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, 1997
( ) 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
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(State or other jurisdiction (IRS Employer
of incorporation) Identification Number)
2550 E. Desert Inn Road, Suite 338, 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
-----
At June 1, 1998 there were 2,169,785 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 $339,028.
Documents incorporated by reference: None.
<PAGE>
PART I
Item 1. Business
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(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 ("CCN"). To date, the Company has
had success in several markets but has experienced marginal or poor results from
the efforts of licensees and has determined it to be in the Company's interest
to seek to recapitalize the Company and to seek other venues of distribution.
(b) Narrative Description of Business
---------------------------------
The Company has created a children's educational division called Children's
Cable Network ("CCN" or the "Network"). Prior to January 1998, the Company
acquired, purchased, and licensed 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. The Company's present lack of any revenue and any
cash reserves has resulted in cessation of these activities.
All reference to the Company in the following discussion of the business
activities of the Company includes Children's Cable Network.
Children's Cable Network
CCN provides award-winning, nonviolent, educational, informative and special
interest children's programming for television and in the process of providing
this programming, creates business opportunities for individuals and
syndications looking to get into the cable television broadcasting business.
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
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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.
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
Prior to January 1, 1998, the Company licensed its programming to Cable
Affiliates who would cablecast this programming on their local cable systems
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. The Company licensed only one Cable Affiliate in each cable system
market.
Employees
The Company currently has two employees in the corporate office in Las Vegas,
Nevada, having reduced its staff from eighteen employees in order to reduce
costs. 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.
The Company, through its own research, has located many award-winning children's
series produced since 1950, some of which the Company plans to obtain through
direct acquisition or licensing, provided the Company is able to raise the
capital necessary so to do. 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.
3
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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 12 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 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.
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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.
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.
5
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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.
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 Company presently leases no space and during the report period terminated
its leases in Burbank, California, and subsequently in Las Vegas, Nevada.
Item 3. Legal Proceedings
- -------------------------
The Company is currently involved in the following legal matters:
The Company is a Defendant in Civil Action 96 CV 1930, Capital Funding &
Financial Group, Inc., et al. vs. Olympic Entertainment Group, Inc. In this
cause, Plaintiff seeks refund of approximately $120,000 paid to the Company as
licensing fees in 1996. The Company intends to defend itself and pursue its
claims for licensing fees owed in excess of $100,000 and for damages caused by
Capital Funding through tortuous interference with various contracts.
The Company is a Defendant in Lee Van Dyke, Judy Lynn Kloepfer and William G.
Chandler vs. Olympic Entertainment Group, Inc., et al., which was filed in
Superior Court of Los Angeles County, Case No. BC189116, seeking class action
status and alleging various allegations of violation of California securities
laws, breach of contract and violation of the California Business and
Professions Code. The Company intends to vigorously defend itself and deny that
it ever offered or sold any securities nor did it participate in the sale of
securities. The Company further intends to assert its rights to indemnity from
the other defendants which were licensed broadcast rights by the Company.
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, 1997.
6
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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, 1997
----------------- -------------------
High Bid Low Bid High Bid Low Bid
-------- ------- -------------------
First Quarter $3.38 $1.75 1.125 0.5625
Second Quarter $3.63 $1.75 1.125 0.53125
Third Quarter $2.38 $0.75 0.8125 0.40625
Fourth Quarter $1.19 $0.50 1.125 0.4375
(iv) Not applicable
(v) Not applicable
(2) (a) Not applicable
(b) Holders
- -----------
(1) Title of Class Number of Record Holders
-------------- ------------------------
Common Stock, Approximately 138
$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.
