<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO 2
--------------
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS
UNDER SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
BOYSTOYS.COM, INC.
------------------
(Exact name of registrant in charter)
Delaware 33-0824801
-------- ----------
(State or Other (IRS Employer
Jurisdiction of Incorporation Identification No.)
or Organization)
7825 Fay Avenue, Suite 200, La Jolla, California 92037
------------------------------------------------------
(address of principal executive offices)
(858) 456-5556
--------------
(Issuer's Telephone No., Including Area Code)
SECURITIES TO BE REGISTERED UNDER SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
Title of each class Name of Each Exchange on
to be so registered each class is to be
------------------- -------------------
<S> <C>
None None
------------------- -------------------
------------------- -------------------
</TABLE>
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, Par Value $0.001
------------------------------
(Title of Class)
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
COMPANY STRUCTURE
BoysToys.com, Inc., a Delaware corporation (the "Company"), was
incorporated in the State of Delaware on April 21, 1997 under the name Wagg
Corp.
In January 1998 the Company changed its name to Alternative
Entertainment, Inc. (the same name of a Nevada corporation (identified below as
"AEI-Nevada") previously established for the operation of the Company's
business) and in December 1998 the Company's name was changed to BoysToys.com,
Inc.
THE COMPANY'S BUSINESS
The Company, through its wholly-owned subsidiary, RMA of San
Francisco, Inc., a California corporation ("RMA") owns and operates an upscale
gentlemen's club in San Francisco, California (the "Club") under the name, "Boys
Toys Club." The Company originally intended to operate the Club through Boys
Toys Cabaret Restaurants, Inc., a California corporation ("BTC Restaurants")
that is currently a dormant corporation with no operations or assets. All assets
and operations of BTC Restaurants have been assigned to RMA.
The Company has the following subsidiaries: RMA, BTC Restaurants, and
Alternative Entertainment, Inc., a Nevada corporation ("AEI-Nevada") of which
only RMA has any assets or operations.
INTERNET-RELATED MATTERS
While the Company's name includes the ".com" moniker, this reflected
the Company's original intention to pursue business activities involving the use
of the internet. Currently, the Company has not had sufficient financial or
managerial resources to pursue or develop any significant internet related
business: (i) the Company has two internet Web Sites for the Company's public
and investor relations (namely, Boystoys.com and Boystoysir.com, respectively)
(the "Corporate Web Sites") and (ii) six sites that opened in October 1999 and
which have remained in development only (namely, Super-teens.com,
Sexyyoungasians.com, Red-hotsex.com, Pussysource.com, Peeing-girls.com, and
Strange-insertions.com) (the "Developmental Web Sites").
The Company believes that its Corporate Web Sites are useful in giving
the Company an internet presence or identity for its customers, vendors, and
stockholders Given the location of the Company's Club in San Francisco,
California as a venue for business travelers and the possible use of the
internet by visitors to San Francisco (and by San Francisco-area residents), the
Company believes that its Corporate Web Sites are important to disseminate
information regarding the Company, the Club, and the Club menu and interior
decor.
The six Developmental Web Sites, which were opened in October 1999,
were intended by the Company as an experiment to assist the Company's management
in becoming familiar with adult internet pay sites (i.e., Web Sites that
generate revenues from monthly subscriber fees).
Currently, the Developmental Web Sites are adult-only Web Sites and
each offers monthly memberships to subscribers at $29.95 per month or $49.95 for
three months. The Company's receives assistance in the operation of each of the
Developmental Web Sites from the following vendors pursuant to oral agreements
as follows: (i) I-Gallery provides adult live-streaming video content at $1,495
per month under a month to-month arrangement with the Company; (ii) Web 800
Service provides merchant card services at a fee equal to 15% of any credit card
amounts collected under a month-to-month arrangement with the Company; and (iii)
Spotted Fly Technologies is paid $495 per month for hosting the Company's
Corporate Web Sites and the Developmental Web Sites under a month-to-month
arrangement with the Company. From inception in October 1999 through December
31, 1999, the Company derived an aggregate of $916.00 in revenues from the
Developmental Web Sites; and throughout this period the Company's management has
been and remains primarily focused on meeting the managerial and financial
obligations related to the opening and currently the operation of the Company's
Club.
The Corporate Web Sites and the Developmental Web Sites (together with
five inactive but registered Web Sites) required that the Company expend $70 per
Web Site or an aggregate of $910 to register the domain names of all these 13
Web Sites. The five inactive Web Sites are as follows: Onlinecontent.com,
Boystoysgambling.com, Boystoyslottery.com, Boystoysgaming.com,
Boystoyshorseracing.com. While the Company registered these Web Sites, the
Company has determined that it does not intend to enter into on-line internet
gaming, horse racing, or any other gambling-related business activities. As a
result, these Web Sites were never developed, tested, and are not on-line.
The Company is continuing to evaluate the Developmental Web Sites and
may add or delete to the list of its Developmental Web Sites as the Company's
financial and managerial resources allows. Further, and subject to the Company's
successful operation of its existing Club, the Company anticipates that it will
explore, within the next 18 months, the acquisition of one or more established
adult-related gentlemens clubs and/or entertainment internet business
opportunities that would compliment the Company's existing Club. In the event
that the Company undertakes any one or more acquisitions, the Company has
currently established the following types of business opportunities that it may
consider for acquisition:
1) Other upscale gentlemens clubslocated in major metropolitan
areas;
2) Adult-only internet Web Sites (Web Sites that require a
subscriber to pay monthly subscription fees);
3) Pre-recorded and/or live-streaming video content providers or
vendors that provide adult-related video content marketable
through adult-related internet Web Sites (these vendors
provide live performances by adult entertainers that may be
viewed in real time by subscribers to adult-only internet Web
Sites); and
4) other business enterprises that possess proprietary technology
or video compression technology that may be used in
conjunction with any adult-only internet Web Sites and/or
pre-recorded or live-streaming video content that the Company
may otherwise offer.
Currently, the Company has not identified any acquisition candidates or
otherwise conducted any review or evaluation of any precise acquisition target
or related strategy. The Company has not retained and will likely not have the
financial and managerial resources to obtain independent investment banking or
similar advice in connection with any such acquisition but will likely rely
primarily upon evaluations made by its management. In addition, in the event
that the Company implements an acquisition strategy, the Company will likely be
limited to using its common stock, preferred stock, or a debt security as
consideration in any such transaction. This may well limit the Company's ability
to complete any acquisitions since many sellers prefer to sell their business in
exchange for a cash payment.
While the Company's name includes the ".com," this moniker reflected
the Company's original intention to pursue business activities involving the use
of the internet. However, the Company has determined that it will not currently
pursue any internet-related business activities, any gaming operations, or any
similar ventures.
The Company is filing this Form 10-SB to ensure that its stockholders
can obtain current information regarding the Company's affairs on a continuous
basis in accordance with the Securities Exchange Act of 1934.
Construction of the 15,000 square foot Club was completed in October
1999 at which time the Company received its certificate of final completion. The
Company has secured an alcoholic beverage license, a cabaret license, and all
other licenses and permits required by the City and County of San Francisco,
California. The Club opened on January 26, 2000 and has remained in operation
since that date.
A subsidiary, Alternative Entertainment, Inc., a Nevada corporation
("AEI-Nevada") was initially formed to engage in the business of developing,
owning, and operating upscale nightclubs providing exotic dance entertainment
combined with private membership men's clubs and contemporary-styled full
service restaurants and bars. On January 15, 1998, 80% of the Company's Common
Stock was acquired by AEI-Nevada and the Company changed its name from Wagg
Corp. to Alternative Entertainment, Inc. On January 26, 1998, AEI-Nevada, as the
majority stockholder of the Company, effected a one for two reverse split of the
Company's common stock and approved an amendment to the Company's Certificate of
Incorporation to change the Company's name to Alternative Entertainment, Inc.
and to authorize the issuance of up to 8,000,000 shares of Preferred Stock. The
Company has not
2
<PAGE>
issued any Preferred Stock and has no Preferred Stock outstanding.
Following these actions and on January 28, 1998, AEI-Nevada's Board of
Directors voted to approve the exchange of one share of the Company's Common
Stock for each share of AEI-Nevada common stock outstanding. This resulted in
AEI-Nevada becoming a subsidiary of the Company. As a result, AEI-Nevada became
a wholly-owned subsidiary of the Company. Subsequently and on December 29, 1998,
a majority of the Company's shareholders approved an amendment to the Company's
Certificate of Incorporation to change the Company's name to BoysToys.com, Inc.
The Company's subsidiary, AEI-Nevada, previously filed a Registration
Statement on Form SB-2 with the U.S. Securities and Exchange Commission for a
proposed public offering of over $11 million. AEI-Nevada's Registration
Statement became effective on July 3, 1996 and on September 15, 1996, AEI-Nevada
filed Form 8-A.
However, despite the efforts of AEI-Nevada's management, AEI-Nevada was
unsuccessful in obtaining the services of an underwriter and was not able to
sell any of its securities pursuant to the public offering. As a result,
AEI-Nevada subsequently terminated its public offering without selling any of
its common stock or warrants or otherwise raising any capital pursuant to the
Registration Statement.
In January 1997, AEI-Nevada withdrew the filing of its Registration
Statement. Subsequently, on March 10, 1997, AEI-Nevada filed Form 15 with the
U.S. Securities and Exchange Commission to terminate its registration under
Section 12(g) of the SECURITIES EXCHANGE ACT OF 1934.
On February 18, 1998, the Company entered into an agreement (the
"Purchase Agreement") with ITEX USA, Inc. ("ITEX") whereby ITEX has agreed to
provide the Company with up to $530,000 cash credit (the "Cash Credit") to be
applied to the Company's purchase of $530,000 in goods and services at prices
equal to the lowest price verified in writing by competitive bid as agreed
between the company and ITEX. ITEX is a barter exchange company that offers
goods and services that it acquires through barter from others.
Under the terms of the Purchase Agreement, the Company is to issue
purchase requests to ITEX and ITEX is then obligated to provide the goods and
services requested through ITEX's suppliers and vendors. In exchange for the
Cash Credit, the Company committed to issue to ITEX the sum of 100,000 shares of
the Company's Common Stock. The Company intends to use the Cash Credit to
acquire, in part, newspaper, billboard, and radio advertising from ITEX using
the Cash Credit for use in promoting the Club.
The Company believes that the Club serves three distinct business
segments: a nightclub providing exotic dance entertainment, a full service
restaurant and bar, and a private membership men's club each of which is within
the confines of a single facility. The business of the Company is conducted
under the trade name, trademark, and service mark of "Boys Toys." Although the
Company intends to register its claim to these tradename, the Company has not
yet filed an application with the U.S. Patent and Trademark office to register
these names.
3
<PAGE>
The Club's revenues are generated from:
(1) food and beverage sales;
(2) Boardroom VIP membership sales;
(3) nightclub admission (door) fees;
(4) fees charged by the Company in connection with the use of
credit cards by patrons to obtain cash equivalent items (i.e.,
the Company sells "Diamond Dollars" certificates (in multiples
of $10 and $20 amounts) to patrons of the Club such that each
"Diamond Dollars" certificate may be used in lieu of cash or
credit cards at the Club for a patron's payment of a "dance
fee" to an entertainer) ("Cash Equivalent Fees");
(5) sales of certain merchandise on display at the Club (i.e.,
polo shirts, t-shirts, jackets, and caps) and other
merchandise salable on a consignment basis; and
(6) entertainers' lease fees paid by entertainers (dancers) for
the privilege of performing at the Club. (Currently, the
Company charges each entertainer a lease fee equal to $20 to
$50 for the right to perform at the Club during any shift.)
With respect to Cash Equivalent Fees, the Company charges a service fee
equal to 20% of the amount of any "Diamond Dollars" certificate that it sells to
any patron (i.e., if a patron seeks to purchase $100 in "Diamond Dollars"
certificates, the Company sells the certificates at a price equal to $120). Each
"Diamond Dollars" certificate may be used to pay "dance fees" to an entertainer
(as described above). If an entertainer receives a "Diamond Dollar" certificate
in payment for a "dance fee," the entertainer is able to exchange each "Diamond
Dollars" certificate and receive cash from the Company. The Company purchases
each "Diamond Dollars" certificate from the entertainers at a 10% discount
(i.e., for every $100 in stated value in "Diamond Dollars" certificates
submitted for exchange and redemption, the Company pays $90 in cash).
As a result, the Company earns $20 upon the sale of every $100 in
"Diamond Dollars" certificates and, upon redemption of a $100 "Diamond Dollars"
certificate, the Company pays only $90 to the entertainer who redeems it.
The Company leases the land and building for the Club through its other
wholly-owned subsidiary, RMA of San Francisco, Inc., a California corporation
("RMA") (and as successor in interest to Boys Toys Caberet Restaurants, Inc., a
California corporation). The real property for the Club is owned by Roma Cafe,
Inc. ("RCI") and is located in San Francisco's financial district at 408-412
Broadway, San Francisco, California.
If the Company is successful in operating the Club and if the Company
is able to obtain additional financing, the Company plans to establish
additional Boys Toys Clubs in other locations, including New York, Chicago, New
Orleans and Boston. However, the Company has not identified any specific
location in any of these cities and these plans are subject to: (i) the
successful operation of its existing Club; (ii) the negotiation of acceptable
terms for the acquisition of an existing gentlemen's club in a location which
would be suitable and compatible with the Company's strategy; and (iii) the
availability of financing terms from a seller of a gentlemen's club that would
permit the Company to complete the acquisition on financial terms that are
acceptable to the Company in view of the Company's then existing financial
abilities and the costs that the Company would incur in expanding its currently
limited management staff and providing additional working capital to meet an
expanded level of operations. The Company has not presently identified any
prospective acquisition candidate and there can be no assurance that the Company
will undertake any such acquisition or otherwise expand to other locations.
If the Company were to establish other Boys Toys Clubs, it anticipates
that the Company would likely lease existing nightclub and/or restaurant
locations, acquire related nightclub/restaurant properties and equipment, and
thereafter make all necessary improvements to such locations, properties and
equipment in order to conform them to the Boys Toys motif.
The Boys Toys Club name, embraces a concept featuring exotic dance
entertainment performed by attractive and talented entertainers within an
upscale and trendy nightclub environment. The Club has an interior setting where
patrons will be surrounded, and among, numerous and various material items which
many men aspire to obtain in their life. The Company anticipates that a patron
of its Club will be quickly struck by the nature and number of items on display,
such as artwork, collectibles, unusual artifacts and memorabilia. The Company
currently has $80,000 of artwork on display in the Club and consigned for sale
pursuant to oral agreements with local San Francisco-area artists.
The Company has placed this artwork on display throughout the Club,
each such displayed item will be available for purchase by patrons, or the
Company is able to provide patrons with detailed information concerning how and
where such displayed item may be purchased.
The Company expects that all items on display in the Club will be
replaced with new and different items approximately every 60 to 90 days, thereby
giving the Club a new interior physical appearance every two to three months.
4
<PAGE>
If the Company is successful, the Company further expects that the
exciting and vibrant atmosphere created by the Club's interior decor will be
enhanced by exhilarating lighting and specially selected upbeat music. In order
to obtain the items to place on display in its Club, the Company approach local
and regional vendors of the items it desires to display, and enters into
consignment arrangements with each vendor.
The Company has verbal consignment arrangements that allows the Company
to display various types of artwork, collectibles and memorabilia owned by the
vendors at each Club at no cost to the Company, while in return providing the
vendor with increased exposure to its owned items, and therefor providing the
vendor with potential additional marketing venues and outlets for the sale of
its owned items. However, retail competition for the sale of such items is
intense and there are many other retail galleries and consignment outlets likely
will be able to attract high quality artwork and other items that the Company
seeks to display for consignment at its Club. Thus, there can be no assurance
that the Company will attract high quality items on a consignment basis or, if
it does, that it can continue to do so.
Failure of the Company to obtain additional desired items in the future
and on a consignment basis may result in the Company being unable to embellish
the interior physical decor of its Club in its planned manner. Further, failure
of the Company to obtain the desired items on a consignment basis will have a
material adverse impact on the Company's plan of operation in that such failure
may require the Company to expend significant amounts of its capital to purchase
such items.
The Club has, in addition to its nightclub proper, a full service
restaurant and bar and full service, private VIP members-only men's club.
Rather than just establishing an exotic dance entertainment nightclub,
the Company's business concept for the Club is to create an entertainment
complex combining an exotic dance entertainment nightclub with a full service
restaurant and bar and a private VIP members-only men's club. The concept is to
provide a place where one may enjoy quality exotic dance entertainment, relax
and converse in a place where one may see and be seen, partake in quality
restaurant dining, and entertain and be entertained in private members-only
quarters, all within the Boardroom Restaurant.
The Company believes that excellence in operations, ambiance and
location are important for success in the exotic dance entertainment business.
The Company believes that it will be able to differentiate its Boys Toys Club by
implementing the following strategic elements:
* Combining its exotic dance entertainment nightclubs with its
Boys Toys Club and private VIP members-only men's clubs so as
to provide patrons with a multi-faceted entertainment
experience.
* Designing its Boys Toys Club to attract primarily upscale
professionals and businessmen.
* Physically embellishing its Boys Toys concept by creating an
exterior and interior physical decor for its Boys Toys Club
which evidences the style and class of an establishment
designed for men's entertainment and reflecting the upscale
caliber of its patrons.
5
<PAGE>
* Providing high quality and attentive service in a manner to
ensure patron satisfaction.
The Company believes that its Boys Toys concept will create a distinct
image and popularity among upscale gentlemen's club patrons. As such, the
Company believes that it will be successful in marketing T-Shirts, jackets and
other casual-wear merchandise that feature the Boys Toys logo and location.
However, absolutely no assurance can be given that the Company's Boys Toys
concept will create a distinct image and widespread popularity, or that the
Company will be successful in marketing T-Shirts, jackets and other casual-wear
merchandise with the Boys Toys logo.
It is also the Company's philosophy and intention that the Boys Toys
Club exhibit civic and social responsibilities by creating and maintaining an
active relationship with a variety of charity organizations in their respective
local communities.
In this regard, the Company expects to make contributions of food,
services or funds benefitting a wide range of causes, which causes management of
the Company expects to be brought to its attention through suggestions from the
Company's employees, officers and shareholders.
The Company's Club restaurant provides all patrons of the Company's
Boys Toys Club with a full service restaurant, bar and lounge area providing
business lunch buffet and dinner table service by waitresses. The Company has
hired an experienced executive chef and other experienced support personnel and
believes that its menu represents the finest culinary delights, distinctive for
their taste as well as nutritional balance, from throughout the various regions
of the United States.
Coupled with this distinctively American menu, the restaurants are
expected to offer the highest quality of food prepared with the greatest of care
and presented and served in a manner which would reflect the upscale nature of
the Boys Toys Club. As a complement to its food menu, the Company expects that
its Boys Toys Restaurant will offer an extensive selection of domestic and
foreign wines, spirits, and champagne. Management of the Company anticipates
that an average lunch check per customer will be $25.00 and an average dinner
check per customer will be $60.00.
However, these amounts and the operation of the restaurant will be
subject to prevailing competitive conditions.
In general, the Company believes that excellence in operations and
quality of food and service, ambiance, location and price-value relationship are
keys to success in the restaurant industry. The Company believes that it will be
able to differentiate its Club by emphasizing the following strategic elements:
* Positioning in the mid-priced to upper-priced, full service
dining segment of the restaurant industry.
* The location of the Club within the confines of an exciting
and upbeat facility provides a unique and enduring attraction
to a broad and diverse demographic mix of customers in the 25
to 65 age group.
* Quality and attentive service with each waitress generally
being assigned to no more than four tables at lunch and three
tables at dinner to ensure customer satisfaction.
6
<PAGE>
* Consistent quality products through careful ingredient
selection and food preparation.
There can be no assurance that the Company can achieve any one or more
of these objectives or, if it does achieve these objectives, that it can achieve
them while also achieving and maintaining profitability.
PRIVATE VIP MEMBERSHIP CLUB
The Boys Toys Club has a full service private VIP membership facility
is open only to patrons who are members. These private VIP membership facilities
are known as the "Boardroom." Membership in the Boardroom entitle members to:
(i) access to the private VIP Boardroom; (ii) bring up to six guests to the
Boardroom without payment of any entrance fee (currently $30.00 per person);
(iii) preferred seating for dining; (iv) first priority for special events; and
(v) free limousine service within the city of San Francisco. The Boardroom also
has a business center (with facsimile machines, secretarial staff and
computers).
Additionally, Boardroom members have free use of Boardroom facilities
for private parties and meetings, preferred seating and advanced notices for
special events and holiday functions held at the Club, and access to personal
improvement seminars and concierge services. Currently Boardroom memberships are
for a period of one year, and may be renewed by a member at the end of each
membership year. Membership fees for the Boardroom are $1,000 per annum.
SITE SELECTION CRITERIA AND LEASING
In the event that the Company expands with other locations, the Company
believes that the selection process for sites for the Company's clubs is
critical in determining the potential success of a Boys Toys Club, and therefore
it expects to devote a significant amount of time and resources to analyze each
prospective club site.
A variety of factors are considered in the site selection process,
including local market demographics, site visibility and accessibility and
proximity to significant generators of potential customers such as office
complexes, hotel concentrations and other entertainment centers such as stadiums
and arenas. The Company will also review potential competition and attempt to
analyze the profitability of other nightclub, restaurant and bar establishments
operating in areas where the Company proposes to establish a Boys Toys Club.
