reflected in the 1998 financial statements as an
extraordinary gain.
F-12
<PAGE>
ITEM 8. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS.
The sole Director of the Company is Richard S. Berger, age 66. He holds
office until the next annual meeting of stockholders or until their successors
are elected and qualified.
RICHARD S. BERGER has been Chairman of the Company's Board of Directors
since November 1992. Mr. Berger has previously been a self-employed business
consultant in various industries including: cable television, publishing,
production of animated movies and commercials, plastics manufacturing, machining
(tool and die companies), environmental companies (waste water treatment,
contaminated soil removal, and CFC removal), and retailing (niche retailing such
as Big & Tall men's stores, and pop culture stores). He is currently involved
with several high-technology and internet related entities.
INDEMNIFICATION
Pursuant to the Company's Certificate of Incorporation and By-laws,
officers and directors of the Company shall be indemnified by the Company to the
fullest extent allowed under Delaware law for claims brought against them in
their capacities as officers or directors. Indemnification is not allowed if the
officer or director does not act in good faith and in a manner reasonably
believed to be in the best interests of the Company, or if the officer or
director had no reasonable cause to believe his conduct was lawful. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted for directors, officers and controlling persons of the Company
pursuant to the foregoing provisions or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE (1)
<TABLE>
<CAPTION>
========================= ============ ============= ============== ============= ==================================================
LONG TERM COMPENSATION
-------------------------- ------------ ==========
ANNUAL COMPENSATION AWARDS PAYOUTS
========================= ------------ ------------- -------------- ------------- ------------- ------------ ------------ ==========
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Long-term
Other Restricted Incentive All Other
NAME AND PRINCIPAL SALARY Annual Stock Options/ Plan Compen-
------ COMPEN-
POSITION YEAR ($) BONUS($) SATION($) AWARD(S)($) SARS(#) PAYOUTS ($) SATION
--------- ---- --- -------- --------- ----------- ------- ----------- ------
========================= ============ ============= ============== ============= ============= ============ ============ ==========
Richard S. Berger, 1998 $ 8,000 0 0 0 0 0 0
1997 $32,000 0 0 0 0 0 0
Chairman (1,2) 1996 $18,000 0 0 0 0 0
========================= ============ ============= ============== ============= ============= ============ ============ ==========
</TABLE>
(1) See also "Certain Relationships and Related Transactions."
(2) No cash compensation has been paid since July, 1996. The unpaid amount
has been accrued and is reflected in the December 31, 1998 financial statements.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
No options or stock appreciation rights were issued in the last fiscal
year, nor are any outstanding as of December 31, 1998.
EMPLOYEE BENEFIT PLANS
1992 EMPLOYEE STOCK OPTION PLAN
In November, 1992, the Company adopted the 1992 Employee Stock Option
Plan (the "Option Plan"). The Option Plan was amended in September, 1993 to
include additional options under the Option Plan. The Option Plan provides for
the grant of options to qualified employees (including officers and directors)
of the Company to purchase an aggregate of 1,000,000 shares of Common Stock. The
Option Plan is administered by the Board of Directors or a committee of the
Board of Directors (the "Option Committee") whose members are not entitled to
receive options under the Option Plan. The Option Committee has complete
discretion to select the optionee and to establish the terms and conditions of
each option, subject to the provisions of the Option Plan. Options granted under
the Option Plan may or may not be "incentive stock options" as defined in
Section 422 of the Code ("Incentive Options") depending upon the terms
established by the Option Committee at the time of grant, but the exercise price
of options may not be less than 100% of the fair market value of the Company's
Common Stock as of the date of grant (110% of the fair market value if the grant
is an Incentive Option to an employee who owns more than 10% of the outstanding
Common Stock). Options may not be exercised more than 10 years after the grant.
Options granted under the Option Plan are not transferable and may be exercised
only by the respective grantees during their lifetimes or by their heirs,
executors or administrators in the event of death. Under the Option Plan, shares
subject to cancelled or terminated options are reserved for subsequently granted
options. The number of options outstanding and the exercise price thereof are
subject to adjustment in the case of certain transactions such as mergers,
recapitalizations, stock splits or stock dividends. No options are outstanding
as of December 31, 1998.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of December 31, 1998,
with respect to the beneficial ownership of shares of Common Stock by (i) each
person known by the Company to be the owner of more than 5% of the outstanding
shares of Common Stock, (ii) each Director, and (iii) all officers and Directors
as a group:
<TABLE>
<CAPTION>
<S> <C> <C>
================================================================== ------------------------ =======================
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1)
PERCENTAGE OF CLASS
================================================================== ------------------------ =======================
Richard S. Berger 6,516,667(2) 37.4%
1350 North Lake Shore Drive
#315 S.