Item 6. Selected Financial Data
- -------------------------------
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-------------------------------------------------------------------------------------------
Income statement data:
<S> <C> <C> <C> <C> <C>
Revenues $ 1,736,491 $ 2,518,253 $ 358,932 $ -- $ --
Income (loss)
from Operations (402,646) 378,090 (545,396) (2,170,003) (102,899)
Net interest expense (28,680) (23,234) (33,605) (36,546) (31,646)
Income (loss)
before income taxes (431,326) 355,856 (579,001) (2,176,549) (134,545)
Income taxes -- -- -- -- --
Net income
(loss) $ (431,326) $ 355,856 (579,001) (2,176,549) (134,545)
=========== =========== =========== =========== ===========
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1997 1996 1995 1994 1993
--------------------------------------------------------------------------------------
Per share data:
Primary:
Net income (loss) $ (.16) $ 0.14 $ (.30) $ (1.92) $ (.15)
=========== =========== =========== =========== ===========
Weighted average shares
outstanding 2,626,390 2,626,390 1,915,038 1,132,125 900,000
Fully diluted:
Net income (loss) $ (.16) $ 0.12 $ (.30) $ (1.92) $ (.15)
=========== =========== =========== =========== ===========
Weighted average shares
outstanding 2,626,390 2,922,390 1,915,038 1,132,125 900,000
Balance sheet data:
Working capital
(deficiency) (404,694) 162,296 $ (872,167) $ 10,305 $ 465,138
Total assets 1,093,232 1,368,723 545,152 260,354 245,760
Long-term debt 16,623 -- -- -- --
Redeemable preferred stock 203,000 203,000 213,000 213,000 --
Total stockholders' equity
(deficiency) 350,676 782,004 (492,441) 86,560 (225,229)
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
The Company has continued to experience severe cash flow problems occasioned by
(i) no revenue from license renewal fees or new Broadcast Affiliates licenses;
(ii) the failure of the Optimist Group licensing program initiated in January
1998, and terminated by mutual consent on April 1, 1998; and (iii) the failure
of the TSR program to produce significant new revenue from its cause marketing
initiatives. Since January 1998, the Company has sought to reduce overhead and
expenditures by (i) reducing personnel from twelve to two as of June 1, 1998
(reduced from eighteen to twelve prior to 1997 year end); (ii) ceasing to pay
salaries to corporate officers; and (iii) terminating its leasehold office space
at 2755 East Desert Inn Road, Suite 200, Las Vegas, Nevada 89121.
In order to generate revenue, the Company has retained a firm to license its
library of children's programming to non-competitive venues of broadcast.
Additionally, the Company is seeking a strategic financial partner to provide
the necessary capital so that CCN can be delivered to homes via direct broadcast
satellite (Primestar and Direct TV are examples of DBS). Revenue from this
method of delivery can be substantial and would be derived from potential
national advertisers or fees based on the number of subscribers serviced. Should
the Company be unsuccessful in the next 30-45 days in either of the foregoing,
it would seek to reorganize its debt and to sell its programming in an orderly
proceeding under the protection of the Bankruptcy Court.
8
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<TABLE>
<CAPTION>
Results of Operations
The following table sets forth, for the fiscal years ended December 31, 1997,
1996, and 1995 certain items from the Company's Statement of Operations.
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $1,736,491 $ 2,518,253 $ 358,392
Expenses 2,139,137 2,140,163 903,788
Income (loss) from Operations (402,646) 378,090 (545,396)
Other income (expense) (28,680) (22,234) (33,605)
----------- -----------
Income before taxes (431,326) 355,856 (579,001)
Provision for income taxes -- -- --
Net income (loss) (431,326) $ 355,856 $ (579,001)
=========== =========== ===========
Earnings per Share
Primary:
Weighted Average
Common Shares Outstanding 2,626,390 2,626,390 1,915,038
=========== =========== ===========
Income (Loss) per Common Share (.16) $ .14 $ (.30)
=========== =========== ===========
Fully Diluted:
Earnings per Share
Weighted Average
Common Shares Outstanding 2,626,390 2,922,390 1,915,038
=========== =========== ===========
Income (Loss) per Common Share (.16) $ .12 $ (.30)
=========== =========== ===========
</TABLE>
Comparison of 1997 to 1996
The Company's activities during 1997 and 1996 consisted of developing the
Company's products, licensing cable affiliates and negotiating acquisitions of
rights to various children's television programs. Revenues were down thirty-one
percent (31%) in 1997 versus 1996 due to the fact that cable affiliates did not
renew their licensing rights and there were fewer new affiliates. The Company
recognizes revenue from the network license agreements when all specified
conditions have been made. During 1997 and 1996, the bulk of the Company's sales
were attributed to the sale of network license agreements. The selling, general
and administrative expenses were almost the same from $2,140,163 in 1996 to
$2,139,137 in 1997.
