Initial Public Offering (IPO): Registration Statement (General Form) — Form S-1
Filing Table of Contents
Document/Exhibit Description Pages Size
1: S-1 S-1/ Common Stock - $10,822,500 95 448K
2: EX-1.1 Selling Group Agreement 7 43K
3: EX-3.1 Articles of Incorporation - Msh Entertainment 14 65K
4: EX-3.2 Bylaws - Msh Entertainment Corp. 6 32K
5: EX-4.1 Subscription Agreement 3 16K
6: EX-5.1 Opinion - Glenn Gearhart 2± 11K
7: EX-10.1 Employment Agreement - Msh & Robert Maerz 12 48K
16: EX-10.10 Cooperation Agreement - Msh & Happy Zone 16 61K
17: EX-10.11 Promissory Note - Msh & Robert Maerz 1 10K
18: EX-10.12 Promissory Note - Msh & Alfred Morgan 1 10K
19: EX-10.13 Promissory Note - Msh & Rick Seibold 1 10K
20: EX-10.14 Promissory Note - Msh & Jonathan Stathakis 1 10K
21: EX-10.15 Credit Agreement - Msh & Happy Zone 3 17K
8: EX-10.2 Employment Agreement - Msh & Jonathan Stathakis 12 48K
9: EX-10.3 Employment Agreement - Msh & Christopher Haigh 9 47K
10: EX-10.4 Employment Agreement - Msh & Fred Aurelio 10 43K
11: EX-10.5 Promissory Note - Christopher Haigh 2 14K
12: EX-10.6 Msh - 1996 Stock Option Plan 12 48K
13: EX-10.7 Credit Agreement - Msh & Robert Posner 5 25K
14: EX-10.8 Cooperation & Warrant Agreement - Msh & Intel 37 160K
15: EX-10.9 Production Agreement - Msh & Abrams/Gentle 19 75K
22: EX-27 Financial Data Schedule 2 10K
As filed with the Securities and Exchange Commission on April 4, 1997
Registration No.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
--------------------------
MSH Entertainment Corporation
------------------------------------------
(Exact name of registrant as specified in its charter)
Utah 94-3248713
------------------------------ ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
7812
--------------------------------------------------------
(Primary Standard Industrial Classification Code Number)
3330 Ocean Park Blvd., Santa Monica, CA 90405 (310) 664-1090
---------------------------------------------------------------------------
(Address, including zip code, and telephone number, including area code, of
registrant; principal executive offices and principal place of business)
Robert Maerz
3330 Ocean Park Blvd., Santa Monica, CA 90405
(310) 664-1090
------------------------------------------------------------------------------
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copy to
Glenn L. Gearhart, Esq.
7222 Seaworthy Drive
Huntington Beach, California 92648 (714) 536-8045
Approximate date of proposed sale to the Public:
As soon as practicable after this Registration Statement is declared effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933 check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
[Enlarge/Download Table]
Title of each class of Amount to be Proposed maximum Proposed maximum Amount of
securities to be registered registered offering price per unit aggregate offering price Registration fee
Common Stock $3,250,000 $ ------ $10,822,500 $3,278,00
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
Exhibit Index is located on sequentially numbered page ______.
3,250,000 Shares
MSH ENTERTAINMENT CORPORATION
Common Stock
MSH ENTERTAINMENT CORPORATION, (the "Company"), a development stage Utah
Corporation, is offering 3,000,000 shares of common stock and 250,000 shares are
being offered by the Selling Stockholders. The Company will not receive any of
the proceeds from the sale of the shares by the Selling Stockholders. See
"Principal and Selling Stockholders." The Company is in the business of film,
video, music and television production and distribution, and computer software
development. Through recent acquisitions and strategic alliances the Company
intends to expand its business operations to include creating, developing,
producing, licensing, distributing and merchandising of entertainment media
products and software.
The Company's strategy for growth emphasizes the development of new products,
selected acquisitions and participation in strategic alliance agreements. The
Company commenced commercial production and sales of entertainment and
educational media products in 1983 and plans to utilize a substantial portion of
the proceeds from this offering to expand its business operations.
Prior to this offering there has been only a limited public market for the
Common Stock of the Company. There can be no assurance that any significant
trading market in these securities will develop hereafter, or that such market,
if developed, will continue.
THE SECURITIES OFFERED HEREBY ARE HIGHLY SPECULATIVE, INVOLVE A HIGH DEGREE OF
RISK AND SUBSTANTIAL IMMEDIATE DILUTION. SEE "RISK FACTORS" FOR SPECIAL RISKS
CONCERNING THE COMPANY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
[Download Table]
------------------------
Underwriter's Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions (1) Company (2) Shareholders (3)
-------- --------------- ------------ ----------------
Per Share $ $ $ $
Total (4) $ $ $ $
The date of this Prospectus is _________ __, 1997
(1) The 3,000,000 shares of common stock are being offered on behalf of the
Company by the officers and directors of the Company, who will not be separately
compensated for such services. In addition, the Company may offer the shares
through broker-dealers who, in the USA, are members of the National Association
of Securities Dealers, Inc. ("NASD"), or outside of the USA, through broker-
dealers or others. If the Company makes such an arrangement with a
broker/dealer, this prospectus will be supplemented to disclose such
arrangement. If the shares are sold through broker-dealers, they may receive
commissions of up to 10% of the price of the shares sold by them. The table on
the cover page assumes that commissions will be paid with respect to all of the
shares being offered hereby.
(2) Before deducting expenses payable by the Company, estimated at $80,000.
(3) The Selling Shareholders have informed the Company that they intend to sell
the previously issued shares covered hereby, from time to time during the
Offering Period for their own respective accounts on the open market or in
individually negotiated transactions, at prevailing market prices or at such
prices as may be agreed upon. Although there are no current arrangements
therefor, commissions equal to or in excess of normal brokerage commissions may
be paid by the Selling Shareholders to brokerage firms in connection with such
sales. See "Plan of Distribution - Shares Offered by the Selling Shareholders."
The Company will not receive any part of the proceeds from the sale of any of
these Selling Shareholder shares. Certain of the Selling Shareholders may be
deemed "affiliates" of the Company as defined under the Securities Act of 1933,
as amended (the "Securities Act"), and therefore may be deemed "underwriters"
within the meaning of the Securities Act of the shares to be sold by them in
connection with this offering.
(4) There can be no assurance that any or all of the shares being offered will
be sold. Subscriptions may not be withdrawn once made. The Company personnel
authorized to administer this offering are Robert Maerz and Jonathan Stathakis,
who will not receive any separate compensation therefor. The proceeds will be
released to the Company upon receipt of the amount of the purchase price of an
offered amount and thereafter, while the offering continues will be delivered
directly to the Company for the remaining unsold shares. (See "Plan of
Distribution").
The Company is not currently a reporting company under the Securities Exchange
Act of 1934. The Company intends to furnish to its shareholders annual reports
containing financial statements audited by an independent public accounting firm
after the end of each fiscal year.
2
SUMMARY
The following summary is qualified in its entirety by the detailed information
and financial data appearing elsewhere in this offering circular.
MSH ENTERTAINMENT CORPORATION, (the "Company"), a development stage Utah
Corporation, is offering 3,000,000 shares of common stock and 250,000 shares are
being offered by the Selling Stockholders. The Company will not receive any of
the proceeds from the sale of the shares by the Selling Stockholders. See
"Principal and Selling Stockholders." The Company is in the business of film,
video, music and television production and distribution, and computer software
development. The Company was organized in Utah in 1983 and through recent
acquisitions, new strategic alliances and the proceeds from this offering the
Company intends to expand its business operations to include creating,
developing, producing, licensing, distributing and merchandising of
entertainment media products and software.
The Company's business plan is focused toward the generation of profits and
equity growth by developing, producing and distributing both live action and
animated TV specials, TV movies, TV series, movies for broadcast TV, cable,
satellite and syndicated TV, and video cassettes. The Company also intends to
participate in revenue generated from music, software licensing and the
ancillary merchandising of toys and associated products which are related to the
Company's created works.
The Company's strategy for growth emphasizes the development of new products,
selected acquisitions and participation in strategic alliances. The new
consolidated Company plans to utilize a substantial portion of the proceeds from
this offering to expand its entertainment business operations.
During June 1996, in exchange for cash and a promissory note, the Company
acquired all of the rights and, assets of East End Communication Inc., East End
Productions Inc., and J.B. Dubs Inc., ("East End"), all of which were California
corporations. During September 1996, in conjunction with the execution of an
animated children's production agreement, the Company participated in the
formation of and received a 60% equity interest in Happy Zone Entertainment
Corporation (HZE), a California corporation. The other major HZE shareholder is
AGE, Inc. Through its ownership interest in HZE, the Company is participating in
the development, production and licensing of animated television programs and
televisions series. It is also pursuing opportunities in licensing of related
children's toys and merchandising. See "Business - HZE."
During November 1996 the Company entered into a strategic product development
agreement with Abrams/Gentile Entertainment Inc. (AGE). Under terms of the
agreement AGE acquired warrants to acquire up to 1,000,000 shares of Common
Stock of the Company and the Company acquired the rights to produce a new
children's TV series entitled "Vanpires" developed by AGE and scheduled to
commence network broadcast during fall 1997. The company also acquired an
interest in the potential revenue from toys and merchandising related to the new
series. See "Business - AGE Agreement."
During November 1996 the Company entered into a strategic marketing and product
development agreement with Intel Corporation (Intel). Under terms of the
agreement Intel acquired warrants to acquire 1,000,000 shares of Common Stock of
the Company and the Company acquired the rights to develop joint marketing and
awareness programs and a marketing and promotion plan for the Company's products
including its new animation production management system which is designed to
operate on Intel micro processors and Microsoft Windows NT. See "Business -
Intel Agreement."
The Company is proceeding with development and marketing of an advance
technology software program which utilizes the parallel processing capabilities
of the Intel MP platform and the related Intel computer chips to provide a
significant increase in the production performance in the creation, development
and rendering of computer animation products. The Company intends to begin
limited application testing of the software by Mid 1997 followed by the
licensing and distribution of this advanced software product to the
entertainment industry.
3
The software technology provides efficient computerized management of the TV and
movie animation production process. Specifically the software technology is
designed to enhance the production of animated feature films, such as "Toy
Story," animated TV Series, such as the "Simpsons" and children's programs, such
as "Sky Dancers." The development and licensing of this advanced software
technology is being supported by Intel through the marketing and technology
development agreement and the AGE marketing and product development agreement.
The Company's headquarters are located at 3330 Ocean Park Boulevard, Santa
Monica, CA 90405. The Company has production studios, an animation and software
development center, and support facilities in San Francisco, California. The
Company also maintains an office in Houston, Texas.
Gross income from operations of the Company will depend upon a number of key
factors including but not limited to: sales; product sales mix; pricing;
production rates; distribution; merchandising; and other factors. Because the
Company has recently commenced significant expansion, an investment in the
shares of the Company involves risks. Accordingly, potential investors should
carefully review this entire prospectus and particularly the section entitled
"Risk Factors."
The Company is offering a maximum of 3,000,000 shares of common stock at a price
of $_____ per share. The shares are being offered on behalf of the Company by
the officers and directors of the Company, who will not be separately paid for
such services, on a "best efforts" basis with respect to all 3,000,000 shares.
There is no minimum number of shares that must be purchased. In addition, the
Company may offer the shares through broker-dealers who, in the USA, are members
of the National Association of Securities Dealers, Inc. ("NASD"), or outside of
the USA, through broker-dealers or others. If the shares are sold through
broker-dealers, they may receive commissions of up to 10% of the price of the
shares sold by them. The table on the cover page assumes a commission will be
paid with respect to all of the shares being offered hereby. There can be no
assurance that any or all of the shares being offered will be sold.
Subscriptions may not be withdrawn once made. The proceeds will be released to
the Company upon receipt and acceptance of subscriptions. See "Plan of
Distribution."
The Company has 50,000,000 shares of common stock authorized with a par value of
$0.001. As of September 30, 1996 the Company had 9,391,649 shares issued and
outstanding. Upon completion of the offering, with all options, all warrants and
all credit agreement conversions, at the estimated conversion rate, executed,
there will be 15,551,646 shares issued and outstanding, assuming all shares are
sold. The Company has 25,000,000 shares of preferred stock authorized, none are
issued or outstanding.
RISK FACTORS
In addition to the other information in this Prospectus, the following factors
should be carefully considered in evaluating an investment in the shares of
Common Stock offered hereby.
NEW BUSINESS VENTURE. Although the Company was organized in 1983, and has
pursued various business objectives, the current focus of the Company's business
plan is directed toward the entertainment products industry. In support of this
focus, during 1996 the Company has completed major acquisitions and entered into
two strategic relationships with major US companies. Although management of the
Company has spent several years in research, development and evaluation of the
entertainment market and the availability of products, the Company is
implementing a business plan focused toward family and children's entertainment,
and integrating the assets and capabilities of newly acquired resources into
business, and has only a very limited history of operations as a fully
integrated entertainment company. The Company incurred consolidated losses
through the calendar year 1994, and incurred consolidated losses through the end
of 1995 and for the nine months ended September 30, 1996. As of September 30,
1996, the Company had an unaudited accumulated deficit. Accordingly, it can be
expected that future operating results will continue to be subject to many of
the problems, expenses, delays and risks inherent in the establishment of a new
business enterprise, many of which the Company has no control over.
4
There can be no assurance, therefore, that the Company will be able to achieve
or sustain profitability in future periods. Even if the Company's operations
prove to be marginally profitable, the value of the Company's Common Stock, and
the potential return to investors, could be substantially diminished.
Consequently, an investment in the Company is highly speculative and no
assurance can be given that purchasers of the shares of Common Stock offered
hereby will realize any return on their investment or that purchasers will not
lose their entire investment.
GENERAL RISKS OF BUSINESS; NO INDEPENDENT MARKETING STUDIES. The Company has
formulated its business plans and strategies based on certain assumptions of the
Company's management regarding the size of the market for its products, the
Company's anticipated share of the market for those products, the anticipated
availability and cost of production talent and supplies, and the estimated
prices for and acceptance of the Company's products. Although these assumptions
are based on the best estimates of management, there can be no assurance that
these assessments will prove to be correct.
No independent marketing studies have been conducted on behalf of or otherwise
obtained by the Company, nor are any such studies planned. Any future success
that the Company might enjoy will depend upon many factors, including factors
which may be beyond the control of the Company or which cannot be predicted at
this time. These factors may include increased levels of competition, including
the entry of additional competitors and increased success by existing
competitors, changes in general economic conditions, increases in operating
costs including costs of supplies, personnel, and equipment, reduced margins
caused by competitive pressures and other factors, and changes in environmental
regulation imposed under federal, state or local laws.
POSSIBLE DECLINE IN POPULARITY OF OTHER CURRENT PROGRAMS AND UNCERTAINTY OF
ACCEPTANCE OF NEW PROGRAMS. A portion of the Company's revenues are expected
to be derived from the creation, development, production, acquisition,
distribution, merchandising and other exploitation of family and children's
television properties. The success of each series depends upon unpredictable
and volatile factors beyond the Company's control, such as family and children's
preferences, competing programming and the availability of other entertainment
activities for children. A shift in children's interests could cause the
Company's current television programming to decline in popularity, which could
materially and adversely affect the Company's results of operations and
financial condition. The Company also intends to continue to produce or acquire
new properties, the success of which depends entirely upon market acceptance.
There can be no assurance as to the continuing commercial success of any of the
Company's current properties, or that the Company will be successful in
generating sufficient demand and market acceptance for its new properties. While
the Company is committed to the ongoing development and acquisition of family or
children's television programming, the inability of the Company to develop or
acquire new programs that are capable of achieving commercial success could
materially and adversely affect the Company's results of operations and
financial condition. The Company is also in the business of corporate
communications and entering the production of TV Commercials, international
distribution, music publication and related entertainment activities. Each of
these activities face competition, changes in consumer and customer preferences
and various economic factors all of which could materially and adversely affect
the Company's results of operations and financial conditions.
LIMITED PRODUCTION AND DISTRIBUTION EXPERIENCE. While the Company has
successfully produced and distributed entertainment media products on a limited
basis, it has not yet engaged in large-scale development, production,
distribution and merchandising operations. Once large-scale operations are
under way, it is possible that unanticipated problems might arise in the
operations process, due to the introduction of new equipment, new media's, new
distribution channels, or otherwise. Any such problems could result in delays
in the shipment of products to customers, resulting in postponements in the
recognition of revenues.
5
LIMITED NUMBER OF TIME SLOTS FOR US FAMILY AND CHILDREN'S TELEVISION
PROGRAMMING. The Company is engaged in the creation, development and production
of family and children's television programming intended for broadcast on
various networks, and in syndication, in both the US and international markets.
The Company's products compete for time slots with a variety of companies which
produce animated or live-action television programming targeted at families and
children. The number of US outlets available to producers of family and
children's programming has expanded in the last decade due, in part, to the
growth in the number of broadcast and cable outlets. However, the number of time
slots currently allocated to general family and children's television
programming remains limited (a "slot" is typically a half hour broadcast time
period for a program that either airs five times per week -- Monday through
Friday -- or once per week, usually on the weekend). The success of the Company
will be materially dependent upon its ability to expand and continue to be
successful in producing TV programming which is accepted by the networks and
syndication markets.
COMPETITION. The businesses in which the Company engages are highly
competitive. Each of the Company's primary business operations is subject to
competition from companies which, in some instances, have greater production,
distribution and capital resources than the Company.
The Company competes on the basis of relationships and pricing for access to a
limited supply of facilities and talented creative personnel to produce its
programs and provide its services. The Company competes with other studios and
production companies for the services of writers, producers, animators, actors
and other creative personnel and specialized production facilities.
In the United States, the Company's products compete with the major studios and
other independents for time slots, ratings and related advertising revenues
The Company's products will be offered for sale to broadcast television networks
and cable television channels, such as Nickelodeon, USA Network, The Family
Channel, Discovery Networks, The Cartoon Network and other domestic broadcast
outlets for market acceptance of its programming and for viewership ratings.
The Company will also offer the products to broadcasters and distributors in the
foreign marketplace. In addition, The Walt Disney Company has recently
announced plans to launch an educational cable television channel for children
and Fox has announced the formation of Fox Kids World Wide, Inc. to expand its
children's programming world wide. Over the past five years, cable television
has captured an increasing market share while overall viewership of the
networks, and broadcast television in general, has declined. Further, the
Company's product vies for the children's audience with independent television
stations, suppliers of cable television programs, direct broadcast satellite and
other DTH systems, radio and other forms of media. As a result of heightened
competition for children in the 2-11 age category, virtually every major
broadcast network suffered a decline in ratings for each of the last two
television seasons, and there can be no assurance that such trend will not
continue. Internationally, the Company contends with a large number of US-based
and international distributors of family and children's programming, including
The Walt Disney Company, Fox and Warner Bros., with whom it must also compete in
the development or acquisition of programming properties expected to appeal to
international audiences. Such programming often must comply with foreign
broadcast rules and regulations which may stipulate certain local content
requirements.
DEPENDENCE ON KEY CONTRACTS. The Company has entered into a production
agreement with Abrams/Gentile Entertainment Inc. (AGE) pursuant to which the
Company has been granted the right to produce the new children's television
series, "Vanpires." Should the Company's agreements with AGE terminate, there
can be no assurance that the Company would be able to enter into production
agreements with other creative children's entertainment companies on terms
comparable to the AGE agreement. While the Company believes that its ability to
successfully develop future programming is not materially dependent on its
relationship with AGE, the possibility nonetheless exists that any change in the
Company's relationship with AGE, or the failure of AGE to perform its
obligations under the agreements with the Company, could have a material adverse
effect on the results of operations and financial condition of the Company.
6
The Company has entered into a strategic marketing and product development
agreement with Intel pursuant to which the Company has been granted conditional
rights to utilize certain Intel trademarks and to receive support from Intel in
the marketing and distribution of animation management software products and
entertainment products. While the Company believes that its ability to
successfully develop and market its products and is not naturally dependent on
its relationship with Intel, the possibility none the less exists that any
change in the Company's relationship with Intel or the failure of Intel to
perform its obligations under the agreements with the Company, could have a
material adverse effects on the results of operations and financial condition of
the Company.
The Company has entered into a product development support agreement with HZE
pursuant to which the Company will provide pre and post production and animation
services to HZE for the production of animated children's TV properties.
While the Company believes that its ability to successfully develop and market
its products and is not materially dependent on its relationship with HZE, the
possibility exists that any change in the Company's relationship with HZE or the
failure of HZE to perform its obligations under the agreements with the Company,
could have a material adverse effect on the results of operations and financial
conditions of the company.
DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a significant
extent upon the continued service of its founders and the senior management
team. The loss of any of these parties at any time could have a material
adverse effect on the Company. The Company only maintains a "key-man" insurance
policy on the life of Christopher Haigh, but none of the other key personnel.
The Company also will depend on its ability to attract, retain and motivate such
additional qualified personnel as may be needed. The competition for such
personnel is intense. There can be no assurance that the Company will be
successful in retaining its existing key employees, and consultants, or in
attracting and retaining any additional personnel or consultants it requires.
See "Management."
DEPENDENCE ON NEW MATERIAL AND TALENT. The ability of the Company to create new
products is dependent upon the continued availability of new media material and
talent. The Company has no control over the availability of these items. The
supply of new materials and talent for the creation and development of programs
could be adversely affected by a number of factors, including the possible
introduction of more bidders for new materials, production talent, and actors,
all of which could result in less available product, or an increase in the
acquisition costs of new material. Any disruption or suspension in the supply
of these materials could adversely affect the ability of the Company to create
new products. An increase in costs of acquiring new materials could also
adversely affect the performance of the Company.
INTERNATIONAL SUBCONTRACTING OF ANIMATION. As with other producers of animated
programming, the Company may subcontract some of the less creative and more
labor-intensive components of its animation production process to studios
located in countries with relatively low-cost labor, primarily in the Far East
and Europe. With an increasing number of animated feature films and animated
television programs being produced in recent years, the demand for the services
of overseas studios has increased substantially. This increased demand may lead
overseas studios to increase their fees, which could result in increased
animated programming production costs incurred by the Company or the inability
of the Company to contract with its preferred overseas studios. No assurance
can be given that future subcontracting arrangements will be obtainable on terms
which are as favorable to the Company as its current arrangements.
DEPENDENCE ON DISTRIBUTION OUTLETS. The ability of the Company to distribute
its products is dependent upon the performance of the Company's distribution
division and the continued availability of distribution outlets for its media
products. The Company has no control over the availability of distribution
outlets. The supply of distribution outlets could be adversely affected by a
number of factors, including the possible merger or consolidation of
distribution channels, resulting in less outlets, the development of new media
formats which are not compatible with the Company's product, or the development
of customer viewing trends which are inconsistent with the Company's product,
resulting in the rejection of the Company's products by the distribution
networks. Any disruption or suspension in the distribution outlets could
7
adversely affect the ability of the Company to distribute its products and may
reduce the value of the product library assets held by the Company.
OVERESTIMATION OF REVENUES OR UNDERESTIMATION OF COSTS. The Company follows
Financial Accounting Standards Board Statement No. 53, "Financial Reporting by
Producers and Distributors of Motion Picture Films," regarding revenue
recognition and amortization of production costs, in which the Company owns or
controls all applicable rights. All costs incurred in connection with an
individual program or film, including acquisition, development, production and
allocable production overhead costs and interest, are capitalized as television
and film costs. These costs are stated at the lower of unamortized cost or
estimated net realizable value. Estimated total production costs for an
individual program or film are amortized in the proportion that revenue realized
relates to management's estimate of the total revenues expected to be received
from such program or film. If revenue or cost estimates change with respect to
a program or film, the Company may be required to write down all or a portion of
the unamortized costs for such program or film. No assurance can be given that
such write-downs, if they occur, will not have a material adverse effect on the
Company's results of operations or financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
REVENUE VARIATIONS. Significant fluctuations in the Company's total revenues
and net income can occur from period to period depending upon availability dates
of programs, production schedules and other factors. Due, in part, to these
factors, the results of any one quarter are not necessarily indicative of
results for future periods, and cash flows may not correlate with revenue
recognition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations".
INTERNATIONAL SALES. As part of its business strategy, the Company intends to
expand its international program production and distribution activities, as well
as its worldwide merchandising, licensing and ancillary activities. The Company
is subject to the special risks inherent in international business activities,
including (i) general economic, social and political conditions in each country,
(ii) currency fluctuations, (iii) double taxation, (iv) unexpected changes in
applicable regulatory requirements and (v) compliance with a variety of
international laws and regulations. The results of the Company's international
operations may be measured, in part, in local currencies. For reporting
purposes, assets and liabilities are translated into US dollars using exchange
rates in effect at the end of each reporting period. Revenues and expenses are
translated into US dollars at the average exchange rates prevailing during the
period. As a result, the Company can expect to record foreign exchange losses
and gains in the future. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
GOVERNMENT REGULATION. The Company's US children television productions must
comply with the provisions of the Children's Television Act of 1990 ("CTA") and
the rules and policies of the Federal Communications Commission ("FCC")
pertaining to the production and distribution of television programs directed to
children.
