SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission file #: 33-87714
OLYMPIC ENTERTAINMENT GROUP, INC.
---------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada 88-0271810
--------------------------- ---------------------
(State or other jurisdiction (IRS Employer
of incorporation) Identification Number)
2755 E. Desert Inn Road, Suite 200, Las Vegas, NV 89121
---------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (702) 369-2588
--------------
Securities registered pursuant to Section 12(b) of the Act:
Common Stock $0.01 Par Value NONE
---------------------------- ----------------------
(Title of Class) (Name of Each Exchange
on Which Registered)
Securities registered pursuant to Section 12(g) of the Act:
NONE
--------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. (1) Yes X No (2) Yes X No
--- --- --- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
-----
<PAGE>
At January 25, 1997 there were 2,938,681 shares of common stock outstanding. The
aggregate market value of the common stock held by non-affiliates of the
registrant (i.e., excluding shares held by executive officers, directors and
control persons as defined in rule 405) on that date was $1,309,801.
Documents incorporated by reference:
- ------------------------------------
Form S-8 dated July 26, 1996
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PART I
Item 1. Business
- ------- --------
(a) General Development of Business
-------------------------------
Olympic Entertainment Group, Inc. (the "Company") is a multimedia educational
company and was incorporated on May 21, 1987 in the State of Nevada. The Company
was originally formed to finance, produce co-produce and distribute motion
pictures and television shows and pursued various opportunities through 1993,
when the Company's management decided to focus upon the development of a cable
television network for the distribution of children's nonviolent television
programming. From 1993 through 1995 the Company developed this concept and in
1995, launched the Children's Cable Network. Management believes that the
Company's growth plan and experience of senior management are likely to enhance
shareholder value, long term growth and expansion.
(b) Financial Information About Industry Segments
---------------------------------------------
The Company's activities are in one segment of the entertainment industry --the
development of a children's cable television network.
(c) Narrative Description of Business
---------------------------------
The Company has created a children's educational division called Children's
Cable Network ("CCN" or the "Network"). The Company acquires, by purchase, and
licenses educational programming for the Children's Cable Network; specializing
in nonviolent, educational, informative and special interest preschool
programming, children's classics programs and G-rated children's motion
pictures.
All reference to the Company in the following discussion of the business
activities of the Company includes its children's educational division,
Children's Cable Network.
Children's Cable Network
CCN provides award-winning, nonviolent, educational, informative and special
interest children's programming and in the process of providing this
programming, creates business opportunities for individuals and syndication's
looking to get into the cable television broadcasting business.
The network's primary market is the 11,100 FCC cable system licenses in the
United States. The Company licenses its programming to Cable Affiliates to air
on their local cable systems. The Cable Affiliates obtain revenue through the
sale of commercial advertising time in the programs.
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Federal Legislation
The Federal Communications Act of 1984 requires cable operators to provide
channels for lease to the public in an attempt to enhance the diversity of
program choices available to cable subscribers. Generally, such allocation of
channels is referred to as "leased access." Section 612 of the Communications
Act of 1984 established a federal scheme through channel leasing to assure
access to cable systems by third parties unaffiliated with the cable operator.
Under the amendments to Section 612, cable operators were also permitted to
place programming from a qualified minority or educational programming source on
up to 33 percent of the cable system's designated leased access channels.
Additionally, the Cable Act of 1992 mandated that every cable system with more
than thirty-six channels and less than fifty-five activated channels must
designate 10 percent of their capacity to leased access. Systems with greater
than 55 activated channels must set aside 15 percent of their capacity to leased
access. In addition, the Federal Communications Act of 1984 provides individuals
and groups the opportunity to use the public, educational and government access
channels offered by the cable companies. Systems with fewer than 36 activated
channels are not required to make lease channel capacity available unless
otherwise required to do so by terms of the franchise in effect on December 29,
1994. The Cable Television Act of 1992 renewed government supervision of the
franchised cable television industry which was deregulated by the Cable Act of
1984. Both Acts are amendments to the Communications Act of 1934. The Cable
Television Act of 1992 ("1992 Act") authorized the FCC to implement rate and
service regulation for certain basic cable television services and to create
regulations that will increase competition to franchised cable operators. On
April 1, 1993, the FCC announced several features of the rules it planned to
implement in connection with the 1992 Act. Most of the announced rules concerned
rate regulation for franchised services as well as a temporary rate freeze and
rollback. In order to promote competition with franchised cable operators, the
FCC announced program access regulations as part of the Act. These provisions
essentially allow competitive cable operators to purchase television programming
at fair prices. Management believes that these provisions of the Act may result
in lower operating costs for the Company, however, there can be no guarantee
that revisions in said regulation will not materially affect the Company.
The cable television industry is subject to both regulatory restrictions
implemented primarily by the Federal Communications Commission, ("FCC") and also
legislation which affects communications/broadcast industries in general.
4
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The Children's Television Act of 1990 established new requirements including
that each broadcasting station must provide programs that serve the educational
and informational needs of young viewers. Accordingly, broadcasters must limit
the amount of advertising aired during children's programming and must provide
programs that meet the educational and informational needs of children.
Cable Affiliates
The Company licenses its programming to Cable Affiliates who cablecast this
programming on their local cable system through the purchase of time on a leased
access channel. The Company obtains Cable Affiliates through business
opportunity shows and seminars, direct mail and business opportunity
advertisements in national publications and on the Internet. There are currently
11,100 FCC cable system licenses located coast to coast where potential cable
affiliates can be licensed to cablecast the Company's programming. The Company
licenses only one Cable Affiliate in each cable system market. The Company
currently has active cable affiliates in approximately 20 markets across the
United States.
Employees
The Company currently has eighteen employees with twelve of those in the
corporate office in Las Vegas, Nevada and six in Burbank, California. None of
the Company's employees are represented by a labor union.
Competition
The Company's business is very competitive. The Company is in competition with
many cable companies none of which specialize in nonviolent, educational
programming. Many competitors exist which have greater financial resources
and/or more experience in the delivery of programming than the Company. The
Company competes with all other broadcasters of children's programming. On cable
television competitors include The Family Channel, The Learning Channel, PBS,
Nickelodeon, and The Disney Channel. The Company intends to offer programming
Monday through Friday, 6:00 AM to 12:00 Noon which is potentially more weekly
air time of nonviolent, educational programming than all of the other
competitors.
Programming
The programs consist of nonviolent, educational, informative and special
interest programming which teach positive character development, morality, and
introduction to numbers, letters and music. Each program is approximately 25
minutes in length, which leaves 5 minutes of time for the Cable Affiliate to
sell commercial advertisements, sponsorships, and/or create and produce locally
originated programming.
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The Company, through its own research, has located nearly every award-winning
children's series produced since 1950, many of which the Company plans to obtain
through direct acquisition or licensing. The programming for children includes
puppet shows, live action and animated characters, children's classic stories
and music that is designed to teach children in a fun and entertaining way.
Library
The library of programs, many of which are award-winning, focus on educational
value as well as character and morality development. To date, each series of
programs is aimed at the 1 1/2 to 6 year old audience assisting them in their
preparation for school. The Company owns outright or licenses under long term
leases each of the following programs.
CCN's Library Of Programming
The Shari Show
26 1/2 hour episodes
The Shari Show takes place in the TV station called Bearly
Broadcasting where all of the positions are manned by puppets. Shari
Lewis is the secretary to the station manager, Mr. Bearly. As they put
on the full range of typical shows at Bearly Broadcasting, human
interaction and value judgments are explored and revealed. More than
an entertainment show for children of all ages, The Shari Show
stimulates children's senses of curiosity and humor, which creates
involvement... a basic measurement of the educational process. Shari
Lewis and The Shari Show have won seven (7) Emmys, the Peabody award
and numerous other prestigious awards for excellence. Programming on
license.
Bill Cosby's PicturePages
80 1/2 hour episodes
Bill Cosby's PicturePages, winner of a Golden Globe award and Gold
Medalist of the International Film Festival of New York, helps
children develop important skills like following directions, drawing,
hand-eye coordination, clear thinking and numbers. PicturePages is the
epitome of educating children with love and laughter. Bill Cosby's
unique approach, which delights children and adults, is recommended by
the National Education Association. Programming on license.
