UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from __________ to __________.
Commission file number: 33-18143
PEAK ENTERTAINMENT HOLDINGS, INC.
(Name of small business issuer in its charter)
NEVADA 87-0449399
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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Issuer's telephone number: 44-1629-814555
Securities registered under Section 12(b) of the Exchange Act: None.
Securities registered under Section 12(g) of the Exchange Act: None.
Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. [ ]
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the 90 past days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
State issuer's revenues for its most recent fiscal year: $1,166,156.
The aggregate market value of voting and non-voting stock of the issuer held by non-affiliates on March 31, 2005 was $4,848,211.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
As of May 1, 2005, we had 31,180,530 shares of common stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Transitional Small Business Disclosure Format (check one): YES [ ] NO [X]
INTRODUCTORY STATEMENT
In this Amendment No. 2 to our Annual Report on Form 10-KSB/A (the "Second Amendment") for the year ended December 31, 2004, we further amend the following items set forth in our Amendment No. 1 to our Annual Report on Form 10-KSB/A (the "First Amendment") filed on May 16, 2005:
Part II - Item 6. Management's Discussion and Analysis Part II - Item 7. Financial Statements
Part III - Item 13. Exhibits
The staff of the Division of Corporation Finance of the Securities and Exchange Commission (the "Commission") issued comments on June 9, 2005 to the Company in connection with its review of the Company's First Amendment.
Based on these comments and discussions with the Commission, and after consultation with the Company's independent registered public accounting firm, the Company's management recommended, and its Board of Directors determined on June 24, 2005, that it will restate its financial statements for the year ended December 31, 2004.
The Company's determination to restate these previously issued financial statements stems from comments from the Commission requesting information related to (i) the accounting of pre-production labor costs, and (ii) the nature, source, and basis for measurement of foreign exchange gain (loss).
Certain errors were made in the recording of pre-production expenses in connection with pre-production revenue in the year ended December 31, 2004, resulting in an increase in cost of revenues of $253,495 and a reduction in selling, general and administrative costs of the same value. The restatement adjustments record pre-production labor and associated costs connected to pre-production revenue, which were previously included within selling, general and administrative costs, as direct costs of revenues. This adjustment reduces selling, general and administration costs by $253,495 and increases costs of revenues by $253,495.
The foreign exchange gain (loss) arose from two sources: (i) translation
adjustments, and (ii) adjustments arising from the Company's functional currency
being UK pounds, which is the principal source of the foreign exchange gain
(loss). A foreign exchange loss of $32,263 arising from the Company's functional
currency being UK Pounds had been incorrectly included within foreign exchange
gain within the consolidated statements of operations rather than the cumulative
translation adjustment within the consolidated statements of comprehensive loss.
The restatement adjustment reflects an additional element of the foreign
exchange gain within the Statements of Comprehensive Loss rather than in the
Statements of Operations. This had the effect of increasing the foreign exchange
gain within the consolidated statements of operations by $32,263 and increasing
the cumulative translation loss within the consolidated statements of
comprehensive loss by $32,263.
The above items resulted in a reduction in net loss for the year ended December 31, 2004 of $32,263 offset by a similar increase in loss from cumulative translation adjustment such that the comprehensive loss for the year ended December 31, 2004 and the consolidated balance sheet totals at December 31, 2004 remain unchanged.
Except as discussed above, we have not modified or updated disclosures presented in the First Amendment, except as required to reflect the effects of the restatement, in this Second Amendment. Accordingly, this Second Amendment does not reflect events occurring after the filing of the First Amendment or modify or update those disclosures affected by subsequent events.
Please refer to Note 2 to the accompanying consolidated financial statements for additional information on the restatement.
PEAK ENTERTAINMENT HOLDINGS, INC.
TABLE OF CONTENTS
Page
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PART I
Item 1. Description of Business 4
Item 2. Description of Property 14
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 15
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 16
Item 6. Management's Discussion and Analysis 18
Item 7. Financial Statements 32
Item 8. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure 62
Item 8A. Controls and Procedures. 63
Item 8B. Other Information 63
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act 65
Item 10. Executive Compensation 68
Item 11. Security Ownership of Certain Beneficial Owners and Management 69
Item 12. Certain Relationships and Related Transactions 71
Item 13. Exhibits 72
Item 14. Principal Accountant Fees and Services 76
Signatures 77
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
General Overview
We are a Nevada corporation named Peak Entertainment Holdings, Inc.
Prior to April 2003, we were known as Palladium Communications, Inc. and we operated a telecommunications business. In April 2003, we sold all of our former telecommunications business and purchased our present entertainment business pursuant to a reverse acquisition with Peak Entertainment Ltd., a United Kingdom registered company.
We only recently began our current business operations on April 22, 2003 when we acquired the business of Peak Entertainment, Ltd. Peak Entertainment Ltd. is a United Kingdom registered company incorporated in November 2001 that conducted a media and entertainment business. In 2001 and through most of 2002, Peak Entertainment Ltd. was in its start-up stages. Peak Entertainment Ltd. began its entertainment activities and licensing activities in about February 2002, and its consumer product activities in about April 2002 and began generating from consumer product sales in the last quarter of 2002.
Our current business is developing, marketing and selling television shows and toy and gift products focused on the children's media and leisure market. We have a limited history of revenues and significant operational losses to date, as well as an accumulated shareholder deficit.
Our current business is to develop, market and sell television shows and toy and gift products focused on the children's media and leisure market. Our primary strength is in the conception and development of character concepts that we believe children will find appealing. Our business objective is to take a character concept and develop the concept into a television show, a movie, a video game, a toy, apparel, or other product. We operate with three principal divisions: entertainment, licensing, and consumer products. Our activities include or will include development, production and distribution of television shows for children, licensing intellectual property rights to our television shows, and the manufacture and distribution of toy and gift products. We are currently focusing on two television projects, Monster Quest and The Wumblers, which are in various stages of production and not yet ready for airing on television. In 2005, we entered into an agreement with Maverick Entertainment Group Plc, a United Kingdom based company, to represent Maverick Entertainment's broadcast, licensing and merchandising rights to Muffin the Mule, due to air in the United Kingdom in Fall 2005, that has been commissioned by the British Broadcasting Corporation (BBC). Maverick also granted to Peak certain broadcast, licensing and merchandising rights to Snailsbury Tails, which is another BBC commissioned television series that is currently airing in various international territories.
We currently sell the following toy and gift products: Countin' Sheep toy merchandise, and Pretty Pony Club gift pony molds and are developing toy lines for Monster Quest, Muffin the Mule, Snailsbury Tails and The Wumblers television shows in anticipation of their anticipated merchandise launches in early 2006.
Our principal offices are located at Bagshaw Hall, Bagshaw Hill, Bakewell, Derbyshire, United Kingdom, and our telephone number is 44-1629-814555. We maintain a web site at: http://www.peakentertainment.co.uk.
Organization History
Peak Entertainment Holdings, Inc. was originally incorporated as Corvallis, Inc. in the state of Nevada on September 28, 1987 to seek business opportunities.
On March 31, 2003, we effected a 100 for 1 reverse stock split. As a result of the reverse split, the 211,907,574 shares of our common stock that were issued and outstanding became 2,119,195 shares issued and outstanding.
In April 2003, Palladium Communications sold its telecommunications business to Palladium Consulting Group, LLC for $75,000. The assets sold to Palladium Consulting Group consisted of substantially all of Palladium Communication's assets, including all carrier agreements, sales agent agreements, and equipment. The retained assets included cash and notes receivable. Palladium Consulting Group assumed certain of our liabilities, including our payables for phone systems and equipment and a lease for office facilities. Palladium Communications retained liabilities in connection with outstanding convertible debentures. As a result of the transaction, Palladium Communications had substantially no assets and had significant liabilities, consisting of the retained convertible debentures and accrued interest.
On April 22, 2003, Palladium Communications acquired the business of Peak Entertainment Ltd., together with its subsidiaries. Palladium Communications exchanged 19,071,684 shares of its common stock for all of the shares of Peak Entertainment Ltd. in a transaction viewed as a reverse acquisition. The shares issued to the holders of Peak Entertainment Ltd. constituted 90 percent of our outstanding shares. At the closing of the reverse acquisition, Palladium Communications appointed the principals of Peak Entertainment, Ltd., as officers and directors of Palladium Communications, and the former directors and officers of Palladium Communications resigned.
Upon consummation of the acquisition of Peak Entertainment, Ltd., the founders of Peak Entertainment, Ltd., Wilf and Paula Shorrocks, were appointed directors and officers of Palladium. The former directors and officers of Palladium Communications resigned as of the acquisition date.
On May 14, 2003, Palladium Communications Inc. changed its corporate name to Peak Entertainment Holdings, Inc.
As of December 31, 2004, we had 29,040,955 shares of common stock issued and outstanding.
Business Overview
We develop, market and sell television shows and toy and gift products focused on the children's media and leisure market.
We operate primarily through our wholly-owned United Kingdom subsidiary, Peak Entertainment Ltd., and its subsidiaries: Jusco UK Ltd, a United Kingdom registered company; Jusco Toys Ltd, a Hong Kong registered company; Wembley Sports Master Ltd., a United Kingdom registered company; and Cameo Collectables Ltd, a United Kingdom registered company.
We also utilize a wholly owned United States subsidiary, Peak Entertainment Holdings LLC, a Delaware limited liability company formed in April 2002.
Strategy
Our business plan is to develop, market and sell television shows and toy and gift products focused on the children's entertainment market. Our planned activities include the development, production and distribution of television shows targeted for the children's entertainment market, the licensing of intellectual property rights related to our television shows, and the manufacturing and sales of consumer products related to our television shows.
Our business objective is to develop a character or entertainment concept into a media product, such as into a television show, a movie, or a book, and to build the media product into a popular brand among children and either sell items ourselves such as a video game, a toy, or apparel, or license merchandise rights to third parties for manufacture and sale by third parties. We anticipate that we will rely on third parties such as animation and television production companies to co-produce entertainment shows, and broadcast companies to broadcast our television shows.
We believe that this business model will enable us to develop a character and product idea from its concept stages, through development, manufacturing, and promotion stages, to the consumer product, while maintaining control of the character concept and product ideas, so that we will be able to control and coordinate broadcast, promotions and product launches.
Structure and Business Initiatives
We operate within one business segment, namely childrens media, with three main sources of income: entertainment, licensing, and consumer products.
Entertainment
Entertainment is currently focusing on three television shows, two of which we are responsible for production. All three shows are in the pre-production or production stages. We anticipate that we will generate revenues from the distribution of television shows to broadcasting companies and other media outlets. The key costs are substantial animation and production costs in getting television episodes produced. We will initially seek to introduce the planned television shows in the United Kingdom, United States, Canada, Europe, Australia and New Zealand.
Monster Quest
Monster Quest is an animated television series based upon the history and heritage of 'Monsters' from Medusa, Mynator and Cyclops of mythological times to the modern classics of Frankenstein, Dracula and Werewolf.
We entered into an Agreement for the Provision of Co Production Services with Persistence Of Vision Sdn Bhd, dated May 18, 2004, for the co-production of 26 thirty minute episodes of an animated television program for children provisionally entitled "Monster Quest - The Quest." We are providing the intellectual property, format and concept for the television episodes, and Persistence Of Vision will supply the production services. Persistence Of Vision will be paid for its production services. The costs of the production of the episodes are projected to be approximately $273,000 per episode.
The television project is in pre-production stages with our in-house computer graphics studio creating the models, frames, characters and environments. Our production team, in conjunction with our co-production partners, will produce 26 thirty-minute episodes. We have a letter of intent agreement with Persistence of Vision pursuant to which Persistence of Vision is to provide approximately $1,200,000 of funding to the project.
We are to provide via third party funding, the initial first stages of the pre-production funding, either in cash or services, for each of the 26 episodes. The project is currently in pre-production with storyboards and models being prepared. We are actively seeking sources of financing to fund the project with Persistence of Vision in conjunction with the Malaysian Government, but have no such firm commitments to date. A delay in receipt of funding will likely delay the timetable for production. Assuming the receipt of funding by June 2005, we anticipate production for delivery of the first thirteen episodes by April 2006 and the next thirteen by October 2006. If sufficient funding is not available shortly, the timetable for production of the episodes will likely be re-scheduled for completion for Fall 2006 or Spring 2007.
We intend to distribute this series of 26 animated programs in various markets. We currently have a broadcast contract signed with Good Morning Television in the United Kingdom (known as GMTV), for terrestrial broadcast rights for a period of five years ending August 2008 in the United Kingdom markets in exchange for an aggregate license fee of $393,000 payable through July 2005. GMTV has committed to running the episodes from April 2006 through March 2007.
We will seek to distribute programs in other countries, including the United States, although no such agreements have been reached to date.
The Wumblers
The Wumblers are a sweet natured, whimsical collection of cartoon characters. The Wumblers is an educational and entertainment show geared toward pre-school aged children.
We entered into an entertainment production agreement, dated as of December 16, 2003, with The Silly Goose Company, LLC for the production of animated television episodes for a certain intellectual property entitled "The Wumblers". Pursuant to an agreement dated April 28, 2003, we are entitled to all exploitation rights in The Wumblers including merchandise and distribution rights. We are to finance or obtain financing for the episodes. Funding sources will share copyright interests in the television episodes according to the allocation of net proceeds. We will have the right to produce other episodes based on the licensed intellectual property. We have the right to exploit the licensed property worldwide in perpetuity.
On January 9, 2004, we entered into an Agreement for the Provision of Co Production Services with Cosgrove Hall Films Ltd. for the co-production of 52 eleven minute episodes of an animated television program for children provisionally entitled "The Wumblers." We are providing the intellectual property, format and concept for the television episodes, and Cosgrove Hall Films will supply the production services. Cosgrove Hall Films will be paid for its production services. The costs of the production of the episodes are projected to be approximately $3,5000,000.
We have completed the production of one pilot episode to date. We anticipate that the remaining episodes will be completed by April 2006, subject to receipt of financing for production costs. We are actively seeking sources of financing to fund the completion of this project.
We exhibited the pilot episode at the MIPTV International toy fair in Cannes, France in April 2004, and it received a very favorable acceptance from broadcasters, including GMTV (UK), HOP! (Israel); SABC (South Africa) and Chisan International (Korea), with all of whom we have entered initial negotiations for broadcast terms, and are awaiting written contractual agreements once further episodes are produced. In March 2005, we entered into an agreement with 4Kids Entertainment granting it certain United States broadcast, licensing and merchandising rights and we have a commitment from 4Kids Entertainment to broadcast the 52 episodes in the United States before the end of 2006. We expect at least 12 other countries that viewed The Wumblers pilot episode at MIPTV to advance their interest at MIPCOM in April 2005.
Muffin the Mule
To celebrate the 60th anniversary of Muffin's first appearance on British television, the BBC has commissioned 40 brand new animated episodes to be broadcast in 2006. Maverick Entertainment has invested $4 million to produce 26 ten minute episodes, with a further 14 episodes expected in 2006. Subsequent to the year end, Peak Entertainment became the licensing agent for certain of Maverick Entertainment's intellectual property, including Muffin the Mule.
This broadcasting icon has been credited with kick-starting the post-war children's licensing industry with a host of toys, books, games, gifts collectables and more. The new show takes from the original and combines it with the more sophisticated visuals that modern children have come to know and expect. It still retains the charm and simple story telling that made it a nation's favourite and gives Muffin and his friends a whole new lease on life. The series is aimed at pre-schoolers and the new show follows a classic story-telling format incorporating all of Muffin's friends from the original 1940's series.
Tattoo - The Marked Man
This is a proposed project in the very early stages of development. Tattoo is an action-adventure concept character involving a hero character and tattoos which can become three-dimensional. We made some previous efforts and agreements to move this project forward with Stan Lee and POW! Entertainment, but the parties have disagreed on how to proceed and we did not make a $250,000 payment in furtherance of the project. Accordingly, and because other more developed projects have moved forward, this project remains in the early stages of development.
Licensing
This comprises the licensing and sublicensing of intellectual properties to and from third parties. We intend to license or sub-license our products for use by others in other mediums, such as in video games, apparel, toys, and other merchandise.
We have an in-house licensing team headed by our licensing director, Alan Shorrocks. We have entered into agreements with several international agents and intend to further develop a network of international agents for the international promotions of our products.
We entered into license agreements with Character Option Ltd, Video Collection International Ltd, Radica Ltd, Zoo Digital Publishing Limited and Impact International Ltd 2004 for Monster Quest products, with Toontastic Publishing for magazine use of our Pretty Pony Club concepts, and with CCA Group for our Countin' Sheep products for use in greeting cards and via our licensing agent The Sharpe Company with Cadaco in the United States and Canada for our Countin' Sheep collectable plush toy products.
Licensing has not generated significant revenues to date. We anticipate that it will become much more active once we have produced sufficient episodes of our television shows so that broadcasting of the shows can commence. After broadcasting, and subject to a receptive audience, we believe that licensing may become our principal source of revenues.
The principal revenues for this division are anticipated to be a customary 35% commission we receive from all revenue received from licensing entertainment properties to broadcasters, toy and gaming companies, and other manufacturers such as clothing and home entertainment. Revenue is earned from selling licenses for our non-entertainment driven properties. The key costs for are staff, travel, toy and good production costs, and costs for attendance at annual toy and licensing trade shows internationally.
We intend to expand the licensing of our products through:
o A consumer public relations campaign; and
o Related marketing programs.
International toy fairs, such as MIP TV in Cannes, France in April 2004, have provided an ideal forum to display our products. We also attend the New York Licensing Show in June 2004 and will build on that platform with our partners 4Kids Entertainment at the New York Licensing Show in June 2005 and the European Licensing Show in October 2005.
Consumer Products
Consumer products have historically been our primary source of revenues operated primarily through three wholly-owned subsidiaries:
o Cameo Collectables - for the sale of gift and collectibles items;
o Jusco Toys - for the manufacture and production of toys and other consumer
products; and o Wembley Sportsmaster - for a range of leisure toys (not yet
launched).
Currently, we manufactures and sell the following products:
Cameo Collectables
o Countin' Sheep toy products in the United Kingdom and United States markets since January 2003; o Mini Flora toy products in the United Kingdom market since January 2003; and o Pretty Pony Club products (mold ponies) in the United Kingdom market since December 2002.
Our consumer products are sold primarily with the assistance of various independent sales agents to toy stores and gift stores.
Jusco Toys
Our Jusco Toys subsidiary, works with third party manufacturers and distributors, to make toys and other consumer products.
We acquired Jusco Toys in April 2002, to acquire its inventory and its manufacturing capabilities. Jusco will be used primarily to manufacture products for third parties, some of which may be our licensees.
We are currently developing toy lines and pre-production samples for our new television shows, Monster Quest, The Wumblers and Muffin the Mule. We expect to sell these lines either directly to retailers/distributors or under license with master toy licensees on a worldwide or territory basis and have started to make formal representations now that we have specific broadcast deals in place.
Wembley Sportsmaster
This subsidiary is not currently active, and we have no definitive plans for this subsidiary in fiscal year 2005 or at any time in the near future. We acquired the assets of Wembley Sportmaster primarily for its trademarks. Our future intent is to eventually launch a range of balls, leisure toys, inflatable pools and play products under the Wembley Sportsmaster banner. We have no current plans or timetable for utilizing this division or the trademarks, and it could be many years before we do so.