On August 8, 1996, the FCC amended its rules to establish a "processing
guideline" for broadcast television stations of at least three hours per week,
averaged over a six-month period, with "Core Programming" that furthers the
educational and informational needs of children 16 and under in any respect,
including the child's intellectual/cognitive or social/emotional needs. Core
Programming has been defined as educational and informational programming that,
among other things, (i) has served the educational and informational needs of
children "as a significant purpose", (ii) has a specified educational and
informational objective and a specified target child audience, (iii) is
regularly scheduled, weekly programming, (iv) is at least 30 minutes in length,
and (v) airs between 7:00 a.m. and 10:00 p.m. Any TV station that satisfies the
processing guideline by broadcasting at least three weekly hours of Core
Programming will receive FCC staff-level approval of the portion of its license
renewal application pertaining to the CTA. Alternatively, a station may qualify
for staff-level approval even if it broadcasts "somewhat less" than three hours
per week of Core Programming by demonstrating that it has aired a weekly package
of different types of educational and informational programming that is "at
least equivalent" to three hours of Core Programming. Non-core programming that
can qualify under this alternative includes specials, public service
announcements, short-form programs and regularly scheduled non-weekly programs,
which have "a significant purpose of
8
educating and informing children." The adoption of the new quantitative
guideline could result in a material increase in demand for educational and
informational children's programming. There can be no assurance such increase
would result in a benefit to the Company's business.
The United States Congress and the FCC also currently have under consideration,
and may in the future adopt, new laws, regulations and policies regarding a wide
variety of matters which could, directly or indirectly, materially affect the
operations of the Company. The Company is unable to predict the outcome of
future federal legislation or the impact of any such laws or regulations on its
operations.
MANAGEMENT OF ANTICIPATED GROWTH. The net proceeds to the Company from this
offering will be used to support the continued development and growth of the
Company's operations. The anticipated development and expansion of the
Company's operations to be financed using the net proceeds from this offering
will place additional demands on the Company's management, and is likely to
require the Company to hire additional personnel, to implement additional
operating, production and financial controls, install additional reporting and
management information systems for order processing, system monitoring, customer
service and financial reporting, and otherwise to improve coordination between,
production, marketing, sales and other functions. The Company's future
operating results will depend on management's ability to manage future growth,
and there can be no assurance that efforts to manage future growth will be
successful. See "Management."
STRATEGIC RELATIONSHIPS WITH HZE, INTEL AND AGE. The Company has and continues
to have, a close strategic relationship with HZE, Intel and AGE and their
affiliated entities and believes that there relationships are materially
important to its business and business strategies. However, except as may be
provided in the agreements between them which are discussed elsewhere in this
Prospectus, none of the parties or their affiliated companies, nor the Company,
are obligated to engage in any business transactions or jointly participate in
any opportunities with the other, and the possibility exists that the current
strategic relationships between the parties could materially change in the
future. See "HZE Agreement," "Intel Agreement," and "AGE Agreement."
POSSIBLE NEED FOR ADDITIONAL CAPITAL. Developments in the Company's business
and possible expansions could indicate that the Company should expand its
business at a faster rate than that currently planned. In such event, it is
likely that the Company would attempt to raise additional capital to accelerate
its growth. Moreover, there can be no assurance that the Company will not
encounter unforeseen difficulties that may deplete its capital resources more
rapidly than anticipated, which would require that the Company seek additional
funds through equity, debt or other external financing. There can be no
assurance that any additional capital resources which the Company may need will
be available to the Company if and when required, or on terms that will be
acceptable to the Company. If additional financing is required, or desired, the
Company may be required to forego a substantial interest in its future revenues
or dilute the equity interests of existing shareholders, and a change in the
control of the Company may result.
TRADEMARKS AND PROPRIETARY RIGHTS. The Company's trademarks and rights to its
creative properties and characters are significant assets. As appropriate the
Company has files applications for copyright to its creative properties and
federal trademark registration for trademarks. The Company intends to, as
appropriate, file applications for trademark and copyright protection for each
of its new properties, featured characters and other creative properties. There
can be no assurance that any such application, when filed, will be approved, or
that the Company will have the financial and other resources necessary to
enforce its proprietary rights against infringement by others. The inability of
the Company to obtain adequate protection or to enforce its proprietary rights
could have a material adverse effect on the Company. See "Business."
TRANSACTIONS WITH STOCKHOLDERS AND THEIR AFFILIATES. The Company has in the
past entered into transactions and agreements, some of which are ongoing, with
officers and directors of the Company and with HZE, Intel and AGE and their
affiliated companies. In addition, the Company may in the future enter into
additional agreements and other transactions with certain of these affiliates.
Although the Company has adopted a policy that future transactions between the
Company and any of these affiliates or family
9
members must be approved by a majority of the Board of Directors of the Company,
including a majority of the disinterested members of the Board, there can be no
assurance that any such future transactions will prove to be favorable to the
Company. See "Certain Transactions."
BROAD DISCRETION IN APPLICATION OF PROCEEDS. The Company intends to use the net
proceeds of the offering for general corporate purposes, including working
capital primarily to finance the Company's development, acquisition and
licensing of family and children's programming and its expansion in
international distribution. In addition, the Company may use a portion of the
net proceeds to acquire businesses, libraries, and other assets believed by the
Company to be complementary to the Company's current businesses or which support
the Company's strategic goals; although, except as described in this Prospectus,
the Company has no such commitments. As a result, a significant portion of the
net proceeds will be available for projects that are not yet identified, and
management will have broad discretion with respect to the application of such
proceeds. See "Use of Proceeds" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
FLUCTUATIONS IN OPERATING RESULTS. The Company's operating results may vary
significantly due to a variety of factors, including changes in the availability
and cost of materials, the introduction of new products by the Company or its
competitors, the timing of the Company's marketing efforts, pricing pressures,
general economic and industry conditions that affect television, cable and home
video customer demand, and other factors.
LIMITED MARKET FOR THE COMMON STOCK; ARBITRARY DETERMINATION OF PRICE. There
has only been a limited public market for the Common Stock of the Company prior
to the effective date of the Registration Statement of which this Prospectus is
a part, and there can be no assurance that an active public market for the
Company's Common Stock will develop or be sustained in the foreseeable future.
In the absence of an active public market therefor, the public offering price of
the Common Stock was determined by the Company. The offering price was
determined without the assistance of any investment banking firm or other expert
in the valuation of businesses or securities, and is not necessarily related to
the Company's assets, book value, net worth or other criteria of value. Among
the factors considered by the Company's management in determining the public
offering price were the prospects for the Company, an assessment of the industry
in which the Company operates, past private and public sales of the Common
Stock, and the general condition of the securities markets. Accordingly, in no
event should the offering price set forth on the cover page of this Prospectus
be regarded as an indications of the actual value of the Company or the Common
Stock, or of any future market price of the Company's Common Stock. Moreover,
there can be no assurance that the market price of the Common Stock will not
decline following this offering, or that investors will be able to sell any of
the securities purchased hereunder at a price equal to or greater than the
prices paid therefor.
SUFFICIENCY OF PROCEEDS. Although this offering contemplates the sale of shares
in the aggregate maximum of $10,000,000, there is no assurance the Company
will receive the full subscription amount or any significant portion thereof.
The capital required by the Company for its operations is being sought
principally from the proceeds of this offering. The amount actually received
may be insufficient to permit the Company to adequately develop its business
activities. Should the Company need additional capital there is no assurance
that additional funding will be available on terms favorable to the Company.
POSSIBLE VOLATILITY OF STOCK PRICES; NO MARKET MAKERS. The over-the-counter
markets for securities such as the Company's Common Stock historically have
experienced extreme price and volume fluctuations during certain periods. These
broad market fluctuations and other factors, such as new product developments
and trends in the Company's industry and the investment markets generally, as
well as economic conditions and quarterly variations in the Company's results of
operations, may adversely affect the market price of the Company's Common Stock.
The Common Stock could become subject to rules adopted by the Securities and
Exchange Commission regulating broker-dealer practices in connection with
transactions in "penny stocks." Penny stocks generally are equity securities
with a price of less than $5.00 (other than securities registered on certain
national securities exchanges or quoted on NASDAQ, provided that current price
and volume information with respect to transactions in such securities is
provided by the
10
exchange or the NASDAQ system). Unless an exemption from the definition of a
"penny stock" were available, any broker engaging in a transaction in the
Company's Common Stock would be required to provide any customer with a risk
disclosure document, disclosure of market conditions, if any, disclosure of the
compensation of the broker-dealer and its salesperson in the transaction, and
monthly accounts showing the market values of the Company's Common Stock held in
the customers account. The bid and offer quotation and compensation information
must be provided prior to effecting the transaction and must be contained on the
customer's confirmation. It may be anticipated that a number of brokers may be
unwilling to engage in transactions in the Company's Common Stock because of the
need to comply with the "penny stock" rules, thereby making it more difficult
for purchasers of Common Stock offered hereby to dispose of their shares.
Various securities firms act as a "market maker" for the Company's Common Stock.
CONTROL BY EXISTING MANAGEMENT. Following this offering the current executive
officers and directors of the Company will continue to own beneficially at least
39% of the Company's outstanding Common Stock, exclusive of unexercised option
rights. Accordingly, it should be anticipated that the current executive
officers and directors of the Company will continue to have the ability to
significantly influence the outcome of elections of the Company's directors and
other matters presented to a vote of stockholders. See "Principal
Shareholders."
SHARES ELIGIBLE FOR FUTURE SALE. As of the date of this Prospectus,
approximately 6,883,646 shares of Common Stock held by existing shareholders
constitute "restricted securities" as defined in Rule 144 under the Securities
Act, and may only be sold if such shares are registered under the Securities Act
or sold in accordance with Rule 144 or another exemption from registration under
the Securities Act.
In general, under Rule 144, a person (or group of persons whose shares are
aggregated) who has beneficially owned restricted securities for at least two
years, including persons who may be deemed "affiliates" (as defined in Rule 144)
of the Company, will be entitled to sell, within any three month period, a
number of shares that does not exceed the greater of (i) 1% of the then
outstanding shares of the Common Stock or (ii) the average weekly trading volume
in the Common Stock during the four calendar weeks preceding such sale. Sales
under Rule 144 are also subject to certain manner of sale limitations, notice
requirements and the availability of current public information about the
Company. A person who has not been an "affiliate" of the Company for the 90
days preceding a sale and who has beneficially owned restricted securities for
at least three years is entitled to sell such shares in the public market
without restriction. Restricted securities properly sold in reliance upon Rule
144 are thereafter freely tradable without restrictions or registration under
the Securities Act, unless thereafter held by an "affiliate" of the Company.
The Securities and Exchange Commission (the "Commission") has proposed to reduce
the above-referenced two year holding period to one year and the above-
referenced three-year holding period to two years. Adoption of these proposed
Rule 144 changes may occur in the near future. Once the Rule 144 changes are
adopted and in effect, the reduced holding periods is expected to apply to all
restricted securities.
Any employee or consultant to the Company who acquires his or her shares
pursuant to a written compensatory plan or contract is entitled to rely on the
resale provisions of Rule 701, under the Act, which permits non-affiliates to
sell their Rule 701 shares without having to comply with the public information,
holding period, volume limitation or notice provisions of Rule 144, and permits
"affiliates" to sell their Rule 701 shares without compliance with Rule 144
holding period restrictions, in each case, commencing 90 days after the date of
this Prospectus.
DILUTION. Purchasers of the shares of Common Stock offered hereby will incur
immediate substantial book value dilution of approximately $______ per share, or
approximately _____% in the net tangible book value of their investment. The
net tangible book value per share of the Company's Common Stock as of September
30, 1996 was $_____ per share. See "Dilution."
NO DIVIDENDS. The Company has never paid any cash dividends on its Common Stock
and does not anticipate that it will pay dividends in the foreseeable future.
Instead, the Company intends to apply any earnings to the development and
expansion of its business.
11
EFFECT OF OUTSTANDING OPTIONS, WARRANTS AND CONVERTIBLE SECURITIES. As of the
date of this Prospectus, the Company has, under a stock option plan, outstanding
options to purchase an aggregate of 910,000 shares of Common Stock at a price of
$0.10 per share; and, under two warrant agreements, Intel holds outstanding
warrant rights to purchase an aggregate of 1,000,000 shares of Common Stock and
AGE holds outstanding warrant rights to purchase an aggregate of 1,000,000
shares of Common Stock. Additionally, the Company has, under a convertible
credit agreement, outstanding rights to receive shares of Common Stock. The
exercise of the outstanding option rights, warrant rights, and convertible
securities rights will result in an immediate increase in the number of actual
outstanding shares of Common Stock and an immediate dilution to the shareholders
holding issued and outstanding shares. See "Dilution."
AUTHORIZATION OF PREFERRED STOCK. The Company's Articles of Incorporation
authorize the issuance of preferred stock with such designations, rights and
preferences as may be determined from time to time by the Board of Directors.
Accordingly, the Board of Directors is empowered, without shareholder approval,
to issue preferred stock with dividend, liquidation, conversion, voting or other
rights which could adversely affect the voting power or other rights of the
holders of the Company's Common Stock. In the event of issuance, the preferred
stock could also be utilized, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control of the Company.
Although the Company has no intention as of the date of this Prospectus to issue
any shares of its preferred stock there can be no assurance that the Company
will not issue additional shares in the future. See "Description of Capital
Stock."
USE OF PROCEEDS
The estimated net proceeds from the maximum offering, $9,920,000, will be
applied according to the following estimated allocations. The net cash proceeds
are net of costs and expenditures relating to the offering, which are estimated
to be $80,000.
[Download Table]
Capital Equipment $1,500,000
Operations 5,420,000
Marketing & Distribution 1,000,000
Capital Reserves 2,000,000
----------
Total $9,920,000
The Company intends to utilize the $1,500,000 allocated to capital equipment to
enhance integration of the animation computer network with other computer
networks owned by the Company and to acquire additional office equipment. The
balance of the capital equipment funds raised will be utilized to acquire
additional video and production studio equipment.
The Company intends to use the remainder of the proceeds for general corporate
purposes, including working capital. Pending the use of funds the proceeds will
be invested in short-term, investment grade, interest bearing securities or
deposit accounts.
DIVIDEND POLICY
The Company has not paid dividends since its inception. The Company currently
intends to retain all earnings, if any, for use in the expansion of its business
and therefore does not anticipate paying any dividends in the foreseeable
future.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded in the US over-the-counter market and
reported on the NASD Bulletin Board system under the trading symbol "MSHE."
The following table sets forth, for the periods indicated below, the high and
low closing bid quotations for the Common Stock, as reported by the
12
company's market makers. The quotations represent quotations between dealers
without adjustments for retail markups, markdowns or commissions and may not
necessarily represent actual transactions. As of September 30, 1996, the Stock
Registrar and Transfer Agent reports there were approximately 252 record holders
of the Company's Common Stock. The Company believes that there are more
beneficial holders of the Company's Common Stock.
[Download Table]
Price
-----
Period High Low
------ ---- ----
First Quarter 1996 3.25 0.88
Second Quarter 1996 3.00 0.50
Third Quarter 1996 3.50 1.37
Fourth Quarter 1996 3.62 0.87
CAPITALIZATION
The following table sets forth the capitalization of the Company as of December
31, 1995 and as adjusted to give the effect to the sale of the Common Shares
offered by the Company after deducting estimated offering expenses payable by
the Company. This table should be read in conjunction with the Company's
Financial Statements included elsewhere in this Prospectus.
[Download Table]
As of December 31, 1995
Actual As Adjusted
------ -----------
Shareholders' equity
Common Shares, par value $0.001
50,000,000 authorized;
___issued and outstanding
___issued and outstanding,
as adjusted
Preferred Shares, no par
25,000,000 authorized;
none issued and outstanding
Warrants to acquire common
convertible on a 1 to 1 basis
2,000,000 authorized;
2,000,000 issued and outstanding
Additional paid-in capital
Total shareholders' equity
Total capitalization
DILUTION
The pro forma net tangible book value of the Company as of September 30, 1996
was $_____ or $ ______ per share. Net tangible book value per share represents
the Company's total tangible assets less its total liabilities divided by the
number of shares of Common Stock outstanding.
Pro forma net tangible book value dilution per share represents the difference
between the amount paid per share by purchasers of Common Stock in this offering
and the pro forma net tangible book value per share as adjusted to give effect
to this offering. After giving effect to the sale of the 3,000,000 shares of
Common Stock offered hereby at the public offering price of $___ per share
(after deducting the estimated offering expenses), the as adjusted net book
value of the Company as of September 30, 1996 would have been $ ____
13
or $ _____ per share. This represents an immediate increase in pro forma net
tangible book value of $ _____ per share to existing shareholders and an
immediate dilution of $______ per share to new investors in this offering. The
following table illustrates the dilution per share to new investors as of
September 30, 1996:
[Download Table]
Initial public offering price per share $
Pro forma net tangible book value per share $
as of September 30, 1996
Increase in pro forma net tangible book value $
per share attributable to new shareholders
As adjusted net tangible book value per share after offering $
Dilution per share to new shareholders $
The following table on a pro forma basis summarizes, as of September 30, 1996,
the difference between the number of shares of Common Stock purchased from the
Company, the total consideration paid to the Company and the average price per
share paid by existing shareholders and by new investors in this offering.
[Download Table]
Shares Purchased Total Consideration Average Price
---------------- ------------------- Per Share
Number Percent Amount Percent -------------
Existing shareholders $ $
New shareholders _____ _______ ______ ______ $
Total 100% $ 100%
The outstanding shares of existing shareholders, as of September 30, 1996,
assumes the exercise of all warrants for stock, the conversion of all
outstanding convertible debt into common stock and sale of the maximum offering.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the Consolidated Pro
Forma Financial Statements of MSH Entertainment Corporation, the Consolidated
Financial Statements of MSH Entertainment Corporation, and the Consolidated
Financial Statements of East End, Notes to Financial Statements and other
financial information included herein. Certain statements set forth herein are
forward-looking and involve risks and uncertainties. For information regarding
potential factors that could have a material adverse effect on the Company's
business, operating results and financial condition refer to the "Risk Factors"
section.
OVERVIEW
The Company was organized in Utah in 1983. In 1994 the Company change its name
to MSH Entertainment Corporation and acquired all of the outstanding stock of
MSH Productions, Inc. and established it as a wholly owned subsidiary. In June
of 1996 the Company acquired substantially of the assets of East End
Communications, Inc., East End Productions, Inc. and J.B. Dubs Inc. (East End)
an established media production company. The Company has integrated the assets
and backlog of sales into the Company's operations. In conjunction with this
acquisition, the Company entered into employment agreements with Christopher R.
Haigh and Fred E. Aurelio. Under the terms of the acquisition the Company paid
$200,000 and entered into a promissory note in the amount of $865,000. In
addition to the referenced loan, as of September 30, 1996 the officers and
directors of the Company had outstanding loans to the Company in the amount of
$145,764.
During September 1996, in exchange for the first right of refusal on all
children's productions offered to the Company and a commitment to provide
production support services, the Company acquired a controlling equity interest
in Happy Zone Entertainment Corporation (HZE). HZE was established to produce
and
14
deliver animated television programs tailored to the children's market. Under
the terms of the agreement, the Company retains the rights to all non-children's
productions offered to the Company or to HZE, and the right to produce all
children's productions which are not selected for production by HZE.
During November 1996 the Company entered into a production agreement with AGE.
Under the terms of the agreement AGE acquired warrants to purchase 1,000,000
shares of Common Stock of the Company. In exchange the Company received rights
to produce a new children's TV series.
During November 1996, the Company entered into an agreement with Intel
Corporation. Under the terms of the agreement Intel acquired warrants to
purchase 1,000,000 shares of Common Stock of the Company. In exchange the
Company received rights to develop joint marketing and awareness programs for
its animation production management system and entertainment products.
1995 COMPARED TO 1994
Consolidated Pro Forma revenues during 1995 were $_____, which was $_____ less
than 1994. This reduction in revenue was due primarily to the results of the
activities associated with the development of the new direction and business
focus of the Company.
During 1995 the Company continued normal business operations. The Company also
implemented a market research study to identify future opportunities in the
entertainment media markets and develop a business plan to direct the Company to
these areas of opportunity.
During the second half of 1995 the Company ceased the production of low budget
films and focused upon the implementation of its revised business plan.
Significant activities included the review, diligence evaluation and
negotiations of potential mergers, and the acquisition of assets and properties
which would provide the Company with the resources and capabilities to fulfill
its business objectives.
Also during 1995, gross revenues at East End were less than 1994. This
reduction of revenues was due in part to the reduced revenues and downsizing of
a major client of East End. In response to this event East End expanded its
client base and took actions designed to reduce its dependence upon one major
client. Management of the Company believes the unification and integration of
assets of East End into the Company's operations will result in a broadening of
the client base and reduce the impact of one or two large revenue clients.
In conjunction with these activities the Company commenced acquiring technical
and managerial talent and began to market its new capabilities and to secure
contractual commitments for current and future production. The Company financed
these efforts through the private sale of shares of Common Stock and the
issuance of loans and loans convertible to shares of Common Stock.
FIRST QUARTER 1996
During the first quarter of 1996 the Company reviewed various acquisition
opportunities and entered into discussions for the acquisition of the assets of
East End.
SECOND QUARTER 1996
During the second quarter of 1996 the Company completed the acquisition of
substantially all of the assets of East End Communications, Inc., East End
Productions, Inc. and J.B. Dubs Inc. (East End). This acquisition included the
good will and backlog of sales of East End. In conjunction with the East End
acquisition a number of the key management and technical personnel joined the
Company. The Company believes the results of this acquisition will be a unified
business with the capability to offer existing clients and new clients a large
and diverse opportunity for professional media service capabilities.
THIRD QUARTER 1996
Activities which continued during the third quarter was the entry into a
strategic alliance agreements with AGE and Intel. Also the Company participated
in the establishment of Happy Zone Entertainment Corporation and obtained a
major equity interest in the new company. The Company continued to develop
15
new products. Management believes by third quarter of 1997 sales results will
begin to represent the benefits of the acquisition of East End.
FOURTH QUARTER 1996
During the fourth quarter the Company finalized a strategic alliance agreement
with Intel Corporation and entered into a co-production agreement with AGE, a
leading children's episodic TV and merchandising company. The Company also
presented demonstrations of Jethro, the Company's animated episodic TV
production management system. The Company signed agreements to rights to a
number of live action projects for TV.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception from the sale of shares
of common stock, borrowing, and cash flow from operations. The cash outflows
were primarily due to net losses caused by the research and development expenses
associated with the new animation technology, the formation and organizational
expenses associated with the assembly and unification of the Company,
acquisition expenses, and related marketing expenses associated with the
establishment of production, distribution and merchandising agreements. The
losses that the Company has experienced since inception have in various years
generated a tax net operating loss.
The Company has an outstanding secured promissory note in the principal amount
of $865,000 payable on December 1, 1996, with rights to extend to December 1,
1997. The note is held by Christopher R. Haigh, an executive of the Company.
Following this offering the Company anticipates repayment in full of this note.
The Company is dependent on the proceeds of this offering to repay certain
indebtedness, to fund new products and business development, and to expand
sales, distribution and marketing activities.
During the third quarters the Company leased an additional 6,200 sq. ft of
space in San Francisco, California. The lease is for a term of 5 years with
current payments of $5,890 monthly. The Company's headquarters in Santa
Monica, California is approximately 1,800 sq. ft. The current lease is for two
years at a rate of $2,754 per month.
The Company expects to continue making expenditures to acquire additional
computer hardware, software, furniture and fixtures and to lease additional
office space as it expands, although no material commitments other than those
previously described have been made.
The Company anticipates that its capital resources, including the proceeds from
this offering, cash flow from existing operations and co-funding of the
production development expenses of many of the Company's products will be
sufficient to satisfy its capital requirements for the next 18 to 24 months.
While it is anticipated that some or all of the planned products may involve
obtaining co-funding of the development expenses from other sources, there can
be no assurance that such contracts can be consummated and such co-funding of
production development expenses will be received.
The Company's ability to achieve positive cash flow after the next 18 months
depends on a variety of factors including continued co-funding of development
expenses, the timeliness and success of its production commitments, the costs of
developing, producing, marketing, distributing and merchandising of its products
and services, and various other factors, some of which may be beyond the
Company's control. Should the Company's loss be greater than currently
anticipated or its production and delivery of products is significantly delayed
or do not generate significant revenues, the company may require additional
capital, which it may seek through additional public or private financing or
other sources.
The Company's future capital requirements will be affected by, among other
things, the market acceptance of the Company's products and services, the timing
and costs of producing new titles, promotional and marketing expenses and
investments in technological and production process research.
16
If appropriate opportunities arise, a portion of the proceeds from this offering
may be used for selective acquisitions of businesses, products or technologies
that complement the Company's business. The Company has no present commitments
or understandings with respect to any acquisitions at this time.
INFLATION
The Company believes that inflation has not had a material impact on its
operations. Substantial increases in labor costs or distribution costs could
adversely affect the operations of the Company for future periods.
THE UNITED STATES TELEVISION INDUSTRY
The United States television market is served by network affiliated stations,
independent stations and local cable system operators. During "prime time"
hours (primarily 8 P.M. to 11 P.M. in the Eastern and Pacific time zones and 7
P.M. to 10 P.M. in the Central and Mountain time zones), network affiliates
primarily broadcast program produced for the network. In non-prime time,
network affiliates telecast network program, off-network program (reruns),
first-run program (program produced for distribution on a syndicated basis) and
local program produced by the local stations themselves. Independent television
stations, during both prime and non-prime time, produce their own programs,
telecast off-network programs or first-run programs acquired from independent
producers or Syndicators. Syndicators generally are companies that sell to
independent television stations, and network affiliates, programs produced or
acquired by the syndicator for distribution. Programs acquired by stations on a
syndicated basis are generally acquired for cash licensing fees or in exchange
for a certain amount of commercial advertising time within the program which is
retained by the syndicator for sale ("barter"), or for a combination of cash and
barter.