Dusty's Treehouse
260 1/2 hour episodes
Dusty's Treehouse is a children's show designed for ages 2-6. The show
uses both adult and children mixed with puppets. Winner of eight (8)
Emmys and the coveted George Foster Peabody award, Dusty's Treehouse
is very entertaining, while at the same time teaches children how to
cope when someone was injured, what love
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is, to look both ways when crossing the street, never let strangers
into the house and other social and practical skills for dealing with
today's world. Owned by the Company.
Achievements In African-American History
10 1/2 hour programs
Achievements in African-American History documents in a ten part
series, the historical achievements of black women and men in the
fields of literature and poetry, cinema, religion, medicine and
science. This series features noted black personalities such as Abbey
Lincoln, Roscoe Lee Browne, Brock Peters and Lou Gossett, Jr., who
document through narration, dramatic scenes and readings, some of the
important historical contributions made by African- Americans. Owned
by the Company.
The Chuck Jones Collection
6 1/2 hour episodes
The Chuck Jones Collection is comprised of beautifully animated
stories/fairy tales written by such authors as Rudyard Kipling. Chuck
Jones is one of the leading award winning animators of our time. As
creator of such characters as Road Runner, Wile E. Coyote, Pepe Le Pew
and co-creator of Bugs Bunny, Porky Pig and Daffy Duck, this series
portrays the beauty, creativity and quality of its Academy Award
winning creator. Programming on license.
Hot Fudge
75 1/2 hour episodes
Hot Fudge is the recipient of two national honors, the Action for
Children's Television Award for Outstanding Contribution to Mental
Health Programming for children, and the San Francisco State College
Excellence in Broadcasting Award. This nationally recognized program
that combines live action and a delightful cast of puppets with
lessons, music and fun. Join the Hot Fudge Gang as they learn about
the complexities of relationships, friendship, self esteem, feelings,
and cooperation, among many others, through song, live action skits,
and game shows. Each energetic show follows a single theme with
engaging dialogue And lively performances. Owned by the Company.
KidStreet
130 1/2 hour episodes
This highly exciting game show for children is also family oriented.
Three pairs of siblings, the red team, the blue team and the green
team, vie for victory and prizes by guessing how one sibling will
answer a set of questions. Points are awarded for correct answers and
the team with the most points wins the chance to solve the final
puzzle. The show motivates kids to learn problem solving skills and to
better understand their sisters and brothers. Programming on license.
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Gigglesnort Hotel
80 1/2 hour episodes
The Gigglesnort Hotel brings kids worthwhile story lines filled with
comedy, action and surprises. The Hotel has a very funny human desk
clerk, B.J., presiding over a crew of puppets such as Hotel guests
Mrs. Plumtree and the old Professor, Hotel Detective W.C. Cornfield,
and the Janitor Dirty Dragon. Through the everyday running of the
Hotel, concepts such as love, hope anger, and trust are presented in
ways that are both thought-provoking and highly entertaining. The
Gigglesnort Hotel garnered two (2) Chicago Emmys and the Iris award
for program excellence from the National Association of Program
Executives. Programming on license.
Coming To Ametrica
2 1/2 hour episodes
Coming To Ametrica is a combination of live action and animation
designed to teach children as well as adults the metric system of
weights and measures. In this series, a spaceship kidnaps Admiral
Gordon and six young people who have been chosen to teach America the
metric system of measurements. While detained aloft in the spaceship
the Admiral and his young crew learn everything there is to know about
the metric system.
The spaceship computer uses lively and entertaining animation to teach
the skeptical Americans about liters, meters, and grams. They learn
that the metric system is used worldwide, and that once understood, it
is easier to use than gallons, yards and pounds. The series is fun,
entertaining and most of all, highly educational. Owned by the
Company.
Metric Series
38 15 minute episodes
(approximately 600 minutes of animation)
A series of animation programs designed to teach children, as well as
adults, the metric system of weights and measures. The Metric Series
features a mild mannered character named Newton Joule who, when
conversion problems arise, turns into the superhero Metric Man to
teach children about liters, meters and grams. They learn the metric
system is used worldwide, and that once understood, it is easier to
use then gallons, yards and pounds. The series is fun, entertaining
and most of all, highly educational.
Scott McGrout Inside Out
1 30 minute special
A highly informative and entertaining film on body awareness. This
beautifully animated story introduces Scott McGrout who takes a
fascinating journey through the human body. This film teaches the
child how important each part of the body is and how each part works
together to keep the body healthy and strong. Owned by the Company.
Kerchoo - What Really Happens When You Catch A Cold
1 10 minute film short
In this imaginative film, Scott McGrout learns about the common cold.
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Experiencing cold spells and sneeze quakes, Scott and the viewer watch
the body fight off Elvirus and her vacation companion, Common Cold.
Owned by the Company.
Rod Rocket
135 5 minute episodes (675 minutes of animation)
The exciting adventures of two astronauts in outer space in wonderful
animation. Owned by the Company.
Item 2. Properties
- ------- ----------
The following table sets forth information regarding the Company's facilities:
Location Size Function
-------- ---- --------
Las Vegas, Nevada 4,468 sq. feet Corporate offices
Burbank, California. 4,000 Sq. feet Production facility
The Company leases the Burbank facility on a month to month basis and has a five
year lease on the Las Vegas office.
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Item 3 Legal Proceedings
- ------ -----------------
The Company is currently involved in the following legal matters:
The Company is plaintiff in Los Angeles Superior Court, Central District, civil
action # BC145541, Olympic Entertainment Group, Inc. etc. v. Nationwide Media
Investments, Inc. et al. A cross-complaint was filed by Nationwide against the
Company. It was then stipulated by and between all parties that the matter would
be submitted to binding arbitration. The Company has been informed that
Nationwide is incapable of prosecuting the cross-complaint and both sides have
agreed to mutual dismissals of the action, without prejudice. It is the opinion
of counsel to the Company that it is extremely unlikely that the
cross-complaint, even if prosecuted, would result in an unfavorable outcome to
the Company.
The Company is plaintiff in Los Angeles Superior Court, Central District, civil
action # BC144306, Olympic Entertainment Group, Inc. etc. v. Preferred Way
Management, et al. No cross action was filed by any of the defendants against
the Company in this action. It was stipulated by and between all parties that
the matter would be submitted to binding arbitration to take place in Las Vegas,
Nevada. Defendant's counsel has since been relieved as counsel of record by
reason of his client's failure to pay legal fees. It is the plan of the Company
to dismiss the action, without prejudice, due to its inability to collect any
potential judgment against the insolvent defendants.
The Company is plaintiff in United States District Court, Central District, in
civil action #CV 96 3287 JGD(JRx), Olympic Entertainment Group, Inc., etc. v.
Scott Severson, et al. No cross action was filed by any of the defendants
against the Company in this action. No answer is on file by the defendants. A
motion was filed by the defendants to dismiss the action based on lack of
personal jurisdiction. Jurisdiction has been established by the court over the
corporate defendant but not against Scott Severson personally. The Company
intends to vigorously pursue its claims for licensing fees owed in excess of
$100,000 and for damages caused by Mr. Severson through tortuous interference
with various contracts.
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Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter ended December 31, 1996.
PART II
Item 5. Market for Registrant's Common Equity & Related Stockholder Matters
- ------- -------------------------------------------------------------------
(a) Market Information
(1) (i) None
(ii) Not applicable
(iii) Fiscal Year End Fiscal Year End
December 31, 1996 December 31, 1995
----------------- -----------------
High Bid Low Bid High Bid Low Bid
First Quarter $3.38 $1.75 - -
Second Quarter $3.63 $1.75 - -
Third Quarter $2.38 $0.75 - -
Fourth Quarter $1.19 $0.50 - -
Source: The Company's stock was not traded in sufficient volume during 1995 to
establish market prices.
(iv) Not applicable
(v) Not applicable
(2) (a) Not applicable
(b) Holders
-------
(1) Title of Class Number of Record Holders
-------------- ------------------------
Common Stock, Approximately 145
$0.01 Par Value
(2) Not applicable
(c) Dividends
(1) There have never been any dividends declared by the
Registrant.
(2) Registrant's losses do not currently indicate the ability
to pay cash dividends.