Design Studio Team
We have set up an in-house design studio team, with designers and artists, equipped with an animation studio. The team is involved in character creation, storyboard development, and animation production. The team is also involved in preparing marketing literature to support our licensing activities, and in toy design, packaging and display solutions to support our consumer products.
Intellectual Property Rights
We have acquired the following rights:
o Shorrocks Portfolio Worldwide - from Wilf and Paula Shorrocks, in a license agreement dated April 30, 2002, for royalties of 10% of the net selling price, payable quarterly, in perpetuity. The guaranteed minimum royalty payable for rights to the portfolio in perpetuity is $1,000,000. We are to pay a minimum of $12,500 per quarter beginning September 30, 2004, credited against the guaranteed minimum.
o The Wumblers - from The Silly Goose Company, LLC. We entered into an entertainment production agreement, dated as of December 16, 2003, with The Silly Goose Company, LLC for the production of animated television episodes for certain intellectual property entitled "The Wumblers". Pursuant to an agreement dated April 28, 2003, we are entitled to all exploitation rights in The Wumblers including merchandise and distribution rights. We are to finance or obtain financing for the episodes. Funding sources will share copyright interests in the television episodes according to the allocation of net proceeds. We will have the right to produce other episodes based on the licensed intellectual property. We have the right to exploit the licensed property worldwide in perpetuity. We are entitled to 35% to 40% of the gross revenues, depending on the location from which revenues are generated and the form of the source of revenues, whether television, music, or merchandise. We and any financing partners are entitled to recoup all production and marketing costs from gross revenues. Silly Goose is entitled to 31% of the net proceeds, Peak is entitled to 25% of the net proceeds, and the other 44% of the net proceeds is allocated among the financing parties, which may include Silly Goose and Peak.
o Muffin the Mule - We entered into a representation agreement, dated March 1, 2005, with Maverick Entertainment Group Plc, pursuant to which we acquired, on a worldwide basis, other than for video, DVD and publishing rights in the United Kingdom and Ireland, the right to exploit television broadcasting rights for Muffin the Mule, and the right to negotiate with and grant manufacturers and other interested parties licenses in relation to the manufacture and distribution of merchandise. We are entitled to 35% of gross receipts in the UK and 40% of gross receipts in the rest of the world. The agreement expires on February 28, 2008, subject to automatic renewal if a minimum (pound)500,000 in royalties has been paid to Maverick.
We have licensed the following rights to third parties:
o Monster Quest for videograms - We entered into an agreement, dated
April 29, 2004 and as amended in June 2004, with Video Collection
International Limited. Under the agreement, we licensed exclusive
videogram rights to the Monsters Quest television series. For
purposes of the agreement, the term videogram rights refer to the
right to distribute the television shows through videocassette, DVD,
CD-ROM, laser disk, video-on-demand, electronic and similar
technology. The performance of the agreement by Video Collection
International is subject to various conditions, such as that we
obtain a commitment to broadcast episodes of the television series
beginning in 2006, that we enter into a toy license with a third
party, and that we arrange for the production of collectible toy
figures. Under the agreement, we are to conduct a marketing campaign
in connection with the television broadcast of at least UK
(pound)500,000, and publish a comic book and a book in 2006. The
license territory is the United Kingdom and Ireland. We are entitled
to receive royalties of 15% of gross receipts for most products. The
royalty rate may be 7.5% for products sold by direct mail, or 25%
for certain premium products. The agreement provides for an advance
royalty of UK (pound)100,000, of which we received UK (pound)20,000
upon entering the agreement. The remainder of the advance royalty is
receivable in installments based on future events, such as
completion of broadcasting of episodes and launching of toy
products. The agreement is to expire seven years from the first
release of a videogram. No videogram has been released to date.
o Monster Quest for electronic games - We entered into a license agreement, dated December 12, 2003 and as amended in January 2004 and June 2004, with Radica U.K. Ltd. Under the agreement, we licensed certain rights to Monster Quest in connection with the sale of certain electronic handheld games. The license territory is the United Kingdom, Channel Islands and Eire. We are to receive royalties of 8% to 10% of the net selling price. The license term is four years from December 2003.
o Monster Quest for DS Game Boy - We entered into a license agreement, dated October 4, 2004, with Zoo Digital Publishing Limited. Under the agreement, we licensed certain rights to Monster Quest in connection with the sale of Game Boy games. The license territory is worldwide. We are to receive royalties of $1.50 per unit sold. The license term is three years from first publication of the product.
o Countin' Sheep for greeting cards - We entered into a license
agreement, dated February 10, 2003, with CCA Group Ltd. Under the
agreement, we licensed the right to intellectual property called
Countin' Sheep in connection with the sale of greeting cards. The
license territory is the United Kingdom, Channel Islands and
Ireland. We are to receive royalties of 10% of the net selling
price. We are entitled to a guaranteed minimum royalty of UK
(pound)10,000. We received an advance royalty of UK (pound)5,000 in
February 2003. The license expires on January 31, 2006.
o Pretty Pony Club - to Toontastic Publishing Ltd., pursuant to a license agreement dated December 5, 2002, and renewed in 2004. Under the agreement, we licensed the right to intellectual property called Pretty Pony Club in connection with the sale of comic books. The license territory is the United Kingdom and Eire. We are to receive royalties of 4% of the net sales price or 5% of the purchase price, depending on the manufacturer. There is no minimum guaranteed royalty under the renewed license. The license expired on February 28, 2005.
Distribution and Sales Rights
We have entered into the following distribution and sales rights:
o We entered into a distribution agreement, dated July 1, 2003, with Perfectly Plush Inc., a Canadian company, whereby Perfectly Plush would serve as exclusive distributor of our Countin' Sheep products in Canada. Under the agreement, Perfectly Plush is to pay us a royalty of 10% of the net selling price, which is included in the purchase shipment price. Perfectly Plush shall pay to us 25% of the value of the invoice on placement of order, 25% on release from port of shipment and the remaining balance on release of products from port of entry for orders on the first 54,000 pieces. For subsequent orders, Perfectly Plush shall pay us 25% of the value of the invoice on placement of order, 25% on release from port of shipment, 25% on release of products from port of entry, and the remaining balance within 45 days of receipt of shipment. The agreement expired on December 31, 2004.
o We entered into a distribution agreement, dated January 20, 2003 and
as amended on June 17, 2004, with Character Options Ltd., whereby it
would serve as exclusive distributor of our `Monster Quest' products
in the United Kingdom, Channel Islands and Eire. Under the
agreement, Character Options paid a non-refundable advance of UK
(pound)100,000, credited against royalty payments, and is to pay us
a royalty of 10% of the net selling price. We are entitled to a
guaranteed minimum royalty of UK (pound)150,000 if 26 episodes of
`Monster Quest' are broadcast on GMTV or satellite television by
June 30, 2006. The agreement expires on June 30, 2007.
o We entered into a representation agreement, dated August 19, 2003, with Haven Licensing Pty Ltd. for the use of Monster Quest Brand, excluding television and video distribution, in Australia and New Zealand. The commission rate is 30% of gross receipts. The agreement expires on December 31, 2006.
o We entered into a representation agreement, dated September 17, 2003, with Character Licensing & Marketing for the use of Monster Quest Brand, excluding television and video distribution, in South Africa. The commission rate is 30% of gross receipts. The agreement expires on September 16, 2005.
o We entered into a representation agreement, dated October 31, 2003, with Kidz Entertainment, for the use of Monster Quest Brand, in the Nordic Region of Europe. The commission rate is 30% of gross receipts. The agreement expires on December 31, 2006.
o We entered into a representation agreement, dated April 22, 2004, with The Sharpe Company, Inc., located in Manhattan Beach, California, granting The Sharpe Company, in connection with our Countin' Sheep product 6 12 ts, the exclusive right to negotiate with manufacturers and other interested parties licenses for merchandising rights in the United States and Canada for a period ending on September 30, 2005. The commission rate is 30% of gross receipts. The Sharpe Company also had the right to find a distributor for the sale and distribution the sale of the products in the United States through June 2004.
o We entered into a distribution agreement, dated April 27, 2004, with Cadaco, located in Chicago, Illinois, whereby Cadaco would serve as exclusive distributor of our Countin' Sheep products in the United States. Under the agreement, Cadaco is to pay us a royalty of 10% of the net selling price. The agreement expires on December 31, 2006.
o We entered into a representation agreement, dated August 2, 2004, with Blue Chip Brands Pty Ltd., located in Australia, granting Blue Chips, in connection with our Countin' Sheep products, the non-exclusive right to negotiate with manufacturers and other interested parties licenses for merchandising rights in Australia for a period ending on December 31, 2006. The commission rate is 30% of gross royalty on all products other than the plush toy range, for which the commission rate if 1.5% of gross receipts.
o We entered into a distribution agreement, dated November 1, 2004, with Impact International Ltd 2004, whereby Impact International would serve as exclusive distributor of our Countin' Sheep Plush products in the United Kingdom, Channel Islands and Ireland. Under the agreement, Impact International is to pay us a royalty of 10% of the net selling price. The agreement expires on February 28, 2008.
Competitive Environment
We have many competitors internationally across three principal areas of our proposed business: entertainment, licensing and consumer products.
Competitors include large companies who operate with similar business strategies to ours, but on a much larger scale, such as Vivendi with its Universal Studios and Time Warner Inc. with Warner Brothers. These large companies have an integrated business approach to their properties, with television, film, licensed toys and merchandise, and have a competitive advantage because they own or are significant partners in worldwide broadcast companies and have direct access to their consumers internationally. Similarities can be observed within the United Kingdom with the BBC, which commissions television shows, controls its own channel and content, and has its own licensing and consumer products division, BBC Worldwide, which exploits the rights and places the content internationally.
Other competitors include companies that do not have their own broadcast facilities, as we do not, and therefore do not enjoy the competitive advantages that broadcast companies like Vivendi and Time Warner have. These smaller broadcast-independent companies include H.I.T. Entertainment, 4Kids Entertainment, DIC Entertainment and Saban. These smaller firms have created many of the well-known and currently popular properties, such as 4Kids Entertainment's Pokemon, H.I.T.'s Bob The Builder, and Saban's Power Rangers. Pokemon, since its appearance in 1998, has generated sales of $15 billion through 2003. Nickelodeon's Rugrats and Fox Kids/Saban's Power Rangers both launched in 1992, and remain well-known brands to this day.
Most of our competitors operate in the same three primary business lines as we do: entertainment, licensing and consumer products; and they do so on an international scale. Successful companies have gained visibility through coordinated marketing efforts in various segments of the market, and do not rely on generating revenues from television licensing and distribution income, but also on income from product licensing and merchandise sales. Successful television shows in one territory also tend to be successful in other territories, and the ability to license the brand and to sell consumer products is related to the popularity and the success of the television shows. Accordingly, the same companies and the same brands tend to dominate the market in each of the three business segments of the children's market: entertainment, licensing and consumer products.
Many companies and brands do not succeed in this highly competitive market. The international broadcast arena has witnessed a demand for more and more content over recent years as the proliferation of new television channels continues.
Principal Suppliers
In 2004, we were not dependent on any particular supplier.
Dependence on Major Customers
In our fiscal year ended December 31, 2004, Silly Goose Company represented approximately 34% of our revenues.
Government Regulation
Our toy and related products sold in the United States are subject to the provisions of The Consumer Product Safety Act, The Federal Hazardous Substances Act, The Flammable Fabrics Act, and the regulations promulgated thereunder. The Consumer Product Safety Act empowers the Consumer Product Safety Commission to take action against hazards presented by consumer products, including the formulation and implementation of regulations and uniform safety standards. The Consumer Product Safety Commission has the authority to seek to declare a product "a banned hazardous substance" under the Consumer Product Safety Act and to ban it from commerce. The Consumer Product Safety Commission can file an action to seize and condemn an "imminently hazardous consumer product" under the Consumer Product Safety Act and may also order equitable remedies such as recall, replacement, repair or refund for the product. The Federal Hazardous Substances Act provides for the repurchase by the manufacturer of articles which are banned. Consumer product safety laws also exist in some states and cities within the United States and in Canada, Australia and Europe. We vigorously seek to maintain compliance with the Consumer Product Safety Act, the Federal Hazardous Substances Act, the Flammable Fabrics Act, international standards, and our own standards. Notwithstanding the foregoing, there can be no assurance that all of our products are or will be hazard free. Any material product recall could have an adverse effect on our results of operations or financial condition, depending on the product, and could affect sales of other products.
The Children's Television Act of 1990 and the rules promulgated thereunder by the United States Federal Communications Commission, as well as the laws of certain countries, place certain limitations on television commercials during children's programming. We, of course, seek to comply in all respects with these laws and regulations.
Compliance with Environmental Laws
Not applicable.
Employees
As of December 31, 2004, we employed a total of 15 employees on a full-time basis, 9 of which are management level employees, two of which are clerical, and four employed as designers.
ITEM 2. DESCRIPTION OF PROPERTY
We lease approximately 3,000 square feet of space for our Bakewell, England headquarters pursuant to a one year lease at approximately $6,059 per month. We believe that our facilities are adequate for our present purposes. Our offices are adequately covered by insurance for claims arising out of such occupancies.
ITEM 3. LEGAL PROCEEDINGS
As at March 31, 2005, we are not a party to any material pending legal proceeding, other than ordinary routine litigation incidental to our business and except as described below.
In 2002, we entered into an agreement with CK Supermarket to provide working capital on a short-term basis secured against certain inventory of our subsidiary, Jusco UK Ltd. At December 31, 2004, the balance was $386,095 including interest of $115,596. The debt was originally due on January 10, 2003. At March 31, 2004, it was envisaged that the loan would be repaid in 2004 from revenues from the sale of inventory. In May 2004, the lender notified us regarding immediate payment of the balance owed. We have been and remain in discussion with the lender regarding the repayment of the debt through a combination of cash from the sale of certain inventory and the issuance of our securities. In the event the repayment issue is not resolved, the lender could institute a legal proceeding against our subsidiary, Jusco UK Ltd, seeking repayment. The lender has a security interest on the assets of our subsidiary, Jusco UK Ltd., but does not have a security interest in our parent company or our other subsidiaries. As CK Supermarket has previously targeted the assets of Jusco UK Ltd. for use in repaying the lender, we believe that a proceeding against our subsidiary, Jusco UK Ltd. would not have a material effect on our operations.
On January 26, 2004, we entered into an agreement with POW! Entertainment LLC for the development and exploitation of the property "Tattoo - the Marked Man". We have the worldwide distribution and merchandising rights in perpetuity and the agreement describes a payment of $250,000 to fund project development. The payment was subject to certain deliverables from POW! upon which payment was anticipated to be made on the earlier of August 31, 2004 or ten business days after the effective date of our registration statement filed in February 2004. Stan Lee is to develop the concept, based on characters created by the Shorrocks. The project was geared toward creating a motion picture based on the character. The parties were to share all profits received from the project, after deduction of expenses, and in addition, POW would have been entitled to any executive producer fees from theatrical and television releases. We have not yet paid the amounts due to POW! under the agreement, and it appears that the transaction has been abandoned. We believe that we have meritorious defenses to any potential claims.
On August 13, 2004, in a labor action entitled Thomas Bernard Skahill v. Peak Entertainment Holdings, Inc. before the Labor Commissioner of the State of California, the Company was ordered to pay $24,358.27 in wages, expenses, penalties, and interest in connection with an employment claim. We are informed that the matter was confirmed as a judgment on or about October 15, 004 by the Superior Court of the State of California in the amount of $24,938.57. The financial statements include an accrual of $9,166 in relation to this claim.
We are informed that on or about April 6, 2004, James E. Skahill and Marie A. Skahill filed a complaint for damages for breach of contract against Peak Entertainment Ltd. before the Superior Court of the State of California for the County of Los Angeles, Northeast District, Case No. GC033622 alleging breach of a lease and seeking damages in an amount to be determined. We believe that the matter was not properly commenced with proper service upon Peak Entertainment Ltd. We have not submitted a response to the matter before the Superior Court of the State of California. We are unaware of the present status of the matter before the Superior Court of the State of California and we are unable to evaluate the likelihood of an unfavorable outcome, nor provide an estimate of the amount or range of potential loss.
On January 5, 2004, we completed a transaction, pursuant to a Settlement Agreement and Release dated as of December 22, 2003, with former debenture holders: AJW Partners, LLC, New Millennium Capital Partners II, LLC, AJW Offshore, Ltd, and AJW Qualified Partners, LLC. Pursuant to the terms of the settlement agreement, the former debenture holders had the right, thirteen months after the closing of the transaction, to provide notice to the Company of an exercise of a "put" right pursuant to which we would buy from the former debenture holders all of the 1,000,000 shares of common stock issued to them pursuant to the settlement agreement, at the price of $0.75 per share. Pursuant to the terms of the settlement agreement, the former debenture holders were to provide us with written notice if they wished to exercise the put right after thirteen months and prior to one year and two months after the closing of the transaction, at the expiration of which, the put right terminates. Closing on the put was to occur within ten business days from receipt of notice of the put. On or about January 10, 2005, the former debenture holders submitted a notice to exercise the put right. On or about January 26, 2005, the former debenture holders resent the January 10, 2005 notice to exercise the put right. We believe that the notice was not properly submitted in accordance with the notice procedures provided in the settlement agreement. To the best of our knowledge, and after inquiry to the counsel for the former debenture holders of the "put", no notice of exercise of the "put" was sent to us. Accordingly, we considered the notice ineffective and did not honor the notice. In or about March 2005, an agent for the former debenture holders informed us that the former debenture holders may institute a legal proceeding to enforce their put rights. We understand that the former debenture holders filed a lawsuit in this regard in or about March 21, 2005. As of May 6, 2005, we have not been served with the lawsuit. In the event that we are served with a lawsuit, we intend to contest the matter vigorously. We may be required to pay $750,000 for repurchase of 1,000,000 shares of common stock from the former debenture holders, plus potential interest and costs, if we lose such threatened litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
Our common stock is quoted on the OTC Bulletin Board under the symbol "PKEH". For the periods indicated, the following table sets forth the high and low closing prices per share of common stock. These prices represent inter-dealer quotations without retail markup, markdown, or commission and may not necessarily represent actual transactions.
Prices prior to April 22, 2003 are not related to our current business operations, but reflect a predecessor business, Palladium Communications Inc., a business that we sold in April 2003 and no longer conduct.
Fiscal Quarter Ended High Low -------------------- ---- --- June 30, 2003 1.65 0.03 September 30, 2003 1.15 0.65 December 31, 2003 0.80 0.40 March 31, 2004 0.90 0.40 June 30, 2004 0.56 0.11 September 30, 2004 0.48 0.09 December 31, 2004 0.41 0.12 March 31, 2005 0.50 0.30 |
Holders
As of April 1, 2005, we had approximately 582 record holders of our common stock. The number of record holders was determined from the records of our transfer agent and does not include beneficial owners of common stock whose shares are held in the names of various security brokers, dealers, and registered clearing agencies.