The Company expects that it will likely lease all of its locations for
any additional Boys Toy Club, although the Company may consider purchasing
properties for its facilities in the future, where it is cost effective to do
so.
LOCATION OF BOYS TOYS CLUB
The Company's existing Club is the Company's first club and is located
at 408-412 Broadway, San Francisco, California, in the north beach area of the
financial district of San Francisco (the "Facility"), approximately four blocks
north of the landmark Transamerica Building.
7
<PAGE>
The Company leased the Facility from Roma Cafe, Inc. The Company has
obtained a Place of Entertainment Permit with respect to the exotic dance
entertainment aspects of the Company's business at the San Francisco Premises.
The Company has secured an alcoholic beverage license, a cabaret license, and
all other licenses and permits required by the City and County of San Francisco,
California.
ADDITIONAL BOYS TOYS CABARET CLUBS.
In addition to the existing Club and if the Company can obtain
additional financing on favorable terms, the Company may establish other Boys
Toys Clubs. The exact number, location, and other aspects of this plan has not
been determined at this time.
Additional locations that may be considered for Boys Toys Clubs include
New York, Chicago, New Orleans and Boston. However, the Company has not
identified any specific location in any of these cities and these plans are
subject to: (i) the successful operation of the existing Club; (ii) the
negotiation of acceptable terms for the acquisition of an existing gentlemen's
club in a location which would be suitable and compatible with the Company's
strategy; and (iii) the availability of financing terms from a seller of a
gentlemen's club that would permit the Company to complete the acquisition on
financial terms that are acceptable to the Company in view of the Company's then
existing financial abilities and the costs that the Company would incur in
expanding its currently limited management staff and providing additional
working capital to meet an expanded level of operations. The Company has not
presently identified any prospective acquisition or location and there can be no
assurance that the Company will undertake any such acquisition or otherwise
expand to other locations.
MARKETING
The Club (and any other clubs that the Company may establish), will be
marketed to attract primarily (if not strictly) professional and white collar
businessmen clientele.
The Company plans to use the Club's name to develop name recognition
and patron loyalty to attract these customers. Due to its upscale theme, exotic
dance entertainment experience and quality food and service, the Company
believes that its Boys Toy Clubs will have the unique ability to attract both
local and out-of-town professional and white collar businessmen patronage.
The tour and travel as well as convention segments of the cities in
which Boys Toys Clubs will be located will be another focus of the Company's
marketing strategy. The Company's marketing strategy will be designed to inform
targeted patrons that Boys Toys Clubs provide a unique and exciting atmosphere
not found elsewhere through visual and audio experiences.
The Company expects that the center of its marketing efforts will
revolve around its exotic dance entertainment nightclubs. The Company's Boys
Toys concept will be directed at upscale, professionals and white collar
businessmen aged 25-65 who either reside in or near major U.S. commercial
centers where Boys Toys Clubs will be located, or who frequently visit these
areas on business.
In order to reach this targeted market, the Company will attempt to
establish Boys Toys Clubs in the heart of those cities in which it intends to
operate, so as to make its facilities easily accessible by professional and
white collar businessmen.
8
<PAGE>
The Company believes that its local patrons will include primarily men
who work and/or live near a Boys Toys Club, and who will seek some form of
nightclub environment at the end of their work day which will provide a
comfortable atmosphere with appropriately priced, high quality, food available.
The Company believes it will meet this type of patron's needs by
providing a quality entertainment experience with a high level of personalized
service in a casual, fun setting - an experience that the Company expects will
generate repeat visits among the local customer segment.
The Company anticipates that its business travel segment will be
primarily composed of individuals traveling on business to those cities where
Boys Toys Clubs are located. The Company further believes that the marketing
approach for this customer requires an emphasis on the beauty and elegance of
the Boys Toys Clubs, the exciting atmosphere, and safety.
The Company expects to promote and advertise its Boys Toys Restaurant
and private VIP members-only men's club segments of its Boys Toys Clubs as if
they were not dependent upon its exotic dance entertainment segment. Thus, the
Company will strongly promote its Boys Toys Restaurants as an establishment
providing the best food possible at reasonable prices. The Company will promote
its private VIP members-only men's club as a private location where men can meet
to, among other things, discuss and effectuate business in a congenial
atmosphere, as well as a place where men can entertain themselves as well as
business clients and associates.
The Company is utilizing billboard, print and direct mail advertising,
and is conducting coordinated promotional efforts with local and regional
hotels, taxi companies and limousine services.
Additionally, the Company intends to utilize merchandise as a means of
marketing its Boys Toys Clubs. Thus, the Company will promote various Boys Toys
merchandise which is expected to be created by the Company as popularity of the
Boys Toys Clubs increases. Such merchandise is expected to include T-Shirts,
jackets, sweatshirts, and other memorabilia.
Because of its Boys Toys Restaurants, and if the Company can maintain
the presence and availability of many interesting items displayed prominently
throughout the Club, the Company believes that its Club will be able to adopt
event-driven promotion oriented marketing strategies. Thus, in addition to
traditional advertising techniques, the Company intends to seek to establish
close ties with the entertainment industry so as to provide the Company with
extensive promotional opportunities.
Events such as surprise appearances by recording artists or
professional athletes can be expected to attract targeted upscale patrons.
BOYS TOYS CLUB OPERATIONS AND MANAGEMENT
The Company will strive to maintain quality and consistency in its
existing Club through the careful training and supervision of personnel and the
establishment of standards relating to food and beverage preparation,
maintenance of facilities and conduct of personnel.
9
<PAGE>
The Company maintains financial and accounting controls for the
existing Club through the use of centralized accounting and management
information systems. Operations information will be collected weekly from the
Club, and club managers will be provided with weekly and 28-day period operating
statements for their locations. Cash will be controlled through daily deposits
of sales proceeds in local operating accounts. The Club is scheduled to be open
daily from 11:00 a.m. to 2:00 a.m.
Overall management of a typical Boys Toys Cabaret Club will be
conducted by two managers, a day manager and an evening manager in addition the
Club's General Manager. The Club also employs a staff consisting of
approximately 40 hourly employees and 50 part-time employees. The composition of
the Company's current full-time employees is as follows:
<TABLE>
<CAPTION>
Category No. of Employees
-------- ----------------
<S> <C>
General Manager 1
Club Manager 1
Restaurant Manager 1
Bookkeeper 1
Office Staff 2
Executive Chef 1
Kitchen Staff 11
Host & Hostesses 14
Secretarial Staff-Boardroom 2
Servers 4
Bus Persons 4
</TABLE>
The additional 50 part-time employees are primarily restaurant servers,
bus persons, and support personnel.
In addition to these employees, the Company utilizes 25 to 50 female
exotic entertainers, as independent contractors, on a varying basis. Each exotic
female entertainer is paid directly by a patron for each dance performed. The
Company does not employ or pay any wages, salary, compensation, or other fees to
any of the exotic female entertainers that perform at the Club. Entertainers
also pay a lease fee of $20 to $50 per shift gor the right to perform at the
Club. Entertainers receive only "dance fees" from patrons of the Club. The
Company does not receive any percentage from any cash fees paid by patrons to
the entertainers (dancers) that perform at the Club.
However and as described earlier, when an entertainer redeems any
"Diamond Dollars" certificates (previously received from a patron in payment of
any "dance fees"), the Company pays the entertainer an amount equal to 90% of
the face or stated value of the "Diamond Dollars" certificates that are later
submitted for redemption. (Thus, if an entertainer submits $1,000 in "Diamond
Dollars" certificates to the Company, the Company redeems these certificates by
paying the entertainer $900 in cash.)
The General Manager of the Club reports directly to the Company's
President. Working in concert with club managers, the Company's senior
management will define operations and performance objectives for the Club and
will monitor implementation. The Company expects that its Club managers will
participate in a variety of Company sponsored employee incentive programs such
as the Company's stock option plans.
Awards under Company sponsored employee incentive programs will be tied
to achievement by facility managers of specified operating targets. The Company
plans for its senior management to regularly visit each Club the Company
operates and meet with the respective managers of those clubs to ensure that the
Company's strategies and standards of quality in all respects of operations and
personnel development are complied with.
The Company believes that customer service and satisfaction are keys to
the success of its existing Club and any other clubs that the Company may
establish. The Company's commitment to customer service and satisfaction will be
evidenced by several Company practices and policies, including periodic visits
by managers to customers' tables, active involvement of management in responding
to customer comments and assigning waitresses in the Company's Boys Toys
Restaurants to a limited number of tables, generally four for lunch and three
for dinner.
10
<PAGE>
PURCHASING
The Company negotiates directly with suppliers for food and beverage
products to ensure consistent quality and freshness of products and to obtain
competitive prices. The Company purchases substantially all food and beverage
products from authorized local or national suppliers. Food, beverage and other
products and supplies are shipped directly to the Club, although invoices for
purchases will be paid by the Company's wholly-owned subsidiary, RMA of San
Francisco, Inc., a California corporation ("RMA"). RMA is the corporation the
Company established to operate the existing Club.
MANAGEMENT INFORMATION SYSTEMS
The Company has a computer information system which is designed to
maintain personal profile information on the members of its private VIP
members-only men's club. The profiles are designed to assist managers of the
Club in meeting the personal desires of particular Boardroom members, and will
contain such information as a Boardroom member's favorite beverage, favorite
food and spending habits. This information will be available to any other Club
locations that the Company may establish through a proprietary database, and
will enable Boardroom members to visit any of the Company's Clubs (that the
Company may establish) and be provided with a similar level of personal service.
The Company's point-of-sale information system is designed to assist in
labor scheduling and food cost management, provide corporate management quicker
access to financial data and reduce a particular club manager's administrative
time.
TRADE NAMES, TRADEMARKS AND SERVICE MARKS
The Company expects to develop and implement Boys Toys trademarks
and/or service marks which will enhance a customer's ability to identify the
Company, as well as the products and services to be offered by the Company.
Currently, the Company has not developed and implemented any trademarks
and/or service marks, and therefore has not filed any applications to register
any trademarks and/or service marks. Furthermore, the Company is unaware of
names similar to the trade names to be used by the Company which are used by
other persons.
The Company's overall policy will be to pursue registration of its
marks whenever possible and to oppose vigorously any infringement of its marks.
There can be no assurance that if and when the Company develops and implements
its trademarks and/or service marks, that such trademarks and/or service marks
will afford protection against competitors with similar products and services.
There can also be no assurance that the Company's trademarks and/or service
marks will not be infringed upon or designed around by others, or that the
Company can adequately prosecute or defend any infringements.
COMPETITION
The Company's existing Club (and any other clubs that the Company may
later establish) will compete with other nightclubs, restaurants and bars, some
of which may be larger and more established, experienced and better financed
than the Company.
Competing nightclubs, restaurants and bars may offer services not
offered by the Club, which could place the Company at a competitive
disadvantage.
11
<PAGE>
The Company believes that the following factors will allow the Company
to compete effectively:
* Many of the Company's competitors are not designed to market
themselves as high quality, upscale exotic dance entertainment
complexes and have not attempted to do so.
* The Company's marketing strategy focuses on creating a
reputation for its Clubs as an upscale, tasteful nightclub,
restaurant, and bar facility frequented by professionals and
white collar businessmen.
* The Company's three-pronged approach of having its Clubs
produce revenues from food and beverage sales, Boardroom
membership fees and exotic dance nightclub associated fees are
anticipated to enhance the profitability of the Company.
The adult entertainment industry, including adult entertainment offered
in private clubs and through the internet, is large and includes many
well-established and well-managed and experienced enterprises.
Many of these businesses possess financial and managerial skills that
far exceed the resources that the Company has or will have at any time in the
foreseeable future. Some of the larger operators have multiple locations within
a metropolitan area and effectively utilize their advertising and marketing
budgets to gain greater market share while achieving economies of scale to lower
certain fixed costs per unit and per retail location.
In addition, many of these established operators have developed
marketing, real estate, zoning, and licensing management skills that the Company
is not likely to possess at any time in the near future.
While the Company believes that its Club is unique and will offer and
attract an "upscale" clientele, there can be no assurance that the Company will
be successful or, if the Company achieves any success, that other competitors
will not imitate and duplicate the Company's planned business with the result
that the Company will not gain any significant long-term advantage.
The retail market for locally-produced and owned artwork, memorabilia,
and other items that may be displayed at the Company's Club on a consignment
basis is characterized by intense competition. Further, while the Company
currently has obtained such items and has them on display at its existing Club
under oral arrangements with the owners of the consigned items (such that the
Company is to receive 20% of the proceeds from the sale of any such consigned
item), there can be no assurance that the Company can attract suitable artwork
and memorabilia on a consignment basis or, if it is able to do so, that any such
items can be sold.
REGULATORY ASPECTS
The ownership and operation of restaurants, bars and exotic dance
nightclub businesses are generally subject to extensive state and local
regulation, and the Company, any subsidiaries it may form and various of their
respective officers and employees will be subject to such regulations.
Currently, the Company has not experienced any problems with any of
their business, liquor, or other licenses or permits from any governmental
agencies except that on April 5, 2000, the Company was forced to appear before
the San Francisco Planning Board of Appeals (the "Appeals Board") to respond to
efforts made by the Telegraph Hill Dwellers Association (a local neighborhood
group) ("THDA"). THDA sought to repeal the planning permit previously issued to
the Company by the City of San Francisco Planning Department for the operation
of the Company's Club. In a 3-2 vote, in favor of the Company, the Appeals Board
re-affirmed the Company's prior issuance of the Permit.
12
<PAGE>
While the Company has obtained all necessary licenses needed to open
its Club, the Company will need to renew licenses and permits from various
governmental agencies including, without limitation, applicable zoning, land
use, environmental and building permits.
The federal Americans with Disabilities Act prohibits discrimination on
the basis of disability in public accommodations and employment. The Company's
Boys Toys Cabaret Club is designed to be accessible to the disabled, and will
comply with all current applicable regulations relating to accommodating the
needs of the disabled. There can be no assurance that the Company will maintain
its licenses or permits or that they will always be obtained or renewed in a
timely manner. The failure to obtain any such permits or licenses could
adversely affect the Company.
Further, the Club is subject to numerous federal, state and local laws
affecting health, sanitation and safety standards, as well as to state and local
licensing related to the sale of alcoholic beverages. The Company has secured
all appropriate licenses from regulatory authorities allowing it to sell liquor,
beer and wine, champagne, and a food service license from San Francisco,
California health authorities.
Management of the Company believes that the Company's licenses to sell
alcoholic beverages will in all likelihood require that they be renewed annually
and may be suspended or revoked at any time for cause, including violation by
the Company or its employees of any law or regulation pertaining to alcoholic
beverage control, such as those regulating the minimum age of patrons or
employees, advertising, wholesale purchasing and inventory control. The failure
of the Company's Club (and any other clubs that the Company establish) to retain
liquor or food service licenses could have a material adverse effect on its
operations. In order to reduce this risk, the Company intends to develop and
implement at its Club standardized procedures designed to assure compliance with
all applicable codes and regulations.
The Company may be subject in certain states to "dram-shop" statutes
which generally provide a person injured by an intoxicated person the right to
recover damages from an establishment that wrongfully served alcoholic beverages
to the intoxicated person. The Company carries liquor liability coverage as part
of its comprehensive general liability insurance.
The Club is also subject to federal and state minimum wage laws
governing such matters as working conditions, overtime and tip credits and other
employee matters. The Company expects that significant numbers of the Company's
food and beverage service and preparation personnel will be paid at rates
related to the federal minimum wage and, accordingly, further increases in the
minimum wage could increase the Company's labor costs.
Finally, the Company believes that since its operations involve "exotic
female entertainment," the Company may be subject to continuing social,
political, and other institutional pressures from organizations, women's groups,
and others who believe that the Company's business is inimical to social
progress and the rights of women. These groups frequently seek to have city
ordinances and other laws enacted which adversely impact the continued operation
of the Company's business or deny the Company the ability to renew needed
licenses or permits.
As a result, many companies that offer adult entertainment similar to
the Company's business expend substantial sums in legal fees and costs to
prevent or at least delay changes to city zoning ordinances, state laws relating
to adult entertainment, and other similar regulations.
13
<PAGE>
To the extent that these organizations and groups are able to organize
and obtain recognition by certain governmental bodies that license or allow the
Company to operate its planned business, the Company would likely suffer
additional costs, expenses, and losses whose magnitude can not be foreseen.
The Company also maintains two Corporate Web Sites and six
Developmental Web Sites on the internet (as discussed earlier). Although the
Company believes that its Corporate Web Sites will be helpful in gaining a
corporate identity for the Company and its business, the Developmental Web Sites
do contain adult-only content and there is substantial variation in the
definition accorded "pornography" under state and local laws. For this reason
and upon advice of its counsel, the Company has taken recent steps to carefully
revise the content of its Corporate Web Sites to reduce the possibility that any
images or other content may be found to be in violation of such state, federal,
and local laws.
The Company also maintains a website on the internet. Although the
Company believes that its website will be helpful in gaining a corporate
identity for the Company and its business, there is substantial variation in the
definition accorded "pornography" under state and local laws. For this reason
and upon advice of its counsel, the Company has taken recent steps to carefully
revise the content of its website to reduce the possibility that any images or
other content may be found to be in violation of such state, federal, and local
laws. Despite these precautions, the Company may well incur substantial costs
and expenses in defending the content of its website against assertions that it
contains impermissible images or other unlawful content.
The Company also anticipates that it will also expend substantial sums
in legal fees in connection with defending its business licenses, liquor
license, and any other operating, use, or occupancy licenses it requires to
operate its Club. If the Company later acquires and operates any other
gentlemen's clubs at any other location, it will likely incur significant
similar expenses for any such other location as well. These costs will likely
arise since there are significant segments of our society that believe that the
Company's business will inhibit the social progress, rights, and dignity of
women and the efforts undertaken by these segments to restrict or inhibit the
Company and its business. The magnitude of these costs and expenses is expected
to be significant.
ITEM 1a. FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's business organization and existing debt and obligations
on its balance sheet all involve elements of substantial risk. In many
instances, these risks arise from factors over which the Company will have
little or no control. Some adverse events may be more likely than others and the
consequence of some adverse events may be greater than others. No attempt has
been made to rank risks in the order of their likelihood or potential harm. In
addition to those general risks enumerated elsewhere, any purchaser of the
Company's Common Stock should also consider the following factors.
1. CONTINUED OPERATING LOSSES & LACK OF OPERATING HISTORY. The Company incurred
$4,148,117 in losses during the nine months ending September 30, 1999 and the
Company anticipates that it may well incur significant additional losses in the
future as well. The Company lacks a substantial operating history on which to
base its anticipated expense and revenues. There is no assurance that the
Company's operations will be successful or that it will be profitable in the
future.
2. UNCERTAINTIES OF REVENUES. While the Company has expended substantial
resources for the development of its Club in San Francisco, California, the Club
is subject to changing state and municipal codes and ordinances. There can be no
assurance that the Company will be successful in operating the Club or in
generating revenues sufficient to sustain profitable operations.
14
<PAGE>
3. CURRENT FINANCIAL STRUCTURE, LIMITED EQUITY, LIMITED WORKING CAPITAL & NEED
FOR ADDITIONAL FINANCING. While the Company's management believes that its
financial policies have been prudent, the Comnpany has relied, in large part,
upon the use of debt financing to provide a substantial portion of the Company's
financial needs. The Company has, as of December 31, 1999, an aggregate of
$2,519,069 in current liabilities that are due for payment prior to December
31, 2000 and of which $2,283,614 in convertible debt and $370,980 in notes
payable are convertible into shares of the Company's Common Stock. While the
Company believes that the Company's operation of the Club will be successful
and will allow the Company to generate sufficient profits and cash flow to
service and repay its existing debt, the Company may need to obtain
additional financing or renegotiate its existing debt financing in the event
that the Company's operations are not successful. In that event the Company
may need to obtain additional financing. The Company has had only limited
discussions with potential investors and it does not anticipate receiving any
assurances that the Company will obtain any additional capital from any
investors. Further, the Company has not sought to receive and has not
received any commitments or assurances from any underwriter, investment
banker, venture capital fund, or other individual or institutional investor.
In the event that that the Company needs additional financing there can be no
assurance that the Company will obtain any new financing or, if it is
successful, that it can be obtained on reasonable terms in light of the
Company's current circumstances.
4. AUDITOR'S OPINION: GOING CONCERN. Except for the explanatory paragraph
included in the firm's report on the financial statements for the years ended
December 31, 1997, 1998 and 1999 relating to the substantial doubt existing
about the Company's ability to continue as a going concern, the audit report
did not contain an adverse opinion or disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope, or accounting
principles.
5. SUBORDINATE TO EXISTING AND FUTURE DEBT & AUTHORIZED BUT UNISSUED PREFERRED
STOCK. All of the Common Stock offered hereby are subordinate to the claims of
the Company's existing and future creditors and any future holders of the
Company's preferred stock. The Company is authorized to issue up to 8,000,000
shares of the Company's preferred stock and currently the Company has not issued
any preferred stock.
6. MARKETING STRATEGY . While the Company believes that the operation of the
Club will be successful, there is no guarantee that these business operations
will be commercially accepted with sales revenues sufficient to permit the
Company to achieve or maintain profitable operations.
7. LIMITED PUBLIC MARKET . There is a limited trading market for the Company's
Common Shares, and there is no guarantee that a continuous liquid trading market
will subsequently develop. There can be no assurance that the Common Shares will
ever gain any liquid trading volumes in any other market or gain listing on any
stock exchange. Further, the Company's Common Stock is a "Penny Stock" and as
such, the ability of the Company to gain a liquid trading market for it will be
inhibited by various regulations and there can be no assurance that any liquid
trading market for the Company's Common Stock will ever develop or, if it does
develop, that it can be maintained. The Company became a "reporting company" on
January 23, 2000.