Comparison of 1996 to 1995
Revenues in 1996 were up 584% versus 1995. 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 were selling for as much as
$100,000 in the large cable markets. 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 were up 146% from $903,788 in 1995
to $2,140,163 in 1996. Interest expense was down in 1996 due to the partial
repayment of debt in early 1996.
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Capital Resources & Sources of Liquidity
During 1997, the Company's working capital decreased to a deficiency of $404,694
compared to $162,296 at December 31, 1996, primarily due to a decrease in
affiliate sales in the fourth quarter.
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. The Company's primary source of cash was from
revenue which accounted for approximately 93 percent of all cash brought into
the Company. The Company did obtain $125,000 in financing during the year.
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 were 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 has been through program licensing.
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.
Related Party Transactions
The deferred compensation features of the employment contract with Dominic
Orsatti were cancelled by mutual consent during the report period.
In 1997, the Company also received legal services from firms in which another of
the Company's directors is a principal. Such services totaled $83,635 for 1997,
and the amount of $29,696 was payable at December 31, 1997.
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 1997 to major
customers as follows:
Customer: Sales/% of total
- --------- ----------------
Carousel Media Marketing $1,750,000 99%
Employment Contract
During 1997, Mr. Orsatti and the Company mutually agreed to terminate all
deferred compensation features and the grant of options pursuant to the terms of
the hereinafter described employment contract because of marginal results of
operations. On January 15, 1997, the Company entered into a five year employment
agreement with Mr. Orsatti, its chief executive officer, whereby Mr. Orsatti was
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 granted 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 provided 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
was an amount equal to twice the remaining base salary that would be due during
the remaining contract term.
10
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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-7
Notes to financial statements F-9
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
- --------------------------------------------------------------------------------
There were no changes or disagreements with accountants on accounting and
financial disclosures.
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
- ---- --- --------
Dominic Orsatti 66 Chief Executive Officer and Chairman of
the Board of Directors
Michael E. Marcovsky(1) 53 President, Chief Operating Officer and
Director
John Holt Smith 57 Secretary and Director
H. C. Hernandez(2) 66 Executive Vice President
Kathleen Hitt(3) 48 Vice President - Public Affairs
Bonnie Houldsworth 44 Treasurer and Chief Financial Officer
Jack E. Rhodes(4) 73 Director
- ---------------
(1) Resigned effective June 10, 1997
(2) Passed away April 24, 1997
(3) Resigned effective April 1, 1998
(4) Resigned effective June 30, 1997
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.
11
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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, AGet 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, 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.
John Holt Smith, 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.
Bonnie Houldsworth, Treasurer and Chief Executive Officer, started her public
accounting career at Laventhol & Horwath. Ms. Houldsworth has been a founding
principal in a Las Vegas public accounting firm since 1987, Houldsworth, Russo &
Company, which is a full service accounting firm in which she specializes in
accounting and auditing for highly regulated industries such as banks, mortgage
companies and gaming companies. Ms. Houldsworth obtained a Bachelor of Science
in Accounting in June 1984 from the University of Nevada, Las Vegas, and became
a licensed Certified Public Accountant in Nevada and California.
Item 11. Executive Compensation
- -------------------------------
The table below sets forth the payroll and consulting compensation for fiscal
1997 for the executive officers and directors of the Company.
Name of Individual Capacities in Which Served Compensation
- --------------------------------------------------------------------------------
Dominic Orsatti Chairman and Chief Executive Officer $235,000
Michael E. Marcovsky President, Chief Operating Officer
and Director $60,000
John Holt Smith Secretary and Director *$83,635
Bonnie Houldsworth Treasurer and Chief Financial Officer **$36,568
H. C. Hernandez Vice President $12,000
Kathleen Hitt Vice President, Public Affairs $56,200
Jack Rhodes Director ***$103,700
- ---------------
* Represents moneys paid to law firms in which Mr. Smith is a principal.
** Represents moneys paid to Houldsworth, Russo & Company, a firm in which Ms.
Houldsworth is a principal and an accountant.
*** Paid to Encore Entertainment, Inc., a company in which Mr. Rhodes is a
principal, for video production services.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -----------------------------------------------------------------------
As of December 31, 1997, there were 2,824,552 Common Shares outstanding. The
following tabulates holdings of Common Shares of the Company by each person who,
subject to the above, are holders of record or are 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.