Dividends
We have never declared or paid any cash dividends on our common stock. We do not anticipate paying any cash dividends to stockholders in the foreseeable future. In addition, any future determination to pay cash dividends will be at the discretion of the Board of Directors and will be dependent upon our financial condition, results of operations, capital requirements, and such other factors as the Board of Directors deem relevant.
Transfer Agent
The transfer agent for our common stock is American Stock Transfer & Trust Company.
Recent Sales of Unregistered Securities
On January 4, 2005, we entered into a consulting agreement with Salvani Investments, pursuant to which we issued 1,000,000 warrants, exercisable for 5 years at $0.50 per share, in exchange for business consulting and investor relations services. We relied on an exemption from registration for a private transaction not involving a public distribution provided by Section 4(2) under the Securities Act.
On January 5, 2005, we sold to Dan Brecher 250,000 warrants, exercisable for three years at $0.50 per share, for $2,500. We relied on an exemption from registration for a private transaction not involving a public distribution provided by Section 4(2) under the Securities Act. We applied the proceeds to working capital.
On March 1, 2005, we entered into a loan agreement for $500,000 with Tayside Trading Ltd. Pursuant to the loan agreement, we issued 500,000 warrants, exercisable for five years at $0.50 per share, to the lender. We also granted the lender an option exercisable commencing with the date of return of the $500,000 and expiring two weeks thereafter, to acquire, at the purchase price of $100,000, (i) shares of the Company's common stock at $0.30 per share (333,333 shares) and (ii) warrants to purchase 200,000 shares of common stock, exercisable for five years at $0.50 per share. We used the funds to fund a $500,000 letter of credit. We agreed to grant the lender, as collateral, rights to our intellectual property, to the extent not already encumbered. In consideration for the loan, we issued to the lender 500,000 warrants, exercisable for five years at $0.50 per share. We used the funds to fund a $500,000 letter of credit, which was subsequently terminated in April 2005. The principal amount of the loan was returned in April 2005, with accrued interest still owed. As the principal was not paid by March 30, 2005, as penalty, in April 2005, we issued 1,800,000 shares as a late payment penalty. We relied on an exemption from registration for a private transaction not involving a public distribution provided by Section 4(2) under the Securities Act.
On March 2, 2005, we issued 50,000 warrants, exercisable for five years at $0.50 per share, to Aaron M. Lasry in return for business consulting services. We relied on an exemption from registration for a private transaction not involving a public distribution provided by Section 4(2) under the Securities Act.
On April 10, 2005, we issued 159,575 shares of restricted common stock to Crescent Fund, LLC in return for financial consulting services. We relied on an exemption from registration for a private transaction not involving a public distribution provided by Section 4(2) under the Securities Act.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
"FORWARD-LOOKING" INFORMATION
This report on Form 10-KSB contains certain "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, which represent our expectations and beliefs, including, but not limited to statements concerning the Company's expected growth. The words "believe," "expect," "anticipate," "estimate," "project," and similar expressions identify forward-looking statements, which speak only as of the date such statement was made. These statements by their nature involve substantial risks and uncertainties, certain of which are beyond our control, and actual results may differ materially depending on a variety of important factors.
Introductory Statement
Unless otherwise stated, the discussion and analysis refers to the business of Peak Entertainment Ltd., which we acquired on April 22, 2003 in a transaction viewed as a reverse acquisition, and does not refer to the operations for our former business which was sold in April 2003. Under applicable accounting principles, the historical financial statements of Peak Entertainment Ltd. became those of the Company.
Our current business plan is centered on the production of television shows geared for the children's entertainment market. Once our planned television shows are produced, we believe that we can generate revenue through the sale of broadcast rights of those shows. We also intend to license intellectual property rights created from the television shows and offer for sale merchandise related to the television shows.
We have not generated significant revenues in this period because we had not yet funded the television shows upon which we plan our exploitation of the related intellectual rights portfolio. Our ability to convert current negotiations to executed contracts is dependent upon such progress with the television shows. We have delayed the production of the associated toys and merchandise for the television shows, and this has compromised our ability to generate sales in these areas.
The following discussion and analysis should be read in conjunction with the information set forth in the audited financial statements for the year ended December 31, 2004.
With limited available capital, we have produced initial episodes of our planned television shows and we believe that we will now be viewed more favorably by potential capital sources and believe that we should have better success in raising much needed capital to fund full production of the planned television shows.
Further, we have diversified the way in which we seek to finance some of our television show production budgets, and during this year we have focused on third party co-production financing. The delay in obtaining from, and limited capital provided by, third party co-production financiers has delayed our planned production timetable, but has been successful in significantly reducing the internal cash expenditure of Peak.
We have entered into an agreement with Maverick Entertainment Group Plc., and have certain exploitation rights to certain of its intellectual property: Muffin the Mule and Snailsbury Tails, both of which the British Broadcasting Corporation commissioned television episodes. Peak expects to exploit these television shows aggressively in 2005 and anticipate increased revenues via their licensing and manufacturing divisions as a result. We, and third party financiers, have financed over $1,600,000 for the production of The Wumblers, and we are expecting to finance the balance of the production budget ($1,900,000) with the support of Silly Goose Company and third parties.
The Wumblers has been licensed to 4Kids Entertainment LLC for broadcast, home entertainment (video/DVD), licensing and merchandising rights in the United States, and we expect to utilize 4Kids Entertainment's prominence in the industry to market and promote The Wumblers.
We are also negotiating a potential debt financing deal with Persistence of Vision Sdn Bhd (POV) and the Malaysian Government to fund our $7.1m production budget for Monster Quest.
We have still yet to raise the requisite capital for the television shows in order to complete production in earnest and it is still a factor that until we raise sufficient capital to produce the planned television shows, we do not expect to generate any significant revenues from any of our lines of business. If we are is unable to raise capital to produce its television shows, we intend to alter our business plan to focus on licensing our intellectual property to third parties, and on the sale of toys and consumer goods.
Sale of Former Business
Prior to April 2003, we were known as Palladium Communications Inc. and conducted a telecommunications business.
In April 2003, we sold off substantially all of our assets and certain of our liabilities to Palladium Consulting Group, LLC, in exchange for $75,000. The assets sold consisted of substantially all of our assets used in our telecommunications business, including all of our carrier agreements, sales agent agreements, and equipment, which business we discontinued on April 22, 2003. The assets that we retained included cash and notes receivable, which were nominal amounts. The liabilities assumed by Palladium Consulting Group, Inc. consisted primarily of payment for phone systems and other equipment and a lease for office facilities. We retained substantially all of the liabilities, consisting primarily of outstanding debentures and accrued interest. As a result of the transaction, we were essentially a shell company with no assets and with substantial liabilities related to outstanding debentures.
On April 22, 2003, we acquired the business of Peak Entertainment Ltd., a United Kingdom company, by acquiring all of the outstanding shares of Peak Entertainment Ltd. in a transaction viewed as a reverse acquisition.
The purpose of these corporate transactions was to try to create some value for our shareholders. It is the understanding of our current management that the former principals of Peak Entertainment Holdings, Inc. sought to discontinue its business operations as a publicly-held entity, and the principals of Peak Entertainment Ltd. sought access to financing, which it had difficulty obtaining as a privately-held company.
Current Business
Our business operations are primarily in three areas of the children's entertainment and leisure market: production of television shows; licensing of entertainment concepts and characters; and sale of merchandise products. Since inception, we have not generated significant revenues and we will require substantial working capital to execute our business plan.
Our current business plan is centered on the production of television shows geared for the children's entertainment market. Once our planned television shows are produced, we believe that we will be able to generate revenue through the sale of broadcast rights of those shows. We also intend to license intellectual property rights created from the television shows and offer for sale merchandise related to the television shows.
The year ended December 31, 2004 was an extremely difficult time for us. We had very little operating capital to fund the production of planned television shows, and focused on raising capital from third parties to fund the production of the television shows. We experienced difficulty in raising capital in 2003 and 2004 from potential capital sources. We believe that this difficulty was due to the terms of convertible debentures outstanding in 2003, which contained terms very favorable to the debenture holders, and made potential financiers reluctant to provide capital to us. Accordingly, we entered into discussions with the debenture holders and repurchased those debentures in January 2004.
We believed that with the repurchase in January 2004 of debentures that were outstanding at December 31, 2003, our capital structure would be viewed more favorably by potential capital sources, and that we would have better success in 2004 in raising much needed capital to fund production of the planned television shows. However, in 2004, we continued to experience difficulty in raising capital on terms acceptable to us, as many potential financiers sought further development of our business prior to committing capital.
The difficulty in raising capital in 2003 and 2004 has delayed our projected timetable for the distribution of our planned television series. Due to lack of capital, we were unable to fund production of a single television episode show in 2003 and produced only one episode in 2004. The delay in producing television shows, in turn, has delayed and compromised our ability to license intellectual property rights and sell toys and merchandise based on the television shows.
Until we raise sufficient capital to produce our planned television shows, we do not expect to generate any significant revenues from any of our lines of business. If we are unable to raise capital to produce our planned television shows, we intend to alter our business plan to focus on licensing intellectual property to third parties, and on the sale of toys and other consumer goods.
RESULTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2004 COMPARED WITH THE YEAR ENDED
DECEMBER 31, 2003
Revenues
Consolidated net revenues increased 15% to $1,166,156 for the year ended December 31, 2004 from $1,014,996 for the year ended December 31, 2003. A breakdown of revenues from our media income is set forth in the table below.
2003 Revenue ($) 2004 Revenue ($) % Increase/(Decrease)
---------------- ---------------- ---------------------
Entertainment/ Production 500,000 713,876 43%
Licensing Arrangements 97,082 214,357 121%
Character Related Consumer Products 417,914 237,923 -43%
Total Revenues 1,014,996 1,166,156 15
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The increase in total revenue is partly due to the 43% increase in revenue from production activities. This revenue is generated from pre-production work that is then invoiced to third party or co-production partners. This increase is in line with the early stages of the completed work on the shows that we are working on.
Revenues from licensing increased 121% to $214,357 in the year ended December 31, 2004 from $97,082 in the year ended December 31, 2003. In 2004, we generated licensing revenue from Toontastic, pursuant to a licensing agreement for Pretty Pony Club, and licensing revenues pursuant to licensing agreements for Monster Quest with Radica UK Ltd, Character Options Ltd and Impact International.
Revenues from the sale of consumer products decreased (43)% from $417,914 in the year ended December 31, 2003 to $237,923 in the year ended December 31, 2004. Sales in 2004 were generated from the sales of the remaining toy related inventory that we acquired in 2002 as part of our acquisition of Jusco Toys Ltd, along with its principal consumer products activities, which was focused primarily on our `gift' concept Countin' Sheep. This product was sold primarily in the United Kingdom. We have started to build on this initial base by appointing Cadaco (USA) internationally to build on this concept. These sales accounted for 14% of our total revenues sales for the year ended December 31, 2004.
In 2004, we were primarily focused on the raising of capital, and the sales of inventory along with products launched in 2003 that were short-term cash generating projects. Our intention is to begin aggressively marketing toy products associated with television projects once adequate financing has been obtained for the production of the television shows. We have negotiated various representation agreements with licensees, and attended worldwide trade shows and retail presentations to raise the profile of our products in order to seed the markets in anticipation of the television show launches.
We are still in the early production stages of two television shows, and we expect to remain in the production stages of the shows through 2005 and into 2006. Until we have completed production of the shows and are in a position to generate revenues from the sales of broadcast rights for the shows, we do not have an adequate basis for projecting revenues, nor identifying trends or demands. This applies for all main lines of our business, as our business plan is centered around the television shows.
Cost of Revenue
For the year ended December 31, 2004, cost of revenues was $596,651 as compared to $725,066 in 2003, a decrease of 18%. Cost of revenues as a percentage of revenues decreased to 51% in 2004 as compared to 71% in 2003. Cost of revenue is primarily made up of labor costs, inventory, transport and royalties due on licenses.
We anticipate that our cost of revenue with respect to income from entertainment and consumer products will increase significantly in 2005 as we enter into the production stages of more television show episodes and increased marketing efforts for the sale of consumer goods. It is anticipated that the cost of revenue for our television shows will initially increase in relation to our entertainment revenues, until such time that the television episodes are completed, at which time the significant costs will have been incurred. Since costs for entertainment comprise mostly of non-recurring episode production costs, we expect such costs to decrease as a percentage of revenues as we distribute the shows and generate revenues from more and more markets. It is anticipated that the cost of revenue for our consumer products will increase in direct relation to an increase in revenues.
Gross Profit
Gross profit for the twelve months ended December 31, 2004 was $569,505, or 49% of revenues, as compared to $289,930 or 28.6% of revenues, for the same period in 2003.
Operating Expenses
Selling, General and Administrative Expenses. Selling, general and administrative costs were $2,343,790 for the year ended December 31, 2004 compared to $2,614,593 for the year ended December 31, 2003. As a percentage of revenues, selling, general and administrative costs decreased to 201% for the year ending December 31, 2004 from 257% for the year ending December 31, 2003. The following table summarizes the costs incurred in 2004.
Operation Expense ($) % of Total Cost --------- ----------- --------------- General Costs 567,579 24% Employee Compensation 281,257 12% Legal and Professional 1,290,130 55% Travel and Entertainment 204,824 9% TOTAL 2,343,790 100% |
The significant and noteworthy expenses were principally costs incurred from legal, accounting and other professional services related to the ongoing SEC filings and investment within the company. Such costs have been a significant factor affecting the business operations at a time when we lack sufficient revenues from operations to finance the production of our television shows and rely upon financing from third parties. We will continue to incur such expenses in 2005 as the company is in the financing stages of its animation projects and general investment into the company. We anticipate that expenses for legal, accounting and other professional services will continue to be a significant factor in 2005, due to our continuing need to raise capital and our securities law reporting obligations as a publicly-held company.
Depreciation and amortization. Depreciation for the year ended December 31, 2004 was $22,580 as compared to $14,460 for the same period in 2003. The increase is in direct relationship with the expansion of our capital spending on equipment.
Amortization for the year ended December 31, 2004 was $407,647 as compared to $159,370 for the same period in 2003. The increase is in direct relationship with amortization of licensing rights, debentures and warrants.
Net Loss
Our net loss decreased from $2,966,547, or $0.14 loss per share, in the year ended December 31, 2003 to $1,993,942, or $0.077 loss per share, in 2004. The decrease in net loss is significantly attributable to a gain on settlement of convertible debentures and accrued interest.
LIQUIDITY AND CAPITAL RESOURCES
Cash Requirements
Our revenues have been insufficient to cover our operating expenses. Since inception, we have been dependent on loans from the Company's officers and on private placements of the Company's securities in order to sustain operations.
Management expects to satisfy our liquidity needs on a short-term basis through private placements of the Company's securities, including the issuance of debt. There can be no assurances that the proceeds from private placements or other capital transactions will continue to be available, that revenues will increase to meet our cash needs, that a sufficient amount of our securities can or will be sold, or that any common stock purchase options/warrants will be exercised to fund our operating needs.
As of December 31, 2004, we had commitments for capital and other expenditures aggregating $5,977,192 included in current and long term liabilities, payable over a maximum 20 year period. Those commitments and the amounts payable in 2004, giving effect to terms amended in 2004, are summarized in the following table.
Contractual Liability Amounts payable Contract Terms
Obligations as of 12/31/04 within 12 months and Notes
Short term loan - $ 386,095 $ 386,095 20% interest per annum. Was secured by
CK Supermarkets inventory, part sold and monies used to
part pay balance. We are negotiating to
convert the balance to common stock in
2005.
Accounts Payable - $ 1,301,439 $ 1,301,439 Refers to various payables (composed
Various significantly of various ordinary business
expenses, as well as legal, accounting, and
other professional fees).
Stock holders' advances $ 752,522 $ 100,000 No pre-set repayment terms through 3/2004.
account - Shorrocks
In 2004, we entered into a promissory note,
payable in installments. First payment due on
1/2005 and to be repaid in full not later
than 2008.
Short Term License $ 67,831 $ 67,831
Debentures - various $ 330,652 $ 0 Discount and interest on the debentures.
debenture holders Does not include the principal amount of
the debentures in the amount of $958,000.
Other - including Tax and $ 1,904,534 $ 1,904,534 Various costs payable within 2005
Social security and accruals including UK employment taxes and UK
value added tax.
Long Term License - Shorrocks $ 975,000 $ 50,000 10% royalty payable quarterly in
perpetuity. Guarantee of $1,000,000, with
no established payment term.
Pay from royalties from licenses to third
parties over the term of the contract.
In 2004, the Company amended the license
agreement to establish a minimum quarterly
royalty payment of $12,500 due beginning
September 30, 2004.
P.O.V (Malaysia) $ 259,119 To be determined Animation costs for Monster Quest.
based upon the level
of financing
received within 2005.
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TOTAL $ 5,977,192 $ 3,809,899
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You will note that $1,994,643 or 33% of the total commitments as of December 31 2004, is committed to the principals of Peak in promissory notes or long-term licenses and a further 5% is committed to the holders of outstanding debentures.
We rely on short-term outside funding to meet our short-term liquidity needs, as the internal cash flows generated by sales of our toys and gift products have been insufficient to fully meet our short-term liquidity needs. We anticipate that in fiscal year 2005, we will be in position to meet our short-term and long-term liquidity needs through the internal cash flows generated from broadcast sales from our current entertainment projects, Monster Quest and The Wumblers, which are scheduled for production in late 2005 to early 2006. However, our gross profit for the year ended December 31, 2004 represented only 15 % of our commitments payable within twelve months. As of December 31, 2004. Because our current operations did not generate any significant revenues and our principal planned products are still in production stages, we are in constant need of cash to pay for our ordinary operating expenses, and more significantly, to pay for the production costs of three projects currently in various stages of production. Accordingly, until our entertainment projects can be funded and full television production activities commenced, we will continue to rely on short-term outside funding. If we are unable to obtain funding for the projects, we may be forced to curtail or terminate operations.
Sources and Uses of Cash
For the twelve months ended December 31, 2004, we had a net operating loss of $2,204,512 and an overall net loss of $1,993,942. At December 31, 2004, we had $10,235 in cash and had a working capital outflow of $437,281.
In 2003, we did not use or depreciate the moulds and tooling acquired from the acquisition of Jusco Toys Ltd, due to an enquiry from the Hong Kong Inland Revenue Department. The enquiry concerned the non-submission of certain tax computations to ascertain taxes payable by the prior owners of Jusco Toys. This was unknown to Peak until after we acquired Jusco Toys from the administrators of Just Group Plc. This enquiry was determined in July 2004 at a cost to us of $9,235, and we can now utilize the moulds and tooling and depreciate the equipment. The amount was paid in July 2004.
Sources and Uses of Cash from Operating Activities
For the twelve months ended December 31, 2004, cash flows from operating activities resulted in negative cash flows of $437,281. The cash outflow from losses was increased due to the effects of the foreign exchange loss of $371,113 but reduced by the gain on settlement of convertible debentures of $883,033 and by non-cash charges of $2,701,135 for depreciation, amortization of intangible assets, amortization of discount on debentures, non-cash professional and consulting fees and loss on sale of intangibles. Cash used in operations also arises from an increase of $459,726 in accounts receivable a decrease of $150,161 in accounts payable and other accrued liabilities and a decrease of $223,823 in other current assets.