15
<PAGE>
8. CONCENTRATION & LACK OF DIVERSIFICATION. The Company's assets are invested
almost entirely in the existing Club. While the Company believes that will be
successful, in the event that the Club is not successfully received by the
market, the Company will likely incur substantial and protracted losses since
the Company lacks diversification.
9. CONTROL BY OFFICERS AND DIRECTORS. The Company's present directors and
officers hold the power to vote an aggregate of 37.66% of the Company's Common
Shares as of December 31, 1999 (after including any shares purchasable upon
exercise of all existing common stock purchase options held by the Company's
officers and directors). The Company has granted a common stock purchase option
(the "First Amato Option") to Ralph M. Amato, the Company's Chairman, President,
Secretary, and Founder. The First Amato Option grants Mr. Amato the right to
purchase 1,200,000 shares of the Company's Common Stock at an exercise price of
$0.25 per Common Share. The First Amato Option has no expiration date. In
addition, Mr. Amato holds a second common stock purchase option for the purchase
of 600,000 shares of the Company's Common Stock with an exercise price of $0.25
per share (the "Second Amato Option"). The Second Amato Option expires February
13, 2004. Finally, Michael L. Potter, the Company's Secretary and Director,
holds an option to purchase 250,000 shares of the Company's Common Stock at a
purchase price of $0.25 per share (the "Potter Option"). The Potter Option
expires on February 13, 2004.
10. COMPETITION. The Company's existing Club (and any other clubs that the
Company may establish) will face severe competition from several established
companies who have well-established operations, experienced management, and
possess significantly greater financial resources. In addition, the gentlemen's
club business is very competitive and many of competitors have substantially
greater managerial resources. Further, because the gentlemens club business is
dependent upon the uncertain commercial viability of the Company's business, it
is especially sensitive to ever-changing and unpredictable competitive trends
which can not be easily predicted and which are beyond the control of the
Company. Finally, the Company's sale of any consigned artwork and memorabilia
items can not be guaranteed since competition from other retail outlets is
intense and the availability of desired items for items to display in the Club
may not be desired by some sellers of such items. For these and other reasons,
the Company's business may be said to be riskier than investments in other types
of businesses.
11. DEPENDENCE UPON KEY PERSONNEL AND NEW EMPLOYEES. The Company believes its
success will depend, to a significant extent, on the efforts and abilities of
Ralph M. Amato, the Company's President and CEO. The loss of the services of Mr.
Amato could have a material and continuing adverse effect on the Company. The
Company's success also depends upon its ability to attract and retain qualified
employees. Hiring to meet anticipated Company operations will require the
Company to assimilate significant numbers of new employees during a relatively
short period of time.
12. KEY MAN INSURANCE & LIMITED FULL-TIME MANAGEMENT. While the Company
currently plans to obtain key man life insurance on the life of Ralph M. Amato,
the Company has no key man life insurance on his life. In the event that he is
unable to perform his duties, the Company's business may be adversely impacted.
If the Company grows, it will need to hire additional management and the ability
of the Company to employ suitable management at a cost acceptable to the
Company, in light of the Company's limited financial resources, can not be
assured.
16
<PAGE>
13. LACK OF INDEPENDENT EVALUATION OF BUSINESS PLAN & PROPOSED STRATEGY. The
Company has not obtained any independent evaluation of the Company's Business
Plan and the Company's proposed business strategy. There can be no assurance
that the Company's Club or proposed strategy will generate any revenues, or if
revenues can be generated, that they can be generated at a level to maintain
profitability.
14. LIMITED MANAGERIAL EXPERIENCE. The Company's officers, Ralph M. Amato and
Michael L. Potter, Esq. have no substantial recent experience in acquiring,
establishing, developing, or operating clubs that feature female exotic dance
entertainment other than the recent and limited experience gained in opening the
existing Club. While the Company has, under an employment agreement, employed
Gary Marlin as the General Manager of the Club, and the Company believes that he
possesses the necessary skills and experience, the Company will likely need to
secure the services of others who possess the management skill, experience, and
industry knowledge. There can be no assurance that the Company can secure and
retain any additional necessary management and staff on terms acceptable to the
Company.
15. NO ASSURANCE OF AVAILABILITY OF THE ADDITIONAL CAPITAL & PAYMENT OF DEBTS.
The Company's continued operation of its existing Club will be dependent upon
the Company's ability to meet its obligations to an aggregate of $2,519,069 in
amounts due as Total Current Liabilities (as of December 31, 1999). There can
be no assurance that the Company will be successful in paying these debts. The
Company has received no commitment from any underwriter or other source of
capital that any additional capital will be provided to the Company. There can
be no assurance that the Company will be successful in generating and sustaining
sufficient cash flow to pay these debts.
16. NO PLANNED DIVIDENDS. The Company does not anticipate that it will pay any
dividends on the Company's Common Stock. Any profits that the Company may
generate, if any, will be reinvested into the Company.
17. GOVERNMENT REGULATION & EXOTIC ENTERTAINMENT INDUSTRY. The Company seeks to
operate establishments that offer "female exotic entertainment." This business
routinely suffers severe and unfavorable regulatory burdens, adverse zoning
ordinances, and other oppressive government regulations which may result in the
Company incurring substantial losses and significant delays in connection with
the development of any establishment.
17. LACK OF DIVERSIFICATION. The Company's proposed business involving the
operation of establishments offering "female exotic entertainment" will not
provide any diversification. If the Company is successful, all of the Company's
business and assets will be concentrated in the same industry.
18. POTENTIAL DILUTION. Funding of the Company's business plan is likely to
result in substantial and on-going dilution of the Company's existing
stockholders. While there can be no guarantee that the Company will be
successful in raising additional capital, if the Company is successful in
obtaining any additional capital, existing stockholders may incur substantial
dilution.
17
<PAGE>
19. RULE 144 STOCK SALES. As of December 31, 1999, the Company had 1,541,374
shares of the Company's outstanding Common Stock as "restricted securities"
which may be sold only in compliance with Rule 144 adopted under the Securities
Act of 1933 or other applicable exemptions from registration. Rule 144 provides
that a person holding restricted securities for a period of one year may
thereafter sell in brokerage transactions, an amount not exceeding in any three
month period the greater of either (i) 1% of the Company's outstanding Common
Stock, or (ii) the average weekly trading volume during a period of four
calendar weeks immediately preceding any sale. Persons who are not affiliated
with the Company and who have held their restricted securities for at least two
years are not subject to the volume limitation. Possible or actual sales of the
Company's Common Stock by present shareholders under Rule 144 may have a
depressive effect on the price of the Company's Common Stock if any liquid
trading market develops.
20. RISKS OF LOW PRICED STOCKS. Trading in the Company's Common Stock is limited
since the Company's Common Stock is a "PENNY STOCK" and thereby the retail
market for the Common Stock is subject to burdens that are imposed on brokers
whose customers may wish to acquire the Company's Common Stock.
Consequently, a shareholder may find it more difficult to dispose of,
or to obtain accurate quotations as to the price of, the Company's securities.
In the absence of a security being quoted on NASDAQ, or the Company having
$2,000,000 in net tangible assets, trading in the Common Stock is covered by
Rule 3a51-1 promulgated under the Securities Exchange Act of 1934 for non-NASDAQ
and non-exchange listed securities. Under such rules, broker/dealers who
recommend such securities to persons other than established customers and
accredited investors (generally institutions with assets in excess of $5,000,000
or individuals with net worth in excess of $1,000,000 or an annual income
exceeding $200,000 or $300,000 jointly with their spouse) must make a special
written suitability determination for the purchaser and receive the purchaser's
written agreement to a transaction prior to sale. Securities are also exempt
from this rule if the market price is at least $5.00 per share, or for warrants,
if the warrants have an exercise price of at least $5.00 per share. The
Securities Enforcement and Penny Stock Reform Act of 1990 requires additional
disclosure related to the market for penny stocks and for trades in any stock
defined as a penny stock.
The Commission has adopted regulations under such Act which define a
penny stock to be any NASDAQ or non-NASDAQ equity security that has a market
price or exercise price of less than $5.00 per share and allow for the
enforcement against violators of the proposed rules.
In addition, unless exempt, the rules require the delivery, prior to
any transaction involving a penny stock, of a disclosure schedule prepared by
the Commission explaining important concepts involving a penny stock market, the
nature of such market, terms used in such market, the broker/dealer's duties to
the customer, a toll-free telephone number for inquiries about the
broker/dealer's disciplinary history, and the customer's rights and remedies in
case of fraud or abuse in the sale.
Disclosure also must be made about commissions payable to both the
broker/dealer and the registered representative, current quotations for the
securities, and, if the broker/dealer is the sole market maker, the
broker/dealer must disclose this fact and its control over the market. Monthly
statements must be sent disclosing recent price information for the penny stock
held in the account and information on the limited market in penny stocks.
18
<PAGE>
While many NASDAQ stocks are covered by the proposed definition of
penny stock, transactions in NASDAQ stock are exempt from all but the sole
market-maker provision for (i) issuers who have $2,000,000 in tangible assets
has been in operation for at least three years ($5,000,000 if the issuer has not
been in continuous operation for three years), (ii) transactions in which the
customer is an institutional accredited investor, and (iii) transactions that
are not recommended by the broker/dealer.
In addition, transactions in a NASDAQ security directly with the NASDAQ
market maker for such securities, are subject only to the sole market-maker
disclosure, and the disclosure with regard to commissions to be paid to the
broker/dealer and the registered representatives. The Company's securities are
subject to the above rules on penny stocks and the market liquidity for the
Company's securities could be severely affected by limiting the ability of
broker/dealers to sell the Company's securities.
21. MATTER OF "Y2K" AND THE COMPANY'S COMPUTER AND INFORMATION SYSTEMS. The
Company has acquired point-of-sale computer hardware and software together with
certain management information systems for use in its existing Club. While the
Company has had its computer hardware and software evaluated to ensure that it
will operate effectively in the year 2000 or beyond and otherwise not result in
"Y2K" operating problems (problems arising out of the inability of any computer
systems to accurately calendar all dates following December 31, 1999 as
occurring in the year 2000 and thereafter rather than inaccurately calendar all
such dates as 1900, etc.) there can be no assurance that the Company's
point-of-sale computer hardware and software together with certain management
information systems will function effectively in the year 2000 or beyond.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Company opened its existing Club on January 26, 2000 and the Club
has been in operation since that date. The Club's operations are the Company's
sole source of revenues and its principal asset. It is located in San
Francisco's financial district at 408-412 Broadway, San Francisco, California,
The Club's premises consist of an entire building consisting of two floors and
an alleyway along the west side of the building.
The Company has expended over $1,648,014 in leasehold improvements,
equipment, and fixtures at the Club in addition to other expenditures to
implement the Company's business plan. The Company believes that it will not
need to expend any additional sums for equipment, computer systems, sound
systems, furniture, fixtures, or similar capital expenditures over the next
twelve months. The Company has also obtained approximately $500,000 in working
capital financing to support the Company's operations and working capita needs
for the next 12 months.
The Company continues to follow a strategy designed to conserve its
limited cash resources by carefully evaluating proposed cash expenditures to
control cash outlays. To that end, on April 30, 1999, the Company recently
closed its La Jolla, California executive office and consolidated this office at
the office facilities the Company has for its Club.
In addition, the Company also anticipates utilizing the $530,000 in
barter credits it previously purchased from ITEX Corporation ("ITEX"). ITEX is a
barter exchange company that offers goods and services it acquires through
barter.
These barter credits allow the Company to develop and purchase radio
and billboard advertising and other marketing and promotional support from ITEX
which ITEX acquires through barter transactions with other vendors and
suppliers. The Company anticipates using these credits to implement the
marketing and promotion of its existing San Francisco Club.
On June 23, 1999, the Company obtained financing and a commitment
for up to $1,000,000 from Essex Capital Holdings, Ltd. ("Essex") in the form
of an unsecured convertible promissory note (the "Essex Note"). Under the
terms of the Note the Company is able to borrow up to $1,000,000 at a cost of
12% interest per year with interest due and payable quarterly. The Essex Note
has a maturity date of January 23, 2001 (the "Maturity Date"). The Company
has the right to accelerate the Maturity Date of the Note and prepay all or
any portion of the outstanding principal due under the Essex Note upon
payment of a premium equal to 125% of the then principal balance plus accrued
interest. Essex has the right, upon 30 days notice to the Company, to convert
all or any portion of the then outstanding principal amount, plus any accrued
and unpaid interest, into shares of the Company's Common Stock at a
conversion price equal to $0.40 per share.
Subsequently, on February 28, 2000, the Company and Essex negotiated an
Addendum to the Essex Note which resulted in an increase the maximum amount that
the Company may borrow from Essex. Under the Addendum, the Company may borrow up
to $1,500,000 from Essex under all of the same terms and provisions as given in
the original Note. As of December 31, 1999, the outstanding balance of the Essex
Note was $959,674.
In addition to the monies borrowed from Essex, the Company financing
needs have also been met through the efforts that the Company has undertaken in
borrowing funds through the issuance of several unsecured promissory notes (the
"Promissory Notes"), on a limited basis, to individuals with whom the Company
has a substantial existing and well-established business or personal
relationship. Nearly all of these Promissory Notes are convertible into the
Company's Common Stock $0.40 per Share. As of December 31, 1999, the collective
balance of these Promissory Notes was $1,323,940 and each Promissory Note
carries an interest rate of 12%. The maturity dates for these Promissory Notes
ranges from six months to one year from the date of their issuance.
In total, the Company had, as of December 31, 1999, an aggregate of
$2,283,614 in convertible promissory notes outstanding. The Company continues to
rely and may rely in the future upon the use of convertible promissory notes to
provide needed financing.
THE COMPANY ANTICIPATES THAT IT WILL NEED TO CONTINUE TO FOLLOW A
STRATEGY OF CONSERVING ITS CASH RESOURCES AND USE ITS RESTRICTED COMMON STOCK,
(AND, IF NECESSARY, ITS PREFERRED STOCK AND DEBT SECURITIES) ISSUED ON A PRIVATE
PLACEMENT BASIS IN ACCORDANCE WITH APPLICABLE EXEMPTIONS PROVIDED UNDER STATE
AND FEDERAL SECURITIES LAWS AND IN LIEU OF CASH TO MEET ANY CASH SHORTFALLS OR
FINANCIAL DIFFICULTIES THAT IT MAY EXPERIENCE. In the past the Company has
followed this strategy, on a selective basis, to acquire architectural services,
to pay rent to the owner of the real property leased for the Club, to repay
interest and principal due on debt, to pay accounts payable, to pay for various
services, to pay compensation to officers and directors, and otherwise to
acquire certain goods and services needed by the Company.
In this respect, the Company has relied upon the use of its restricted
common stock to provide the financing needed by the Company. There can be no
assurance that the Company can continue to utilize its common stock, in lieu of
cash payments, to pay for goods and services it requires or if it does, that it
can do so on terms that are reasonable in light of the Company's current
financial conditions.
19
<PAGE>
Overall, the Company has also used its restricted common stock, issued
on a private placement basis in accordance with applicable exemptions provided
under state and federal securities laws and in lieu of cash, to purchase
architectural services, to pay rent to the owner of the real property leased for
the Club, to repay interest and principal due on debt, to pay accounts payable,
to pay for various services, to pay compensation to officers and directors, and
otherwise to acquire certain goods and services needed by the Company. In this
respect, the Company has relied upon the use of its restricted common stock to
provide the financing needed by the Company. There can be no assurance that the
Company can continue to utilize its common stock, in lieu of cash payments, to
pay for goods and services it requires.
If the Company does undertake any acquisitions or expansion of its
operations beyond the existing Club and even if the Company is successful in
operating the Club, the Company will need to renegotiate and obtain additional
financing to the extent that cash flows generated by the operation of the Club
are not sufficient to provide funds to repay existing creditors and any future
creditors. If the Club's operations are successful and if the Club can generate
sufficient excess cash flows, the Company will not likely require additional
financing unless the Company sought to acquire another club or expanded its
operations. There can be no guarantee that the Company will be successful in
these efforts.
If the Company implements its business plan to acquire and establish
new Boys Toys Clubs in other locations, then the Company will need to obtain
additional debt and equity capital on such terms as the Company may obtain. The
amount and form of any such financing will depend on the Company's then existing
financial condition, then existing market conditions, and the terms that the
Company may be able to obtain in any such negotiations. The Company has not
identified any locations or operations that are suitable for the establishment
of any new Boys Toys Club. In addition, the Company has not had any discussions
with any underwriter, venture capital fund, or other source to provide
additional financing. There can be no assurance that the Company that the
Company can obtain any additional financing or, if it is successful, that it can
be obtained on reasonable terms.
The Company currently has approximately 40 full-time and 50 part-time
employees none of which are employed under a collective bargaining agreement.
The Company believes that its relationship with its employees is excellent.
These employees are grouped as follows: management, office staff, bookkeeper,
executive chef, hosts/hostesses, food servers, bartenders, cocktail waitresses,
kitchen staff. The Company believes that while it will incur employee turnover,
however, the number of employees it will require over the next 12 months will
likely remain at these levels.
The Company also utilizes 25-50 "exotic female entertainers" as
independent contractors. All of these entertainers are not paid any wage,
salary, fee, or other compensation by the Company. Each is and will continue to
remain independent contractors.
ITEM 3. DESCRIPTION OF PROPERTY
On April 30, 2000, the Company terminated its month-to-month lease of
office space at 7825 Fay Avenue, Suite 200, La Jolla, California 92037 and moved
all of its executive offices to the office facilities at the Company's existing
Club located at 412 Broadway, San Francisco, California 94133. The closing of
the Company's La Jolla, California office was undertaken to conserve the
Company's cash resources.
20
<PAGE>
The Company leases two residential apartment units from Bayside
Village at 180 Brannan Street Suite #217 and #406, San Francisco, California
under a month-to-month lease at a combined monthly rental of $4,520.00. One
unit is used by the general manager of the Company's Planned San Francisco
Club and the other unit is used by the Company's Chairman. The Company
believes that the two apartment units are sufficient for the Company's
anticipated requirements.
The Company's wholly-owned subsidiary, RMA of San Francisco, Inc., a
California corporation ("RMA") and as successor in interest to Boys Toys Cabaret
Restaurants, Inc., a California corporation), is the lessee of a lease (the
"Lease") executed on August 1, 1994 for the lease of a 14,500 square foot
premises at 408 - 412 Broadway, San Francisco, California (the "Facility") in
which the Club is located. The subsidiary has subsequently assigned the lease to
RMA of San Francisco, Inc. The Facility consist of an entire building consisting
of two floors and an alleyway along the west side of the building.
Under the terms of the Lease, Roma Cafe, Inc. ("RCI") leased the
Facility to the Boys Toys Cabaret Restaurants, Inc., a company established and
owned by the Company. This lease was subsequently assigned to RMA. The Facility
is leased to the Company for a period of 10 years from August 1, 1994 to July
31, 2004 (the "Initial Lease Term"). The Lease provides that the Company is
obligated to pay $12,000 in monthly lease payments to RCI during the twelve
months ending July 31, 1999 and subsequently the amount of $12,500 monthly
during the two years thereafter (ending July 31, 2001), $13,000 monthly during
the following year (ending July 31, 2002), $13,500 monthly in the next year
(ending July 31, 2003), and, in the final 10th year of the lease (ending July
31, 2004), the Company is obligated to pay $14,000 in monthly lease payments.
The monthly lease payments to RCI are also subject to adjustment using
the U.S. Department of Labor's Consumer Price Index for the San
Francisco/Northern California Region. All lease payments are due on the first
day of each month and, in the event that the Company fails to pay any
obligations due RCI within 10 days of the date that they are due, the Company
incurs a late charge equal to 5% of the amount due in addition to paying all
other amounts due under the Lease.
During the term of the Lease, the Company is also obligated to pay all
real property taxes and personal property taxes assessed against the Facility.
And, provided that the Company is not in default of its obligations under the
Lease, RCI has granted the Company the right to extend the term of the Lease for
an additional two successive five year terms following the Initial Lease Term.
The Company believes that the Facility will be adequate for the operations of
the Company's existing Club.
21
<PAGE>
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information relating to the beneficial
ownership of Company common stock by those persons beneficially holding more
than 5% of the Company's capital stock, by the Company's directors and executive
officers, and by all of the Company's directors and executive officers as a
group as of December 31, 1999.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
(1) (2) (3) (4)
Name And Amount And
Address Of Nature Of
Title Of Beneficial Beneficial Percent Of
Class Owner Owner Class
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock Ralph M. Amato 2,786,669(1) 34.33%(1)
7825 Fay Avenue #200
La Jolla, CA 92037
Common Stock Michael L. Potter, Esq. 270,000(2) 3.33%(2)
7825 Fay Avenue #200
La Jolla, CA 92037
------------------------ --------------------
Total for all persons
as a group (2 persons) 3,056,6693 37.66%3
======================== ====================
</TABLE>
- ------------------
Footnotes:
1. The amounts shown include 1,200,000 shares purchasable at $0.25 per share by
Ralph M. Amato pursuant to a certain common stock purchase option granted by the
Company's Board of Directors (the "First Amato Option"). The First Amato Option
has no expiration date. In addition, the amounts shown includes 600,000 shares
purchasable at $0.25 per share by Ralph M. Amato (the "Second Amato Option").
The Second Amato Option expires on February 13, 2004.
