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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
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FORM 10-SB
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GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS
Under Section 12(g) of
The Securities Exchange Act of 1934
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SELECT MEDIA COMMUNICATIONS, INC.
(Name of Small Business Issuer in its charter)
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<S> <C>
New York 13-3415331
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
666 Third Avenue, New York, NY 10017
(Address of principal executive offices) (Zip code)
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Issuer's telephone number: (212) 584-1900
Securities to be registered pursuant to Section 12(b) of the Act:
None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock ($.001 Par Value)
(Title of Class)
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TABLE OF CONTENTS
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Page
PART I
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Item 1. Description of Business. 1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 7
Item 3. Description of Property. 12
Item 4. Security Ownership of Certain Beneficial Owners and Management 12
Item 5. Directors, Executive Officers, Promoters and Control Persons 14
Item 6. Executive Compensation 16
Item 7. Certain Relationships and Related Transactions 17
Item 8. Description of Securities 17
PART II
Item 1. Market for Common Equities and Related Stockholder Matters 17
Item 2. Legal Proceedings 19
Item 3. Changes in and Disagreements with Accountants 19
Item 4. Recent Sales of Unregistered Securities. 20
Item 5. Indemnification of Directors and Officers. 22
PART F/S
Financial Statements 23
Table of Contents 24
PART III
Item 1. Index to Exhibits. 36
Signatures 36
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PART I
Item 1. Description of Business
Select Media Communications, Inc. (the "Company" or "Select Media"), a New York
media company, was organized in September, 1981 and specializes in the creation
and production of short-form (thirty-second) television programming, referred to
as "vignettes", designed to wrap around commercials in order to hold the
viewer's interest and improve viewer recall. Select also purchases airtime for
its vignette commercials. Integration enables Select to maximize profitability
by retaining control of the production, distribution, advertising and sales of
its products.
Select has produced vignettes for a wide variety of advertisers including
Campbell Soup Company, Miller Brewing Company, Paramount Pictures, Beatrice
Foods, Hyundai Motors of America, The Prudential, Warner Lambert Company and
L'Oreal. Production and sales of vignettes constitute Select's core business and
entail making the vignettes available to advertisers for their exclusive use for
a period of time for a fee. Select purchases advertising time around which the
vignettes would air and retains the difference between the fees paid by
advertisers and the cost of purchasing required advertising airtime and
producing the vignette. Select is able to purchase advertising time at the best
available rates and maximize profitability.
The Company produces or has under development the following vignette series: (a)
The Business of Sports; (b) Your Health Today; (c) The Beauty Report; and (d)
Fashion Matters. The Company also produces and distributes video press releases
for General Motors Corporation. In 1999, the Company hired personnel to provide
services to worldwide news broadcasters and act as a television news agency
under the name "Select International Television Network" ("SITN") to produce and
distribute news segments for sale to local and foreign news broadcasters. SITN
also provides crewing, transmission and studio facilities, teleconferencing and
video news release production and distribution to the corporate community.
On October 13, 1995, the Company filed a voluntary petition for reorganization
in accordance with and pursuant to Chapter 11 of Title 11 of the United States
Bankruptcy Code. The petition was filed in the United States Bankruptcy Court
for the Southern District of New York and its plan of reorganization was
confirmed on August 28, 1997.
In January, 2000, the Company purchased the assets and business of Sigma Sound
Studio, Inc. ("Sigma"). Sigma is one of the most famous recording studios in
popular music history. Founded in 1968 by Joseph Tarsia, the Company's
president, Sigma is a state of the art recording facility, including both analog
and digital capabilities. Sigma was the birthplace of THE SOUND OF PHILADELPHIA,
and the home of some of the most influential record producers and audio
engineers of the Seventies and Eighties. Sigma and its staff will assist in
record production and sound mixing for CDs, DVDs and videos.
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Select Media's business is subject to numerous risk factors, including, but not
limited to, the following:
RISKS RELATED TO THE COMPANY'S BUSINESS
Select Media Anticipates Future Losses and Negative Cash Flow; Substantial
Accumulated Deficit. Select Media expects operating losses and negative cash
flow to continue for the foreseeable future. Select Media anticipates the
Company's losses will increase significantly from current levels because the
Company expects to incur additional costs and expenses related to:
- brand development, marketing and other promotional activities;
- expansion of the Company's operations;
- integration of the Sigma acquisition;
- potential other acquisitions in the Company's areas of focus; and
- development of relationships with strategic business partners.
As of December 31, 1999, Select Media had an accumulated deficit of
$95,762,106. Select Media incurred net losses of $91,410,341 on gross sales of
$2,310,002 for the fiscal year ended December 31, 1999. The Company's ability
to become profitable depends on the Company's ability to generate and sustain
substantially higher net sales while maintaining reasonable expense levels. If
Select Media does achieve profitability, the Company cannot be certain that the
Company would be able to sustain or increase profitability on a quarterly or
annual basis in the future. See Item 2-"Managements Discussion and Analysis."
The Company's Operating Results are Volatile and Difficult to Predict. If
Select Media Fails to Meet the Expectations of Public Market Analysts and
Investors, the Market Price of the Company's Common Stock May Decrease
Significantly. The Company's annual and quarterly operating results may
fluctuate significantly in the future due to a variety of factors, many of
which are outside of the Company's control, including, among other things, the
unpredictability of consumer trends. Because the Company's operating results
are volatile and difficult to predict, Select Media believes that
quarter-to-quarter comparisons of the Company's operating results are not a
good indication of the Company's future performance. It is likely that in some
future quarter the Company's operating results may fall below the expectations
of securities analysts and investors. In this event, the trading price of the
Company's Common Stock may fall significantly. Factors that may harm the
Company's business or cause the Company's operating results to fluctuate
include the following:
- the Company's inability to obtain new customers at reasonable cost
and retain existing customers;
- decreases in the funds available for marketing and promoting the
Company's services;
- the Company's inability to manage integration of acquisitions;
- the Company's inability to adequately maintain, upgrade and develop
the Company's
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technical systems;
- the ability of the Company's competitors to offer competitive
services or products;
- price competition;
- the termination of existing, or failure to develop new, strategic
marketing relationships;
- increases in the cost of marketing; and
- the amount and timing of operating costs and capital expenditures
relating to expansion of the Company's operations.
A number of factors will cause the Company's gross margins to fluctuate in
future periods, including the mix of services provided by the Company and its
subsidiaries, the market for the Company's products, the Company's ability to
keep up with technical innovations and efficiencies and the like. Any change in
one or more of these factors could harm the Company's gross margins and
operating results in future periods.
If Select Media Is Unable To Obtain Contracts for use of its Vignettes From the
Company's Customers, the Company's Net Sales Would Be Adversely Affected. If
Select Media were unable to sell the use of its vignettes to its customers, the
Company's net sales and results of operations would be harmed.
To Manage the Company's Growth and Expansion, Select Media Needs To Integrate
its Acquisitions. If Select Media Is Unable To Do So Successfully, the Company's
Business Would Be Seriously Harmed. The Company's growth in operations and
possible acquisitions will place a significant strain on the Company's
management, information systems and resources. In order to manage this growth
effectively, Select Media needs to continue to improve the Company's financial
and managerial controls and reporting systems and procedures. The Company's
failure to successfully implement, improve and integrate these systems and
procedures would harm the Company's results of operations.
Select Media May Not Be Able To Compete Successfully Against Current and Future
Competitors. The Company faces competition from some of the largest
entertainment companies in the United States. The entertainment market is
rapidly evolving and intensely competitive. Increased competition is likely to
result in price reductions, reduced gross margins and loss of market share, any
of which could seriously harm the Company's net sales and results of operations.
Select Media expects competition to intensify in the future as additional
distribution channels for entertainment product are opened.
Many of the Company's competitors have longer operating histories, larger
customer bases, greater brand recognition and significantly greater financial,
marketing and other resources than does Select Media. Many of these competitors
can devote substantially more resources to marketing and promotion than can
Select Media. In addition, larger, well-established and well-financed
entertainment companies may try to offer competing products. The Company's
competitors may be able to adopt more aggressive pricing policies than can
Select Media.
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If Select Media Does Not Successfully Expand the Company's Product Offerings,
the Company's Business Could be Seriously Harmed. If Select Media does not
successfully expand the Company's product offerings, including new vignette
series, news services and video press releases, Select Media will not be able
to increase the Company's net sales in accordance with the expectations of
securities analysts and investors. In such an event, the Company's business
will be harmed. The Company's success depends on the Company's ability to
expand the Company's product and service offerings rapidly in order to
accommodate a significant increase in customer orders. The Company's planned
expansion may cause disruptions that could harm the Company's business, results
of operations and financial condition.
If Select Media Does Not Respond To Rapid Technological Changes, the Company's
Services Could Become Obsolete and the Company's Business Would Be Seriously
Harmed. If Select Media faces material delays in introducing new services,
products and enhancements, the Company's customers may forego the use of the
Company's services and use those of the Company's competitors. To remain
competitive, Select Media must continue to improve and expend its programming
choices and value-added services. The entertainment industry is rapidly
changing as a result of technology improvements, new distribution channels and
new customer demands. If competitors introduce new products and services
embodying new technologies, or if new industry standards and practices emerge,
the Company's existing products and services may become obsolete. Developing,
enhancing and upgrading the Company's technology entails significant technical
and business risks. Select Media may use new technologies ineffectively or
Select Media may fail to adapt the Company's existing technology and the
Company's computer network to customer requirements or emerging industry
standards.
Intellectual Property Claims Against the Company Could Be Costly and Could
Result In the Loss Of Significant Rights. Other parties may assert infringement
or unfair competition claims against Select Media. The Company cannot predict
whether third parties will assert claims of infringement against Select Media,
or whether any future assertions or prosecutions will harm the Company's
business. If Select Media is forced to defend against any such claims, whether
they are with or without merit or are determined in the Company's favor, then
Select Media may face costly litigation, diversion of technical and management
personnel, or product shipment delays. Because of such a dispute, Select Media
may have to develop non-infringing technology or enter into royalty or
licensing agreements. Such royalty or licensing agreements, if required, may be
unavailable on terms acceptable to the Company, or at all. If there is a
successful claim of product infringement against the Company and Select Media
are unable to develop non-infringing technology or license the infringed or
similar technology on a timely basis, it could harm the Company's business.
If the Protection of the Company's Technology, Trademarks and Proprietary
Rights Is Inadequate, the Company's Business Will Be Seriously Harmed. The
steps Select Media takes to protect the Company's proprietary rights may be
inadequate. Select Media regards the Company's copyrights, service marks,
trademarks, trade dress, trade secrets
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and similar intellectual property as critical to the Company's success. Select
Media relies on trademark and copyright law, trade secret protection and
confidentiality or license agreements with the Company's employees, customers,
partners and others to protect the Company's proprietary rights.
The Loss of the Services of One Or More of the Company's Key Personnel, or the
Company's Failure To Attract, Assimilate and Retain Other Highly Qualified
Personnel in the Future Would Seriously Harm the Company's Business. The loss
of the services of one or more of the Company's key personnel could seriously
harm the Company's business. Select Media depends on the continued services and
performance of the Company's senior management and other key personnel,
particularly Mitch Gutkowski. All of the Company's officers and key employees
are bound by employment agreements. Select Media does not have "key person"
life insurance policies covering any of the Company's employees.
Select Media May Be Adversely Impacted if the Software, Computer Technology and
Other Systems Select Media Uses are not Year 2000 Compliant. Any failure of the
Company's material systems, the Company's vendors' material systems or the
Internet to be Year 2000 compliant would have material adverse consequences for
the Company. Such consequences would include difficulties in providing
switching or conducting other fundamental parts of the Company's business.
Select Media has determined that all of its material systems are Year 2000
compliant and has received assurances that its vendors' systems are Year 2000
compliant also. Select Media also depends on the Year 2000 compliance of the
computer systems and financial services used by consumers and by
telecommunications companies with which its systems operate. A significant
disruption in the ability of consumers to reliably access their
telecommunications system or portions of it would have an adverse effect on
demand for the Company's services and would have a material adverse effect on
the Company. See Item 2-"Management's Discussion and Analysis."
Risks Associated With Potential Acquisitions. If Select Media is presented with
appropriate opportunities, Select Media intends to make investments in
complementary companies, products or technologies. Select Media may not realize
the anticipated benefits of any acquisition or investment. If Select Media buys
a company, Select Media could have difficulty in assimilating that company's
personnel and operations. In addition, the essential personnel of the acquired
company may decide not to work for the Company. If Select Media makes other
types of acquisitions, Select Media could have difficulty in assimilating the
acquired technology or products into the Company's operations. These
difficulties could disrupt the Company's ongoing business, distract the
Company's management and employees and increase the Company's expenses.
Furthermore, Select Media may have to incur debt or issue equity securities to
pay for any future acquisitions or investments, the issuance of which could be
dilutive to the Company or the Company's existing stockholders.
Existing Stockholders Will Be Able to Exercise Significant Control Over Select
Media. Executive officers, directors and entities affiliated with them, if
acting together, would be
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able to significantly influence all matters requiring approval by the Company's
stockholders, including the election of directors and the approval of mergers
or other business combination transactions. These stockholders, taken together,
beneficially own approximately 46% of the Company's outstanding common stock
and can effectively elect all directors and pass any action requiring
stockholder approval at a meeting. See Item 4. "Security Ownership of Certain
Beneficial Owners and Management" and Item 5 "Directors, Executive Officers,
Promoters and Control Persons."
RISKS RELATED TO SECURITIES MARKETS
Select Media May Be Unable to Meet the Company's Future Capital Requirements.
Select Media cannot be certain that additional financing will be available to
the Company on favorable terms when required, or at all. If Select Media raises
additional funds through the issuance of equity, equity-related or debt
securities, such securities may have rights, preferences or privileges senior
to those of the rights of the Company's Common Stock and the Company's
stockholders may experience additional dilution. Select Media requires
substantial working capital to fund the Company's business. Since the Company's
emergence from Chapter 11 bankruptcy proceedings, Select Media has experienced
negative cash flow from operations and expects to experience significant
negative cash flow from operations for the foreseeable future. Select Media
currently anticipates that the Company's available funds will be sufficient to
meet the Company's anticipated needs for working capital and capital
expenditures through at least the next 12 months. Select Media may need to
raise additional funds before the expiration of such period.
The Company's Common Stock Price May Be Volatile, Which Could Result in
Substantial Losses For Individual Stockholders. The market price for the
Company's common stock is likely to be highly volatile and subject to wide
fluctuations in response to factors including the following, some of which are
beyond the Company's control:
- actual or anticipated variations in the Company's quarterly
operating results;
- announcements of new products or services by the Company or the
Company's competitors;
- changes in financial estimates by securities analysts;
- conditions or trends in the telecommunications industry;
- changes in the economic performance and/or market valuations of
other independent telecommunications companies;
- announcements by the Company or the Company's competitors of
significant acquisitions, strategic partnerships, joint ventures or
capital commitments;
- additions or departures of key personnel;
- release of lock-up or other transfer restrictions on the Company's
outstanding shares of common stock or sales of additional shares of
common stock; and
- potential litigation.
If the Company's Stock Price Is Volatile, Select Media Could Face a Securities
Class Action Lawsuit. In the past, following periods of volatility in the market
price of their
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stock, many companies have been the subjects of securities class action
litigation. If disgruntled stockholders sued Select Media in a securities class
action, it could result in substantial costs and a diversion of management's
attention and resources and would harm the Company's stock price.
Substantial Sales of the Company's Common Stock Could Cause the Company's Stock
Price To Fall. If the Company's stockholders sell substantial amounts of the
Company's Common Stock in the public market, the market price of the Company's
Common Stock could fall. Such sales also might make it more difficult for the
Company to sell equity or equity-related securities in the future at a time and
price that Select Media deems appropriate.
Conflicts of Interest. Officers and directors of the Company may in the future
participate in business ventures that could be deemed to compete directly with
the Company. Additional conflicts of interest and non-arms length transactions
may also arise in the future in the event the Company's officers or directors
are involved in the management of any firm with which the Company transacts
business. The Company has adopted a policy that the Company will not seek a
merger with, or acquisition of, any entity in which members of the Company's
management serve as officers, directors or partners, or in which they or their
family members own or hold any material ownership interest.