It is necessary for us to obtain additional capital from outside sources to allow us to move forward with our operations and proposed new products. We believe that our future growth is dependent on the degree of success of current operations in generating revenues. Our ability to meet the obligations under the contractual terms of our existing agreements, and the ability to obtain additional funding for our operations, the sale of which, in turn, it is anticipated, should produce cash inflows in line with our expectations from our broadcast, licensing and merchandising activities.
Management expects to satisfy our liquidity needs on a short-term basis through the continuing support of the directors, outside financings, and the subsequent expected sales growth from our various company activities. We anticipate meeting our long-term liquidity needs through the internal cash flows generated by ongoing sales growth from projects such as our current entertainment project Monster Quest. Furthermore, we will attempt to limit our long-term liquidity needs through the continuance of cost control measures applied to our operations.
Sources and Uses of Cash from Investing Activities
Cash flows from investing activities resulted in positive cash flows of $1,010,590 in the twelve months ended December 31, 2004, a significant increase from cash flows of ($109,001) in fiscal 2003. In the twelve months ending December 31, 2004, cash applied to investing activities included $71,029 toward plant and equipment. In 2005, our focus will be on production and investment in new product licenses from third parties. We may expend significant resources in investing activities in 2005.
Cash for our initial start-up expenses was obtained primarily from advances from two of our directors, Wilf and Paula Shorrocks.
Sources and Uses of Cash from Financing Activities
Cash flows from financing activities resulted in negative cash flows of $399,970 in the twelve months ended December 31, 2004, compared to same period in 2003 of positive $952,351. In 2005, we intend to continue to rely upon capital raised from third party investors in private placements to fund our operations, as well as any entertainment production financing partners we can obtain. Entertainment production financing partners will share in the proceeds of the sale of the produced product.
Whereas, in 2003, the primary source of funds were loans from our officers, in 2004, we relied upon capital raised from the sale of securities, including convertible debentures and common stock, to fund our operations. In 2005, we intend to continue to rely upon capital raised from third party investors in private placements to fund the Company's operations, as well as any entertainment production financing partners we can obtain. Entertainment production financing partners will share in the proceeds of the sale of the produced product.
Short Term Borrowings. In 2002, we had net cash provided from short term financing agreements totaling $264,600. This was an agreement to provide working capital on a short-term basis secured against certain inventory of our subsidiary, Jusco UK Ltd. At December 31, 2004, the balance was $386,093, which includes interest and storage charges. The debt was originally due on January 10, 2003. In May 2004, the lender notified us regarding immediate payment of the balance owed. We are in discussion with the lender regarding the repayment of the debt through a combination of cash from the sale of certain inventory and the issuance of our securities. In the event the repayment issue is not resolved, the lender could institute a legal proceeding against our subsidiary, Jusco UK Ltd, seeking repayment. The lender has a security interest on the assets of our subsidiary, Jusco UK Ltd., but does not have a security interest in our parent company or our other subsidiaries. As we have previously targeted the assets of Jusco UK Ltd. for use in repaying the lender, we believe that a proceeding against our subsidiary, Jusco UK Ltd. would not have a material effect on our operations.
Stockholder Advances. From time to time, Mr. and Mrs. Shorrocks loaned money to Peak to fund day-to-day operations, as well as for the acquisition of certain properties. Since inception through December 31, 2003, the Shorrocks loaned to Peak an aggregate of $916,634. The debt has incurred a foreign exchange loss of $5,320. As of December 31, 2004, the Shorrocks are now owed $752,522. These monies were loaned without interest and did not have a due date, and were due on demand. In March 2004, we gave the Shorrocks a promissory note for the monies due establishing a repayment schedule. The amount due is to be repaid in installments, consisting of six periodic payments of $25,000 from January 31, 2005 through September 30, 2006, two payments of $100,000 on March 31, 2007 and September 30, 2007, and the balance due on January 31, 2008. The promissory note provides for earlier repayment of any unpaid balance subject to various future financial results of the Company, such as the Company obtaining shareholders' equity in excess of 150% of the amount due, or positive net income from operations in excess of 150% of the amount due.
Issuance of Convertible Debentures and Repurchase of 2002 and 2003 Convertible Debentures. In April 2003, immediately following the sale of the Company's predecessor telecommunications business to Palladium Consulting Group, we had outstanding convertible debentures in the principal amount of $215,000 and warrants to buy 645,000 shares of common stock. These securities had been sold by the Company's predecessor business in February 2002 and we retained these liabilities following the sale of the Company's former telecommunications business.
On April 22, 2003, following the acquisition of Peak Entertainment Ltd., we sold to the same investors of the outstanding convertible debentures additional convertible debentures in the principal amount of $785,000 and warrants to buy 1,570,000 shares of our common stock.
We sold the debentures in April 2003 to raise operating capital and used the proceeds for the payment of licensing commitments and general working capital.
The conversion terms of the debentures provided that the debentures could be converted into shares of our common stock at the lower of $1.00 or a 50% discount to the trading price of the common stock. Accordingly, the conversion price was continuously adjustable, with no minimum or floor conversion price set. Therefore, our obligation to issue shares upon conversion of debentures was essentially limitless.
These debentures represented a large amount of debt relative to our identifiable liquid assets. As of January 1, 2004, we had an aggregate of approximately $1,000,000 in 12% convertible debentures outstanding, with outstanding interest payable of approximately $249,010. We determined that it would be preferable to repurchase these debentures; and, we did so, as described below, so these debentures are no longer outstanding.
In the months after April 2003 through December 2003, we had very little success in raising capital from third parties to fund our operations. This inability was due, in part, to the conversion terms of the outstanding debentures. Potential financiers were unwilling to commit capital to us because of the conversion terms of the outstanding debentures, since the debenture holders could convert their debentures into a significant and potentially limitless number of our shares at a significant discount to the market price of our common stock. In order to raise capital, we needed to seek an amendment of the conversion terms of the debentures or repurchase the debentures.
On January 5, 2004, we completed a transaction with former debenture holders in which we repurchased from the former debenture holders an aggregate of $1,000,000 principal amount of 12% convertible debentures and 2,215,000 common stock purchase warrants, which represented all of the securities that they purchased pursuant to Securities Purchase Agreements dated as of February 28, 2002 and April 22, 2003. We paid the former debenture holders $1,000,000 in cash and 1,000,000 shares of our unregistered common stock for the repurchase of the securities. The $1,000,000 payment to the former debenture holders consisted of $500,000 in cash, and $500,000 by promissory notes, which was paid in full on March 22, 2004. In order to make such payment, we used $250,000 that we had in operating capital, and $750,000 that we raised through the sale of securities. The former debenture holders had the right to make us buy from them all of the 1,000,000 shares of common stock issued to them, at the price of $0.75 per share. The right expired in March 2005. We also paid $10,000 of the former debenture holders' fees and expenses in connection with the transaction. As more fully discussed at Item 3 Legal Proceedings, we are currently in dispute with the former debenture holders.
The 8% convertible debentures issued in January 2004 are substantially different from the repurchased debentures. The most material difference in the debentures is that the repurchased debentures could be converted at a fluctuating rate at a substantial discount to the market price of our common stock into an undeterminable amount of shares of common stock whereas the new debentures are convertible at a fixed rate into a fixed number of shares of common stock. Other differences are that the repurchased debentures accrued interest at 12% whereas the new debentures accrue interest at 8%, the repurchased debentures were due in 2004 whereas the new debentures mature in 2007.
In July 2004, debentures in principal amounts totaling $541,500 were converted into 1,805,500 shares of common stock. We may need approximately $1,008,500, plus accrued interest, to pay off the remaining debentures and accrued interest in January 2007. We do not presently have the cash to pay that amount and our present revenues and gross profit levels make it unreasonable to think that our present operations are capable of producing cash streams to pay the debt in 2007. We do not have any specific plan to pay the debentures or the accrued interest. We believe that the holders of the debentures are likely to convert the debentures into shares of common stock prior to their maturity in 2007. If the debentures are not converted prior to 2007, we anticipate that by January 2007 our operations will be producing sufficient revenues and cash flow to pay off the debt, because it is highly unlikely that we will continue to be in operation in 2007 if we are unable to resolve our going concern issues in 2005 or 2006. The first interest payment on the 8% convertible debentures was due in January 2005, and if our operating revenues are insufficient to pay the interest, or if the interest amount is not converted into common stock, we will seek to resolve payment of interest through a promissory note, issuance of other securities, or some other similar arrangement. We elected to accrue the interest payment due January 2005 until another interest payment period.
Although we repurchased the 12% debentures in January 2004, we have current liabilities related to the repurchased debentures reported on our December 31, 2003 balance sheet of $838,279. Because we financed the repurchase primarily through the sale of new 8% convertible debentures due January 2007, we may need approximately $1,860,000 to pay off the debentures and accrued interest in January 2007 if none of the debentures are converted into the Company's common stock, however, we believe that the holders of the debentures are likely to convert the debentures, including accrued interest, into shares of common stock prior to maturity of the 8% debentures in 2007. The first interest payment on the 8% convertible debentures was due until January 2005. We elected to accrue the interest payment for another interest payment period.
Sales of Securities in 2004
On January 5, 2004, we sold $1,500,000 in 8% convertible debentures due January 5, 2007 and 3,000,000 common stock purchases warrants. The purchase price totaled $1,500,000, of which $750,000 was paid in cash, and $750,000 by promissory notes, which were paid in July 2004. The principal amount of the debentures, plus any accrued and unpaid interest on them, may be converted into shares of common stock at the conversion price of $0.30 per share. Annual interest payments on the debentures are due on January 7 of each year, commencing January 7, 2005. At our option, interest payments may be accrued beyond the annual interest payment date, in which event the debenture holder shall have the option to accrue the interest payment then due to another interest payment period, or cause us to issue common stock in exchange for interest. The warrants are exercisable at a price of $0.50 per share. After the tenth consecutive business day in which our common stock trades at $3.00 or greater, the warrants become redeemable at $0.10 per warrant. We agreed to file such a registration statement for the resale of the underlying shares and, in the event that the registration statement was not declared effective within 120 days, to issue, as a penalty, approximately 100,000 shares of common stock for each $500,000 investment for each subsequent month period in which the registration statement had not been declared effective. In September 2004, we issued a total of 275,000 shares to investors as a result of this agreement. As reported above, in July 2004, debentures in principal amounts totaling $541,500 were converted into 1,805,500 shares of common stock. The remaining debentures are protected by security interests in substantially all of our collateral. We will need the approval of the debenture holders in order to grant security interest rights to third parties that are senior to or on par with these debentures. We used $750,000 of the proceeds for the retirement of previously issued 12% debentures discussed above. We did not pay the interest due January 7, 2005 and we are awaiting the option holders decision as to whether the interest is to be accrued until the next payment period or converted to common stock.
On January 29, 2004, we entered into a Securities Purchase Agreement with an individual investor. Pursuant to the agreement, we sold $50,000 in 8% convertible debentures due January 29, 2007 and 100,000 common stock purchase warrants. The purchase price was $50,000. The principal amount of the debentures, plus any accrued and unpaid interest on the debentures may be converted into shares of common stock at the conversion price of $0.30 per share. Annual interest payments on the debentures are due on January 29 of each year, commencing January 29, 2005. At our option, interest payments may be accrued beyond the annual interest payment date, in which event the debenture holder shall have the option to accrue the interest payment then due to another interest payment period, or cause us to issue common stock in exchange for interest. We used the proceeds for working capital purposes. On January 26, 2005, the investor converted these $50,000 in debentures, plus $4,000 in accrued interest, into an aggregate of 180,000 shares.
On March 10, 2004, the Company entered into Securities Purchase Agreements with eleven accredited investors. Pursuant to the agreements, the Company sold an aggregate of 1,000,000 shares of common stock and 600,000 common stock purchase warrants, exercisable for three years at $0.75 per share, for a total purchase price of $500,000. Legend Merchant Group, Inc. acted as the placement agent for these transactions. All of the purchasers were pre-existing customers of Legend Merchant Group. We paid Legend a fee of $25,000, and 100,000 common stock purchase warrants exercisable for three years at $0.50 per share and 60,000 common stock purchase warrants exercisable for three years at $0.75 per share, for its services. We agreed to seek registration of the resale of the shares of common stock and the shares underlying the warrants in the amendment to our registration statement initially filed in February 2004, or in a separate registration statement, and to incur cash and other penalties for late effectiveness of such a registration statement. No such penalties were incurred. We used the proceeds from the sale of securities for working capital purposes.
On April 28, 2004, we entered into an agreement with Laura Wellington, whereby we exchanged a debt of $250,000 owed to Ms. Wellington in exchange for 500,000 shares of common stock. Ms. Wellington had loaned $250,000 to us on or about October 2003, which we used for working capital purposes.
On July 23, 2004, we entered into an agreement with Laura Wellington, whereby we exchanged a debt of $194,000 owed to Ms. Wellington in exchange for 388,000 shares of common stock. Ms. Wellington had loaned $194,000 to us on or about April 25, 2004, which we used for working capital purposes.
On August 17, 2004, we issued 75,001 shares of common stock to PR Portfolio, our former public relations firm, for services rendered.
On September 28, 2004, we entered into Securities Purchase Agreements with three accredited persons for the sale of 1,666,666 shares of common stock and 1,750,000 common stock purchase warrants, exercisable for three years at $0.50 per share, for the aggregate purchase price of $500,000.
CASH MANAGEMENT
The Company will use its cash to meet certain expenses necessary to operate, such as payment of employee salaries, taxes, and ordinary business expenses such as office rent. The Company will also use cash to make payments on short term borrowings, contractually obligated payments on license arrangements and other accounts payable, although the Company will seek to renegotiate the timing and payment schedule of certain license arrangements.
After paying for ordinary expenses, to the extent that the Company has available cash, including cash received from financing arrangements, significantly all of its cash will be applied to the production of the television episodes. We have been in negotiations with co-production partners for all of our television episodes. The total cost of each show will be formalized by way of a cashflow budget, payable over a period of 12 to 36 months. This will be monitored in detail. It will be a requirement of any of our partners to supply us with an actual budget statement on a monthly basis compared to the agreed budget. It is imperative that the Company does not increase the budget by significant amounts and that it tries to keep within the budget as much as it can. We have implemented tight procedures to ensure that the cash management has sufficient controls.
PLAN OF OPERATIONS TO ADDRESS GOING CONCERN
In its report dated May 16, 2005, the independent registered public accounting firm stated that our financial statements for the years ended December 31, 2004 and December 31, 2003 were prepared assuming that we would continue as a going concern. Our ability to continue as a going concern is an issue raised as a result of historical losses from operations, cash flow deficits and a net capital deficiency. As a result of the foregoing, the auditors have expressed substantial doubt about our ability to continue as a going concern.
We continue to experience net operating losses. Our ability to continue as a going concern is subject to our ability to generate a profit or obtain necessary funding from outside sources, including obtaining additional funding from the sale of our securities, increasing sales or obtaining loans from various financial institutions where possible. Our continued net operating losses and stockholders' deficit increases the difficulty in meeting such goals and there can be no assurances that such methods will prove successful.
The primary issues management will focus on in the immediate future to address this matter include:
o seeking institutional investors for equity investments;
o complete negotiations to secure short term financing through promissory notes or other debt instruments on an as needed basis;
o focusing on, and continue to expand, revenues, through sales of consumer products and pre-sales on our projects in development;
o renegotiate payments terms of existing contractual obligations;
o develop co-production financing opportunities for our entertainment projects;
o consider third-party licensing alliances for the products in our entertainment division; and
o seek acquisition and partnership opportunities with third party companies to expand our fully integrated media business.
To address these issues, in 2005, we have entered into agreements with various investment banking companies to assist us in raising capital. We believe we are close to securing $2,000,000 in short term funding to meet the operational needs of the business. We have entered into a preliminary agreement with Maverick Entertainment Plc, and expect to enter into more formal discussions about potentially combining our businesses during 2005. We anticipate increased revenues from having our first completed TV series to exploit later in 2005 with Muffin the Mule. Further, we expect to generate pre-sales from the Wumblers in the second half of 2005 as the show is slated to launch in the US and other international territories in early 2006.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
This Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, intangible assets, financing operations, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The accounting policies are described in the notes to the consolidated financial statements included in this document for the fiscal year ended December 31, 2004.
Certain significant accounting policies and estimates inherent in the preparation of our financial statements include policies and estimates with regards to revenue recognition, capitalization of film and television costs, and currency.
(1) Revenue Recognition.
Revenue from the production of television entertainment is recognized in accordance with Statement of Position 00-2 "Accounting by Producers or Distributors of Film". Under this guidance, the Company recognizes revenue from the sale of television entertainment when all of the following conditions are met:
(a) persuasive evidence of a sale or licensing arrangement with a customer exists,
(b) the television episode is complete and, in accordance with the terms of the arrangement, has been delivered or is available for immediate and unconditional delivery,
(c) the license period of the arrangement has begun and the customer can begin its exploitation, exhibition or sale, and
(d) the arrangement fee is fixed or determinable.
While this accounting treatment has not been material in our past operations, from time to time, we expect to receive funds in advance to produce television show episodes, the production of which could take from one to three years. Advances received will not be recorded as revenues until the revenue recognition conditions are met.
Revenue from character licensing arrangements is recognized over the life of the agreement. Revenue from the sale of character related consumer products is recognized at the time of shipment when title of the products passes to the customer. Amounts received in advance are recorded as unearned revenue until the earnings process is complete.
(2) Film and Television Costs.
The Company capitalizes the costs of developing film and television projects in accordance with Statement of Position 00-2 "Accounting by Producers or Distributors of Film". These costs will be amortized using the individual-film-forecast-computation method, which amortizes costs in the same ratio that current period actual revenue bears to estimated remaining unrecognized ultimate revenue at the beginning of the current fiscal year. The Company has recorded no amortization to date as revenue has yet to be recognized.
(3) Functional currency and treatment of foreign currency translation.
Due to the majority of our operations being based in the United Kingdom, the British Pound has been selected as our functional currency.
Transactions denominated in foreign currencies are translated at the year-end rate with any differences recorded as foreign currency transaction gains and losses and are included in the determination of net income or loss. The Company has translated the financial statements into US Dollars. Accordingly, assets and liabilities are translated using the exchange rate in effect at the balance sheet date, while income and expenses are translated using average rates. Translation adjustments are reported as a separate component of stockholders' equity (deficit).
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation ("FIN") No. 46, "Consolidation of Variable Interest Entities" and in December 2003, a revised interpretation was issued (FIN No. 46, as revised). In general, a variable interest entity ("VIE") is a corporation, partnership, trust, or any other legal structure used for business purposes that either does not have equity investors with voting rights or has equity investors that do not provide sufficient financial resources for the entity to support its activities FIN 46, as revised, requires a VIE to be consolidated by a company if that company is designated as the primary beneficiary. The interpretation applies to VIEs created after January 31, 2003, and for all financial statements issued after December 15, 2003 for VIEs in which an enterprise held a variable interest that it acquired before February 1, 2003. The adoption of FIN 46, as revised, did not have a material effect on the Company's financial position or results of operations.