11
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<TABLE>
<CAPTION>
Item 6. Selected Financial Data
- ------- ------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ---------- ----------
Income statement data:
<S> <C> <C> <C> <C> <C>
Revenues $ 2,518,253 $ 358,932 $ -- $ -- $ --
Income (loss)
from
Operations 378,090 (545,396) (2,170,003) (102,899) (38,001)
Net interest
expense (23,234) (33,605) (36,546) (31,646) (21,069)
Income (loss)
before income
taxes 355,856 $ (579,001) $(2,176,549 $ (134,545) $ (59,070)
Income taxes -- -- -- -- --
Net income
(loss) $ 355,856 $ (579,001) $(2,176,549) $ (134,545) $ (59,070)
=========== =========== =========== =========== ===========
Per share data:
Primary:
Net income
(loss) $ 0.14 $ (.30) $ (1.92) $ (.15) $ (.07)
=========== =========== =========== =========== ===========
Weighted
average shares
outstanding 2,626,390 1,915,038 1,132,125 900,000 900,000
Fully diluted:
Net income
(loss) $ 0.12 $ (.30) $ (1.92) $ (.15) $ (.07)
=========== =========== =========== =========== ===========
Weighted
average shares
outstanding 2,922,390 1,915,038 1,132,125 900,000 900,000
Balance sheet data:
Working capital
(deficiency) 162,296 $ (872,167) $ 10,305 $ 465,138 $ (34,844)
Total assets 1,368,723 545,152 260,354 245,760 212,867
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Long-term debt -- -- -- -- --
Redeemable
preferred
stock 203,000 213,000 213,000 -- --
Total stockholders'
equity
(deficiency) 782,004 (492,441) 86,560 (225,229) (110,685)
</TABLE>
13
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Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- -------------------------------------------------------------------------
The Company is a new emerging cable network that is unique in that it only
distributes nonviolent children's television programming through local broadcast
affiliates who utilize the leased access channels of their local cable company.
The Company's fiscal year end is December 31. Unless otherwise noted, references
to fiscal 1996, 1995 and 1994 relate to the fiscal years ended December 31,
1996, 1995 and 1994.
Overview
As a new cable network the Company faces two principal problems: (1)
distribution of programming, and (2) audience acceptance of that programming.
Audience acceptance is always difficult to predict. The Company is, however,
licensing award-winning programming which has already earned consumer
acceptance, and is being well received through the Company's current cable
affiliates. Traditional methods of distribution for a cable company are
difficult because transponder time on satellites (which are traditionally used
for distribution of the cable signal) is very scarce, and even when available,
very expensive. The channel space on many cable systems is also limited,
prohibiting additional satellite feeds of new cable networks. The Company has
adjusted to the uncertainties of the availability of delivery systems to reach
the market place by utilizing the "leased access" rules provided by the Federal
Communications Commission ("FCC") since 1984. Under these regulations, cable
companies are required by law to provide leased access channels to third parties
who request it. Thus the Company does not distribute its programs by satellite,
but instead provides videotape programs to affiliates which are then aired by
the purchase of leased access cable time by the Company's cable affiliates from
local cable systems.
With 11,100 cable broadcast systems nation wide, the Company's potential market
is enormous. At December 31, 1996, the Company had seven licensed affiliates on
the air, including the territories of Denver, Colorado; Beverly Hills/Hollywood,
California; Orange County, California; San Fernando Valley, and Simi Valley,
California; San Diego Southeast in California; and Greeley, Colorado, in
addition to the Company operated territories of Las Vegas, Nevada and
Burbank/Glendale, California. The Company is scheduled to go on the air in
fifteen additional territories in 1997, including new Cable System Affiliates in
San Jose, California; Oakland, California; San Francisco, California;
Sacramento, California; Anaheim, California; Salt Lake City, Utah; Puget Sound,
Washington; Seattle, Washington; Tacoma, Washington; Portland, Oregon; Phoenix,
Arizona; Bakersfield, California; Lancaster/Palmdale, California; San Gabriel
Valley, California; and Carlsbad, California. The Company's affiliates on the
air are currently bringing the Company's product to 2,234,000 cable subscribers
with an additional 3,673,000 subscribers to be added to the Company's total
available viewing audience when the above listed affiliates go on the air.
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Results of Operations
The following table sets forth, for the fiscal years ended December 31, 1996,
1994, and 1993 certain items from the Company's Statement of Operations.
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- ----------- ----
<S> <C> <C> <C>
Revenues $ 2,518,253 $ 358,392 $ --
Expenses 2,140,163 903,788 2,140,003
----------- ----------- -----------
Income (loss)
from operations 378,090 (545,396) (2,140,003)
Other income (expense) (22,234) (33,605) (36,546)
----------- ----------- -----------
Income before taxes 355,856 (579,001) (2,176,549)
Provision for income taxes -- -- --
----------- ----------- -----------
Net income (loss) $ 355,856 $ (579,001) $(2,176,549)
=========== =========== ===========
Earnings per share
Primary:
Weighted average
common shares
outstanding 2,626,390 1,915,038 1,132,125
=========== =========== ===========
Income (Loss) per
common share $ .14 $ (.30) $ (1.92)
=========== =========== ===========
Full diluted:
Earnings per share
Weighted average
common shares
outstanding 2,922,390 1,915,038 1,132,125
=========== =========== ===========
Income (Loss) per
common share $ .12 $ (.30) $ (1.92)
=========== =========== ===========
</TABLE>
The Company's activities during the 1996 and 1995 consisted of developing the
Company's products, licensing cable affiliates, and negotiating acquisitions of
rights to various children's television programs, and the initial release of the
Company.
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<PAGE>
Comparison of 1996 to 1995
Revenues in 1996 are up 584% versus 1995 due to the fact that the Company is now
better established and has more cable affiliates. In addition, the Company is
now able to charge a higher license fee to Company affiliates than in the
previous year. The fees charged during 1995 ranged from $10,000 to $40,100 per
affiliate based on the number of potential customers, whereas in 1996 affiliate
licenses are selling for as much as $100,000 in the large cable markets. The
Company recognizes revenue from network license agreements not related to
specific programming over the term of the related agreements. Revenue from the
sale of licenses for television program rights is recorded in accordance with
SFAS #53, which provides for recognition of revenue at the beginning of the
license period when specified conditions have been met. During 1996, the bulk of
the Company's sales were attributable to the sale of television program rights
to affiliates which increased the Company's 1996 recorded sales.
Selling, general and administrative expenses are up 146% from $903,788 to
$2,140,163 because of the increased activity generated by the additional sales,
including, but not limited to, the hiring of additional personnel. Interest
expense is down in 1996 due to the partial repayment of debt in early 1996.
Comparison of 1995 to 1994
The Company's initial revenues were $358,592 in 1995 as opposed to the prior
year when the Company had not commenced selling cable affiliates and had no
revenue. Expenses decreased by $1,236,215, the net effect of an increase in cash
operating expenses, and the absence of the significant non-cash expenses that
had been incurred in 1994. Those 1994 transactions are summarized as follows:
- The issue of 200,000 common shares valued at $2 per share for
consulting services totaling $400,000.
- The issue of 228,500 common shares valued at $2 per share to certain
officers and directors. The aggregate value of these shares was
$457,000.
- The issue of 32,800 shares of its Series C preferred stock valued at
$2 per share for consulting services of $65,600.
- The issue of 98,000 shares of its Series D preferred stock valued at
$2 per share to an officer and director in lieu of cash payment for
services for the aggregate value of $196,000.
- The Company charged off film rights of $200,793.
After giving effect to the non-cash expenses listed above, 1995 expenses
increased $83,178 or approximately 10%. This increase was due to the increased
activity due to the commencement of licensing activities.
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<PAGE>
Capital Resources & Sources of Liquidity
During 1996, the Company's working capital increased to $162,296 compared to a
deficiency of $872,167 at December 31, 1995. This was primarily due to the
significant increase in affiliate sales in 1996 in addition to approximately
$913,000 in proceeds from various equity financings during 1996.
The Company's primary cash requirements are for operating expenses, primarily
labor and general and administrative expenses, and for the acquisition of rights
to additional television series. In 1996, the Company's primary source of cash
was from revenues which accounted for approximately 67% of all cash brought in
to the Company. The Company also brought in approximately 33% of its cash
inflows from equity financing. Historically, the Company's primary source of
cash have been through equity and long term debt financing.
In 1995, the Company's primary source of cash was from revenues as the revenue
stream accounted for approximately 96% of all cash brought in to the Company.
In 1994, the Company raised approximately $600,000 and $145,000 respectively
from the issuance of 500,000 shares of common and 106,500 shares of cumulative
convertible redeemable preferred stock. The Company used the proceeds of these
offerings to fund current operating requirements and to acquire the rights to
television programming.