Reporting Requirements May Delay or Preclude Acquisition. Sections 13 and 5(d)
of the Securities Exchange Act of 1934 (the "1934 Act"), require companies
subject thereto to provide certain information about significant acquisitions,
including certified financial statements for the company acquired, covering one,
two, or three years, depending on the relative size of the acquisition. The time
and additional costs that may be incurred by some target entities to prepare
such statements may significantly delay or essentially preclude consummation of
an otherwise desirable acquisition by the Company. Acquisition prospects that do
not have or are unable to obtain the required audited statements may not be
appropriate for acquisition so long as the reporting requirements of the 1934
Act are applicable.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Select Media is a New York corporation whose common stock is currently traded on
the Over-the-Counter Bulletin Board under the symbol "SMTV." The Company
currently produces and distributes "vignettes," which are short-form
(thirty-second) informational programs distributed by particular sponsors for
viewing during regular programming. The Company produces or has under
development the following vignette series: (a) The Business of Sports; (b) Your
Health Today; (c) The Beauty Report; and (d) Fashion Matters. The Company also
produces and distributes video press releases for General Motors Corporation. In
1999, the Company hired personnel to provide services to
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worldwide news broadcasters and act as a television news agency under the name
"Select International Television Network" ("SITN") to produce and distribute
news segments for sale to local and foreign news broadcasters. SITN also
provides crewing, transmission and studio facilities, teleconferencing and video
news release production and distribution to the corporate community.
In January, 2000, the Company purchased the assets and business of Sigma Sound
Studio, Inc. ("Sigma"). The acquisition of Sigma was accounted for as a
purchase. See, Financial Statements.
COMPETITION
The Company faces competition from some of the largest entertainment companies
in the United States. The entertainment market is rapidly evolving and intensely
competitive. Increased competition is likely to result in price reductions,
reduced gross margins and loss of market share, any of which could seriously
harm the Company's net sales and results of operations. Select Media expects
competition to intensify in the future as additional distribution channels for
entertainment product are opened. In particular, the Company believes that the
use of the Internet for distribution of entertainment product is both an
opportunity and a challenge. With so many entertainment choices, the Company
faces the challenge of adapting its core business to Internet entertainment.
MARKET STRATEGY
The Company markets its vignette products to large advertisers directly to the
marketing departments of these companies. The Company uses its own internal
staff for such marketing. The Company intends to continue with this strategy for
its vignette products. The Company is developing vignettes for radio as well,
and is developing a form of vignette for on-line advertising.
Sigma markets its services directly through its principals. Sigma has also
produced successful compilation albums sold through home shopping channels,
direct response television and direct mail. Select Media and Sigma are working
jointly on projects for marketing musical works via the Internet and expects to
develop such a strategy or partner with an Internet retailer for on-line product
distribution of both compact discs and downloadable music files.
The Company has 11 full time and 2 part time employees and operates a facility
at 666 Third Avenue, New York, New York used as the principal corporate office
and the site of its studio facilities. As a result of the Sigma acquisition, the
Company also leases a sound recording studio facility at North 12th Street in
Philadelphia, Pennsylvania.
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's consolidated
statements of operations as a percentage of net revenues for the periods
indicated:
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<TABLE>
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For the Year ended
December 31,
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1999 1998
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Net revenues 100.0% 100.0%
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Cost of revenues 56.1% 48.9%
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Gross profit 43.9% 51.1%
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Operating expenses:
Marketing and selling 0% 0%
General and administrative 190% 291.1%
Nonrecurring costs 3639.4% 453%
Amortization of acquisition-related
intangible assets 0 % 0 %
Total operating expenses 3829.4% 744.1%
Operating income (loss) (3785.5) (693)%
Other income and expense, net (14.1)% (259.9)%
Income (loss) before income taxes
and extraordinary items (3799.6)% (952.9)%
Provision for (benefit from)
income taxes 0% 0 %
Net income (loss) before
extraordinary items (3799.6)% (952.9)%
Extraordinary Items (157.6)% 0%
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Net Revenues (3957.2)% (952.9)%
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The Company's net revenues have been derived mainly from the sales of vignettes
and video press releases. Net revenues increased by $1.9 (475%) to $2.3 million
in the year ended December 31, 1999 from $0.4 million in 1998. The increase in
net revenues during 1999 was primarily attributable to revenues from its
international news operations and video press releases for General Motors
Corporation. The Company believes it can expand its video press release business
for the current year, but expects SITN revenues to be consistent with 1999
levels.
Gross Profit
Cost of revenues consists primarily of costs associated with the producing the
vignettes and video press releases and marketing the finished product, including
scriptwriting, filming, salaries and post-production processing and editing. The
resulting gross profit fluctuates based on factors such as salary expense,
editing and marketing. Re-use of vignettes and portions thereof increases
profits. Gross margin decreased to 44% in 1999, compared to 51% in 1998. The
decrease during 1999 was primarily due to for expenses
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of starting the international news bureau operation. The Company currently
expects gross margins during 2000 to be consistent with the 1999 levels. In the
current year, the Company expects the Sigma acquisition to have a positive
effect on both revenues and gross margin.
Expenses
Selling, general and administrative expenses were $4,389,803 in 1999 and
$1,304,615 in 1998, for an increase of $3,085,188, or 236%. This increase was
attributable to large salary and rent expenses for the expansion of the
Company's new SITN business and relocation of the Company's offices. The
Company's expenses in 1999 also include a non-recurring stock based compensation
expense of $84,070,333, which had a substantial impact on expenses for the year.
The Company also had extraordinary item of $3,640,000 in 1999, due to
extinguishment of debt costs.
Losses
The Company incurred losses from operations of $(87,445,024) in 1999 compared to
$(3,105,497) in 1998, for an increase of $(84,339,527) or 2,716%. The
substantial increase in losses was due primarily to non-recurring stock based
compensation expense of $84,070,333 in 1999, caused by issuances of stock to the
Company's principals and employees, for extinguishment of debt and for
consultant's compensation. These non-recurring costs were vital to the Company's
remaining viable in its industry. The Company anticipates that it will not be
subject to such substantial non-recurring costs in 2000. Net other expenses were
$(325,317) in 1999 and $(1,164,798) in 1998, for a decrease of $(839,481) or
72%.
LIQUIDITY AND CAPITAL RESOURCES
The Company has significant capital needs, which to date the Company has met
through private sales of its equity and loans. The Company will continue to need
substantial infusions of capital, which it expects to continue to fund primarily
from private sales of its equity and loans, or by a public offering of its
equity or debt securities. The Company has received a commitment from a funding
source for $2 million in additional financing for the year 2000 and is
continuing in efforts to increase capital resources.
Item 3. Description of Property
The Company leases a facility as its headquarters located at 666 Third Avenue,
New York, New York. This facility contains studio space, editing equipment and
offices. The facility contains approximately 16,700 square feet total, of which
11,000 square feet are used for office space, 4,000 square feet are used for
studios and 1,200 square feet are used to house equipment. The lease on this
facility expires February 15, 2015 and the annual lease payments in 2000 are
$522,951 for the entire facility.
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As part of the Sigma transaction, the Company leases a facility located at North
12th Street, Philadelphia, Pennsylvania as the recording studio and offices of
Sigma Sound. This facility contains recording studio space, editing equipment
and offices. The facility contains approximately 3,000 square feet total, of
which 1,000 square feet are used for office space, and 2,000 square feet are
used for studios. The lease on this facility expires January 31, 2005 and the
annual lease payments are $76,000 for the entire facility.
Item 4. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners.
The following table sets forth the beneficial ownership for the Company's sole
class of Common Stock of the Company beneficially owned by all directors,
officers and 5% or more holders.
<TABLE>
<CAPTION>
Name and
Address of Nature of
Beneficial Beneficial Number of
Owner Ownership Shares Percent
- ----- --------- ------ -------
<S> <C> <C> <C>
Mitch Gutkowski(1) Record 2,000,000 23%
James Mongiardo Not Applicable 0 0%
Chet Simmons(1) Record 11,600 (2)
Dominick Sartorio(1) Record 2,006,667 23%
</TABLE>
(1) Address c/o the Company at 666 Third Avenue, New York, New York.
(2) Less than 1%.
Item 5. Directors, Executive Officers, Promoters and Control Persons.
The directors and officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Mitch Gutkowski 45 Chairman of the Board
and Director
James Mongiardo 54 Vice Chairman and Director
Chet Simmons 71 Director
Joseph Tarsia 65 President of Sigma Sound
Billy Terrill 55 Executive Vice President of Sigma Sound
</TABLE>
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MITCH GUTKOWSKI founded Select Media Communications, Inc. in 1981 and as Co-
Chairman coordinates the efforts of the Company's divisions and oversees
operations. With the Board of Directors as a group, Mr. Gutkowski oversees
strategic planning for the Company. Before founding Select Media, Mr. Gutkowski
was Vice President for Advertising Sales for Pro-Sport Entertainment, Inc.
JAMES MONGIARDO, Vice Chairman of the Board, has extensive experience in
building companies and in the banking and securities business. He has served as
Chief Executive Officer for public biotechnology and healthcare services
companies and as head of United States Marketing for Schering-Plough
Corporation. For the past five years, he has been Managing Director of LBC
Capital, an investment banking firm specializing in institutional private
placements for emerging companies.
CHET SIMMONS, Director, has a distinguished career in helping to shape modern
sports television. In 1957, he joined the group responsible for the American
Broadcasting Company's sports programming, including "ABC's Wide World of
Sports," "The American Sportsman," and ABC's classic Olympic Games coverage. In
1964, he moved to NBC, where rose to the position of the first President of NBC
Sports. During his tenure at NBC, that network acquired the rights to televise
Major League Baseball, the National Hockey League, various Olympic Games and
NCAA football. Mr. Simmons left NBC Sports to become the first President and
Chief Executive Officer of ESPN. Mr. Simmons became commissioner of the United
States Football League in 1982 and then went on to serve as a consultant to a
wide variety of sports/television businesses.
JOE TARSIA started his recording career in 1958, building and maintaining local
Philadelphia recording studios. In 1961, he joined Cameo Parkway Records, where
he quickly rose to the position of Chief Engineer for such artists as Bobby
Rydell, Chubby Checker, the Dovells and the Orlons. In 1968, Mr. Tarsia founded
Sigma Sound Studios as an independent recording studio, which became the home of
major record producers Kenny Gamble, Leon Huff and Thom Bell, and the birthplace
of THE SOUND OF PHILADELPHIA.
Sigma earned Gold and Platinum record awards for recordings by Jerry Butler, The
Intruders, Harold Melvin and The Blue Notes, The Ojays, Teddy Pendergrass, The
Stylistics, The Delfonics, Lou Rawls and The Jacksons. Artists and producers who
recorded at Sigma included Stevie Wonder, B.B. King, Grace Jones, Gladys Knight
and The Pips, David Bowie, Robert Palmer and The Four Tops.
In 1976, Mr. Tarsia expanded Sigma to include three studios in Manhattan's music
district. Sigma New York attracted the likes of Whitney Houston, Madonna, Steely
Dan, The Village People, Talking Heads, Paul Simon, Ashford and Simpson and
Billy Joel.
Mr. Tarsia has won many industry awards for his engineering accomplishments,
including over 150 Gold and Platinum records. Recently, his Philadelphia
recording studio was named as a national rock and roll landmark.
12
<PAGE> 15
Mr. Tarsia is President of Sigma.
BILLY TERRILL, Executive Vice President of Sigma Sound, has spent the last 30
years in the music business. Over the course of his career, he has written,
arranged and produced over 300 works released by Frankie Avalon, Helen Reddy,
David Clayton-Thomas, LeVert, The Manhattans, The Moments and many others. Mr.
Terrill has written and produced works for Columbia Records, Atlantic, Polydor,
Mercury, RCA, Paramount and many others. His hits span many genres, from pop to
R & B to jazz.
The above listed directors will serve until the next annual meeting of the
stockholders or until their death, resignation, retirement, removal, or
disqualification, and until their successors have been duly elected and
qualified. Our executive officers serve at the discretion of the Board of
Directors. Vacancies in the existing Board of Directors are filled by majority
vote of the remaining Directors. Officers of the Company serve at the will of
the Board of Directors. There are no agreements or understandings for any
officer or director to resign at the request of another person and no officer or
director is acting on behalf of or will act at the direction of any other
person. There is no family relationship between any executive officer or
director of the Company.
Board Committees. The Board of Directors has not yet established any committees.
The Board intends to establish a Compensation Committee and an Audit Committee
at the next meeting of the Board of Directors.
Compensation Committee Interlocks And Insider Participation. The Board has not
yet established a Compensation Committee. The Board of Directors as a whole
performs this function.
Director Compensation. Select Media's directors do not receive any cash
compensation for their service as members of the Board of Directors, although
they are reimbursed for travel and lodging expenses in connection with
attendance at Board meetings.
Item 6. Executive Compensation.
Executive Compensation. The following table sets forth the compensation received
for services rendered to the Company during the fiscal year ended December 31,
1999 by our Chief Executive Officer. Except for the CEO, the Company had no
officers who earned more than $100,000 during the fiscal year ended December 31,
1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Name And Principal Annual Compensation Other Annual Long-Term All Other
Position Salary($) Bonus($) Compensation Compensation Awards
- -------- --------- -------- ------------ ------------ ------
Compensation
------------
<S> <C> <C> <C> <C> <C>
Mitch Gutkowski $200,000 $ 0 None None None
Chief Executive Officer
</TABLE>
13
<PAGE> 16
The Company did not pay to our Chief Executive Officer or any executive officer
any compensation intended to serve as incentive for performance to occur over a
period longer than one year pursuant to a long-term incentive plan in the fiscal
year ended December 31, 1999. The Company does not have any defined benefit or
actuarial plan with respect to our Chief Executive Officer or any executive
officer under which benefits are determined primarily by final compensation and
years of service.
Option Grants
The Company issued stock options to its Chief Executive Officer to purchase
1,500,000 shares at an exercise price of $3.50 per share in the fiscal year
ended December 31, 1999.
Employment Contracts
The Company has an employment contract with Mr. Gutkowski to act as the
Company's president and chief executive officer, which provides for a yearly
salary of $200,000 in 2000, $300,000 in 2001, $350,000 in 2002, $400,000 in 2003
and $450,000 in 2004, with a bonus of 2% of the Company's net profits,
determined and paid quarterly. This agreement has a term of 5 years and expires
October, 2004.
Members of the Company's management are associated with other firms involved in
a range of business activities. Consequently, there are potential inherent
conflicts of interest in their acting as officers and directors of the Company.
Insofar as the officers and directors are engaged in other business activities,
management anticipates it will devote only a minor amount of time to the
Company's affairs.
The officers and directors of the Company are now and may in the future become
stockholders, officers or directors of other companies that may be engaged in
business activities similar to those conducted by the Company. Accordingly,
additional direct conflicts of interest may arise in the future with respect to
such individuals acting on behalf of the Company or other entities. Moreover,
additional conflicts of interest may arise with respect to opportunities which
come to the attention of such individuals in the performance of their duties or
otherwise. The Company does not currently have a right of first refusal
pertaining to opportunities that come to management's attention insofar as such
opportunities may relate to the Company's business operations.
None of the Company's directors receives any compensation for their respective
services rendered to the Company as directors, nor have they received such
compensation in the past. They all have agreed to act without compensation until
authorized by the Board of Directors. Further, none of the directors is accruing
any compensation under any agreement with the Company.
Item 7. Certain Relationships and Related Transactions.
There have been no related party transactions or any other transactions or
relationships required to be disclosed pursuant to Item 404 of Regulation S-B.
14
<PAGE> 17
Item 8. Description of Securities.
The Company's authorized capital stock consists of 25,000,000 shares, par value
$.001 per share. All share numbers in this Registration Statement have been
adjusted to reflect the Company's 1 for 300 reverse stock split effective
November 15, 1999. There are 9,602,592 shares of Common Stock issued and
outstanding as of the date of this filing. All shares of Common Stock have equal
voting rights and, when validly issued and outstanding, are entitled to one vote
per share in all matters to be voted upon by stockholders. The shares of Common
Stock have no preemptive, subscription, conversion or redemption rights and may
be issued only as fully-paid and non-assessable shares. Cumulative voting in the
election of directors is not permitted, which means that the holders of a
majority of the issued and outstanding shares of Common Stock represented at any
meeting at which a quorum is present will be able to elect the entire Board of
Directors if they so choose and, in such event, the holders of the remaining
shares of Common Stock will not be able to elect any directors. In the event of
liquidation of the Company, each stockholder is entitled to receive a
proportionate share of the Company's assets available for distribution to
stockholders after the payment of liabilities and after distribution in full of
preferential amounts, if any. All shares of the Company's Common Stock issued
and outstanding are fully paid and nonassessable. Holders of the Common Stock
are entitled to share pro rata in dividends and distributions with respect to
the Common Stock, as may be declared by the Board of Directors out of funds
legally available therefor.