In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No 123, "Share-Based Payment" ("SFAS Statement 123R") which replaces SFAS No 123, "Accounting for Stock-Based Compensation," and supercedes APB Opinion No 25, "Accounting for Stock Issued to Employees." This statement requires that all share-based payments to employees be recognized in the financial statements based on their fair values on the date of grant. SFAS No 123R is effective as of the beginning of the first interim or annual reporting period that begins after December 31, 2005 and applies to all awards granted, modified, repurchased or cancelled after the effective date. The Company is evaluating the requirements of SFAS 123R and expects that its adoption will not have a material impact on the Company's consolidated results of operations and earnings per share.
In December of 2004, the FASB issued SFAS No 153, "Exchanges of Nonmonetary Assets - an Amendment of APB Opinion No 29" (SFAS 153). SFAS 153 eliminates the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS 153 is effective for fiscal years beginning after June 15, 2005 and is required to be adopted by the Company in the first quarter of 2006. The Company does not believe that the adoption of SFAS 153 will have a material impact on the Company's consolidated results of operations or financial condition.
ITEM 7 - FINANCIAL STATEMENTS
TABLE OF CONTENTS
Page
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Report of independent registered public accounting firm 33
Consolidated balance sheets 34
Consolidated statements of operations 35
Consolidated statements of changes in stockholders' equity (deficit) 36
Consolidated statements of comprehensive loss 37
Consolidated statements of cash flows 38
Notes to the consolidated financial statements 40
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Peak Entertainment Holdings, Inc
We have audited the accompanying combined balance sheets of Peak Entertainment Holdings, Inc (the Company) as of December 31, 2004 and December 31, 2003 and the related consolidated statements of operations, stockholders' equity (deficit), comprehensive loss, and cash flows for each of the two years ending December 31, 2004. 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 the standards of the Public Accounting Oversight Board (United States). 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 consolidated financial position of Peak Entertainment Holdings, Inc as of December 31, 2004 and December 31, 2003, and the consolidated results of its operations and its cash flows for each of the two years ending December 31, 2004, in conformity with U.S. generally accepted accounting principles in the United States of America.
As discussed in Note 2 to the accompanying consolidated financial statements, the Company has restated its consolidated balance sheets as of December 31, 2004, and the related consolidated statements of operations, changes in shareholders' equity, comprehensive loss and cash flows for the year ended December 31, 2004.
Certain errors were made in the recording of pre-production expenses in connection with pre-production revenue in the year ended December 31, 2004, resulting in a reclassification of an increase in cost of revenues of $253,495 and a reduction in selling, general and administrative costs of the same value. In addition, a foreign exchange loss of $32,263 arising from the Company's functional currency being UK Pounds had been incorrectly included within foreign exchange gain within the consolidated statements of operations rather than the cumulative translation adjustment within the consolidated statements of comprehensive loss.
The above items resulted in a reduction in net loss for the year ended December 31, 2004 of $32,263 offset by a similar increase in loss from cumulative translation adjustment such that the comprehensive loss for the year ended December 31, 2004 and the consolidated balance sheet total at December 31, 2004 remain unchanged.
The accompanying 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, cash flow deficits and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this significant uncertainty.
Garbutt & Elliott Limited
York, England
May 16, 2005, except for
the effects of the matter discussed in Note 2,
which are as of January 19, 2006.
PEAK ENTERTAINMENT HOLDINGS, INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Year Ended Year Ended
December 31, December 31,
2003 2004 (Restated)
--------------- ---------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 152,339 10,235
Accounts receivable 34,620 498,187
Inventory 236,007 91,743
Other current assets 588,439 861,728
--------------- ---------------
Total current assets $ 1,011,405 1,461,893
Deferred professional fees 335,833 205,834
Plant and equipment, net 198,245 259,649
Intangible assets, net of amortization 2,079,716 1,972,683
--------------- ---------------
$ 3,625,199 3,900,059
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY/ (DEFICIT)
CURRENT LIABILITIES
Short term borrowing $ 582,786 --
Advances from factor 1,437 --
Account payable 1,209,339 1,301,439
Stockholders' advance account 916,634 752,522
Licenses fees payable 457,715 67,831
Other accrued liabilities 1,325,524 2,290,729
--------------- ---------------
Total current liabilities $ 4,493,435 4,412,521
LONG TERM LIABILITIES
License fees payable 1,078,009 1,234,119
Convertible debentures 754,774 330,652
--------------- ---------------
Total long term liabilities $ 1,832,783 1,564,771
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, par value $0.001 - 900,000,000
Shares authorized, 21,774,212 and 29,040,955 issued
and outstanding $ 21,777 29,050
Additional paid in capital 1,650,841 4,576,739
Retained earnings (deficit) (3,933,998) (5,927,940)
Other comprehensive income (439,639) (755,082)
--------------- ---------------
Total stockholders' equity (deficit) (2,701,019) (2,077,233)
--------------- ---------------
$ 3,625,199 3,900,059
=============== ===============
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See accompanying notes to consolidated financial statements.
PEAK ENTERTAINEMNT HOLDINGS, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended Year ended
December 31, December 31,
2003 2004 (Restated)
-----------------------------------
Revenue 1,014,996 1,166,156
Cost of revenue
Cost of Goods Sold 725,066 596,651
-----------------------------------
Total cost of revenue 725,066 596,651
Gross profit 289,930 569,505
Operating expenses
Selling, general and administrative 2,614,593 2,343,790
Depreciation and amortization 173,830 430,227
-----------------------------------
Total operating expenses 2,788,423 2,774,017
-----------------------------------
Loss from operations (2,498,493) (2,204,512)
Gain/ (loss) on settlement of convertible
debentures and accrued interest -- 444,031
Foreign exchange gain 217,273 371,113
Interest expense (685,327) (604,574)
--
-----------------------------------
Net loss (2,966,547) (1,993,942)
===================================
Basic and diluted net loss per share $ (0.14) (0.077)
Weighted average common shares 20,562,980 25,942,440
outstanding
===================================
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See accompanying notes to consolidated financial statements.
PEAK ENTERTAINMENT HOLDINGS INC,
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
Accumulated
Additional Retained Other
paid in Earnings comprehensive
Shares Common stock capital deficit income/ (loss) Total
----------- ------------ ----------- ----------- -------------- -----------
Balance, December 31, 2002 19,071,684 19,075 (19,072) (967,451) (71,530) (1,038,978)
Issuance of stock, warrants,
debentures 2,702,528 2,702 1,669,913 -- -- 1,672,615
Net loss -- -- -- (2,966,547) -- (2,966,547)
Cumulative translation adjustment -- -- -- -- (368,109) (368,109)
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31,2003 21,774,212 $ 21,777 $ 1,650,841 ($3,933,998) ($ 439,639) ($2,701,019)
=========== =========== =========== =========== =========== ===========
Buy-back of debentures 1,000,000 1,000 (1,001,000) -- -- (1,000,000)
Issuance of convertible debentures 2,666,666 2,667 2,522,334 -- -- 2,525,001
Conversion of debentures 1,805,000 1,805 539,695 -- -- 541,500
Issuance of warrants in exchange
for future consulting service 632,077 638 133,655 -- -- 134,293
Issuance of common stock and
warrants in exchange for
cancellation of short-term debt 888,000 888 443,112 -- -- 444,000
Issuance of penalty shares 275,000 275 123,475 -- -- 123,750
Stan Lee (Unvested) -- -- 9,295 -- -- 9,295
Vintage Filings -- -- 155,332 -- -- 155,332
Net loss -- -- -- (1,993,942) -- (1,993,942)
Cumulative translation adjustment -- -- -- -- (315,443) (315,443)
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 2004
(Restated) 29,040,955 $ 29,050 $ 4,576,739 ($5,927,940) ($ 755,082) ($2,077,233)
=========== =========== =========== =========== =========== ===========
|
See accompanying notes to consolidated financial statements.
PEAK ENTERTAINEMNT HOLDINGS, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
Year ended Year ended
December 31, December 31,
2003 2004 (Restated)
--------------- ---------------
Net loss $ (2,966,547) (1,993,942)
Cumulative translation adjustment (368,109) (755,082)
--------------- ---------------
Comprehensive loss $ (3,334,656) (2,749,024)
=============== ===============
|
See accompanying notes to consolidated financial statements.
PEAK ENTERTAINMENT HOLDINGS, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended Year ended
December 31, December 31,
2003 2004 (Restated)
--------------- ---------------
Cash flows from operating activities
Net loss $ (2,966,547) (1,993,942)
Adjustment to reconcile net loss to net
cash used in operating activities:
Depreciation 14,460 22,580
Amortization of intangible assets 159,370 407,647
Foreign exchange gain/(loss) (217,273) 371,113
Amortization of discount on debentures 546,274 232,790
Gain on settlement of debentures -- (883,033)
Non-cash common stock expenses 506,287 --
Non-cash professional and consulting fees -- 1,497,360
Loss on sale of intangibles -- 578,337
Changes in working capital:
Accounts receivable 35,351 (459,726)
Inventories 26,982 163,577
Other current assets (434,445) (223,823)
Accounts payable and other accrued liabilities 1,669,647 (150,161)
--------------- ---------------
Net cash used in operating activities (659,894) (437,281)
=============== ===============
Cash flows from investing activities:
Purchase of plant and equipment (63,676) (71,029)
Purchase of intangibles (47,132) --
Proceeds from sale of plant and equipment 1,807 3,565
Issue of debentures -- 1,078,054
--------------- ---------------
Net cash (used in)/ provided by investing activities (109,001) 1,010,590
=============== ===============
|
See accompanying notes to consolidated financial statements.
PEAK ENTERTAINMENT HOLDINGS, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
Year ended Year ended
December 31, December 31,
2003 2004 (Restated)
--------------- ---------------
Cash flows from financing activities:
Short term borrowing, net 237,120 (160,028)
Stockholders' advances account (71,206) (239,942)
Advances from factor, net 1,437 --
Convertible debentures 785,000 --
--------------- ---------------
Net cash provided by/(used in) financing activities 952,351 (399,970)
=============== ===============
Cumulative translation adjustment (40,987) (315,443)
=============== ===============
Increase in cash and cash equivalents 142,469 (142,104)
Cash and cash equivalents, beginning of period 9,870 152,339
--------------- ---------------
Cash and cash equivalents, end of period $ 152,339 10,235
=============== ===============
Supplemental disclosures of cash flow information
Interest Paid $ 24,533 1,182
=============== ===============
Purchases of licenses through issuance of long
term liabilities $ 17,785 (407,036)
=============== ===============
Accounting for reserve acquisition 208,500 --
=============== ===============
Issuance of shares in settlement of liability 332,500 444,000
=============== ===============
|
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2004
1 Description of Business and Future Prospects
Peak Entertainment Holdings, Inc, formerly Peak Entertainment Ltd, was formed on November 20, 2001 as an integrated media group focused on children. Its activities include the production of television entertainment, character licensing and consumer products development, including toy and gift manufacturing and distribution. Integration enables Peak Entertainment Holdings, Inc to take property from concept to consumer in-house, controlling and co-ordinating broadcast, promotions and product launches (toys, apparel, video games, etc.) to build market momentum and worldwide brand quality. The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. As shown in the financial statements, at December 31, 2004 and for the twelve months then ended, the Company has suffered recurring losses, negative cash flows from operations, negative working capital, an accumulated deficit of $5,927,940 and a stockholders' deficiency of $2,077,233.
As shown in the accompanying financial statements, the Company incurred a net loss of $1,993,942 during the current period. Current economic conditions have limited the ability of the Company in acquiring additional equity capital.
In response to economic conditions, management has implemented expense reduction and revenue enhancements as well as initiated additional investor financing. Specifically, management has implemented reductions on the salaries of senior management. Also, nonessential capital expenditures, travel and other expenses have either been eliminated or postponed. Management has shifted its corporate and business development activities to focus strategic resources. To that end, the Company continues to pursue a three million dollar bridge financing round directed toward existing and strategic investors. Management believes the combination of these actions maximizes the probability of the Company's ability to remain in business. A portion of that capital has been secured recently but it is still uncertain at this stage whether the Company will be totally successful in accomplishing these objectives. Without this capital there is some uncertainty about the Company's ability to continue as a going concern though management are close to completing this transaction following the appointment of credible merchant bankers and management consultants. The financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.
The Company has developed a business plan to increase revenue by capitalizing on its integrated media products. The Company is in constant discussions with outside sources to provide the required funds to cover operational costs. This continuous need raises substantial doubt about the Company's ability to continue in existence. The financial statements do not contain any adjustments that might result from the outcome of this uncertainty. While the Company is optimistic that it can execute its business plan, there can be no assurance that;
a) increased sales necessary to obtain profitability will materialize, and
b) the Company will be able to raise sufficient cash to fund the additional working capital requirements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2004
2 Restatement of Financial Statements:
The staff of the Division of Corporation Finance of the Securities and Exchange Commission (the "Commission") issued comments on June 9, 2005 to the Company in connection with its review of the Company's Annual Report on Form 10-KSB/A for the year ended December 31, 2004 filed on May 16, 2005.
Based on these comments and discussions with the Commission, and after consultation with the Company's independent registered public accounting firm, Garbutt & Elliott Limited, the Company's management recommended, and its Board of Directors determined on June 24, 2005, that it restate its financial statements for the year ended December 31, 2004. As a result, the financial statements issued by the Company for the year ended December 31, 2004 should no longer be relied upon.
The Company's determination to restate these previously issued financial statements stems from comments from the Commission requesting information related to (i) the accounting of pre-production labor costs, and (ii) the nature, source, and basis for measurement of foreign exchange gain (loss).
Certain errors were made in the recording of pre-production expenses in connection with pre-production revenue in the year ended December 31, 2004, resulting in an increase in cost of revenues of $253,495 and a reduction in selling, general and administrative costs of the same value. The restatement adjustments record pre-production labor and associated costs connected to pre-production revenue, which were previously included within selling, general and administrative costs, as direct costs of revenues. This adjustment reduces selling, general and administration costs by $253,495 and increases costs of revenues by $253,495.
The foreign exchange gain arose from two sources: (i) translation adjustments, and (ii) adjustments arising from the Company's functional currency being UK pounds, which is the principal source of the foreign exchange gain (loss). A foreign exchange loss of $32,263 arising from the Company's functional currency being UK Pounds had been incorrectly included within foreign exchange gain within the consolidated statements of operations rather than the cumulative translation adjustment within the consolidated statements of comprehensive loss. The restatement adjustment reflects an additional element of the foreign exchange gain within the Statements of Comprehensive Loss rather than in the Statements of Operations. This had the effect of increasing the foreign exchange gain within the consolidated statements of operations by $32,263 and increasing the cumulative translation loss within the consolidated statements of comprehensive loss by $32,263.
The above items resulted in a reduction in net loss for the year ended December 31, 2004 of $32,263 offset by a similar increase in loss from cumulative translation adjustment such that the comprehensive loss for the year ended December 31, 2004 and the consolidated balance sheet totals at December 31, 2004 remain unchanged.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2004
3 Summary of Significant Accounting Policies
(A) Principals of Consolidation and Combination
The accompanying consolidated financial statements include the accounts of Peak Entertainment Limited, Jusco Toys Ltd, Jusco UK Ltd, Wembley Sportsmaster Ltd and Cameo Collectables Ltd after elimination of inter-company transactions and balances. Peak Entertainment Limited, Jusco Toys Ltd, Jusco UK Ltd, Cameo Collectables Ltd and Wembley Sportsmaster Ltd are wholly-owned subsidiaries of Peak Entertainment Holdings, Inc.
Cameo Collectables Ltd was formed on August 20, 2002 and was owned by Wilfred and Paula Shorrocks until February 7, 2003 when Peak Entertainment Holdings, Inc acquired the whole of the share capital of Cameo Collectables Ltd. Prior to February 7, 2003 the financial statements of Cameo Collectables Ltd were combined with Peak Entertainment Holdings, Inc as both entities were under common control.
(B) Basis of Preparation
The consolidated financial statements presented herein are restated.
The financial statements have been prepared on a going concern basis, the validity of which depends upon future funding being available. The validity of the going concern concept is also dependent upon the continued support of the directors.
Should such support be withdrawn and funding not made available, the company may be unable to continue as a going concern. Adjustments would have to be made to reduce the value of assets to their recoverable amount to provide for any further liabilities which might arise and to reclassify fixed assets as current assets.
(C) Risks and Uncertainties
The entertainment/media industry is highly competitive. The Company competes with many companies, including larger, well capitalized companies that have significantly greater financial and other resources. The Company's success is dependent upon the appeal of its entertainment products. Consumer preferences with respect to entertainment products are continuously changing and are difficult to predict. Therefore, the Company's success will depend on its ability to redesign, restyle and extend the useful life of products and to develop, introduce and gain customer acceptance of new entertainment products. The Company's ability, or inability, to manage these risk factors could influence future financial and operating results.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2004
2 Summary of Significant Accounting Policies (continued)
(D) Revenue Recognition
The Company generates revenues from three distinct sources; the license fees generated from the production of television entertainment, character licensing and sales of character related consumer products. Revenue from the production of television entertainment is recognized in accordance with Statement of Position 00-2 "Accounting by Producers or Distributors of Film". Under this guidance, the Company recognizes revenue from the sale of television entertainment when all of the following conditions are met:
1. Persuasive evidence of a sale or licensing arrangement with a customer exists,
2. The television episode is complete and, in accordance with the terms of the arrangement, has been delivered or is available for immediate and unconditional delivery,
3. The license period of the arrangement has begun and the customer can begin its exploitation, exhibition or sale, and
4. The arrangement fee is fixed or determinable.
Revenue from character licensing arrangements is recognized over the life of the agreement. Revenue from the sale of character related consumer products is recognized at the time of shipment when title of the products passes to the customer. Amounts received in advance are recorded as unearned revenue until the earnings process is complete.
(E) Intangible assets and amortization
Intangible assets are stated at cost less accumulated amortization and any provision for impairment. Amortization is provided on intangible fixed assets over their expected useful lives as follows:
Trade marks - 10 years Website development costs - 3 years
Licensing rights are amortised on a straight line basis over the term of the agreement, which range from 3 years - 20 years.
Web Site Development Costs
In March 2000, EITF No. 00-02, Accounting for Website Development Costs, was issued which addresses how an entity should account for costs incurred related to website development. EITF 00-02 distinguishes between those costs incurred during the development, application and infrastructure development stage and those costs incurred during the operating stage. The Company expenses all costs incurred during the development and operating stages. The Company evaluates costs incurred during the applications and infrastructure development stage using the guidance in Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use".
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2004
3 Summary of Significant Accounting Policies (continued)
(F) Plant and equipment
Plant and equipment are stated at cost, net of accumulated depreciation. Depreciation is provided on plant and equipment over their expected useful lives as follows:
Fixtures & fittings - 10 years Moulds and tooling - 5 years Computer equipment & software - 4 years |
Costs associated with the repair and maintenance of plant and equipment are expensed as incurred.