2. The amounts shown include 250,000 shares purchasable at $0.25 per share by
Michael L. Potter, Esq. pursuant to a certain common stock purchase option
granted by the Company's Board of Directors. This option expires on February 13,
2004.
3. Totals shown include shares purchasable upon exercise of the options stated.
In the event that all of the options were exercised and assuming that the
Company does not issue any additional shares of its Common Stock (par value
$0.001), the Company would have an aggregate of 8,116,503 shares of its Common
Stock (par value $0.001) outstanding.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
The members of the Board of Directors of the Company serve until the
next annual meeting of stockholders, or until their successors have been
elected. The Company's by-laws provide for four authorized directors. Currently,
the Company has only two directors and intends, as opportunities become
available, to identify two additional directors to serve on the Company's Board
of Directors.
22
<PAGE>
The officers serve at the pleasure of the Board of Directors.
Information as to the directors and executive officers of the Company is as
follows:
<TABLE>
<CAPTION>
Name Age Position Date
Elected
- --------------------------------------------------- ---------- -------------------------------------- ---------------
<S> <C> <C> <C>
Ralph M. Amato 48 President, Chairman, & Chief 12/06/93
7825 Fay Ave. #200 Financial Officer
La Jolla, California 92037
Michael L. Potter, Esq. 48 Secretary & Director 01/29/96
7825 Fay Ave. #200
La Jolla, California 92037
</TABLE>
Each of the foregoing persons may be deemed a "promoter" of the
Company, as that term is defined in the rules and regulations promulgated under
the SECURITIES ACT OF 1933. Directors are elected to serve until the next annual
meeting of stockholders and until their successors have been elected and have
qualified.
RALPH M. AMATO, age 48, is the founder of the Company and has been its
President and Chairman since the December 6, 1993 incorporation of Alternative
Entertainment, Inc., a Nevada corporation ("AEI-Nevada"). In August of 1998, Mr.
Amato assumed the additional responsibilities of Chief Financial Officer. In
addition to his position as President, Chairman, and Chief Financial Officer,
Mr. Amato is also President of California Merchant Group, an investment banking
firm located in La Jolla, California ("CMG"). CMG specializes in assisting
emerging growth companies in obtaining capital throughout the United States,
Canada, and Mexico. From 1990 to 1992, Mr. Amato was a management consultant to
Big Bob's Sports Collectibles, a Milford Connecticut-based sports memorabilia
distributor. From November 1988 to November 1990, Mr. Amato was a Senior Account
Executive for PaineWebber in its San Diego, California office.
MICHAEL L. POTTER, ESQ., age 48, has been the Company's Secretary and a
Director of the Company since January 29, 1996. Since July 1994 to the present,
Mr. Potter has been an attorney with and name partner of the San Diego law firm
of Potter, Day & Associates where he specializes in business law, asset
protection law, and advanced estate planning. From January 1990 to July 1994,
Mr. Potter was an attorney with and name partner of the San Diego law firm of
Cannon, Potter & Day. Mr. Potter serves as a Commanding Officer in the United
States Navy Reserve. He holds a B.A. Degree from the University of New York
(Albany), an M.A. Degree (Management and Supervision) from Central Michigan
University, am M.S. Degree (Education) from the University of Southern
California, and a J.D. Degree from National University, San Diego, California.
In addition, to the above officers and directors of the Company, the
Company has entered into a six year employment agreement with Gary Marlin. Mr.
Marlin is serving as the General Manager of the Company's existing Club. Mr.
Marlin has over 13 years of experience in managing gentlemen's clubs.
23
<PAGE>
ITEM 6. EXECUTIVE COMPENSATION
The Company's Board of Directors has authorized the compensation of its
officers with the following annual cash salaries:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
- -------------------------------------------------------------------------------------------------------------------
Annual Compensation
---------------------------------------------
Name and Principal Position Other Annual
(a) Salary Bonus Compensation
Year ($) ($) ($)
(b) (c) (d) (e)*
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ralph M. Amato 1997 $0 $0 $0
Chairman, President and CFO 1998 $7,600 $0 $0
1999 $30,000 $0 $0
- -------------------------------------------------------------------------------------------------------------------
Michael L. Potter 1997 $0 $0 $0
Secretary and Director 1998 $0 $0 $0
1999 $0 $0 $0
====================================================================================================================
</TABLE>
FOOTNOTE:
* The amounts shown do not include any value assigned to the Options granted in
1999 as follows:
1) an option to purchase 1,200,000 shares of the Company's Common Stock
exercisable at $0.25 per share by Ralph M. Amato pursuant to a certain common
stock purchase option granted by the Company's Board of Directors (the "First
Amato Option"). The First Amato Option has no expiration date. In addition, Mr.
Amato received an option to purchase 600,000 shares exercisable at $0.25 per
share by Ralph M. Amato (the "Second Amato Option"). The Second Amato Option
expires on February 13, 2004.
2) an option to purchase 250,000 shares of the Company's Common Stock
at $0.25 per share by Michael L. Potter, Esq. pursuant to a certain common stock
purchase option granted by the Company's Board of Directors. This option expires
on February 13, 2004.
All of the above options have not been exercised and all of them would
result in the Company issuing restricted shares of the Company's Common Stock.
Each option does not require that the Company file any registration statement
for the registration of the shares.
With respect to cash salaries, the Company may change or increase
salaries as the Company's profits and cash flow allow. The amount of any
increase in salaries and compensation for existing officers has not been
determined at this time and the number and dollar amount to be paid to
additional management staff that will likely be employed has not been
determined.
<TABLE>
<CAPTION>
AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
Number of
Unexercised Value Of
Securities Unexercised
Underlying In The Money
Options/SARs Option/SARs
Shares At Fy-End 1999 Exercisable/
Acquired Value Exercisable/ Unexercisable
Name On Exercise Realized Unexercisable -------------
- ---- ----------- -------- -------------
<S> <C> <C> <C> <C>
Ralph M.
Amato, 0 0 1,200,000 $300,000
Chmn. &
President 0 0 600,000 $150,000
Michael L.
Potter, Esq., 0 0 250,000 $ 62,500
Director
</TABLE>
- ----------------------
All of the stock options shown are exercisable for the purchase of the
Company's Common Stock at an exercise price of $0.25 per share whereby each said
share will be restricted pursuant to the Securities Act of 1933 and bear a
restricted securities legend. The dollar values shown on the far right hand
column utilize a $0.50 per share common stock market price. See footnotes for
table shown above.
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST TWO FISCAL YEARS
(1999 Fiscal Year Individual Grants)
- ---------------------------------- --------------------- --------------------- ------------------ ---------------------
No. of Percent of
Securities Total Options/
Underlying SARs Granted Exercise of
Options/SARs to Employees Base Price
Granted in Fiscal Year ($/Sh) Expiration
Name (#)(1) (c)(1) (d) Date
(a) (b) (e)
- ---------------------------------- --------------------- --------------------- ------------------ ---------------------
<S> <C> <C> <C> <C>
Ralph M. Amato 1,200,000 87.18% $0.25 None
600,000 $0.25 02-13-04
- ---------------------------------- --------------------- --------------------- ------------------ ---------------------
Michael L. Potter, Esq. 250,000 12.82% $0.25 02-13-04
================================== ===================== ===================== ================== =====================
================================== ===================== ===================== ================== =====================
</TABLE>
Footnote:
1. Represents common stock purchase options granted the Company's officers and
directors in 1999 (no options were granted in 1998). Prior to 1998 and except
for an option to purchase 60,000 shares (at $0.50 per share) granted to Stanley
V. Heyman, a former officer, the Company has not issued or granted any common
stock purchase options to the Company's officers and directors. All of the
options shown were granted in 1999.
The Company may change or increase salaries as the Company's profits
and cash flow allow. The amount of any increase in salaries and compensation for
existing officers has not been determined at this time and the number and dollar
amount to be paid to additional management staff that will likely be employed
has not been determined.
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST TWO FISCAL YEARS
(1998 and 1999 Fiscal Year Individual Grants)
- -------------------------------------------------------------------------------------------------------------------------
No. of Percent of
Securities Total Options/
Underlying SARs Granted Exercise of
Options/SARs to Employees Base Price
Granted in Fiscal Year ($/Sh) Expiration
Name (#)1 (c)1 (d) Date
(a) (b) (e)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ralph M. Amato 1,200,000 87.18% $0.25 None
600,000 $0.25 02-13-00
-------------------------------------------------------------------------------------
Michael L. Potter, Esq. 250,000 12.82% $0.25 02-13-00
=========================================================================================================================
</TABLE>
Footnote:
1. Represents common stock purchase options granted the Company's officers and
directors in 1998 and 1999. Prior to 1998 and except for an option to purchase
60,000 shares (at $0.50 per share) granted to Stanley V. Heyman, a former
officer, the Company has not issued or granted any common stock purchase options
to the Company's officers and directors. All of the options shown were granted
in 1999.
24
<PAGE>
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On February 13, 1999 and in recognition of the limited cash
compensation paid, the Company's Board of Directors granted Ralph M. Amato, the
Company's Chairman, President, Secretary, and Founder, a common stock purchase
option (the "First Amato Option") for the purchase of up to 1,200,000 shares of
the Company's Common Stock at an exercise price of $0.25 per share. The First
Amato Option granted Mr. Amato does not have an expiration date.
On February 13, 1999, the Company granted Michael L. Potter, The
Company's Secretary and a Director, a common stock purchase option for the
purchase of up to 250,000 shares of the Company's Common Stock at an exercise
price of $0.25 per share (the "Potter Option"). The Potter Option expires on
February 13, 2004.
On February 13, 1999, the Company granted Ralph M. Amato, the Company's
President, Chairman, CEO, and Treasurer a common stock purchase option for the
purchase of up to 600,000 shares of the Company's Common Stock at an exercise
price of $0.25 per share (the "Second Amato Option"). The second Amato Option
expires on February 13, 2004.
As of September 30, 1999, the Company had outstanding a note receivable
in the amount of $37,073 from its President and Chairman, Ralph M. Amato. The
receivable is due and payable upon demand and bears interest at 5.85%. This note
receivable compares to a $33,602 and $35,515 in note receivables due from Mr.
Amato as of December 31, 1997 and December 31, 1998, respectively.
On October 25, 1999 the Company's Board of Directors accepted a loan of
$70,000 from the Company's President, Ralph M. Amato. The loan is due and
payable on or before October 25, 2000 and carries an interest rate of 10%.
On January 15, 2000, the Company's Board of Directors accepted a loan
of $16,000 from the Company's President, Ralph M. Amato. The loan is due and
payable on or before October 25, 2000 and carries an interest rate of 10%.
25
<PAGE>
ITEM 8. DESCRIPTION OF SECURITIES
COMMON STOCK
The Company's Certification of Incorporation, authorize the issuance of
20,000,000 shares of the Company's Common Stock. Holders of shares of the Common
Stock are entitled to one vote for each share on all matters to be voted on by
the stockholders. Holders of Common Stock have no cumulative voting rights.
Holders of shares of Common Stock, subject to the rights of any outstanding
Preferred Stock, are entitled to share ratably in dividends, if any, as may be
declared from time to time by the Board of Directors in its discretion, from
funds legally available therefor.
In the event of a liquidation, dissolution or winding up of the
Company, the holders of shares of Common Stock are entitled to share pro rata
all assets remaining after payment in full of all liabilities. Holders of common
stock have no preemptive rights to purchase the Company's Common Stock. All of
the outstanding shares of Common Stock are fully paid and non-assessable.
PREFERRED STOCK
The Company's Articles of Incorporation authorize the issuance of
8,000,000 shares of Preferred Stock (par value $0.001) in one or more series and
with such rights, privileges, and preferences as the Company's Board of
Directors may determine. The Company has no Preferred Stock issued or
outstanding.
26
<PAGE>
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON REGISTRANT'S COMMON EQUITY
AND OTHER SHAREHOLDER MATTERS.
The Company's Common Stock trades in the Over-The-Counter ("OTC")
market (Electronic Bulletin Board and "Pink Sheets") listed in the National
Daily Quotations Service. Since October 6, 1998 to the present, there were only
sporadic quotations with only limited and minimal interest by market makers. As
of December 31, 1999, the company had 12 market makers and 751 shareholders of
record. The following represents high and low bid prices by quarter as reported
by the National Quotation Bureau, Inc.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
High Low
- --------------------------------------------------------------------------------
<S> <C> <C>
1998
- ----
4th Quarter $3.75 $0.5625
- --------------------------------------------------------------------------------
1999
- ----
1st Quarter $4.25 $2.00
2nd Quarter $1.46 $0.62
3rd Quarter $0.81 $0.56
4th Quarter $0.75 $0.20
- --------------------------------------------------------------------------------
</TABLE>
ITEM 2. LEGAL PROCEEDINGS.
On April 13, 2000, Superior Heating and Sheet Metal, Inc.(the
"Plaintiff") filed a Complaint against the Company, W.B. Elmer & Company, Lewis
Chin and other unnamed persons in Superior Court for the County of San Francisco
(the "Complaint").
The Complaint asserts that: (i) the Company breached a contract to pay
for services to the Plaintiff; (ii) the Plaintiff is entitled to payment for the
reasonable value of the services rendered by the Plaintiff; and (iii) the
Plaintiff is entitled to exercise its foreclosure rights pursuant to a
mechanics' lien. The Complaint arises out of the construction of the Company's
Club.
The Plaintiff seeks $119,822 in damages. While the Company believes
that it is not responsible for payment of these monies and that the general
contractor, W.B. Elmer & Company, is responsible for the payment of all such
amounts, there can be no assurance that the Company will prevail in any ultimate
resolution of this litigation or that the Company will not incur substantial and
protracted litigation costs, expenses, and settlement payments in resolving the
claims made in the Complaint and the resulting litigation.
Finally, on April 18, 2000 the Company was served with a copy of a
summons and a Complaint filed by Tucknott Electric Co. (the "Tucknott
Plaintiff") asserts: (i) that the Company breached its contract with the
Tucknott Plaintiff; (ii) that the Company has been unjustly enriched at the
expense of the Tucknott Plaintiff; and (iii) that the Tucknott Plaintiff is
entitled to exercise its foreclosure rights pursuant to a mechanics' lien. This
Complaint also arises out of the construction of the Company's Club.
The Tucknott Plaintiff seeks $52,666.49 in damages. While the Company
believes that it is not responsible for payment of these monies and that the
general contractor, W.B. Elmer & Company, is responsible for the payment of all
such amounts, there can be no assurance that the Company will prevail in any
ultimate resolution of this litigation or that the Company will not incur
substantial and protracted litigation costs, expenses, and settlement payments
in resolving the claims made in the Complaint and the resulting litigation.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
The Company engaged the independent accounting firm of Sporl and
Welker, the predecessor of Pannell Kerr Forster as the Company's independent
auditor in October 1998. Pannell Kerr Forster resigned as the Company's auditor
on December 17, 1999. The resignation did not arise out of any disagreement
between the Company and Pannell Kerr Forster regarding any matter. Pannell Kerr
Forster has stated that their resignation occurred because the industry in which
the Company operates did not meet their long-term client profile objective.
From December 1993 to March 1, 1996 the Company (through its
predecessor, AEI-Nevada) engaged the firm of Harlan & Boettger as its
independent auditor. Harlan & Boettger were dismissed by the Company.
On March 18, 2000, the Company has engaged the services of Armando C.
Ibarra, C.P.A. as its independent accountant to replace Pannell Ferr Forster.
There have been no disagreements between the Company and any
predecessor auditor during the past two fiscal years and any subsequent interim
period prior to the termination of any said precdecessor's engagement. In each
case, the change in auditors was determined by the Company's Chairman of the
Board of Directors.
While Pannell Kerr Forster's audit report on the financial statements
for 1997 and 1998 contained a going concern modification, the Company does not
have any disagreements between it and Pannell Kerr Forster through the date of
Pannell Kerr Forster's termination.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES.
In January 1998 the Company issued 602,811 shares of its common stock
(par value $0.001) representing approximately $6,028 pursuant to Section 4(2) of
the SECURITIES ACT OF 1933. The shares were issued in connection with the
purchase of the Company by Alternative Entertainment, Inc., a Nevada
corporation. The Shares were issued without an underwriter.
27
<PAGE>
During the period from October through December 1998, the Company
issued 350,388 shares of its common stock (par value $0.001) to convert $480,831
in outstanding notes payable. Each of the noteholders who exchanged their
promissory notes to acquire the shares were sophisticated persons and each had a
pre-existing relationship with the Company. All of the shares were issued
pursuant to Section 4(2) and 4(6) of the SECURITIES ACT OF 1933 and Rule 506
of Regulation D thereunder. The Shares were issued to Anthony Azevedo,
William M. Aul, Christopher Palozzi, Lewis Chin, Hannah Cohen, Morris
Diamond, James Palacek, Paul Palacek, Ina L. Weeda, Steve Cohen, Van Dam, and
James DiNapoli.
During the period from October through December 1998, the Company
issued 186,376 shares of its common stock (par value $0.001) to convert $162,484
of then outstanding accounts payable. Each of the purchasers were sophisticated
persons and each had a pre-existing relationship with the Company. All of the
shares were issued pursuant to Section 4(2) and 4(6) of the SECURITIES ACT OF
1933 and Rule 506 of Regulation D thereunder. The shares were issued without an
underwriter. The shares were issued without an underwriter. The Shares were
issued to Scott Kelley, John L. Martin, Vernon Chu and Olde Monmouth Capital.
During the period from October through December 1998 and in lieu of
cash payments, the Company issued 185,500 shares its common stock (par value
$0.001) for approximately $170,771 in architectural, design, and other services.
Each of the purchasers were sophisticated persons and each had a pre-existing
relationship with the Company. All of the shares were issued pursuant to Section
4(2) and 4(6) of the SECURITIES ACT OF 1933 and Rule 506 of Regulation D
thereunder. The shares were issued without an underwriter. The Shares were
issued to W.B. Elmer & Company, Inc.
During the period from October through December 1998 and in lieu of
cash payments, the Company issued 240,000 shares of its common stock (par value
$0.001) for approximately $240,000 in construction work. The purchaser was a
sophisticated person and had a pre-existing relationship with the Company. All
of the shares were issued pursuant to Section 4(2) of the SECURITIES ACT OF
1933. The shares were issued without an underwriter. The Shares were issued
to W. B. Elmer & Company, Inc.
In December 1998 and in lieu of a cash payment, the Company issued
20,000 shares of its common stock (par value $0.001) in payment of certain
deposits due under the lease of the Company's lease agreement for its Planned
San Francisco Club at the real property located at 408- 412 Broadway, San
Francisco, California. The purchaser was a sophisticated person and had a
pre-existing relationship with the Company. All of the shares were issued
pursuant to Section 4(2) of the SECURITIES ACT OF 1933. The shares were issued
without an underwriter. The Shares were issued to Roma Cafe, Inc.
During October and November 1998 and in exchange for approximately
$90,000 of accounts payable, the Company issued common stock purchase options
for the purchase of up to 60,000 shares of its common stock at an exercise price
of $1.00 per share. The options remain exercisable however none of the options
have been exercised. The holders of the options are sophisticated investors and
each had a pre-existing relationship with the Company. The options were issued
pursuant to Section 4(2) of the SECURITIES ACT OF 1933. The options were issued
without an underwriter. The options were issued without an underwriter. The
options were issued to Palmer Schooley, AIA, Architecture.
In January 1999, an investor exercised an option to purchase 100,000
shares of the Company's common stock (par value $0.001) at an exercise price of
$0.25 per share. The Company received $25,000 upon exercise of the option. The
investor is a sophisticated investor and had a pre-existing relationship with
the Company. The shares were issued pursuant to Sections 4(2) and 4(6) of the
SECURITIES ACT OF 1933 and Rule 506 thereunder. The shares were issued without
an underwriter. The shares were issued without an underwriter. The Shares were
issued to Alex Lemus.
28
<PAGE>
In January through August 1999, the Company issued 923,000 shares of
its common stock (valued at $1,129,235) to certain holders of $1,129,235 of the
Company's convertible promissory notes. Each of the converting promissory note
holders were sophisticated investors, Accredited Investors (as that term is
defined under Rule 501(a) of Regulation D) and each had a pre-existing
relationship with the Company. The shares were issued pursuant to Section 4(2)
and 4(6) of the SECURITIES ACT OF 1933 and Rule 506 thereunder. The shares were
issued without an underwriter. The Shares were issued to Ranji Doshl, Richard
Langley, Lenny Gotter, Chris Haltnerman, John Yadegar, Arthur Adams, Even
Yoav, Shingal Ashok, Arthur Steinberg, P. Scaccia, Robert Smith, Trafalgar
Trust, J. Carey, Harvey Productions, Joseph Minieri, Curtis Moring, Rich and
Famous Travel, Charlene Abernathy, W.B. Elmer & Company, Inc., Thomas
Johnson, Brian Pado, Geoffrey Smith, Wendell Stemley, Robert Woo, Marge
Yonika, Ken Yonika, William M. Randoll, Van Dam, Deloof Haj, Steven Demko,
Colbert Gutierrez, Picilde Kirby, Ina L. Weeda, Ballymore Investments, Dairen
Hylton, and Gary Gee.
In February 1999 and in lieu of cash payments, the Company issued
223,642 shares of the Company's Common Stock at $1.00 per share for certain
consulting services rendered to the Company. The purchaser was a sophisticated
person and had a pre-existing relationship with the Company. All of the shares
were issued pursuant to Section 4(2) and 4(6) of the SECURITIES ACT OF 1933 and
Rule 506 thereunder. The shares were issued without an underwriter. The Shares
were issued to Olde Monmouth Capital Corp.