Chicago, IL 60610
================================================================== ------------------------ =======================
Benjamin B. LeCompte III, M.D. 2,815,834(3) 16.2%
1575 N. Barrington, Suite 350
Hoffman Estates, IL 60194
================================================================== ------------------------ =======================
All officers and directors as a group (1 person) 6,516,667 37.4%
(1)(2)(3)
================================================================== ------------------------ =======================
</TABLE>
(1) Unless otherwise noted, the Company believes that all persons named in the
table have sole investment power with respect to all shares of Common Stock
beneficially owned by them.
(2) Excludes an aggregate of 91,665 shares owned by Mr. Berger's adult
children, as to which Mr. Berger has no beneficial interest.
(3) Excludes 412,500 shares of Series B, 9% cumulative, convertible,
redeemable Preferred Stock.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company is provided with office and administrative facilities under
an informal arrangement with a principal shareholder. Amounts charged to
operations for such services in 1998 and 1997 were $10,500 and $42,000,
respectively.
<PAGE>
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
1. FINANCIAL STATEMENTS
The following financial statements of the Company are included
in Part II, Item 7:
PAGE
Index to Financial Statements F-1
Report of Independent Auditor F-2, F-3
Consolidated Balance Sheet F-4
December 31, 1998
Consolidated Statement of Operations - F-5
Years ended December 31, 1998 and 1997
Consolidated Statement of Stockholders'
Deficit - Years ended December 31, 1998 and 1997 F-6
Consolidated Statement of Cash Flows -
Years ended December 31, 1998 and 1997 F-7
Notes to Consolidated Financial Statements F-8 - F-13
Year ended December 31, 1998
2. FINANCIAL STATEMENT SCHEDULES
None
3. EXHIBITS
The exhibits designated with an asterisk (*) have previously been filed
with the Commission in connection with the Company's Registration Statement on
Form SB-2, File No. 33-62762, and on previous Forms 10-KSB, and pursuant to 17
C.F.R. Sections 201.24 and 240.12b-32, are incorporated by reference to the
document referenced in brackets following the description of such exhibits.
4. REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the year ended December 31,
1998.
<PAGE>
EXHIBIT NO. DESCRIPTION
*2.1 Agreement between Classics International Entertainment, Inc. and First
Publishing, Inc. for the acquisition of First Classics, Inc. dated
January 1, 1994.
*2.1.1 Agreement between Classics International Entertainment, Inc. and
Vulcanium Designs Corporation for the sale of First Publishing, Inc.
dated December 31, 1994.
*3.1 Certificate of Incorporation of the Registrant (Exhibit 3.1 to
Registration Statement on Form SB-2, File No. 33-62762)
*3.1.1 Certificate of Designation of Series A Preferred Stock
*3.2 By-Laws of the Registrant (Exhibit 3.2 to Registration Statement on
Form SB-2, File No. 33-62762)
*3.3 Amendment to By-Laws of Registrant (Exhibit 3.3 to Registration
Statement on Form SB-2, File No. 33-62762)
*3.4 Amended and Restated By-Laws (Exhibit 3.4 to Registration Statement on
Form SB-2, File No. 33-62762)
*4.1 Form of Underwriter's Warrants issued to the Underwriter (Exhibit 4.1
to Registration Statement on Form SB-2, File No. 33-62762)
*4.2 Form of Warrant (Exhibit 4.2 to Registration Statement on Form SB-2,
File No. 33-62762)
*10.1 Agreement and Plan of Merger among the Registrant, First Publishing,
Inc. and FP Acquisition Corp. dated December 31, 1992 (Exhibit 10.1 to
Registration Statement on Form SB-2, File No. 33-62762)
*10.2 Stock Purchase Agreement by and among Michael Raub, Lori Raub, Domenic
Corbo, James Percival, Jr., Mike Gold, Ken Levin, Dream Factory Inc.
and the Registrant dated December 31, 1992 (Exhibit 10.2 to
Registration Statement on Form SB-2, File No.33-62762)
*10.3 Amendment to Stock Purchase Agreement by and among Michael Raub, Lori
Raub, Domenic Corbo, James Percival, Jr., Mike Gold, Ken Levin, Dream
Factory, Inc. and the Registrant dated May 10, 1993 (Exhibit 10.3 to
Registration Statement on Form SB-2, File No. 33-62762)
*10.4 Stock Purchase Agreement by and among the Registrant, Classics Media
Group, Ltd. and Classics Media Group, Inc. dated December 31, 1992
(Exhibit 10.4 to Registration Statement on Form SB-2, File No.