The Company has experienced a significant increase in sales volume and projects
sufficient cash flows from the sale of existing products to fund current
operations. In addition, the Company is pursuing numerous possible equity
arrangements that could lead to significant cash infusions during 1997. In the
event that these deals do not come to fruition, and the Company's sales were to
take a downturn, the Company currently has no material commitments for capital
expenditures and could easily scale back operations in the event that the
Company's does not meet its cash flow projections.
The Company intends to use the proceeds from any equity infusion to buy
additional programming and to expand its marketing of licenses to new
affiliates.
The Company is a plaintiff in certain litigation arising from various disputes
(see "Legal Proceedings"). The Company is charging legal costs from this
litigation to operations as they are incurred. These costs totaled approximately
$152,000 and $64,000 in 1996 and 1995 respectively. The Company believes that
internally generated cash will be sufficient to satisfy any obligations in
connection with any realistically adverse outcome that may result from such
litigation.
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New Accounting Standards
The Company adopted Statement of Financial Accounting Standard No. 123 (FAS
123), Accounting for Stock-Based Compensation in 1996. Upon adoption of FAS 123,
the Company measured compensation expense for its stock-based employee
compensation plans using the fair value-based method prescribed by FAS 123 to
measure compensation expense.
In 1996 Financial Accounting Standards No. 125 (FAS 125) Accounting for Transfer
and Servicing of Financial Assets and Extinguishments of Liabilities was issued.
FAS 125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996. The Company
will adopt FAS 125 in 1997. Adoption of FAS 125 is not expected to have a
material effect on the Company's consolidated financial position or operating
results.
Related Party Transactions
During 1996, the Company purchased program rights for Kidstreet and Gigglesnort
Hotel from an entity controlled by one of the Company's directors. The total
acquisition price was $166,511 including $75,625 which is included in amounts
due to stockholders at December 31, 1996.
In 1996 and 1995, the Company also received legal services from firms in which
another of the Company's directors is a principal. Such services totaled
$185,000 and $25,000 for 1996 and 1995 respectively of which $37,644 was payable
at December 31, 1996.
The Company believes that such amounts represented the fair market value of
comparable products and services that could have been obtained elsewhere under
similar terms and circumstances.
Major customers
The Company made sales in excess of 10% of total revenues in 1996 and 1995 to
major customers as follows:
Customer: Sales/% of total Receivable at 12/31/96
1996:
Carousel Media
Marketing $1,550,000 62% $ 320,000
Capital Funding 269,840 11% -
1995:
Worldwide
Marketing 211,584 59% -
In the event that sales to Carousel were to discontinue, management believes
that there is sufficient demand for the Company's product that such revenues
could be replaced from other sources.
18
<PAGE>
Employment contract
On January 15, 1997, the Company entered into a five year employment agreement
with its chief executive officer whereby the officer is to receive base
compensation of $480,000 per year, and a bonus of $10,000 for each new affiliate
added to the Company's cable television network.
The agreement also grants the executive options to purchase 800,000 shares of
common stock at an exercise price of 80% of the fair value of the stock at the
grant date. The options vest at a rate of 20% per year during the contract term.
The agreement also provides for termination payments to the executive of all
accrued but unpaid salary and bonus, the rights to vested stock options and a
cash payment of $5,000,000 if termination (as defined in the contract) occurs
during the first contract year. The cash payment after the first contract year
is an amount equal to twice the remaining base salary that would be due during
the remaining contract term. It is management's belief that this contract is
representative of similar contracts in the industry and is necessary to secure
the talents of Mr. Orsatti on a long term basis.
Item 8. Financial Statements
- ------- --------------------
The following financial statements are filed with this report as pages F-1
through F-15 following the signature page
Reference
---------
Report of independent public accountants F-1
Balance sheets F-2
Statements of operations F-4
Statements of stockholders' equity F-5
Statements of cash flows F-6
Notes to financial statements F-7
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
- ------------------------------------------------------------------------
None
There were no changes or disagreements with accountants on accounting and
financial disclosures.
19
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The following table sets forth the name, age, and position held of each
director and officer of Olympic Entertainment Group, Inc.:
Name Age Position - Year
- -------------------- --- ---------------
Dominic Orsatti 65 Chief Executive Officer
Chairman of the Board of
Directors
Michael Marcovsky 52 President(1)
Chief Operating Officer(1)
Director
John Holt Smith 55 Corporate Secretary/
Director
Steve Henson 35 Treasurer and Chief Financial
Officer
H.C. Hernandez 65 Executive Vice President
Kathleen Hitt 47 Vice President - Public Affairs
Jack Rhodes 70 Director
Officers and Directors
Pursuant to the Bylaws, each Director shall serve until the annual meeting of
the stockholders, or until his or her successor is elected and qualified. It is
the intent of the Company to support the election of a majority of "outside"
directors at such meeting. The Company's basic philosophy mandates the inclusion
of directors who will be representative of management, employees and the
minority shareholders of the Company. Directors may only be removed for "cause".
The term of office of each officer of the Company is at the pleasure of the
Company's Board.
BUSINESS EXPERIENCE OF DIRECTORS AND EXECUTIVE OFFICERS
Dominic Orsatti
Chairman of the Board, Chief Executive Officer and Founder, was formerly
President of Orsatti Productions, Inc., a leading producer of educational films.
Among Orsatti Productions credits were an NBC Children's Television Special,
"All About Me", a musical television special, "Get Down", hosted by Milton
Berle, more than 100 educational films and two educational children's record
albums. Mr. Orsatti is the recipient of more than 18 major industry awards,
20
<PAGE>
including four gold and three silver medal awards by the New York International
Film Festival and two Golden Babe awards awarded at the Chicagoland Film
Festival. Mr. Orsatti co-wrote and was executive producer of the first place
Telly award-winning "Coming To Ametrica" in 1993. He is also a member of the
Writer's Guild of America.
Michael E. Marcovsky
President, Chief Operating Officer and Director, is a pioneer in both the cable
television and cellular communications industries. As Vice President of program
operations with Warner Cable and QUBE, Mr. Marcovsky was responsible for the
implementation of a number of programming concepts, which later developed into
successful cable networks such as Nickelodeon, The Movie Channel and MTV. As
Vice President of Pay-TV at Buena Vista Distribution, a division of Walt Disney
Productions, Mr. Marcovsky laid the foundation for what would eventually be The
Disney Channel. He also served as President of the STV Division of Golden West
Broadcasters. As President and owner of Marnel Associates, Ltd., a multi-tiered
Los Angeles-based telecommunications firm, he developed strategies for entry
into new arenas of pay television, cable, and pay-per-view for such clientele as
CBS, ABC, and Cox Cable.
John Holt Smith, Esq.
Corporate Secretary and Director, is a senior partner of Smith & Associates and
was formerly a partner in the Fort Worth, Texas firm of McDonald, Sanders,
Ginsburg, Phillips, Maddox & Newkirk. As a partner, he served as Vice President
of the United States Trust Company of New York and in that capacity opened the
Beverly Hills, California office of the company. Mr. Smith subsequently returned
to the practice of law to ultimately head the securities department of the Los
Angeles firm of Bushkin, Gaims, Gaines & Jonas. In that capacity, Mr. Smith
represented clients including Johnny Carson, Kareem Abdul-Jabbar, Diane Keaton,
Joan Rivers, Bill Cosby, David Letterman, Neil Simon and many NBC personalities.
Mr. Smith is currently engaged in the private practice of law representing
broker-dealers, individuals and entities raising capital as well as preparing
private placements and subsequent public offerings. Mr. Smith is a two-time
graduate of Vanderbilt University (B.A. 1963, LL.B. 1966) and a member of the
State Bars in Texas and California.
Steve Henson
Steve Henson is a founding partner of Henson & Company, a Pasadena based CPA
firm. Steve's firm specializes in providing auditing, accounting and tax
services. Prior to founding the firm, Steve was with Arthur Young & Company as
an audit manager. During Steve's five years at Arthur Young, Steve served
clients ranging from start-up enterprises to billion dollar conglomerates. Steve
was also a national seminar instructor and was responsible for audit education
for a staff of over 600 professionals. Mr. Henson obtained a Bachelor of Science
in Public Accounting in June, 1983 from the University of Southern California.
21
<PAGE>
H.C. Hernandez
Executive Vice President, is a seasoned business executive in finance, marketing
and sales with over 20 years experience in the entertainment industry. Mr.