12
<PAGE>
Table I - Common Stock
Name and Address Number of Shares of Percentage
of Beneficial Owner Common Stock Owned(1) of Ownership
- ------------------- --------------------- ------------
Dominic Orsatti(2) 800,000 28.32 Percent
2550 E. Desert Inn Road #338
Las Vegas, Nevada 89121
Nevada Entertainment Partners, Ltd.(2) 800,000 28.32 Percent
2550 E. Desert Inn Road #338
Las Vegas, Nevada 89121
John Holt Smith 8,000 .0028 Percent
1925 Century Park East #1600
Los Angeles, California 90067
All Directors and Officers as a Group (3) 808,000 28.3228 Percent
- ---------------
(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.
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%
2550 East Desert Inn Road, Suite 338
Las Vegas, Nevada 89121
Nevada Entertainment Partners Ltd.(2) 12,000 36.58%
2550 East Desert Inn Road, Suite 338
Las Vegas, Nevada 89121
John Holt Smith 8,000 24.39%
1925 Century Park East #1600
Los Angeles, California 90067
All Directors & Officers
as a group (3) 20,000 60.97%
- ----------
13
<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.
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%
2755 East Desert Inn Road, Suite 200
Las Vegas, Nevada 89121
Nevada Entertainment Partners Ltd.(2) 98,000 100%
2755 East Desert Inn Road, Suite 200
Las Vegas, Nevada 89121
All Directors & Officers
as a group (3) 98,000 100%
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-7
Notes to financial statements F-9
(b) Reports on form 8-K
None
(c) Exhibits
None
14
<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 ____ day of ______,
1998:
Olympic Entertainment Group, Inc.
By: /s/ Dominic Orsatti
----------------------------------- Date:
Dominic Orsatti, Chairman and --------------------------
Chief Executive Officer
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
- ------------------------------------- ----------------------
Dominic Orsatti,
Chairman & Chief Executive Officer
/s/ John Holt Smith
- ------------------------------------- ----------------------
John Holt Smith
Corporate Secretary & Director
/s/ Bonnie Houldsworth
- ------------------------------------- ----------------------
Bonnie Houldsworth
Treasurer and Chief Financial Officer
15
<PAGE>
OLYMPIC ENTERTAINMENT GROUP, INC.
Balance Sheet
December 31, 1997
(unaudited)
Assets
------
Current assets:
Cash and cash equivalents $ 15,504
Accounts receivable - trade 15,535
Accounts receivable - officer 87,200
-----------
Total current assets 118,239
-----------
Property and equipment, at cost 178,707
Less accumulated depreciation (35,046)
-----------
143,661
Other assets:
Film library 817,557
Deposits and other assets 13,775
-----------
831,332
-----------
Total assets $ 1,093,232
===========
See accompanying notes.
F-2
<PAGE>
OLYMPIC ENTERTAINMENT GROUP, INC.
Balance Sheet
December 31, 1997
(unaudited)
(continued)
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Notes payable $ 135,000
Current portion of long term debt 22,164
Accounts payable-trade 234,778
Accrued expenses 101,295
Amounts due related party 29,696
-----------
Total current liabilities 522,933
Long term debt 16,623
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
Preferred stock, convertible, $.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 par share liquidating preference (Series D) 196,000
Common stock, $.01 par value, 20,000,000
shares authorized, 2,824,552 shares issued
and outstanding 28,246
Paid in capital 3,306,979
Accumulated deficit (3,246,149)
-----------
350,676
-----------
Total liabilities and stockholders' equity $ 1,093,232
===========
See accompanying notes.
F-3
<PAGE>
OLYMPIC ENTERTAINMENT GROUP, INC.