(G) Film and television costs
The Company capitalizes the costs of developing film and television projects in accordance with Statement of Position 00-2 "Accounting by Producers or Distributors of Film". These costs will be amortized using the individual-film-forecast-computation method, which amortizes costs in the same ratio that current period actual revenue bears to estimated remaining unrecognized ultimate revenue at the beginning of the current fiscal year. The Company has recorded no amortization to date as revenue has yet to be recognized.
(H) Asset Impairment
The Company periodically evaluates the carrying value of long-lived assets when events and circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such an asset is separately identifiable and is less than the carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved.
(I) Cash Equivalents
For purposes of the statements of cash flows, all temporary investments purchased with a maturity of three months or less are considered to be cash equivalents. The Company maintains bank accounts in the United States of America, United Kingdom and Hong Kong. The balances held in these accounts are $11,161, UK(pound)(1,123), and HK $1,998 respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2004
3 Summary of Significant Accounting Policies (continued)
(J) Inventories
Inventory is valued at the lower of cost or market, with cost being determined on the first-in, first-out basis. The Company reviews the book value of slow-moving items, discounted product lines and individual products to determine if these items are properly valued. The Company identifies these items and assesses the ability to dispose of them at a price greater than cost. If it is determined that cost is less than market value, then cost is used for inventory valuation. If market value is less than cost, then the Company establishes a reserve for the amount required to value the inventory at the market value. It the Company is not able to achieve its expectations of the net realizable value of the inventory at its current value, the Company adjusts its reserve accordingly. Inventory is comprised entirely of finished goods.
(K) Advertising costs
Advertising costs, included in selling, general and administrative expenses, are expensed as incurred and were $46,286 and $7,233 for the years ended December 31, 2003 and December 31, 2004, respectively.
(L) Foreign currencies
The Company uses the British Pound as its functional currency. Transactions denominated in foreign currencies are translated at the year-end rate with any differences recorded as foreign currency transaction gains and losses and are included in the determination of net income or loss. The Company has translated the financial statements into US Dollars. Accordingly, assets and liabilities are translated using the exchange rate in effect at the balance sheet date, while income and expenses are translated using average rates. Translation adjustments are reported as a separate component of stockholders' equity (deficit).
(M) Income taxes
Income taxes are provided based on the liability method of accounting pursuant to Statement of Financial Accounting Standards No 109 "Accounting for Income Taxes" ("SFAS 109"). In accordance with SFAS No 109, deferred tax assets are recognised for deductible temporary differences and operating loss carry forwards, and deferred tax liabilities are recognised for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
(N) Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from such estimates.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2004
3 Summary of Significant Accounting Policies (continued)
(O) Earnings Per Share
Earnings per share is based on the weighted average number of shares of common stock and dilutive common stock equivalents outstanding. Basic earnings per share includes no dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that could share in the earnings of an entity.
Basic and diluted earnings per share are the same during the year ended December 31, 2003 and 2004 as the impact of dilutive securities is antidilutive. There were 7,050,000 warrants to purchase shares of the Company's common stock outstanding as of December 31, 2004.
(P) Warrants
The Company issues warrants to purchase shares of its common stock in exchange for services and in combination with the sale of convertible debentures. The Company accounts for warrants issued in exchange for services in accordance with EITF 96-18 "Accounting for Equity Instruments that are Issued to other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services". The Company records expenses based on the fair value of the equity instruments. The Company measures the fair value of the equity instruments using the stock price and other measurement assumptions as of the earlier of (1) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty's performance is complete.
For the purposes of calculating earnings per share, the Company has retroactively restated its outstanding common stock based upon the stock split declared on April 22, 2003.
The Company accounts for warrants issued in combination with convertible debentures in accordance with the provisions of EITF 00-27 "Application of EITF 98-5 to Certain Convertible Instruments". Under the provisions of EITF 00-27, the Company allocates the total proceeds received between the convertible debentures and the warrants based on their relative fair value at the date of issuance.
(Q) Recent Accounting Pronouncements
In January 2003, the FASB issued Interpretation ("FIN") No. 46, "Consolidation of Variable Interest Entities" and in December 2003, a revised interpretation was issued (FIN No. 46, as revised). In general, a variable interest entity ("VIE") is a corporation, partnership, trust, or any other legal structure used for business purposes that either does not have equity investors with voting rights or has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46, as revised requires a VIE to be consolidated by a company if that company is designated as the primary beneficiary. The interpretation applies to VIEs created after January 31, 2003, and for all financial statements issued after December 15, 2003 for VIEs in which an enterprise held a variable interest that it acquired before February 1, 2003. The adoption of FIN 46, as revised, did not have a material effect on the Company's financial position or results of operations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2004
3 Summary of Significant Accounting Policies (continued)
(Q) Recent Accounting Pronouncements (continued)
In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No 123, "Share-Based Payment" ("SFAS Statement 123R") which replaces SFAS No 123, "Accounting for Stock-Based Compensation," and supercedes APB Opinion No 25, "Accounting for Stock Issued to Employees." This statement requires that all share-based payments to employees be recognized in the financial statements based on their fair values on the date of grant. SFAS No 123R is effective as of the beginning of the first interim or annual reporting period that begins after December 31, 2005 and applies to all awards granted, modified, repurchased or cancelled after the effective date. The Company is evaluating the requirements of SFAS 123R and expects that its adoption will not have a material impact on the Company's consolidated results of operations and earnings per share.
In December of 2004, the FASB issued SFAS No 153, "Exchanges of Nonmonetary Assets - an Amendment of APB Opinion No 29" (SFAS 153). SFAS 153 eliminates the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS 153 is effective for fiscal years beginning after June 15, 2005 and is required to be adopted by the Company in the first quarter of 2006. The Company does not believe that the adoption of SFAS 153 will have a material impact on the Company's consolidated results of operations or financial condition.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2004
4 Significant current assets and liabilities
Included within current assets and current liabilities are the following significant balances:
December 31, December 31,
2003 2004
------------ ------------
Other current assets
Prepaid consulting 153,990 --
Accrued royalty income 88,925 826,242
Monies in Escrow 276,379 --
Other current assets 69,145 35,486
============ ============
588,439 861,728
============ ============
Accounts payable
UK professional fees 182,866 373,613
US professional fees -- 222,160
Stock supplies - Countin' Sheep 164,355 --
TV animation costs - Monster Quest 119,720 129,689
Other accounts payable 742,398 575,977
============ ============
1,209,339 1,301,439
============ ============
Other accrued liabilities
Consultancy fees 188,521 196,513
Wumblers pilot show costs 271,954 111,448
Deferred royalties income 68,734 957,060
Sales and payroll taxes 193,084 409,195
Debenture interest 120,424 100,802
Legal fees 97,753 --
Other accrued liabilities 385,054 515,611
============ ============
1,325,524 2,290,629
============ ============
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2004
5 Plant and Equipment
Plant and equipment comprise the following:
2003 2004
Fixtures and fittings $ 135,966 $ 74,051
Moulds and tooling 105,674 123,124
Computer equipment & software 41,405 103,699
------------ ------------
283,045 300,874
Accumulated depreciation 84,800 41,225
------------ ------------
198,245 259,649
============ ============
|
The Company can now utilize the moulds and tooling acquired from the acquisition of Jusco Toys Ltd (Hong Kong). The Company owns other moulds and tooling included above that has a cost of $13,670, which it is currently using and hence depreciating.
6 Intangible Assets
Intangible assets comprise the following at December 31, 2004.
Cost Accumulated Total
amortization
Licences $1,365,959 $ 193,214 $1,172,745
Trademarks 136,642 9,947 126,695
Film and television costs 663,814 -- 663,814
Website costs 24,930 15,501 9,429
---------- ---------- ----------
$2,191,345 $ 218,662 $1,972,683
========== ========== ==========
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2004
6 Intangible Assets (continued)
Intangible assets comprise the following at December 31, 2003.
Cost Accumulated Total
amortization
Licences $1,984,870 $ 213,982 $1,770,888
Trademarks 126,138 4,025 122,113
Film and television costs 170,338 -- 170,338
Website costs 23,014 6,637 16,377
---------- ---------- ----------
$2,304,360 $ 224,644 $2,079,716
========== ========== ==========
|
As of December 31, 2004, the estimated aggregate amortization expense, based on current levels of intangible assets for the succeeding five years is as follows:
$
December 31, 2005 80,606
December 31, 2006 391,838
December 31, 2007 391,838
December 31, 2008 391,838
December 31, 2009 386,877
7 Income Taxes
|
The components of the deferred tax balances at December 31, 2003 and 2004 are as follows.
2003 2004
Deferred tax assets - non - current
Loss carry forwards $ 728,959 $ 919,690
--------- ---------
Total deferred tax assets 728,959 919,690
--------- ---------
Deferred tax liabilities - current
Depreciation and amortization not currently
deductible for tax purposes 19,401 --
--------- ---------
Total deferred tax liabilities 19,401 --
--------- ---------
Net deferred tax asset before valuation
allowance 709,558 919,690
Valuation allowance (709,558) (919,690)
--------- ---------
Net deferred tax asset $ -- $ --
========= =========
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2004
7 Income Taxes (continued)
The Company's effective tax rate of 0% differs from the statutory rate of 30% due to the fact that the Company, at this point in time, considers it more likely than not that the deferred tax asset related to net operating loss carryforwards will not be recognized. Accordingly, deferred tax assets at December 31, 2003 and 2004 have been reduced by a valuation allowance relating to the tax benefits attributable to net operating losses. Operating losses can be carried forward indefinitely in the United Kingdom. At December 31, 2004 net operating loss carry forwards totaled $3,065,635.
It has been assumed that any losses will be utilised against the first available profits at a tax rate of 30% but a tax rate of 19% may be used, if the small Company rate of tax is utilised.
8 Short Term Borrowings
On July 10, 2002, the Company borrowed $240,000 from an individual lender. The debt bears interest at 20% per year. The debt and all accrued interest was originally due on January 10, 2003. The debt has not been fully repaid and is due upon demand. Accordingly, the outstanding debt of $220,937 and all accrued interest totaling $115,596 is included in short term borrowings. The debt is collateralized by certain inventory of the Company's subsidiary, Jusco UK Ltd.
In November 2003, the Company borrowed $250,000 from an individual lender. There were no terms for repayment and no interest was charged to the Company during the quarter. On April 28, 2004, the Company entered into an agreement whereby it exchanged the debt of $250,000 for 500,000 shares of common stock. See note 10.
9 Advances from Factor
On January 13, 2003 the Company entered into an invoice factoring agreement with IFT London Ltd ("IFT"). Under the agreement, the Company specifically identified receivables that it wanted to receive advances on and submitted them to IFT. Once IFT approved the receivables that were submitted, the Company received 70% of the invoice amount. Customers were then instructed to pay IFT directly. When the customer paid the entire outstanding balance to IFT, the Company received the remaining 30% of the invoice amount, less a financing charge equal to 8% of the total invoice amount. The Company no longer factors receivables through this agreement.
On October 2, 2003 Cameo Collectables Limited entered into an invoice factoring agreement with Arbuthnot Commercial Finance Ltd ("ACF"). Under the agreement, the Company identified receivables that it wanted to factor and submitted them to ACF. Once ACF approved the receivables that were submitted it purchased the receivables with recourse and invoiced the customers direct. ACF paid 100% of the invoice amount to a current account on the collection date. Customers paid ACF directly.
ACF's financing charge of 1.75% of the total invoice amount was debited to the current account. The Company was entitled to withdraw any credit balance on the current account representing cleared funds.
The Company accounted for this arrangement in accordance with Statement of Financial Accounting Standard No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." Under the agreement any invoice not paid 6 months after the date on which it was due to be paid can be re-sold back to the Company. Accordingly, the Company recorded the advances received as a liability until the customer invoice is paid in full. In addition, the Company recognized the interest charge in full at the time the initial advance was received. The assets of Cameo Collectables Limited are pledged as security to Arbuthnot Commercial Finance Limited.
The above agreements ceased on the 21 January 2005.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2004
10 Convertible debentures
Convertible debentures are comprised of the following as at December 31, 2004:
Old convertible debentures $
Balance at December 31, 2003 754,774
Settlement and release agreement (754,774)
========
New convertible debentures:
Amortized debt discount quarter ended March 31, 2004 120,424
Amortized debt discount quarter ended June 30, 2004 128,586
Released on conversions during quarter ended September 30, 2004 (90,104)
Amortized debt discount quarter ended September 30, 2004 87,035
Amortized debt discount quarter ended December 31, 2004 84,747
Balance at December 31, 2004 330,652
========
11 Commitments
|
The Company leases buildings under non-cancelable operating leases. Future minimum lease payments under those leases are as follows at December 31, 2004:
Rent expense for all operating leases charged against earnings amounted to $69,028 in 2003 and $57,109 in 2004.
12 Contingent Liabilities
As at March 31, 2005, we are not a party to any material pending legal proceeding, other than ordinary routine litigation incidental to our business and except as described below.
In 2002, we entered into an agreement with CK Supermarket to provide working capital on a short-term basis secured against certain inventory of our subsidiary, Jusco UK Ltd. At December 31, 2004, the balance was $386,095 including interest of $115,596.. The debt was originally due on January 10, 2003. At March 31, 2004, it was envisaged that the loan would be repaid in 2004 from revenues from the sale of inventory. In May 2004, the lender notified us regarding immediate payment of the balance owed. We have been and remain in discussion with the lender regarding the repayment of the debt through a combination of cash from the sale of certain inventory and the issuance of our securities. In the event the repayment issue is not resolved, the lender could institute a legal proceeding against our subsidiary, Jusco UK Ltd, seeking repayment. The lender has a security interest on the assets of our subsidiary, Jusco UK Ltd., but does not have a security interest in our parent company or our other subsidiaries. As CK Supermarket has previously targeted the assets of Jusco UK Ltd. for use in repaying the lender, we believe that a proceeding against our subsidiary, Jusco UK Ltd. would not have a material effect on our operations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2004
12 Contingent Liabilities (continued)
On January 26, 2004, we entered into an agreement with POW! Entertainment LLC for the development and exploitation of the property "Tattoo - the Marked Man". We have the worldwide distribution and merchandising rights in perpetuity and the agreement describes a payment of $250,000 to fund project development. The payment was subject to certain deliverables from POW! upon which payment was anticipated to be made on the earlier of August 31, 2004 or ten business days after the effective date of our registration statement filed in February 2004. Stan Lee is to develop the concept, based on characters created by the Shorrocks. The project was geared toward creating a motion picture based on the character. The parties were to share all profits received from the project, after deduction of expenses, and in addition, POW would have been entitled to any executive producer fees from theatrical and television releases. We have not yet paid the amounts due to POW! under the agreement, and it appears that the transaction has been abandoned. We believe that we have meritorious defenses to any potential claims.
On August 13, 2004, in a labor action entitled Thomas Bernard Skahill v. Peak Entertainment Holdings, Inc. before the Labor Commissioner of the State of California, the Company was ordered to pay $24,358.27 in wages, expenses, penalties, and interest in connection with an employment claim. We are informed that the matter was confirmed as a judgment on or about October 15, 004 by the Superior Court of the State of California in the amount of $24,938.57.
We are informed that on or about April 6, 2004, James E. Skahill and Marie
A. Skahill filed a complaint for damages for breach of contract against
Peak Entertainment Ltd. before the Superior Court of the State of
California for the County of Los Angeles, Northeast District, Case No.
GC033622 alleging breach of a lease and seeking damages in an amount to be
determined. We believe that the matter was not properly commenced with
proper service upon Peak Entertainment Ltd. We have not submitted a
response to the matter before the Superior Court of the State of
California. We are unaware of the present status of the matter before the
Superior Court of the State of California and we are unable to evaluate
the likelihood of an unfavorable outcome, nor provide an estimate of the
amount or range of potential loss.
On January 5, 2004, we completed a transaction, pursuant to a Settlement Agreement and Release dated as of December 22, 2003, with former debenture holders: AJW Partners, LLC, New Millennium Capital Partners II, LLC, AJW Offshore, Ltd, and AJW Qualified Partners, LLC. Pursuant to the terms of the settlement agreement, the former debenture holders had the right, thirteen months after the closing of the transaction, to provide notice to the Company of an exercise of a "put" right pursuant to which we would buy from the former debenture holders all of the 1,000,000 shares of common stock issued to them pursuant to the settlement agreement, at the price of $0.75 per share. Pursuant to the terms of the settlement agreement, the former debenture holders were to provide us with written notice if they wished to exercise the put right after thirteen months and prior to one year and two months after the closing of the transaction, at the expiration of which, the put right terminates. Closing on the put was to occur within ten business days from receipt of notice of the put. On or about January 10, 2005, the former debenture holders submitted a notice to exercise the put right. On or about January 26, 2005, the former debenture holders resent the January 10, 2005 notice to exercise the put right. We believe that the notice was not properly submitted in accordance with the notice procedures provided in the settlement agreement. To the best of our knowledge, and after inquiry to the counsel for the former debenture holders of the "put", no notice of exercise of the "put" was sent to us. Accordingly, we considered the notice ineffective and did not honor the notice. In or about March 2005, an agent for the former debenture holders informed us that the former debenture holders may institute a legal proceeding to enforce their put rights. We understand that the former debenture holders filed a lawsuit in this regard in or about March 21, 2005. As of May 6, 2005, we have not been served with the lawsuit. In the event that we are served with a lawsuit, we intend to contest the matter vigorously. We may be required to pay $750,000 for repurchase of 1,000,000 shares of common stock from the former debenture holders, plus potential interest and costs, if we lose such threatened litigation.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2004
13 Transactions with related parties
The relationship between the Company and its related parties are:
Wilfred and Paula Shorrocks are deemed to be related parties as they are directors and shareholders of Peak Entertainment Holdings, Inc.
Terence Herzog and Michael Schenkein are deemed to be related parties as they are principals of Agora Capital Partners Inc, a management consulting company. They were directors of Peak Entertainment Holdings, Inc. Terence Herzog is a shareholder of Peak Entertainment Holdings, Inc. In December 2004, Mr. Herzog and Mr. Schenkein resigned as directors of the Company.
During the period the company had the following transactions with its related parties:
a) Wilfred and Paula Shorrocks
i) Movements on stockholders' advances account
Balance due by company, December 31,2002 $ 894,193
Reapayments (71,206)
Foreign exchange loss 93,647
Balance due by the Company, December 31, 2003 $ 916,634
Cash advances 88,598
Repayments (247,390)
Foreign exchange loss (5,320)
---------
Balance due by the Company at December 31, 2004 $ 752,522
=========
|
Interest amounting to $24,038 in the year to December 31, 2004 and $nil in the year to December 31, 2003 has been accrued.
On March 24, 2004, the Company signed a promissory note which established a repayment schedule for the amounts advanced by the stockholders. The amount advanced is to be repaid in installments of $25,000 on January 31, 2005, May 31, 2005, September 30, 2005, December 31, 2005, March 31, 2006 and September 30, 2006 and installments of $100,000 on March 31, 2007 and September 30, 2007, with any balance to be repaid in full on January 31, 2008.
Interest will accrue commencing July 1, 2005 on any unpaid balance, at 8% per annum.