Hernandez is a former Vice President of Orsatti Productions, Inc. and formerly
President of Educational Film Systems, Inc., a national distributor of
educational materials, as well as a founder of the Motion Picture Development
Fund, Ltd. Mr. Hernandez' solid experience and background is an asset for the
Management team of Olympic Entertainment Group, Inc.
Kathleen Hitt
Vice President Public Affairs, brings with her 27 years experience in law
enforcement, politics and public affairs. Ms. Hitt served as Administrative Aide
first to powerful Sheriff, Ralph Lamb then Sheriff John Moran, one of the most
popular police officers and politicians in Clark County's history until his
retirement in 1994. The Las Vegas Metropolitan Police Department is respected
nationwide and charged with protecting one of the most exciting and fastest
growing regions in the nation. A lifelong resident of Las Vegas, Kathleen became
well known in the community as a dynamic force for making things happen. She is
Chair of Membership for the Republican Men's Club in Nevada, serves on the Board
of Directors for the Youth Camerata Orchestra, who introduce the classics to
at-risk neighborhoods. As Kate Hitt, she has hosted open line talk shows for 15
years over KDWN Radio, a 50,000 watt clear channel station (720 AM) earning a
large and loyal following. Kathleen currently hosts a weekly radio show, "Taking
Care of Business" , sponsored by the Nevada Development Authority. She, along
with elected officials, business leaders and celebrities, are ambassadors for
Southern Nevada and encourage those listening throughout the western region to
bring their corporation or business into Nevada.
Jack E. Rhodes
Director, is the President of Rhodes Productions and has held executive
positions with Independent Television Corporation and Warner Brothers television
prior to joining Westinghouse Broadcasting Company as Vice President / General
Manager. Mr. Rhodes through Westinghouse's Group W Productions, was responsible
for the launching of the "Merv Griffin" and "Mike Douglas" shows. Mr. Rhodes'
successes include introducing "Mary Hartman, Mary Hartman" to American
television for Norman Lear. He was Creator and Executive Producer for the
multi-award winning "Second City Television (SCTV)" comedy series which brought
to us favorite comedians like John Candy and Eugene Levy. Rhodes Productions is
also responsible for introducing the night-time version of "Hollywood Squares".
22
<PAGE>
Item 11. Executive Compensation
- -------- ----------------------
The table below sets forth the payroll and consulting compensation for fiscal
1996 for the executive officers and directors of the Company.
Name of Individual Capacities in Which Served Compensation
- ------------------ -------------------------- -------------
Dominic Orsatti Chairman & CEO $ 130,793
Michael Marcovsky President & COO 70,000
John Holt Smith Secretary & Director 125,279*
Steve Henson CFO & Treasurer 16,334**
H.C. Hernandez Executive VP 29,600
Kathleen Hitt Vice President 9,600
Jack Rhodes Director 166,511***
* Represents moneys paid to law firms in which Mr. Smith is a principal.
** Paid to Henson & Company, a California partnership in which Mr. Henson is
partner.
*** Paid to Encore Entertainment, Inc. a Company in which Mr. Rhodes is a
principal. The moneys were paid for video production services.
23
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -------- --------------------------------------------------------------
There are currently 2,824,552 Common Shares outstanding. The following tabulates
holdings of Common Shares of the Company by each person who, subject to the
above, at the date of this Memorandum, holders of record or is known by
Management to own beneficially more than 5.0% of the Common Shares and, in
addition, by all directors and officers of the Company individually and as a
group.
Table I - Common Stock
----------------------
Name & Address of Number of Shares of Percentage
Beneficial Owner Common Stock Owned of Ownership
- ------------------------ ------------------ -----------
Dominic Orsatti(2) 800,000 27.22%
2755 E. Desert Inn Road #200
Las Vegas, Nevada 89121
Nevada Entertainment
Partners, Ltd.(2) 800,000 27.22%
2755 E. Desert Inn Road #200
Las Vegas, Nevada 89121
Michael Marcovsky 0 0%
801 S. Main Street
Burbank, California 91506
John Holt Smith 18,000 0.61%
1901 Avenue of the Stars
18th floor
Los Angeles, California 90067
Steve Henson 0 0%
87 N. Raymond Avenue, Suite 320
Pasadena, California 91103
H.C. Hernandez 0 0%
801 S. Main Street
Burbank, California 91506
Kathleen Hitt 0 0%
2755 E. Desert Inn Road #200
Las Vegas, Nevada 89121
Jack Rhodes 0 0%
124 11th Street
Manhattan Beach, California 90266
All Directors & Officers
as a group (7) 818,000 27.83%
24
<PAGE>
(1) Pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as
amended, beneficial ownership of a security consists of sole or shared
voting power (including the power to vote or direct the voting) and/or sole
or shared investment power (including the power to dispose or direct the
disposition) with respect to a security whether through a contract,
arrangement, understanding, relationship or otherwise. Unless otherwise
indicated, each person indicated above has sole power to vote, or dispose
or direct the disposition of all shares beneficially owned, subject to
applicable community property laws.
(2) Includes Nevada Entertainment Partners, Ltd., and Dominic Orsatti, the
managing general partner thereof, who together constitute a "group," as
that term is defined in Section 13D of the Securities Exchange Act of 1934,
as amended.
(3) Does not include any Common Shares to be issued upon exercise of any
outstanding warrants.
After the Warrant Distribution pending, the Company shall have approximately 109
Common Shareholders.
The following tabulates holding of Series "C" Preferred Shares of the Company
owned beneficially by all directors and officers of the Company individually and
as a group.
Table 2 - Series "C" Preferred Shares
-------------------------------------
Number of Series "C" Percent of
Name and Address Preferred Shares(1) Class
- ------------------------ ------------------ -----------
Dominic Orsatti(2) 12,000 36.58%
2001 E. Flamingo Road
Las Vegas, Nevada 89119
Nevada Entertainment
Partners, Ltd.(2) 12,000 36.58%
2001 E. Flamingo Road
Las Vegas, Nevada 89119
John Holt Smith 8,000 24.39%
530 Wilshire Boulevard, Fourth Floor
Santa Monica, California 90401
All Directors & Officers
as a group (7) 20,000 60.97%
(1) Pursuant to Rule 13d-3 under the Securities Exchange Act of 1934,
25
<PAGE>
as amended, beneficial ownership of a security consists of sole or shared voting
power (including the power to vote or direct the voting) and/or sole or shared
investment power (including the power to dispose or direct the disposition) with
respect to a security whether through a contract, arrangement, understanding,
relationship or otherwise. Unless otherwise indicated, each person indicated
above has sole power to vote, or dispose or direct the disposition of all shares
beneficially owned, subject to applicable community property laws.
(2)Includes Nevada Entertainment Partners, Ltd. and Dominic Orsatti,
the managing general partner thereof, who together constitute a
"group," as that term is defined in Section 13D of the Securities
Exchange Act of 1934, as amended.
Table 3 - Series "D" Preferred Shares
-------------------------------------
Number of Series "D" Percent of
Name and Address Preferred Shares(1) Class
- ------------------------ -------------------- -----------
Dominic Orsatti(2) 98,000 100%
2001 E. Flamingo Road
Las Vegas, Nevada 89119
Nevada Entertainment
Partners, Ltd.(2) 98,000 100%
2001 E. Flamingo Road
Las Vegas, Nevada 89119
All Directors & Officers
as a group (7) 98,000 100%
The following tabulates holdings of 7% Convertible Preferred Shares of the
Company owned beneficially by all directors and officers of the Company
individually and as a group.
Table 4 - 7% Convertible Preferred Shares
-----------------------------------------
Number of 7%
Convertible Percent
Name and Address Preferred Shares(1) of Class
- ------------------------ ------------------ -----------
All Directors & Officers
as a group (7) 0 0%
(1) Pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as
amended, beneficial ownership of a security consists of sole or shared
voting power (including the power to vote or direct the voting) and/or sole
or shared investment power (including the power to dispose or direct the
disposition) with
26
<PAGE>
respect to a security whether through a contract, arrangement,
understanding, relationship or otherwise. Unless otherwise indicated, each
person indicated above has sole power to vote, or dispose or direct the
disposition of all shares beneficially owned, subject to applicable
community property laws.
(2) Includes Nevada Entertainment Partners, Ltd. and Dominic Orsatti, the
managing general partner thereof, who together constitute a "group," as
that term is defined in Section 13D of the Securities Exchange Act of 1934,
as amended.