In January through March 1999, the Company issued 909,879 shares of its
common stock at $1.00 per share in exchange for $909,879 in cash proceeds
pursuant to Section 4(2) of the SECURITIES ACT OF 1933 and Rule 504 of
Regulation D thereunder. All of the shares were issued without an underwriter.
The Shares were issued to Idalari, S.A., Generation Capital Associates, and
Ballymore Investments, Ltd.
In June 1999, the Company issued 125,000 shares of its common stock at
$1.00 per share in exchange for $125,000 in cash pursuant to Section 4(2) and
4(6) of the SECURITIES ACT OF 1933 and Rule 506 thereunder. The purchaser was a
sophisticated investor and the Company had a pre-existing relationship with the
purchaser. The shares were issued without an underwriter. The Shares were issued
to Arthur Adams.
In June 1999, the Company obtained commitments for the Company's
issuance of up to $1,000,000 in an unsecured convertible promissory note (the
"Note") issued to Essex Capital Holdings, Ltd.. Under the terms of the Note, the
Company received $890,000 from the investor who was issued the Note. The
investor is a sophisticated investor and has a pre-existing relationship with
the Company. The Note was issued pursuant to Section 4(2) of the SECURITIES ACT
OF 1933. The Note was issued without an underwriter. The Note was issued to
Essex without an underwriter.
On September 7, 1999, the Company agreed to issue 150,000 shares of its
common stock in exchange for certain consulting services to be valued at
$150,000. The purchaser was a sophisticated investor and the Company had a
pre-existing relationship with the purchaser. The shares were to be issued
pursuant to Section 4(2) of the SECURITIES ACT OF 1933. The shares were issued
without an underwriter. The Shares were issued to Market Pulse.
In December 1999 the Company obtained $300,000 from Lewis Chin, the
owner of Roma Cafe Inc., the owner of the real estate on which the Company's San
Francisco Club is located. In exchange for the $300,000, the Company issued Mr.
Chin an Unsecured Convertible Promissory Note convertible into shares of the
Company's Common Stock at $0.36 per share. The investor is a sophisticated
investor and has a pre-existing relationship with the Company. The Note was
issued pursuant to Section 4(2) of the SECURITIES ACT OF 1933. The Note was
issued without an underwriter. The Note was issued to Mr. Chin without an
underwriter.
In October 1999 and again in January 2000, the Company received funds
of $70,000 and $16,000, respectively, from the Company's President and Chairman,
Ralph M. Amato under the terms of unsecured promissory notes which bear interest
at 10% and payable on or before October 25, 2000. Mr. Amato is a sophisticated
investor and has a pre-existing relationship with the Company. The Notes were
issued pursuant to Section 4(2) of the SECURITIES ACT OF 1933. The Note were
issued without an underwriter. The Note were issued to Mr. Amato without an
underwriter.
29
<PAGE>
In December 1999 and again in January 2000, the Company received funds
from Essex Capital Holdings, Ltd. ("Essex") pursuant to an Addendum to the
Unsecured Convertible Promissory Note (the "Addendum") issued to Essex. Under
the terms of the Addendum, the Company is able to borrow additional funds from
Essex up to a maximum of $1,500,000. The Addendum increases the amount of funds
that the Company may borrow from the original $1,000,000 amount established by
the terms of the original note issued to Essex in June 1999. (See above.) Essex
is sophisticated investor and has a pre-existing relationship with the Company.
The Notes were issued pursuant to Section 4(2) of the SECURITIES ACT OF 1933.
The Note were issued without an underwriter. The Note were issued to Essex
without an underwriter.
In January 2000, the Company issued a $100,000 Unsecured Promissory
Note to Lewis Chin, the owner of Roma Cafe Inc., the owner of the real estate on
which the Company's San Francisco Club is located. The Company received $100,000
in cash from the sale of the Note. The investor, Mr. Chin, is a sophisticated
and Accredited Investor and has a pre-existing relationship with the Company.
The Note was issued pursuant to Section 4(2) of the SECURITIES ACT OF 1933. The
Note was issued without an underwriter. The Note was issued to Mr. Chin without
an underwriter.
All of the transactions referred to above are exempt from the
registration requirements of the SECURITIES ACT OF 1933, as amended, by virtue
of Section 4(2) thereof covering transactions not involving any public offering
or involving no "offer" or "sale." As a condition precedent to each sale, the
respective purchaser was required to execute an investment letter and consent to
the imprinting of a restrictive legend on each stock certificate received from
the Company.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware Corporation Law provides that a corporation
may indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending, or completed action, suit or proceeding by
reason of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgements, fines, and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding if the person acted in good faith and in a manner the person
reasonably believed to be or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe such person's conduct was unlawful, except that, in
the case of an action or suit by or in the right of the corporation, the
corporation shall not indemnify such persons against judgements and fines and no
person shall be indemnified as to any claim, issue, or matter as to which such
person shall have been adjudged to be liable for the negligence or misconduct in
the performance of that person's duty to the corporation, unless and only to the
extent that the court in which the action or suit was brought determines upon
application that such person is fairly and reasonably entitled to indemnity for
proper expenses.
In addition, the Company amended its Certificate of Incorporation on
January 26, 1998 and, among other provisions, adopted Article "EIGHTH" which
provides for the indemnification of the Company's officers and directors as
follows:
EIGHTH. (a.) A Director of the Corporation shall not be personally
liable to the Corporation or its shareholders for monetary damages for
breach of fiduciary duty as a Director, except for liability (i) for
any breach of the Director's duty of loyalty to the Corporation or its
shareholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii)
under Section 174 of the Delaware General Corporation Law, or (iv) for
any transaction
30
<PAGE>
from which the Director derived an improper personal benefit. If the
Delaware General Corporation Law is amended after approval by the
shareholders of this article to authorize corporate action further
eliminating or limiting the personal liability of Directors, then the
liability of a Director of the Corporation shall be eliminated or
limited to the fullest extent permitted by the Delaware General
Corporation Law, so as amended. Any repeal or modification of the
foregoing paragraph by the shareholders of the Corporation shall not
adversely affect any right or protection of a Director of the
Corporation existing at the time of such repeal or modification.
(b.) Right to Indemnification. Each person who was or is made
a party to, or is threatened to be made a party to, or is otherwise
involved, in any action, suit, or proceeding, whether civil, criminal,
administrative, or investigative (hereinafter a "proceeding"), by
reason of the fact that he or she is or was a Director, Officer, or
employee of the Corporation, or is or was serving at the request of the
Corporation as a Director, Officer, employee, or agent of another
corporation or of a partnership, joint venture, trust, or other
enterprise, including service with respect to employee benefit plans
(hereinafter an "indemnitee"), whether the basis of such proceeding is
alleged action in an official capacity as a Director, Officer,
employee, or agent or in any other capacity while serving as a
Director, Officer, employee, or agent, shall be indemnified and held
harmless by the Corporation to the fullest extent authorized by the
Delaware General Corporation Law, as the same exists or may hereafter
be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the Corporation to provide broader
indemnification rights than such law permitted the Corporation to
provide prior to such amendment, against all expense, liability, and
loss (including attorneys' fees, judgments, fines, ERISA excise taxes
or penalties, and amounts paid in settlement) reasonably incurred or
suffered by such indemnitee in connection therewith, and such
indemnification shall continue as to an indemnitee who has ceased to be
a Director, Officer, employee, or agent and shall inure to the benefit
of the indemnitee's heirs, executors, and administrators; provided,
however, that, except as provided in paragraph (b) hereof with respect
to proceedings to enforce rights to indemnification, the Corporation
shall indemnify any such indemnitee in connection with a proceeding (or
part thereof) initiated by such indemnitee only if such proceeding (or
part thereof) was authorized by the Board of Directors of the
Corporation.
The right to indemnification conferred in this section shall be a
contract right and shall include the right to be reimbursed by the
Corporation for expenses incurred in defending any such proceeding in
advance of its final disposition (hereinafter an "advancement of
expenses"); provided, however, that, if the Delaware General
Corporation Law requires, an advancement of expenses incurred by an
indemnitee in his or her capacity as a Director of Officer (and not in
any other capacity in which service was or is rendered by such
indemnitee, including, without limitation, service to an employee
benefit plan) shall be made only upon delivery to the Corporation of an
undertaking, by or on behalf of such indemnitee, to repay all amounts
so advanced if it shall ultimately be determined by final judicial
decision from which there is no further right to appeal that such
indemnitee is not entitled to be indemnified for such expenses under
this section or otherwise (hereinafter an "undertaking").
31
<PAGE>
(c.) Right of Indemnitee to Bring Suit. If a claim under paragraph (a)
of this section is not paid in full by the Corporation within sixty
days after a written claim has been received by the Corporation, except
in the case of a claim for an advancement of expenses, in which case
the applicable period shall be twenty days, the indemnitee may, at any
time thereafter, bring suit against the Corporation to recover the
unpaid amount of the claim. If successful, in whole or in part, in any
such suit or in a suit brought by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the
indemnitee shall be entitled to be paid also the expense of prosecuting
or defending such suit. In any suit brought by the indemnitee to
enforce a right to indemnification hereunder (but not in a suit brought
by the indemnitee to enforce a right to an advancement of expenses), it
shall be a defense that the indemnitee has not met the applicable
standard of conduct set forth in the Delaware General Corporation Law.
In any suit brought by the Corporation to recover an advancement of
expenses, pursuant to the terms of an undertaking, the Corporation
shall be entitled to recover such expenses upon a final adjudication
that the indemnitee has not met the applicable standard of conduct set
forth in the Delaware General Corporation Law.
Neither the failure of the Corporation (including its Board of
Directors, independent legal counsel, or its shareholders) to have made
a determination prior to the commencement of such suit that
indemnification of the indemnitee is proper in the circumstances
because the indemnitee has met the applicable standard of conduct set
forth in the Delaware General Corporation Law, nor an actual
determination by the Corporation (including its Board of Directors,
independent legal counsel, or its shareholders) that the indemnitee has
not met such applicable standard of conduct, shall create a presumption
that the indemnitee has not met the applicable standard of conduct or,
in the case of such suit brought by the indemnitee, by a defense to
such suit. In any suit brought by the indemnitee to enforce a right
hereunder, or by the Corporation to recover an advancement of expenses
pursuant to the terms of an undertaking, the burden of proving that the
indemnitee is not entitled to be indemnified or to such advancement of
expenses under this section or otherwise shall be on the Corporation.
(d.) Non-Exclusivity of Rights. The rights to indemnification and to
the advancement of expenses conferred in this section shall not be
exclusive of any other right which any person may have or hereafter
acquire under any statute, this Certificate of Incorporation, By-Law,
agreement, vote of shareholders or disinterested Directors, or
otherwise.
(e.) Insurance. The Corporation may maintain insurance, at its expense,
to protect itself and any Director, Officer, employee, or agent of the
Corporation or another corporation, partnership, joint venture, trust,
or other enterprise against any expense, liability, or loss, whether or
not the Corporation would have the power to indemnify such person
against such expense, liability, or loss under the Delaware General
Corporation Law.
(f.) Indemnification of Agents of the Corporation. The Corporation may,
to the extent authorized from time to time by the Board of Directors,
grant rights to indemnification and to the advancement of expenses to
any agent of the Corporation to the fullest extent of the provisions of
this section with respect to the indemnification and advancement of
expenses of Directors and Officers of the Corporation.
32
<PAGE>
Finally, on December 10, 1993, the Company's predecessor, Alternative
Entertainment, Inc., a Nevada corporation, agreed to indemnify Ralph M. Amato,
the Company's Chairman, from and against any loss, damage, deficiency, expense,
or cost (including reasonable attorneys' fees) incurred by Mr. Amato on account
of or in connection with his serving as a director of the Company.
PART III
ITEM 1. INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Description Page
- ----------- ----
<S> <C> <C>
3 Certificate of Incorporation - Wagg Corp.
3.1 Amendment to Certificate of Incorporation - Wagg Corp.
3.2 Amendment to Certificate of Incorporation - Wagg Corp.
3.3 By-Laws of Wagg Corp. (Delaware)
3.4 Articles of Incorporation - Alternative Entertainment, Inc. (NV)
3.5 By-Laws of Alternative Entertainment, Inc. (NV)
3.6 Articles of Incorporation of RMA of San Francisco, Inc.
3.7 By-Laws of RMA of San Francisco, Inc.
4.1 Specimen of Common Stock Certificate
10 Agreement for the Purchase of Common Stock
10.1 Lease for Office Space in La Jolla, California
10.2 Lease of Real Property from Roma Cafe, Inc.
10.3 Lease of Apartment Units in San Francisco, California
10.4 Indemnification Agreement between the Company and Ralph M. Amato
10.5 Agreement with Itex Corporation
10.6 Employment Agreement Between the Company and Gary Marlin
10.7 Loan Agreement with Unsecured Convertible Note
10.8 Unsecured Promissory Note (C. Palozzi)
10.9 Settlement Agreement With Bowne of Los Angeles, Inc.
10.10 Unsecured Promissory Note (V. Amato)
10.11 Unsecured Promissory Note (V. Amato)
10.12 Secured Promisory Note (R. Smith)
10.13 Secured Promissory Note (I. Weeda Family Trust)
10.14 Secured Promissory Note (I. Weeda Family Trust)
10.15 Secured Promissory Note (K. Marc)
10.16 Secured Promissory Note (G. W. Smith)
10.17 Secured Promissory Note (D. Hylton)
10.18 Secured Promissory Note (M. Yonika)
10.19 Unsecured Promissory Note (R. Kaelan)
10.20* Unsecured Convertible Promissory Note ($300,000 - Chin)
10.21* Addendum to Promissory Note (Essex)
10.22* Unsecured Promissory Note ($70,000 - Amato)
10.23* Unsecured Promissory Note ($16,000 - Amato)
10.24* Unsecured Promissory Note ($100,000 - Chin)
23.1 Consent of Pannell Kerr Forster
23.2* Resignation of Pannell Kerr Forster
27 Financial Data Schedule
</TABLE>
* Filed herewith
33
<PAGE>
ITEM 2. DESCRIPTION OF EXHIBITS
The following exhibits required by Item 601 of Regulation S-B are filed
herewith:
<TABLE>
<CAPTION>
Exhibit No. Document Description
- ----------- --------------------
<S> <C>
3 Certificate of Incorporation - Wagg Corp.
3.1 Amendment to Certificate of Incorporation - Wagg Corp.
3.2 Amendment to Certificate of Incorporation - Wagg Corp.
3.3 By-Laws of Wagg Corp. (Delaware)
3.4 Articles of Incorporation - Alternative Entertainment, Inc. (NV)
3.5 By-Laws of Alternative Entertainment, Inc. (NV)
4.1 Specimen of Common Stock Certificate
10 Agreement for the Purchase of Common Stock
10.1 Lease for Office Space in La Jolla, California
10.2 Lease of Real Property from Roma Cafe, Inc.
10.3 Lease of Apartment Units in San Francisco, California
10.4 Indemnification Agreement between the Company and Ralph M. Amato
10.5 Agreement with Itex Corporation
10.6 Employment Agreement Between the Company and Gary Marlin
10.7 Loan Agreement with Unsecured Convertible Note
10.8 Unsecured Promissory Note (C. Palozzi)
10.9 Settlement Agreement With Bowne of Los Angeles, Inc.
10.10 Unsecured Promissory Note (V. Amato)
10.11 Unsecured Promissory Note (V. Amato)
10.12 Secured Promisory Note (R. Smith)
10.13 Secured Promissory Note (I. Weeda Family Trust)
10.14 Secured Promissory Note (I. Weeda Family Trust)
10.15 Secured Promissory Note (K. Marc)
10.16 Secured Promissory Note (G. W. Smith)
10.17 Secured Promissory Note (D. Hylton)
10.18 Secured Promissory Note (M. Yonika)
10.19 Unsecured Promisory Note (R. Kaelan)
10.20* Unsecured Convertible Promissory Note ($300,000 - Chin)
10.21* Addendum to Promissory Note (Essex)
10.22* Unsecured Promissory Note ($70,000 - Amato)
10.23* Unsecured Promissory Note ($16,000 - Amato)
10.24* Unsecured Promissory Note ($100,000 - Chin)
23.1 Consent of Pannell Kerr Forster
23.2* Resignation of Pannell Kerr Forster
- -------------------------------------------------------------------------------
27 Financial Data Schedule
</TABLE>
* Filed herewith
34
<PAGE>
SIGNATURE
In accordance with Section 12 of the Securities Exchange Act of 1934,
the Registrant caused this registration statement to be signed on its behalf by
the undersigned thereunto duly authorized.
BOYSTOYS.COM, INC.
(Registrant)
Date: May 24, 2000 By /s/ Ralph M. Amato
---------------------------------------
Ralph M. Amato, Chairman,
President, CEO, & Treasurer
35
<PAGE>
BOYSTOYS.COM, INC.
(A Development Stage Company)
<TABLE>
<S> <C>
INDEPENDENT AUDITORS' REPORTS.................................................. F-1 - F-3
FINANCIAL STATEMENTS:
Consolidated Balance Sheets
as of December 31, 1997 and 1998,
and September 30, 1999 (unaudited) ..................................... F-4 - F-5
Consolidated Statements of Operations for the Years Ended December 31,
1997 and 1998, and for the Nine Months Ended September 30, 1998
and 1999 (unaudited), and from December 6, 1993 (inception) through
December 31, 1998, and from December 6, 1993 (inception) through
September 30, 1999 (unaudited) ......................................... F-6
Consolidated Statements of Changes in Shareholders' (Deficit) Equity for
the Years Ended December 31, 1997 and 1998, and for the Nine
Months Ended September 30, 1999 (unaudited) and from December
6, 1993 (inception) through September 30, 1999 (unaudited).............. F-7 - F-9
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997 and 1998, and for the Nine Months Ended September 30, 1998
and 1999 (unaudited), and from December 6, 1993 (inception) through
December 31, 1998, and from December 6, 1993 (inception) through
September 30, 1999 (unaudited).......................................... F-10 - F-11
Notes to Consolidated Financial Statements................................ F-12 - F-24
</TABLE>
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors.
BoysToys.com, Inc.
San Diego, California
We have audited the accompanying consolidated balance sheets of BoysToys.com,
Inc. as of December 31, 1997 and 1998 and the related consolidated statements
of operations, shareholders' deficit and cash flows for the years then ended,
and the cumulative totals for development stage operations from December 6,
1993 (inception) through December 31, 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. The
financial statements of BoysToys.com, Inc. (formerly Alternative
Entertainment, Inc.) for the period December 6, 1993 (inception) to December
31, 1995 were audited by other auditors whose report dated January 22, 1996,
expressed an unqualified opinion on those statements. Our opinion, insofar as
it relates to the cumulative totals for development stage operations from
December 6, 1993 (inception) through December 31, 1995, is based solely on
the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
BoysToys.com, Inc. and subsidiaries as of December 31, 1997 and 1998, and the
results of their operations and their cash flows for the years then ended,
and the cumulative totals for development stage operations from December 6,
1993 (inception) through December 31, 1998, in conformity with generally
accepted accounting principles. Our opinion, insofar as it relates to the
cumulative totals for development stage operations from December 6, 1993
(inception) through December 31, 1995, is based solely on the report of the
other auditors.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 11 to the consolidated financial statements, the Company's loss from
operations and excess of liabilities over assets raises substantial doubt
about its ability to continue as a going concern. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
San Diego, California PANNELL KERR FORSTER
August 31, 1999 (except for note 13, Certified Public Accountants
as to which the date is April 12, 2000) A Professional Corporation
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors.
Alternative Entertainment, Inc.
San Diego, California
We have audited the accompanying consolidated balance sheets of Alternative
Entertainment, Inc. as of December 31, 1997 and 1996 and the related
consolidated statements of operations, shareholders' deficit and cash flows for
the years then ended, and the cumulative totals for the development stage
operations from December 6, 1993 (inception) through December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The financial statements of Alternative Entertainment, Inc. from
December 6, 1993 (inception) through December 31, 1995, were audited by other
auditors whose report dated January 22, 1996 , expressed an unqualified opinion
on those statements. Our opinion, insofar as it relates to the cumulative totals
for development stage operations from December 6, 1993 (inception) through
December 31, 1995, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Alternative
Entertainment, Inc. as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for the years then ended, and the cumulative
totals for the development stage operations from December 6, 1993 (inception)
through December 31, 1997, in conformity with generally accepted accounting
principles. Our opinion, insofar as it relates to the cumulative totals for
development stage operations from December 6, 1993 (inception) through December
31, 1995, is based solely on the report of the other auditors.
The accompanying consolidated financial statements have been prepared assuming
that the company will continue as a going concern. As discussed in Note 12 to
the consolidated financial statements, the company's loss from operations and
excess of liabilities over assets raises substantial doubt about its ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
San Diego, California
September 29, 1998 SPORL & WELKER
F-2
<PAGE>
AUDIT REPORT FROM
HARLAN & BOETTGER TO FOLLOW
(TO COME)
F-3
<PAGE>
BOYSTOYS.COM, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
As of December 31, 1997 and 1998, and
September 30, 1999 (unaudited)
ASSETS
<TABLE>
<CAPTION>
December 31,
---------------------- September 30,
1997 1998 1999
-------- -------- ------------
(Unaudited)
<S> <C> <C> <C>
Current assets:
Cash $ - $ - $ 14,449
Prepaid rent - 24,000 4,000
Construction escrow deposits - 240,000 47,971
-------- -------- ----------
Total current assets - 264,000 66,420
-------- -------- ----------
Noncurrent assets:
Organization costs, net 1,445 - -
Note receivable-officer 33,602 35,515 37,073
Deposits 37,000 37,000 64,715
Property and equipment, net 540,525 538,350 2,378,393
-------- -------- ----------
Total noncurrent assets 612,572 610,865 2,480,181
-------- -------- ----------
Total Assets $612,572 $874,865 $2,546,601
======== ======== ==========
</TABLE>
The accompanying notes are an integral part of
the financial statements.