The promissory note provides for earlier repayment of any unpaid balance subject to various future financial results of the Company.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2004
13 Transactions with related parties (continued)
ii) License agreement
On April 30, 2002, the Company entered into a license agreement with Wilfred and Paula Shorrocks whereby the Company acquired the exclusive rights to apply various intellectual properties to the manufacture, distribution and sale of products on a worldwide basis. Under the terms of the agreement the Company has undertaken to pay to Wilfred and Paula Shorrocks a guaranteed minimum royalties amount of US $1,000,000, with the agreement treated for accounting purposes as due to expire on December 31, 2023. On April 14, 2004, the Company entered into an amendment of the license agreement which established a minimum quarterly royalty payment of $12,500 beginning September 30, 2004. This liability is included in license fees payable and the related asset is included in intangible assets.
On February 25, 2002, the Company entered into a license agreement for rights to Monsters In My Pocket from Morrison Entertainment Group, Inc., in which Wilfred and Paula Shorrocks were also parties. Pursuant to the agreement, Wilfred and Paula Shorrocks were individually entitled to a certain percentage of the revenues. The Company was entitled to 10% of the revenues from the United States, 35% of the revenues from the United Kingdom, and 40% of the revenues from other territories. Morrison Entertainment Group was entitled to 60% of the revenues from the United States, 32.5% of the revenues from the United Kingdom, and 30% of the revenues from other territories. The Shorrocks were entitled to 30% of the revenues from the United States, 32.5% of the revenues from the United Kingdom, and 30% of the revenues from other territories. The revenue allocation referred to revenues from character and merchandise licensing and sales activities, and the allocation was to be adjusted for entertainment production financing terms. In October 2004, Morrison Entertainment Group sent the Company a notice terminating any and all agreements with the Company. On December 22, 2004, the Company entered into an agreement with Morrison Entertainment Group, whereby the parties dissociated the Company's Monster Quest property and products from Morrison Entertainment Group's Monster In My Pocket property and products. Any and all agreements between the parties entered into prior to December 22, 2004, including license agreements, were terminated.
b) Terence Herzog and Michael Schenkein
i) Consulting services
From March 2003 through June 2004, Agora Capital Partners Inc, through Terence Herzog and Michael Schenkein, has provided management consulting services to the Company. The Company paid aggregate fees of $nil in the year to December 31, 2004 and $46,000 in the year to December 31, 2003.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2004
14 Warrants
On July 24, 2003, pursuant to a consulting agreement with POW! Entertainment LLC and Stan Lee, the Company issued to POW warrants to purchase 750,000 shares of the Company's common stock exercisable for five years at $0.35 per share in exchange for consulting services to be provided over a three year term. Warrants to purchase 375,000 shares of common stock vested upon execution of the consulting agreement, and the remaining warrants to purchase 375,000 shares of common stock vested on July 24, 2004. POW has the right to demand registration of the shares of common stock underlying the warrant at the Company's expense, although no demand had been received at the date of this report.
The warrants have been valued using the Black-Scholes Option Model. The value of the warrants that vested immediately was $390,000 on the date of grant. The value of these warrants has been recorded as deferred professional fees and will be amortized to earnings ratably over the three year service period.
The value of the warrants that were subject to future vesting, and vested on July 24, 2004, were determined at the end of each reporting period. The Company recorded the expense for each quarter based on the value of the warrants at the end of each reporting period. For the quarter ended June 30, 2004, the Company recorded an expense of $10,918 related to these warrants, and for the six months ended June 30, 2004, the Company recorded an expense of $9,295.
On July 15, 2003, pursuant to a consulting agreement with Mr Jack Kuessous, the Company issued to Mr Kuessous warrants to purchase 240,000 shares of the Company's common stock with an exercise price of $1.20 per share in exchange for consulting services over a one year period. The warrants vested immediately upon execution of the consulting agreement. The warrants have been valued using the Black-Scholes Option Model and had a value of $263,983 on the date of grant. The value of these options has been recorded as a current asset and has been fully amortized to earnings.
On December 17, 2003, the exercise price of the warrants held by Mr. Kuessous was changed from $1.20 per share to $0.50 per share. The amount to be expensed over the remaining service period related to the $1.20 warrants was the remaining unamortized fair value of the $0.50 warrants as of December 17, 2003, plus the amount by which the fair value of the $1.20 warrants valued as of December 17, 2003 was greater than the fair value of the $0.50 warrants immediately before the terms were modified. The Company used the Black-Scholes Option Model and determined that the value of the $0.50 warrants immediately prior to the conversion of the terms was essentially the same as the $1.20 warrants granted on December 17, 2003. Accordingly, the Company has now fully amortized the original value of $263,983.
In July 2003, Mr Kuessous advanced the Company $100,000. On December 17, 2003, the Company entered into a "Cancellation of Debt in Exchange for Securities Agreement", whereby Mr Kuessous cancelled the $100,000 owed to him by the Company in exchange for 583,333 shares of common stock of the Company and 150,000 common stock purchase warrants with an exercise price of $0.50 per share. The warrants vested immediately and are exercisable over a three year period. The warrants have been valued using the Black-Scholes Option Model and had a value of $79,449 at the date of grant and the common stock had a value of $332,500 on the date of issuance. The total value of the common stock and warrants is $411,995 and was compared with the $100,000 carrying value of the advances, resulting in an additional expense of $311,995, which was included in selling, general and administrative expenses in 2003.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2004
14 Warrants (continued)
On January 5, 2004, the Company completed a "Settlement Agreement and Release" with former holders of 12% convertible debentures. Under the agreement, the Company exchanged $1,000,000 and 1,000,000 shares of unregistered common stock in return for the surrender of an aggregate of $215,000 principal amount of 12% convertible debentures, accrued interest and warrants to purchase 645,000 shares of common stock, issued pursuant to a "Securities Purchase Agreement" dated as of February 28, 2002, and an aggregate of $785,000 principal amount of 12% convertible debentures, accrued interest and warrants to purchase 1,570,000 shares of common stock, issued pursuant to a "Securities Purchase Agreement" dated as of April 22, 2003. The $1,000,000 consisted of $500,000 paid on January 5, 2004 and $500,000 in promissory notes, which was subsequently paid on March 22, 2004. The agreement provided that, after a period of thirteen months from January 2004, all of the 1,000,000 shares of common stock still owned at that time by the former debenture holders may be put to the Company at a price $0.75 per share, on an all-or-none basis, for a one month period. The Company also paid for $10,000 of the former debenture holders' legal fees and expenses in connection with the transaction.
The Company accounted for this transaction in accordance with EITF 00-27 "Application of Issue 98-5 to Certain Convertible Instruments". Accordingly, the Company first allocated the consideration paid based on the fair value of the warrants to be repurchased and the beneficial conversion features as of January 5, 2004. Any remaining consideration was used to offset the carrying value of the convertible debentures and accrued interest and resulted in a gain on the extinguishment of the debt. The Company determined that the fair value of the warrants to be repurchased and the beneficial conversion features at January 5, 2004 exceeded the total consideration to be paid of $1,580,000. Accordingly, the Company recorded a gain on the extinguishment of the convertible debentures and accrued interest. In accordance with FAS 133, the 1,000,000 shares of common stock are considered an embedded derivative instrument and recorded as equity.
On January 5, 2004, the Company entered into "Securities Purchase Agreements" with four accredited investors. Pursuant to the agreements, the Company sold $1,500,000 in 8% convertible debentures due January 5, 2007 and 3,000,000 common stock purchase warrants, exercisable for five years at $0.50 per share. The purchase price totaled $1,500,000, of which $750,000 was paid in cash, and $750,000 by promissory notes. The principal amount of the debentures, plus any accrued and unpaid interest on the debentures, may be converted into shares of common stock at the conversion price of $0.30 per share. The conversion price may be adjusted downward for issuances of securities by the Company at prices below the lower of $0.50 per common share, or fair market value for such securities as determined at the time of issuance. Annual interest payments on the debentures are due on January 7 of each year, commencing January 7, 2005. At the option of the Company, interest payments may be accrued beyond the annual interest payment date, in which event the debenture holder shall have the option to accrue the interest payment then due for another interest payment period, or cause the Company to issue common stock in exchange for interest. Unless upon 75 days prior written notice, the debenture and warrant holder may not convert the debentures or warrants for shares of common stock to the extent that such conversion would cause it to beneficially own 4.9% or more of our then issued and outstanding common stock. After the tenth consecutive business day in which the common stock trades at $3.00 or greater, the warrants become redeemable at $0.10 per warrant.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2004
14 Warrants (continued)
The warrants have been valued using the Black-Scholes Option Model at a value of $1,649,901 at the date of grant. A discount of the full amount of the debt was recorded and will be amortized over the life of the debt of approximately 3 years.
During the quarter to September 30, 2004, $541,000 of the 8% convertible debentures was converted at $0.30 per share into 1,805,000 shares of common stock. A loss on conversion of $481,395 was recognized during that quarter.
On January 23, 2004, the Company entered into an agreement for services to be provided over twelve months with Vintage Filings, LLC. It issued 300,000 common stock purchase warrants, which vested immediately and are exercisable for three years at $0.50 per share pursuant to the agreement. The warrants have been valued using the Black-Scholes Option Pricing Model and have a value of $224,988 at the date of grant. The value of the warrants will be recorded as additional selling, general and administrative expenses ratably over the twelve month service period.
On January 29, 2004, the Company entered into a "Securities Purchase Agreement" with Shai Stern. Pursuant to the agreement, it issued $50,000 in 8% convertible debentures due January 29, 2007 and 100,000 common stock purchase warrants. The principal amount of the debentures, plus any accrued and unpaid interest on the debentures, may be converted into shares of common stock at the conversion price of $0.30 per share. Annual interest payments on the debenture are due on January 29 of each year, commencing with January 29, 2005. At the option of the Company interest payments may be accrued beyond the annual interest payment date, in which event the debenture holder shall have the option to accrue the interest payment then due for another interest payment period, or cause the Company to issue common stock in exchange for interest. The warrants are exercisable for three years at a price of $0.50 per share. After the tenth consecutive business day in which the common stock trades at $3.00 or greater, the warrants become redeemable at $0.10 per warrant.
The warrants have been valued using the Black-Scholes Option Pricing Model and have a value of $51,997 at the date of grant. The Company has recorded these debentures and warrants in accordance with the provisions of EITF 00-27 "Application of Issue 98-5 to Certain Convertible Instruments". Under the provisions of EITF 00-27, the Company has allocated the total proceeds received between the convertible debentures and the warrants based on their relative fair value at the date of issuance. The Company has then estimated the intrinsic value of the beneficial conversion feature. The Company has determined that the intrinsic value of the beneficial conversion feature exceeds the face value of the debt and accordingly, the Company has recorded a debt discount of $50,000. The debt discount will be amortized as interest expense over the life of the debentures, which is three years.
On September 28, 2004, the Company entered into a "Securities Purchase Agreement" with three accredited persons. Pursuant to the agreements, the Company sold 1,666,666 shares of common stock and 1,750,000 common stock purchase warrants, exercisable for three years at $0.50 per share, for an aggregate purchase price of $500,000.
Prior to the termination date, the warrant shall be callable, under the circumstances described below, at the discretion of the company, for $0.10 per warrant. The Company's right to call shall be exercisable commencing upon the day following the tenth consecutive business day during which the Company's common stock has traded at prices of, or in excess of, $1.75 per share, subject to adjustment for stock splits, dividends, subdivisions, reclassification and the like, with weekly volume of such trading being in excess of the total number of shares represented by this warrant. In the event the Company exercises its right to call the warrants, the Company shall give the Holder written notice of such decision. In the event that the Holder does not exercise all or any part of the warrants or the Company does not receive the warrant from the Holder within 30 days from the date on the notice to the Holder of the Company's intension to redeem the warrant, then the warrant shall be deemed canceled, and the holder shall not be entitled to further exercise thereof or to the redemption fee.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2004
14 Warrants (continued)
The value of the stock and warrants is made more difficult due to the call provision of the warrant, which reduces the value of the warrant. The Company recognizes that due to the call provision it is inappropriate to value the warrant using the Black-Scholes Option Model. The Company has calculated the fair value of the common stock at a price of $0.21 per share, being the trading price at September 28, 2004. The remaining proceeds of $150,000 have been allocated as the value of the warrants at the date of the grant.
15 Share transactions
On February 11, 2004, the Company entered into a financial advisor agreement with Ameristar International Capital, Inc. It issued 100,000 shares of common stock as an initial equity fee pursuant to the agreement. These shares had a fair value of $43,000 at the date of grant. The Company has recorded the value of the common stock as an expense, as there is no continuing benefit.
In 2003, the Company entered into an agreement with William Ivers in connection with business consulting services, relating to the preparation of a written business plan rendered by Mr Ivers. In exchange for these services, the Company agreed to pay $19,012 in cash and issue 16,667 shares of common stock at a future date. On February 12, 2004, the Company issued 16,667 shares of common stock to Mr Ivers at a value of $8,333 at the date of grant. Accordingly, the Company expensed the value of the shares at December 31, 2003 and recorded a corresponding liability.
In 2003, the Company entered into an agreement with Lou Schneider in connection with business consulting services, related to establishing potential apparel-related licensing relationships with third parties, rendered by Mr Schneider. In exchange for these services, the Company agreed to issue 20,000 shares of common stock at a future date. On February 12, 2004, the Company issued 20,000 shares of common stock to Mr Schneider at a value of $10,000 at the date of grant. Accordingly, the Company expensed the value of the shares at December 31, 2003 and recorded a corresponding liability.
In 2003, the Company entered into an agreement with Rolin Inc to provide financial advisory services in exchange for common stock of the Company. On February 12, 2004, the Company issued an aggregate of 20,409 shares of common stock to Rolin Inc. These shares had a fair value of $10,204 at the date of grant. The Company has recorded the transaction as professional fees expensed in the quarter ended March 31, 2004.
On March 10, 2004, the Company entered into "Securities Purchase Agreements" with eleven accredited investors. Pursuant to the agreements, the Company sold an aggregate of 1,000,000 shares of common stock and 600,000 common stock purchase warrants, exercisable for three years at $0.75 per share, for a total purchase price of $500,000.
Legend Merchant Group, Inc acted as the placement agent for the above transaction. All of the purchasers were pre-existing customers of Legend Merchant Group. The Company paid Legend a fee of $25,000, and 100,000 common stock purchase warrants exercisable for three years at $0.50 per share and 60,000 common stock purchase warrants exercisable for three years at $0.75 per share, for its services. The warrants have been valued using the Black-Scholes Option Pricing Model and have a value of $92,794 at the date of grant which was March 10, 2004 The total fee of $117,744 has been offset against the proceeds of the offering.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2004
15 Share transactions (continued)
On September 1, 2004, the Company entered into a consultancy agreement with CEOcast, Inc. to provide consultancy services for a six month period commencing September 1, 2004, in exchange for 400,000 shares of common stock of the Company. These shares had a value of $44,000 at the date of grant.
On August 17, 2004, the Company issued 75,001 shares to Portfolio PR in connection with professional services provided. The shares had a value of $18,750 at the date of the grant. The Company expensed $36,000 as professional fees during the quarter, being the value of professional services received, and recognized a profit of $17,250 on issue of the shares.
16 Reverse Acquisition
On April 22, 2003, Palladium Communications, Inc. ("Palladium') (a US public company) issued 19,071,684 shares of its common stock for all of the outstanding common stock of Peak Entertainment Holdings, Inc. Immediately prior to the transaction, Peak Entertainment Holdings, Inc authorized a stock split so that the outstanding shares of common stock were increased from 2 to 19,071,684. Immediately after the transaction, the shareholders of Peak Entertainment Holdings, Inc (Wilf and Paula Shorrocks) owned approximately 90% of the outstanding common stock of Palladium. This transaction has been accounted for as a reverse acquisition of a public shell. The accounting for a reverse acquisition with a public shell is considered to be a capital transaction rather than a business combination. That is, the transaction is equivalent to the issuance of common stock by Peak for the net monetary assets of Palladium, accompanied by a recapitalization. Palladium's net deficit has been recorded at carryover basis and no goodwill was generated in the transaction. The net deficit of Palladium, $215,500, at the time of transaction is included in stockholders' equity. The other side of this transaction is to add $215,500 in liabilities related to convertible debentures to the historical financial statements of Peak Entertainment Holdings Inc. The historical financial statements of the "registrant" become those of Peak Entertainment Holdings, Inc. Subsequent to the transaction, Palladium changed its name to Peak Entertainment Holdings, Inc.
17 Stockholders' Equity
Immediately following the reverse acquisition on April 22, 2003, the Company entered into an agreement for the issuance of up to $785,000 in convertible debentures and warrants to purchase 1,570,000 shares of the Company's common stock. The Company received $300,000 at the time of execution of the agreement for the issuance of the debentures and warrant and received the remainder of $250,000 on June 26, 2003 and $235,000 on July 11, 2003. The debentures and warrants were subsequently repurchased in January 2004.
The debentures carried interest at 12%, matured one year from the date of issuance and were convertible at the option of the holder at the lower of $1.00 or 50% of the average of the three lowest intra-day trading prices for the common stock on a principal market for the 20 trading days before but not including the conversion date. The warrants were exercisable for five years at $0.31 per share.
The Company recorded these debentures and warrants in accordance with the provisions of EITF 00-27 "Application of Issue 98-5 to Certain Convertible Instruments". Under the provision of EITF 00-27, the Company allocated the total proceeds received between the convertible debentures and the warrants based on their relative fair values at the date of issuance. The Company then estimated the intrinsic value of the beneficial conversion feature resulting from the ability of the debenture holders to convert at a 50% discount. As a result, the Company recorded a debt discount of $785,000. The debt discount was amortized as interest expense over the life of the debentures of one year.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2004
17 Stockholders' Equity (continued)
On February 28, 2002, Palladium, the predecessor to Peak Entertainment Holdings, Inc entered into an agreement pursuant to which Palladium issued $215,000 in convertible debentures and issued warrants to purchase 645,000 shares of the Company's common stock exercisable for five years at $0.31 per share. These debentures and warrants were subsequently repurchased in January 2004.
On April 28, 2004, the Company entered into an agreement with Laura Wellington, whereby it exchanged a debt of $250,000 owed to Ms Wellington for 500,000 shares of common stock. Ms Wellington had loaned $250,000 to the company in November 2003. The total value of the common stock at the date of grant was $250,000 compared with the $250,000 carrying value of the advance, so there was no additional expense.
On July 23, 2004, the Company entered into an agreement with Laura Wellington, whereby it exchanged a debt of $194,000 owed to Ms Wellington for 388,000 shares of common stock. The total value of the common stock at the date of the grant was $194,000 compared with the $194,000 carrying value of the debt, so there was no additional expense.
18 Subsequent Events
On January 4, 2005, the Company entered into a consulting agreement with Salvani Investments, pursuant to which it issued 1,000,000 warrants, exercisable for 5 years at $0.50 per share, in exchange for business consulting and investor relations services.
On January 5, 2005, the Company sold to Dan Brecher 250,000 warrants, exercisable for three years at $0.50 per share, for $2,500.