Barter syndication is the process whereby a syndicator obtains commitments
("clearances") from television stations to broadcast a program at a certain
time; retains advertising time in the program in lieu of receiving a cash
licensing fee and sells such retained advertising time for its own account to
national advertisers at rates based on projected ratings and viewer
demographics.
From time to time, certain stations may require cash consideration from a
syndicator, in addition to programming, in exchange for advertising time. By
clearing the program with television stations representing a penetration of 70%
or more of television households throughout the United States (calculated by
means of a generally recognized system as measured by A.C. Nielsen), the
syndicator creates an "ad hoc" television network. This enables the syndicator
to sell its inventory of advertising time to sponsors desiring national coverage
at rates per thousand viewers that are generally lower than those which networks
normally charge national advertisers for similar demographics.
The business of the television production industry may be broadly divided into
two major segments: production, involving the development, and making of the
television program; and distribution, involving the promotion and exploitation
of completed product in a variety of media.
Historically, the largest companies, the "Majors," have dominated the television
and motion picture industry by both in production and distribution. The Majors
include MCA Universal Pictures, Warner Bros. Pictures, Twentieth Century Fox
Film Corporation, Paramount Pictures Corporation, Sony Pictures Entertainment
(including Columbia Pictures, TriStar Pictures and the Walt Disney Company
(Buena Vista Pictures, Touchstone Pictures and Hollywood Pictures). Generally,
the Majors own their own production studios (including lots, sound stages and
post-production facilities), have a nationwide or worldwide distribution
organization.
Since the invention of the VHS in the early '70's; the explosive expansion of
broadcasting channels and networks in the US and foreign markets; coupled with
the universal acceptance of American produced product in the foreign
marketplace; has fueled the growth of the "Independent" marketplace. Companies
such as All American, Fremantle, King World, MTM, Tribune, Fox-Lorber, Polygram,
GRB, Camelot, etc., started as production and/or distribution companies. Over
time the independents then became one of the main sources of programming and
program formats for the networks, independent channels, cable channels
17
cable broadcasters, pay-per-view and satellite channels for the entire world.
Today, the independents have had a significant impact on the studios control
over programming.
As broadcasting became more and more segmented there arose a need for producers
and distributors to fill specific niches to these new channel outlets. Some
examples of companies that specialize in the children's niche are Saban, Sunbow,
DIC, HIT, S4C, Bohbot, and others. We are now seeing segmentation of
programming targeted for broadcasters such as Discovery Channel, A&E, The
History Channel, USA Network, HBO, Showtime, etc. As the capacity for new
channels and delivery systems increases the result will be even narrower
segmentation. Certain programming is now geared to very targeted audiences
which deal in various tastes, lifestyles and hobbies. Such channels include
ESPN, E!, QVC, The Home Shopping Network, The Travel Channel, The Food Network,
Bravo, The Golf Network, etc. As channel capacity increases and television
stations become more segmented globally, independent producers and distributors
will have greater opportunity to fill the programming needs in a more efficient
and financially prudent manner than in any time in the past.
Some of the Majors have divisions which are promoted as Independent
distributors. These Independent divisions of Majors include Miramax Films (a
division of the Walt Disney Company) and Sony Classics (a division of Sony
Pictures). Independents engaged in the distribution of motion pictures produced
by companies other than the Majors include, among others, Trimark Holdings
(through Trimark Pictures and Vidmark Entertainment), Live Entertainment,
October Films, Republic Pictures (a division of Viacom), The Samuel Goldwyn
Company and Fine Line Pictures (a division of New Line Cinema).
TELEVISION PRODUCTION
The production of television programming involves the development of a format
based on a creative concept or literary property into a television script, the
hiring of talent, the filming or video taping of the program, and the technical
and post-production activities necessary to produce a finished program.
Television producers may originate projects internally or acquire them from
others. If a concept is deemed suitable for development, the producer
commissions and pays for a pilot episode prior to committing itself to the
production of a series. Once a script is approved by the producer, one or more
license agreements are negotiated with the potential broadcasters of such
program and pre-production and production activities commence. Such license
agreements provide a production order for such series and will establish the
license fee to be paid to the producer. A production order for a series is
generally for a specified number of episodes, with the licensee retaining an
option to renew the license. The ratings of the program usually determine
whether such option is exercised.
TELEVISION DISTRIBUTION
Domestic and foreign television networks, independent television networks,
television stations, cable system operators, pay-per-view and satellite networks
generally license television series, specials, mini-series, events programming,
movie-of-the-week (MOW), and made-for-television (MFT) pursuant to agreements
with distributors or Syndicators that allow a fixed number of telecasts over a
prescribed period of time for a specified cash license fee or barter for
advertising time. The broadcasting venue chosen for showing the programming
generally determines the course of the negotiations and price.
HOME VIDEO
The home video distribution business involves the promotion and sale of
videocassettes and videodiscs to local, regional and national and international
video retailers (including video specialty stores, convenience stores, record
stores and other outlets), which then rent or sell the videocassettes and
videodiscs to consumers for private viewing. In the last decade, home video has
been one of the fastest growing distribution media. In terms of total
distribution revenues generated, the domestic home video market is currently
larger than the domestic theatrical exhibition market.
Videocassettes are generally sold to domestic wholesalers either on a unit basis
or pay-per-transaction basis. Unit based sales typically involve the sales of
individual videocassettes to wholesalers or distributors at prices which range
from $5 to $60 per unit and generally are rented by consumers for fees ranging
from $1 to $3 per day (with all rental fees retained by the retailer). Pay-per-
transaction based sales involve the sale
18
of a videocassette at a nominal price of $1 to $10, with rental fees divided
between the video retailer and the video distributor.
Wholesalers who meet certain sales and performance objectives may earn rebates,
return credits and cooperative advertising allowances. Selected titles,
including certain made-for-video programs, are priced significantly lower to
encourage direct purchase by consumers. The market for direct sale to consumers
is referred to as the "priced-for-sale" or "sell-through" market.
According to available industry data, between 1990 and 1993 there was an
approximately 9% increase in the number of VCRs (from approximately 67% to 76%)
owned or maintained by households having televisions. As the number of
installed units increases, annual increases in VCR penetration levels are
expected to decline.
In 1993, based upon available industry data, consumers spent approximately $5.2
billion on the purchase of videocassettes and another $7.6 billion on rentals.
Based on total annual revenues, since 1990, the "sell-through" market has grown
more rapidly than the rental market for videocassettes.
Technological developments including videoserver and compression technologies,
which regional telephone, cable, and others companies, are developing could make
competing delivery systems economically viable and may significantly impact the
Company's home video revenues and overall business. The Company might be
required to develop and implement new operating strategies and distribution
capabilities.
PAY TELEVISION.
The domestic pay television industry currently consists of channels such as
HBO/Cinemax, Showtime/The Movie Channel and a number of regional pay services.
Pay television services are sold to cable and satellite system operators for a
monthly license fee based on the number of subscribers receiving the service.
These pay programming services are offered by cable system operators to
subscribers for a monthly subscription fee. The pay television networks
generally acquire their programming by purchasing the distribution rights from
motion picture distributors, and also for MFT productions.
PAY-PER-VIEW.
Pay-per-view television allows cable television subscribers to purchase
individual programs, primarily recently released theatrical motion pictures,
sporting events and music concerts, on a "per use" basis. The fee a subscriber
is charged is typically split among the program distributor, the pay-per-view
operator and the cable operator.
BROADCAST AND BASIC CABLE TELEVISION.
Television exhibition includes the exhibition by means of over-the-air
television available to viewers without charge, whether through national
networks or Independent television stations (referred to as "free television")
and cable transmitted television for which viewers pay a fee for the right to
receive a package of over-the-air and cable channels. United States television
includes the Major networks, ABC, CBS, NBC and Fox, and two newer networks, WB
and UPN, independent television stations, and cable and satellite networks and
stations. Cable television delivers multiple channels of entertainment, news,
sports and informational programming to subscribers who pay a monthly fee based
upon the type and number of services they receive. The increased channel
capacity and large base of subscribers that developed, and the recent
introduction of the digital satellite TV services, have made possible the
proliferation of a number of new cable satellite networks which have become
important purchasers of TV programming and motion picture rights.
In many cases, these networks have purchased the right to air pictures and TV
programming which traditionally would have been sold to the broadcast networks
or to independent television stations in the syndication market. Syndication is
the process of furnishing programming directly to television stations as opposed
to the network system for distribution to its affiliated stations. Syndicators
attempt to sell a
19
program or film to a television station (which may or may not be an affiliate of
a network) in every major television market, seeking to achieve an audience as
large as the potential network audience.
INTERNATIONAL MARKETS.
The worldwide demand for entertainment is growing dramatically--as evidenced by
the development of new international markets and media. According to published
data for 1991, the fastest growing revenue source for publicly held media
companies during the years 1987 through 1991 was international sales, which grew
at approximately twice the rate of growth of aggregate revenues generated from
domestic theatrical exhibition, home video and pay and free television. This
growth is primarily driven by the overseas privatization of television stations,
introduction of direct broadcast satellite services, growth of home video and
increased cable penetration.
CHILDREN'S TELEVISION
The US television market is served principally by network-affiliated stations,
independent stations and cable or satellite television operators. Historically,
four major broadcast networks, ABC, CBS, NBC and Fox, collectively have been
watched by the vast majority of the television viewing audience. In recent
years UPN and WB have commenced national broadcast television networks.
Additional television entertainment options, including cable channels and DTH
satellite services, have also begun to deliver children's program.
The networks and cable channels have increased the amount of children's
television programming broadcast in recent years. Weekend morning children's
programming now airs on Fox Kids Network, ABC, CBS, UPN Kids and Kids WB. In
addition, Fox Kids Network and Kids WB broadcast animated and live-action
programming for children Monday through Friday mornings and afternoons. For the
1996-97 broadcast season, children's animated and live-action programming will
occupy approximately 40 hours of air time per week on the US broadcast
television networks. UPN and the USA cable network, as well as many first-run
Syndicators, provide children's programming blocks on Sunday mornings. Cable
channels which broadcast advertiser-supported children's programs include The
Cartoon Network, Nickelodeon, USA cable network and The Family Channel.
In the United States, an estimated $725 million was spent in the 1995-1996
broadcast season by advertisers on children, and expenditures have grown at an
average annual rate of 13% since 1990. For the period from September 1995
through May 1996, national advertiser expenditures on television commercials
targeting children, including major toy companies such as Mattel and Hasbro,
other children's consumer product companies such as Kellogg's and Quaker Oats,
and major fast food chains such as McDonald's, Burger King and Taco Bell were
over $230 million in the aggregate.
The growth in the number of international television outlets has created
additional global demand for children's programming. The privatization of the
international television industry has encouraged a ratings/revenue-oriented
focus among international broadcasters, increasing the demand for high-quality
television entertainment. Children's programs produced in the United States
have enjoyed wide acceptance internationally. In addition, the number of cable
and satellite programming services addressing the international community has
grown significantly in recent years. These added programming services have
created an opportunity for distributors, including the Company, to license
simultaneously both traditional broadcast and DTH satellite programming rights
within the same territory. International television, cable, DTH satellite and
home video sales of a children's program produced in the United States can
account for more than half of the revenue for a given program.
SUPPLIERS AND DISTRIBUTORS
Suppliers of television programming include the production divisions and
affiliated companies of the major motion picture studios, independent production
companies, Syndicators, broadcast television networks, station owners and
advertising agencies. These suppliers sell programming to broadcast networks or
television stations for a fixed cash fee per episode, by barter, or by a
combination of cash and barter. Virtually all children's programming sold
though syndication is sold by barter, where a syndicator obtains commitments
from television stations to broadcast a program at a certain time, retains a
portion of the
20
advertising time in the program in lieu of receiving cash licensing fees and
sells the retained advertising time for its own account to national advertisers.
Broadcasters of children's television programming in the United States consist
primarily of networks (both over the air broadcast television networks and basic
cable networks) and independent television stations. Distributors of children's
programming generally sell television series to networks on a cash basis and
sell to independent television stations on a barter basis. Networks typically
pay a distributor a fixed cash license fee which entitles the network to a
number of runs of a series over a defined period of time. Networks are
generally entitled to retain 100% of the advertising revenues generated by the
broadcast of a series and sell advertising spots to national advertisers on the
basis of guaranteed ratings.
Independent television stations, which obtain series programming through barter
transactions, agree to provide a distributor with a certain number of
advertising spots during each broadcast of the series on the station in exchange
for the local broadcast rights. The advertising spots retained by the
independent station are sold by the station on a local basis. The advertising
spots retained by the distributor are sold to national advertisers on the basis
of guaranteed ratings. Nielsen periodically publishes data on the percentage of
viewers actually watching each program. If the actual viewership falls below
the guaranteed rating, the distributor or network, as the case may be, generally
provides the advertiser with "make-goods"--additional airings of the
advertiser's commercial in order to achieve the promised audience level-or in
some cases, cash refunds. When selling national advertising time, the network
or distributor typically holds back a certain number of advertising spots to be
used as future "make-goods." Since stations do not receive any compensation for
delivering ratings in excess of the guarantee, and "make-goods" lower the
inventory of available commercial time which can be sold on an up-front basis,
accurately predicting a series' rating is important to maximizing advertising
revenues.
LICENSING AND MERCHANDISING
In addition to utilizing television to advertise products to children, the
creation of children's programming itself provides broad licensing and
merchandising opportunities. Characters developed in a popular series, and
often the series themselves, achieve a high level of recognition and popularity
among children, making them valuable assets for the licensing and merchandising
market, where they can provide attractive "branding" opportunities. It is
reported that the children's market is one of the fastest growing segments in
licensed merchandising sales, with over 70% of the $6 billion spent in the
United States on entertainment and character-related properties in 1995 relating
to children-oriented products. Among the most popular licensed items are toys,
t-shirts, food, dinnerware/lunch boxes, watches and soft vinyl goods such as
boots, backpacks and raincoats. There are currently over 38 million children in
the United States between the ages of 2-11, with approximately 4.5 million
children entering the marketplace annually, and the average annual amount spent
on toy purchases for a child up to ten years of age is estimated at between $240
and $300.
BUSINESS
The Company is in the business of film, video, music, software development, and
television production and distribution. Its business operations include
creating, developing, producing, licensing, distributing and merchandising
entertainment media products. In addition to animated and live-action family
and children's TV productions, the company's products include infomercials,
product introductions, marketing roll-outs, prime time drama series, music
specials, record albums, music publishing and related services.
The continued advances in the computer and communications industries, and the
integration of these two industries with the entertainment industry is creating
significant opportunities for growth. Based upon the pursuit of this growth
opportunity the Company has proceeded with acquiring the assets and capabilities
to create, develop, produce, license, distribute and merchandise television
programs and televisions series programs for: (a) children and family audiences;
and (b) for the mature prime-time television and cable markets. The Company is
also pursuing opportunities in children's toys and merchandising as it relates
to Company produced programming.
21
The Company's strategy for growth emphasizes the development of new properties,
selected acquisitions and participation in strategic alliance agreements. The
Company's business plan is focused toward the generation of profits and equity
growth by developing, producing and distributing both live action and animated
TV specials, TV movies, TV series, movies and commercials for broadcast TV,
cable, satellite and syndicated TV, and video cassettes. The Company also
intends to participate in revenue generated from software licensing, music
publishing and from ancillary merchandising of toys and associated products
which are related to the Company's created works. Additionally, within the next
12 to 18 months the Company intends to commence the marketing and licensing of
computer animation management software to the entertainment industry.
The Company views acquisitions and strategic alliance agreements as key vehicles
to the entry into new markets and the leveraging its existing infrastructure.
The Company's is aggressively establishing strategic alliance agreements and
management of the Company believes there will continue to be opportunities in
the markets in which it operates and will continue to engage in the review of
candidate opportunities for acquisition and, as appropriate, participation in
strategic alliances.
As part of the expansion of business operations, during June 1996, in exchange
for cash and a promissory note, the Company acquired substantially all of the
assets of East End Communication Inc., East End Productions Inc., and J.B. Dubs
Inc., ("East End"), all of which are California corporations.
During September 1996, in conjunction with the execution of an animated
children's production agreement, the Company participated in the formation of,
and received a 60% equity interest in, Happy Zone Entertainment Corporation
(HZE), California corporation. The other major HZE shareholder is AGE, and
minority interests are held by officers and directors of the Company.
During October 1996 the Company entered into a strategic product development
agreement with Abrams/Gentile Entertainment Inc., (AGE). Under terms of the
agreement AGE acquired warrants to acquire up to 1,000,000 shares of Common
Stock of the Company and the Company acquired the rights to produce a new
children's TV series entitled "Vanpires" developed by AGE and scheduled to
commence network broadcast during fall 1997. The Company also acquired an
interest in the potential revenue from toys and merchandising related to the new
TV series.
During November 1996 the Company entered into a strategic marketing and product
development agreement with Intel Corporation (Intel). Under terms of the
agreement Intel acquired warrants to acquire 1,000,000 shares of Common Stock of
the Company and the Company acquired the rights from Intel to develop joint
marketing and awareness programs and a marketing and promotion plan for the
Company's products.
Additionally, the Company provides various production services and distribution
services, both international and domestic, to both Major and independent
producers. The Company's headquarters is located in Los Angeles, California
with animation facilities, the software development center, production studio
and support facilities in San Francisco, California. The Company also maintains
an office in Houston, Texas.
MARKETING STRATEGY
The Company's primary strategy is to create, develop and produce products for
the television market in the United States, Europe and Asia, as well as home
videos for those markets. The Company will attempt to retain copyright
ownership of all its productions for the purpose of building a profitable
library for future exploitation in all media worldwide.
The potential markets for the products and services provided by the Company
include:
[Download Table]
- Domestic television networks - Domestic television syndication
- Domestic home video - Domestic pay-cable
- Domestic basic cable networks - Foreign theatrical and home video
22
[Download Table]
- Foreign television and pay cable - Music publishing
- Toys and merchandising - Contract production services
- Computer animation services - Contract post production services
- Record Album sales - Software licensing
With the growth of interest in various ancillary elements of a property, the
Company will endeavor to incorporate these elements into each production
project. The integration of these ancillary elements into the project are
referred to as "synergistic" packaging. Synergistic packaging encompasses the
areas of video rights; multiple productions for the establishment of "library
packages" for ultimate syndication sales; television series; live action and/or
animation television specials for networks, cable networks and/or syndication;
character and/or product licensing; merchandising, promotional tie-ins and
considerations, corporate identity and sponsorship programs via product
placement; music sound track publishing; replay rights; music videos; literary
and educational publishing rights; and, in rare cases, the creation of theme
park rides and attractions based upon the subject and characters of the a
project.
CUSTOMERS
Over the last few years the Company has provided television, video and multi-
media productions and services to many high profile clients. Some of these
client's include:
[Download Table]
Amdahl Corporation Bank America Corp.
Honeywell DDI Kawasaki Motor Corporation
Stanford University Tandem Computers
Apple Computer, Inc. Banana Republic
Hilton Hotels Intel Corporation
Omega Sun Microsystems
Hoffman LaRoche ITT Information Systems
Shaklee Corporation Supercuts
Ungerrnann-Bass VISA USA
Wells Fargo Bank World Savings & Loan
Hewlett-Packard Company Gap, Inc.
Cisco Systems, Inc. Seagate Technology
Sports Channel RSD Data Security, Inc.
Sybase, Inc. McGraw Hill
Charles Schwab & Co., Inc. San Francisco State University
Organizations for which the Company's key personnel have created, developed or
staffed productions include:
[Download Table]
A&M Records Odyssesy International
ABC Television Network Paramount Pictures
ASCAP Public Broadcast System (PBS)
All Girl Productions Playboy and Penthouse
Bantam Books Prism Pictures
The Beacon Group Radio City Music Hall Productions
BMI Radio Vision International
Dave Bell & Associates Realm Productions & Entertainment
Canon Films RCA
Canadian Broadcasting Company RKO
Carnegie Hall Showtime
CBS Television Network Sunshine KidVid Entertainment
CBS/Fox Home Video SONY Home Video
Columbia Pictures Television The Nashville Network
Dick Clark Productions Twentieth Century Fox
Disney/Touchstone Trimark/Vidmark
Featureline Films United Paramount Network (UPN)
First Choice Universal Pictures
23
[Download Table]
The Robert Evans Company Universal Pay-TV
The Family Channel Warner Brothers
Fox/Lorber Warner Home Video
General Media International CVB-TV
Group W WOR-TV
Harmony Gold Young & Rubicam
HBO Viacom
Inter-American Films InterContinental Releasing
IRS Media ITC
J. Walter Thompson Lorimar
MCA Home Video MCA/Curb records
Miramax MTV
NBC New Line Cinema
Nickelodeon OAK Media
PROFESSIONAL AWARDS
Awards won by members of the Company's creative and production team include:
[Download Table]
Quantity Awards
-------- ------
1 Academy Award
5 EMMY Awards
5 ACE Awards
1 VIRA Award
1 Berlin Film Festival Award
1 Clio Award
1 New York Film Festival Award
7 ACE Award Nominations
11 EMMY Award Nominations
2 Chicago Film Festival Award Honorable Mentions
2 TONY nominations
4 Billboard Songwriting Awards
BUSINESS STRATEGIES
The Company intends to continue to increase its presence in the family and
children's television entertainment business, with the goal of becoming a
recognized worldwide producer and distributor of family and children's
television programming, music publishing and software licensing. The principal
elements of the Company's strategies for achieving this objective is through the
production of strong identifiable characters and properties. Strong
identifiable characters and names not only dramatically improve the audience
acceptance and the longevity of the property but also increase the worldwide
distribution potential of programming. The Company intends to develop household
name "franchise values," with each of its characters which are then leveragable
into merchandising, movies and spin-off and sequel shows.
The Company intends to continue to create and develop new entertainment
properties with potential franchise value and to further build on its existing
programming, capitalizing on the popularity and recognition of its properties in
all media and markets, including toys, merchandising, home video and consumer
products.
The Company plans to seek to further improve, and to expand the reach of its
programming products, by continuing to develop acquire or license quality
programming which is attractive to families and children. The Company will
strive to increase the number of its owned programs. This integration of
ownership and distribution has the potential to enhance the profitability of the
Company's programming.
The Company foresees significant expansion opportunities in the international
television markets, where the Company believes that children's programming has
been relatively undeserved. With its new family and
24
children's programming and half-hour episodes of children's programming, a
significant portion of which meet the "local content" requirement of various
European countries, the Company intends to focus significant resources on the
expansion of its international operations. The Company has an important
strategic advantage because of its current relationship with AGE, whose
experience and interests in international television distribution platforms will
be helpful in introducing the Company to the international markets.
The Company intends to continue to build its asset property library through
internal creation, development and production, and by pursuing co-production
arrangements with US and international partners and by acquiring properties and
libraries from third parties.
With the resources and capabilities to manage every stage of the family and
children's television business, from the creation and production of programming
to the worldwide licensing and merchandising of properties, the Company believes
it will be able to coordinate all forms of exploitation in tandem with the
timing of television broadcasts on a worldwide basis with the goal of maximizing
market reach and revenues.
CREATION AND DEVELOPMENT OF PROGRAMMING
The Company creates, produces and acquires quality animated and live-action
family and children's television programming. The principal programming
objective of the Company is to develop or acquire, on a cost-effective basis,
appealing characters and concepts that can be commercially exploited throughout
the world through television exhibition, home video sales, licensing and
merchandising.
One of the essential attributes of quality family and children's programming is
its "portability." Children's programming produced for exhibition in a
particular country is "portable" because it can generally be modified at a
modest cost and resold for exhibition in other countries through editing and
dubbing into other languages.
The Company has and will continue to pursue ideas and properties for original
production from a number of sources. For example, the Company may acquire
production, distribution and possibly other rights to an existing property or
series, develop internally a new property based on an existing public domain
property, or create or acquire an entirely new idea or character. The Company
has employees involved in programming development and currently has five
projects in various stages of active development. In general, production does
not commence without significant commitments for broadcasting by networks or
independent television stations. Typically, the Company has seven months to one
year to produce and deliver anywhere from 13 half-hour episodes (the typical
number of episodes ordered for a weekly series) to 65 half-hour episodes (the
typical maximum number of episodes ordered for a weekday series). The Company
attempts to produce programming in a cost-effective manner while maintaining
control over critical parts of the production process to ensure continued high
quality.
For example, with respect to programming in which the Company has assumed
responsibility for physical production, freelance script writers are utilized
but supervised by a Company production executive and certain labor-intensive
animation work may be subcontracted to countries with relatively low-cost labor,
while the Company handles or directly supervises both initial creative
development, on going activities, and all post-production work.
The Company has the capability to implement and directly supervises most aspects
of the creative development of a property from initial concept through the post-
production of a series, from the development of a story and writing of scripts
to the production of voices, music and special effects. The Company has the
capability to film live-action series at its production facilities in San
Francisco, California or at remote sites as appropriate. The Company also
maintains a post-production facility in San Francisco, California. The Company
maintains the capability to record all of the music for its programming, and
edits and adds audio and sound effects to its programming. The Company has a
full-service animation studio which develops programming containing content that
meets the content requirements of both US and foreign countries for local
broadcast television.
25
The Company believes that by owning and controlling the international
distribution rights to its programming, it not only can generate significant
revenue from the sales of its programming, but can also establish an
international presence for the Company and its properties which should support
its international licensing and merchandising efforts. The Company also intends
to use its international presence to expand its operations in emerging
television markets.