F-4
<PAGE>
BOYSTOYS.COM, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
As of December 31, 1998 and 1997, and
September 30, 1999 (unaudited)
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
<TABLE>
<CAPTION>
December 31,
------------------------- September 30,
1997 1998 1999
----------- ----------- -------------
(Unaudited)
<S> <C> <C> <C>
Current liabilities:
Bank overdraft $ 2,247 $ 12,556 $ -
Accounts payable and accrued expenses 642,931 621,704 622,969
Accrued interest 175,509 262,856 108,233
Notes payable 1,297,528 1,255,668 370,980
Convertible debt - - 890,000
----------- ----------- -----------
Total current liabilities 2,118,215 2,152,784 1,992,182
----------- ----------- -----------
Commitments and contingencies (Note 10)
Shareholders' (deficit) equity:
Preferred stock, $.01 par value
(8,000,000 authorized; none issued
and outstanding) - - -
Common stock, $.01 par value
(20,000,000 shares authorized; issued
and outstanding: 1,856,687, 3,441,762
and 5,723,283 as of December 31,
1997 and 1998, and September 30,
1999 (unaudited) 18,567 34,418 57,233
Additional paid-in-capital 825,733 2,013,996 8,034,136
Common stock subscribed - - (62,500)
Deficit accumulated during the
development stage (2,349,943) (3,326,333) (7,474,450)
----------- ----------- -----------
Total shareholders' (deficit) equity (1,505,643) (1,277,919) 554,419
----------- ----------- -----------
Total Liabilities and Shareholders'
(Deficit) Equity $ 612,572 $ 874,865 $ 2,546,601
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of
the financial statements.
F-5
<PAGE>
BOYSTOYS.COM, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1998 and 1997,
for the Nine Months Ended September 30, 1998 and 1999 (unaudited),
from December 6, 1993 (inception) through December 31, 1998
and from December 6, 1993 (inception) through September 30, 1999 (unaudited)
<TABLE>
<CAPTION>
Nine months ended
Years ended December 31, September 30, December 6, 1993 December 6, 1993
------------------------ ------------------------- (Inception) through (Inception) through
1997 1998 1998 1999 December 31, 1998 September 30, 1999
--------- ---------- ----------- ----------- ------------------ ------------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenues $ - $ - $ - $ - $ - $ -
--------- ---------- ---------- ----------- ----------- -----------
General and
Administrative Expenses (355,177) (838,594) (395,921) (3,691,556) (2,705,515) (6,397,071)
--------- ---------- ---------- ----------- ----------- -----------
Other Income (Expenses):
Interest income 1,359 2,102 133 4,064 3,461 7,525
Interest expense (146,949) (139,098) (121,067) (460,025) (322,335) (782,360)
Offering costs written-off - - - - (297,944) (297,944)
--------- ---------- ---------- ----------- ----------- -----------
Total other expenses (145,590) (136,996) (120,934) (455,961) (616,818) (1,072,779)
--------- ---------- ---------- ----------- ----------- -----------
Deficit Before Income Taxes (500,767) (975,590) (516,855) (4,147,517) (3,322,333) (7,469,850)
--------- ---------- ---------- ----------- ----------- -----------
Provision for Income Taxes (800) (800) (600) (600) (4,000) (4,600)
--------- ---------- ---------- ----------- ----------- -----------
Net loss $(501,567) $ (976,390) $ (517,455) $(4,148,117) $(3,326,333) $(7,474,450)
========= ========== ========== =========== =========== ===========
Basic and diluted net loss
per share $ (0.27) $ (0.41) $ (0.24) $ (0.81)
========= ========== ========== ===========
Weighted average shares
used for basic and diluted
net loss per share 1,856,687 2,409,637 2,198,221 5,114,379
========= ========== ========== ===========
</TABLE>
The accompanying notes are an integral part of
the financial statements.
F-6
<PAGE>
BOYSTOYS.COM, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' (DEFICIT) EQUITY
For the Years Ended December 31, 1997 and 1998,
for the Nine Months Ended September 30, 1998 and 1999 (unaudited),
and from December 6, 1993 (inception) through September 30, 1999 (unaudited)
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated
Common Stock Additional Subscribed During
-------------------- Paid-in -------------------- Development
Shares Amount Capital Shares Amount Stage Total
--------- ------- ---------- ---------- ------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 6, 1993 - $ - $ - - $ - $ - $ -
Issuance of common stock 50,000 500 1,000 - - - 1,500
Sale of stock to common stock
subscribers upon full payment of
subscription during December, 1993 11,817 118 237 - - - 355
Common stock subscribed, net
$50,871 of subscriptions receivable - - - 1,666,667 119 - 119
Net loss - - - - - (564) (564)
--------- ------- -------- ---------- ----- ----------- -----------
Balance, December 31, 1993 61,817 618 1,237 1,666,667 119 (564) 1,410
Sale of stock to common stock
subscribers upon full payment of
subscription during June, 1994 1,666,667 16,667 34,233 (1,666,667) (119) - 50,781
Issuance of common stock in
private placement offering, net
$10,067 of offering costs 71,442 714 203,546 - - - 204,260
Net loss - - - - - (170,155) (170,155)
--------- ------- -------- ---------- ----- ----------- -----------
Balance, December 31, 1994 1,799,926 17,999 239,016 - - (170,719) 86,296
Issuance of common stock in
private placement offering 56,761 568 169,717 - - - 170,285
Return and cancellation of
common stock (139,000) (1,390) 1,390 - - - -
Issuance of common stock for
services 139,000 1,390 415,610 - - - 417,000
Net loss - - - - - (777,674) (777,674)
--------- ------- -------- ---------- ----- ----------- -----------
Balance, December 31, 1995 1,856,687 18,567 825,733 - - (948,393) (104,093)
Net loss - - - - - (899,983) (899,983)
--------- ------- -------- ---------- ----- ----------- -----------
Balance, December 31, 1996 1,856,687 18,567 825,733 - - (1,848,376) (1,004,076)
Net loss - - - - - (501,567) (501,567)
--------- ------- -------- ---------- ----- ----------- -----------
Balance, December 31, 1997 1,856,687 $18,567 $825,733 - $ - $(2,349,943) $(1,505,643)
--------- ------- -------- ---------- ----- ----------- -----------
</TABLE>
The accompanying notes are an integral part of
the financial statements.
F-7
<PAGE>
BOYSTOYS.COM, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' (DEFICIT) EQUITY (Continued)
For the Years Ended December 31, 1997 and 1998,
for the Nine Months Ended September 30, 1998 and 1999 (unaudited),
and from December 6, 1993 (inception) through September 30, 1999 (unaudited)
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated
Common Stock Additional Subscribed During
-------------------- Paid-in --------------- Development
Shares Amount Capital Shares Amount Stage Total
--------- ------- ---------- ------ ------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 1,856,687 $18,567 $ 825,733 - $ - $(2,349,943) $(1,505,643)
Issuance of common stock on
reverse merger (Note 1) 602,811 6,028 - - - - 6,028
Issuance of common stock on
conversion of notes payable and
accrued interest, from September
1998 through December 1998, at
an average price of $1.37 per share 350,388 3,504 477,327 - - - 480,831
Issuance of common stock on
conversion of accounts payable,
from January 1998 through October
1998, at an average price of $0.87
per share 186,376 1,864 160,620 - - - 162,484
Issuance of common stock for
services, from January 1998 through
December 1998, at an average price
of $0.92 per share 185,500 1,855 168,916 - - - 170,771
Issuance of common stock for
construction escrow deposits in
October 1998, at a price of $1.00
per share 240,000 2,400 237,600 - - - 240,000
Issuance of common stock for
prepaid rent in December 1998,
at a price of $1.20 per share 20,000 200 23,800 - - - 24,000
Issuance of stock options on
conversion of accounts payable
in October 1998, at a price of
$1.00 per share (Note 7) - - 90,000 - - - 90,000
Issuance of stock options to
directors for services in
October 1998, at a price of
$1.00 per share (Note 7) - - 30,000 - - - 30,000
Net loss - - - - - (976,390) (976,390)
--------- ------- ---------- ------- ----- ------------ -----------
Balance, December 31, 1998 3,441,762 $34,418 $2,013,996 - $ - $(3,326,333) $(1,277,919)
--------- ------- ---------- ------- ----- ------------ -----------
</TABLE>
The accompanying notes are an integral part of
the financial statements.
F-8
<PAGE>
BOYSTOYS.COM, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' (DEFICIT) EQUITY (Continued)
For the Years Ended December 31, 1997 and 1998,
for the Nine Months Ended September 30, 1998 and 1999 (unaudited),
and from December 6, 1993 (inception) through September 30, 1999 (unaudited)
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated
Common Stock Additional Subscribed During
-------------------- Paid-in ------------------ Development
Shares Amount Capital Shares Amount Stage Total
--------- ------- ---------- ------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 3,441,762 $34,418 $2,013,996 - $ - $(3,326,333) $(1,277,919)
Unaudited information:
Issuance of common stock on
exercise of option in September
1999, at an exercise price of $0.25 100,000 1,000 24,000 - - - 25,000
Issuance of common stock on
conversion of notes payable and
accrued interest, from February 1999
through June 1999, at an average
price of $1.22 per share 923,000 9,230 1,120,005 - - - 1,129,235
Issuance of common stock for
services, from April 1999
through July 1999, at an average
price of $1.00 per share 223,642 2,236 221,741 - - - 223,977
Issuance of common stock in
private placement offering, from
February 1999 through May 1999,
at a price of $1.00 per share 909,879 9,099 900,780 - - - 909,879
Issuance of stock options to
directors for services in February
1999 (Note 7) - - 3,042,000 - - - 3,042,000
Issuance of common stock for
cash and subscription receivable
in March 1999, at a price of $1.00
per share 125,000 1,250 123,750 (62,500) (62,500) - 62,500
Beneficial conversion feature of
convertible debt, from June 1999
through December 1999 (Note 12) - - 587,864 - - - 587,864
Net loss - - - - - (4,148,117) (4,148,117)
--------- ------- ---------- ------- -------- ----------- -----------
Balance, September 30, 1999
(Unaudited) 5,723,283 $57,233 $8,034,136 (62,500) $(62,500) $(7,474,450) $ 554,419
========= ======= ========== ======= ======== =========== ===========
</TABLE>
The accompanying notes are an integral part of
the financial statements.
F-9
<PAGE>
BOYSTOYS.COM, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1997 and 1998,
for the Nine Months Ended September 30, 1998 and 1999 (unaudited),
from December 6, 1993 (inception) through December 31, 1998,
and from December 6, 1993 (inception) through September 30, 1999 (unaudited)
<TABLE>
<CAPTION>
Nine months ended
Years ended December 31, September 30, December 6, 1993 December 6, 1993
------------------------ ------------------------ (Inception) through (Inception) through
1997 1998 1998 1999 December 31, 1998 September 30, 1999
---------- ---------- ----------- ----------- ------------------- -------------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from Operating
Activities:
Net loss $(501,567) $(976,390) $(517,455) $(4,148,117) $(3,326,333) $(7,474,450)
Non-cash operating activities
included in deficit accumulated:
Depreciation and Amortization 1,040 2,175 - - 5,931 5,931
Accrued rent converted into
note payable - - - - 94,600 94,600
Issuance of common stock for
services - 170,771 421,983 223,977 170,771 394,748
Issuance of stock options to
directors for services - 30,000 - 3,042,000 30,000 3,072,000
Financing cost of beneficial
conversion feature of
convertible debt - - - 587,864 - 587,864
(Increase) decrease in assets:
Prepaid rent - - - 20,000 - 20,000
Note receivable-officer (22,875) (1,913) 51 (1,558) (35,515) (37,073)
Deposits - - (27,715) (37,000) (67,715)
Organization Costs - 1,445 - - (3,756) (3,756)
Increase (decrease) in
liabilities:
Accounts payable and accrued
expenses 103,959 231,257 (87,344) 1,265 874,188 875,453
Accrued interest 112,359 159,490 65,510 51,384 334,999 389,383
-------- --------- --------- ----------- ----------- -----------
Net cash used in operating
activities (307,084) (383,165) (117,255) (250,900) (1,892,115) (2,143,015)
-------- --------- --------- ----------- ----------- -----------
Cash Flows from Investing
Activities:
Capital expenditures on
leasehold improvements (11,632) - - (1,648,014) (540,525) (2,188,539)
-------- --------- --------- ----------- ----------- -----------
Net cash used in investing
activities (11,632) - - (1,648,014) (540,525) (2,188,539)
-------- --------- --------- ----------- ----------- -----------
Cash Flows from Financing
Activities:
Increase (decrease) in bank
overdraft 328 10,309 2,607 (12,556) 12,556 -
Borrowings on notes payable 318,388 366,828 114,648 38,540 1,569,756 1,608,296
Borrowings on convertible debt 890,000 - 890,000
Proceeds from issuance of
common stock - 6,028 - 972,379 850,328 1,822,707
Proceeds on exercise of stock
option - - 25,000 - 25,000
-------- --------- --------- ----------- ----------- -----------
Net cash provided by financing
activities 318,716 383,165 117,255 1,913,363 2,432,640 4,346,003
-------- --------- --------- ----------- ----------- -----------
Net increase in cash - - - 14,449 - 14,449
Cash at Beginning of Year - - - - - -
-------- --------- --------- ----------- ----------- -----------
Cash at End of Year - $ - $ - $ 14,449 $ - $ 14,449
======== ========= ========= =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of
the financial statements.
F-10
<PAGE>
BOYSTOYS.COM, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the Years Ended December 31, 1998 and 1997,
for the Nine Months Ended September 30, 1998 and 1999 (unaudited),
from December 6, 1993 (inception) through December 31, 1998
and from December 6, 1993 (inception) through September 30, 1999 (unaudited)
<TABLE>
<CAPTION>
Nine months ended
Years ended December 31, September 30, December 6, 1993 December 6, 1993
------------------------ ------------------------ (Inception) through (Inception) through
1997 1998 1998 1999 December 31, 1998 September 30, 1999
---------- ---------- ----------- ----------- ------------------- -------------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of amount capitalized) $(7,500) $ (1,880) $ (1,880) $ - $ (13,380) $ (13,380)
======= ========= ========= ============ =========== ===========
Income taxes $ (800) $ (800) $ (600) $ (600) $ (4,000) $ (4,600)
======= ========= ========= ============ =========== ===========
Noncash investing and financing
activities:
Accrued rent, late payment fees and
costs due to landlord converted into
note payable $ - $ - $ - $ - $ (94,600) $ (94,600)
======= ========= ========= ============ =========== ===========
Issuance of common stock and stock
options on conversion of debt $ - $(733,315) $ - $(1,129,235) $( 733,315) $(1,862,550)
======= ========= ========= ============ =========== ===========
Issuance of common stock and stock
options for goods and services $ - $(264,000) $(264,000) $ - $ (264,000) $ (264,000)
======= ========= ========= ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of
the financial statements.
F-11
<PAGE>
BoysToys.com, Inc.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1997 and 1998,
for the Nine Months Ended September 30, 1998 and 1999 (unaudited),
and from December 6, 1993 (inception) through September 30, 1999 (unaudited)
NOTE 1 - ORGANIZATION AND BUSINESS
BoysToys.com, Inc. (formerly Alternative Entertainment, Inc.) was
incorporated in the state of Delaware on April 21, 1997, under the name
Wagg Corp. ("Wagg"). BoysToys.com, Inc. engages in the business of
developing, owning and operating nightclubs providing exotic dance
entertainment combined with a full service restaurant, lounge, and
business meeting facilities.
On December 6, 1993, Alternative Entertainment, Inc., a Nevada
corporation ("AEI Nevada"), was formed. On November 10, 1994, a
wholly-owned subsidiary was formed, BoysToys Cabaret Restaurants, Inc.,
a California Corporation, which plans to operate its first such
nightclub facility in San Francisco, California.
On January 15, 1998, AEI Nevada acquired 80% of the outstanding common
stock of Wagg. On January 25, 1998, the shareholders of AEI Nevada voted
to execute a one-for-three reverse split of its common stock. On January
26, 1998, the shareholders of Wagg voted to execute a one-for-two reverse
split of its common stock. Number of shares and per share amounts have
been restated as though the transaction occurred on December 6, 1993
(Inception).
Following these actions and on January 28, 1998, the Wagg Board of
Directors voted to approve a plan and agreement of reorganization between
Wagg and AEI Nevada. Under the terms of the reorganization, each
outstanding share of Wagg's common stock was exchanged for one share of
AEI Nevada common stock and all of the assets of AEI Nevada were
transferred to Wagg. This resulted in AEI Nevada becoming a wholly-owned
subsidiary of Wagg. In conjunction with these actions, the shareholders
of Wagg approved an amendment to Wagg's Certificate of Incorporation to
change its name to Alternative Entertainment, Inc., a Delaware
Corporation ("AEI"). The reorganization has been accounted for as a
reverse acquisition with a public shell. Accordingly, the accompanying
consolidated financial statements have been presented as if AEI Nevada
had always been a part of Wagg.
During 1998 Wagg changed its name to AEI. On December 29, 1998, AEI
changed its name to BoysToys.com, Inc. (the "Company")
Activity for all periods consisted primarily of efforts devoted to
identifying suitable properties for acquisition, performing
administrative functions, and the initial construction of the Company's
first establishment located in San Francisco, California. Since planned
operating activities have not yet commenced, the financial statements are
those of a development stage company.
F-12
<PAGE>
BoysToys.com, Inc.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1997 and 1998,
for the Nine Months Ended September 30, 1998 and 1999 (unaudited),
and from December 6, 1993 (inception) through September 30, 1999 (unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
The Company's policy is to use the accrual method of accounting and to
prepare and present financial statements in accordance with generally
accepted accounting principles.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, Boys Toys Cabaret Restaurants, Inc.
and AEI Nevada. All significant intercompany transactions and balances
have been eliminated.
INTERIM FINANCIAL STATEMENTS
The accompanying balance sheet as of September 30, 1999 and the
statements of operations and cash flows for the nine month periods ended
September 30, 1998 and 1999, and from December 6, 1993 (inception)
through September 30, 1999, have not been audited. However, these
financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and with
the instructions to Form 10 of Regulation S-B. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
management's opinion, the accompanying financial statements reflect all
material adjustments (consisting only of normal recurring adjustments)
necessary for a fair statement of the results for the interim periods
presented. The results for the interim periods are not necessarily
indicative of the results which will be reported for the entire year.
FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheets for cash, bank
overdraft, accounts payable and accrued expenses approximate fair value
due to the immediate short-term maturity of these financial instruments.
The fair value of the Company's notes payable and convertible debt
approximates the carrying amount based on the current rates offered to
the Company for debt of the same remaining maturities with similar
collateral requirements.
F-13
<PAGE>
BoysToys.com, Inc.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1997 and 1998,
for the Nine Months Ended September 30, 1998 and 1999 (unaudited),
and from December 6, 1993 (inception) through September 30, 1999 (unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. The company is currently
capitalizing all leasehold improvements, equipment and fixtures
associated with the development of its first establishment located in San
Francisco, California. No depreciation or amortization has been recorded
because the Company is currently in the development stage and the assets
have not yet been placed into service. Equipment and fixtures will be
depreciated using the straight-line method over the estimated asset lives
ranging from 3 to 7 years. Leasehold improvements will be amortized using
the straight-line method over the shorter of the life of the improvements
or the length of the lease.
Leasehold improvements are primarily architectural, planning and
construction costs associated with construction of the facility.
Equipment and fixtures are primarily computer systems, furniture,
lighting, sound and video equipment.
The Company applies the provisions of Statement of Financial Accounting
Standards (SFAS) No. 34. Consequently, interest cost related to the
construction of the Company's first establishment is capitalized and will
be amortized consistent with the leasehold improvements. Capitalized
interest totaled $31,422, $31,422 and $233,070 as of December 31, 1997
and 1998, and September 30, 1999 (unaudited), respectively.
STOCK BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting
for Stock-Based Compensation." This statement allows entities to measure
compensation costs related to awards of stock-based compensation, using
either the fair value method or the intrinsic value method. The Company
has elected to account for stock-based compensation programs using the
intrinsic value method.
Companies that do not choose to adopt the expense recognition rules of
SFAS No. 123 will continue to apply the existing accounting rules
contained in Accounting Principles Board Opinion (APB) No. 25, but are
required to provide pro forma disclosures of the compensation expense
determined under the fair-value provisions of SFAS No. 123. APB No. 25
requires no recognition of compensation expense for most of the
stock-based compensation arrangements provided by the Company, namely,
broad-based employee stock purchase plans and option grants where the
exercise price is equal to the market price at the date of the grant. See
Note 7 for the proforma disclosures of the effect on net loss and net
loss per share.
F-14
<PAGE>
BoysToys.com, Inc.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1997 and 1998,
for the Nine Months Ended September 30, 1998 and 1999 (unaudited),
and from December 6, 1993 (inception) through September 30, 1999 (unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED ASSETS
In March 1995, the FASB issued SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," which requires impairment losses to be recorded on long-lived assets
used in operations when indicators of the impairment are present and the
undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. SFAS No. 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. No
impairment of long-lived assets has been recognized.