PART II
Item 1. Market Price for Common Equity and Related Stockholder Matters.
Price quotations for the Company's Common Stock are posted presently on the OTC
Bulletin Board and have been since August, 1997. As soon as the Company becomes
eligible, the Company intends to request a listing for the Common Stock on the
NASDAQ SmallCap Market (TM). This listing requires certain asset, earnings and
per share price standards that the Company does not now meet. The Company can
give no assurance that it will meet these standards in the foreseeable future,
it at all.
(a) Market Price.
The historical prices for the Company's Common Stock on the OTC Bulletin Board
are as follows:
15
<PAGE> 18
<TABLE>
<CAPTION>
Period High Low
- ------ ---- ---
<S> <C> <C>
1997
First Quarter $52.50 $33.00
Second Quarter $46.50 $30.00
Third Quarter $204.00 $30.00
Fourth Quarter $144.00 $36.00
1998
First Quarter $51.00 $15.00
Second Quarter $300.00 $16.50
Third Quarter $267.00 $45.00
Fourth Quarter $108.00 $30.00
1999
First Quarter $84.00 $42.00
Second Quarter $183.00 $52.50
Third Quarter $60.00 $27.00
Fourth Quarter $30.00 $2.00
2000
First Quarter (to March 24) $6.50 $5.00
</TABLE>
For the initial listing in the NASDAQ SmallCap Market(TM), a company must have
net tangible assets of $4 million or market capitalization of $50 million or a
net income (in the latest fiscal year or two of the last fiscal years) of
$750,000, a public float of 1,000,000 shares with a market value of $5 million.
The minimum bid price must be $4.00 and there must be three market makers. In
addition, there must be 300 stockholders holding 100 shares or more, and the
company must have an operating history of at least one year or a market
capitalization of $50 million. For continued listing in the NASDAQ SmallCap
Market(TM), a company must have net tangible assets of $2 million or market
capitalization of $35 million or a net income (in the latest fiscal year or two
of the last fiscal years) of $500,000, a public float of 500,000 shares with a
market value of $1 million. The minimum bid price must be $1.00 and there must
be two market makers. In addition, there must be 300 stockholders holding 100
shares or more. The Company can give no assurances that it will qualify its
securities for listing on NASDAQ or some other national exchange, or be able to
maintain the maintenance criteria necessary to insure continued listing. The
failure of the Company to qualify its securities or to meet the
16
<PAGE> 19
relevant maintenance criteria after such qualification in the future may result
in the discontinuance of the inclusion of the Company's securities on a national
exchange. In such events, trading, if any, in the Company's securities may then
continue in the non-NASDAQ over-the-counter market. As a result, a stockholder
may find it more difficult to dispose of, or to obtain accurate quotations as to
the market value of, the Company's securities.
(b) Holders. There are approximately 258 holders of the Company's Common Stock.
During 1998 and 1999, the Company issued 62,692 shares and 8,494,868 shares,
respectively, to investors for cash, in exchange for services, or to extinguish
debt. The Company's outstanding stock includes shares issued in the Company's
initial public offering in 1994, shares issued as part of the Company's
reorganization under Chapter 11 of the Bankruptcy Code and shares issued in
accordance with exemptions from registration afforded by Sections 3(b) or 4(2)
of the Securities Act of 1933, as amended (the "Securities Act"). As of the date
of this registration statement, 4,603,419 shares of the Company's Common Stock
held by non-affiliates are eligible for sale, including 62,692 shares eligible
under Rule 144 promulgated under the Securities Act of 1933, as amended, subject
to certain limitations included in such Rule. In general, under Rule 144, a
person (or persons whose shares are aggregated), who has satisfied a one year
holding period, under certain circumstances, may sell within any three-month
period a number of shares which does not exceed the greater of one percent of
the then outstanding Common Stock or the average weekly trading volume during
the four calendar weeks prior to such sale. Rule 144 also permits, under certain
circumstances, the sale of shares without any quantity limitation by a person
who has satisfied a two-year holding period and who is not, and has not been for
the preceding three months, an affiliate of the Company.
(c) Dividends. The Company has not paid any dividends to date, and has no plans
to do so in the immediate future.
Item 2. Legal Proceedings.
There is no litigation pending or threatened by or against the Company, except
for collections and related maters in the ordinary course of business which
would not have a material impact on the Company if decided adversely to Select
Media.
Item 3. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
The Company has changed accountants since its formation; but there were no
disagreements with the findings of the Company's former accountants.
Item 4. Recent Sales of Unregistered Securities.
(a) Securities sold. The Company sold and issued its securities during the three
year period preceding the date of this registration statement in a series of
private transactions
17
<PAGE> 20
or exempt offerings of securities; as follows:
On August 27, 1997, as part of the Company's reorganization under the Bankruptcy
Code, the Company issued 26,657 shares to certain creditors.
On various dates in 1998, in order to raise additional capital, the Company
issued 62,692 shares to investors in sales exempt under Section 4(2) of the
Securities Act of 1933, as amended. On November 15, 1999, Select Media approved
a 1 for 300 reverse stock split, effective November 30, 1999. On October 22,
1999, the Company issued 4,000,000 shares to the Company's Chief Executive
Officer and an employee in lieu of other compensation in a private transaction.
On December 21, 1999, the Company issued 4,500,000 shares to an investor in an
offering exempt under Rule 504 of Regulation D In connection with that sale, the
Company issued 1,000,000 shares to a finder under Section 4(2) as compensation
in a private transaction. On December 29, 1999, the Company issued 6,667 shares
to an employee in lieu of other compensation in a private transaction.
Certain of the shares of Common Stock of the Company were sold and issued on
various dates, described above, for investment purposes in "private
transactions" and are "restricted" shares as defined in Rule 144 under the
Securities Act of 1933, as amended. These shares may not be offered for public
sale except under Rule 144, or otherwise, pursuant to said Act. In summary, Rule
144 applies to affiliates (that is, control persons) and nonaffiliates when they
resell restricted securities (those purchased from the issuer or an affiliate of
the issuer in nonpublic transactions). Nonaffiliates reselling restricted
securities, as well as affiliates selling restricted or nonrestricted
securities, are not considered to be engaged in a distribution and, therefore,
are not deemed to be underwriters as defined in Section 2(11) of the Securities
Act of 1933, as amended, if six conditions are met:
(1) Current public information must be available about the issuer unless sales
are limited to those made by non-affiliates after two years.
(2) When restricted securities are sold, generally there must be a one-year
holding period.
(3) When either restricted or nonrestricted securities are sold by an
affiliate after one year, there are limitations on the amount of
securities that may be sold; when restricted securities are sold by
non-affiliates between the first and second years, there are identical
limitations; after two years, there are no volume limitations for resales
by non-affiliates.
(4) Except for sales of restricted securities made by non-affiliates after two
years, all sales must be made in brokers' transactions as defined in
Section 4(4) of the Securities Act of 1933, as amended, or a transaction
directly with a "market maker" as that term is defined in Section 3(a)(38)
of the 1934 Act.
(5) Except for sales of restricted securities made by non-affiliates after two
years, a notice of proposed sale must be filed for all sales in excess of
500 shares or with an aggregate sales price in excess of $10,000.
(6) There must be a bona fide intention to sell within a reasonable time after
the filing of the notice referred to in (5) above.
18
<PAGE> 21
(b) Underwriters and other purchasers. There were no underwriters in the sale
and issuance of any of the Company's securities in the period reported. All of
the purchasers of Common Stock from the Company have had a pre-existing personal
or business relationship with the Company or its officers and directors.
(c) Consideration.
The Company sold certain shares of stock for cash and others were issued either
for services rendered to the Company or to settle outstanding debts of the
Company or its predecessor. The Company sold shares in 1998 and 1999 at various
prices, ranging from $.45 to $225.00.
(d) Exemptions from Registration Relied Upon.
The sale and issuance of the shares of stock sold in 1997 through 1999 were
exempt from registration under the Securities Act of 1933, as amended, by virtue
of either section 3(b) or 4(2) and, in certain cases, Regulation D promulgated
thereunder. Purchasers in transactions exempt under Section 4(2) and Rule 506
purchased shares from the Company for investment and not with a view to
distribution to the public.
Item 5. Indemnification of Directors and Officers.
Except for acts or omissions which involve intentional misconduct, fraud or
known violation of law or for the payment of dividends in violation of the New
York Business Corporation Law, there shall be no personal liability of a
director or officer to the Company, or its stockholders for damages for breach
of fiduciary duty as a director or officer. The Company may indemnify any person
for expenses incurred, including attorneys fees, in connection with their good
faith acts if they reasonably believe such acts are in and not opposed to the
best interests of the Company and for acts for which the person had no reason to
believe his or her conduct was unlawful. The Company may indemnify the officers
and directors for expenses incurred in defending a civil or criminal action,
suit or proceeding as they are incurred in advance of the final disposition of
the action, suit or proceeding, upon receipt of an undertaking by or on behalf
of the director or officer to repay the amount of such expenses if it is
ultimately determined by a court of competent jurisdiction in which the action
or suit is brought determined that such person is fairly and reasonably entitled
to indemnification for such expenses which the court deems proper. Insofar as
indemnification for liabilities arising under the 1933 Act may be permitted to
officers, directors or persons controlling the Company pursuant to the
foregoing, the Company has been informed that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act of 1933, as amended, and is therefore
unenforceable.
19
<PAGE> 22
PART F/S
Financial Statements. The following financial statements are attached to this
report and filed as a part thereof.
1) Table of Contents
2) Independent Auditors' Report
3) Assets
4) Liabilities and Stockholders' Equity
5) Statement of Operations
6) Statement of Stockholders' Equity
7) Statement of Cash Flows
8) Notes to Financial Statements
20
<PAGE> 23
SELECT MEDIA COMMUNICATIONS INC.
FINANCIAL STATEMENTS
For the Years Ended December 31, 1999 and 1998
<PAGE> 24
SELECT MEDIA COMMUNICATIONS INC.
CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS
Balance Sheets 2-3
Statements of Operations 4-5
Statement of Stockholders' Deficit 6
Statements of Cash Flows 7-8
NOTES TO FINANCIAL STATEMENTS 9-19
</TABLE>
<PAGE> 25
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Select Media Communications Inc.
We have audited the accompanying balance sheet of Select Media Communications
Inc. as of December 31, 1999 and the related statements of operations, changes
in stockholders' deficit and cash flows for the years ended December 31, 1999
and 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Select Media Communications
Inc. as of December 31, 1999, and the results of their operations and their cash
flows for the years ended December 31, 1999 and 1998 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 shown in the financial statements,
the Company incurred a net loss of $91,410,341 during the year ended December
31, 1999, and, as of that date, had a working capital deficiency of $2,604,399
and net deficiency of $1,867,373. Those conditions raise substantial doubt about
the Company's ability to continue as a going concern. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Marcum & Kliegman llp
March 29, 2000
Woodbury, New York
1
<PAGE> 26
SELECT MEDIA COMMUNICATIONS INC.
BALANCE SHEET
December 31, 1999
ASSETS
<TABLE>
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 344
Accounts receivable, less allowance for doubtful accounts
of $243,114 365,200
Capital improvement receivable 557,303
Prepaid expenses and other 140,377
Due from stockholder 166,000
Deposit on acquisition 400,000
-------
Total Current Assets $1,629,224
PROPERTY AND EQUIPMENT, Net 463,365
REORGANIZATION VALUE, Net of accumulated
amortization of $570,304 1,873,854
----------
TOTAL ASSETS $3,966,443
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 27
SELECT MEDIA COMMUNICATIONS INC.
BALANCE SHEET
December 31, 1999
LIABILITIES AND STOCKHOLDER'S DEFICIT
<TABLE>
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $1,315,977
Accrued expenses 2,194,656
Notes payable 567,500
Current portion of capital lease obligation 55,490
Reorganization liabilities, current portion 100,000
----------
Total Current Liabilities $4,233,623
OTHER LIABILITIES
Capital lease obligation 120,224
Reorganization liabilities 1,479,969
----------
Total Other Liabilities 1,600,193
----------
TOTAL LIABILITIES 5,833,816
COMMITMENTS
STOCKHOLDER'S DEFICIT
Common stock - $.001 par value; 35,000,000 shares
authorized, and 9,602,592 shares issued and outstanding,
respectively 9,603
Additional paid in capital 93,885,130
Accumulated deficit (95,762,106)
----------
TOTAL STOCKHOLDER'S DEFICIT (1,867,373)
----------
TOTAL LIABILITIES AND
STOCKHOLDER'S DEFICIT $3,966,443
----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 28
SELECT MEDIA COMMUNICATIONS INC.
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
SALES $ 2,310,002 $ 448,123
COST OF SALES 1,294,890 219,005
------------ ------------
GROSS PROFIT 1,015,112 229,118
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 4,389,803 1,304,615
STOCK-BASED COMPENSATION EXPENSE 84,070,333 2,030,000
------------ ------------
OPERATING LOSS (87,445,024) (3,105,497)
OTHER INCOME (EXPENSE)
Other income 32,476 --
Interest expense (357,793) (1,164,798)
------------ ------------
TOTAL OTHER EXPENSE (325,317) (1,164,798)
------------ ------------
NET LOSS BEFORE INCOME TAXES AND
EXTRAORDINARY ITEMS (87,770,341) (4,270,295)
INCOME TAXES -- --
------------ ------------
NET LOSS BEFORE EXTRAORDINARY ITEMS (87,770,341) (4,270,295)
EXTRAORDINARY ITEMS
Loss on extinguishments of debt, net of tax (3,640,000) --
------------ ------------
NET LOSS $(91,410,341) $ (4,270,295)
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 29
SELECT MEDIA COMMUNICATIONS INC.
STATEMENTS OF OPERATIONS, Continued
For the Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
PER SHARE DATA
Basic net loss per common share:
Before extraordinary item $ (45.82) $ (68.57)
============= =============
Extraordinary item $ (1.90) $ 0.00
============= =============
After extraordinary item $ (47.72) $ (68.57)
============= =============
Diluted net loss per common share:
Before extraordinary item $ (45.82) $ (68.57)
============= =============
Extraordinary item $ (1.90) $ 0.00
============= =============
After extraordinary item $ (47.72) $ (68.57)
============= =============
Weighted Average Common Shares Outstanding 1,915,582 62,277
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 30
SELECT MEDIA COMMUNICATIONS INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
For the Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
Par Additional
Value Paid in Accumulated
Shares $0.001 Capital Deficit Total
------ ------ ------- ------- -----
<S> <C> <C> <C> <C> <C>
BALANCE - January 1, 1998 50,727 $ 51 $ 281,949 $ (81,470) $ 200,530
Issuance of stock for services 10,704 11 2,029,989 2,030,000
Exercise of warrants 5,867 6 479,994 480,000
Conversion of debentures 19,628 20 1,163,702 1,163,722
Net loss -- -- -- (4,270,295) (4,270,295)
--------- ------------ ------------ ------------ ------------
BALANCE - December 31, 1998 86,926 88 3,955,634 (4,351,765) (396,043)
Sale of common stock 5,500,000 5,500 994,500 1,000,000
Conversion of debentures 5,000 5 242,995 243,000
Stock compensation 4,006,666 4,007 84,029,323 84,033,330
Issuance of stock for service 666 1 41,957 41,958
Debt to equity conversion 3,334 2 4,199,998 4,200,000
Reorganization -- 420,723 420,723
Net loss -- -- -- (91,410,341) (91,410,341)
--------- ------------ ------------ ------------ ------------
BALANCE - December 31, 1999 9,602,592 $ 9,603 $ 93,885,130 $(95,762,106) $ (1,867,373)
========= ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 31
SELECT MEDIA COMMUNICATIONS INC.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(91,410,341) $ (4,270,295)
------------ ------------
Adjustments to reconcile net loss to net cash
provided by operating activities:
Stock-based compensation 84,033,330 2,030,000
Depreciation and amortization 368,035 250,876
Increase in allowance for doubtful accounts 243,116 --
Increase in accounts receivable (313,648) (294,666)
Decrease (increase) in note receivable 194,800 (194,800)
Increase in due from stockholder (166,000) --
Increase in capital improvement receivable (503,321) (53,982)
Increase in prepaid expenses and other current
assets (77,022) (63,355)
Increase in accounts payable 926,945 389,032
Increase in accrued expenses 1,894,502 300,154
(Decrease) increase in bankruptcy liability (603,784) 21,595
------------ ------------
TOTAL ADJUSTMENTS 85,996,953 2,384,854
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (5,413,388) (1,885,441)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (339,706) (69,616)
Deposit on acquisition (400,000) --
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (739,706) (69,616)
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in capital lease obligation (8,408) --
Advances in notes payable 698,000 1,404,500
Repayments in notes payable -- (375,000)
Increase in common stock 9,317 29
Increase in additional paid in capital 5,336,364 1,043,693
------------ ------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES $ 6,035,273 $ 2,073,222
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE> 32
SELECT MEDIA COMMUNICATIONS INC.