33-62762)
*10.5 Option Assignment between the Registrant and JLI Acquisitions,Inc.
dated December 31, 1992 (Exhibit 10.5 to Registration Statement on
Form SB-2, File No. 33-62762)
*10.6 Employment Agreement between the Registrant, Dream Factory, Inc. and
Michael Raub dated May 10, 1993 (Exhibit 10.6 to Registration
Statement on Form SB-2, File No. 33-62762)
*10.7 Employment Agreement between the Registrant, Dream Factory, Inc. and
Lori Raub dated May 10, 1993 (Exhibit 10.7 to Registration Statement
on Form SB-2, File No. 33-62762)
*10.8 Employment Agreement between the Registrant, Dream Factory, Inc. and
Domenic Corbo dated May 10, 1993 (Exhibit 10.8 to Registration
Statement on Form SB-2, File No. 33-62762)
*10.9 Employment Agreement between the Registrant, Dream Factory, Inc. and
James Percival, Jr. dated May 10, 1993 (Exhibit 10.8 to Registration
Statement on Form SB-2, File No. 33-62762)
*10.10 Employment Agreement between the Registrant, Dream Factory, Inc. and
Mike Gold dated May 10, 1993 (Exhibit 10.10 to Registration Statement
on Form SB-2, File No. 33-62762)
*10.11 Consulting Agreement between the Registrant, Dream Factory, Inc. and
Kenneth Levin dated May 10, 1993 (Exhibit 10.11 to Registration
Statement on Form SB-2, File No. 33-62762)
*10.12 License Agreement, as amended, by and among Berkley Publishing
Corporation, First Publishing, Inc., Classics Media Group, Inc. and
Frawley Corporation dated as of December 30, 1988 (Exhibit 10.12 to
Registration Statement on Form SB-2, File No. 33-62762)
*10.13 Letter dated December 15, 1989 from Frawley Corporation consenting to
assignment of License Agreement from First Publishing, Inc. to First
Classics, Inc. (Exhibit 10.13 to Registration Statement on Form SB-2,
File No. 33-62762)
*10.14 Letters dated December 30, 1988 from Frawley Corporation clarifying
terms of License Agreement (Exhibit 10.14 to Registration Statement on
Form SB-2, File No. 33-62762)
*10.15 Lease Agreement between 575 Boston Post Road Associates and Michael
and Lori Raub D/B/A Dream Factory dated September 14, 1987 (Exhibit
10.15 to Registration Statement on Form SB-2, File No. 33-62762)
*10.16 Lease Agreement between Vincent Gagliardi and Russell A. McDaniel and
Louis Wysocki dated April 28, 1989 (Exhibit 10.16 to Registration
Statement on Form SB-2, File No. 33-62762)
*10.17 Indenture of Lease between Jora Realty Assoc., Michael Raub, Lori
Raub, James Percival and Mary Susan Percival dated October 18, 1989
(Exhibit 10.17 to Registration Statement on Form SB-2, File No.
33-62762)
*10.18 Lease Agreement between Fyber Properties Broadriver Corner Limited
Partnership and Mike Raub dated June 20, 1990 (Exhibit 10.18 to
Registration Statement on Form SB-2, File No. 33-62762)
*10.19 Lease between Connecticut Post Limited Partnership and Dream Factory,
Inc. dated February 13, 1992 (Exhibit 10.19 to Registration Statement
on Form SB-2, File No. 33-62762)
*10.20 Lease between Westland Properties, Inc. and Dream Factory, Inc. dated
February 13, 1992 (Exhibit 10.20 to Registration Statement on Form
SB-2, File No. 33-62762)
*10.21 Lease between Muller Park Realty Company and Dream Factory, Inc. dated
March 1, 1993 (Exhibit 20.21 to Registration Statement on Form SB-2,
File No. 33-62762)
*10.22 Registrant's 1992 Employee Stock Option Plan (Exhibit 10.22 to
Registration Statement on Form SB-2, File No. 33-62762)
*10.23 License Agreement between National Audubon Society, Inc. and First
Publishing, Inc. dated August 1, 1991 (Exhibit 10.23 to Registration
Statement on Form SB-2, File No. 33-62762)
*10.24 License Agreement between Dark Horse Comics, Inc. and First
Publishing, Inc. dated November 1, 1992 (Exhibit 10.24 to Registration
Statement on Form SB-2, File No. 33-62762)
*10.25 Agreement between Dark Horse Comics, Inc. and First Publishing, Inc.