The following tabulates holdings of 10% Convertible Preferred Shares of the
Company owned beneficially by all directors and officers of the Company
individually and as a group.
Table 5 - 10% Convertible Preferred Shares
------------------------------------------
Number of 10%
Convertible Percent
Name and Address Preferred Shares(1) of Class
- ------------------------ ------------------ -----------
All Directors & Officers
as a group (7) 0 0%
(1) Pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as
amended, beneficial ownership of a security consists of sole or shared
voting power (including the power to vote or direct the voting) and/or sole
or shared investment power (including the power to dispose or direct the
disposition) with respect to a security whether through a contract,
arrangement, understanding, relationship or otherwise. Unless otherwise
indicated, each person indicated above has sole power to vote, or dispose
or direct the disposition of all shares beneficially owned, subject to
applicable community property laws.
27
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements, and Reports on Form 8-K
- -------- -------------------------------------------------------
(a) Financial Statements
--------------------
Reference
---------
Report of independent public accountants F-1
Balance sheets F-2
Statements of operations F-4
Statements of stockholders' equity F-5
Statements of cash flows F-6
Notes to financial statements F-7
(b) Reports on form 8-K
-------------------
None
(c) Exhibits
--------
(10.1) Orsatti employment contract
(28) Olympic Entertainment Group, Inc. 1996 Stock Option
Plan, incorporated by reference to form S-8 filed
July 29, 1996
28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized this 18th day of March,
1997:
Olympic Entertainment Group, Inc.
By: /s/ Michael Marcovsky Date: 3/18/97
--------------------------- --------
Michael Marcovsky, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following person on behalf of the Registrant and in the
capacity and on the date indicated.
NAME & POSITION DATE
/s/ Dominic Orsatti March 18, 1997
- ------------------------------
Dominic Orsatti,
Chairman & Chief Executive Officer
/s/ Michael Marcovsky March 18, 1997
- ------------------------------
Michael Marcovsky
President
/s/ John Holt Smith March 18, 1997
- -------------------------------
John Holt Smith
Corporate Secretary & Director
/s/ Steve Henson March 18, 1997
- -------------------------------
Steve Henson,
Treasurer & Chief Financial Officer
/s/ H. C. Hernandez March 18, 1996
- -------------------------------
H. C. Hernandez,
Executive Vice-president
/s/ Kathleen Hitt March 18, 1996
- -------------------------------
Kathleen Hitt
Vice president
/s/ Jack Rhodes March 18, 1996
- -------------------------------
Jack Rhodes, Director
29
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
Olympic Entertainment Group, Inc.
We have audited the balance sheet of Olympic Entertainment Group, Inc. as of
December 31, 1996, and the related statements of operations, changes in
stockholders' equity, and cash flows for each of the two years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above, present fairly, in
all material respects, the financial position of Olympic Entertainment Group,
Inc. as of December 31, 1996, and the related statements of operations, changes
in stockholders' equity, and cash flows for each of the two years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 11 to the
financial statements, the Company has suffered recurring losses from operations
in prior years, has made significant commitments and relies upon one major
customer which raise substantial doubts about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 11. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Winter, Scheifley & Associates, P.C.
Certified Public Accountants
Englewood, Colorado
February 12, 1997
F-1
<PAGE>
Olympic Entertainment Group, Inc.
Balance Sheet
As of December 31, 1996
Assets
1996
Current Assets:
Cash and cash equivalents $ 175,083
Accounts receivable - trade 320,000
Prepaid expenses 12,145
-----------
Total current assets 507,228
Property and equipment, at cost 116,820
Less accumulated depreciation (14,849)
-----------
101,971
Other Assets:
Film library 745,501
Deposits and other assets 14,023
-----------
759,524
-----------
Total assets $ 1,368,723
===========
The accompanying notes are an integral part of the financial statements.
F-2
<PAGE>
Olympic Entertainment Group, Inc.
Balance Sheet
As of December 31, 1996
(Continued)
Liabilities and Stockholders' Equity
1996
Current Liabilities:
Note payable $ 10,000
Current portion of long-term debt 22,164
Accounts payable - trade 139,548
Accrued expenses 66,570
Amounts due stockholders and
and related parties 106,652
----------
Total current liabilities 344,934
Long-term debt 38,787
Commitments and contingencies
Redeemable preferred stock:
Preferred stock, 10% cumulative convertible
$.01 par value, 650,000 shares authorized,
101,500 and 106,500 shares issued
and outstanding in 1996 and 1995
liquidating preference $1 per share 203,000
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000
total shares authorized:
Preferred stock, convertible, 40,000 shares
authorized, 32,800 shares issued and
outstanding, $10 per share liquidating
preference (Series C) 65,600
Preferred stock, convertible, 98,000 shares
authorized, issued and outstanding, $3 per
share liquidating preference (Series D) 196,000
Common stock, $.01 par value, 20,000,000
shares authorized, 2,938,681 and 1,978,500
shares issued and outstanding 29,387
Paid in capital 3,305,838
Accumulated deficit (2,814,823)
-----------
782,002
-----------
Total liabilities and
stockholders' equity $ 1,368,723
===========
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
Olympic Entertainment Group, Inc.
Statements of Operations
For the Years Ended December 31, 1996 and 1995
1996 1995
Revenue $ 2,518,253 $ 358,392
Costs and expenses:
General and administrative 1,955,163 878,788
General and administrative - related
parties 185,000 25,000
----------- -----------
2,140,163 903,788
Income (loss) from operations 378,090 (545,396)
Other income and (expense):
Investment income -- 16,411
Interest expense (23,234) (50,016)
Other 1,000 --
----------- -----------
(22,234) (33,605)
Net income before income taxes 355,856 (579,001)
Provision for income taxes -- --
----------- -----------
Net income (loss) $ 355,856 $ (579,001)
=========== ===========
Per share information:
Primary
Net income (loss) per share $ 0.14 $ (0.30)
=========== ===========
Weighted average shares outstanding 2,626,390 1,915,038
=========== ===========
Net income (loss) per share $ 0.12 $ --
=========== ===========
Weighted average shares outstanding 2,922,390 1,915,038
=========== ===========
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
Olympic Entertainment Group, Inc.
Statement of Stockholders' Equity
For the Years Ended December 31, 1996 and 1995
Additional Common
Common Preferred Paid-In Stock Accumulated
Shares Amount Shares Amount Capital Subscriptions Deficit
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1994 1,828,500 $ 18,285 163,300 $ 586,600 $ 1,560,353 $ 300,000 $(2,591,678)
Issuance of subscribed shares 150,000 1,500 298,500 (300,000)
Net loss for the year -- -- -- -- -- -- (579,001)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance December 31, 1995 1,978,500 19,785 163,300 586,600 1,858,853 -- (3,170,679)
Issuance of common
shares for cash 218,181 2,182 -- -- 280,605 -- --
Exercise of common
stock warrants 320,500 3,205 -- -- 637,795 -- --
Issuance of common
shares for services 91,500 915 -- -- 182,085 -- --
Conversion of Series A
preferred stock 325,000 3,250 (32,500) (325,000) 321,750 -- --
Conversion of redeemable
preferred stock 5,000 50 9,950
Compensation attributed
to stock options 14,800
Net income for the year -- -- -- -- -- -- 355,856
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance December 31, 1996 2,938,681 29,387 130,800 261,600 3,305,838 -- (2,814,823)
=========== =========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of the financial statements.
F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Olympic Entertainment Group, Inc.
Statements of Cash Flows
For the Years Ended December 31, 1996 and 1995
1996 1995
<S> <C> <C>
Operating activities:
Net income (loss) $ 355,856 $(579,001)
Adjustments to reconcile net income
(loss) to net cash:
Depreciation 7,300 4,344
Amortization of film costs 9,473 21,992
Common stock issued for services 197,800 --
Film rights charged off 198,218 --
Debt issued in lawsuit settlement 73,880
Sale of trading securities -- 66,477
(Increase) in accounts receivable (320,000)
(Increase) decrease in prepaid expenses 26,114 (46,785)
(Increase) in other assets (531) 23,277
Increase (decrease) in accrued expenses (21,467) 68,338
Increase (decrease) in deferred revenue (607,008) 607,008
Increase (decrease) in accounts payable (103,702) 196,979
Increase in accounts payable - related party 102,667 196,979
--------- ---------
Total adjustments (437,256) 941,630
--------- ---------
Net cash provided by (used in) operating activities (81,400) 362,629
Cash flows from investing activities:
(Increase) in film library (592,829) (382,355)
Purchase of property and equipment (94,874) (5,774)
--------- ---------
Net cash provided by (used in)
investing activities (687,703) (388,129)
Cash flows from financing activities:
Decrease in deferred offering costs -- 26,519
Common stock sold for cash 923,787 --
Repayment of stockholder loans (75,313) --
Repayment of notes payable (10,000)
Repayment of long-term debt (12,929)
--------- ---------
Net cash provided by (used in)
financing activities 825,545 26,519
Net increase in cash and cash equivalents 56,442 1,019
Beginning cash 118,641 117,622
--------- ---------
Ending cash $ 175,083 $ 118,641
========= =========
Supplemental cash flow information:
Cash paid for: Interest $ -- $ 3,904
Income taxes $ -- $ --
The accompanying notes are an integral part of the financial statements.