Statements of Operation
For the years ended December 31, 1997 and 1996
(unaudited)
1997 1996
----------- -----------
Revenue $ 1,736,491 $ 2,518,253
Costs and expenses:
General and administrative 2,139,137 1,955,163
General and administrative - related
parties 0 185,000
----------- -----------
Total expenses 2,139,137 2,140,163
----------- -----------
Income (loss) from operations (402,646) (378,090)
Other income and (expenses):
Interest expense (28,680) (23,234)
Other 0 1,000
----------- -----------
(28,680) (22,234)
----------- -----------
Net income before income taxes (431,326) 355,856
Provision for income taxes -- --
----------- -----------
Net income (loss) $ (431,326) $ 355,856
=========== ===========
Net income (loss) per share $ (0.16) $ 0.14
=========== ===========
Weighted average shares 2,626,390 2,626,390
=========== ===========
See accompanying notes.
F-4
<PAGE>
<TABLE>
<CAPTION>
OLYMPIC ENTERTAINMENT GROUP, INC.
Statement of Stockholders' Equity
For the years ended December 31, 1997 and 1996
(unaudited)
Common Preferred
Shares Amount Shares Amount
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance December 31, 1995 1,978,500 $ 19,785 $ 163,300 $ 586,600
Issuance of common shares for cash 218,181 2,182 -- --
Exercise of common stock warrants 320,500 3,205 -- --
Issuance of common shares
for services 91,500 915 -- --
Conversion of Series A preferred
stock 325,000 3,250 (32,500) (325,000)
Conversion of redeemable preferred
stock 5,000 50 -- --
Compensation attributed to stock
options -- -- -- --
Net income for the year -- -- -- --
----------- ----------- ----------- -----------
Balance December 31, 1996 2,938,681 29,387 130,800 261,600
Cancellation of shares at par value -- (114,129) (1,141) --
Net (loss) for the year -- -- -- --
----------- ----------- ----------- -----------
Balance December 31, 1997 2,824,552 $ 28,246 130,800 $ 261,600
=========== =========== =========== ===========
(Continued)
Additional
Paid - In Accumulated
Capital Deficit Total
----------- ----------- -----------
Balance December 31, 1995 $ 1,858,853 $(3,170,679) $ (705,441)
Issuance of common shares for cash 280,605 -- 282,787
Exercise of common stock warrants 637,795 -- 641,000
Issuance of common shares
for services 182,085 -- 183,000
Conversion of Series A preferred
stock 321,750 -- --
Conversion of redeemable preferred
stock 9,950 -- 10,000
Compensation attributed to stock
options 14,800 -- 14,800
Net income for the year -- 355,856 355,856
----------- ----------- -----------
Balance December 31, 1996 3,305,838 (2,814,823) 782,002
Cancellation of shares at par value -- 1,141 --
Net (loss) for the year -- (431,326) (431,326)
----------- ----------- -----------
Balance December 31, 1997 $ 3,306,979 $(3,246,149) $ 350,676
=========== =========== ===========
See accompanying notes
F-5
</TABLE>
<PAGE>
OLYMPIC ENTERTAINMENT GROUP, INC.
Statements of Cash Flows
For the years ended December 31, 1997 and 1996
(unaudited)
1997 1996
--------- ---------
Operating activities $(431,326) $ 355,856
Net income (loss)
Adjustments to reconcile net income
(loss) to net cash:
Depreciation 20,197 7,300
Amortization of film costs 128,355 9,473
Common stock issued for services -- 197,800
Film masters rights charged off 74,876 198,218
Debt issued in lawsuit settlement -- 73,880
(Increase) decrease in accounts receivable 304,465 (320,000)
(Increase) decrease in prepaid expenses 12,145 26,114
(Increase) in other assets 248 (531)
Increase (decrease) in accrued expenses 34,725 (21,467)
Increase (decrease) in deferred revenue -- (607,008)
Increase (decrease) in accounts payable 95,230 (103,702)
Increase in accounts payable - related party (76,956) 102,667
--------- ---------
Total adjustments 593,285 (437,256)
--------- ---------
Net cash provided by (used in) operating activities 161,959 (81,400)
Cash flows from investing activities:
(Increase) in film library (275,287) (592,829)
Purchase of property and equipment (61,887) (94,874)
--------- ---------
Net cash provided by (used in)
Investing activities (337,174) (687,703)
Cash flows from financing activities:
Decrease in deferred offering costs -- --
Common stock sold for cash -- 923,787
Advances to stockholder (87,200) --
Repayment of stockholder loans -- (78,313)
Proceeds from notes payable 125,000 --
Repayment of notes payable -- (10,000)
Repayment of long-term debt (22,164) (12,929)
--------- ---------
Net cash provided by (used in)
financing activities 15,636 825,545
Net increase in cash and cash equivalents (159,579) 56,442
Beginning cash 175,083 118,641
--------- ---------
Ending cash $ 15,504 $ 175,083
========= =========
See accompanying notes.