July 1, 1991 (Exhibit 10.25 to Registration Statement on Form SB-2,
File No. 33-62762)
*10.26 Employment Agreement between Registrant, First Publishing, Inc. and
Mike Gold dated May 10, 1993 (Exhibit 10.26 to Registration Statement
on Form SB-2, File No. 33-62762)
*10.27 Form of Financial Consulting Agreement between the Company and
Berkeley Securities Corporation (Exhibit 10.27 to Registration
Statement on Form SB-2, File No. 33-62762)
*10.28 Employment Agreement between the Registrant and Geoffrey Talbot
(Exhibit 10.28 to Registration Statement on Form SB-2, File No.
33-62762)
*10.29 Employment Agreement between Registrant and Peter Cooper (Exhibit
10.29 to Registration Statement on Form SB-2, File No. 33-62762)
*10.30 Sublease between the Registrant and American Dental Assistants
Association dated July 1, 1993 (Exhibit 10.30 to Registration
Statement on Form SB-2, File No. 33-62762)
*10.31 Modification to Amended Stock Purchase Agreement by and among Michael
Raub, Lori Raub, Domenic Corbo, James Percival, Jr., Mike Gold, Ken
Levin, Dream Factory, Inc. and the Registrant dated September 28,
1993.
*10.32 Letter Agreement by and among Michael Raub, Lori Raub, Domenic Corbo,
James Percival, Jr., Mike Gold, Ken Levin, Dream Factory, Inc., First
Publishing, Inc. and the Company dated September 28, 1993 (Exhibit
10.32 to Registration Statement on Form SB-2, File No. 33-62762)
*10.33 Lease between Madison Square Associates, L.P. and Dream Factory Inc.
dated November 22, 1993.
*10.34 Lease between Spring Valley Marketplace Shopping Center and Dream
Factory, Inc. dated November 30, 1993.
*10.35 Lease between Meadow Park Associates and Dream Factory, Inc. dated
December, 1993.
*10.36 Lease between Gilbert Bassin and The Dream Factory dated December 15,
1993.
*10.37 Lease between Paragano Associates, L.P. and The Dream Factory, Inc.
dated February 7, 1994.
*10.38 Lease between Danbury Mall Associates Limited Partnership and Dream
Factory, Inc. dated March 18, 1994.
*10.39 Lease between Albert B. Ratner Trustee and Dream Factory, Inc. dated
March 28, 1994.
*10.40 Lease between Sara Creek Property Company B.V. and Dream Factory Inc.
dated March 25, 1994.
*10.41 Lease between Meadowbrook Development Corp. and Dream Factory, Inc.
dated February 18, 1994.
*10.42 Lease between Gandol Realty Corporation and Dream Factory Inc. on or
about January 1, 1994.
*10.43 Lease between Chicago Title and Trust Company and Dream Factory, Inc.
dated June 15, 1994.
*22.1 Subsidiaries of the Registrant (Exhibit 22.1 to Registration Statement
on Form SB-2, File No. 33-62762)
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CLASSICS INTERNATIONAL
ENTERTAINMENT, INC.
BY \S\Richard S. Berger
Richard S. Berger
Sole Director, and
Principal Accounting Officer
Dated: November 4, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
NAME AND POSITION DATE
November 4, 1999
\S\Richard S. Berger
Richard S. Berger
Sole Director, and
Principal Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000894789
<NAME> CLASSICS INTERNATIONAL ENTERTAINMENT, INC.
<MULTIPLIER> 1
<CURRENCY> U.S.DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 2,438,970
<BONDS> 0
0
2,012,488
<COMMON> 17,379
<OTHER-SE> (4,468,837)
<TOTAL-LIABILITY-AND-EQUITY> (2,438,970)
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> (21,882)
<EXTRAORDINARY> 218,515
<CHANGES> 0
<NET-INCOME> 196,633
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