PROJECTS IN DEVELOPMENT
The Company is continually evaluating project proposals and strategic alliance
opportunities and the following are active projects. Any of these may be
developed, placed on hold, released or canceled at any time. Furthermore, new
projects may be added at any time without notice.
Vanpires: An AGE created and developed project, "Vanpires" is an 3-D animated
---------
children's series and toy line aimed at young boys. The Galoob has signed a
master toy license for world-wide distribution of the toys and merchandising.
Summit Media is the distributor of the series. The series is scheduled to begin
network distribution during the fall 1997 season.
Vallas & Son: Created by a key member of the Company's management, "Vallas &
-------------
Son" is based on a true life father and son team who are considered among the
world's best arson, bomb and terrorist experts. The made-for-television movie
and the 26 one hour episodes are all based on actual cases from their files and
each is unique and fascinating. A combination of "Colombo" and "Quincy" with a
dash of "NYPD Blue" thrown in, this project is being development by Sony
Entertainment's Columbia Pictures Television as a TV series for the 1997 season.
Arnold The Invincible: A children's animation project aimed at the largest
----------------------
children's television audience today, boys 6 to 11, is being developed for the
television marketplace, and for multiple toy licenses and merchandising
worldwide. The series is planned to be music driven, consisting of 3 to 4 new
original songs per episode. The new music is expected to open additional
markets for the series.
Christmas In July: "Christmas In July" is a made-for-television 2 hour movie
------------------
that will serve as the pilot for a proposed family television series whose theme
encompasses the current "hot" topic of angels, as is evident by a long running
successful network television series. The series is being structured as a
weekly one hour family oriented series that promotes positive family values.
Kickers: A live action family oriented television series centers on a kid's
--------
soccer team from Europe that spends its summer in San Francisco playing a little
soccer, while also playing detective and solving one mystery after another. The
weekly plot will focus on good versus evil, right versus wrong, friendship,
teamwork, trust, family, soccer and adventure. Each story will carry a strong
message of good over evil. Wholesome family oriented values will be paramount
in each episode's theme. With a multi-national cast and interesting background
locations, this proposed series is designed to be a favorite for the whole
family.
Griffin Goes To...: The story of a 2 year old boy, Griffin, and his 9 year old
-------------------
sister, Emily, who celebrate the world through exploration and discovery and
invite the viewer to go along. A live action children's series with a target
audience being ages 3 to 7, but something that all ages will find charming and
entertaining. Each 30 minute episode will take children on an exploration of a
world outside of their own neighborhood. Some of the places that will be
visited will be the White House, Yellowstone National Park, A Rain Forest,
Buckingham Palace, an Indian Reservation, The Great Barrier Reef, a dude ranch
and other places.
Earth Escapes: Music in High Places: This is a dynamic 60 minute weekly
------------------------------------
television music special and spin-off weekly series. It is the ultimate rock
and roll adventure show featuring heart-felt performances by some of the world's
most talented recording artists as they travel to the most mysterious and
exciting places on the planet. These breathtaking scenes serve as a backdrops
for "unplugged" musical concerts featuring talents such as Sting, Eric Clapton,
U2, REM, Peter Gabriel, Grath Brooks, Don Henley, Sade, and others. In addition
to the series there will be a series of books, home videos, and an Internet
series. The series is designed to be a rock and roll "National Geographic" for
the MTV generation.
26
Tiny Tales: This is a series of 30 minute programs in the tradition of
-----------
"Fantasia" that combine children's literature, famous artwork, animation and
music in meaningful tales for children. In each show the host, Mortimer,
welcomes a little boy and a little girl and introduces them to the great works
of literature, art and music by welcoming the creators of the works, to
"collaborate" in telling and illustrating a story accomplished by "Fantasia" -
like music and orchestrations. The little boy, Billy, and the little girl,
Laura, watch and participate as history and all the arts come together in a
group of tiny tales.
The Bridal Show: The Company owns a minor interest in Compass LP, a Florida
----------------
limited partnership formed to finance and produce a multi-series television show
which would address the many facets of the multi-billion dollar bridal industry.
Compass has created a pilot episode which is serving as the basis for a sales
promo which is currently being circulated.
Additional Properties: The Company has acquired ownership rights to additional
----------------------
scripts which are being evaluated as a source for the development of an original
made-for-pay and cable movies. Additionally, the Company is continuing an on-
going policy of evaluating and acquiring commercial properties to be developed
for network movies, co-ventures, and possible TV series.
MERCHANDISING AND LICENSING
Merchandising of character related products is conducted principally through the
grant of licenses to independent third parties who manufacture products
incorporating the Company's characters and distribute these products through
normal distribution channels. Generally, these licensees provide payment of
royalties to the Company based on specified percentages of the sales of licensed
products.
Royalty payments in the merchandising industry typically range of 5% to 15% of
gross sales. Merchandising products featuring the Company's characters may
included various types of toys, T-shirts, caps, trading cards, posters, buttons,
etc. The marketing and sales duration of a "hot" merchandising item is
typically 18 months to 30 months.
As the markets for multimedia and interactive entertainment products and
services continue to grow, the Company intends to develop and lease products for
the interactive multimedia markets. According to industry sources, in 1994
retail sales of new media in the form of video game cartridges, PC and Macintosh
floppy disk and PC and Macintosh CD-ROM games exceeded $5 billion, approximately
equivalent to box office gross receipts (estimated at $5.4 billion) for the
first time feature films. Industry sources expect growth of the new media
market to be in the 15 to 25% range per year as new high-performance platforms,
such as the Sony Playstation, are made available and as the on-line and
networked markets mature. The Company intends to actively pursue participation
in this market through licensing of characters and concepts.
The Company intends to capitalize on its characters and properties by entering
into licensing agreements with manufacturers and retailers of children's
products. By controlling licensing and merchandising rights, the Company
maintains the rights to earn revenue from the sale of products while limiting
the costs and risks associated with manufacturing, distributing and marketing
merchandise. The revenue derived from licensing and merchandising depends not
only on the success, recognition and appeal of a character, but also on the
quality and extent of the marketing efforts of the Company and its licensees.
Sales of licensed products also help the Company by promoting the Company's
characters and production capabilities. The following table sets forth examples
of the products for which some licensees have merchandised a children's
televisions character.
Plastic lunch kits
Toys including action figures and video games
Children's' books
Halloween costumes and sweatshirts
Colgate Plus toothbrush
Backpacks and other soft vinyl goods
27
Girl's and boy's underwear
Frozen novelties
Games and puzzles
Belts, hats and other apparel
Children's' optical frames
Cookies and candy
Sheets and other bedding products
Fitness sets and remote control vehicles
Individual films and film viewers
Fishing rods, reels and fishing tackle
The Company also competes with hundreds of owners of creative content who seek
to license their characters and properties to a limited number of manufacturers
and distributors. The ability of the Company to successfully exploit the
merchandising opportunities afforded by its programs will continue to be
dependent on the favorable ratings of its programs and the ability of the
Company's characters to continue to provide attractive merchandising features to
its customers.
DISTRIBUTION
In the United States, the Company's products competes for time slots, ratings
and related advertising revenues. The Company currently competes, with other
production company who supply products to broadcast television networks, public
television and cable television channels, such as Nickelodeon, USA cable network
and The Cartoon Network for market acceptance of its programming and for
viewership ratings. The Walt Disney Company has recently announced its plans to
launch a 24-hour cable television children's channel. Further, the Company vies
for the family and children's audience with independent television stations,
suppliers of cable television programs, direct broadcast satellite and other DTH
satellite systems, radio and other forms of media. The Company also competes
with other syndicators on a market-by-market basis for time slots, coverage
commitments, ratings and advertising revenue. Internationally, the Company
contends with a large number of US-based and international distributors of
children's programming, with whom it must compete in the development or
acquisition of programming expected to appeal to international audiences. Such
programming often must amply with foreign broadcast rules and regulations which
may stipulate certain minimum local content requirements.
The Company's distribution business is being expanded to a full service content
provider for the television, home video and the animation marketplace. The
primary emphasis will be on distributing both in-house products and
independently produced entertainment products. Management's informal research
of the marketplace has indicated the existence of a number of independent
producers who are seeking access to a reliable distribution network. Servicing
these independent producers one of the key markets for the Company's expanded
distribution services.
Management believes the Company's established contacts and relationships in the
industry will be advantageous in the marketing and sales of the Company's
distribution services. In addition, as part of its ongoing business, the
Company will have access to many of the established distribution outlets
including: theatrical release, network television, home video, pay-for-view,
regular cable, pay-cable, syndicated television networks, the Internet, on-line
services, CD-ROM producers, toy manufacturers and merchandising syndicates.
Management believes it can arrange partnership relationships with major pay-
cable (such as HBO, Showtime) and network television broadcasters (such as CBS,
ABC, NBC, Fox) for the co-financing or complete financing of select projects.
Under this arrangement, the pay-cable and television network would finance
either the entire budget of the project or up to 50%, with the balance being
financed by the Company. The pay-cable or television network would have a
license arrangement to broadcast the completed production for a limited number
of runs (usually two for a made-for-television movie) within a short time frame
on domestic US television only.
Thereafter, all rights, title and claim to the production, including copyright
ownership, home video, CD-ROM, foreign broadcast and domestic re-run rights
would revert back to the Company. These reverted rights can then be marketed in
any and all markets throughout the world. The Company intends to market
28
these products primarily in those market which were not included in the pay-
cable or network broadcast arrangement.
As the foregoing relationships are established, management believes the Company
may be able to internally generate revenues for the development, acquisition and
the production of four to six properties a year. The Company believes funding
for these project would be provided principally from the revenues earned from
previously released productions. Although the foregoing plan is based on
management's knowledge and experience in the entertainment industry no assurance
can be given that the Company will be able to generate revenues sufficient to
become self sustaining from the distribution of its own properties.
To enhance revenue potential in all markets around the world, the Company will
actively seek products for acquisition which already conform to pre-set business
and content parameters. The Company anticipates such services will result in
receipt of distribution fees of between 15.5% to 33% of the gross revenues of
each product. The Company presently owns the copyrights to its previously
produced films and scripts and will endeavor to own all or part of the
copyrights to any and all products it distributes in all media worldwide.
GOVERNMENT REGULATION
The Company's programming must comply with the provisions of the CTA and the
rules and policies of the FCC pertaining to the production and distribution of
television programs directed to children. With respect to programs originally
produced and broadcast primarily for children ages 12 and under, the CTA and FCC
rules, among other things, (i) limit the number of minutes of commercial matter
per hour, (ii) generally require that program material be clearly separated from
commercial matter, (iii) prohibit the broadcast within a program of commercials
for products associated with that program, and (iv) prohibit program
personalities, whether live or animated, from delivering commercials during, or
in close proximity to, programs in which the personalities appear or with which
they are associated. Failure to comply with the children's television
commercial limitations can result in the imposition of sanctions, including
substantial monetary fines, on a broadcast television station.
On August 8, 1996, the FCC amended its rules to establish a "processing
guideline" for broadcast television stations of at least three hours per week,
averaged over a six-month period, of "programming that furthers the educational
and informational needs of children 16 and under in any respect, including the
child's intellectual/cognitive or social/emotional needs." Core Programming has
been defined as educational and informational programming that, among other
things, (i) has served the educational and informational needs of children "as a
significant purpose," (ii) has a specified educational and informational
objective and a specified target child audience, (iii) is regularly scheduled,
weekly programming, (iv) is at least 30 minutes in length, and (v) airs between
7:00 a.m. and 10:00 p.m. Any station that satisfies the processing guideline by
broadcasting at least three weekly hours of Core Programming will receive FCC
staff-level approval of the portion of its license renewal application
pertaining to the CTA. Alternatively, a station may qualify for staff-level
approval even if it broadcasts "somewhat less" than three hours per week of Core
Programming by demonstrating that it has aired a weekly package of different
types of educational and informational programming that is "at least equivalent"
to three hours of Core Programming. Non-core programming that can qualify under
this alternative includes specials, public service announcements, short-form
programs and regularly scheduled non-weekly programs, "with a significant
purpose of educating and informing children."
A licensee that does not meet the processing guideline under either of these
alternatives will be referred by the FCC's staff to the Commissioners of the
FCC, who will evaluate the licensee's compliance with the CTA on the basis of
both its programming and its other efforts related to children's educational and
informational programming, e.g., its sponsorship of Core Programming on other
stations in the market, or non-broadcast activities "which enhance the value" of
such programming.
A television station ultimately found not to have complied with the CTA could
face sanctions including monetary fines and the possible non-renewal of its
broadcast license. The adoption of the new quantitative guideline could result
in a material increase in the amount of educational and informational children's
programming broadcast; and it is unclear what impact, if any, such a result
would have on the Company's
29
business.
Pursuant to the 1992 Cable Act, the FCC substantially deregulated the cable
television industry in various areas, including rate regulation, competitive
access to programming, "must-carry" and retransmission consent for broadcast
stations, and customer service regulations. These rules, among other things,
restrict the extent to which a cable system may profit from (or recover the
costs associated with) adding new program channels, impose certain carriage
requirements with respect to television broadcast stations, limit exclusivity
provisions in programming contracts, and require prior notice for channel
additions, deletions and changes.
Cable operators and satellite cable or satellite broadcast programmers in which
cable operators have attributable interests are prohibited from using unfair
methods of competition or unfair acts or deceptive acts or practices, the
purpose or effect of which is to hinder significantly or prevent any
multichannel video programming distributor from providing satellite cable or
satellite broadcast programming to customers. A cable operator with an
attributable interest (defined as five percent equity or five percent voting
control) in a satellite cable or satellite broadcast programmer must not
improperly influence the programmer's decision to sell programming to an
unaffiliated multichannel video programming distributor (or the terms and
conditions of such a sale).
Similarly, a satellite cable programmer in which a cable operator has an
attributable interest may not discriminate among competing cable systems or
other multichannel video programming distributors in the prices, terms and
conditions of sale or delivery of programming. Such programmers may offer
discounts, however, based on actual cost savings. Exclusive contracts between
affiliated cable operators and programmers are prohibited for areas not served
by the cable operator as of October 1992. In areas served by the affiliated
cable operator, exclusive contracts are prohibited unless the FCC makes a prior
determination that such a contract would serve the public interest.
Multichannel video programming distributors are generally prohibited from
restraining the ability of unaffiliated programmers to compete fairly by
discriminating in the selection, terms or conditions of carriage of programming
services based on affiliation. It is not possible to predict at this time the
impact, if any, that these rules may have on the Company's plans to distribute
programming through cable and DTH satellite systems, some of which could be
deemed to be affiliated with the Company.
The United States Congress and the FCC also currently have under consideration,
and may in the future adopt, new laws, regulations and policies regarding a wide
variety of matters which could, directly or indirectly, materially adversely
affect the operations of the Company. The Company is unable to predict the
outcome of future federal legislation or the impact of any such laws or
regulations on its operations. The Company is also subject to local content and
quota requirements in international markets which, although a significant
portion of the Company's library meets current European and French requirements,
effectively limits access to particular markets.
ANIMATION MANAGEMENT PRODUCTION
The Company has designed an advanced software program for management of
animation productions- the Jethro Animation Control System. This advanced
technology provides many schedule and costs advantages over the conventional
methods of the development and production of animated television specials,
episodic TV series and movies. Three features of the advanced software and the
Company's animation development center include: Motion Capture, Production
Management and an Asset Library.
The conventional method in the development of computer animation production
requires the artist to create each individual cell. The cell is layered onto
one or more backgrounds, which is then photographed as a single frame. The cell
method of developing an animated production is time consuming and costly. The
Company's Motion Capture system is a tetherless system which is capable of
capturing 3D movement of interacting multiple characters; such as fight scenes
and action scenes. The system also provides for motion capture from a large
variety of angles. Typically, actors are placed into a snug fitting tight suit
which is fitted with a large number of light reflecting sensors. As the actors
perform to the script, and the follow the guidance of the director, one or more
of the Company's high-speed cameras record the
30
movement of light which is reflecting from each of the reflective sensors. The
digitally captured action of the recorded events of each of the actors motion is
transferred into the Company's computer animation production data bases. Upon
entry of this basic character motion data into the computerized representation
of the actor, and the combining of multiple characters into the scene, the
rendering of each of the scenes proceeds under the direction of a computer
graphics artist. The Company's computer artists have access to many
sophisticated computer software animation and rendering tools to create and
transforms the scenes into the final product.
In addition to Motion Capture capabilities, the Company has created an advanced
animation development Production Management system. The System is designed to
aid in the efficient allocation of resources, the timely completion of tasks and
the control of costs and delivery schedules. The technique allows action
sequences to be divided into work packages or sequence segments. Each segment
is traceable as to schedule, computer graphic artists assignment, and other
management parameters. The System also aids in the timely integration of the
various sequence segments into an integrated, unified complete animated
production.
Another significant feature of the Company's animation production capabilities
is the digital Asset Library. The Asset Library is the central depository for
each of the characters, motions, lighting, shading, background and other
descriptive features which describe a animation frame, or sequence of frames.
These items are retained and stored, in digital format, in the Asset Library.
Since all of the characters and their movement is created and stored as an
accessible item, over time a large number of production components become
available which can be utilized in future productions. Because the Motion
Capture system allows 3D cutting and pasting from virtually any viewing angle,
the library data becomes a major factor in the potential reduction in scheduled
production time and the reduction in episodic animation production costs.
Assuming in the creation of one action sequence in one episode of an animated TV
series the subject character is required to be running. In an episode produced
three weeks later the same character, in a action sequence, is running. The
motion capture sequence in the library can be pulled, cut and pasted into the
sequence. The pasting can be for a different character shot from a completely
different angle. This provides a significant savings because the motion capture
activities are not required to be repeated for this sequence of the new episode.
As the magnitude of the items stored in the depository grows, the need to
perform motion capture is reduced.
MUSIC PUBLISHING
The Company intends to retain the rights to many of the songs and music
developed as part of its media production activities. The re-playing of these
songs and music in the TV, radio and other distribution media will result in
royalty payments to the Company. The Company has established a Music Publishing
group to manage these assets and to acquire, as appropriate, additional music
rights for publication. The ownership of music publishing rights for MSHE will
generate income well into the future. MSHE also contemplates forming its own
record label, MSH Records.
The music industry rivals the film and television industry around the world for
size, importance and profitability. In 1994, the music industry reported, on a
worldwide basis, Forty Billion Dollars in sales. Since 1994, the independents
as a group have begun to outdistance some of the "majors" including MCA,
Capitol-EMI and PolyGram. Today, the independents as a group, of which MSH
Music will be a member, are finishing second in revenues, right behind
Warner/Elektra/Atlanta (WEA). By 1997 the independents are expected to surpass
the majors.
MSH Music is concentrating on publishing. Publishing is the anchor, the
cornerstone, of a successful music operation. Music publishing generates income
from five different categories of usage of the music. The five categories
include: Mechanical License Fee; Public (TV plays) Performance; Print Rights;
Synchronization Rights; and Miscellaneous Rights. Other potential revenues are
derived from soundtrack albums of its programs.
31
INFLATION AND SEASONALITY
Although the Company cannot accurately determine the precise effects of
inflation, it does not believe inflation has a material effect on sales or
results of operations. The Company considers its business to be somewhat
seasonal and expects net revenues to be generally higher during the second and
fourth quarters of each fiscal year as a result of the general industry practice
of paying royalties semi-annually.
AGE AGREEMENT
The Company has entered into a strategic product development agreement with
Abrams/Gentile Entertainment Inc. Under terms of the agreement AGE acquired
warrants to acquire up to 1,000,000 shares of Common Stock of the Company and
the Company acquired the rights to produce a new children's TV series entitled
"Vanpires" developed by AGE and scheduled to commerce network broadcast during
fall 1997. The Company also acquired an interest in the potential revenue from
toys and merchandising related to the new series.
As a strategic partner the experience and accomplishments of AGE presents a
major benefit to the Company. In the North American toy market, AGE's toy
"Skydancer" has become a favorite toy among young girls. The toy is being
marketed worldwide by Galoob, which also markets AGE's other toy line, "Happy
Ness." Happy Ness is based upon the successful children's animated television
series "Happy Ness, Secret of The Loch," which has recently awarded The Family
Channel Seal of Quality. Additional AGE toy products include: Power Glove,
Teen Talk Barbie, and Popcorn Pretties for Mattel Toys; Nitro-Bat for Whammo
Toys; Baby Sweet Surprise, Bucky O'Hare, Fazz and Visionaries for Hasbro/Kenner
Toys; Creepy Crawlers, Incredible Edibles, Everglo and Photo Doh for Toymax;
Rambo for Coleco Toys; Drastic Elastic, Comic Campus, Spiral Shop and Boomer
Tube for Just Toys; the personality dolls Marilyn Monroe, James Dean, Cher and
Farrah Fawcett; and licensed properties including Star Trek, Planet Of The Apes,
Baywatch and Marvel Super Heroes.
For television, AGE has created and produced over fifty hours of Saturday
morning animation. Two of AGE's television shows, "Visionaries" and "Bucky
O'Hare" were rated Number 1 in their respective time slots during their initial
runs. During 1996 AGE had "Happy Ness - The Secret Of The Lock" and "Jelly Bean
Jungle" and "Skydancer" and "Dragon Flyz" airing on television. In the theme
park arena, AGE is a creative and technical consultant to the proposed SCI-COM-
CITY theme park in Osaka, Japan.
During the previous seven years AGE has continued research and exploitation of
the new virtual reality (VR) technology. Their "Power Glove" was a
revolutionary video game licensed to Mattel Toys who marketed it for use with
the Nintendo Entertainment System in 1989. Power Glove was one of the First VR
products to be produced for the consumer market. Worldwide gross sales were
reported to exceed $80 million. The success of Power Glove elevated it to the
status of pop video culture and it has been showcased in such major motion
pictures as "The Wizard," "Freddy's Dead," and "Nightmare On Elm Street, VT."
INTEL AGREEMENT
The Company has entered into a strategic marketing and product development
agreement with Intel Corporation. Under terms of the agreement Intel acquired
warrants to acquire 1,000,000 shares of Common Stock of the Company and the
company acquired the rights from Intel to develop joint marketing and awareness
programs and a marketing and promotion plan for the company's products.
The Intel agreement supports the Company's development of a software program
which enables an animation production company to monitor all resources, compare
individual animators' daily delivery against projected delivery quotas and red
flag the art director when additional resources are needed to bring the ongoing
work flow back on schedule. The software program is an episodic television and
movie management system for high quality animation projects using the Intel MP
platform.
In addition to utilization of the software program by the Company, the Company
is evaluating potential markets for the program and presently plans to commence
the licensed distribution of the program during late 1997. As the distribution
and marketing plans for the software program are currently under
32
development, the Company is unable to define whether the software product will
be sold and licensed, the potential economic benefit from such sales and
licensing, if any, nor the release schedule, if any.
HZE AGREEMENT
The Company has entered into a strategic product development agreement with
Happy Zone Entertainment Inc. Under terms of the agreement HZE agrees to engage
the Company from time to time to develop, create, test, and deliver certain
programming materials and to provide various facilities and services to HZE. The
Company will receive compensation for such services. In exchange for these
access rights and the first right of refusal for all children's projects
presented to the Company or HZE, and extending credit to HZE under a credit
agreement, the Company received a sixty percent equity ownership interest in
HZE. Under the terms of the agreement, the Company retains the rights to all
non-children's productions offered to the Company or to HZE, and the right to
produce all children's productions which are not selected for production by HZE.
DEVELOPMENT OF STRATEGIC PARTNERSHIPS
The Company intends to actively seek strategic partners who offer rights,
development capabilities and projects which can be packaged, distributed and
licensed. By joining with domestic and international strategic alliance
partners the Company gains the capability to allocate a portion of a projects
development costs among the partners and the opportunity to derive revenues
from: the sale of the product; a distribution fee; and equity participation in
the revenues.
COMPETITION
Motion picture and television programming production and distribution is a
highly competitive business. The Company faces competition from large
integrated motion picture and television production and distribution companies
as well as with numerous other motion picture and television production
companies, networks and pay cable systems. The Company's distribution
operations compete with many of such firms for distribution rights, placement of
films with exhibitors and the purchase of advertising in various media. Most of
these companies have substantially greater marketing, distribution, technical
and financial resources than the Company, with proven operating histories and
long-standing relationships in the motion picture and television industry.
Competition for the acquisition of television programming is based primarily on
the amount of the advance which the distributor is willing to pay to the
producer, as well as the distributor's marketing capabilities, its commitment to
market television programming in a certain minimum number of markets, and its
reputation in accounting to and consulting with producers. The Company through
acquisitions and strategic relationships has recently attempted to offset the
greater purchasing power of these competitors.
The Company believes that several competitive factors work to the Company's
advantage including its relationships with Intel and AGE. The Company also
offers producers the capacity to distribute a film or television programming,
which the Company believes is often a primary objective of a producer who is
marketing a film or TV series. With the additional capital resources provided
by this offering, and the higher profile provided by being a public company, the
Company expects to be able to compete more effectively in the marketplace than
it has in the past.
Several companies have announced they are developing other technologies,
including videoserver and compression technologies, which will provide movies
"on demand" and directly to consumer homes over cable lines. As these and other
new technologies are introduced on a wide scale basis, the Company's home video
revenues and overall business could be significantly impacted; and the Company
might be required to develop and implement new operating strategies and
distribution capabilities in order for its business to remain viable.