INCOME TAXES
The Company accounts for income taxes using the asset and liability
method. Under the asset and liability method, deferred income taxes are
recognized for the tax consequences of "temporary differences" by
applying enacted statutory tax rates applicable to future years to
differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities. Deferred tax assets are reduced
by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets will
not be realized.
BASIC LOSS PER SHARE
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share",
which specifies the computation, presentation and disclosure requirements
for earnings (loss) per share for entities with publicly held common
stock. SFAS No. 128 supercedes the provisions of APB No. 15, and requires
the presentation of basic earnings (loss) per share and diluted earnings
(loss) per share. The Company has adopted the provisions of SFAS No.
128 effective December 6, 1993 (Inception).
Basic net loss per share excludes dilution and is computed by dividing
net loss by the weighted average number of common shares outstanding
during the reported periods. Diluted net loss per share reflects the
potential dilution that could occur if stock options and other
commitments to issue common stock were exercised. During the years
ended December 31, 1997 and 1998, options to purchase zero and 120,000
common shares, respectively, were anti-dilutive and have been excluded
from the weighted average share computation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the 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.
F-15
<PAGE>
BoysToys.com, Inc.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1997 and 1998,
for the Nine Months Ended September 30, 1998 and 1999 (unaudited),
and from December 6, 1993 (inception) through September 30, 1999 (unaudited)
NOTE 3 - NOTE RECEIVABLE-OFFICER
A note receivable in the amount of $33,602, $35,515 and $37,073 is due
from an officer of the Company as of December 31, 1997 and 1998, and
September 30, 1999 (unaudited), respectively. This note bears interest at
5.85% and is due upon demand.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1997 and 1998, and September
30, 1999 (unaudited) consists of the following:
<TABLE>
<CAPTION>
December 31,
------------------------- September 30,
1997 1998 1999
---------- ---------- -------------
(Unaudited)
<S> <C> <C> <C>
Equipment and fixtures $ 2,175 $ - $ 171,745
Leasehold improvements:
Capitalized construction costs 506,928 506,928 1,973,578
Capitalized interest 31,422 31,422 233,070
---------- ---------- ----------
$ 540,525 $ 538,350 $2,378,393
========== ========== ==========
</TABLE>
NOTE 5 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
December 31,
------------------------- September 30,
1997 1998 1999
---------- ---------- -------------
(Unaudited)
<S> <C> <C> <C>
Accounts payable $ 625,614 $ 597,214 $ 606,652
Accrued expenses 17,317 24,490 16,317
---------- ---------- ----------
$ 642,931 $ 621,704 $ 622,969
========== ========== ==========
</TABLE>
During 1998, accounts payable of $162,484 and $90,000 were converted into
186,376 shares of common stock and options to purchase 60,000 shares of
common stock, respectively.
F-16
<PAGE>
BoysToys.com, Inc.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1997 and 1998,
for the Nine Months Ended September 30, 1998 and 1999 (unaudited),
and from December 6, 1993 (inception) through September 30, 1999 (unaudited)
NOTE 6 - NOTES PAYABLE
Notes payable as of December 31, 1997 and 1998, and September 30, 1999
(unaudited) consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------------ September 30,
1997 1998 1999
---------- ---------- -------------
(Unaudited)
<S> <C> <C> <C>
Secured promissory notes with issuance dates ranging from September 1995
to February 1999, with interest rates ranging from 8% to 12% per annum
The notes are due at the earlier of one year after the date of the note
or 60 days after the Company's common stock is traded on any securities
exchange or in any over-the-counter market. The notes and accrued
interest thereon are secured by Company common stock and note holders
have the option to convert their debt into Company common stock. These
notes were not paid at their maturity dates and are due upon demand. $1,070,528 $1,120,268 $295,580
Unsecured non-negotiable promissory notes dated September 1997, with an
interest rate of 12% computed on a daily basis. The notes, including
principal and interest, are due six months from the issuance date. These
notes were not paid at their maturity dates and are due upon demand. 60,000 60,000 -
Unsecured promissory notes with issuance dates ranging from May 1997 to
December 1997, with an interest rate of 12% per annum, with interest only
payable on a quarterly basis. These notes were not paid at their maturity
dates and are due upon demand. 50,000 50,000 50,000
F-17
<PAGE>
BoysToys.com, Inc.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1997 and 1998,
for the Nine Months Ended September 30, 1998 and 1999 (unaudited),
and from December 6, 1993 (inception) through September 30, 1999 (unaudited)
NOTE 6 - NOTES PAYABLE (CONTINUED)
December 31,
------------------------ September 30,
1997 1998 1999
---------- ---------- -------------
(Unaudited)
<S> <C> <C> <C>
Unsecured promissory note dated December 31, 1996, due ten business days
after demand for payment. Note is non-interest bearing. Note is due to
landlord of the Company's San Francisco facility for unpaid rent, late
payment fees and costs for the year ended December 31, 1996. 94,600 - -
Unsecured promissory notes dated in 1996 and 1997 due to related parties
upon demand, with an interest rate of 12% per annum. 22,400 25,400 25,400
---------- ---------- --------
$1,297,528 $1,255,668 $370,980
========== ========== ========
</TABLE>
Accrued interest related to notes payable totaled $175,509, $262,856 and
$108,233 as of December 31, 1997 and 1998, and September 30, 1999
(unaudited), respectively. During 1998 and the first nine months of 1999,
notes payable of $408,688 and $923,228 and accrued interest of $72,143
and $206,007, were converted into 350,388 and 923,000 shares of common
stock, respectively.
NOTE 7 - SHAREHOLDERS' EQUITY
STOCK OPTIONS ISSUED ON CONVERSION OF ACCOUNTS PAYABLE
During the year ended December 31, 1998, the Company issued options to
purchase 60,000 shares of common stock at an exercise price of $1 per
share, on the conversion of $90,000 of accounts payable. None of the
options had been exercised at year end and expire on December 31, 2000.
STOCK OPTION PLANS
The Company has approved two stock option plans that became effective
January 1, 1994, an Incentive Stock Option Plan and a Non-qualified
Stock Option Plan. Both plans are available to officers, directors and
key employees of the Company. Each plan allows for the purchase of up to
500,000 shares of common stock of the Company. See Note 12.
F-18
<PAGE>
BoysToys.com, Inc.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1997 and 1998,
for the Nine Months Ended September 30, 1998 and 1999 (unaudited),
and from December 6, 1993 (inception) through September 30, 1999 (unaudited)
NOTE 7 - SHAREHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLANS (CONTINUED)
During the year ended December 31, 1998, the Company issued 60,000
options to a director at an exercise price of $0.50 per share under the
non-qualified stock option plan. During the nine months ended September
30, 1999 (unaudited), 1,950,000 options were granted to officers of the
Company as a compensation award (the "Compensation Options"). The
Compensation Options were immediately exercisable for $0.25 per share
and were granted at less than the quoted market price of the stock on
the date of grant. The Company has elected to account for incentive
grants and grants under its Plan following APB No. 25 and related
interpretations. Accordingly, the Company recorded $30,000 and
$3,042,000 as compensation expense for the year ended December 31, 1998
and the nine months ended September 30, 1999 (unaudited), respectively,
with a corresponding credit to additional paid in capital.
The Company has adopted the disclosure provisions of SFAS No. 123
effective January 1, 1997. Under SFAS No. 123, the fair value of each
option granted is estimated on the measurement date utilizing the then
current fair value of the underlying shares, as estimated by management,
less the exercise price discounted over the average expected life of the
options of 10 years, with an average risk free interest rate of 5%,
price volatility of .1 and no dividends. Had compensation cost for all
awards been determined based on the fair value method as prescribed by
SFAS No.123, reported net (loss) and net (loss) per common share would
have been as follows:
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
Net (loss):
As reported $(976,390)
Pro forma $(988,082)
Basic and diluted net (loss) per share:
As reported $ (0.41)
Pro forma $ (0.41)
</TABLE>
F-19
<PAGE>
BoysToys.com, Inc.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1997 and 1998,
for the Nine Months Ended September 30, 1998 and 1999 (unaudited),
and from December 6, 1993 (inception) through September 30, 1999 (unaudited)
NOTE 7 - SHAREHOLDERS' EQUITY (CONTINUED)
A summary of the activity of the stock options for the year ended
December 31, 1998 is as follows:
<TABLE>
<CAPTION>
Year ended
December 31, 1998
----------------------
Weighted
Average
Exercise
Shares Price
----------------------
<S> <C> <C>
Outstanding at beginning of period - $ -
Granted 120,000 0.75
Forfeited - -
Expired - -
----------------------
Outstanding at end of period 120,000 $ 0.75
======================
Exercisable at end of period 120,000 $ 0.75
======================
Weighted-average fair value of options
granted during the period $ 1.10
=========
Weighted-average remaining contractual life 10 years
=========
</TABLE>
NOTE 8 - INTEREST EXPENSE
<TABLE>
<CAPTION>
Nine months ended
Years ended December 31, September 30, December 6, 1993
---------------------------- ---------------------------- (Inception) through
1997 1998 1998 1999 September 30, 1999
----------- ----------- ----------- ----------- -------------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Interest expense incurred $ 146,949 $ 139,098 $ 121,067 $ 661,673 $ 1,015,430
Less: Capitalization interest - - - (201,648) (233,070)
----------- ----------- ----------- ----------- -----------
Net interest expense $ 146,949 $ 139,098 $ 121,067 $ 460,025 $ 782,360
=========== =========== =========== =========== ===========
</TABLE>
NOTE 9 - INCOME TAXES
Provision for income taxes is summarized as follows:
<TABLE>
<CAPTION>
Nine months ended
Years ended December 31, September 30, December 6, 1993
---------------------------- ---------------------------- (Inception) through
1997 1998 1998 1999 September 30, 1999
----------- ----------- ----------- ----------- -------------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Current income taxes $ (800) $ (800) $ (600) $ (600) $ (4,600)
Deferred income taxes - - - - -
----------- ----------- ----------- ----------- -----------
Provision for income taxes $ (800) $ (800) $ (600) $ (600) $ (4,600)
=========== =========== =========== =========== ===========
</TABLE>
F-20
<PAGE>
BoysToys.com, Inc.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1997 and 1998,
for the Nine Months Ended September 30, 1998 and 1999 (unaudited),
and from December 6, 1993 (inception) through September 30, 1999 (unaudited)
NOTE 9 - INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amount of assets and liabilities for
reporting and the amounts used for income tax purposes. The tax effects
of items comprising the Company's net deferred tax assets are as follows:
<TABLE>
<CAPTION>
December 31, September 30,
----------------------------- -------------
1997 1998 1999
----------- ----------- -------------
(Unaudited)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 657,000 $ 1,008,000 $ 2,659,000
Other - 12,000 12,000
----------- ----------- -----------
Gross deferred tax assets 657,000 1,020,000 2,671,000
Valuation allowance (657,000) (1,020,000) (2,671,000)
----------- ----------- -----------
Net deferred tax assets $ - $ - $ -
=========== =========== ===========
</TABLE>
Realization of deferred tax assets is dependant upon sufficient future
taxable income during the period that deductible temporary differences
and carryforward are expected to be available to reduce taxable income.
As the achievement of required future taxable income is uncertain, the
Company recorded a valuation allowance. The valuation allowance
increased by $363,000 and $140,000 from 1997and 1996 respectively.
As of December 31, 1998, the Company has net operating loss carryforwards
for both federal and state income tax purposes of approximately
$2,500,000 which expire through 2018. Under federal and state laws, the
availability of the Company's net operating loss carryforward may be
limited if a cumulative change in ownership of more than 50% occurs
within any three year period. Management has not completed an analysis to
determine whether such a change has occurred.
Subsequent to year end, a cumulative change in ownership as described
above occurred and the availability of the Company's net operating
loss carryforward is limited to approximately $210,000 per year.
F-21
<PAGE>
BoysToys.com, Inc.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1997 and 1998,
for the Nine Months Ended September 30, 1998 and 1999 (unaudited),
and from December 6, 1993 (inception) through September 30, 1999 (unaudited)
NOTE 9 - INCOME TAXES (CONTINUED)
A reconciliation of the effective tax rates with the federal statutory
rate is as follows:
<TABLE>
<CAPTION>
Year ended Nine months ended
December 31, September 30,
----------------------------- -----------------------------
1997 1998 1998 1999
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Income tax expense (benefit)
at 35% statutory rate $ (175,500) $ (338,900) $ (181,100) $(1,452,000)
Change in valuation allowance 140,000 363,000 155,300 1,651,000
Nondeductible expenses 1,000 36,400 36,400 -
Adjustment to net operating
loss carryforwards 38,500 - - -
State income taxes, net (28,200) (55,400) (29,600) (240,400)
Other 25,000 (4,300) 19,600 42,000
----------- ----------- ----------- -----------
$ 800 $ 800 $ 600 $ 600
=========== =========== =========== ===========
</TABLE>
NOTE 10 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASE
In February 1995, the Company began leasing real property in San
Francisco, California which will be used to open its first night club
facility. The operating lease is for a period of ten years with two
renewal options, each for an additional five years. At December 31, 1998,
minimum annual rental commitments under this non-cancelable lease were as
follows:
<TABLE>
<CAPTION>
Year Ending
-----------
<S> <C>
1999 $ 94,800
2000 195,600
2001 195,600
2002 201,600
2003 201,600
Thereafter 128,400
------------
$ 1,017,600
============
</TABLE>
Unpaid rent totaling $60,000 has been included in accrued expenses as of
December 31, 1997.
Rent expense for the years ended December 31, 1997 and 1998 and for the
nine months ended September 30, 1998 and 1999 (unaudited) was $157,026,
$180,707, $135,350 and $150,541, respectively.
BARTER CREDITS
On February 18, 1998, the Company entered into an agreement to purchase
$530,000 of Barter Credits via the future issuance of 100,000 shares of
common stock of the Company. The Barter Credits entitle the Company to
receive goods and services with a fair value estimated at $530,000 in
excess of cash payments made. Management will value the Barter Credits
at the fair value of the Company's common stock on the date of issuance.
As the Company utilizes the Barter Credits, it will record an increase
in additional paid-in capital for the excess of the fair value of the
goods and/or services received over cash payments made plus the pro-rata
portion of the available Barter Credits utilized to the fair value of the
Barter Credits recorded by the Company. The shares to be issued are
subject to restrictions on their transferability of up to two years. The
Barter Credits expire sixty months from February 18, 1998, unless the
Company has used at least $100,000 of the Barter Credits during this
period, which will extend the remaining Barter Credits through February
18, 2008.
F-22
<PAGE>
BoysToys.com, Inc.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1997 and 1998,
for the Nine Months Ended September 30, 1998 and 1999 (unaudited),
and from December 6, 1993 (inception) through September 30, 1999 (unaudited)
NOTE 11 - GOING CONCERN
As shown in the accompanying financial statements the Company has
incurred a deficit of $501,567 and $976,390 for the years ended December
31, 1997 and 1998, respectively, and has incurred a deficit totaling
$7,474,450 since its inception in 1993. Additionally, the Company's
current liabilities exceeded its current assets by $1,925,762 as of
September 30, 1999 (unaudited). The Company has been unable to meet its
loan obligations as they became due. (See Note 6). The ability of the
Company to continue as a going concern is dependent on the significant
generation of revenue from the Company's facility in San Francisco,
California. The financial statements do not include any adjustments that
might be necessary if the Company is unable to continue as a going
concern.
NOTE 12 - SUBSEQUENT EVENTS
CONVERTIBLE DEBT
During 1999 the Company obtained an unsecured convertible promissory note
which is not to exceed $1,000,000. Interest accrues at 12% per year,
payable quarterly. Principal, and any accrued interest, is payable on or
before January 23, 2001. The Company has the right to accelerate the
maturity date and prepay all or any portion of the principal at 125% of
the then outstanding principal amount, plus all accrued interest. The
noteholder has the right, upon thirty days notice to the Company, to
convert all or any portion of the then outstanding principal amount,
plus all accrued interest, into shares of the Company's common stock at
the conversion price of $0.40 per share. Consequently there is no
amortization period and the Company has recognized the value of this
conversion feature by recording additional interest expense based on the
difference between the quoted stock price and the conversion price for
each draw on the line and for each monthly interest accrual. For the nine
months ended September 30, 1999 (unaudited) the Company recognized
$587,864 of interest expense related to this conversion feature.
PRIVATE PLACEMENT
During 1999, the Company completed a private placement of 909,879 shares
of common stock issued under Rule 504 of Regulation D promulgated under
the Securities Act of 1933. Total net proceeds from the offering were
$909,879.
CERTIFICATE OF FINAL COMPLETION
During October 1999 the Company completed its 15,000 square foot
nightclub facility in San Francisco, California and received its
certificate of final completion. The Company anticipates opening the
facility in December 1999.
DEBT CONVERSION
Of the $1,120,268 of outstanding notes payable at December 31, 1998,
$824,688 was converted into equity during the nine months ended September
30, 1999.
F-23
<PAGE>
BoysToys.com, Inc.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1997 and 1998,
for the Nine Months Ended September 30, 1998 and 1999 (unaudited),
and from December 6, 1993 (inception) through September 30, 1999 (unaudited)
NOTE 12 - SUBSEQUENT EVENTS (CONTINUED)
STOCK OPTION PLAN
During February 1999, the Company adopted the BoysToys.com Inc. Stock
Option Plan (the "Plan"). The Plan is available to the Company's
officers, directors, and employees. The Plan allows for the grant of up
to 2,500,000 shares of the Company's common stock at exercise prices and
other terms as determined by the Company's Board of Directors. As of
September 30, 1999 the Company has granted 1,950,000 shares (unaudited)
of common stock under this plan.
NOTE 13 - RESTATEMENT
The financial statements at December 31, 1998 have been restated to
eliminate the Barter Credit asset and the related issuable 100,000
shares of common stock. The result of this restatement decreased total
assets by $100,000, increased total shareholders' deficit by $100,000
and had no effect on the net loss or net loss per share for the year
ended December 31, 1998.
F-24
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Alternative Entertainment, Inc.
We have audited the accompanying consolidated balance sheets of Alternative
Entertainment, Inc. (Note A) as of December 31, 1995 and 1994, and the related
consolidated statements of operations, changes in shareholders' equity, and cash
flows for the years then ended, and cumulative totals for development stage
operations from December 6, 1993 (date of inception) through December 31, 1995.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Alternative Entertainment, Inc. as of December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for the years then
ended and cumulative totals for development stage operations from December 6,
1993 (date of inception) through December 31, 1995 in conformity with generally
accepted accounting principles.
HARLAN & BOETTGER
San Diego, California
January 22, 1996
F-25
<PAGE>
ALTERNATIVE ENTERTAINMENT, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31,1995 AND 1994
<TABLE>
<CAPTION>
ASSETS
1995 1994
--------- ---------
<S> <C> <C>
CURRENT ASSETS
Cash ......................................................................... $ 52,006 $ --
Prepaids and other ........................................................... 3,597 15,375
--------- ---------
TOTAL CURRENT ASSETS .............................................. 55,603 15,375
PROPERTY AND EQUIPMENT, net (Note C) ......................................... 133,910 50,877
DEFERRED OFFERING COSTS ...................................................... 57,800 28,592
OTHER ASSETS
Deposits .................................................................... 34,500 24,500
Organization costs, net ..................................................... 3,525 4,570
--------- ---------
TOTAL OTHER ASSETS ................................................ 38,025 29,070
--------- ---------
$ 285,338 $ 123,914
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses ....................................... $ 154,431 $ 37,618
Notes payable (Note D) ...................................................... 235,000 --
--------- ---------
TOTAL CURRENT LIABILITIES ......................................... 389,431 37,618
COMMITMENT (Note G)
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock, $0.01 par value (40,000,000 shares authorized, 5,660,062 and
5,489,777 shares issued and outstanding, respectively) .................. 56,601 54,898
Additional paid-in capital .................................................. 787,699 202,117
Preferred stock, $0.01 par value (10,000,000 shares authorized, none issued
and outstanding) ........................................................ (948,393) (170,719)
--------- ---------
Deficit accumulated during the development stage ............................ (104,093) 86,296
--------- ---------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) .............................. $ 285,338 $ 123,914
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
ALTERNATIVE ENTERTAINMENT, INC.
(A DEVELOPMENT STAGE COMPANY)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 AND
CUMULATIVE TOTALS FOR DEVELOPMENT STAGE OPERATIONS FROM
DECEMBER 6, 1993 (DATE OF INCEPTION) TO DECEMBER 31, 1995
DEVELOPMENT
STAGE ENDED
DECEMBER 31 DECEMBER 31, DECEMBER 31,
1995 1994 1995
----------- ----------- ------------
(NOTE B)
<S> <C> <C> <C>
REVENUE ................................................. $ -- $ -- $ --
COST OF REVENUES ........................................ -- -- --
----------- ----------- ------------
GROSS MARGIN ........................................... -- -- --
----------- ----------- ------------
OPERATING EXPENSES
Director fee ........................................... 220,000 -- 220,000
Rent expense ........................................... 102,858 15,059 117,917
Travel and entertainment ............................... 56,713 60,715 117,428
Professional fees ...................................... 257,651 28,175 285,826
Officers salary ........................................ 50,000 25,000 75,000
Auto expense ........................................... 2,300 12,632 14,932
Taxes .................................................. 4,576 4,659 9,235
Employee benefits ...................................... 2,644 3,045 5,689
Promotional expense .................................... 16,490 1,040 17,530
Insurance .............................................. 10,483 2,092 12,575
Amortization ........................................... 1,045 631 1,698
Commissions ............................................ 3,500 -- 3,500
Office expenses ........................................ 17,142 16,151 33,835
Interest expense ....................................... 2,768 156 2,924
Offering costs (Note B) ................................ 28,704 -- 28,704
----------- ----------- ------------
TOTAL OPERATING EXPENSES .......................... 776,874 169,355 946,793
----------- ----------- ------------
LOSS BEFORE INCOME TAXES ................................ (776,874) (169,355) (946,793)
Provision for income taxes (Note E)..................... 800 800 1,600
----------- ----------- ------------
NET LOSS ................................................ $ (777,674) $ (170,155) $ (948,393)
=========== =========== =============
LOSS PER COMMON SHARE (Note B) .......................... $ (0.13) $ (0.05) $ (0.22)
=========== =========== =============
AVERAGE COMMON SHARES OUTSTANDING ....................... 5,950,984 3,410,399 4,380,487
=========== =========== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE>
ALTERNATIVE ENTERTAINMENT, INC.