STATEMENTS OF CASH FLOWS, Continued
For the Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $(117,821) $ 118,165
CASH AND CASH EQUIVALENTS - Beginning 118,165 --
--------- ---------
CASH AND CASH EQUIVALENTS - Ending $ 344 $ 118,165
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the years for:
Interest $ 37,865 $ 27,196
Noncash investing and financing activities:
Acquisition of equipment through capital leases $ 126,831 $ 55,649
Purchase of equipment with long-term debt $ 83,840 $ --
Conversion of debt to equity $ 560,000 $ 600,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE> 33
SELECT MEDIA COMMUNICATIONS INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - Summary of Significant Accounting Policies
Nature of Business
Select Media Communications Inc. ("the Company") is an integrated media
company engaged in producing and distributing programming.
Revenue Recognition
Revenue is recognized upon completion of services performed.
Property and Equipment and Depreciation
Property and equipment is stated at cost and is depreciated using a
straight-line method over the estimated useful lives of the respective
assets. Routine maintenance and repairs are expensed as incurred and
improvements that extend the useful life of the assets are capitalized.
When property and equipment is sold or otherwise disposed of, the cost and
related accumulated depreciation are eliminated from the accounts and any
resulting gain or loss is recognized in income.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
short-term investments with an original maturity of three months or less
to be cash equivalents.
Advertising Costs
Advertising costs are expensed as incurred.
Use of Estimates in the Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Net Loss Per Share
The company adopted the provision of SFAS No. 128, "Earnings per Share".
SFAS No. 128 eliminates the presentation of the primary and fully dilutive
earnings per share ("EPS") and requires presentation of the basic and
diluted EPS. Basic EPS is computed by dividing the income (loss) available
to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS is based on the weighted-average
number of shares of common stock and common stock equivalents outstanding
at year-end. All prior periods' EPS have been restated based upon the
Company's 1 for 300 reverse stock split (see Note 4).
9
<PAGE> 34
SELECT MEDIA COMMUNICATIONS INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - Summary of Significant Accounting Policies, continued
Stock-Based Compensation
In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based
Compensation". SFAS No. 123 prescribes accounting and reporting standards
for all stock-based compensation plans, including employee stock options,
restricted stock, employee stock purchase plans and stock appreciation
rights. SFAS No. 123 requires compensation expense to be recorded (i)
using the new fair value method or (ii) using the existing accounting
rules prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations with pro forma disclosure of what net income and earnings
per share would have been had the company adopted the new fair value
method. The Company intends to continue to account for its stock based
compensation plans in accordance with the provisions of APB 25.
Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", effective for fiscal years beginning after December 15, 1997,
with reclassification of earlier periods required for comparative
purposes. SFAS No. 130 establishes standards for the reporting and
presentation of comprehensive income and its components in the financial
statements. The Company adopted this standard in 1998 and the
implementation of this standard did not have any impact on its financial
statements.
NOTE 2 - Reorganization from Bankruptcy
On August 28, 1997, a plan was approved by the court which stipulated
payments totaling $2,444,158 to be paid to certain secured,
administrative and unsecured creditors. As a result of the plan, the
Company established a reorganization value of $2,444,158, which is being
amortized over a period of 10 years (see Note 13).
NOTE 3 - Private Placement
The Company entered into an agreement on October 22, 1999 and amended
November 1, 1999 with Lloyds Bahamas Securities, Ltd. ("Lloyds") to sell
shares of the Company's common stock with Lloyds as their agent through
an offering exempt under Rule 504 of Regulation D by the SEC under the
Securities Act. In exchange for $1,000,000, Lloyds' investors received
4,500,000 new shares of the Company's common stock after a 1 for 300
reverse stock split (See Note 4). As a condition of the funding the
Company agreed to acquire Nationsmusic.com, Inc. ("Nationsmusic") in
exchange for 3,000,000 shares of the Company's common stock. The Company
had not consummated its transaction with Nationsmusic. In addition,
Lloyds received 1,000,000 shares of the Company's common stock subject to
restrictions under Rule 144 as agent for this placement.
10
<PAGE> 35
SELECT MEDIA COMMUNICATIONS INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 4 - Reverse Stock Split
On November 2, 1999, the Board of Directors authorized a one for three
hundred reverse stock split, with the number of authorized shares of
common stock and the par value per share remaining unchanged. The split
was effective November 30, 1999 and all per share amounts and shares
issued have been adjusted to reflect the reverse split.
NOTE 5 - Capital Improvements Receivable
Capital improvements receivable represents amounts paid or accrued by the
Company for leasehold improvements which are to be reimbursed to the
Company by the landlord pursuant to the lease agreement.
The Company is currently in dispute with its landlord in which the
landlord is claiming certain lease payments are due on space occupied by
the Company. The total amount claimed to be due by the landlord is
approximately $300,000. If successful in its claim, the amount receivable
would be reduced by such amounts and amounts attributable to leasehold
improvements would be increased by the same amount.
NOTE 6 - Property and Equipment
Property and equipment at December 31, 1999 consist of the following:
<TABLE>
<S> <C>
Equipment $ 593,444
Less: accumulated depreciation (130,079)
----------
Property and Equipment, net $ 463,365
==========
</TABLE>
Depreciation expense for the years ended December 31, 1999 and 1998 was
$123,619 and $6,460, respectively.
NOTE 7 - Capital Leases
The Company is the lessee of equipment under certain capital leases
expiring through the year 2002. The assets are being depreciated over the
life of the lease. Depreciation of assets under capital leases charged to
expense for the year ended December 31, 1999 and 1998 was $58,944 and
$4,010, respectively.
11
<PAGE> 36
SELECT MEDIA COMMUNICATIONS INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 7 - Capital Leases, continued
Minimum future lease payments under capital leases as of December 31,
1999 for each of the next three years, and in the aggregate, are as
follows:
<TABLE>
<CAPTION>
For the Year Ending
December 31, Amount
------------------------------------------- ----------------------
<S> <C>
2000 $ 82,811
2001 72,576
2002 61,762
----------
Total minimum lease payments 217,149
Less amount representing interest 41,436
----------
Present Value of net minimum lease payments
$175,713
==========
Current Portion $ 55,490
Long-term Portion 120,224
----------
Total $175,714
==========
</TABLE>
Interest rates on capitalized leases vary from 7.91% to 29.39% and are
imputed based on the lessor's implicit rate of return.
NOTE 8 - Notes Payable
Notes payable at December 31, 1999 consisted of the following:
<TABLE>
<CAPTION>
<S> <C>
Note payable non-interest bearing, payable upon
demand. $ 67,500
Note payable non-interest bearing, payable upon
demand. 125,000
Note payable shareholder 375,000
---------
Total $567,500
=========
</TABLE>
12
<PAGE> 37
SELECT MEDIA COMMUNICATIONS INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 8 - Notes Payable, continued
The Company has notes payable to a shareholder for $375,000. The notes
bear interest at 10%. The individual received, in aggregate 6,667 shares
of common stock as compensation. The market value of the shares issued
were treated as debt issuance costs (interest) which was amortized over
the life of the loan. Debt issuance cost recognized in 1999 and 1998 was
$243,678 and $11,822 respectively. The notes had original maturity dates
in November and December 1999. These maturity dates were subsequently
extended and are currently due upon demand.
NOTE 9 - Line of Credit
An individual has signed a letter of credit on behalf of the company for
$1,000,000 acting as a security deposit on the office space occupied by
the Company. If the Company defaults on the lease, money will be drawn
from this letter of credit. This individual will receive company stock as
compensation.
NOTE 10 - Income Taxes
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the deferred tax asset of the Company consist
primarily of the net operating loss, increase in allowance for doubtful
accounts and accrued expenses that are not currently deductible. The
Company has recorded a full valuation allowance against its deferred tax
asset, as it is not assured, it can recognize such an asset in the
future. At December 31, 1999, the Company has significant net operating
loss carryforwards which will expire in 2019.
In accordance with the provisions of the Internal Revenue Code Section
382, utilization of the Company's net operating loss carryforward is
severely limited.
NOTE 11 - Commitments
Leasing Agreements
The Company leases office space under an operating lease agreement, which
expires on February 15, 2015. Rental expense was $560,241 and $93,373 for
the years ended December 31, 1999 and 1998, respectively.
13
<PAGE> 38
SELECT MEDIA COMMUNICATIONS INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 11 - Commitments, continued
Leasing Agreements, continued
Minimum future rental commitments under this lease as of December 31,
1999 are as follows:
<TABLE>
<CAPTION>
For the Year Ending
December 31, Amount
------------------- -----------------
<S> <C>
2000 $ 522,951
2001 522,951
2002 522,951
2003 522,951
2004 522,951
Thereafter 5,921,845
----------
Total $8,536,600
==========
</TABLE>
In addition, as part of the operating lease describe above, the Company
has agreed to lease additional premises at the same facility. Occupation
of the additional premises is pending certain building modifications to
be performed by the landlord. Upon the commencement date of the
additional space, rental commitments will be $360,665 per annum for years
one through five, $387,885 per annum for years six through ten and
$415,105 per annum for years eleven through the expiration date of the
lease.
Sublease Agreement
The Company entered into lease agreements during the fiscal year ended
December 31, 1999 wherein customers sublease space in the building from
the Company. The Company receives monies based on the terms set forth in
the respective agreements.
Minimum future payments from subtenants as of December 31, 1999 for each
of the next three years, and in the aggregate, are as follows:
<TABLE>
<CAPTION>
December 31, Amount
----------- --------
<S> <C>
2000 $121,000
2001 7,000
--------
Total $128,000
========
</TABLE>
In addition, two leases were entered into at the beginning of the fiscal
year ending December 31, 2000. Minimum future payments for these two
leases for the year ending December 31, 2000 and December 31, 2001 is
$57,500 and $8,500 respectively.
14
<PAGE> 39
SELECT MEDIA COMMUNICATIONS INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 11 - Commitments, continued
Payroll Taxes
Past due amounts owed which have been included in accrued expenses total
approximately $879,000 and consist of taxes owed and estimated penalties
and interest.
Employment Agreements
The Company has entered into employment agreements with four employees
two of which expire in 2001 and two which expire in 2003. Two of these
agreement provide for bonuses based on percentages of net profits, as
specified in their respective employment agreements.
Future minimum payments related to these agreements for the next five (5)
years are as follows:
<TABLE>
<CAPTION>
For the Year Ending
December 31, Amount
------------------- -----------
<S> <C>
2000 $ 600,000
2001 600,000
2002 400,000
2003 400,000
----------
Total $2,000,000
==========
</TABLE>
For past services performed, certain employees that entered into the
above employment agreements received 4,006,666 shares of the Company's
common stock during 1999. As a result of this issuance, the Company
recognized $84,033,333 of compensation expense.
NOTE 12 - Major Customer
During the year ended December 31, 1999 the Company sold a substantial
portion of its services to one customer. Sales to this customer totaled
$800,000 (35%). The amount due from this customer included in accounts
receivable was $200,000. For the year ended December 31, 1998 the Company
sold a substantial portion of its services to two customers. Sales to
these customers totaled $206,151 (46%) and $72,316 (16%) respectively.
NOTE 13 - Bankruptcy Proceedings
On August 28, 1997 the United States Bankruptcy Court of the Southern
District of New York confirmed the Company's Plan of Reorganization. The
resulting bankruptcy liability at December 31, 1999 consists of the
following:
15
<PAGE> 40
SELECT MEDIA COMMUNICATIONS INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 13 - Bankruptcy Proceedings, continued
<TABLE>
<CAPTION>
Class of Creditors
----------------------------------------------------------------------
<S> <C>
Class 1 - Secured $ --
Class 2 - Priority and Administrative 1,129,969
Class 3 - Unsecured 450,000
----------
Total $1,579,969
==========
Short-Term $ 100,000
Long Term $1,479,969
</TABLE>
The Company owes approximately $798,000 in professional fees rendered in
accordance with the Order entered into by the United States Bankruptcy
Court in the Southern District of New York. Company has agreed with the
Claimant to pay this amount in quarterly installments equal to 3% of the
Company's corresponding quarterly gross receipts less ordinary expenses
before any cash compensation to officers until paid in full. No part of
the stated amount has been paid.
The New York City Department of Finance has filed alleged unsecured
priority tax claims in the amount of $229,899. Included in this amount is
$37,623 in interest at an annual interest rate of 8.5%.
All remaining allowed claims will be paid in accordance with the
Company's confirmed Plan of Reorganization.
NOTE 14 - Subsequent Events
On January 18, 2000 the Company purchased all of the issued and
outstanding common stock of Sigma Sound Services, Inc. ("Sigma") pursuant
to the terms of a stock purchase agreement (the "Agreement"). The
purchase price for Sigma's common stock was $1,000,000 with payment to be
made of $400,000 at the signing of the Agreement, $200,000 at closing and
$400,000 through the issuance of a 10% secured judgment note. The note is
payable in two installments of $200,000 plus accrued interest on June 30,
2000 and January 3, 2001. The note is secured by all of the Company's
existing and future customer accounts, general intangibles, equipment,
goods, instruments and inventory. The transaction will be accounted for
under the purchase method of accounting.
Under Rule 11-02(b), pro forma financial information in the form of a
combined balance sheet at December 31, 1999 and combined statement of
operations for the year ended December 31, 1999 is presented below to
reflect what the combined companies might look like had the
16
<PAGE> 41
SELECT MEDIA COMMUNICATIONS INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 14 - Subsequent Events, continued
transaction been consummated during 1999. This is not necessarily
indicative of that which would have been attained had the transaction
occurred at an earlier date. The pro forma information should be read in
conjunction with the December 31, 1999 financial statements for each
company used in the preparation of such pro forma statements. As such no
audit procedures have been applied in the preparation of such pro forma
statements.