The software development, sales and licensing business is competitive and
characterized by rapid technology changes and entry into the field of large
recognized and well-capitalized companies as well as smaller competitors.
Although the Company is unaware of any software product which currently is
directly competitive with the Company's episodic television and movie management
system, should the Company
33
decide to sell and license its software program, it may face competition from
such established software development and marketing companies as Microsoft,
Corel, Adobe, Sunsoft, Silicon Graphics and others.
REGULATION
Distribution rights to TV series, special events, mini-series, pay-per-view,
satellite, infomercials MOW, MFT videos and other media are granted legal
protection under the copyright laws of the United States and most foreign
countries, which provide substantial civil and criminal sanctions for
unauthorized duplication and exhibition of programs. The Company plans to take
all appropriate and reasonable measures itself or through licensees to secure
and maintain copyright protection for all media under the laws of all applicable
jurisdictions.
The Code and Ratings Administration of the Motion Picture Association of
America, an industry trade association, assigns ratings for age-group
suitability for viewing of motion pictures. As part of its total business
activities, the Company's intends to produce and distribute "PG" rated motion
pictures. The US television industry instituted a rating system for television
viewing. The Company's products comply with these new ratings. Many of the
major participants who provided data and programming to the Internet and World
Wide Web are exploring methods to implement a content rating system.
In addition to movie and video rating, the United States television stations,
networks and cable and satellite services are preparing a rating system for
delivery of television programs. Some foreign governments impose additional
restrictions on the content of motion pictures, videos and entertainment media
which is distributed to their audiences and may restrict, in whole or in part,
delivery of the Company's product to the market in a particular territory.
There can be no assurance that current or future restrictions on the content of
Company films, videos and media may not limit or affect the Company's ability to
distribute certain of its products in such media or markets.
TRADEMARK AND COPYRIGHT PROTECTION
Rights to scripts, television and movie productions, musical works, sound
recordings, art work, photography, animation characters, computer programs and
other intellectual properties are granted legal protection under the trademark
and copyright laws of the United States and other foreign countries. These laws
provide civil and criminal sanctions for unauthorized duplication, exhibition or
commercial exploitation of the property.
The Company plans as appropriate to secure and maintain protection of the rights
to all of its properties under the laws of applicable jurisdictions including
the United States Copyright Act of 1976. The Company's film scripts have been
registered with the Copyright Division of the Library of Congress, and its
television properties will also be registered here as well as the equally strong
Writers Guild of America ("WGA"). By effecting these registrations, the Company
has utilized the traditional safeguards employed in the entertainment industry
to protect the concepts and titles to properties.
No assurance can be given, however, that others will not infringe upon the
Company's property rights, in which event, the Company may not have sufficient
resources to enforce or defend its rights. Illegal copying and other forms of
exploitation are rampant, in some foreign countries and especially in the video
industry. The continued failure of governments and regulator agencies to
enforce trademark and copyright laws could have an adverse impact on the
Company.
FACILITIES
The Company's headquarters are located at 3330 Ocean Park Boulevard, Santa
Monica, CA 90405. The Company has production studios, an animation and software
development center, and support facilities in San Francisco, California. The
Company also maintains an office in Houston, Texas. As required to support a
specific Company project, the Company intends to rent additional production,
filming, sound, recording and other facilities. The Company believes its
headquarters, production studios, animation facilities and other facilities will
provide adequate space for office, product, and the distribution through this
calendar year and that suitable additional space is available to accommodate
planned expansion.
34
EMPLOYEES
The Company has been successful in its efforts to recruit qualified employees
and consultants and anticipates sufficient qualified employees and consultants
will be available to fulfill the future staffing needs of the Company. On
December 31, 1996 the Company had a total of 10 full-time employees, and 16
consultants. The Company's present employees are not subject to collective
bargaining agreements. The Company believes that relations with its employees
are excellent. The Company intends to utilize, as appropriate, consultants,
under work-for-hire agreements, to support development and production of various
programs and products.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
MANAGEMENT
The Executive Officers, Directors, Key Employees of the Company include:
[Download Table]
Name Age Position
---- --- --------
Robert P. Maerz, J.D. 46 Chairman and Chief Executive Officer
Jonathan G. Stathakis 50 Director and President, COO
Al Morgan 72 Director
Christopher R. Haigh 46 Director, Executive Vice President
Samuel Cable 53 Director, Vice President
Chuck Walker 40 Director, Vice President
Dennis Olle 45 Director
Andrew Steiner 33 Senior Vice President
Fred E. Aurelio 72 Chief Financial Officer
Richard Schulenberg 56 Executive Vice President, MSH Music
ROBERT P. MAERZ is Chairman of the Board and Chief Executive Officer of the
Company. Mr. Maerz has been the Chairman of the Board and the CEO of Company
since August 1994 and MSH Productions Inc., a wholly owned subsidiary, since its
inception in January 1993. Since 1990, Mr. Maerz has been involved with film
and television industry. Mr. Maerz has arranged the financing and assisted in
the production of six feature length films for the Company. He established an
investment company in 1988 which has been instrumental in organizing and seeking
financing for small companies and entertainment properties.
From 1985 to 1988, Mr. Maerz was employed by the following New York Stock
Exchange member firms: Harris Financial Company; and Legg, Mason, Wood, Walker,
Inc. From 1980 to 1984, Mr. Maerz was a principal in Talent Management, Inc., a
corporation that represented musicians and athletes in contract negotiations
with sports franchises and record companies. From 1981 to 1984, he helped
organize and produce video production for various entertainment groups. He is a
graduate of the University of North Florida and has a law degree from Woodrow
Wilson College of Law, Atlanta, Georgia.
JONATHAN G. STATHAKIS is a Director and President of the Company. With over 18
years in the entertainment industry, Mr. Stathakis began his career in the
television and film industries by writing episodes, story treatments and scripts
for numerous television specials, series and low budget feature films. He was
then chosen to produce "Dreamland," a made-for-television movie and,
subsequently, he produced scores of television movies, specials and series. In
Boston, Mr. Stathakis was nominated for an EMMY Award for his work as the
producer and co-writer of the WCVB-TV (ABC affiliate) series "Park Street Under"
which served as the basis for the highly successful NBC series "Cheers." He was
also selected by the United Nations to write and direct the first television
program specifically produced for mainland China. He went on to create, produce
and write a number of TV series, specials and films, receiving 5 ACE Award
nominations, winning 2 ACE Awards, plus winning a VIRA Award for Best Children's
Home Video of the Year, and received 2 Honorable Mentions at the Chicago
Children's Film Festival.
35
On the corporate level, Mr. Stathakis was Vice-President of Acquisitions and
Sales for InterAmerican Productions, Inc.; Executive Vice-President In-Charge-
Of-Production for InterCommunications, LTD; Executive Vice-President In-Charge-
Of-Operations and Production for Television Theater Company (TTC); Director of
Movie Development for the CBN Producers Group; Director of West Coast Operations
for NorthStar Entertainment Group, the in-house production arm and wholly owned
subsidiary of The Family Channel; President of Greenwich Films, Inc.; and Head
of Acquisitions and Creative Director of Featureline Films, Vancouver, Canada.
Mr. Stathakis was also a professional photographer, shooting high profile
concerts like Woodstock and MTV events. He also worked for renowned performers
including Jimi Hendrix and The Grateful Dead.
Mr. Stathakis' credits as a producer are numerous and include 5 made-for-pay-
cable children's television movies for MCA/Universal; 13 MTV concert specials;
and, most recently, "Exit," a feature film for IRS Media and Republic Pictures;
"Yahoo BugaBoos," a pilot for a children's series which has been selected for
distribution by SONY's Columbia-TriStar Television. He recently produced a
children's series, "Jelly Bean Jungle," airing every Saturday morning on ABC and
Fox Television Network stations. Mr. Stathakis is a member of the National
Academy of Television Arts & Sciences; the Association of Independent Video &
Filmmakers; the National Academy of Cable Programmers; the Independent Feature
Projects/West (IFP/West); the National Academy of Program Television Executives;
and the Producers Guild of America.
AL MORGAN is a Director of the Company. Mr. Morgan, who is fluent in Japanese,
German and French, is a Professor of Finance at South Connecticut State
University. Mr. Morgan is a graduate of Harvard University. He was a
consultant and a teacher at Hofstra University School of Business before
becoming President of Peachtree Ventures, Inc. Other positions Mr. Morgan has
held throughout his career include: Corporate and Securities Analyst/Portfolio
Manager for Lehman Brothers and Lehman Corporation; Director of Development for
Fairbanks, Whitney Corp., now known as Colt Industries; Manager of Research and
New Business for Hill, Darling, Grimm (NYSE); and a Partner and Manager of
Research for Federman, Stonehill (NYSE).
Mr. Morgan also has extensive experience with investment firms and
mergers/acquisitions; financing of established companies including private
placements and public underwriting (e.g., Capital Airlines/United Airlines
merger, Suburu of America); revival of bankrupt companies (e.g., Transmedia
Network, Inc. and Resources Exploration Oil, Inc.). Mr. Morgan was a director
of the following publicly traded companies: In-Flight Movies, Inc., Magic Marker
Pens, Inc., Resource America Oil and a former director and principal shareholder
of Transmedia Network, Inc.
Mr. Morgan's publications include the Wharton School Journal of Business
Venturing, "The Public Shell for Venture Financing," 1987; Bankers Magazine,
"Who Moves the Prime and Why?" August, 1987; United States Investor, "Stock for
the Conservative Investor," October, 1995; and Hofstra University with Long
Island Cablevision, tape on "Understanding Stock Investing." Mr. Morgan is a
member of the New York Securities Analysts Society and a member of the United
States Commerce Department, District Export Count.
CHRISTOPHER R. HAIGH is a Director and Executive Vice President of Creative
Development. Over 17 years ago, Mr. Haigh founded East End Communications,
whose assets were acquired by the Company in July 1996. His company was
involved in film, video, slides, interactive multimedia, computer animation,
live theater, to television broadcast entertainment. More recently, Mr. Haigh's
focus has been to develop quality entertainment for commercial television, cable
and feature film.
Mr. Haigh has been on assignment in many parts of the world directing and
producing documentaries and commercials for many of the biggest Fortune 500
companies and television networks. His career also includes being an actor and
Stage Manager for the world renowned and prestigious Royal Shakespeare Company.
Also for several years he was a producer and a director of over a dozen
television programs for the BBC.
36
SAMUEL CABLE is a Director and Vice President of the Company. Mr. Cable served
as the executive producer for each of the Company's low budget feature film
projects, "Portrait of a Nightmare," "Louisiana Conspiracy," "Rings, An Olympic
Story," and, most recently, "God of Rockabilly." He also has experience in
motion picture production and distribution. Prior to entering the film
industry, in 1987, he produced live professional boxing events in the Houston
area. Mr. Cable also produced the "Textel Championship Boxing" broadcast on the
Houston NBC affiliate.
CHUCK WALKER is a Director and Vice President of the Company. Mr. Walker was a
creative director of the Company's four low budget feature films, having
directed "Portrait of a Nightmare" and "Rings, An Olympic Story." He also wrote
the screenplays and acted in "Rings" and in "God of Rockabilly." Mr. Walker
created the basic concept for "Boy From The Bayou."
Throughout his career, Mr. Walker has also been involved in various stage plays
including "Eight To Zero," for which he wrote the script, and he has done many
mystery scenarios for the Houston based "Murder, Inc." During the early days of
his career, he operated the Chuck Walker Theatrical Dance Center in Phoenix,
Arizona and also ran his own professional dance company which performed
throughout the Southwest. As a dancer he has performed solo on numerous
occasions on The Ted Mack Show and Merv Griffin's Dance Fever, produced by
T.A.V. studios in Hollywood. He has also choreographed stage productions and
numerous national dance programs on local cable and syndicated television.
Mr. Walker co-produced and served as the commentator and writer for "Textel
Championship Boxing" broadcast on the NBC affiliate in Houston. Mr. Walker also
served as a location scout and production coordinator for production shooting in
the Montgomery County (Texas) area, and starred in a motion picture filmed there
in 1990 entitled "Open Season." Mr. Walker also participated in "You Wouldn't
Understand" and "YZ," a film trailer. He appeared in "Used Cars," with Kurt
Russell, "The Last Chance," with Lee Majors, "Assault on Paradise," with Oliver
Reed, and a starring role in the documentary, "Arid Motion Picture Production,"
from Apacheland Movie Studios in Arizona. Mr. Walker has written a total of
fourteen scripts now under assignment to Company. In addition to his
entertainment career, Mr. Walker was a member of 1976 Olympic Boxing Team.
DENNIS OLLE is a Director of the Company. Mr. Olle has practiced law for twenty
years in Miami, Florida. He has been the President and a principal shareholder
of Olle, Macaulay & Zorrilla, P.A. (Miami, Florida), since April 1989. He is a
graduate of Rice University (B.A.) and Columbia University School of Law (J.D.),
where he was a Harlan Fiske Stone Scholar and a participant in the Accelerated
Interdisciplinary Legal Education Program between Rice and Columbia. He
specializes in general corporate, securities, and commercial transaction law.
ANDREW STEINER is a Senior Vice President of the Company. Mr. Steiner was
formally Vice President in charge of the Entertainment Division of General Media
International. His responsibilities included management of all distribution and
marketing for feature films, television programming, sell-through home video and
interactive gaming. Mr. Steiner was responsible for opening distribution of
General Media products into twenty-one foreign territories in all media
including video, satellite, terrestrial television, pay-per-view television and
theatrical. He also managed domestic distribution including distributions
through such companies as Warner Vision, a subsidiary of Time-Warner., New Line
Cinema and others.
Prior to joining General Media, Mr. Steiner served as the Vice President of
International Sales and Marketing at Intercontinental Releasing Corporation
where he was responsible for all theatrical, video and television sales. Mr.
Steiner also worked for Communications and Entertainment Corp. where he secured
more than $10 million in sales and directed marketing and promotional campaigns
designed for each picture. He was also in charge of operations, distribution,
marketing and contract administration.
Prior to his involvement in the entertainment industry, Mr. Steiner worked for
Avis and was responsible for corporate business development, marketing and
licensing of franchises for Avis Service, Inc. He established the west coast
sales office and sold over seventy franchises which gross over $75 million. Mr.
37
Steiner is a graduate of the State University of New York at Oswego, with a B.A.
in Communications; Broadcast, Marketing.
FRED E. AURELIO is Chief Financial Officer of the Company. He is also the
founding partner of Sierra Resource Group, a media consulting firm. Mr. Aurelio
was Vice President of Corporate Development for Pan American World Airways;
President of Simi Winery in Sonoma County, California; and Senior Vice-President
and Chief Financial Officer of Sky Chefs, Inc., a subsidiary of American
Airlines, Inc. As a corporate officer and a consultant, Mr. Aurelio has media
business experience which includes assignments throughout North and South
America, Europe and West Africa. Mr. Aurelio attended Villanova University and
is a graduate of Ohio State University with a degree in Accounting.
RICHARD SCHULENBERG is Executive Vice President of the Company's MSH Music
Group. Mr. Schulenberg has been a music entertainment attorney for over 30
years, involved daily with negotiations, drafting, and dealing with
entertainment contracts and various aspects of the entertainment business. His
music law experience is both from the record company's standpoint and as a
private practitioner representing artists, producers, record companies,
managers, agencies, songwriters, and publishers.
Mr. Schulenberg began his music career as an attorney in the legal department of
Capitol Records in 1965. He left there in 1969 to become Director of Business
Affairs for CBS Records, a position he held until 1972 when he was hired by
Paramount Pictures Corporation as General Counsel of its Music Division to
establish a legal department for them. Prior to Mr. Schulenberg joining
Paramount, all legal work for the music division was done by outside counsel.
His main area of focus was managing and overseeing the operation of the legal
and business of the record, publishing and soundtrack divisions of Paramount
Pictures. Mr. Schulenberg entered private practice in 1980 with the firm of
Schulenberg & Warren.
Mr. Schulenberg is a Senior Instructor for UCLA Extension, teaching classes
entitled, "Legal and Practical Aspects of the Recording and Publishing
Industries" and "Film Music - Found Money." He is also a Lecturer for the USC
Graduate School of Business and guest lecturer of Loyola University School of
Law. He was named "Outstanding Teacher of Music" at UCLA Extension.
Mr. Schulenberg has been a contributor to national magazines in excess of
fifteen articles on copyrights and legal aspects of the entertainment industry
and music. He is author of a book on the practical and legal aspects of the
entertainment industry entitled "Living in the Material World." He is also co-
author of the book "Film Music/Found Money." Mr. Schulenberg has served as the
Chairman of the Curriculum Committees for the Conference of Personal Managers
and the UCLA Department of the Arts, Recording Arts Program. He also served as
Co-chairman of the Dutch-American Film Conference and on the Board of Advisors
of the Soviet-American Film Institute.
Representative music clients include Kenny Loggins, Marty Balin, Gary Busey, two
time Academy Award winning screen composers Leonard Rosenman and Al Kasha, and
numerous other musicians, composers and record companies. His film and
television clients have included Sid Caesar, Republic Pictures International,
director Jeannot Szwarc ("Jaws 2," "Supergirl," "Somewhere In Time"), producer-
director Paul Bartel ("Eating Raoul," "Death Race 2000," etc.), Daniel Mann
(director of "Butterfield 8," "The Rose Tattoo," "Come Back Little Sheba,"
"Teahouse of the August Moon," etc.), John DeLorean, Kaye Ballard, His
Holiness, the Dali Lama of Tibet, and Mother Teresa (her television
documentary), and Ben Cross ("Chariots of Fire").
Presently Mr. Schulenberg is the head of Veridian Productions, a music company
active in the creation of motion picture and television soundtracks: the head of
International Royalty Management which acts as a worldwide administrator of
music copyrights for both publishers and writers as well as entertainment
companies, producers, Syndicators and distributors; serves on the Board of
Directors of the Shakespeare Globe Center; is the music consultant to the Family
Channel; and is founder of the Drones Club of Beverly Hills, California. Mr.
Schulenberg received his Bachelor of Arts degree from the University of
California, Los Angeles, and his law degree (J.D.) from the University of
California School of Law, Los Angeles.
38
RECRUITMENT
The Company has been successful in its efforts to recruit qualified employees
and consultants. None of the Company's present employees are subject to
collective bargaining agreements. The Company believes that relations with its
employees and consultants are excellent. The Company maintains a key man
insurance policy in the amount of $500,000 on Mr. Christopher Haigh.
MANAGEMENT COMPENSATION
The following table sets forth certain information with respect to the annual
and long-term compensation earned for the fiscal year ended December 31, 1996,
1995 and 1994 for the Company's Chief Executive Officer and the two most highly
compensated executive officers other than the Chief Executive Officer, the
"Named Executive Officers."
SUMMARY COMPENSATION TABLE
[Enlarge/Download Table]
LONG TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION
-------------------
RESTRICTED SECURITIES
NAME AND STOCK UNDERLYING
POSITION YEAR SALARY ($) BONUS ($) OTHER (4) AWARDS (#) OPTIONS (#)
------------------------------- ------------ ---------- --------- --------- ---------- -----------
Robert P. Maerz 1996 72,000 18,000 15,000 100,000 250,000
Chief Executive Officer (1) 1995 25,000 378,500
1994 -- 371,500
Jonathan G. Stathakis 1996 60,000 100,000 350,000
President (2) 1995 -- 50,000
1994 --
Christopher R. Haigh 1996 75,000 9,000 400,000
Executive Vice President (3) 1995 --
1994 --
(1) The Company entered into an Employment Agreement with Robert P. Maerz on
July 1, 1996. The term of this agreement is three and one half years with an
option for extension. The annual compensation is $72,000 during 1996 with bonus
performance incentives. See "Management Compensation" for additional details.
Mr. Maerz has deferred receipt of some compensation. As of September 30, 1996,
the total amount of such deferred compensation and loans to the Company were
$62,451. The 250,000 in stock options are earned upon the performance of
certain events which as of the date of this offering have not been completed.
(2) During 1995 and 1996 Jonathan G. Stathakis provided services to the Company
under a consulting contract. The Company entered into an Employment Agreement
with Jonathan G. Stathakis on January 1, 1997. The term of this agreement is
three years. See "Management Compensation" for additional details. Mr.
Stathakis has deferred receipt of some compensation. As of September 30, 1996,
the total amount of such deferred compensation was $13,000. Of the 350,000 in
stock options, 250,000 are earned upon the performance of certain events which
as of the date of this offering have not been completed.
(3) The Company entered into an Employment Agreement with Christopher R. Haigh
on June 7, 1996. The term of this agreement is three years. Mr. Haigh's annual
base salary is $150,000 and he retains rights to royalties for certain software
which the Company is currently developing. As of the date of the offering no
royalties have been earned and the Company is at this time unable to determine
the amount of any future royalties, if any. See "Management Compensation" for
additional details. Mr. Haigh has deferred receipt of some compensation. As
of September 30, 1996, the total amount of such deferred compensation was
$46,875. During 1994, 1995 and through June 7, 1996 Mr. Haigh was the Chief
Executive Officer of East End and was not an employee of the Company.
(4) The amounts listed under "Other" consist of an automobile allowance, housing
allowance and other related allowances. In additions to the referenced
compensation some of the officers may act as Executive Producer, Project
Director, or Producer of one or more of the Company's projects. In such cases,
the party will receive a fee for such services over and above their salaries.
Management of the Company intends that such fees will be no greater than those
the Company would be required to pay unaffiliated third parties in the industry
for such services. As of the date
39
of the offering no officer has received or earned such compensation and the
Company is at this time unable to determine the amount of any future
compensation which may be earned under this compensation plan, if any.
The following table contains information concerning the grant of stock options
made during 1996 to each of the Named Executives Officers.
OPTION GRANTS IN LAST FISCAL YEAR
[Enlarge/Download Table]
INDIVIDUAL GRANTS
-----------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES PRICE EXPIRATION GRANT DATE
GRANTED (1) IN YEAR ($/SH) DATE PRESENT VALUE ($) (1)
---------- ---------- -------- ------------- ---------------------
Robert P. Maerz 250,000 29.4 0.10 6/2001 400,000
Jonathan G. Stathakis 250,000 29.4 0.10 6/2001 400,000
Christopher R. Haigh none
(1) The grant date present values are based upon a sales price of $1.60 per
share.
The following table sets forth certain information with respect to the value of
options held at December 31, 1996 by the Named Executive Officers who held
options during 1996. The Named Executive Officers did not exercise any options
to purchase Common Stock during 1996.
YEAR-END OPTION VALUES
[Download Table]
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT YEAR END(#) AT YEAR END($)(1)
-------------------------- --------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
Robert P. Maerz 250,000 375,000
Jonathan G. Stathakis 100,000 250,000 150,000 375,000
Christopher R. Haigh none
(1) Prior to this offering, the Common Stock has had a limited public market and
is quoted on the OTC Bulletin Board under the symbol MSHE. Given the limited
market, the Board of Directors, in connection with grants of stock options from
time to time, determines the fair market value of the Restricted Common Stock as
of the grant date. For the purpose of calculating the value recognized at the
year end, of the restricted shares, the Board of Directors has used $0.10 per
share. In the money values are based upon a sales price of $1.60 per share.
The Company on July 1, 1996 entered into an employment with Robert Maerz that
provides for employment of Mr. Maerz as Chief Executive Officer and Chairman of
the Board of Directors of the Company for three and one half years. The
agreement provides for an annual salary of $ 72,000 during 1996; $59,000 during
1997; and $84,000 in years 1998 and 1999. In addition, Mr. Maerz is entitled to
receive an annual incentive compensation equal to twenty-five percent of the
annual salary and a automobile allowance of $500 per month and a living
allowance of $2,500 per month and a signing bonus of $25,000.
The Company on January 1, 1997 entered into an employment with Jonathan
Stathakis that provides for employment of Mr. Stathakis as Chief Operating
Officer and President of the Company for three years. The agreement provides
for an annual salary of $59,000 during 1997; and $84,000 in years 1998 and
1999. In
40
addition, Mr. Stathakis is entitled to receive an annul incentive compensation
equal to twenty-five percent of the annual salary and a automobile allowance of
$500 per month, a living allowance of $2,500 per month and a signing bonus of
$25,000.
The Company on June 7, 1996 entered into an employment with Christopher R. Haigh
that provides for employment of Mr. Haigh as an executive of the Company for
three years. The agreement provides for an annual salary of $150,000 and he
retains rights to royalties for certain software which the Company is currently
developing. As of the date of the offering no royalties have been earned and
the Company is at this time unable to determine the amount of any future
royalties, if any.
As part of the compensation agreements with both employees and consultants the
Company is implementing those policies and procedures which, in its sole
discretion, are deemed prudent to protect the property rights and other assets
of the Company. These may include covenants not to compete, trade secret
covenants, work-for-hire agreements, and other covenants which are designed to
benefit the Company.
CONFLICTS OF INTEREST
The Company's Officers are actively participating in other projects and
activities. These actual and potential transactions raise two issues which
potential investors must consider before investing: (a) possible conflict of
interest, and (b) non-arm's length transactions. The Company's Officers and
Directors have agreed, where a potential conflict exist, to disclose such
potential conflict to the Board and to abstain from voting on the proposition to
which the potential conflict relates, and in situations where a non arm's length
transaction occurs, to accept terms and conditions which are no more
advantageous than those which would be imposed on the Company by unaffiliated
third parties. Given the implementation of these policies there can be no
assurance that management will resolve conflict of interest issue or non-arm's
length transactions to the benefit of the Company.