F-6
</TABLE>
<PAGE>
Olympic Entertainment Group, Inc.
Notes to Financial Statements
December 31, 1996
Note 1. ORGANIZATION
The Company was incorporated on May 21, 1987, in the State of Nevada, and is in
the business of acquiring, licensing and distributing non-violent educational,
informational and special interest television programming for children. The
Company does business as the "Children's Cable Network" ("CCNII"), which is
comprised of individuals or entities, known as Broadcast affiliates, who license
the Company's programs to air in the various cable markets throughout the United
States. The Company commenced the sale of broadcast licenses to such affiliates
during 1995. Prior to 1995 the Company had been in the development stage.
SIGNIFICANT ACCOUNTING POLICIES
Estimates:
The preparation of the Company's financial statements requires management to
make estimates and assumptions that effect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from these
estimates.
Fixed assets:
The Company depreciates its office equipment utilizing the straight line method
over a period of five years.
Earnings per share:
The earnings per share is computed by dividing the net income (loss) for the
period by the weighted average number of common shares outstanding for the
period. Common stock equivalents are excluded from the computation if their
effect would be anti-dilutive.
Film library:
The Company amortizes the costs of its film library over the estimated economic
life of the film using the film forecast method in accordance with SFAS #53. The
amortization periods begin at the time the films are available for showing by
the Company's Broadcast Affiliates. When the Company concludes that any such
costs will not benefit future periods said costs are charged to operations for
the period. Amortization charged to operations during 1996 and 1995 aggregated
$9,473 and $21,992, respectively (See Note 6).
F-7
<PAGE>
Revenue recognition:
The Company recognizes revenue from network license agreements not related to
specific programming over the term of the agreements. Revenue from the sale of
licenses for television program rights is recorded in accordance with SFAS #53,
which provides for recognition of revenue at the beginning of the license period
when specified conditions have been met.
Cash and cash equivalents
Cash and cash equivalents consist of cash and other highly liquid debt
instruments with a maturity of less than three months.
Advertising
Advertising expenses are charged to expense upon first showing. Amounts charged
to expense were $12,017 and $6,036 for the years ended December 31, 1996 and
1995, respectively
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a concentration of
credit risk consist principally of cash and accounts receivable, trade. During
the year the Company did not
maintain cash deposits at financial institutions in excess of the $100,000 limit
covered by the Federal Deposit Insurance Corporation. The Company has several
major customers, (see Note 10) the loss of any one of which could have a
material negative impact upon the Company.
Stock-based Compensation
The Company adopted Statement of Financial Accounting Standard No. 123 (FAS
123), Accounting for Stock-Based Compensation beginning with the Company's first
quarter of 1996. Upon adoption of FAS 123, the Company continued to measure
compensation expense for its stock-based employee compensation plans using the
intrinsic value method prescribed by APB No. 25, Accounting for Stock Issued to
Employees, and has provided in Note 11 pro forma disclosures of the effect on
net income and earnings per share as if the fair value-based method prescribed
by FAS 123 had been applied in measuring compensation expense.
Recent Pronouncements
In 1996 Financial Accounting Standards No. 125 (FAS 125) Accounting for Transfer
and Servicing of Financial Assets and Extinguishments of Liabilities was issued.
FAS 125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996. The Company
will adopt FAS 125 in 1997. Adoption of FAS 125 is not expected to have a
material effect on the Company's consolidated financial position or operating
results.
F-8
<PAGE>
Note 2. STOCKHOLDERS' EQUITY
During the periods covered by these financial statements the Company issued
securities in reliance upon an exemption from registration with the Securities
and Exchange commission. Although the Company believes that the sales did not
involve a public offering and that it did comply with the exemptions from
registration, it could be liable for recession of said sales if such exemption
was found not to apply. The Company has not received a request for rescission of
shares nor does it believe that it is probable that its shareholders would
pursue rescission nor prevail if such action were undertaken.
The Company issued 4,000,000 common stock purchase warrants to its shareholders
during August 1994. The warrants were exercisable into one common share at a
purchase price of $2 per share for a period of 18 months from issue and were
redeemable by the Company at $.001 per warrant. During 1996, the Company issued
320,500 shares of common stock and received gross proceeds of $641,000 pursuant
to warrants exercised by its shareholders.
The remaining warrants have expired.
During 1995 the Company issued of 150,000 shares of its common stock for
services which were rendered during 1994. The value ascribed to the services
($300,000) was charged to expense in 1994 and was included in common stock
subscriptions at December 31, 1994.
During October, 1994 the Company issued 32,500 shares of its 7% preferred stock
in settlement of a note payable for $325,000. These shares were convertible into
325,000 shares of the Company's common stock at the option of the holder. The
holder exercised his conversion rights during May 1996.
During May 1996, the Company issued 91,500 to a shareholder for services
provided to the Company. The shares were valued at a market price of $2 per
share. Also, during May 1996, the Company sold 218,181 shares of its common
stock pursuant to Regulation S of the US Securities and Exchange Commission for
cash aggregating $282,787, net of expenses of $15,020. Also, during September
1996, a holder of the Company's redeemable preferred stock converted 5,000
shares of preferred stock into 5,000 shares of common stock at a conversion
price of $2 per share.
F-9
<PAGE>
During May 1996, in connection with a lawsuit settlement (see Note 9), the
Company issued common stock purchase warrants for 329,500 shares to an
individual. The warrants are exercisable for a period of eighteen months from
the date of issue at a price of $2.00 per share. The Company has not recorded
any expense related to the warrants as the estimated fair value of the warrants
is less than the exercise price at the grant date.
During July 1996, the Company adopted the 1996 Employee Stock Option Plan for
the benefit of certain employees, officers, directors and consultants. The
Company also filed a Registration Statement on Form S-8 to register these
shares. The number of common shares reserved under the plan is 800,000. The plan
provides that the option price on the grant date shall not be less than the fair
market value on such date. During July 1996 the Company
issued 360,000 options exercisable at $.1.40 per share under the plan which
expire after ten years unless exercised. During December 1996, the Company
granted additional options under the plan for 370,000 shares exercisable at $.60
for a ten year period.
Following is a summary of the transactions in the plan:
Range of Weighted
Shares Exercise Average
Prices Price
Balance December 31, 1995 -
Granted 730,000 $.60 - $1.40 $.99
Canceled -
Exercised -
-------
Balance December 31, 1996 730,000 $.60 - $1.40 $.99
Options available at
December 31, 1996 70,000
As of the date of the financial statements none of the options had been
exercised.
The weighted average fair value at the date of grant for options granted during
1996 was $1.00 per option. The fair value of the options at the date of grant
was estimated using the Black-Scholes model with assumptions as follows:
Month of grant July December
Market value $1.75 $.75
Expected life 10 10
Interest rate 6.96% 6.29%
Volatility 57.30% 76.34%
Dividend yield 0.00% 0.00%
Stock based compensation costs would have reduced pretax income by $730,000 in
1996 ($.28 per share) if the fair value of the options granted during 1996 had
been recognized as compensation expense.
F-10
<PAGE>
Note 3. INCOME TAXES
Deferred income taxes may arise from temporary differences resulting from income
and expense items reported for financial accounting and tax purposes in
different periods. Deferred taxes are classified as current or non-current,
depending on the classification of assets and liabilities to which they relate.
Deferred taxes arising from temporary differences that are not related to an
asset or liability are classified as current or non-current depending on the
periods in which the temporary differences are expected to reverse.