Proforma
Balance Sheet
December 31, 1999
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Pro forma Pro forma (Unaudited)
(Audited) (Audited) Debit Credit Pro forma
Select Sigma Adjustments Adjustments Combined
---------- -------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS
Cash $ 344 $ 1,400 $ 200,000 $ (200,000) $ 1,744
Accounts receivable 365,200 34,517 -- -- 399,717
Capital improvement
receivable 557,303 -- -- -- 557,303
Prepaid expenses and other 140,377 -- -- -- 140,377
Due from stockholder 166,000 -- -- (166,000) ---
Deposit on acquisition 400,000 --- --- (400,000) --
---------- -------- ---------- ----------- ----------
Total Current Assets 1,629,224 35,917 200,000 (766,000) 1,099,141
---------- -------- ---------- ----------- ----------
PROPERTY AND EQUIPMENT, Net 463,365 104,600 -- -- 567,965
Reorganization value , net 1,873,854 -- -- -- 1,873,854
Investment in subsidiary -- -- 1,000,000 (1,000,000) --
Intangible asset, net -- -- 964,504 (64,300) 900,204
---------- -------- ---------- ----------- ----------
Total Assets $3,966,443 $140,517 $2,164,504 $(1,830,300) $4,441,164
========== ======== ========== =========== ==========
CURRENT LIABILITIES
Accounts payable $1,315,977 $ 58,685 $ -- $ -- $1,374,662
Accrued expenses 2,194,656 46,336 -- -- 2,240,992
Notes payable 567,500 -- -- -- 567,500
Due to stockholder -- -- -- 34,000 34,000
Current maturities of long
term debt -- -- -- 200,000 200,000
Current portion of capital
lease obligation 55,490 -- -- -- 55,490
Reorganization liabilities,
current portion 100,000 -- -- -- 100,000
---------- -------- ---------- ----------- ----------
Total Current Liabilities 4,233,623 105,021 -- 234,000 4,572,644
Long term debt -- -- -- 200,000 200,000
Capital lease obligation 120,224 -- -- -- 120,224
Reorganization liabilities 1,479,969 -- -- -- 1,479,969
---------- -------- ---------- ----------- ----------
TOTAL LIABILITIES $5,833,816 $105,021 $ -- $ 434,000 $6,372,837
========== ======== ========== =========== ==========
</TABLE>
17
<PAGE> 42
SELECT MEDIA COMMUNICATIONS INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 14 - Subsequent Events, continued
Proforma
Balance Sheet, continued
December 31, 1999
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Pro forma Pro forma (Unaudited)
(Audited) (Audited) Debit Credit Pro forma
Select Sigma Adjustments Adjustments Combined
------ ----- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
STOCKHOLDERS' DEFICIT
Common stock $ 9,603 $ 1,000 $ (1,000) $ -- $ 9,603
Additional paid in capital 93,885,130 865,002 (865,002) -- 93,885,130
Accumulated deficit (95,762,106) (830,506) (64,300) 830,506 (95,826,406)
------------ ------------ ------------ ------------ ------------
TOTAL STOCKHOLDERS'
DEFICIT (1,867,373) 35,496 (930,302) 830,506 (1,931,673)
------------ ------------ ------------ ------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIT $ 3,966,443 $ 140,517 $ (930,302) $ 1,264,506 $ 4,441,164
============ ============ ============ ============ ============
</TABLE>
Proforma
Statement of Operations
For the year ended December 31, 1999
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Pro forma Pro forma (Unaudited)
(Audited) (Audited) Debit Credit Pro forma
Select Sigma Adjustments Adjustments Combined
------ ----- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
SALES $ 2,310,002 $ 502,791 $ -- $-- $ 2,812,793
------------ ------------ ------------ --- ------------
COST OF SALES 1,294,890 210,198 -- -- 1,505,088
------------ ------------ ------------ --- ------------
GROSS PROFIT 1,015,112 292,593 -- -- 1,307,705
------------ ------------ ------------ --- ------------
SELLING, GENERAL AND
ADMINISTRATIVE 4,389,803 479,069 64,300 -- 4,933,172
STOCK-BASED COMPENSATION 84,070,333 -- -- -- 84,070,333
------------- ------------ ------------ --- ------------
Operating Loss (87,445,024) (186,476) (64,300) -- (87,695,800)
OTHER EXPENSE
Other income 32,476 41,850 -- -- 74,326
Interest expense (357,793) -- -- -- (357,793)
------------- ------------ ------------ --- ------------
Total Other Expense (325,317) 41,850 -- -- (283,467)
------------- ------------ ------------ --- ------------
NET LOSS BEFORE
EXTRAORDINARY ITEMS (87,770,341) (144,626) (64,300) -- (87,979,267)
------------- ------------ ------------ --- ------------
EXTRAORDINARY ITEM
Loss on extinguishment of debt,
net of tax (3,640,000) -- -- -- (3,640,000)
------------- ------------ ------------ --- ------------
NET LOSS $(91,410,341) $ (144,626) $ (64,300) $-- $(91,619,267)
============= ============ ============ === ============
</TABLE>
18
<PAGE> 43
SELECT MEDIA COMMUNICATIONS INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 14 - Subsequent Events, continued
<TABLE>
<CAPTION>
PER SHARE DATA
--------------
<S> <C>
Basic net loss per common share:
Before extraordinary item $(45.93)
=========
extraordinary item $(1.90)
=========
After extraordinary item $(47.83)
=========
Diluted net loss per common share:
Before extraordinary item $(45.93)
=========
Extraordinary item $(1.90)
=========
After extraordinary item $(47.83)
=========
Weighted Average Common
Shares Outstanding 1,915,582
=========
</TABLE>
NOTE 15 - Going Concern Uncertainty
As shown in the accompanying financial statements, the Company incurred a
net loss of $91,410,341 during the year ended December 31, 1999, and, as
of that date, the Company's current liabilities exceeded its current
assets by $2,604,399, and its total liabilities exceeded its total assets
by $1,867,373. These factors create an uncertainty as to the Company's
ability to continue as a going concern.
The financial statements do not include any adjustments to the financial
statements that might be necessary should the Company be unable to
continue as a going concern.
19
<PAGE> 44
PART III
EXHIBITS
Item 1. Exhibit Index
<TABLE>
<CAPTION>
Exhibit No
------- --
<S> <C>
(3) Articles of Incorporation and Bylaws
3.1 Articles of Incorporation*
3.2 Bylaws*
(10) Material Contracts
10.1 Employment Agreement with Mitch Gutkowski**
10.2 Stock Purchase Agreement for the Purchase of all the outstanding
Common Stock of Sigma Sound Studio, Inc.**
(21) Subsidiaries of the Registrant
21.1 Subsidiaries of the Registrant**
(27) Financial Data Schedule
27.1 Financial Data Schedule**
</TABLE>
* Incorporated by reference to Exhibits to Registrant's original Registration
Statement Number 33-80412 filed under the Securities Act of 1933 on August 19,
1994.
** Filed herewith
<PAGE> 45
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the Registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 31, 2000 SELECT MEDIA COMMUNICATIONS, INC.
By: /s/ MITCH GUTKOWSKI
___________________________________
Mitch Gutkowski, Chief Executive Officer
<PAGE> 46
Exhibit 10.1 Employment agreement with Mitch Gutkowski
<PAGE> 1
EXHIBIT 10.1
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EXECUTIVE EMPLOYMENT AGREEMENT (this "Agreement") is entered into
as of October 25, 1999 (the "Effective Date"), by and between SELECT MEDIA
COMMUNICATIONS, INC., a New York corporation (the "Company"), and MITCH J.
GUTKOWSKI (the "Executive").
IN CONSIDERATION of the mutual covenants and agreements hereinafter set
forth, the Company and Executive agree as follows:
1. Agreement Term.
The term of this Agreement shall be the period commencing on
the Effective Date and ending on the fifth anniversary thereof (the "Agreement
Term").
2. Employment.
a. Employment by the Company. Executive agrees to be
employed by the Company for the Agreement Term upon
the terms and subject to the conditions set forth in
this Agreement. Throughout the Agreement Term,
Executive shall serve as the CEO/Chairman of the
Company.
b. Performance of Duties. Throughout this Agreement
Term, Executive shall faithfully and diligently
perform his duties in conformity with the directions
of the Board of Directors of the Company (the
"Board"), consistent with his position as the
CEO/Chairman of the Company.
c. Place of Performance. During the Agreement Term,
Executive shall be based at the Company's executive
offices in New York, New York.
3. Compensation.
a. Base Salary. The Company agrees to pay to Executive a
base salary at the annual rate set forth below, or as
otherwise increased from time to time by the Board
(the "Base Salary"):
<TABLE>
<CAPTION>
YEAR OF AGREEMENT TERM BASE SALARY
---------------------- -----------
<S> <C>
1 $200,000
2 $300,000
3 $350,000
4 $400,000
5 $500,000
</TABLE>
<PAGE> 2
Base Salary shall be payable in installments consistent with the Company's
payroll practices.
b. Annual Incentive Bonus. No later than the March 15th
following the end of each calendar year, the Company
shall pay a cash bonus to Executive equal to two
percent (2%) of the pre-tax net income for the
calendar year of the Company and its consolidated
subsidiaries, prior to reduction for such bonus (the
"Incentive Bonus"). The Incentive Bonus amount shall
be payable for an entire calendar year for each
calendar year that ends during the Agreement Term,
and for any other bonus period that is less than a
full calendar year, the Incentive Bonus shall be
determined with respect to the Company's net income
amounts for the entire calendar year multiplied by a
fraction, the numerator of which is the number of
calendar days in such period, and the denominator of
which is 365. Incentive Bonuses shall be paid in the
form of cash.
c. Common Stock Award; Stock Options
i. In recognition of past services rendered to
the Company by Executive, the Company hereby
grants to Executive (x) 2,000,000 shares
(the "Grant Shares") of common stock of the
Company, par value $.001 per share (the
"Common Stock"), which grant shares shall
vest on the first anniversary of the date
hereof, and (y) options, which shall be
fully vested, to purchase up to 1,500,000
shares of common stock of the Company,
exercisable at $3.50 per share prior to the
fifth anniversary of the Effective Date (the
"Option Shares" and together with the Grant
Shares, the "Shares").
ii. Executive acknowledges and agrees that the
Shares have not been registered under the
Securities Act of 1933, as amended (the
"Act"), and are "restricted securities"
within the meaning of Rule 144 promulgated
under the Act, and will bear the following
legend restricting their transferability:
THE SHARES OF STOCK REPRESENTED BY THIS
CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR
ANY STATE SECURITIES LAWS. THE SHARES MAY
NOT BE OFFERED FOR SALE, SOLD, PLEDGED,
TRANSFERRED OR OTHERWISE DISPOSED OF UNTIL
THE HOLDER HEREOF PROVIDES EVIDENCE
SATISFACTORY TO THE ISSUER (WHICH, IN THE
DISCRETION OF THE ISSUER, MAY INCLUDE AN
OPINION OF COUNSEL, SATISFACTORY TO THE
ISSUER) THAT SUCH OFFER, SALE, PLEDGE,
-2-
<PAGE> 3
TRANSFER OR OTHER DISPOSITION WILL NOT
VIOLATE APPLICABLE FEDERAL OR STATE LAWS.
iii. Executive acknowledges that the Shares must be held
indefinitely unless subsequently registered under the Act or
an exemption from such registration is available. Executive is
aware of the provisions of Rule 144 promulgated under the Act,
which permit the limited resale of shares subject to the
satisfaction of certain conditions, including, among other
things, the existence of a public market for the shares, the
availability of certain current public information about the
Company, the resale occurring not less than one (1) year after
a party has received the security to be sold and provided the
consideration in exchange therefor, the sale being effected
through "broker's transaction" or in transactions directly
with a "market maker" (as provided by Rule 144(f)) and the
number of shares being sold during any three (3) month period
not exceeding specified limitations.
iv. Pursuant to this Agreement, Executive has been issued the
Grant Shares and options to purchase an additional 1,500,00
shares of common stock, for an aggregate of 3,500,000 shares
of common stock (collectively, the "Executive Shares").
(1) Protection Against Dilution. If the Company shall at
any time during the term of this Agreement: (i)
declare or pay to the holders of Common Stock a
dividend payable in any kind of shares of stock of
the Company; or (ii) change or divide or otherwise
reclassify its Common Stock into the same or
different number of shares with or without par value,
or into shares of any class or classes; or (iii)
consolidate or merge with, or transfer all or
substantially all of its property to, any other
affiliated corporation; or (iv) make any distribution
of its assets to holders of its Common Stock as a
liquidation or partial liquidation dividend or by way
or return of capital, with the result that the number
of Executive Shares shall represent less than 15% of
the number of fully-diluted shares of Common Stock of
the Company, then, Executive shall receive such
additional shares of Common Stock, or such
reclassified shares of Common Stock of the Company,
or such shares or securities or assets of the entity
resulting from such consolidation or merger or
transfer of such assets of the Company, as are
necessary for the number of shares of Common Stock
held by Executive to be equal to 15% of the
fully-diluted shares of Common Stock of the Company
(after giving effect to such issuance).
-3-
<PAGE> 4
(2) If the Board of Directors of the Company shall (i)
declare any dividend or other distribution with
respect to the Common Stock, other than a cash
dividend, (ii) offer to the holders of the shares of
Common Stock any additional shares of Common Stock,
any securities convertible into or exercisable for
shares of Common Stock or any rights to subscribe
thereto, or (iii) propose a dissolution, liquidation
or winding up of the Company, the Company shall mail
notice thereof to Executive not less than fifteen
(15) days prior to the record date fixed for
determining stockholders entitled to participate in
such dividend, distribution, offer or subscription
right or to vote on such dissolution, liquidation or
winding up.
(3) If at any time or from time to time the Company shall
take any action affecting its Common Stock or any
other capital stock of the Company, not otherwise
described in any of the foregoing subsections of this
Section 3(c)(iv), then, if the failure to make any
adjustment would, in the reasonable opinion of the
members of the Board of Directors of the Company,
have a materially adverse effect upon the rights of
Executive, the number of shares of Executive Shares,
shall be adjusted in such manner and at such time as
the members of the Board of Directors of the Company
may in good faith determine to be equitable under the
circumstances.
(4) Upon any adjustment or modification of the rights of
the Executive in accordance with this Section
3(c)(iv), the Company shall promptly cause its Chief
Financial Officer to provide a notice to the
Executive setting forth such adjustment or
modification, a brief statement of the facts
requiring such adjustment or modification and the
manner of computing the same.
v. Piggyback Registrations.
(1) Right to Piggyback. Whenever the Company proposes to
register any of its securities under the Act and the
registration form to be used may be used for the
registration of the Shares (a "Piggyback
Registration"), the Company shall give prompt written
notice to Executive of its intention to effect such a
registration and will include in such registration
all Shares with respect to which the Company has
received a written request by Executive for inclusion
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<PAGE> 5
therein within thirty (30) days after the receipt of
the Company's notice.
(2) Priority on Primary Registrations. If a Piggyback
Registration is an underwritten primary registration
on behalf of the Company, and the managing
underwriters advise the Company in writing that in
their opinion the number of securities requested to
be included in such registration exceeds the number
which can be sold in such offering without adversely
affecting the marketability of the offering, the
Company will include in such registration (x) first,
the securities the Company proposes to sell, and (y)
second, the Shares requested to be included in such
registration, pro rata among the Executive and other
holders of such registrable securities on the basis
of the voting power of shares owned by Executive and
each such other holder.
vi. Demand Registration. In the event that this Agreement is
terminated for any reason prior to the third anniversary of
the date hereof, the Company shall, upon the request of
Executive, prepare and file within ninety (90) days of
Executive's request, a registration statement with the
Securities and Exchange Commission covering the Executive
Shares, and shall use its best efforts to cause such
registration statement to become effective promptly.
4. Benefits.
a. During the Agreement Term, Executive shall be entitled to (1)
vacations (taken consecutively or in segments), aggregating
four (4) weeks each fiscal year; (2) reasonable sick leave;
(3) participate in the Company's medical plan; and (4)
participate in any employee benefit plan or fringe benefits
program from time to time in effect for the benefit of any
employee, executive or officer of the Company.
b. It is expressly understood that the Company may in its
discretion from time to time modify any bonus, benefit or
other employee programs applicable to substantially all
employees who benefit from each program, including, without
limitation, terms of eligibility, benefit levels and other
terms and conditions, and that all such modifications shall be
binding on Executive.
c. Executive agrees that the Company shall withhold from any and
all payments required to be made to Executive pursuant to this
Agreement all federal, state, local and/or other taxes which
the Company determines are required to be withheld in
accordance with applicable statutes and/or regulations from
time to
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<PAGE> 6
time in effect.
d. Automobile Allowance. The Company shall provide Executive with
an automobile allowance of $1,600 per month, and the Company
shall pay Executive's gasoline, insurance and maintenance
expenses for operating one automobile.
e. Travel and Entertainment Allowance. The Company shall provide
Executive with a travel and entertainment allowance of $2,000
per month. Executive shall not be required to account for, or
establish the reasonableness of, his travel and entertainment
expenses.