(A DEVELOPMENT STAGE COMPANY)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 AND STATEMENT OF
CHANGES IN SHAREHOLDERS' EQUITY FOR THE PERIOD FROM
DECEMBER 6, 1993 (DATE OF INCEPTION) TO DECEMBER 31, 1995
COMMON STOCK
COMMON STOCK ADDITIONAL SUBSCRIBED DEFICIT ACCUMULATED SHAREHOLDERS'
------------------ PAID-IN ---------------- DURING THE EQUITY
SHARES AMOUNT CAPITAL SHARES AMOUNT DEVELOPMENT STAGE (DEFICIT)
--------- -------- ---------- ------- -------- ------------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 6, 1993 ......... - $ - $ - - $ - $ - $ -
Issuance of common stock ........ 150,000 1,500 - - - - 1,500
Sale of stock to common stock
subscribers upon full payment of
subscription during December,
1993 .......................... 35,450 355 - - - - 355
Common stock subscribed, net
$50,781 of subscriptions
receivable .................... - - - 5,090,000 119 - 119
Net loss incurred during
development stage operations .. - - - - - (564) (564)
--------- -------- ---------- --------- ---- --------- ----------
BALANCE, DECEMBER 31, 1993 ........ 185,450 1,855 - 5,090,000 119 (564) 1,410
Sale of stock to common stock
subscribers upon full payment of
subscription during January,
1994 ........................... 90,000 900 - (90,000) (119) - 781
Sale of stock to common stock
subscribers upon full payment of
subscription during June, 1994.. 5,000,000 50,000 - (5,000,000) - - 50,000
Issuance of common stock in
private placement offering ...... 214,327 2,143 212,184 - - - 214,327
Offering costs associated with
private placement offering ...... - - (10,067) - - - (10,067)
Net loss incurred during
development stage operations ..... - - - - - (170,155) (170,155)
--------- -------- ---------- --------- ---- --------- ----------
BALANCE, DECEMBER 31, 1994 ..... 5,489,777 54,898 202,117 - - (170,719) 86,296
Issuance of common stock in
private placement offering ..... 170,285 1,703 168,582 - - - 170,285
Return and cancellation of
common stock ...... (417,000) (4,170) 4,170 - - - -
Issuance of common stock for
services . 417,000 4,170 412,830 - - - 417,000
Net loss incurred during
development stage operations .. - - - - - (777,674) (777,674)
--------- -------- ---------- --------- ---- --------- ----------
BALANCE, DECEMBER 31, 1995 ...... 5,660,062 $56,601 $787,699 - $ $(948,393) $ (104,093)
========= ======== ========= ========= ==== ========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
ALTERNATIVE ENTERTAINMENT, INC.
(A DEVELOPMENT STAGE COMPANY)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
AND CUMULATIVE TOTALS FOR DEVELOPMENT STAGE
OPERATIONS FROM DECEMBER 6, 1993 (DATE OF
INCEPTION) TO DECEMBER 31, 1995
DEVELOPMENT
STAGE ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1994 1995
------------ ------------ ------------
(NOTE B)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ............................................................ $ (777,674) $ (170,155) $ (948,393)
Adjustments to reconcile net loss to net cash
used in operating activities:
Issuance of common stock for services ............................. 417,000 - 417,000
Amortization ...................................................... 1,045 631 1,698
Changes in assets and liabilities:
Decrease (increase) in prepaids and other ....................... 11,778 (15,375) (3,597)
Increase in deferred offering costs ............................. (29,208) (25,592) (57,800)
Increase in organization expenses ............................... (3,888) (5,223)
Increase in deposits ............................................ (10,000) (24,500) (34,500)
Increase in accounts payable and accrued expenses ............... 116,813 34,618 154,431
------------ ------------ ------------
NET CASH USED IN OPERATING ACTIVITIES ................................ (270,246) (204,261) (476,384)
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property and equipment ............................. (83,033) (50,877) (133,910)
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES ................................ (83,033) (50,877) (133,910)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable ......................................... 246,600 - 246,600
Payments on notes payable ........................................... (11,600) - (11,600)
Proceeds from subscriptions receivable .............................. - 50,781 51,255
Proceeds from issuance of common stock .............................. - - 1,500
Proceeds from issuance of common stock in private placement
offering, net of offering costs ................................... 170,285 204,260 374,545
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES ............................ 405,285 255,041 662,300
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH ...................................... 52,006 (97) 52,006
CASH AT BEGINNING OF PERIOD .......................................... - 97 -
------------ ------------ ------------
CASH AT END OF PERIOD ................................................ $ 52,006 $ - $ 52,006
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
ALTERNATIVE ENTERTAINMENT, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. DEVELOPMENT STAGE OPERATIONS:
Alternative Entertainment, Inc. (the "Company") was incorporated in the
State of Nevada on December 6, 1993 to engage in the business of developing,
owning and operating nightclubs providing exotic dance entertainment combined
with a full service restaurant, bar and business meeting facilities. On
November 10, 1994, the Company formed Boys Toys Cabaret Restaurants, Inc., a
California corporation, which plans to operate its first such nightclub
facility in San Francisco, California. Boys Toys Cabaret Restaurants, Inc. is a
wholly owned subsidiary of the Company.
The consolidated financial statements reflect activity for cumulative
totals for development stage operations from December 6, 1993 (date of
inception) through December 31, 1995 and for the years ended December 31, 1994
and 1995. Activity for all periods consisted primarily of efforts devoted to
identifying suitable properties for acquisition, carrying on administrative
functions, and the initial construction of the Company's first establishment
located in San Francisco, California. Since planned operating activities have
not yet commenced, the financial statements are those of a development stage
company.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF ACCOUNTING
The Company's policy is to use the accrual method of accounting and to
prepare and Dresent financial statements which conlorm to generally accepted
accounting principles. 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 reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from these estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements for the years ended December 31,
1995 and 1994 and cumulative totals for development stage operations from
December 6, 1993 (date of inception) through December 31, 1995, include the
accounts of the Company and its wholly owned subsidiary, Boys Toys Cabaret
Restaurants, Inc. All significant intercompany transactions and balances have
been eliminated.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated on
the straight line method over the estimated useful lives of the assets.
The Company is currently capitalizing all costs associated with the
leasehold improvements for its first establishment located in San Francisco,
California. No depreciation or amortization has been recorded because the
Company is currently in the development stage and the assets have not yet been
placed into operation. Amortization of leasehold improvements will be amortized
over the shorter of the life of the improvements or the length of the lease and
will begin when the facility is placed in service.
Interest costs related to the construction of the night club facility in
San Francisco, California is being capitalized until the facility is complete
and ready for operation. During 1995, the Company incurred and capitalized
total interest costs of $560 related to this facility. These costs are included
and will be amortized as part of leasehold improvements.
All. costs associated with the leasehold improvements incurred to date
have been primarily architectural, planning and permitting expenses associated
with preliminary construction of the facility.
F-30
<PAGE>
ALTERNATIVE ENTERTAINMENT, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DEFERRED OFFERING COSTS
Deferred offering costs include the costs associated with the proposed
initial public offering. The costs related to the initial public offering will
be capitalized and netted against the amount received from the public offering.
All deferred offering costs will be expensed in the event the offering is not
consummated. The deferred offering costs as of December 31, 1995 include
specific incremental out-of-pocket costs associated with the current public
offering effort. Deferred offering costs of $28,704, consisting primarily of
deferred offering costs capitalized as of December 31, 1994, were expensed in
1995 since these costs were greater than nine months old.
INCOME TAXES
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consists of taxes currently due plus deferred
taxes related primarily to differences between the basis of various assets for
financial and income tax reporting. The deferred tax assets and liabilities
represent the future tax return consequences of those differences, which will
either be taxable or deductible when the assets and liabilities are recovered
or settled. Deferred taxes also are recognized for operating losses that are
available to offset future taxable income and tax credits that are available to
offset future federal income taxes.
ORGANIZATION COSTS
Organization costs are shown net of accumulated amortization of $1,045 and
$631, for the years ended December 31, 1995 and 1994, respectively.
Organization costs are being amortized over five years, commencing from the day
they are incurred.
NET LOSS PER COMMON SHARE
Net loss per common share is computed by dividing net loss by the weighted
average number of common shares outstanding during the period. For the years
ended December 31, 1995 and 1994, the Company's common stock equivalents
consist of all warrants granted at prices below the expected offering price in
the previous twelve months which are considered to be outstanding for all
periods presented.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
current 1995 financial statement presentation.
C. PROPERTY AND EQUIPMENT:
Property and equipment at December 31, 1995 and 1994 are summarized as
follows:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Equipment and fixtures ..............................................$ 843 $ -
Leasehold improvements:
Capitalized construction costs .................................... 132,507 50,877
Capitalized interest .............................................. 560
--------- ---------
Total ........................................................... 133,910 50,877
Less accumulated depreciation - -
Net property and equipment $ 133,910 $ 50,877
========= =========
</TABLE>
F-31
<PAGE>
ALTERNATIVE ENTERTAINMENT, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
D. NOTES PAYABLE:
Notes payable consist of six promissory notes totaling $235,000 each
secured by a pledge agreement from an officer of the Company for an equal
amount of shares of common stock owned personally by that officer. The notes
bears interest at 10% and are due at various dates through December, 1996 or
sixty (60) days subsequent to the date that the Company's common stock is first
traded on a public market.
E. INCOME TAXES:
The provision for income taxes for the years ended December 31, 1995 and
1994 consists solely of the $800 minimum California franchise tax for Boys Toys
of California, Inc. Cumulative totals. for the development stage operations
from December 3, 1993 (date of inception) through December 31, 1995 are shown
for comparative purposes.
Provisions for income taxes is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DEVELOPMENT
---------------------------- STAGE ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
Current income taxes ................ $800 $800 $1,600
Deferred income taxes ............... - - -
------------ ------------ ------------
Provision for income taxes......... $800 $800 $1,600
============ ============ ============
</TABLE>
The Company's total deferred tax assets as of December 31, 1995 and 1994 are as
follows:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Deferred tax assets ..................................... $ 173,523 $ 35,123
Valuation allowance ..................................... (173,523) (35,123)
---------- ----------
Net deferred tax assets ............................... $ - $ -
========== ==========
</TABLE>
The net change in valuation allowance was an increase of $138,400, and was
related to the Company's net operating loss for the year ended December 31,
1995.
F. SHAREHOLDERS' EQUITY:
SUBSCRIPTIONS RECEIVABLE
During 1993, the Company sold 5,090,000 shares of common stock on a
subscription basis to two directors of the Company. In connection with the
sale, the Company provided the subscribers non-interest bearine loans which
were paid in full durin2 the vear ended December 31, 1994. Accordingly, the
subscribed stock is reflected in the accompanying financial statements as a
separate component of shareholders' equity, net of any subscriptions
receivable. All subscribed stock was transferred to common stock as of December
31, 1994 since full payment was received and the common stock has been issued.
STOCK OPTION PLAN
The Company has approved two stock option plans that became effective
January 1, 1994, an Incentive Stock Option Plan and a Non-Qualified Stock
Option Plan. Both plans are available to officers, directors and key employees
of the Company. Each plan allows for the purchase of up to 500,000 shares of
common stock of the Company. As of December 31, 1995 and 1994, no options had
been granted or are outstanding under either plan.
F-32
<PAGE>
ALTERNATIVE ENTERTAINMENT, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WARRANTS
Warrants outstanding consist of non-redeemable warrants to purchase
384,612 and 214,327 shares of common stock as of December 31, 1995 and 1994,
respectively (issued as part of the private placement offering). Warrants
outstanding are exercisable at $2.00 per share at any time up to December 31,
1997, or the closing of the sale and issuance of any securities of the Company.
No warrants have been exercised.
PRIVATE PLACEMENT
During August, 1994, the Company began a private placement offering to
sell shares of common stock which consisted of a "unit" of one share of common
stock and one non-redeemable warrant, at a price of $ 1.00 per unit. The
Company sold 384,612 units for total proceeds of $374,545, net of private
offering costs of $10,067.
G. COMMITMENT:
In February, 1995, the Company began leasing real property in San
Francisco, California. The property will be used to open the first night club.
The operating lease is for a period of ten years with two renewal options, each
for an additional five years. Rental expense under the lease was $88,000 for
the year ended December 31, 1995. The Company incurred no rental expense for
the years ended December 31, 1994 and 1993 under the lease agreement. At
December 31, 1995, minimum annual rental commitments under noncancelable leases
were as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1996 ............................ 138,000
1997 ............................ 138,000
1998 ............................ 144,000
1999 ............................ 144,000
2000 ............................ 144,000
Thereafter ...................... 642,000
-----------
Total ........................... $ 1,350,000
===========
</TABLE>
Future minimum rental commitments are subject to inflationary increases,
based upon the Consumer Price Index.
H. SUPPLEMENTAL CASH FLOW INFORMATION:
Supplemental disclosures of cash flow information for the years ended
December 31, 1995 and 1994 and cumulative totals for the development stage
period from December 6, 1993 (date of inception) to December 31, 1995 are
summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DEVELOPMENT
---------------------------- STAGE ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash paid for interest and income taxes:
Interest ............................... $558 $ 156 $ 714
Income taxes ........................... $800 $1,600 $2,400
</TABLE>
Additionally, during 1995, the Company issued 417,000 shares of common
stock to an individual for services consisting of $220,000 related to director
fees and $197,000 for legal services.
F-33
<PAGE>
ALTERNATIVE ENTERTAINMENT, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
I. SUBSEQUENT EVENT:
The Company has filed a Registration Statement on Form SB-2 with the
Securities and Exchange Commission to offer up to 1,600,000 shares of common
stock and 1,600,000 redeemable common stock purchase warrants to the general
public. Each warrant entitles the registered holder to purchase, at any time
over a three year period commencing on the date of the Prospectus, one share of
common stock at a price of $3.00 per share. Commencing from the date of the
Prospectus, the warrants are subject to redemption at $0.05 per warrant on
thirty days written notice if the closing bid price of the common stock equals
or exceeds a price of $6.00 for a period of ten consecutive trading days.
In connection with the offering, the Company has agreed to sell to a
participating dealer at the closing of the proposed public offering, five year
warrants to purchase up to 160,000 shares of common stock and 160,000
redeemable common stock purchase warrants for a purchase price of $4.35 per
share of common stock and $0.18 per redeemable common stock purchase warrant.
The exercise price of these warrants is equal to 145% of the initial public
offering price. The warrants may be exercised for all or any lesser number of
shares of the common stock covered by the warrants during a four year period
after completion of the offering.
F-34
<PAGE>
ALTERNATIVE ENTERTAINMENT, INC.
(A DEVELOPMENT STAGE COMPANY)
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
FEBRUARY 29, 1996
(UNAUDITED)
ASSETS
<S> <C>
CURRENT ASSETS
Prepaid expenses ................................................................. $ 2,397
------------
PROPERTY AND EQUIPMENT ............................................................ 243,576
------------
DEFERRED OFFERING COSTS ........................................................... 97,106
------------
OTHER ASSETS
Deposits ......................................................................... 35,000
Organization costs, net .......................................................... 3,351
------------
TOTAL OTHER ASSETS .......................................................... 38,351
------------
TOTAL ASSETS ...................................................................... $ 381,430
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable, accrued expenses and bank overdraft ............................ $ 295,092
Notes payable .................................................................... 285,000
------------
TOTAL LIABILITIES ................................................................. 580,092
------------
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value (40,000,000 shares authorized,
5,660,062 shares issued and outstanding) ....................................... 56,601
Additional paid-in capital ....................................................... 787,699
Preferred stock, $0.01 par value (10,000,000 shares authorized,
none issued and outstanding) ...........................
Deficit accumulated during the development stage ................................. (1,042,962)
------------
Total stockholders' equity (deficit) ..................................... (198,662)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY. ....................................... $ 381,430
============
</TABLE>
F-35
<PAGE>
ALTERNATIVE ENTERTAINMENT, INC.
(A DEVELOPMENT STAGE COMPANY)
<TABLE>
STATEMENT OF OPERATIONS
FOR THE TWO MONTHS ENDED FEBRUARY 29, 1996
(UNAUDITED)
<S> <C>
REVENUE........................................................... $ --
OPERATING EXPENSES
Rent expense .................................................... 24,701
Travel and entertainment ........................................ 16,227
Officers salary ................................................. 12,015
Consulting expense .............................................. 7,500
Insurance ....................................................... 3,670
Telephone ....................................................... 730
Legal and accounting ............................................ 15,000
Payroll taxes ................................................... 1,220
Property taxes .................................................. 9,805
Business development and promotion .............................. 500
Penalties ....................................................... 82
Utilities ....................................................... 400
Amortization .................................................... 173
Office expenses ................................................. 456
Outside labor ................................................... 2,090
----------
TOTAL OPERATING EXPENSES .................................... 94,569
----------
NET LOSS ......................................................... $ (94,569)
==========
LOSS PER COMMON SHARE ............................................ $ (0.02)
==========
AVERAGE COMMON SHARES OUTSTANDING ................................ 5,660,062
==========
</TABLE>
F-36
<PAGE>
ALTERNATIVE ENTERTAINMENT, INC.
(A DEVELOPMENT STAGE COMPANY)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE TWO MONTHS ENDED FEBRUARY 29, 1996
(UNAUDITED)
ADDITIONAL SHAREHOLDER
COMMON STOCK PAID IN ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
--------- ------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 ........... 5,660,062 $56,601 $787,699 $ (948,393) $(104,093)
Issuance of Common Stock in 1996 ..... -- -- -- -- --
Net loss incurred in 1996 ............ -- -- -- (94,569) (94,569)
--------- ------- ---------- ----------- -----------
5,660,062 $56,601 $787,699 $(1,042,962) $(198,662)
========= ======= ========== =========== ===========
</TABLE>
F-37
<PAGE>
ALTERNATIVE ENTERTAINMENT, INC.
(A DEVELOPMENT STAGE COMPANY)
<TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE TWO MONTHS ENDED FEBRUARY 29, 1996
(UNAUDITED)
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss ................................................... $ (94,569)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Amortization ........................................... 173
Decrease (increase) in assets:
Decrease prepaids ...................................... 1,200
Increase deferred offering costs ....................... (39,306)
Increase in deposits ................................... (500)
Increase (decrease) in liabilities:
Increase in accounts payable ........................... 123,725
Increase in accrued liabilities ........................ 2,783
---------
Net cash used by operating activities ....................... (6,494)
---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures for property and equipment ............ (109,666)
---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable ................................ 50,000
---------
Net decrease in cash ........................................ (66,160)
Cash at beginning of the period ............................. 52,006
---------
Cash at end of the period ................................... $ (14,154)
=========
</TABLE>
F-38
<PAGE>
Exhibit 23.3
[LOGO] [LETTERHEAD]
April 10, 2000
Office of the Chief Accountant
SECPS Letter File
Securities and Exchange Commission
Mail Stop 9-5
450 Fifth Street, N.W.
Washington, D.C. 20549
Gentlemen:
BoysToys.com, Inc. (formerly Alternative Entertainment, Inc.) engaged Sporl &
Welker as their independent auditor on July 21, 1998. Sporl and Welker merged
into Pannell Kerr Forster effective January 1, 1999. We have read Item 3.
"Changes In and Disagreements with Accountants" on Form 10-SB Amendment No. 2 of
BoysToys.com, Inc. and we agree with the statements contained therein as they
relate to Sporl & Welker and to Pannell Kerr Forster.
Very truly yours,
/s/ Pannell Kerr Forster
PANNELL KERR FORSTER
Certified Public Accountants
A Professional Corporation
<PAGE>
EXHIBIT 23.4
[LETTERHEAD]
March 18, 2000
The Board of Directors
BoysToys.com, Inc.
412 Broadway
San Francisco, CA 94133
RE: ENGAGEMENT AS INDEPENDENT AUDITORS
Gentlemen:
I hereby accept engagement as the independent accountant for BoysToys.com, Inc.,
a Delaware corporation (the "Company"), this 18th day of March 2000.
I acknowledge that prior to my engagement of March 18, 2000, neither the
Company nor the Company's prior auditor, Pannell Kerr Forster, consulted me
in connection with any accounting matters or the application of any
accounting principles to a specific or contemplated transaction or the type
of audit opinion that might be rendered on the Company's financial
statements. Further, prior to the engagement, I did not render any written
or oral advice to the Company of any kind.
Sincerely,
/s/ Armando C. Ibarra
- --------------------------
ARMANDO C. IBARRA, CPA