CERTAIN TRANSACTIONS
LOANS
As of June 21, 1996, as part of the acquisition of the assets of East End the
Company incurred an indebtedness to Christopher Haigh of $865,000 due December
1, 1996 with the right to extend to December 1, 1997. In addition to the
referenced loan, as of September 30, 1996 the officers and directors of the
Company had outstanding loans to the Company in the amount of $145,764.
AFFILIATED TRANSACTIONS
The Company follows a policy under which all material affiliated transactions
and loans will be made or entered into on terms no less favorable to the Company
than those that can be obtained from unaffiliated third parties. As part of
this policy all material affiliated transactions and loans, and any forgiveness
of loans, must be approved by a majority of the members of the Company's Board
of Directors who do not have an interest in the transaction.
PRINCIPAL SHAREHOLDERS AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of shares of Common Stock as of September 30, 1996, and as adjusted
to reflect the sale of the shares offered hereby (i) by each person known to the
Company to beneficially own more than 5% of the outstanding shares of Common
Stock, (ii) by each of the Company's directors, (iii) by each of the Company's
named executive officers and (iv) by all identified directors and executive
officers of the Company as a group. Assuming the sale of the maximum of this
offering, the total issued and outstanding shares will be 12,391,646.
41
[Download Table]
BEFORE OFFERING AFTER OFFERING (2)
--------------- ------------------
NUMBER OF PERCENT NUMBER OF PERCENT
NAME OF OWNER(1) SHARES (#) OWNED(%) SHARES(#) OWNED(%)
----------------- ---------- --------- ---------- ---------
Robert P. Maerz 1,127,751 12.0 1,127,751 9.1
Jonathan G. Stathakis 650,000 6.9 650,000 5.2
Sam Cable 1,062,500 11.3 1,062,000 8.5
Chuck Walker 1,062,500 11.3 1,062,000 8.5
Christopher R. Haigh 400,000 4.3 400,000 3.2
Fred E. Aurelio 50,000 -- 50,000 --
Andrew Steiner 300,000 3.2 300,000 2.4
Al Morgan 100,000 1.1 100,000 0.8
Richard Schulenberg 25,000 -- 25,000 --
All directors and executive
officers as a group (9 persons) 4,777,751 50.8 4,777,751 38.6
(1) Unless otherwise indicated, the stockholder's address is at the Company's
principal executive offices.
(2) Based on sale of the maximum offering. As of September 30, 1996, assuming
no conversion of the authorized stock options, and no exercising of the
authorized warrants, there were 9,391,647 shares of common stock outstanding.
The selling shareholder is Robert Posner. Mr. Posner, who is receiving
registration rights under a credit agreement with the Company, is not an officer
or director of the Company. (See "Plan of Distribution").
DESCRIPTION OF CAPITAL STOCK
The Company's authorized stock consists of 50,000,000 shares of common stock,
with a $0.001 par value. The shares of common stock are equal in all respects.
Each issued and outstanding share is entitled to one vote for the election of
Directors and upon each matter submitted to the vote of the stockholders. The
Company has 25,000,000 shares of preferred stock authorized, none of which are
issued or outstanding.
Cumulative voting in the election of directors is not authorized, which means
that holders of a majority of the outstanding shares of Common Stock voting for
the election of Directors will be able to elect all members of the Board of
Directors. A majority vote will also be sufficient for other actions that
require the vote or concurrence of shareholders. The common stock contains no
pre-emptive, subscription, or conversion rights, redemption privileges or
sinking fund provisions. The shares have equal rights on liquidation.
Dividends may be paid as and when declared by the directors out of funds legally
available, although dividends have not been declared or paid by the Company
since inception. All of the outstanding shares are, and the shares offered
hereby will be upon issuance, fully paid and non-assessable. Upon completion of
the offering, with all options, all warrants and all credit agreement
conversions, at the estimated conversion rate, executed, as of December 31,
1996, there will be 15,551,646 shares issued and outstanding, assuming all
shares are sold.
With respect to the result of the disallowance of cumulative voting by
shareholders in the election of directors, the following should be noted. The
current shareholders of the Company have acquired a majority interest in the
outstanding shares. Accordingly, even if all of the 1,000,000 shares offered
hereby are sold, the Company's major shareholders will own or control the
majority voting of the Company's then to be outstanding stock and will be in a
position to control the election of the Board of Directors of the Company,
which, in turn, appoints all of the Company's officers.
The Board of Directors has the authority to issue preferred stock and to
determine the rights, preferences, privileges and restrictions, including the
dividend rights, voting rights, terms of redemption (including sinking fund
provisions), liquidation preferences and the number of shares constituting any
series and the
42
designation thereof, without any further vote or action by the shareholders. The
transfer agent and registrar for the shares of common stock is Pacific Stock
Transfer, Las Vegas, Nevada.
One of the effects of the existence of unissued and unreserved Common Stock and
undesignated Preferred Stock may be to enable the Board of Directors to render
more difficult or to discourage an attempt to obtain control of the Company by
means of a merger, tender offer, proxy contest or otherwise, and thereby to
protect the continuity of the Company's management. If, in the due exercise of
its fiduciary obligations, for example, the Board of Directors were to determine
that a takeover proposal was not in the Company's best interest, such shares
could be issued by the Board of Directors without shareholder approval in one or
more private placements or other transactions that might prevent or render more
difficult or costly the completion of the takeover transaction by diluting the
voting or other rights of the proposed acquiror or insurgent shareholder group,
by creating a substantial voting block in institutional or other hands that
might undertake to support the position of the incumbent Board of Directors, by
effecting an acquisition that might complicate or preclude the takeover, or
otherwise. In this regard, except with respect to voting rights, the Company's
Amended Articles of Incorporation grants the Board of Directors broad power to
establish the rights and preferences of the authorized and unissued Preferred
Stock, including the power to convert Preferred Stock into a large number of
shares of Common Stock or other securities, to demand redemption at a specified
price under prescribed circumstances related to a change of control, or to
exercise other powers to impede a takeover. The issuance of shares of Preferred
Stock pursuant to the Board of Directors authority described above may adversely
affect the rights of the holders of the Common Stock.
On June 1, 1996, the Company adopted a stock option plan which authorizes the
Company to grant options to purchase an aggregate of up to 3,000,000 shares of
common stock from the Company's authorized and unissued shares. Under this plan
the Company has issued options to purchase an aggregate of 850,000 shares of
common stock in the Company. Of these 850,000 shares under option, 350,000
shares are under exercisable options and 500,000 are performance based options
which are currently unexercisable. An additional 60,000 shares remain
unexercised from a prior stock option plan. Therefore, the total shares
available for acquisition under option as of December 31, 1996 was 910,000
shares.
During November 1996 the Company granted warrant rights to Intel and AGE. Each
party received warrant rights to acquire 1,000,000 shares of common stock. As
of December 31, 1996 the Company had warrant rights outstanding which provided
for the acquisition of 2,000,000 shares of common stock.
Additionally, the Company has, under a convertible credit agreement, granted
rights to purchase shares of the Company's Common Stock. The actual number of
shares purchasable under this agreement is a function of a number of events.
Currently the Company estimates the number of shares to be issued under this
agreement will not exceed 250,000 shares.
The offering price of the shares being offered hereby has been determined
arbitrarily by the Company. There currently is only a limited public market for
the common stock of the Company, and there is no assurance an active public
market will develop following the offering. In determining the prices and the
number of shares to be offered, the Company considered such matters as the
number of shares outstanding, the dilution to the new investors in this
offering, the financial condition of the Company, the Company's management, and
its perceived acceptance in the market. Accordingly, the offering price should
not be considered an indication of the actual value of the Company or of its
securities. All subscriptions accepted by the Company may be used immediately.
To the extent that sales are made through broker-dealers, the net proceeds will
be reduced by the amount of the commissions paid and be deducted first from the
proceeds allocated to capital reserves.
In addition to this offering of securities the Company may raise additional
capital through the sale of its common shares and possibly preferred shares of
stock. There can be no assurance the Company will not make offers at a lower
price per share or that the Company will not offer preferred shares which have
priority rights over these offered shares.
43
PLAN OF DISTRIBUTION
The Company's Shares are being offered by the Company through its officers and
directors, who will not receive any separate compensation therefor. The
Company's shares will continue to be offered until the earlier of the sale of
all of the Shares being offered or termination of the offering.
The price at which the shares are offered hereby has been arbitrarily set by the
Company's management, and has no relationship to the book value per share,
current earnings of the Company, or other generally accepted measurement of
value.
The shares are offered subject to prior sale, and the Company reserves the right
to reject any offer in whole or in part. The Company will send written
confirmations by US mail to notify subscribers of the acceptance of their
subscriptions within ten days of their acceptance. Common Stock certificates
will be delivered to investors within two weeks after the minimum offering has
been sold, and thereafter within thirty days of acceptance of the subscription
by the Company.
An additional number of shares of Common Stock (the "Selling Stockholders
Securities") have been registered pursuant to the Registration Statement under
the Securities Act, of which this prospectus forms a part, for sale by the
holders thereof (the "Selling Stockholders"). The Company will not receive
proceeds from the sale of the Selling Stockholder Securities. All of the
Selling Stockholder Securities have been registered, at the Company's expense,
under the Securities Act and are expected to become tradable on or about the
date of this Prospectus. Sales of Selling Stockholders Securities or even the
potential of such sales could have an adverse effect on the market of the Common
Stock and the Warrants. The Selling Shareholder acts as a market-maker of the
Company's Stock. Other than this, there are no material relationships between
any of the Selling Stockholders and the Company, nor have any such material
relationships existed within the past three years.
The sale of the Securities by the Selling Stockholders may be effected from time
to time in transactions (which may include block transactions by or for the
account of the Selling Stockholders ) in the over-the-counter market or in
negotiated transactions, a combination of such methods of sell or otherwise.
Sales may be made at fixed prices which may be changed, at market prices
prevailing at the time of sale, or at negotiated prices.
Selling Stockholders may effect such transactions by selling their securities
directly to purchasers, through broker-dealers acting as agents for the Selling
Stockholders or to broker-dealers how may purchase shares as principals and
thereafter sell the securities from time to time in the over-the-counter market,
in negotiated transactions or otherwise. Such broker-dealers, if any, may
receive compensation in the form of discounts, concessions or commissions from
the Selling Stockholders and/or the purchasers for whom such broker-dealer may
act as agents or to whom the may sell as principals or otherwise (which
compensation as to a particular broker-dealer may exceed customary commissions).
LEGAL MATTERS
Certain legal matters with respect to the legality of the issuance of the shares
of Common Stock offered hereby will be passed upon for the Company by Glenn L.
Gearhart, Attorney at Law, Huntington Beach, California. Mr. Gearhart is the
beneficial owner of 394,050 shares of Common Stock of the Company.
EXPERTS
The Consolidated Pro Forma Financial Statements, and the East End Inc. Financial
Statements included in this Prospectus and elsewhere in the Registration
Statement have been audited by Fox & Fox, independent Certified Public
Accountants, to the extent and for the period indicated in their report
appearing elsewhere herein. The Pro Forma Consolidated Financial Statements of
the Company and the East End Inc. Financial Statements included herein are
included in reliance upon the report of Fox & Fox given upon the authority of
said firm as experts in auditing and accounting.
44
The Financial Statements of MSH Entertainment Corporation, for the years 1994
and 1995, included in this Prospectus and elsewhere in the Registration
Statement have been audited by Hacker, Johnson, Cohen & Grieb, independent
Certified Public Accountants, to the extent and for the period indicated in
their report appearing elsewhere included in reliance upon the report of
Hacker, Johnson, Cohen & Grieb given upon the authority of said firm as experts
in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission, a
Registration Statement on Form S-1 under the Securities Act of 1933, as amended,
with respect to the Common Stock being offered hereby. This Prospectus does not
contain all the information set forth in the Registration Statement and the
exhibits and schedules thereto, certain items of which are omitted in accordance
with the rules and regulations of the Commission.
Statements contained in this Prospectus concerning the provisions of documents
filed with Registration Statement as exhibits are necessarily summaries of such
documents, and each such statement is qualified in its entirely by reference to
the copy of the applicable document filed as an exhibit the Registration
Statement. In addition, the Company is subject to the informational
requirements of the Securities Exchange Act of 1934, as amended, and in
accordance therewith files reports and other information with the Commission.
Such reports and other information concerning the Company and the Registration
Statement can be inspected without charge and copied upon payment of the
prescribed fees at the office of he Securities and Exchange Commission, 450
Fifth Street, N. W., Washington, D. C. 20549.
For further information with respect to the Company and the Common Stock being
offered hereby, reference is made to the Registration Statement, including the
exhibits thereto and the financial statements, notes and schedules filed
therewith.
The Company intends to furnish to its stockholders annual reports containing
audited financial statements and quarterly reports containing unaudited interim
financial information for the first three fiscal quarters of each fiscal year of
the company.
MSH ENTERTAINMENT CORPORATION
INDEX TO CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
Report of Independent Public Accountants .......
Pro Forma Consolidated Balance Sheet - unaudited as of December 31, 1995.
Pro Forma Consolidated Statement of Income - unaudited
as of December 31, 1995 and unaudited as of September 30,
1996.......
Pro Forma Notes to Consolidated Financial Statements ...........
INDEX TO MSH ENTERTAINMENT CORPORATION FINANCIAL STATEMENTS
Balance Sheet - unaudited as of September 30, 1996.......
Statement of Income Deficit - unaudited as of September 30,
1996...
Statement of Cash Flow - unaudited as of September 30, 1996.......
Statement of Shareholders' Equity - unaudited as of September 30, 1996.....
Report of Independent Public Accountants...........
Balance Sheet - audited as of December 31, 1994 and 1995 .......
Statement of Operations and Retained Deficit - audited as of December 31, 1994
and 1995 ...
Statement of Shareholders' Equity - audited as of December 31, 1994 and 1995
......
Statement of Cash Flow - audited as of December 31, 1994 and 1995 .......
Notes to Financial Statements ...........
45
INDEX TO EAST END FINANCIAL STATEMENTS
Report of Independent Public Accountants .........
Balance Sheet - audited as of September 30, 1994 and 1995 and June 30, 1996 ..
..
Combined Statement of Operations and Retained Deficit - audited as of
September 30, 1994 and 1995 and June 30, 1996 .. ..
Combined Statement of Shareholders' Equity - audited as of
September 30, 1994 and 1995 and June 30, 1996 .. ..
Combined Statement of Cash Flow - audited as of
September 30, 1994 and 1995 and June 30, 1996 .. ..
Notes to Combined Financial Statements .......
46
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On June 21, 1996, the Company acquired the assets of East End Communications,
East End Productions, and J.B. Dubbs, Inc. ("East End") for cash and a
promissory note, in a business combination accounted for as a purchase. East
End are producers of communications and promotional media. The purchase price
of $ 1,065,000 exceeded the fair market value of the net assets of East End by
$815,837, which will be amortized on the straight line method over 14 years.
The accompanying condensed consolidated financial statements illustrate the
effect of the acquisition ("Pro Forma") on the Company's financial position and
results of operations. The condensed consolidated balance sheet as of December
31, 1995 is based on the historical balance sheet of the Company as of that date
and East End at September 30, 1995 (Its fiscal year end) and assumes the
acquisition took place on that date. The condensed consolidated statements of
income for the year ended December 31, 1995 and the nine months ended September
30, 1996 are based on historical statements of the Company for those periods and
historical statements of East End for the year ended September 30, 1995 and the
nine months ended June 30, 1996. The pro forma consolidated condensed
statements of income assume the acquisition took place on January 1, 1995.
The pro forma condensed consolidated financial statements may not be indicative
of the actual results of the acquisition. In particular, the pro forma
condensed financial statements are based on management's current estimate of the
allocation of the purchase price, the actual allocation of which may differ.
The accompanying condensed consolidated pro forma financial statements should be
read in connection with the historical financial statements of the Company and
East End.
Sheet 1
MSH ENTERTAINMENT CORPORATION
AND EAST END PRODUCTIONS, INC.
PRO-FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
DECEMBER 31, 1995
[Download Table]
ASSETS
------
MSH EAST END ADJUSTMENTS TOTAL
Cash 1,702 125 1,827
Accounts receivable - 136,115 136,115
--------- -------- ---------- --------
Total Current Assets 1,702 136,240 - 137,942
Property and Equipment - 169,249 169,249
Other assets 73,044 202,323 (201,160) 74,207
--------- -------- ---------- --------
TOTAL ASSETS 74,746 507,812 381,398
========= ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
--------------------
Cash overdraft - 42,709 42,709
Accounts payable 33,000 75,248 108,248
Due to shareholders 32,123 - 32,123
Accrued payroll tax - 29,919 29,919
Income tax 800 800
Notes payable 126,750 - 126,750
--------- -------- ---------- --------
Total Current Liabilities 191,873 148,676 340,549
Stockholders' Equity (117,127) 359,136 (201,160) 40,849
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY 74,746 507,812 (201,160) 381,398
========= ======== ========== ========
See Notes to Pro Forma Consolidated Financial Statements (Unaudited)
Page 1
Sheet 1
MSH ENTERTAINMENT CORPORATION
AND EAST END PRODUCTIONS, INC.
PRO-FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
FOR THE YEAR ENDED DECEMBER 31, 1995
[Download Table]
MSH EAST END ADJUSTMENTS TOTAL
Sales $ 32 $740,662 $ 740,694
Cost of Sales 17,457 319,579 337,036
--------- -------- ---------
Gross Margin (17,425) 421,083 403,658
General and Administrative 244,154 428,943 673,097
--------- -------- ---------
Loss from Operations (261,579) (7,860) (269,439)
Other Income - 260 260
--------- -------- ---------
Loss before Taxes (261,579) (7,600) (269,179)
Income Tax - 800 800
--------- -------- ---------
Net Loss $(261,579) $ (8,400) $(269,979)
========= ======== =========
Net Loss per Share $ (0.06) $ (0.07)
========= =========
Weighted average number of
shares outstanding 4,113,779 4,113,779
See Notes to Pro Forma Consolidated Financial Statements (Unaudited)
Page 2
Sheet 1
MSH ENTERTAINMENT CORPORATION
AND EAST END PRODUCTIONS, INC.
PRO-FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
For the Nine Months Ended September 30, 1996
[Download Table]
MSH EAST END ADJUSTMENTS TOTAL
Sales $ 29,106 $677,924 $ 707,030
Cost of Sales 231,657 470,398 702,055
--------- -------- ---------
Gross Margin (202,551) 207,526 4,975
General and Administrative 590,720 322,394 913,114
--------- -------- ---------
Loss from Operations (793,271) (114,868) (908,139)
Other Income - 795,328 (795,328) -
--------- -------- ---------
Loss before Taxes (793,271) 680,460 (112,811)
Income Tax 800 132,000 (132,000) 800
--------- -------- ---------
Net Loss $(792,471) $548,460 $(244,011)
========= ======== =========
Net Loss per Share $ (0.11) $ (0.03)
========= ======== =========
Weighted average number
of shares outstanding 7,106,881 7,106,881
See Notes to Pro Forma Consolidated Financial Statements (Unaudited)
Page 3
MSH ENTERTAINMENT AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Unaudited)
NOTE A The pro forma adjustments to the condensed consolidated balance sheets
are as follows:
The acquisition of the assets of East End did not include any loans to
the stockholders of East End. At December 31, 1995, the balance due
was $ 201,160. This amount has been eliminated from the condensed
consolidated balance sheet.
NOTE B The pro forma adjustments to the condensed consolidated statement of
income for the nine months ended September 30, 1996 are as follows:
The acquisition of the assets of East End resulted in a substantial
gain to East End. The amount of this gain and the resulting income tax
liability have been eliminated from the condensed consolidated
statement of income.
MSH ENTERTAINMENT CORPORATION
COMPILED FINANCIAL STATEMENT
SEPTEMBER 30, 1996
6
FOX & FOX,
CERTIFIED PUBLIC ACCOUNTANTS
18101 VON KARMAN, SUITE 350
IRVINE, CALIFORNIA 92715
(714) 251-6561
Fax (714) 251-6562
April 3, 1997
MSH ENTERTAINMENT CORPORATION
768 Brannan Street
San Francisco, CA 94103
We have compiled the accompanying balance sheet of MSH ENTERTAINMENT CORPORATION
as of September 30, 1996, and the related statements of income, cash flows and
stockholders' equity for the nine months then ended in accordance with
Statements on Standards for Accounting and Review Services issued by the
American Institute of Certified Public Accountants.
A compilation is limited to presenting in the form of financial statements
information that is the representation of management. We have not audited or
reviewed the accompanying financial statements and, accordingly, do not express
an opinion or any other form of assurance on them.
The Company has incurred significant losses since inception. Management
believes that actions being presently taken to revise the Company's operations
and financial requirements provide the opportunity for the Company to continue
as a going concern. However, if the Company is unable to successfully re
structure operations in order to reduce operating losses or generate profits, or
raise additional capital, it is uncertain whether the Company will be able to
meet its obligations over the coming year and it raises substantial doubt about
the companies ability to continue as a going concern. The financial statements
do no include any adjustments that might result from the outcome of this
uncertainty.
Management has elected to omit statements of income and cash flows and
substantially all of the disclosures ordinarily included in financial
statements. If the omitted statements and disclosures were included with the
financial statement, they might influence the user's conclusions about the
company's financial position and results of operations. Accordingly, these
financial statements are not designed for those who are not informed about such
matters.
/s/ Fox & Fox
____________________________________
Fox & Fox,
Certified Public Accountants
7
MSH ENTERTAINMENT CORPORATION
BALANCE SHEET
SEPTEMBER 30, 1996
[Enlarge/Download Table]
ASSETS
------
Current assets
Cash and cash equivalents $ 2,791
Accounts receivable 39,210
Due from employees 32,529
Film inventory cost 58,044
Prepaid expense 182,131
-----------
Total current assets 314,705
-----------
Property and equipment
Office furniture and equipment 34,943
Computer equipment 149,819
Production equipment 59,417
Automobiles 47,523
Leasehold improvements 45,553
-----------
337,255
Less accumulated depreciation (200,676)
-----------
Total property and equipment 136,579
Other assets
Goodwill 801,027
Loans to shareholder 126,750
Organization costs 950
Loan to affiliate 4,102
-----------
Total other assets 932,829
-----------
TOTAL ASSETS $ 1,384,829
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities
Cash overdraft $ 25,495
Accounts payable 161,222
Notes payable - current 17,177
Deferred compensation 123,813
Convertible notes payable 48,000
Franchise tax payable 800
-----------
Total current liabilities 376,507
Non-Current liabilities
Note payable - long-term 965,000
Stockholders' equity
Preferred stock - par value $.05 per share, 25,000,000 shares
authorized, none issued and outstanding -
Common stock - par value $.001 per share, 50,000,000 shares -
authorized, 9,381,649 issued and outstanding 703,658
Additional paid in capital 701,806
Accumulated deficit (1,362,858)
-----------
Total stockholders' equity 42,606
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,384,113
===========
See accountants' compilation report.
3
MSH ENTERTAINMENT CORPORATION
STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
[Download Table]
NINE MONTHS
ENDED
SEPT. 30, 1996
--------------
Sales $ 29,106
Cost of sales (231,657)
----------
Gross Margin (202,551)
Selling, general and administrative expenses 590,720
----------
Income or (Loss) before income taxes (793,271)
Provision for income taxes (Note 1 and 6) 800
----------
Net income or (loss) $ (794,071)
==========
Net income or (loss) per share $ (0.08)
==========
See accountants' compilation report.
4
MSH ENTERTAINMENT CORPORATION
STATEMENT OF CASH FLOW
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
[Download Table]
Cash flows from operating activities:
Net income or (loss) $ (794,071)
Adjustments to reconcile net loss to cash used by
operating activities:
Depreciation and amortization 25,596
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable (5,232)
Decrease (increase) in loans to employees (32,529)
Decrease (increase) in inventory -
Decrease (increase) in prepaid expenses (167,131)
Increase (decrease) in accounts payable 153,717
Increase (decrease) in accrued liabilities 124,613
----------
Net cash provided (used) by operating activities (695,037)
Cash flows from investing activities:
(Purchase) of goodwill (815,537)
(Purchases) Dispositions of property and equipment (147,615)
(Purchase) of organization costs (1,000)
----------
Net cash used by investing activities (964,152)
----------
Cash flows from financing activities:
Increase in notes payable 903,427
(Decrease) in loans from shareholder (32,123)
Loans to shareholder (126,750)
Loan to affiliate (4,102)
Sale of common stock 698,826
Paid in capital 221,000
----------
Net cash used by financing activities 1,660,278
----------
Net increase (decrease) in cash and cash equivalents 1,089
Cash and cash equivalents balance, beginning 1,702
----------
Cash and cash equivalents balance, ending $ 2,791
==========
Supplemental disclosures of cash flow information:
Interest paid $ 24,173
==========
See accountants' compilation report.
5
MSH ENTERTAINMENT CORPORATION
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
[Enlarge/Download Table]
NUMBER ADDITIONAL TOTAL
PREFERRED OF RETAINED PAID IN STOCKHOLDERS'
STOCK SHARES AMOUNT EARNINGS CAPITAL DEFICIT
--------- --------- ------ ------------ ---------- -----------
Balance at January 1, 1996 - 4,832,113 $4,832 $ (568,787) $ 480,806 $ (83,149)
Common stock issued - 4,549,536 4,550 - 915,276 919,826
Net loss for the year - - - (794,071) - $ (794,071)
--------- --------- ------ ----------- ---------- ----------
Balance at September 30, 1996 - 9,381,649 $9,382 $(1,362,858) $1,396,082 $ 42,606
========= ========= ====== =========== ========== ==========
See accountants' compilation report.