5. Termination of Employment.
a. Ability to Terminate. Executive may terminate this Agreement
and his employment with the Company prior to the expiration of
the Agreement Term. The Company may also terminate this
Agreement and Executive's employment with the Company prior to
the expiration of the Agreement Term. In the event of a
termination of this Agreement by either Executive or the
Company, the termination payments provided in this Section 5
shall be the only payments that the Company shall be obligated
to make on account of or after such termination, except for
any benefits provided under any employee benefit plan of the
Company.
b. Termination for Good Reason or Without Cause. If Executive
terminates his employment with the Company for Good Reason, or
if the Company terminates Executive's employment with the
Company without Cause, Executive shall be entitled to the
following within thirty (30) days of such termination (or at
such other time provided below):
i. his Base Salary and any earned and unused vacation
accrued through the date of such termination; plus
ii. the Incentive Bonus for the calendar year of the
termination (which shall be payable no later than the
March 15th following the calendar year of the
termination) and any other accrued and unpaid
Incentive Bonus amounts; plus
iii. any expenses that have not been reimbursed in
accordance with the terms of this Agreement; plus
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<PAGE> 7
iv. his annual Base Salary for the period between the
date of such termination and the expiration of the
Agreement Term;
v. the Incentive Bonus on account of the remaining
calendar year(s) within the Agreement Term after the
calendar year of the termination (which shall be
payable no later than the March 15th following the
applicable calendar year.
c. Termination For Cause. If the Company terminates Executive's
employment for Cause, Executive shall be entitled to the
following within thirty (30) days of the date of such
termination (or at such other time provided below):
i. his Base Salary and any earned and unused vacation
accrued through the date of such termination; plus
ii. the Incentive Bonus for the calendar year of the
termination (which shall be payable no later than the
March 15th following the calendar year of the
termination); plus
iii. any expenses that have not been reimbursed in
accordance with the terms of this Agreement; plus
iv. his Base Salary for the period between the date of
such termination and either (x) the expiration of the
Agreement Term or (y) the second anniversary of the
date of such termination, whichever period is
shorter; plus
v. the Incentive Bonus on account of either (x) the two
calendar years following the calendar year of such
termination or (y) the period prior to the expiration
of the Agreement Term, whichever period is shorter.
d. Disability. If the Company terminates Executive's employment
because of Executive's Disability, then the Company shall
provide the following to Executive within thirty (30) days of
the date of such termination (or at such other time provided
below):
i. the Base Salary and any earned and unused vacation
accrued through the date of such termination; plus
ii. the Incentive Bonus for the calendar year of the
termination (which shall
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<PAGE> 8
be payable no later than the March 15th following the
calendar year of the termination) and any other
accrued and unpaid Incentive Bonus amounts; plus
iii. any expenses that have not been reimbursed in
accordance with the terms of this Agreement.
e. Death. In the event of the death of Executive during the
Agreement Term, the Base Salary to which Executive is entitled
hereunder shall continue to be paid through the end of the
calendar year in which death occurs to the last beneficiary
designated by Executive pursuant to the last beneficiary
designated by Executive pursuant to Section 18 hereof, or,
failing such designation, to his estate. Upon payment of such
salary, the Company shall have no further obligations under
this Agreement.
f. No Mitigation. In the event of any termination of employment
under this Section 5, Executive shall be under no obligation
to seek other employment, and there shall be no offset against
amounts due to Executive under this Agreement on account of
any remuneration attributable to any subsequent employment
(including any self-employment) that he may obtain.
g. Definitions. For purposes of this Agreement, the following
terms shall have the following meaning:
i. "Cause" shall mean (1) the failure of Executive to
perform his duties as defined in Section 2 above with
the Company or the breach of this Agreement by
Executive if the Company gives notice of such cause
and it remains uncured for ten (10) days following
such notice; (2) any act by Executive of fraud, theft
or dishonesty; (3) drug or alcohol abuse or related
behavior that impedes Executive's job performance or
brings Executive or the Company into disrepute in the
community; (4) misappropriation by Executive of funds
or any corporate opportunity; (5) a conviction or
affirmative finding by an appropriate administrative
agency that Executive is guilty of a felony or a
misdemeanor involving moral turpitude (or a plea of
nolo contendere thereto); (6) acts by Executive
attempting to secure or securing any personal profit
not fully disclosed to and approved by the Board of
the Company in connection with any transaction
entered into on behalf of the Company; (7) gross,
willful or wanton negligence or misconduct by
Executive; or (8) any act or omission that the Board
of Directors reasonably believes to be harmful to the
Company, or any affiliate thereof.
ii. "Disability" shall mean any physical or mental
disability or incapacity
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<PAGE> 9
which continues for ninety (90) consecutive days or
an aggregate period of more than one hundred eighty
(180) days in any twelve (12) month period and which
shall render Executive incapable of performing the
services required of him by the Company. Disability
benefits, if any, due under applicable plans and
programs of the Company shall be determined under the
provision of such plans and programs.
iii. "Good Reason" shall mean a material breach by the
Company of the terms of this Agreement, which breach
continues for thirty (30) days after written notice
thereof from Executive.
6. Restrictive Covenant.
a. Pursuant to this Agreement, Executive has agreed to become an
Executive of the Company and to comply with the non-disclosure
provisions of Section 8 hereof. Executive recognizes and
acknowledges that he will be given access to certain of the
Company's confidential information, and has access to and
authority to develop relationships with customers of the
Company because of his position and status as an employee of
Company, which he would not otherwise attain. In consideration
of the foregoing, Executive agrees to comply with the terms of
this Section 6.
b. The restrains imposed by this Section 6 shall apply during any
period that Executive continues to receive payment of Base
Salary hereunder, and (i) for a period of one (1) year
thereafter (the "Restricted Period"). In the event that any
Court having jurisdiction should find that the Restricted
period is so long and/or the scope (distance)(as set forth
below) is so broad as to constitute an undue hardship on
Executive, then, in such event only, the Restricted Period and
area limitations shall be valid for the maximum time and area
for which they could be legally made and enforced.
c. During the Restricted Period, Executive shall not, as an
employee (other than of the Company or an affiliate of the
Company), the Company, stockholder, officer, director,
partner, consultant, advisor, proprietor, lender, provider of
capital or other ownership, operational or management
capacity, directly or indirectly, through any other person,
firm or corporation (i) solicit or hire any person who on the
date of Executive's termination is, or within the last three
(3) months of Executive's employment by the Company was, an
employee of the Company, or otherwise interfere with or
disrupt the employment relationship between the Company and
any employee, (ii) solicit or do business with (a) the
Company's customers with whom the Company did business while
Executive was employed under this Agreement or (b) individuals
or entities whom Executive met as a result of his position
with the Company while Executive was employed under this
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<PAGE> 10
Agreement, that results in competition with the Company, or
(iii) be associated in any way with any entity doing business
in a 100-mile radius of New York City that competes with the
Company; provided, however, that the foregoing restrictions
shall not apply in any way to Executive's interest in Izzy
Entertainment, a company in the business of producing and
distributing popular music.
d. Executive expressly recognizes and agrees that the restraints
imposed by this Section 6 are (i) reasonable as to time,
geographic limitation and scope of activity to be restrained;
(ii) reasonably necessary to the enjoyment by the Company for
the value of its assets and to protect its legitimate
interests; and (iii) not oppressive. Executive further
expressly recognizes and agrees that the restraints imposed by
this Section 6 represent a reasonable and necessary
restriction for the protection of the legitimate interests of
the Company, that the failure by Executive to observe and
comply with the covenants and agreements in this Section 6
will cause irreparable harm to the Company, that it is and
will continue to be difficult to ascertain the harm and
damages to the Company that such a failure by Executive would
cause, that the consideration received by Executive for
entering into these covenants and agreements is fair, that the
covenants and agreements and their enforcement will not
deprive Executive of his ability to earn a reasonable living
in the Company's industry or otherwise, and that Executive has
acquired knowledge and skills in his field that will allow him
to obtain employment without violating these covenants and
agreements.
7. Indemnification.
a. The Company agrees that if Executive is or becomes a party, or
is threatened to be made party, to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative or investigative and wether brought by or in
the right of the Company or otherwise ("Proceeding"), by
reason of the fact that (whether before or after the Effective
Date) he is or was a director, officer or employee of the
Company or is or was serving at the request of the Company as
a director, officer, member, employee or agent of another
corporation, partnership, joint venture, trust or other
enterprise, including (without limitation) service with
respect to employee benefit plans, whether or not the basis of
such Proceeding is Executive's alleged action in an official
capacity while serving as a director, officer, member,
employee or agent, Executive shall be indemnified and held
harmless by the Company to the fullest extent legally
permitted or authorized by the Company's certificate or
articles of incorporation or by-laws (or other applicable
governing documents) or resolutions of the Board (or other
applicable governing body) or the stockholders of the Company
or, if greater, by the laws of the State of Delaware or any
other applicable state or organization or formation, against
all cost, expense, liability and loss (including, without
limitation,
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<PAGE> 11
attorneys' fees, judgments, costs of appeal, fines, excise
taxes or penalties and amounts paid or to be paid in
settlement) reasonably incurred or suffered by Executive in
connection therewith, and such indemnification shall continue
as to Executive event if he has ceased to be a director,
member, employee or agent of the Company or other entity and
shall inure to the benefit of Employee's heirs, executors and
administrators. In this Section 7, (i) each reference to "the
Company" (other than for the purpose of any notice) shall
include, without limitation, all entities that are
subsidiaries and affiliates of the Company, and (ii) all
obligations of the Company shall be joint and several as to
all entities included in such definition of "the Company". The
Company shall pay or provide such indemnification to Executive
in connection with a Proceeding within sixty (60) days after
written request by Executive for that indemnification. During
that sixty (60) day period, Executive shall have an
opportunity to be heard and to present evidence in connection
with the consideration by the Board of Directors, independent
legal counsel, or stockholders, as the case may be, of any
findings required by applicable law in connection with that
indemnification request. The Company shall also advance to
Executive all reasonable costs and expenses incurred by him
(including, without limitation, all reasonable fees and costs
of counsel selected by Executive, and all other indemnifiable
liabilities covered by this Section 7(a)) in connection with a
Proceeding within thirty (30) days after written request by
Executive for such advance. Such request shall include an
undertaking by Executive to repay the amount of such advance
if it shall ultimately be determined that he is not entitled
to be indemnified against such costs and expenses. In the
event the Company does not properly indemnify or advance
expenses to Executive in accordance with the terms of this
Section 7(a)(including, without limitation, the time period
set forth above), Executive shall be entitled to bring an
action or proceeding against the Company in any state or
federal court or before a panel of arbitrators in accordance
with Section 20 hereof, to enforce the Company's
indemnification or expense-advancement obligations, and (in
either case) Executive shall be reimbursed by the Company for
the reasonable costs and expenses (including, without
limitation, reasonable attorneys fees and costs) of any
successful enforcement of the Company's indemnification or
expense-advancement obligations.
b. Neither the failure of the Company (including, without
limitation, its board of directors, independent legal counsel
or stockholders) to have made any determination that
indemnification of Executive is proper because he has met the
applicable standard of conduct, nor a determination by the
Company (including, without limitation, its board of
directors, independent legal counsel or stockholders) that
Executive has not met such applicable standard of conduct,
shall create a presumption that Executive has not met the
applicable standard of conduct or shall be a defense to any
action or proceeding to enforce the Company's indemnification
or expense-advancement obligations. The Company
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<PAGE> 12
shall have the burden of proof in establishing that Executive
has not met the applicable standard of conduct. Where
Executive is entitled to indemnification under this Section 7
for a portion of the indemnifiable liabilities described in
Section 7(a), but not for the total amount of liabilities of
that kind, the Company shall nevertheless indemnify Executive
for such portion of the indemnifiable liabilities to which
Executive is entitled.
c. Executive's rights provided in this Section 7 shall not be
exclusive of any other rights of indemnification or
advancement of expenses (or any similar rights) that Executive
may have against the Company or under any liability insurance
covering Executive.
d. The Company agrees to continue and maintain one or more
directors' and officers' liability insurance policies that
cover Executive (with reputable and financially sound
insurers) at a level that is commercially reasonable (in light
of the Company's business and the risks of litigation or
claims), and otherwise to the fullest extent the Company
provides such coverage for any of its other executive
officers.
e. Without limiting the generality of Section 7 hereof, the
rights of indemnity and advancement of expenses in favor of
Executive in this Section 7 shall continue and survive any
expiration or termination of this Agreement or Executive's
ceasing to be a director, officer, or employee of the Company.
8. Assignability; Binding Nature.
This Agreement shall be binding and inure to the benefit of the parties
and their respective successors, heirs (in the case of Executive) and permitted
assigns. No rights or obligations of the Company under this Agreement may be
assigned or transferred by the Company (including, without limitation, by
merger, consolidation, or other operation of law) except that such rights or
obligations may be assigned or transferred pursuant to a merger or consolidation
in which the Company is not the continuing or surviving entity, or the sale or
liquidation of all or substantially all of the assets of the Company,, to one or
more entities that have the financial and other ability to perform the Company's
obligations under this Agreement; provided, however, that the assignee or
transferee is the successor to all or substantially all of the assets of the
Company and such assignee or transferee assumes the liabilities, obligations and
duties of the Company under this Agreement, either contractually or as a matter
of law. No rights or obligations of Executive under this Agreement may be
assigned or transferred by Executive other than his rights to compensation and
benefits, as provided in Section 15 below.
9. Representations.
The Company represents and warrants that it is fully authorized and
empowered to enter
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<PAGE> 13
into this Agreement and that the performance of its obligations under this
Agreement will not violate any agreement between it and any other person, firm
or organization. Executive represents that he knows of no agreement between him
and any other person, firm or organization that would be violated by the
performance of his obligations under this Agreement.
10. Warranty.
Executive does hereby warrant that he has not taken any action, and
covenants that during the Agreement Term, or the Restricted Period, as
applicable, he shall take no such action, that constitutes or will constitute a
breach of any agreement concerning confidential information and trade secrets,
confidentiality, solicitation or non-competition to which he is bound as a
party.
11. Entire Agreement.
This Agreement and the other agreements referenced herein contain the
entire understanding and agreement between the parties concerning the subject
matter hereof and supersede all prior agreements, understandings, discussions,
negotiations and undertakings, whether written or oral, between the parties with
respect thereto. Nothing in this Agreement impairs or otherwise adversely
affects any of Executive's rights to or under any stock option or stock
agreements with the Company (or any of its subsidiaries or affiliates) that are
in effect on or after the Effective Date.
12. Amendment or Waiver.
No provision of this Agreement may be amended unless such amendment is
agreed to in writing and signed by Executive and an authorized officer of the
Company (other than Executive). No waiver by either party of any breach by the
other part of any condition or provision contained in this Agreement to be
performed by such other party shall be deemed a waiver of a similar or
dissimilar condition or provision at the same or any prior or subsequent time.
Any waiver must be in writing and signed by Executive or an authorized officer
of the Company (other than Executive), as the case may be.
13. Severability.
In the event that any provision or portion of this Agreement shall be
determined to be invalid or unenforceable for any reason, in whole or in part,
the remaining provisions of this Agreement shall be unaffected thereby and shall
remain in full force and effect to the fullest extent permitted by law.
14. Survivorship.
The respective rights and obligations of the parties hereunder shall
survive any termination of the Executive's employment or the expiration of the
Agreement Term to the
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<PAGE> 14
extent necessary to the intended preservation of such rights and obligations.
15. Beneficiaries/References.
Executive shall be entitled, to the extent permitted under any
applicable law, to select and change a beneficiary or beneficiaries to receive
any compensation or benefit payable hereunder following Executive's death or
incompetence by giving the Company written notice thereof. In the event of
Executive's death or a judicial determination of his incompetence, reference in
this Agreement to Executive shall be deemed, where appropriate, to refer to his
beneficiary, estate or other legal representative.
16. Governing Law/Jurisdiction.
This Agreement shall be governed by and construed and interpreted in
accordance with the laws of New York without reference to principles of conflict
of laws.
17. Resolution of Disputes.
a. Arbitration of Claims. Any disputes arising under or in
connection with this Agreement shall be resolved by binding
arbitration. Such arbitration shall be conducted on an
expedited basis in accordance with the Commercial Arbitration
Rules of the American Arbitration Association before a panel
of three (3) arbitrators, selected by the American Arbitration
Association, sitting in New York, New York. The award of the
arbitrators shall be final and nonappealable, and judgment may
be entered on the award of the arbitrators in any court having
proper jurisdiction. All expenses of such arbitration shall be
borne by Company.
b. Payment of Legal Fees and Costs. The Company agrees to pay as
incurred, to the full extent permitted by law, all legal fees
and expenses which Executive may reasonably incur as a result
of any contest (regardless of the outcome thereof) by the
Company, Executive or others of any action taken pursuant to
the terms of this Agreement, or of the validity or
enforceability of, or liability under, any provision of this
Agreement, or any guarantee of performance thereof (including,
without limitation, as a result of any contest by Executive
about the amount of payment pursuant to the Agreement), plus
in each case interest on any delayed payment at the AFR.