F-6
<PAGE>
OLYMPIC ENTERTAINMENT GROUP, INC.
Notes to Financial Statements
December 31, 1997
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNT POLICIES
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.
Estimates
---------
Timely preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures, some of
which may require revision in future periods.
Fixed assets
------------
Property and equipment are carried at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets.
When assets are retired or otherwise disposed of, the cost and the related
accumulated depreciation are removed from the accounts, and any resulting
gain or loss is recognized in operations for the period. The cost of
repairs and maintenance is charged to operations as incurred and
significant renewals or betterments are capitalized.
The Company depreciates its office equipment utilizing the straight line
method over a period of five years. The Company has recorded $20,197 and
$9,473 of depreciation expense for the years ended December 31, 1997 and
1996, respectively.
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. During the years ended
December 31, 1997 and 1996, the Company made adjustments to reduce the
carrying value of its film library of $74,876 and $198,218, respectively.
Amortization charged to operations during 1997 and 1996 aggregated $128,355
and $9,473, respectively (See Note 6).
F-7
<PAGE>
OLYMPIC ENTERTAINMENT GROUP, INC.
Notes to Financial Statements
December 31, 1997
(continued)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 specific 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 $39,937 and $12,017 for the years ended December
31, 1997 and 1996, respectively.
Fair value of financial instruments
-----------------------------------
The Company's short-term financial instruments consist of cash and cash
equivalents, accounts and loans receivable, and accounts payable and
accruals. The carrying amounts of these financial instruments approximates
fair value because of their short-term maturities. 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 maintained 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 9) 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 2 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.
Earnings (loss) per share
-------------------------
In February 1997, the Financial Accounting Standards Board (AFASB") issued
SFAS No.128, AEarnings Per Share." SFAS No. 128 supersedes and simplifies
the existing computational guidelines under Accounting Principles Board
(AAPB") Opinion No. 15, "Earnings Per Share."
F-8
<PAGE>
OLYMPIC ENTERTAINMENT GROUP, INC.
Notes to Financial Statements
December 31, 1997
(continued)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Earnings (loss) per share (continued)
-------------------------------------
The statement is effective for financial statements issued for periods
ending after December 15, 1997. Among other changes, SFAS No. 128
eliminates the presentation of primary earnings per share and replaces it
with basic earnings per share for which common stock equivalents are not
considered in the computation. It also revises the computation of diluted
earnings per share. The Company has adopted SFAS No. 128 and there is no
material impact to the Company's earnings per share, financial condition,
or results of operations. The Company's earnings per share have been
restated for all periods presented to be consistent with SFAS No. 128.
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 antidilutive.
Recent Pronouncements
---------------------
SFAS No. 130, AReporting Comprehensive Income", establishes guidelines for
all items that are to be recognized under accounting standards as
components of comprehensive income to be reported in the financial
statements. The statement is effective for all periods beginning after
December 15, 1997 and reclassification of financial statements of financial
statements for earlier periods will be required for comparative purposes.
To date, the company has not engaged in transactions which would result in
any significant difference between its reported net loss and comprehensive
net loss as defined in the statement.
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 Exchanges 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 its
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.
F-9
<PAGE>
OLYMPIC ENTERTAINMENT GROUP, INC.
Notes to Financial Statements
December 31, 1997
(continued)
NOTE 2. STOCKHOLDERS' EQUITY (CONTINUED)
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.
During May 1996, in connection with a lawsuit settlement (see Note 8), 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 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 the year ended December 31, 1997, the Company reacquired and
canceled certain of its shares issued for services which had not been
completed. The shares were retired at their par value.
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 of 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.
F-10
<PAGE>
OLYMPIC ENTERTAINMENT GROUP, INC.
Notes to Financial Statements
December 31, 1997
(continued)
NOTE 2. STOCKHOLDERS' EQUITY (CONTINUED)
The 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
and 1997 730,000 $ .60 - 1.40 $ .99
Options available at
December 31, 1996 and 1997 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.