6
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
MSH Entertainment Corporation
Stone Harbor, New Jersey
We have audited the accompanying consolidated balance sheets of MSH
Entertainment Corporation and subsidiary (the "Company") as of December 31, 1995
and 1994 and the related consolidated statements of operations, stockholders'
deficit and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company as of December 31, 1995 and 1994 and the results of its operations and
its cash flows for the year then ended, in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to
the consolidated financial statements, the Company has suffered recurring losses
from operations and has a stockholders' deficit and a working capital deficit
which all raise substantial doubt about its ability to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ HACKER, JOHNSON, COHEN & GRIEB
HACKER, JOHNSON, COHEN & GRIEB
Tampa, Florida
September 30, 1996, except for Note 10 as
to which the date is December 26, 1996
F-1
MSH ENTERTAINMENT CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
[Download Table]
DECEMBER 31,
----------------------
1995 1994
---------- ---------
ASSETS
Current assets-
Cash $ 1,702 234
--------- --------
Other assets:
Film inventory cost 58,044 30,833
Prepaid consulting fees 15,000 -
--------- --------
Total other assets 73,044 30,833
--------- --------
Total assets $ 74,746 31,067
========= ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable 33,000 15,807
Due to stockholders 32,123 20,558
Convertible notes payable 76,750 150,000
Note payable 50,000 -
--------- --------
Total current liabilities 191,873 186,365
--------- --------
Commitments (Note 9)
Stockholders' Deficit:
Preferred stock - par value $.05 per share 25,000,000
shares authorized, none issued and outstanding - -
Common stock, $.001 par value, 50,000,000 shares
authorized, 4,832,113 in 1995 and
2,580,113 in 1994 shares issued and outstanding 4,832 2,580
Additional paid-in capital 480,806 149,330
Accumulated deficit (568,787) (307,208)
--------- --------
(83,149) (155,298)
Less receivable for stock issued (33,978) -
--------- --------
Total stockholders' deficit (117,127) (155,298)
--------- --------
Total liabilities and stockholders' deficit $ 74,746 31,067
========= ========
See accompanying notes to consolidated financial statements.
F-2
MSH ENTERTAINMENT CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
[Download Table]
FOR THE YEAR ENDED
DECEMBER 31,
-------------------------
1995 1994
------------ ----------
Net sales $ 32 445
---------- ---------
Costs and expenses:
Production costs 17,457 22,609
General and administrative expenses 244,154 49,521
---------- ---------
Total costs and expenses 261,611 72,130
---------- ---------
Loss from operations (261,579) (71,685)
Other income (expenses):
Interest income - 18
Loss on investment - (35,000)
---------- ---------
Net loss $ (261,579) (106,667)
========== =========
Net loss per share $ .06 .08
========== =========
Weighted average number of shares outstanding 4,113,779 1,320,113
========== =========
See accompanying notes to consolidated financial statements.
F-3
MSH ENTERTAINMENT CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
[Download Table]
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------
1995 1994
----------- ---------
Cash flows from operating activities:
Net loss $(261,579) (106,667)
Adjustments to reconcile net loss to net cash used
by operating activities:
Common stock issued for services 147,150 1,000
Convertible note payable issued for services 1,000 -
Increase (decrease) in accounts payable 8,693 (13,003)
Increase in prepaid consulting fees (6,500) -
Additions to film inventory costs (27,211) (24,832)
--------- --------
Net cash used by operating activities (138,447) (143,502)
--------- --------
Cash flows from financing activities:
Issuance of note payable 50,000 -
Proceeds from stockholders loans 11,565 20,558
Repayment of convertible notes payable (29,900) -
Proceeds from issuance of common stock 85,000 -
Proceeds from issuance of convertible notes payable 23,250 122,600
--------- --------
Net cash provided by financing activities 139,915 143,158
--------- --------
Net increase (decrease) in cash 1,468 (344)
Cash at beginning of year 234 578
--------- --------
Cash at end of year $ 1,702 234
========= ========
Noncash transactions:
Common stock issued for services rendered $ 147,150 1,000
========= ========
Convertible note payable issued for services $ 1,000 -
========= ========
Common stock exchanged for convertible notes payable $ 67,600 -
========= ========
Common stock issued for receivable $ 33,978 -
========= ========
Accounts payable incurred in connection with
prepayment of consulting fees $ 8,500 -
========= ========
See accompanying notes to consolidated financial statements.
F-4
MSH ENTERTAINMENT CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
[Enlarge/Download Table]
COMMON STOCK RECEIVABLE
------------------------ ADDITIONAL FOR TOTAL
PREFERRED NUMBER OF NUMBER OF PAID IN ACCUMULATED STOCK STOCKHOLDERS'
STOCK SHARES SHARES AMOUNT CAPITAL DEFICIT ISSUED DEFICIT
--------- --------- ------------ ----------- --------- ------------ -------- -------------
Balance at January 1, 1994 - 2,000,000 $ 20,000 130,910 (200,541) - (49,631)
Recapitalization - 2,500,000 (2,000,000) (19,930) 19,930 - - -
--------- --------- ------------ ----------- --------- ------------ -------- -------------
Restated balance - 2,500,000 - 70 150,840 (200,541) - (49,631)
Issuance of common stock to
shareholders for assets
of MSH Entertainment
Corporation - 70,113 - 2,500 (2,500) - - -
Issuance of common stock for
services - 10,000 - 10 990 - - 1,000
Net loss for 1994 - - - - - (106,667) - (106,667)
--------- --------- ------------ ----------- --------- ------------ -------- -------------
Balance at December 31, 1994 - 2,580,113 - 2,580 149,330 (307,208) - (155,298)
Common stock issued for
debt cancellation - 280,500 - 280 67,320 - - 67,600
Sale of common stock - 500,000 - 500 118,478 - - 118,978
Common stock issued for
services - 1,471,500 - 1,472 145,678 - - 147,150
Receivable from sale of
330,000 shares of
common stock - - - - - - (33,978) (33,978)
Net loss for 1995 - - - - - (261,529) - (261,579)
--------- --------- ------------ ----------- --------- ------------ -------- -------------
Balance at December 31, 1995 - 4,832,113 - $ 4,832 480,806 (568,787) (33,978) (117,127)
========= ========= ============ =========== ========= ============ ======== =============
See accompanying notes to consolidated financial statements.
F-5
MSH ENTERTAINMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(1) DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS. MSH Entertainment Corporation (the "Company") and
its wholly-owned subsidiary, MSH Productions, Inc. (Subsidiary)
create, develop and produce home video motion picture tapes primarily
for sale internationally. The Company has released for sale three home
video motion pictures through December 31, 1995. The Company has not
benefited from wide spread market acceptance of its products.
MSH Entertainment Corporation was originally Railside, Inc., a Utah
Corporation incorporated on March 31, 1983. Railside Inc., changed
its name to Micropoly, Inc., on July 16, 1993. On June 23, 1994,
Micropoly changed its name to MSH Entertainment Corporation and
acquired 100% of the outstanding stock of MSH Productions, Inc., in a
transaction accounted for as a recapitalization of MSH Productions,
Inc. with the issuance of 2,500,000 shares of common stock of MSH
Productions, Inc. for the net assets of MSH Entertainment Corporation.
MSH Entertainment Corporation was previously an inactive entity. The
accumulated deficit of MSH Productions, Inc. was carried forward from
the acquisition date and no fair market value adjustments were made.
MSH Productions, Inc., was formed on January 19, 1993 as a Delaware
Corporation.
BASIS OF PRESENTATION. The accompanying consolidated financial statements
have been prepared on a going concern basis which contemplates the
realization of assets and the satisfaction of liabilities in the
normal course of business. As shown in the consolidated financial
statements, the Company has incurred net losses of $261,579 and
$106,667 for the years ended December 31, 1995 and 1994, respectively.
At December 31, 1995 and 1994, the Company has a net working capital
deficit of $190,171 and $186,131, respectively, and a stockholders'
deficit of $117,127 and $155,298, respectively which raises
substantial doubt about the Company's ability to continue as a going
concern. Management has developed plans intended to remedy these
conditions. These plans include seeking other sources of financing,
acquisition of a existing operating company, actively marketing
existing projects, reducing operating costs and seeking a joint
venture partner. No assurances can be given as to the success of these
plans. The consolidated financial statements do not include any
adjustments that might result should the Company be unable to continue
as a going concern.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. A summary of the significant
accounting policies followed in preparing the accompanying
consolidated financial statements is set forth below.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of MSH Entertainment Corporation and MSH Productions
Inc., its wholly-owned subsidiary. All significant intercompany
accounts and transactions have been eliminated in consolidation.
(continued)
F-6
MSH ENTERTAINMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, CONTINUED
ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that effect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
HOME VIDEO MOTION PICTURE PROJECT COSTS. The Company follows the
provisions of Statement of Financial Accounting Standards No. 53
("SFAS 53") with respect to motion pictures, television and video
project costs. Costs incurred in connection with motion picture,
television and video projects are capitalized. Such costs are charged
to production overhead if the project has been held for a three year
period and has not been set for production or if it is abandoned.
Production overhead is allocated to the cost of projects currently set
for, or in production. Although certain projects whose costs have been
carried at zero value may still be actively marketed by management
after the three year period. Project costs are stated at the lower of
cost or realizable value. Cost and related amortization of released
projects allocated to primary markets would be classified as current
assets. To date, no viable projects have been released to primary
markets. All other capitalized costs are classified as noncurrent
assets.
Under FASB 53, project costs, which include accrued related
participations and residuals, would be amortized based on the ratio of
revenue earned for the year to management's estimate of total gross
revenue to be earned. Each picture or project in production is valued
taking into account management's current estimates of the ultimate
revenue to be received from all sources, including theatrical
distribution, cable, pay, network and syndicated television licensing
and video cassette and video disc licensing. Such estimates, which are
based on such factors as the nature and popularity of the subject
matter and the expected rate structure in the various markets during
the periods the revenue from the project is estimated to be earned,
are revised periodically and estimated losses, if any are provided for
in full. To date, the projects of the Company are incomplete and
therefore, no amortization has been taken.
STATEMENTS OF CASH FLOWS. For purposes of the statements of cash flows,
only cash is considered.
REVENUE RECOGNITION. Revenues are recognized when home video motion picture
tapes are sold by distributors and are presented net of distributors'
commissions and expenses.
INCOME TAXES. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
balance sheet carrying amounts of existing assets and liabilities
measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(continued)
F-7
MSH ENTERTAINMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, CONTINUED
FUTURE ACCOUNTING REQUIREMENTS. The FASB has issued Statement of Financial
Accounting Standard No. 123 ("SFAS 123") which encourages employers to
account for stock-based compensation awards based on their fair value
at the date the awards are granted. The resulting compensation award
would be shown as an expense on the consolidated statement of
operations. Entities can choose not to apply the new accounting method
and continue to apply current accounting requirements, which generally
result in no compensation cost for most fixed stock-option plans.
Those that do so, however, will be required to disclose in the notes
to the financial statements what net earnings and earnings per share
would have been had they followed the Statement's accounting method.
This Statement is effective for 1996. Management does not anticipate
this Statement will have a material impact on the Company.
LOSS PER SHARE. Loss per share is computed by dividing net loss by the
weighted average number of common shares outstanding. At December
31, 1995 and 1994 all common stock equivalents were antidilutive.
(2) SIGNIFICANT PROJECTS AND REVENUES
Substantially all of the revenues for the years ended December 31, 1995 and
1994 relates to two video projects. The revenue received is
commissions due to the Company from the marketing of the projects by
distributors pursuant to distribution agreements. The projects are low
budget films which have received limited acceptance in the market
place. Costs included in Film inventory cost at December 31, 1995 and
1994 relate primarily to one film which has not been distributed. In
the opinion of management the revenues expected to be received from
the film exceed the capitalized costs.
Film inventory costs consists of the following:
[Download Table]
AT DECEMBER 31,
-------------------------------------
1995 1994
--------------- --------------
Films in process $ 58,044 30,833
====== ======
(3) INCOME TAXES
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets are presented below:
[Download Table]
AT DECEMBER 31,
------------------
1995 1994
-------- -------
Net operating loss carryforwards $194,740 111,383
Capital loss carryforward 13,171 13,171
------- -------
Total gross deferred tax assets 207,911 124,554
Less valuation allowance 207,911 124,554
------- -------
Net deferred tax assets $ - -
======= =======
(continued)
F-8
MSH ENTERTAINMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(3) INCOME TAXES, CONTINUED
The net increase in the total valuation allowance for the years ended
December 31, 1995 and 1994 was $83,357 and $124,554, respectively.
The Company has available at December 31, 1995, unused net operating loss
carryforwards that may provide future tax benefits and that expire
as follows:
Unused Net
Year of Expiration Operating Loss
------------------ --------------
[Download Table]
1999 $ 24,107
2008 200,541
2009 71,348
2010 221,516
--------
$ 517,512
=======
The Company had capital loss carryovers at December 31, 1995 of $35,000
which will expire on December 31, 1999.
(4) CONVERTIBLE NOTES PAYABLE
In 1993, the Subsidiary authorized the sale of convertible notes payable.
The sale of convertible notes payable continued in 1994 and 1995 and
the convertible notes payable were assumed by the MSH Entertainment
Corporation after the acquisition in June, 1994. The Company received
$183,250 from the sale of the convertible notes through December 31,
1995. The notes were convertible into the Company's common stock based
upon one share of stock for each dollar of debt. The debt holders were
given various multiples of that conversion, which ranged from 1-1 to
4-1, based upon the amount and timing of their investment. Some of the
larger debt holders were given the option to use a lesser multiple
than the one granted for the stock and to also receive their original
debt back in cash. The amount of debt that holders elected to receive
in cash in exchange for the reduced stock multiple was $92,400. The
number of shares to be issued to debt holders still outstanding at
December 31, 1995 is 53,500. The convertible notes payable are
uncollateralized and are noninterest bearing.
Convertible notes payable consist of the following:
[Download Table]
At December 31,
---------------------------
1995 1994
---- ----
$ 76,750 150,000
====== =======
(continued)
F-9
MSH ENTERTAINMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(5) NOTE PAYABLE
Note payable consists of the following:
[Download Table]
At December 31,
---------------
1995 1994
------- ----
Noninterest bearing note payable to individual, due
June 1, 1996 $50,000 -
======= ====
(6) COMMON STOCK
INCENTIVE STOCK OPTION. On April 20, 1993, the Company adopted a Stock
Option Plan (the "Plan"), whereby the Company is authorized to issue
up to 500,000 shares to any one to purchase stock at the fair market
value at date of issue. The options are exercisable within ten years
of date of grant unless otherwise determined by the Company. If the
option is granted to a key employee owning more than 10% of the
combined voting power of all classes of stock of the Company, the
option price is 110% of the fair market value. If any transaction
takes place whereby the existing shareholders cease to own at least
75% of the voting stock of the Company, or if during any period of two
consecutive years, existing Company Board members cease to constitute
a majority, or if a plan of merger, consolidation, reorganization,
liquidation or dissolution is approved or if the Company approves a
plan of sale of substantially all of the Company's assets, the time
for exercising the options is immediately accelerated. The options are
terminated generally upon termination of employment or death.
OUTSTANDING STOCK OPTIONS. On December 31, 1994 and 1995 the options
issued pursuant to the plan are:
[Download Table]
At December 31, 1994:
Year of Expiration Shares Option Price
---------------------------------- --------- ------------
2003 100,000 .11
2004 378,500 .11
---------
Total 478,500
=========
At December 31, 1995:
2003 100,000 .11
2004 378,500 .11
2005 921,500 .10 to .11
---------
Total 1,400,000
=========
There were no options exercised during the years ended December 31, 1995 or
1994.
(continued)
F-10
MSH ENTERTAINMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(7) DUE TO STOCKHOLDERS
Due to stockholders consist of unsecured noninterest bearing demand
promissory notes.
(8) BUSINESS COMBINATION
STOCK EXCHANGE. On June 24, 1994, MSH Entertainment Corporation issued
2,500,000 shares of its .001 par value common stock to the holders
of 100% of the outstanding common stock of MSH Productions, Inc., in
exchange for 2,000,000 shares of the .01 par value common stock in
that company. The stock was issued pursuant to an agreement between
the two companies.
The transaction has been recorded as an issuance of common stock by MSH
Productions, Inc., of the outstanding shares of MSH Entertainment
Corporation at June 24, 1994 in exchange for the assets of MSH
Entertainment Corporation as of that date, net of accumulated deficit
of $24,107.
The historical shares outstanding were retroactively restated, similar to a
stock split, to reflect the effect of the exchange as of the date of
the respective stock issuances.
Summarized results of operations of the separate companies for the period
from January 1, 1994 through June 24, 1994, the date of acquisition,
are as follows:
[Download Table]
AMOUNT
---------------------
MSHE MSHP
--------- ---------
Net sales - -
Loss - (10,165)
Net loss - (10,165)
The summarized assets and liabilities of the separate companies on June 24,
1994, the date of acquisition, were as follows:
[Download Table]
AMOUNT
---------------------
MSHE MSHP
--------- ---------
Cash - 19,489
Other assets - 48,002
Current liabilities - (120,210)
(continued)
F-11
MSH ENTERTAINMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(9) COMMITMENTS
On December 1, 1995, the Company entered into a agreement with Dominion
Group Limited ("Dominion") to locate an acquisition candidate. The
contract provides for the payment of a $15,000 retainer and monthly
fee of $3,500 for six months. If an acquisition occurs Dominion will
receive the greater of $50,000 or 5% of the first $5,000,000 in
purchase price; 2.5% of the next $10,000,000; 10% of the balance of
the purchase price.
(10) SUBSEQUENT EVENTS
EAST END COMMUNICATIONS ACQUISITION. On June 21, 1996, the Company acquired
East End Communications, East End Productions, and J.B. Dubs, Inc.,
("East End") for cash and a promissory note, in a business combination
accounted for as a purchase. East End are producers of communications
and promotional media. The purchase price of $1,065,000 exceeded the
fair value of the net assets of East End by $810,874, which will be
amortized on the straight line method over 14 years. The results of
operations of East End will be included with the results of the
Company from June, 1996. In addition, in connection with the
transaction the Company incurred an indebtedness of $865,000 to a
officer of the Company.
Also, the Company entered into employment agreements to provide salary plus
the issuance of 450,000 shares to the two key employees of East End.
STOCK FOR SERVICES. In June, 1996, the Company issued 1,598,000 shares of
common stock to various individuals in payment for services to the
Company. The number of shares issued is determined by the value of the
services provided relative to the current market value of the shares.
STOCK FOR CONVERTIBLE DEBENTURES. In June, 1996, the Company issued 56,036
shares of common stock in redemption of convertible debentures
totaling $32,500.
STOCK OPTIONS EXERCISED. In June, 1996, four shareholders of the Company
exercised their options to purchase 1,200,000 shares of common stock
in exchange for promissory notes due July, 2001 in the amount of
$120,000.
PRIVATE PLACEMENT. In June, 1996, the Company authorized the offering of
the sale of the Company's shares of stock in three private
placements. The stock is to be offered in the amounts of 500,000,
500,000 and 600,000 shares each at the price of $.50 per share. Such
offerings are to be under Form D of Rule 504 of the Securities Act of
1933.
REGISTRATION. In June, 1996, the Company entered into a consulting
agreement to file a registration statement with the Securities and
Exchange Commission (SEC), file Blue Sky filings with the requisite
states and file as a 1934 Act reporting company and apply for listing
on an established security exchange.
(continued)
F-12
MSH ENTERTAINMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(10) SUBSEQUENT EVENTS, CONTINUED
INTEL AGREEMENT. In November, 1996, the Company executed an agreement with
Intel Corporation, to cooperate in the development and distribution of
a new animation management technology that will be used in the
production and management of production of episodic television shows.
The system would update on a daily basis, workloads, actual versus
budget, and track the project. It would combine the software
technology developed by the Company with the microprocessor capability
of Intel. The Agreement grants to Intel, the right to purchase up to
1,000,000 shares of the Company's common stock over a two year period.
The price per share is to be determined relative to the market value
of the stock at the time of the agreement.
AGE AGREEMENT. In November, 1996, the Company entered into a strategic
product development agreement with Abrams/Gentile Entertainment, Inc.
(AGE). Under the agreement, the Company acquired the rights to produce
a children's TV series entitled Vanpires and potential revenue from
related toys and merchandising. AGE received warrants to purchase
1,000,000 shares of the Company's stock. The purchase price per share
is to be the lowest of $1.75 per share or 75% of the currently
proposed secondary offering price (net of underwriting discounts).
HAPPY ZONE ACQUISITION. In August, 1996, the Company participated in the
formation of a new company, Happy Zone Entertainment (HZE) together
with AGE. The Company owns 60% and AGE owns 20% of HZE with the
balance owned by various members of the Company's management. HZE is
to develop animated television programs and services.
(11) LOSS ON INVESTMENT
During 1994, the Company determined its 17.5% investment in a Corporation
did not have any discernible future benefit. Accordingly, the
Company expensed its remaining investment of $35,000.
F-13
EAST END PRODUCTIONS
REPORT ON AUDIT OF COMBINED FINANCIAL
STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
FOR THE NINE MONTHS ENDED JUNE 30,1996 AND
FOR EACH OF THE TWO YEARS IN THE PERIOD
ENDED SEPTEMBER 30, 1995
1
EAST END PRODUCTIONS
FOR THE NINE MONTHS ENDED JUNE 30,1996 AND
FOR EACH OF THE TWO YEARS IN THE PERIOD
ENDED SEPTEMBER 30, 1995
CONTENTS
--------
Page
----
Report of independent public accountant................................ 3
-Financial Statements-
Balance sheets......................................................... 4
Statements of operations............................................... 5
Statement of changes in stockholder's equity........................... 6
Statements of cash flow................................................ 7
Notes to financial statements.......................................... 8
-SUPPLEMENTARY INFORMATION-
Schedule IV - Indebtedness of related parties - not current........... 14
Schedule X - Supplementary income statement information............... 15
2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANT
To The Board of Directors and Stockholders
East End Productions, Inc.
J.B. Dubs, Inc.
East End Communications, Inc.
We have audited the accompanying combined balance sheets of East End Productions
as of June 30, 1996, September 30, 1995 and 1994, and the related statements of
operations, changes in stockholders' equity, and cash flows for the nine months
and each of the two years in the period ended June 30, 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of East End
Productions as of June 30, 1996, and the results of their operations and their
cash flows for the nine months and each of the two years in the period ended
June 30, 1996, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental financial statement
schedules are presented for the purposes of complying with the Securities and
Exchange Commission's rules and are not a required part of the basic financial
statements. These schedules have been subjected to the auditing procedures
applied in the audits of the basic financial statements and, in our opinion,
fairly state in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
/s/ Fox & Fox
Fox & Fox
Irvine, California
April 2, 1997
3
EAST END PRODUCTIONS
COMBINED BALANCE SHEETS
JUNE 30, 1996 AND SEPTEMBER 30, 1995 AND 1994
ASSETS
------
[Download Table]
JUNE 30, SEPT. 30, SEPT. 30,
1996 1995 1994
----------- ----------- -----------
Current assets
Cash and cash equivalents (Note 1) $ - $ 125 $ 79,928
Accounts receivable (net of
allowance for doubtful accounts)
(Note 1) - 136,115 83,139
---------- -------- --------
Total current assets - 136,240 163,067
---------- -------- --------
Property and equipment ( Note 1)
Office furniture and equipment - 34,943 34,943
Computer equipment - 138,346 101,883
Production equipment - 59,418 59,418
Automobiles - 45,553 45,553
Leasehold improvements - 47,523 47,523
---------- -------- --------
- 325,783 289,320
Less accumulated depreciation - (156,534) (112,392)
---------- -------- --------
Total property and equipment - 169,249 176,928
Other assets
Note receivable 965,000 - -
Loans to shareholder (Note 2) 286,280 201,160 110,668
Organization costs - 1,000 1,000
Deposits - 163 1,500
---------- -------- --------
Total other assets 1,251,280 202,323 113,168
---------- -------- --------
TOTAL ASSETS $1,251,280 $507,812 $453,163
========== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities
Cash overdraft $ - $ 42,709 $ -
Accounts payable 172,688 75,248 80,657
Accrued payroll and taxes 36,089 29,919 4,171
Income tax payable (Note 1 and 5) 134,907 800 800
---------- -------- --------
Total current liabilities 343,684 148,676 85,628
Stockholders' equity
Common stock - East End Productions,
Inc. (Note 3) 3,500 3,500 3,500
Common stock - J.B. Dubs, Inc.
(Note 3) 1,000 1,000 1,000
Retained earnings 903,096 354,636 363,035
---------- -------- --------
Total stockholders' equity 907,596 359,136 367,535
---------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $1,251,280 $507,812 $453,163
========== ======== ========
The accompanying notes are an integral part of these financial statements.