The Company currently has net operating loss carryforwards aggregating
approximately $772,000 which expire beginning in 2002. The principal difference
between the Company's book operating losses and income tax operating losses
results from the issuance of and subscriptions for common stock and preferred
stock during 1994 and 1996 for services. The effects of these differences are
expected to be permanent in nature, therefore no deferred tax asset had been
recorded related thereto.
The Company did not provide Federal income taxes for the year ended December 31,
1995 due to an operating loss. Taxes at the federal statutory rate of 34% for
the year ended December 31, 1996 amounted to $121,000, however utilization of
the Company's net operating loss carryforward has reduced the provision for
income taxes as reported on the accompanying statement of operations to $ 0.
The Company is unable to predict future taxable income that would enable it to
utilize the deferred tax asset arising from the future value of the net
operating loss and therefore the deferred tax asset of approximately $262,000
related thereto is fully reserved. The Company realized approximately $121,000
of deferred tax assets applicable to the tax loss carryforward used in 1996.
Note 4. RELATED PARTY TRANSACTIONS
During the years ended December 31, 1994 and 1993, certain officers and
shareholders made advances to the Company for working capital purposes. During
1996 the Company repaid $75,313, the balance payable by the Company was $3,985
at December 31, 1996.
F-11
<PAGE>
Also included in amounts due to stockholders at December 31, 1996 are balances
due to entities controlled by two of the Company's directors who are also
stockholders. The Company purchased program rights from one of the entities of
$166,511 during the year ended December 31, 1996 and had a year end balance due
the entity of $75,625. The Company received legal services of $185,000 and
$25,000 for the years ended December 31, 1996 and 1995, respectively provided by
firms associated with one of its directors and had a year end balance due such
firms of $27,042.
Note 5. NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt consists of an obligation arising from the settlement of a
lawsuit (see Note 9). Monthly payments of $2,000 per month, including interest
imputed at 8% per annum are due for a forty month period beginning June 1, 1996.
Principal payments due in the years ended December 31, 1997 through 1999 are
$22,164, $21,084 and $17,703, respectively.
Note payable consists of a short term loan of $10,000 made in March 1993 from an
individual pursuant to a debenture bearing interest at 10% per annum and
originally due on March 30, 1994. The holder of the debenture has the right to
convert the debenture into common stock of the Company at the rate of one share
of common stock for each one dollar due on the debenture. During March, 1994,
the holder of the debenture agreed to extend the due date on the debenture to
March 30, 1995. The note has not been extended and is considered to be due on
demand by the holder.
Note 6. FILM LIBRARY
At December 31, 1996, the Company's film library consisted of the following:
License costs $ 694,625
Mastering costs 61,134
---------
755,759
Less accumulated amortization (10,258)
---------
$ 745,501
During 1996 the Company incurred costs in connection with the rights to air
certain programming, including film mastering costs, through the medium of cable
television. The costs incurred and amortization are as follows:
Costs incurred $ 592,829
Amortization $ 9,473
F-12
<PAGE>
Additionally, during 1996, the Company charged off to expense the net
unamortized cost of programming, aggregating $198,218, acquired in prior periods
that it no longer intends to distribute.
Note 7. MARKETABLE SECURITIES
During the year ended December 31, 1995 the Company received net proceeds from
the sale of marketable securities of $80,862 and realized a gain on the sale of
$15,862.
Note 8. COMMITIENTS AND CONTINGENCIES
During July, 1996, the Company entered into a lease for office space in Las
Vegas, Nevada for a sixty month period ending August 31, 2001 at a monthly
rental of $5,406 per year, increasing by approximately 3.5% per year throughout
the lease. The Company also leases production facilities in Burbank, California
on a month to month basis. Rent expense was $92,045 and $69,404 for the years
ended December 31, 1996 and 1995.
On January 15, 1997 the Company entered into a five year employment agreement
with its chief executive officer whereby the officer is to receive base
compensation of $480,000 per year and a bonus of $10,000 for each new affiliate
territory added to the Company's cable television network. The agreement also
grants the executive options to purchase 800,000 shares of common stock at an
exercise price of 80% of the fair value of the stock at the grant date. The
options vest at a rate of 20% per year during the contract term. The agreement
also provides for termination payments to the executive of all accrued but
unpaid salary and bonus, the rights to vested stock options and a cash payment
of $5,000,000 if termination as (defined in the contract) occurs during the
first contract year. The cash payment after the first contract year is an amount
equal to twice the remaining base salary that would be due during the remaining
contract term.
Note 9. LITIGATION
John Herklotz v. Olympic Entertainment Group, -Inc., et. Al. Los Angeles
Superior Court Case No. BC 127498
During May, 1995 the individual holding the preferred stock described in Note 2
filed suit against the Company and its officers seeking recovery of his $325,000
investment plus interest of $32,000 and additional damages of at least $682,000.
F-13
<PAGE>
The Company settled this claim in 1996 whereby the Company agreed to make cash
payments to Herklotz aggregating $125,000 and grant Herklotz an option to
purchase 329,500 shares of its common stock at an exercise price of $2.00 per
share. Herklotz agreed to convert his 32,500 shares of 7% preferred stock issued
to him by the Company into 325,000 shares of the Company's common stock.
Atlas Enterprises, Inc. v. Olympic Entertainment Group, Inc., et al., Los
Angeles Superior Court Case No. SC 039688
During December, 1995 the plaintiff filed an action against the Company and its
officers seeking damages of the balance of the purchase price of certain
programming licensed to the Company of $100,000, an order terminating the
license for the programming, for punitive damages and costs related to the suit.
The Company has included the $100,000 in accounts payable at December 31, 1995
and is vigorously defending the suit. The court has enjoined the Company from
distributing the programming. The programming was included in programming costs
at December 31, 1995 at $195,000 which represented the cash paid plus the
$100,000 described above. The matter was settled during 1996 whereby the Company
returned the licensed programming and charged the programming costs to
operations.
Nationwide Media Investments, Inc. V. Olympic Entertainment Group, Inc. et. al.
Orange County Superior court case No. 760072
During February, 1996 the plaintiff filed an action against the Company and its
officers for rescission of the Company's license to the plaintiff for certain
programming. During February, 1996 the Company terminated the plaintiffs license
in certain territories for failure to pay the license fees. The plaintiff is
seeking return of $70,000 and compensatory damages and exemplary damages in
excess of $500,000. This matter was submitted to binding arbitration during 1996
as a result of which both parties agreed to dismissal without prejudice.
F-14
<PAGE>
Note 10. INFORMATION ABOUT MAJOR CUSTOMERS
The Company, whose customers arrange for programming to air on local cable
systems in their respective licensed territories under leased access rules of
the Federal Communications Commission, made sales in excess of 10% of total
revenues for the years ended December 31, 1996 and 1995 as follows:
Customer Sales/% Receivable at 12/31
1996:
Carousel Media Marketing $1,550,000 62% $320,000
Capital Funding $ 269,840 11% -
1995:
Worldwide Marketing $ 211,584 59% -
Note 11. BASIS OF PRESENTATION
The accompanying financial statements have been prepared on a "going concern"
basis which contemplates the realization of assets and the liquidation of
liabilities in the ordinary course of business.
The Company has incurred operating losses during the years ended December 31,
1995 and 1994 aggregating $579,001 and $2,176,549, respectively. The Company had
net income for the year ended December 31, 1996 of $355,856, however there can
be no assurance that profitable operations will continue due to a.) the
Company's reliance on one major customer, whose ability to generate significant
revenues from the use of the Company's programming has not been demonstrated,
and b.) the anticipated effects of the employment contract described in Note 8
upon the Company's income from operations and cash flows.
Profitable operations are dependent upon, among other factors, the Company's
ability to obtain equity or debt financing and the Company's ability to finance,
produce and/or acquire and distribute its educational films. Management plans to
continue to sell additional affiliate licenses and to renew expiring licenses
and to seek additional equity financing.
F-15
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 175,083
<SECURITIES> 0
<RECEIVABLES> 320,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 507,228
<PP&E> 116,820
<DEPRECIATION> 14,849
<TOTAL-ASSETS> 1,368,723
<CURRENT-LIABILITIES> 344,934
<BONDS> 38,787
0
464,600
<COMMON> 29,387
<OTHER-SE> 491,015
<TOTAL-LIABILITY-AND-EQUITY> 1,368,723
<SALES> 0
<TOTAL-REVENUES> 2,518,253
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,140,163
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,234
<INCOME-PRETAX> 355,856
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 355,856
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