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.
F-11
<PAGE>
OLYMPIC ENTERTAINMENT GROUP, INC.
Notes to Financial Statements
December 31, 1997
(continued)
NOTE 3. INCOME TAXES (CONTINUED)
The Company currently has net operating loss carryforwards aggregating
approximately $1,202,000 which expire beginning in 2003. 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, 1997 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
$408,000 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
of $3,985 at December 31, 1996 was repaid during 1997. Additionally, the
Company made $87,200 of cash advances to its president during 1997. The
advances will be paid out of future bonuses.
Included in amounts due to stockholders at December 31, 1997 is a balance
due to an entity controlled by one of the Company's directors who is also a
stockholder. The Company received legal services of $108,062 and $185,000
for the years ended December 31, 1997 and 1996, respectively, provided by a
firm associated with one of its directors and had a year end balance due
such firm of $29,696. Additionally, the Company purchased program rights
and production costs from another related entity of $113,625 and $166,511
during the years ended December 31, 1997 and 1996, respectively. During the
year ended December 31, 1997, the Company purchased program rights from an
officer/stockholder in the amount of $18,000.
F-12
<PAGE>
OLYMPIC ENTERTAINMENT GROUP, INC.
Notes to Financial Statements
December 31, 1997
(continued)
NOTE 5. NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt consists of an obligation arising from the settlement of a
lawsuit (see Note 8). Monthly payments of $2,000, including interest
imputed at 8% per annum, are due for a 40 month period beginning June 1,
1996. Principal payments due in the years ended December 31, 1998 and 1999
are $22,164 and $16,623, respectively.
Notes 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. Also included in notes
payable are a series of four notes aggregating $125,000 which were issued
by the Company in December 1997. The notes are due during September 1998
with interest at 10% per annum payable quarterly. The notes are secured by
an aggregate of 250,000 shares of the Company's common stock controlled by
an officer of the Company. The fair value of the pledged shares is
equivalent to the face amount of the notes at the issue date of the notes.
NOTE 6. FILM LIBRARY
At December 31, 1997, the Company's film library consisted of the
following:
License costs $ 912,935
Mastering costs 43,235
---------
956,170
Less accumulated depreciation (138,613)
---------
$ 817,557
=========
During 1997 and 1996 the Company incurred costs in connection with the
rights to air certain programing, including film mastering costs, through
the medium of cable television. The costs incurred and amortization are as
follows:
1997 1996
-------- --------
Costs incurred $275,287 $592,829
Amortization 128,355 9,473
Additionally, during 1996, the Company charged off to expense the net
unamortized cost of programming, aggregating $198,218, acquired in prior
F-13
<PAGE>
OLYMPIC ENTERTAINMENT GROUP, INC.
Notes to Financial Statements
December 31, 1997
(continued)
NOTE 6. FILM LIBRARY
periods that it no longer intends to distribute. During 1997, the Company
charged off to expense the value of film masters delivered to network
affiliates that have not renewed their license agreements.
NOTE 7. COMMITMENTS 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 $10,145, increasing by approximately 3.5% per year throughout the
lease. Rent expense was $143,158 and $92,042 for the years ended December
31, 1997 and 1996.
NOTE 8. LITIGATION
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.
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.
NOTE 9. 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 Communication Commission, made sales in excess of 10% of
total revenues for the years ended December 31, 1997 and 1996 as follows:
Customer Sales/% Receivable at 12/31
---------------------------- ------------------ -------------------
1996:
Carousel Media Marketing $ 1,550,000 62% $ 320,000
Capital Funding 269,840 11% --
1997:
Carousel Media Marketing $ 1,735,000 100% --
F-14
<PAGE>
OLYMPIC ENTERTAINMENT GROUP, INC.
Notes to Financial Statements
December 31, 1997
(continued)
NOTE 10. 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,
and a loss from operations of $431,326 for the year ended December 31,
1997. There can be no assurance that profitable operations will be attained
due to the Company's reliance on one major customer, which ability to
generate significant revenues from the use of the company's programming has
not been demonstrated.
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.
Additionally, management is exploring plans for a merger of the Company
with another operating entity.
F-15
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