18. Notices.
Any notice given to a party shall be in writing and shall be deemed to
have been given when delivered personally or by courier, or upon receipt if sent
by certified or registered mail, postage prepaid, return receipt requested, duly
addressed to the party concerned at the address indicated below or to such
changed address as such party may subsequently given such notice of:
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<PAGE> 15
If to the Executive: Select Media Communications, Inc.
666 Third Avenue
New York, NY 10022
Attention: Mitch J. Gutkowski, President
With a Copy to
(which shall not McDermott Will & Emery
constitute notice): 50 Rockefeller Plaza
New York, NY 10020
Attention: Stephen B. Selbst, Esquire
If to Company:
19. Headings.
The headings of the sections contained in this Agreement are for
convenience only and shall not be deemed to control or affect the meaning or
construction of any provision of this Agreement.
20. Counterparts.
This Agreement may be executed in two or more counterparts.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first written above.
SELECT MEDIA COMMUNICATIONS, INC.
------------------------------------------
By:
Its:
------------------------------------------
MITCH J. GUTKOWSKI
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EXHIBIT 10.2
STOCK PURCHASE AGREEMENT
This Agreement is made as of November 18, 1999, by and among Joseph D.
Tarsia, whose address is 117 The Mews, Haddonfield, New Jersey, 08033-1342
("Seller") and Select Media Communications, Inc., a New York corporation, with a
principal place of business of 666 Third Avenue, New York, New York, 10017
("Purchaser").
BACKGROUND
A. Seller owns twenty (20) shares of the capital stock of Sigma Sound
Services, Inc., a Pennsylvania corporation (the "Company"), which shares
represent one hundred percent (100%) of the outstanding shares of the capital
stock of the Company (the "Stock").
B. Seller wishes to sell and Purchaser wishes to purchase the Stock on
the terms and conditions set forth herein.
NOW THEREFORE, in consideration of the premises and the mutual and
several covenants, conditions, representations, warranties and indemnities set
forth herein, intending to be legally bound hereby, the parties hereto agree as
follows:
1. DEPOSIT TOWARDS PURCHASE PRICE. Purchaser acknowledges and
understands that by entering into this Agreement, Seller has forgone a
profitable opportunity to cause the Company to enter in to an agreement for the
sale of substantially all of the Company's assets. Accordingly, as a covenant
independent of the Closing (as defined below), on the date hereof, Purchaser
shall pay Seller in good funds by wire transfer to an account or accounts
designated by Seller or, in the absence of such designation, by certified or
bank cashier's checks payable to Seller delivered to Seller's address set forth
above, the sum of Four Hundred Thousand Dollars [$400,000] (the "Payment Upon
Execution"). If Purchaser shall not pay when due the Payment Upon Execution,
Seller may terminate this Agreement and either exercise any and all remedies
available to Seller hereunder, at law or in equity or retain as liquidated
damages the Payment Upon Execution. Notwithstanding anything herein to the
contrary, the Payment Upon Execution shall be deemed earned by Seller as of the
date of this Agreement and shall not be refundable to Purchaser under any
circumstances whatsoever.
2. SALE AND PURCHASE OF THE STOCK.
2.1 TRANSFER AT CLOSING. At the Closing, Seller shall sell,
transfer, assign and convey to Purchaser the Stock. If any Seller should refuse
or fail to deliver the Stock at the Closing, Purchaser shall at its sole
discretion have the option to accept delivery of such shares of the Stock as are
delivered at the Closing (without losing any rights Purchaser may have hereunder
or at law or in equity against Seller for refusing or failing to make such
delivery) or to terminate the transactions contemplated by this Agreement
without any further liability to Purchaser.
2.2 PURCHASE PRICE FOR THE STOCK. The purchase price for the
Stock shall be One Million Dollars [$1,000,000] (the "Purchase Price"), of
which: (i) Four Hundred Thousand Dollars ($400,000) shall be paid pursuant to
the terms of Section 1 hereof; (ii) Two Hundred Thousand
<PAGE> 2
Dollars ($200,000) shall be payable in cash at the Closing by wire transfer to
an account or accounts designated by Seller or, in the absence of such
designation, by certified or bank cashier's checks payable to Seller (the "Down
Payment"); and (iii) Four Hundred Thousand Dollars ($400,000) shall be payable
pursuant to the terms of the Note (as defined in Section 2.3 hereof).
2.3 NOTE PAYABLE FOR THE STOCK. At the Closing, Purchaser
shall execute and deliver to Seller: (i) a promissory note in the principal sum
of Four Hundred Thousand Dollars ($400,000) in the form attached as Exhibit "A"
hereto (the "Promissory Note"); (ii) an Escrow Agreement for Assignment of Name
in the form attached as Exhibit "B" hereto, together with the Assignment of Name
attached thereto as an exhibit, duly executed by Purchaser and the Company (the
"Escrow Agreement for Assignment of Name"); (iii) a Security Agreement in the
form attached as Exhibit "C" hereto (the "Security Agreement"); and (iv) all
appropriate Forms UCC-1.
3. CLOSING; TRANSFER PROCEDURES.
3.1 CLOSING. The consummation of the transactions resulting in
the sale and purchase of the Stock ( the "Closing") shall occur on January 18,
2000, commencing at 10:00 A.M. (the "Closing Date"), at the offices of Eizen
Fineburg & McCarthy, LLP, Two Commerce Square, Suite 3410, 2001 Market Street,
Philadelphia, Pennsylvania 19103, or on such other Closing Date or at such other
place agreed to by the parties. Time is of the essence.
3.2 MINUTE BOOKS, CORPORATE SEAL AND STOCK RECORDS. At the
Closing, Seller shall deliver or cause the Company to deliver to Purchaser all
minute books, corporate seals, stock certificate books and other stock records
of the Company.
3.3 DELIVERY OF THE STOCK. At the Closing, Seller shall
deliver to Purchaser all certificates representing the Stock, duly endorsed in
blank or with appropriate stock powers duly endorsed in blank.
3.4 BANK ACCOUNT SIGNATURES. At the Closing, Seller shall
deliver or cause the Company to deliver to Purchaser all necessary documents
required by any banks or other depository institutions for the Company to remove
the authorized signatories and replace them with the Purchaser's designees.
3.5 NAME. Effective the Closing, Seller shall be deemed to
have assigned, transferred and conveyed to the Company: (i) all of Seller's
right, title and interest, if any, in and to the name "Sigma Sound," and all
goodwill associated therewith; and (ii) all of Seller's right, title and
interest, if any, in and to the name "Sigma Sound Studios," and all goodwill
associated therewith.
4. REPRESENTATIONS AND WARRANTIES OF SELLER. Seller hereby represents
and warrants to Purchaser as of the date hereof and at the Closing as follows:
4.1 ORGANIZATION AND GOOD STANDING. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the Commonwealth of Pennsylvania.
2
<PAGE> 3
4.2 NO SUBSIDIARIES. The Company has no interest in any other
corporation, partnership, joint venture or other legal entity.
4.3 CAPITALIZATION. The issued, authorized and outstanding
capital stock of the Company consists of the Stock, of which Seller owns one
hundred percent (100%). Each share of such capital stock issued and outstanding
is validly issued, fully paid and non-assessable. There are no outstanding
options, warrants, puts, calls, contracts, commitments, preemptive rights,
cumulative voting rights, assignments, pledges or demands of any character
relating to any of the capital stock of the Company.
4.4 STOCK OWNERSHIP. Seller owns the Stock free and clear of
all liens, encumbrances, pledges, mortgages, security interests, conditional
sales contracts, claims and other charges of every kind ("Liens"). Seller has
the full right to transfer the Stock to Purchaser free and clear of all Liens,
and without violating any agreement or understanding to which the Company or
Seller is a party or by which either of them is bound.
4.5 TITLE TO PROPERTIES. The Company owns outright, and has
good and marketable title to, all of its properties, free and clear of all
Liens, except for the lien of current taxes not yet due and payable and
statutory liens incurred in the ordinary course of business which are not
delinquent. The Company's assets include substantially all of the inventory and
equipment listed on Schedule "1" hereto (the "Inventory and Equipment"). The
Company's assets expressly exclude all of the office furniture, furnishings and
memorabilia listed on Schedule "2" hereto (the "Excluded Assets"). Any assets
within the Company's business premises located at 210-212-214 North 12th Street,
Philadelphia, Pennsylvania 19107 and not listed on Schedule "2" shall be deemed
assets of the Company and not Excluded Assets from and after the Closing.
4.6 TAX MATTERS. The Company has filed or caused to be filed
all federal, state and local tax returns and reports through the taxable year
ended December 31, 1998, and as of the date hereof, the taxable calendar quarter
ended June 30, 1999, and, as of the Closing, the taxable calendar quarter ended
September 30, 1999, which are due and required to be filed and has paid or
caused to be paid all taxes reported thereby, except taxes or assessments being
contested in good faith and for which adequate reserves have been established.
Since July 1, 1999, the Company has made all required interim payroll tax
payments, including, without limitation, all payroll withholding taxes.
4.7 LITIGATION. There is no dispute, claim, action, suit,
proceeding, arbitration or governmental investigation, either administrative or
judicial, pending, or, to the knowledge of Seller, threatened, against or
related to the Company or its properties or business. The Company is not in
default with respect to any order, writ, injunction or decree of any court or
governmental department, commission, board, bureau, agency or instrumentality,
which involves the possibility of any judgment or liability which may result in
any material adverse change in the Company's financial condition, assets,
liabilities, properties or business. Seller has no knowledge of any facts that
would provide a basis for any such claim, action, suit, proceeding,
investigation or default referred to in the first two sentences of this Section
4.7.
3
<PAGE> 4
4.8 LIABILITIES. The Company has no liabilities or obligations
accrued, absolute, contingent or otherwise, except for trade accounts payable
consistent with past business practice in the normal and ordinary course of its
business and payroll taxes and unemployment compensation insurance and similar
expenses consistent with past business practice in the normal and ordinary
course of its business. Effective upon the Closing, any loans, accounts or other
sums payable to Seller shall be deemed to have been capital contributions and
treated as such from and after the Closing. The Company is not a party to any
debenture, note, conditional sale, loan or other borrowing agreement, or any
lease required to be capitalized in accordance with generally accepted
accounting principles, any of which involves a total remaining financial
obligation of more than Ten Thousand Dollars ($10,000). No dividends have been
declared that are payable by the Company to Seller.
4.9 COMPLIANCE WITH LAWS. The Company has received no notice
of violation of any law, ordinance, rule, regulation or order (including,
without limitation, any environmental, safety, health or price or wage control
law, ordinance, rule, regulation or order), and, to the knowledge of Seller none
are pending or threatened, applicable to its operations, business or properties
as presently constituted.
4.10 EMPLOYEE BENEFIT PLANS; EMPLOYEE RELATIONS. The Company
maintains no pension, profit sharing, stock bonus, stock option, deferred
compensation, health, life, accident or disability plans and the Company is not
a party to any employment or severance agreements (including but not limited to,
any "employee benefit plans" within the meaning of Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended and the regulations
promulgated thereunder.
4.11 DIRECTORS, OFFICERS AND AUTHORIZED PERSONS. Seller and
Cecelia Tarsia are the Company's directors. No other person is a director of
Company. Seller and Cecelia Tarsia shall be deemed to have resigned as directors
of the Company as of the Closing. Michael Tarsia and Cecelia Tarsia are the only
officers of the Company.
4.12 DISCLOSURE. No representation or warranty by Seller in
this Agreement or in any other exhibit, list, certificate or document delivered
pursuant to this Agreement, contains or will contain any material omission or
untrue statement of material fact. Disclosure in any particular Exhibit attached
hereto shall constitute disclosure for all purposes of this Agreement.
5. REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser hereby
represents and warrants to Seller as of the date hereof and at the Closing, as
follows:
5.1 ORGANIZATION AND GOOD STANDING. Purchaser is a corporation
duly organized, validly existing and in good standing under the laws of the
State of New York. Purchaser is qualified to do business and is in good standing
in each jurisdiction in which the nature of its activities or the character of
its property owned, leased or operated by it make such qualification necessary
or appropriate except for those jurisdictions in which the failure to be so
qualified will not have a material adverse effect on Purchaser's business or
financial affairs. Purchaser has full corporate power to own its properties,
assets and business and to carry on its business as now
4
<PAGE> 5
conducted.
5.2 AUTHORIZATION OF TRANSACTION "Authorization of
Transaction". Purchaser has the legal capacity, power and authority (including
full corporate power and authority) to execute and deliver this Agreement and
each agreement, document, instrument or certificate executed by it in connection
with this Agreement, including, without limitation, the Promissory Note, the
Escrow Agreement for Assignment of Name, the Security Agreement, the Lease [as
defined below], the Employment Agreement [as defined below], the Consulting
Agreement [as defined below] and the Guaranties [as defined below]
(collectively, the "Transaction Documents") and to perform its obligations
hereunder and thereunder. All corporate and other actions or proceedings to be
taken by or on the part of Purchaser to authorize and permit the execution and
delivery by it of the Transaction Documents to which it is a party, the
instruments required to be executed and delivered by it pursuant thereto, the
performance by Purchaser of its obligations under the Transaction Documents, and
the consummation by it of the transactions contemplated therein, have been duly
and properly taken. The Transaction Documents have been duly executed and
delivered by Purchaser and constitute the legal, valid and binding obligation of
Purchaser enforceable in accordance with their terms and conditions. At the
Closing, Purchaser shall deliver to Seller copies of Purchaser's and the
Company's corporate resolutions authorizing the matters set forth in this
Agreement and the other Transaction Documents. Any individual executing this
Agreement on behalf of Purchaser represents and warrants that he is a duly
authorized officer of Purchaser and authorized to act in the name of Purchaser
to bind Purchaser to this Agreement. If any such individual shall not be so
authorized then such individual shall be personally liable hereunder until
Purchaser ratifies, approves and adopts this Agreement as a binding obligation
of Purchaser, enforceable in accordance with its terms.
6. CONDUCT PENDING THE CLOSING. Seller hereby covenants and agrees
that, pending the Closing and except as otherwise approved in advance in writing
by the Purchaser:
6.1 CONDUCT OF BUSINESS. The Company shall carry on its
business diligently and substantially in the same manner as heretofore and
refrain from any action that would result in the breach of any of the
representations, warranties or covenants of Seller or the Company hereunder. The
Company shall not enter into any contract, commitment or transaction not in the
usual and ordinary course of its business and not consistent with past
practices. The Company will not sell or dispose of any capital asset with an
original cost in excess of Two Hundred and Fifty Dollars ($250). The Company
will not, and will not agree to, create any indebtedness or any other fixed or
contingent liability including, without limitation, liability as a guarantor or
otherwise with respect to the obligations of others, other than that incurred in
the usual and ordinary course of its business consistent with past practices,
and that incurred pursuant to existing contracts. The Company will not: (A)
issue any capital stock other than the Stock or grant any options, warrants or
other rights to purchase or obtain (including upon conversion, exchange or
exercise) any of its capital stock; (B) declare, set aside, or pay any dividend
or make any distribution with respect to its capital stock (including the Stock)
or redeem, purchase, or otherwise acquire any of its capital stock (including
the Stock).
6.2 AMENDMENT. The Company will not, and will not agree to,
amend its Articles of Incorporation or Bylaws, nor will there be any change in
its authorized or unissued capital stock.
5
<PAGE> 6
6.3 INSURANCE. All insurance maintained by the Company
insuring the Company, its employees, or its business or operations will be
maintained by the Company in all respects.
6.4 NO DEFAULT. The Company shall not do any act or omit to do
any act, or permit any act or omission, which will cause a material breach of
any material contract, commitment or obligation to which it is a party or by
which it is bound.
6.5 TAX RETURNS. The Company will prepare and file all state,
federal and other tax returns, and amendments thereto required to be filed
between the date of this Agreement and the Closing Date. After the Closing,
Purchaser shall have a reasonable opportunity to review all such returns and
amendments thereto, prior to their being filed.
7. CONDITIONS PRECEDENT TO PURCHASER'S OBLIGATIONS. All obligations of
Purchaser under this Agreement are subject to the fulfillment, prior to or at
the Closing, of each of the following conditions:
7.1 REPRESENTATIONS AND WARRANTIES. Seller's representations
and warranties contained in this Agreement or in any list, certificate or
document delivered pursuant to the provisions hereof shall be true at and as of
the time of Closing.