4
EAST END PRODUCTIONS
COMBINED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED JUNE 30, 1996
AND THE YEARS ENDED SEPTEMBER 30, 1995 AND 1994
[Download Table]
1996 1995 1994
-------- -------- ----------
Sales (Note 1) 677,924 $740,662 $1,969,422
Cost of sales 470,398 319,579 1,345,176
-------- -------- ----------
Gross Margin 207,526 421,083 624,246
Selling, general and administrative expenses 322,394 428,943 861,138
-------- -------- ----------
Loss from operations (114,868) (7,860) (236,892)
Other income
Gain on sale of assets (Note 7) 795,328 - -
Interest income - 260 1,481
-------- -------- ----------
Income or (Loss) before income taxes 680,460 (7,600) (235,411)
Provision for income taxes (Note 1 and 5) 132,000 800 800
-------- -------- ----------
Net income or (loss) $548,460 $ (8,400) $ (236,211)
======== ======== ==========
Net income or (loss) per share $ 91.41 $ (1.40) $ $(39.37)
======== ======== ==========
The accompanying notes are an integral part of these financial statements.
5
EAST END PRODUCTIONS
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED JUNE 30, 1996 AND
FOR THE YEARS ENDED SEPTEMBER 30, 1995 AND 1994
[Enlarge/Download Table]
East End Productions, Inc. J.B. Dubs, Inc.
Common Stock Common Stock
-------------------------- -----------------------
Number Number
of of Retained
Shares Amount Shares Amount Earnings
------ ------ ------ ------ ---------
Balance at October 1, 1993 1,000 $3,500 5,000 $1,000 $ 599,247
Net loss for the year - - - - (236,211)
----- ------ ----- ------ ---------
Balance at September 30, 1994 1,000 3,500 5,000 1,000 $ 363,036
Net loss for the year - - - - (8,400)
----- ------ ------ ------ ---------
Balance at September 30, 1995 1,000 $3,500 5,000 $1,000 $ 354,636
----- ------ ------ ------ ---------
Net income for the year - - - - 548,460
----- ------ ------ ------ ---------
Balance at June 30, 1996 1,000 $3,500 5,000 $1,000 $ 903,096
===== ====== ===== ====== =========
The accompanying notes are an integral part of these financial statements.
6
EAST END PRODUCTIONS
COMBINED STATEMENT OF CASH FLOW
FOR THE NINE MONTHS ENDED JUNE 30, 1996 AND
FOR THE YEARS ENDED SEPTEMBER 30, 1995 AND 1994
[Enlarge/Download Table]
1996 1995 1994
------------ -------- ---------
Cash flows from operating activities:
Net income or (loss) $ 548,460 $ (8,400) $(236,211)
Adjustments to reconcile net loss to
cash used by operating activities:
Depreciation 33,106 44,142 42,465
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 136,115 (52,976) 351,478
Decrease (increase) in inventory - - 55,357
Decrease (increase) in deposits 163 1,338 71,500
Decrease (increase in organization costs 1,000 - -
Increase (decrease) in accounts payable 54,731 37,300 (51,198)
Increase (decrease) in accrued liabilities 140,277 25,748 (21,613)
----------- -------- ---------
Net cash provided (used) by operating activities 913,852 47,152 211,778
Cash flows from investing activities:
(Purchases) Dispositions of property and equipment 136,143 (36,463) (96,587)
----------- -------- ---------
Net cash used by investing activities 136,143 (36,463) (96,587)
----------- -------- ---------
Cash flows from financing activities:
(Increase) in note receivable (965,000) - -
Loans to shareholder (85,120) (90,492) (110,668)
----------- -------- ---------
Net cash used by financing activities (1,050,120) (90,492) (110,668)
----------- -------- ---------
Net increase (decrease) in cash and cash equivalents (125) (79,803) 4,523
Cash and cash equivalents balance, beginning 125 79,928 75,405
----------- -------- ---------
Cash and cash equivalents balance, ending $ - $ 125 $ 79,928
=========== ======== =========
Supplemental disclosures of cash flow information:
Interest paid $ 36 $ 604 $ 1,077
=========== ======== =========
The accompanying notes are an integral part of these financial statements.
7
EAST END PRODUCTIONS
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 1996 AND
YEARS ENDED SEPTEMBER 30, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
GENERAL:
East End Productions (the "Companies") consist primarily of various video
production, video conferencing and animation production Companies.
COMBINATION POLICY:
The accompanying combined financial statements include the accounts of
the following Companies, all of which are under common control and stock
ownership:
[Download Table]
NAME OF COMPANY: PRINCIPAL BUSINESS ACTIVITY:
----------------------------- ----------------------------
East End Productions, Inc. Video production
East End Communications, Inc. Video production
J.B. Dubs, Inc. Video production
Intercompany transactions and balances have been eliminated in combination.
METHOD OF ACCOUNTING:
Assets, liabilities, revenue and expenses are recognized on the accrual
method of accounting for both financial statement presentation and income
tax purposes
CASH EQUIVALENTS:
For purposes of these statements of cash flows, the Companies consider all
highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents. There were no cash equivalents at September 30,
1995 or 1994
ACCOUNTS RECEIVABLE:
Accounts receivable consists of the following:
[Download Table]
June 30, 1996 September 30, 1995
1995 1994
Accounts receivable $ -0- $137,265 $ 84,289
Allowance for doubtful accounts -0- (1,150) (1,150)
------ -------- --------
Total $ -0- $136,115 $ 83,139
------ -------- --------
8
EAST END PRODUCTIONS
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 1996 AND
YEARS ENDED SEPTEMBER 30, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost. Depreciation is provided by the
straight-line method over the estimated useful lives of the assets.
Significant additions and betterments are capitalized. Expenditures for
maintenance, repairs and minor renewals are charged to operations.
Depreciation expense for the nine months ended June 30, 1996 and the years
ended September 30, 1995 and 1994 was $ 33,106, 44,142 and 42,465
respectively.
Property and equipment are depreciated using the following estimated useful
lives:
[Download Table]
ESTIMATED USEFUL
LIVE IN YEARS
----------------
Office furniture and equipment 5-7
Computer equipment 5-7
Production equipment 5
Automobiles 5
Leasehold improvements 31
INCOME TAXES:
Deferred tax provisions are calculated for certain transactions and events
because of differing treatments under generally accepted accounting
principles and the currently enacted tax laws of the federal government. The
results of these differences on a cumulative basis, known as temporary
differences, could result in the recognition and measurement of deferred tax
assets and liabilities in the accompanying balance sheets (See Note 6).
CONCENTRATION OF CREDIT RISK:
The Companies sell their products and services from their facilities in San
Francisco, California. The Companies extend credit to customers located
throughout California.
MAJOR CUSTOMER:
The Companies sold services representing more than 10% of its revenue for
the years ended September 30, 1995 and 1994 to Amdahl Corporation
9
EAST END PRODUCTIONS
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 1996 AND
YEARS ENDED SEPTEMBER 30, 1995 AND 1994
2. RELATED PARTY TRANSACTIONS:
The Companies are affiliated through common control and stock ownership The
amounts due related Companies totaled $8,251, 14,993 and $8,259 at June 30,
1996 September 30, 1995 and 1994, respectively.
The Companies' shareholder has received advances under a corporate loan
agreement. Amounts included in Loans to shareholder at June 30, 1996 and
September 30, 1995 and 1994 totaled $ 286,280, 201,160 and $ 110,668,
respectively.
3. COMMON STOCK:
Common stock consists of the following:
East End Productions, Inc. No par value, 10,000 shares authorized,
1,000 shares issued and outstanding
East End Communications, Inc. $ 1.00 par value, 50,000 shares authorized,
5,000 shares issued and outstanding
J.B Dubs, Inc. No par value, 10,000 shares authorized, 5,000 shares
issued outstanding
10
EAST END PRODUCTIONS
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 1996 AND
YEARS ENDED SEPTEMBER 30, 1995 AND 1994
4. PROFIT SHARING PLAN:
On October 1, 1991, the Companies adopted a qualified profit sharing plan.
All full-time employees over age 21 and with a minimum of one year of
service are eligible to participate. There is no required minimum
contribution to the plan, and the maximum allowable contribution is 3% of
annual compensation. Contributions to the plan within the minimum and
maximum limitations are determined by the board of directors. Contributions
to the plan for the fiscal years ended September 30, 1995 and 1994 were $ 0
and $ 0, respectively.
5. PROVISION FOR INCOME TAXES:
Effective October 1, 1993, the Companies adopted Statement of Financial
Accounting Standard No. 109 "Accounting for Income Taxes: (SFAS 109)",
as permitted under the new rules prior years' financial statements have not
been restated.
The adoption of SFAS 109 changes the Companies' method of accounting for
income taxes from the deferred method (APB 11) to an asset and liability
method. Previously, the Companies deferred the past tax effects of timing
differences between financial reporting and taxable income. The asset and
liability method requires the recognition of deferred tax liabilities and
assets for the expected future tax consequences of temporary differences
between tax bases and financial reporting of other assets and liabilities.
No adjustment has been recognized as a result of this change in accounting
method.
Due to the recurring net operating losses incurred by the Companies and the
uncertainty regarding the recognition of those accumulated tax benefits, no
net deferred tax asset or benefit has been recognized by the Companies as of
and for the years ended September 30, 1995 and 1994.
6. LEASE COMMITMENTS:
At September 30, 1995 and 1994, the Companies was renting their office and
production facilities on a month to month basis.
11
EAST END PRODUCTIONS
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 1996 AND
YEARS ENDED SEPTEMBER 30, 1995 AND 1994
7. SALE OF ASSETS
On June 21, 1996, the Companies were acquired by MSH Entertainment
Corporation for cash and a promissory note in a business combination
accounted for as a purchase. The results of operations of the Companies
will be included with the results of MSH Entertainment Corporation from
June, 1996.
In addition, MSH Entertainment Corporation entered into employment
agreements to provide salary plus the issuance of 450,000 shares of common
stock to the employees of the Companies.
12
FINANCIAL STATEMENT SCHEDULES
13
EAST END PRODUCTIONS
SCHEDULE IV - INDEBTEDNESS OF RELATED PARTIES - NOT CURRENT
[Enlarge/Download Table]
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
---------------------------------- ---------- ---------- ---------- ----------
indebtedness of
---------------
Balance at Balance at
Name of person beginning additions deductions end
---------------------------------- ---------- ---------- ---------- ----------
Nine Months ending June 30, 1996
--------------------------------
Christopher Haigh $ 201,160 $ 146,000 $ 60,880 $ 286,280
========== ========== ========= ==========
Year ending September 30, 1995
------------------------------
Christopher Haigh $ 110,668 $ 90,492 $ - $ 201,160
========== ========== ========= ==========
Year ending September 30, 1994
------------------------------
Christopher Haigh $ - $ 110,668 $ - $ 110,668
========== ========== ========= ==========
The accompanying notes are an integral part of these financial statements.
14
EAST END PRODUCTIONS
SCHEDULE X - SUPPLEMENTARY INFORMATION
[Download Table]
ITEM CHARGED TO COSTS AND EXPENSES
------------------------------------ -----------------------------
Six Months Ended Year Ended
June 30, September 30,
------- ------------
1996 1995 1994
---- ---- ----
Maintenance and repairs $ 6,019 $ 7,984 $ 19,381
Advertising costs $ -- $ 15 $ 2,112
The accompanying notes are an integral part of these financial statements
15
MSH ENTERTAINMENT CORPORATION
3,000,000 SHARES
COMMON STOCK
--------------------
PROSPECTUS
--------------------
___________ __, 1997
No dealer, salesman or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the offer made by this Prospectus and, if given or
made, such information or representations must not be relied upon as having been
authorized by the Company. This Prospectus does not constitute an offer to sell
or the solicitation of any offer to buy any security other than the shares of
the Common Stock offered by this Prospectus, nor does it constitute an offer to
sell or a solicitation of any offer to buy the shares of Common Stock by anyone
in any jurisdiction in which such offer or solicitation is not authorized, or in
which the person making such offer or solicitation is not qualified to do so, or
to any person to whom it is unlawful to make such offer or solicitation. Neither
the delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances create any implication that information contained herein is
correct as of any time subsequent to the date hereof.
[Download Table]
TABLE OF CONTENTS
Topic Page
----- ----
Summary 1
Risk factors 2
Use of Proceeds
Dividend Policy
Price Range of Common Stock
Capitalization
Dilution
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The United States Television Industry
Business
Management
Certain Transactions
Principal Shareholders
Description of Capital Stock
Plan of Distribution
Legal Matters
Experts
Additional Information
Financial Information
Appendix A - Subscription A-1
Until ________ __, 1997 (90 days after the date of this Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as a underwriters and with respect to their unsold allotments or
subscriptions.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses incurred or to be incurred by the Company in connection with the
preparation and filing of this Registration Statement are estimated to be as
follows:
[Download Table]
Printing and duplication expenses $20,000
Registration fee 3,280
Blue sky filing fees and expenses 5,000
Legal fees and expenses 10,000
Accounting fees and expenses 30,000
Transfer Agent fees 2,000
Miscellaneous 9,720
-------
Total $80,000
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Bylaws provide that the Company may indemnify its officers and
directors, and may indemnify its employees and other agents, to the fullest
extent permitted by Washington law. Insofar as indemnification for liabilities
arising under the Securities Act of 1933 may be permitted to officers, directors
or persons controlling the Company pursuant to the foregoing provisions, the
Company has been informed that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is therefore unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following is a schedule of all securities issued during the 36 month period
preceding the filing date with the note that following the acquisition of the
7,000,001 shares, a 1:100 reverse shock split was completed, data is current to
the date of filing. The table includes the names of the purchasers, the number
of shares, the exemptions relied on, and the consideration. The table is
through December 31, 1996 and totals 9,691,649 shares. As of September 30,
1996 the number of outstanding shares were 9,381,649. The 504 offering shares
were sold for $0.50 per share. The services were provide and the loans were
converted to shares at various values.
[Download Table]
Name Date Shares Consideration Exemptions
---- ---- ------ ------------- ----------
Chuck Walker 8-31-94 1,062,500 Acquisition/Merger Section 4(2)
Sam Cable 8-31-94 1,062,500 Acquisition/Merger Section 4(2)
Robert Maerz 8-31-94 305,000 Acquisition/Merger Section 4(2)
Conversion 2-10-95 280,500 Acquisition/Merger Section 4(2)
Financial Technology 3-23-95 150,000 Services/Financial Section 4(2)
Neal Bruckman 3-23-95 75,000 Services/Financial Section 4(2)
Inventive Resources 3-23-95 25,000 Services/Financial Section 4(2)
Geoffrey Deuel 3-23-95 7,500 Services/Financial Section 4(2)
Simon Weinberger 3-23-95 7,500 Services/Financial Section 4(2)
Richard Feiner 3-23-95 20,000 Services/Legal Section 4(2)
John Lowy 3-23-95 30,000 Services/Legal Section 4(2)
John Lowy PC 3-23-95 50,000 Services/Legal Section 4(2)
Alfred A. Stein 3-23-95 5,000 Services/Financial Section 4(2)
Tribune International 3-23-95 5,000 Services/Financial Section 4(2)
Infinet Inc. 4-05-95 500,000 Services/Financial Section 4(2)
CLR Associates 5-24-95 500,000 Cash 504 Offering
Carol Katchen 8-17-95 6,000 Note Conversion Section 4(2)
1
[Download Table]
Hoffman Schneider 4-02-96 50,000 Cash 504 Offering
Capital
Allen Amsterdam 4-19-96 20,000 Services/Financial Section 4(2)
Schiffman Amsterdam 4-19-96 2,000 Services/Financial Section 4(2)
& Leshner
George Davis 4-19-96 40,000 Services/Consulting Section 4(2)
Andrew Steiner 4-19-96 150,000 Services/Consulting Section 4(2)
Mike Greenfield 4-19-96 150,000 Services/Consulting Section 4(2)
Olle Macaulay & Zorilla 4-19-96 40,000 Services/Legal Section 4(2)
Kay Collyer & Boose 4-19-96 25,000 Services/Legal Section 4(2)
Kim Wade 4-19-96 2,000 Services/Acting Section 4(2)
Keith Walker 4-19-96 2,000 Services/Production Section 4(2)
Ruchey Cable 4-19-96 2,000 Services/Production Section 4(2)
Karen McClain 4-19-96 2,000 Services/Script Sup. Section 4(2)
Kitty Lee 4-19-96 2,000 Services/Consulting Section 4(2)
Leslie Easterbrook 4-19-96 2,000 Services/Acting Section 4(2)
George Boyd 4-19-96 2,000 Services/Producer Section 4(2)
Margery Thompson 4-19-96 5,000 Services Section 4(2)
Claude Grespinet 4-19-96 150,000 Services/Financial Section 4(2)
Hofman Schneider 4-29-96 450,000 Cash 504 Offering
Capital
Hofman Schneider 5-06-96 500,000 Cash 504 Offering
Capital
Hastings Ltd. 5-15-96 216,000 Cash 504 Offering
Olle Macaulay & Zorrilla 6-13-96 10,000 Services/Legal Section 4(2)
Stazzulla Family Trust 6-13-96 20,000 Note Conversion Section 4(2)
Arthur Wilkie 7-15-96 12,673 Services/Financial Section 4(2)
Robert P Maerz 7-15-95 850,000 Services Section 4(2)
Timothy Noble 7-15-96 1,724 Note Conversion Section 4(2)
James Farrish 7-15-96 6,034 Note Conversion Section 4(2)
John Shimp 7-15-96 17,242 Note Conversion Section 4(2)
Janis Shimp 7-15-96 17,242 Note Conversion Section 4(2)
Fred Hassan 7-15-96 8,621 Note Conversion Section 4(2)
Johnathan Stathakis 7-15-96 650,000 Services Section 4(2)
Rick Siebold 7-15-96 50,000 Services Section 4(2)
Alfred Morgan 7-15-96 100,000 Services Section 4(2)
Christopher Haigh 7-15-96 400,000 Services Section 4(2)
Andrew Steiner 7-15-96 150,000 Services/Consulting Section 4(2)
Fred Aurelio 7-15-96 50,000 Services Section 4(2)
Irwin Zellermaier 7-15-96 20,000 Services/Financial Section 4(2)
Olle Macaulay 7-15-96 100,000 Services/Legal Section 4(2)
Dominion Group Ltd. 7-15-96 5,000 Services/Financial Section 4(2)
John Lowy 7-15-96 13,000 Services/Legal 504 Offering
Dan Markle 7-15-96 1,000 Note Conversion Section 4(2)
Barry Jackson 7-15-96 1,000 Note Conversion Section 4(2)
Nick Flaskay 7-15-96 1,000 Note Conversion Section 4(2)
Gearhart Family Trust 7-15-96 380,000 Services/Legal Section 4(2)
Robert J Zepfel 7-15-96 25,000 Services/Legal Section 4(2)
Geoffrey Deuel 7-15-96 5,000 Services/Financial Section 4(2)
Jack Large 7-15-96 15,000 Note Conversion Section 4(2)
Walmur & Co. 7-16-96 124,000 Cash 504 Offering
Roberts Premier 7-16-96 100,000 Cash 504 Offering
Holdings
Walmur & Co. 8-02-96 114,000 Cash 504 Offering
O Lee Tawes 8-29-96 100,000 Cash 504 Offering
2
[Download Table]
Satinwood Ltd. 8-29-96 14,000 Cash 504 Offering
Swan Alley 10-29-96 125,000 Cash 504 Offering
Prudential Securities 10-29-96 41,667 Cash 504 Offering
Midland Walwyn Capital 10-29-96 83,333 Cash 504 Offering
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
DESCRIPTION OF EXHIBITS
The following exhibits are filed with the Registration Statement:
[Enlarge/Download Table]
1.1 Selling Group Agreement
3.1 Articles of Incorporation of MSH Entertainment Corporation
3.2 Bylaws of MSH Entertainment Corporation
4.1 Subscription Agreement
5.1 Opinion of Glenn L. Gearhart
10.1 Employment Agreement, dated July 1, 1996, between MSH Entertainment Corporation and Robert Maerz
10.2 Employment Agreement, dated January 1, 1997, between MSH Entertainment Corporation and Jonathan Stathakis
10.3 Employment Agreement, dated June 7, 1996, between MSH Entertainment Corporation and Christopher Haigh
3
[Enlarge/Download Table]
10.4 Employment Agreement, dated June 21, 1996, between MSH Entertainment Corporation and Fred E. Aurelio
10.5 Promissory Note, dated June 21, 1996, by MSH Entertainment Corporation in favor of Christopher Haigh
10.6 MSH Entertainment Corporation 1996 Stock Option Plan
10.7 Credit Agreement, dated December 11, 1996 between MSH Entertainment Corporation and Robert Posner
10.8 Cooperation Agreement and Warrant Agreement, dated November 4, 1996, between Intel Corporation and MSH Entertainment
Corporation
10.9 Production Agreement and Warrant Agreement, dated November 1, 1996, between Abrams/Gentle Entertainment Inc. and MSH
Entertainment Corporation
10.10 Cooperation Agreement, dated September 1, 1996, between Happy Zone Entertainment Corporation and MSH Entertainment
Corporation
10.11 Promissory Note, dated July 11, 1996, by Robert Maerz in favor of MSH Entertainment Corporation
10.12 Promissory Note, dated July 11, 1996, by Alfred Morgan in favor of MSH Corporation
10.13 Promissory Note, dated July 15, 1996, by Rick Siebold in favor of MSH Entertainment Corporation
10.14 Promissory Note, dated July 11, 1996, by Jonathan Stathakis in favor of MSH Entertainment Corporation
10.15 Credit Agreement, dated September 1, 1996 between Happy Zone Entertainment Corporation and MSH Entertainment Corporation
23.3 Consent of Glenn L. Gearhart (included as part of Exhibit 5.1)
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a post-
effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding
4
the foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the effective
registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "Act") may be permitted to directors, officers and controlling persons
of the issuer pursuant to the foregoing provisions, or otherwise, the issuer has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the issuer of expense incurred or paid by a director,
officer or controlling person of the issuer in the successful defense of any
action, or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the issuer will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
SIGNATURES
In accordance with the Securities Act of 1933, the registrant certifies
that it has reasonable grounds to believe that it meets all of the requirements
of filing on Form S-1 and authorized this Amendment to Registration Statement to
be signed on its behalf by the undersigned, in the City of Los Angeles, State of
California on March 6, 1997.
MSH Entertainment Corporation
5
By: /s/ Robert Maerz, Chairman
--------------------------
In accordance with the requirements of the Securities Act of 1933, this
Amendment to Registration Statement has been signed by the following persons in
the capacities and on the dates indicated:
[Download Table]
Signature Title Date
--------- ----- ----
(1) Principal Executive Officer
/s/ Robert Maerz Chairman and a April 3, 1997
---------------------------------- Director
Robert Maerz
/s/ Jonathan Stathakis President and a April 3, 1997
---------------------------------- Director
Jonathan Stathakis
(2) Principal and Accounting Officer
/s/ Fred Aurelio Chief Financial Officer April 3, 1997
----------------------------------
Fred Aurelio
(3) Directors
/s/ Christopher Haigh Vice President and April 3, 1997
---------------------------------- a Director
Christopher Haigh
/s/ Al Morgan
---------------------------------- Director April 3, 1996
Al Morgan
/s/ Sam Cable Vice President and April 3, 1997
---------------------------------- a Director
Sam Cable
/s/ Chuck Walker Vice President and April 3, 1997
---------------------------------- a Director
Chuck Walker
/s/ Dennis Olle Director April 3, 1997
----------------------------------
Dennis Olle
6
The following exhibits are filed with the Registration Statement:
1.1 Selling Group Agreement
3.1 Articles of Incorporation of MSH Entertainment Corporation
3.2 Bylaws of MSH Entertainment Corporation
4.1 Subscription Agreement
5.1 Opinion of Glenn L. Gearhart
10.1 Employment Agreement, dated July 1, 1996, between MSH
Entertainment Corporation and Robert Maerz
10.2 Employment Agreement, dated January 1, 1997, between MSH
Entertainment Corporation and Jonathan Stathakis
10.3 Employment Agreement, dated June 7, 1996, between MSH
Entertainment Corporation and Christopher Haigh
10.4 Employment Agreement, dated June 21, 1996, between MSH
Entertainment Corporation and Fred E. Aurelio
10.5 Promissory Note, dated June 21, 1996, by MSH Entertainment
Corporation in favor of Christopher Haigh
10.6 MSH Entertainment Corporation 1996 Stock Option Plan
10.7 Credit Agreement, dated December 11, 1996 between MSH Entertainment
Corporation and Robert Posner
10.8 Cooperation Agreement and Warrant Agreement, dated November 4, 1996,
between Intel Corporation and MSH Entertainment Corporation
10.9 Production Agreement and Warrant Agreement, dated November 1, 1996,
between Abrams/Gentle Entertainment Inc. and MSH Entertainment
Corporation
10.10 Cooperation Agreement, dated September 1, 1996, between Happy Zone
Entertainment Corporation and MSH Entertainment Corporation
10.11 Promissory Note, dated July 11, 1996, by Robert Maerz in favor of
MSH Entertainment Corporation
10.12 Promissory Note, dated July 11, 1996, by Alfred Morgan in favor of
MSH Entertainment Corporation
10.13 Promissory Note, dated July 15, 1996, by Rick Siebold in favor of
MSH Entertainment Corporation
10.14 Promissory Note, dated July 11, 1996, by Jonathan Stathakis in favor
of MSH Entertainment Corporation
10.15 Credit Agreement, dated September 1, 1996 between Happy Zone
Entertainment Corporation and MSH Entertainment Corporation
23.3 Consent of Glenn L. Gearhart (included as part of Exhibit 5.1)
Dates Referenced Herein
↑Top
Filing Submission 0000898430-97-001403 – Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)
Copyright © 2024 Fran Finnegan & Company LLC – All Rights Reserved.
About — Privacy — Redactions — Help —
Thu., Apr. 25, 5:06:39.1am ET 