7.2 PERFORMANCE OF AGREEMENTS. Seller shall have performed and
complied with all agreements and conditions required by this Agreement to be
performed or complied with by them prior to or at the Closing.
7.3 CLOSING DELIVERIES. Seller shall have delivered the
documents and other items described in Section 3 hereof.
7.4 LEASE. Seller and Cecelia Tarsia shall have entered into
the Lease substantially in the form attached as Exhibit "D" hereto (the "Lease")
and the same shall be in full force and effect.
8. CONDITIONS PRECEDENT TO SELLER'S OBLIGATIONS. All obligations of
Seller under this Agreement are subject to the fulfillment, prior to or at the
Closing, of the following conditions:
8.1 REPRESENTATIONS AND WARRANTIES. Purchaser's
representations and warranties contained in this Agreement shall be true at and
as of the time of Closing.
8.2 PERFORMANCE OF AGREEMENTS. Purchaser and the Company shall
have performed and complied with all agreements and conditions required by this
Agreement or any of the other Transaction Documents to which it is a party to be
performed or complied with by it prior to or at the Closing. Purchaser and the
Company shall have delivered all agreements, documents, certificates and
instruments required to be delivered by this Agreement or any of the other
Transaction Documents.
8.3 PAYMENTS. Purchaser shall have paid to Seller the Payment
Upon Execution,
6
<PAGE> 7
the Down Payment and Seller's Transaction Costs (as defined in Section 9.6
hereof).
8.4 PROMISSORY NOTE. Purchaser shall have executed and
delivered to Seller the Promissory Note, Escrow Agreement for Assignment of
Name, Security Agreement and all appropriate Forms UCC-1.
8.5 LEASE. The Company shall have entered into the Lease and
the same shall be in full force and effect.
8.6 EMPLOYMENT AND CONSULTING AGREEMENTS. The Company shall
have entered into the Employment Agreement substantially in the form attached as
Exhibit "E" hereto (the "Employment Agreement") and the Consulting Agreement
substantially in the form attached as Exhibit "F" hereto (the "Consulting
Agreement"), and each of these two (2) agreements shall be in full force and
effect.
8.7 PARENT GUARANTIES. Purchaser shall have entered into the
Purchaser's Security Agreement and each of the Guaranty Agreements substantially
in the form attached as Exhibits "G", "H" and "I" hereto (collectively, the
"Guaranties") and the same shall be in full force and effect.
9. REPRESENTATIONS, WARRANTIES AND INDEMNITIES.
9.1 SURVIVAL. All representations, warranties and agreements
made by Seller individually and collectively in this Agreement or in any
exhibit, list, certificate or document delivered pursuant hereto shall survive
the Closing for a period of one (1) year, except those made in Section 4.3
(titled "Capitalization"), Section 4.4 (titled "Stock Ownership") and Section
4.6 (titled "Tax Matters"), which shall survive for a period of three (3) years.
All representations, warranties and agreements made by Purchaser in this
Agreement or any other of the Transaction Documents or in any exhibit, list,
certificate or document delivered pursuant hereto or thereto shall survive for a
period of one (1) year following the date on which Purchaser shall have paid in
full the Promissory Note.
9.2 INDEMNIFICATION BY SELLER. Seller shall indemnify, defend
and hold harmless Purchaser from and against all claims, demands, liabilities,
damages, losses, costs and expenses, including reasonable attorneys' fees,
caused by or arising out of the breach of any agreement of or any representation
or warranty made by Seller in this Agreement or in any exhibit, list,
certificate or document delivered by them pursuant hereto; provided, however,
that no such claim for indemnification hereunder may be asserted until and only
to the extent that the amount of such claim or the aggregate amount of such
claims exceeds the sum of One Hundred Thousand Dollars ($100,000), this
obligation of Seller to survive the Closing.
9.3 INDEMNIFICATION BY PURCHASER. Purchaser shall indemnify,
defend and hold harmless Seller from and against all claims, demands,
liabilities, damages, losses, costs and expenses, including reasonable
attorneys' fees, caused by or arising out of the breach of any agreement of or
any representation or warranty made by Purchaser in this Agreement or any other
of the Transaction Documents to which it is a party including, without
limitation, Section 9.6 hereof, this obligation of
7
<PAGE> 8
Purchaser to survive the Closing.
9.4 DEFENSE OF CLAIMS. Promptly after any service of process
by any third person in any litigation in respect of which indemnity may be
sought from the other party pursuant to this Section 9, the party so served
shall notify the indemnifying party of the commencement of such litigation, and
the indemnifying party shall be entitled to assume the defense thereof at its
expense with counsel of its own choosing.
9.5 LIMITATION OF LIABILITY. Purchaser acknowledges as of the
date hereof and as of the Closing having had full and fair opportunity to
investigate the business, financial and other affairs of the Company. Purchaser
further acknowledges that except as expressly set forth herein, neither Seller
nor the Company has made any representatives and warranties to Purchaser.
9.6 SELLER'S TRANSACTION COSTS. Purchaser shall reimburse
Seller for all of Seller's fees, costs and expenses of this transaction,
including, without limitation Seller's legal and accounting fees, costs and
expenses attributable to this transaction, including the negotiation and
preparation of all of the Transaction Documents for the execution of this
Agreement and the administration of the Closing, this obligation of Purchaser to
survive the Closing (collectively, Seller's Transaction Costs").
10. MISCELLANEOUS.
10.1 FURTHER ASSURANCES. Seller will, at the request of
Purchaser from time to time, execute and deliver such further documents and
instruments and will take such other action reasonably required to consummate
the transactions contemplated by this Agreement.
10.2 NO BROKERS. Each party hereby represents and warrants to
the other that it has not engaged or dealt with any broker or other person who
may be entitled to any brokerage fee or commission in respect of the execution
of this Agreement or the consummation of the transactions contemplated hereby.
Each of the parties hereto shall indemnify and hold the other harmless against
any and all claims, losses, liabilities or expenses which may be asserted
against a party as a result of such other party's dealings, arrangements or
agreements with any such broker or person.
10.3 PRESS RELEASES AND PUBLIC ANNOUNCEMENTS. No party shall
issue any press release or make any public announcement relating to the subject
matter of this Agreement prior to the Closing without the prior approval of the
other party.
10.4 NO THIRD PARTY BENEFICIARIES. This Agreement shall not
confer any rights or remedies upon any person other than the parties and their
respective successors and permitted assigns.
10.5 ENTIRE AGREEMENT. This Agreement (including the documents
referred to herein) constitutes the entire agreement between the parties and
supersedes any prior understandings, agreements, or representations by or
between the parties, written or oral, to the extent they related in any way to
the subject matter hereof.
8
<PAGE> 9
10.6 SUCCESSION AND ASSIGNMENT. This Agreement shall be binding
upon and inure to the benefit of the parties named herein and their respective
successors and permitted assigns. No party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior written
approval of the other party.
10.7 COUNTERPARTS. This Agreement may be executed in one or
more counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
10.8 HEADINGS. The section headings contained in this Agreement
are inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
10.9 NOTICES. All notices, requests, demands, claims, and
other communications hereunder will be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given (i) upon
confirmation of facsimile, (ii) one business day following the date sent when
sent by overnight delivery and (iii) three (3) business days following the date
mailed when mailed by registered or certified mail return receipt requested and
postage prepaid at the following address:
If to Purchaser:
Select Media Communications, Inc.
666 Third Avenue
New York, NY 10017
With a copy to:
Astor Weiss Kaplan & Rosenblum, LLP
The Bellevue, Sixth Floor
Broad Street at Walnut
Philadelphia, PA 19102
Attn: Christopher P. Flannery, Esquire
If to Seller and/or Company:
Joseph D. Tarsia
117 The Mews
Haddonfield, NJ 08033-1342
9
<PAGE> 10
With a Copy to:
Eizen Fineburg & McCarthy, LLP
2001 Market Street, Suite 3410
Philadelphia, PA 19103
Attention: Gary J. McCarthy, Esquire
Any party may send any notice, request, demand, claim, or other communication
hereunder to the intended recipient at the address set forth above using any
other means (including personal delivery, expedited courier, messenger service,
telecopy, telex, ordinary mail, or electronic mail), but no such notice,
request, demand, claim, or other communication shall be deemed to have been duly
given unless and until it actually is received by the intended recipient. Any
Party may change the address to which notices, requests, demands, claims, and
other communications hereunder are to be delivered by giving the other party
notice in the manner herein set forth.
10.10 GOVERNING LAW; ARBITRATION. This Agreement shall be
governed by and construed in accordance with the domestic laws of the
Commonwealth of Pennsylvania without giving effect to any choice or conflict of
law provision or rule (whether of the Commonwealth of Pennsylvania or any other
jurisdiction) that would cause the application of the laws of any jurisdiction
other than the Commonwealth of Pennsylvania. Any and all legal proceeds
concerning the infringement, breach or contemplated breach of this Agreement
shall be filed in the Commonwealth of Pennsylvania, Philadelphia County only,
and the parties hereto consent to such jurisdiction and venue. If a dispute
arises as to interpretation of this Agreement, it shall be decided finally by
three arbitrators in an arbitration proceeding conforming to the Rules of the
American Arbitration Association applicable to commercial arbitration. The
arbitrators shall be appointed as follows: one by Seller, one by Purchaser and
the third by the said two arbitrators, or, if they cannot agree, then the third
arbitrator shall be appointed by the American Arbitration Association. The third
arbitrator shall be chairman of the panel and shall be impartial. The
arbitration shall take place in Philadelphia, Pennsylvania. The decision of a
majority of the Arbitrators shall be conclusively binding upon the parties and
final, and such decision shall be enforceable as a judgment in any court of
competent jurisdiction. Each party shall pay the fees and expenses of the
arbitrator appointed by it, its counsel and its witnesses. The parties shall
share equally the fees and expenses of the impartial arbitrator.
10.11 AMENDMENTS AND WAIVERS. No amendment of any provision of
this Agreement shall be valid unless the same shall be in writing and signed by
each of the parties. No waiver by any party of any default, misrepresentation,
or breach of warranty or covenant hereunder, whether intentional or not, shall
be deemed to extend to any prior or subsequent default, misrepresentation, or
breach of warranty or covenant hereunder or affect in any way any rights arising
by virtue of any prior or subsequent such occurrence.
10.12 SEVERABILITY. Any term or provision of this Agreement
that is invalid or unenforceable in any situation in any jurisdiction shall not
affect the validity or enforceability of the remaining terms and provisions
hereof or the validity or enforceability of the offending term or provision in
any other situation or in any other jurisdiction.
10
<PAGE> 11
10.13 CONSTRUCTION. The parties have participated jointly in
the negotiation and drafting of this Agreement and the other Transaction
Documents. In the event an ambiguity or question of intent or interpretation
arises, the Transaction Documents shall be construed as if drafted jointly by
the parties and no presumption or burden of proof shall arise favoring or
disfavoring any party by virtue of the authorship of any provision thereof. Any
reference to any federal, state, local, or foreign statute or law shall be
deemed also to refer to all rules and regulations promulgated thereunder, unless
the context requires otherwise. The word "including" shall mean including
without limitation. Nothing in any Schedule hereto shall be deemed adequate to
disclose an exception to a representation or warranty made herein unless it
identifies the exception with particularity and describes the relevant facts in
detail. Without limiting the generality of the foregoing, the mere listing (or
inclusion of a copy) of a document or other item shall not be deemed adequate to
disclose an exception to a representation or warranty made herein (unless the
representation or warranty has to do with the existence of the document or other
item itself). The parties intend that each representation, warranty, and
covenant contained herein shall have independent significance. If any party has
breached any representation, warranty, or covenant contained herein in any
respect, the fact that there exists another representation, warranty, or
covenant relating to the same subject matter (regardless of the relative levels
of specificity) which the party has not breached shall not detract from or
mitigate the fact that the party is in breach of the first representation,
warranty, or covenant. Time is of the essence with respect to any obligation of
Purchaser to pay any sums to Seller under any of the Transaction Documents.
10.14 INCORPORATION OF EXHIBITS AND SCHEDULES. The Exhibits
and Schedules identified in this Agreement are incorporated herein by reference
and made a part hereof.
10.15 SPECIFIC PERFORMANCE. Each of the parties acknowledges
and agrees that the other party would be damaged irreparably in the event any of
the provisions of this Agreement are not performed in accordance with their
specific terms or otherwise are breached. Accordingly, each of the parties
agrees that the other party shall be entitled to an injunction or injunctions to
prevent breaches of the provisions of this Agreement and to enforce specifically
this Agreement and the terms and provisions hereof in any action instituted in
any court of the United States or any state thereof having jurisdiction over the
parties and the matter in addition to any other remedy to which it may be
entitled, at law or in equity.
[SIGNATURES APPEAR NEXT PAGE]
11
<PAGE> 12
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement on the day and year first above written.
SELLER:
---------------------------------
Joseph D. Tarsia
PURCHASER:
ATTEST: Select Media Communications, Inc.,
a New York corporation
BY: BY:
------------------------ -------------------------
NAME: NAME:
------------------------ -------------------------
TITLE: TITLE:
------------------------ -------------------------
12
<PAGE> 13
STOCK PURCHASE AGREEMENT
DATED NOVEMBER 18, 1999 MADE BY AND BETWEEN
JOSEPH D. TARSIA AND SELECT MEDIA COMMUNICATIONS, INC., A NEW YORK CORPORATION
LIST OF EXHIBITS AND SCHEDULES TO STOCK PURCHASE AGREEMENT
<TABLE>
<CAPTION>
<S> <C>
Exhibit "A" Promissory Note
Exhibit "B" Escrow Agreement for Assignment of Name
Exhibit "C" Security Agreement
Exhibit "D" Lease
Exhibit "E" Employment Agreement of Michael Tarsia
Exhibit "F" Consulting Agreement of Joseph D. Tarsia
Exhibit "G" Guaranty of Lease
Exhibit "H" Guaranty of Michael Tarsia
Exhibit "I" Guaranty of Joseph D. Tarsia
Schedule "1" Inventory and Equipment
Schedule "2" Excluded Assets
</TABLE>
13
<PAGE> 14
EXHIBIT "A"
PROMISSORY NOTE
SEE ATTACHED
<PAGE> 15
EXHIBIT "B"
ESCROW AGREEMENT FOR
ASSIGNMENT OF NAME
SEE ATTACHED
<PAGE> 16
EXHIBIT "C"
SECURITY AGREEMENT
SEE ATTACHED
<PAGE> 17
EXHIBIT "D"
LEASE
SEE ATTACHED
<PAGE> 18
EXHIBIT "E"
EMPLOYMENT AGREEMENT
OF MICHAEL TARSIA
SEE ATTACHED
<PAGE> 19
EXHIBIT "F"
CONSULTING AGREEMENT
OF JOSEPH TARSIA
SEE ATTACHED
<PAGE> 20
EXHIBIT "G"
GUARANTY OF LEASE
SEE ATTACHED
<PAGE> 21
EXHIBIT "H"
GUARANTY OF MICHAEL TARSIA
SEE ATTACHED
<PAGE> 22
EXHIBIT "I"
GUARANTY OF JOSEPH D. TARSIA
SEE ATTACHED
<PAGE> 23
SCHEDULE "1"
INVENTORY AND EQUIPMENT
SEE ATTACHED
<PAGE> 24
SCHEDULE 2
EXCLUDED ASSETS
SEE ATTACHED
<PAGE> 1
Exhibit 21.1 Subsidiaries of the Registrant
Sigma Sound Studios, Inc- Wholly-owned as of January 18, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the audited
financial statements for the year ended December 31, 1999 qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 344
<SECURITIES> 0
<RECEIVABLES> 365,200
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,629,224
<PP&E> 463,365
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,966,443
<CURRENT-LIABILITIES> 4,233,623
<BONDS> 0
0
0
<COMMON> 9,602,592
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,966,443
<SALES> 2,310,002
<TOTAL-REVENUES> 2,310,002
<CGS> 1,294,890
<TOTAL-COSTS> 4,389,803
<OTHER-EXPENSES> 84,070,333
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 357,793
<INCOME-PRETAX> (87,770,341)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> (3,640,000)
<CHANGES> 0
<NET-INCOME> (91,410,341)
<EPS-BASIC> (47.72)
<EPS-DILUTED> (47.72)
</TABLE>