On March 1, 2005, the Company entered into a loan agreement for $500,000 with Tayside Trading Ltd. Pursuant to the loan agreement, the Company issued 500,000 warrants, exercisable for five years at $0.50 per share, to the lender. The Company also granted the lender an option exercisable commencing with the date of return of the $500,000 and expiring two weeks thereafter, to acquire, at the purchase price of $100,000, (i) shares of the Company's common stock at $0.30 per share (333,333 shares) and (ii) warrants to purchase 200,000 shares of common stock, exercisable for five years at $0.50 per share. The Company agreed to grant the lender, as collateral, rights to the Company's intellectual property, to the extent not already encumbered. The Company used the funds to fund a $500,000 letter of credit, which was subsequently terminated in April 2005. The principal amount of the loan was returned in April 2005, with accrued interest still owed. As the principal was not paid by March 30, 2005, as penalty, in April 2005, the Company issued 1,800,000 shares as a late payment penalty.
On March 2, 2005, the Company issued 50,000 warrants, exercisable for five years at $0.50 per share, to Aaron M. Lasry in return for business consulting services.
On April 10, 2005, we issued 159,575 shares of restricted common stock to Crescent Fund, LLC in return for financial consulting services.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On June 5, 2003, we notified Chisholm & Associates, our independent public accountants, that the Company was terminating its services, effective as of that date. Our Board of Directors approved such decision.
Chisholm's opinion in its report on our financial statements for the year ended June 30, 2002 (prior to the Company's reverse acquisition with Peak Entertainment Ltd.), expressed substantial doubt with respect to the Company's ability, at that time, to continue as a going concern. During the year ended June 30, 2002 and for the six months ended June 30, 2001 and 2000, and the years ended December 31, 2000 and 1999, Chisholm did not issue any other report on our financial statements which contained any adverse opinion or disclaimer of opinion, or was qualified or modified as to uncertainty, audit scope or accounting principles, except as to going concern issues. Furthermore, during such period there were no disagreements with Chisholm within the meaning of Instruction 4 to Item 304 of Regulation S-B under the Securities Exchange Act of 1934 on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Chisholm, would have caused them to make reference in connection with their opinion to the subject matter of the disagreement in connection with any report they might have issued.
On June 5, 2003, we engaged Goodband Viner Taylor, as its independent public accountants. We did not previously consult with Goodband Viner Taylor regarding any matter, including but not limited to:
o the application of accounting principles to a specified transaction,
either completed or proposed; or the type of audit opinion that
might be rendered on our financial statements; or
o any matter that was either the subject matter of a disagreement (as
defined in Item 304(a)(1)(iv) of Regulation S-B and the related
instructions) or a reportable event (as defined in Item 304(a)(1)(v)
of Regulation S-B).
On August 20, 2004, we notified Goodband Viner Taylor, our independent public accountants, that we were terminating its audit services, effective as of that date. The Company's Board of Directors approved such decision.
Goodband Viner Taylor's opinion in its report on the Company's financial statements for the years ended December 31, 2002 and December 31, 2003 expressed substantial doubt with respect to the Company's ability, at that time, to continue as a going concern. During the years ended December 31, 2002 and December 31, 2003, and the three month period ended March 31, 2004, Goodband Viner Taylor did not issue any other report on the financial statements of the Company which contained any adverse opinion or disclaimer of opinion, or was qualified or modified as to uncertainty, audit scope or accounting principles, except as to going concern issues. Furthermore, during such periods and through the date of termination, August 20, 2004, there were no disagreements with Goodband Viner Taylor within the meaning of Instruction 4 to Item 304 of Regulation S-B under the Securities Exchange Act of 1934 on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Goodband Viner Taylor, would have caused them to make reference in connection with their opinion to the subject matter of the disagreement in connection with any report they might have issued.
On August 20, 2004, the Company engaged Garbutt & Elliott Ltd., York, United Kingdom, as its independent public accountants. The Company did not previously consult with Garbutt & Elliott Ltd. regarding any matter, including but not limited to:
o the application of accounting principles to a specified transaction,
either completed or proposed; or the type of audit opinion that
might be rendered on the Company's financial statements; or
o any matter that was either the subject matter of a disagreement (as
defined in Item 304(a)(1)(iv) of Regulation S-B and the related
instructions) or a reportable event (as defined in Item 304(a)(1)(v)
of Regulation S-B).
ITEM 8A. CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer and Principal Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15a-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective.
There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the fourth quarter of fiscal year 2004 ended December 31, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 8B. OTHER INFORMATION
On December 22, 2004, we entered into an agreement with Morrison Entertainment Group, whereby the parties dissociated our Monster Quest property and products from Morrison Entertainment Group's Monster In My Pocket property and products. Any and all agreements between the parties entered into prior to December 22, 2004, including license agreements, were terminated. We have informed licensees of the discontinuation of the use of Monster In My Pocket.
On January 4, 2005, we entered into a consulting agreement with Salvani Investments, pursuant to which we issued 1,000,000 warrants, exercisable for 5 years at $0.50 per share, in exchange for services.
On March 1, 2005, we entered into a loan agreement for $500,000 with Tayside Trading Ltd. The loan was to be used to fund a $500,000 letter of credit, and the principal amount to be returned by March 30, 2005. If the principal is not paid by March 30, 2005, as penalty, we are to issue shares of our common stock at the rate of 200,000 shares per day, and in the aggregate, up to 5,000,000 shares. We agreed to grant the lender, as collateral, rights to our intellectual property, to the extent not already encumbered. In consideration for the loan, we issued 500,000 warrants, exercisable for five years at $0.50 per share, to the lender. We also granted the lender an option exercisable commencing with the date of return of the $500,000 and expiring two weeks thereafter, to acquire, at the purchase price of $100,000, (i) shares of the Company's common stock at $0.30 per share (333,333 shares) and (ii) warrants to purchase 200,000 shares of common stock, exercisable for five years at $0.50 per share.
On March 1, 2005, we entered into a non-binding letter of intent with Maverick Entertainment Group plc (UK ) concerning a possible business combination of the parties. The proposed transaction is presently contemplated to involve an exchange of shares of the parties and is to occur by June 30, 2005. The terms of the transactions have not been clearly defined, and no further progress on the terms has been addressed.
We entered into a representation agreement, dated March 1, 2005, with Maverick Entertainment Group plc (UK), pursuant to which we acquired, on a worldwide basis, other than for video, DVD and publishing rights in the United Kingdom and Ireland, the right to exploit television broadcasting rights for Muffin the Mule and for Snailsbury Tails, and the right to negotiate with and grant manufacturers and other interested parties licenses in relation to the manufacture and distribution of merchandise. We are entitled to 35% of gross receipts in the UK and 40% of gross receipts in the rest of the world. The agreement expires on February 28, 2008, subject to automatic renewal if a minimum (pound)500,000 in royalties has been paid to Maverick.
We entered into an agreement, dated March 7, 2005, with 4Kids Entertainment,
Inc. The territory covered by the agreement is the United States. The term of
the agreement is March 7, 2005 through December 31, 2011. Pursuant to the
agreement, we granted to 4Kids certain exclusive television broadcast and home
video rights to 52 episodes of the television series The Wumblers. 4Kids is to
use reasonable commercial efforts to cause the series to be broadcast on network
television in the territory for a minimum of 52 broadcasts commencing on or
before January 1, 2007. As to broadcasts for which 4Kids controls the
programming schedule or distribution method, revenues derived by 4Kids shall be
retained 100% by 4Kids and such revenues shall not be deemed net series income.
Revenues derived by 4Kids from broadcasts in the territory that 4Kids does not
control is to be divided as follows: 35% to 4Kids and 65% to Peak. With respect
to home video sales, we are entitled to a royalty of 15% of net wholesale sale
price if the wholesale price is greater than $10 per unit and 10% of the net
wholesale price if the wholesale price is $10 or less per unit. We also
appointed 4Kids as our exclusive agent in the territory during the term to
represent all merchandising, publishing and promotional rights to the series and
all characters and elements contained in the series. 4Kids is to pay us $125,000
as a nonrefundable license fee and $125,000 as an advance against royalties,
payable as follows: $4,807 as license fee and as an advance per episode upon
delivery and acceptance by 4Kids of each of the episodes. The $125,000 advance
shall be offset against Peak's share of royalties. We are entitled to 60% and
4Kids is entitled to 40% of the series net income from the exploitation of the
home video rights and merchandising rights derived in the territory. Series net
income is defined as gross receipts from the exploitation or license by 4Kids of
the home video rights and the merchandising, less certain production costs, and
less actual out-of-pocket expenses, excluding overhead expenses, incurred by
4Kids in connection with the exploitation of the television and merchandising
rights, and less third party out-of-pocket syndication costs paid by 4Kids.
Series net income does not include any advertising revenue received by 4Kids
from the sale of advertising on any 4Kids controlled broadcasts. 4Kids has an
annual option to license television rights and home video rights to at least
thirteen additional episodes per broadcast season. The term is to be extended
for an additional year upon exercise of such option. If Peak does not produce
additional episodes and 4Kids desires to produce such additional episodes, 4Kids
shall have the right to do so on terms and conditions to be negotiated in good
faith by the parties. We also granted to 4Kids the non-exclusive right to
represent and negotiate worldwide or multi-territory licenses, for which
advances, royalties and guarantees from such licenses generated in the United
States will be considered series net income, and advances, royalties and
guarantees from such licenses generated outside the United States or are
attributable to sales outside the United States are to be divided as follows:
15% to 4Kids and 85% to Peak.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
OUR MANAGEMENT
The persons listed in the table below are our present directors and executive officers.
Name Age Position
---- --- --------
Wilfred Shorrocks 55 Chairman, Chief Executive Officer
and Director
Paula Shorrocks 52 Vice President - Design and Development,
and Director
Phil Ogden 37 Vice President - Managing Director, and Director
Alan Shorrocks 44 Vice President - Licensing Division
Nicola Yeomans 34 Vice President - Finance
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Directors are elected to serve until the next annual meeting of stockholders and until their successors are elected and qualified. Currently, there are three persons serving on our board of directors.
Officers are elected by the Board of Directors and serve until their successors are appointed by the Board of Directors.
MANAGEMENT PROFILE
Wilfred Shorrocks, Chairman and Chief Executive Officer
Mr. Shorrocks, co-founded Peak Entertainment Ltd. in November 2001 and he became Chairman, Chief Executive Officer and a director of Peak Entertainment Holdings, Inc. in April 2003. Prior to that, Mr. Shorrocks was co-founder of Just Group, Plc., where he acted as its Chief Executive Officer from 1987 to 2001. At Just Group, Mr. Shorrocks was responsible for all areas of activity relating to development and creation of concepts through to intellectual property acquisition, corporate acquisition, and financing activities. In January 2002, about five months subsequent to his August 2001 departure from Just Group, Just Group entered into administration, a process similar to the Chapter 11 bankruptcy process. In 1980, he founded Acamas Toys, a developer of toys, and he sold his ownership of Acamas Toys in 1987. From 1973 to 1980, Mr. Shorrocks worked in sales at what was, at that time, the world's largest toy maker, Dunbee Combex Marx, makers of Sindy dolls and Hornby railways, and he became Sales & Marketing Director for the Burbank sales division of Dunbee Combex Marx. He is the spouse of Paula Shorrocks, and the brother of Alan Shorrocks.
Paula Shorrocks, Vice President - Design and Development, and Director
Ms. Shorrocks, co-founded Peak Entertainment Ltd. in November 2001 and she became Vice President and a director of Peak Entertainment Holdings, Inc. in April 2003. Prior to that, Ms. Shorrocks was co-founder of Just Group, Plc., where she acted as its Commercial Director from 1987 to 2001. At Just Group, Ms. Shorrocks identified opportunities and then secured rights to represent blue chip companies as licensing agent for their brands. In January 2002, about five months subsequent to her August 2001 departure from Just Group, Just Group entered into administration, a process similar to the Chapter 11 bankruptcy process. Before co-founding Just Group, Ms. Shorrocks taught Business Studies at The Harwich School, Essex and West Gloucester College of Further Education (1978-1987). She also was the Marketing Manager for Acamas Toys. She is the spouse of Wilfred Shorrocks.
Phil Ogden, Vice President - Managing Director, and Director
Mr. Ogden, joined Peak Entertainment Ltd. in November 2001 and he became Vice President and a director of Peak Entertainment Holdings, Inc. in April 2003. From October 1998 to October 2001, Mr. Ogden served as Sales and Marketing Director of Just Group, Plc, in a non-executive capacity, at Just Group Plc. Prior to working at Just Group, Mr. Ogden developed his sales and marketing experience with Seymour International, a division of UK's leading magazine distributor, Frontline, from 1989 to 1998. Mr. Ogden was employed as an Account Director with the responsibility for the strategic and commercial success of a portfolio of Seymour's premier clients, including Dennis, Paragon, FT Magazines (Investors Chronicle) and TimeWarner.
Alan Shorrocks, Vice President - Licensing Division
Mr. Shorrocks, has been Vice President - Licensing Division of Peak Entertainment Ltd. since November 2001 and he became Vice President of Peak Entertainment Holdings, Inc. in April 2003. Prior to that time, Mr. Shorrocks was Licensing Director. in a non-executive capacity, of Just Group Plc. from 1991 through October 2001. Before joining Just Group, Mr. Shorrocks ran his own companies specializing in the leisure and surfing markets and was exclusive United Kingdom importer/ distributor for various branded merchandise including Quicksilver from the early 1980's. He sold his company Victory along with the United Kingdom rights to market Victor Wetsuits in 1991. He is the brother of Wilf Shorrocks.
Nicola Yeomans, Vice President - Finance
Ms. Yeomans joined Peak Entertainment in June 2002 as company accountant. She became Vice President - Finance of Peak Entertainment Holdings Inc. in January 2004 and serves as the principal person in charge of accounting and financials. Prior to that time, she was an accountant, in a non-executive capacity, for Just Group Plc from July 1997 to December 2001. Before joining Just Group Plc, Ms. Yeomans trained as an accountant for the entertainment arm of the BBC (British Broadcasting Corporation) at their London headquarters. She qualified as a Certified Chartered Accountant (A.C.C.A) in October 1998. She is currently studying towards a Masters Degree (M.B.A) in international business studies and corporate finance.
INSOLVENCY OF JUST GROUP PLC
In January 2002, Just Group Plc, a United Kingdom company, entered into administration, a process similar to the Chapter 11 bankruptcy process in the United States. Wilf and Paula Shorrocks were executive officers at Just Group in 2001, and their employment at Just Group ended in August 2001. Alan Shorrocks, Phil Ogden and Nicola Yeomans also had worked at Just Group, in non-executive level positions, prior to joining Peak Entertainment.
TERMINATION OF EMPLOYMENT FROM JUST GROUP PLC (UK) AND LEGAL PROCEEDINGS AGAINST JUST GROUP PLC
In August 2001, Wilf Shorrocks and Paula Shorrocks were dismissed from their officer and director positions at Just Group Plc, purportedly on the basis of internal disagreement on accounting policy and breaches of employment contract and fiduciary duties, allegations which the Shorrocks deny. In November 2001, Wilf Shorrocks and Paula Shorrocks instituted claims for breach of employment contract, wrongful dismissal, and in the case of Paula Shorrocks, a claim of sex discrimination against Just Group before the High Court of Justice, Queen's Bench Division, in the United Kingdom, and claims of unfair dismissal before the Nottingham Employment Tribunal in the United Kingdom. The proceedings against Just Group were stayed due to Just Group Plc entering into administration in January 2002. In 2004, Just Group Plc submitted its defense denying the claims on the basis of breaches of employment contract and fiduciary duties and Just Group asserted counterclaims for unjust enrichment and restitution. In May 2004, the parties entered into a settlement of all claims, whereby the Shorrocks are to receive payment based on an agreed total amount of UK (pound)175,000, payment of which is subject to the terms of Just Group's arrangement with its creditors.
BOARD COMMITTEES AND MEETINGS
During the fiscal year that ended on December 31, 2004, the Board of Directors held one meeting, attended or participated in by all of the directors. Other matters were undertaken by written consent by the Board of Directors.
The Board of Directors are responsible for matters typically performed by an audit committee. We do not have a separate audit committee, nor any other committee, of the Board of Directors. No person serving on our Board of Directors qualifies as a financial expert. We seek to attract persons with financial experience to serve on our Board of Directors and we intend to form an audit committee of the Board of Directors during our fiscal year 2005
We have not yet adopted a code of ethics applicable to our directors, officers and employees. However, we expect to adopt a code of ethics during our fiscal year 2005.
We presently do not have a separate nominating committee of the Board of Directors for the selection of directors, and do not have a nominating committee charter. Presently, all such actions are performed by the entire Board of Directors.
OTHER INFORMATION ABOUT DIRECTORS
Other than as reported, none of the directors are directors of other reporting companies, are associated by family relationships, or have been involved in legal proceedings.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires Peak's directors
and executive officers, and persons who own more than ten percent of Peak's
common stock, to file with the SEC initial reports of beneficial ownership and
reports of changes in beneficial ownership of Peak's common stock. Such persons
are also required by SEC regulations to furnish Peak with copies of all such
Section 16(a) forms they file. Based solely on a review of the copies of such
reports furnished to Peak, Peak is not aware of any material delinquencies in
the filing of such reports.
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table
The following tables set forth certain information regarding our Chief Executive Officer and each of our most highly compensated executive officers whose total annual salary and bonus for the past three fiscal years exceeded $100,000:
Fiscal
Name and Principal Position Year Salary Bonus Other (1)
--------------------------- ---- ------ ------ ---------
Wilfred Shorrocks,(2) 2004 $9,074 $0 $0
Chief Executive Officer 2003 7,556 0 0
2002 5,200 0 0
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(1) Does not include repayment of advances made by the executive to us.
(2) We intend to enter into an employment agreement with Mr. Shorrocks and other executive officers during our 2005 fiscal year.
Director Compensation
We do not have a compensation plan for directors. We may adopt one during our 2005 fiscal year.
Employee Stock Option
During our fiscal year 2005, we intend to adopt and implement, subject to stockholder approval, an employee stock incentive plan, whereby we may issue shares of common stock and stock options to our employees and consultants. We intend for the plan to cover the issuance of an amount equal to, or up to 10% of our outstanding shares of common stock.
Option Grants in Fiscal 2004
No options were granted to employees, including executive officers and directors, during the year ended December 31, 2004.
Option Exercises in Fiscal 2004 and Year End Option Values
No options were held by employees, including executive officers and directors, during the year ended December 31, 2004.
Employment Agreement with Executive Officer
We do not have a written employment agreement with any of our executive officers.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth, as of May 1, 2005, the shares of our common stock beneficially owned by
o by each person who is known by us to beneficially own more than 5%
of our common stock;
o by each of our officers and directors; and
o by all of our officers and directors as a group.
This information was determined in accordance with Rule 13(d)-3 under the Securities Exchange Act of 1934, and is based upon the information provided by the persons listed below. As of May 1, 2005, we had 31,180,530 shares of common stock issued and outstanding.
All persons named in the table have the sole voting and dispositive power with respect to common stock beneficially owned. Beneficial ownership of shares of common stock that are acquirable within 60 days upon the exercise or conversion of stock options, warrants, or other convertible securities are listed separately. For each person named in the table, the calculation of percent of class gives effect to those additional shares acquirable within 60 days.
The address of each of the persons named in the table, unless otherwise indicated, is c/o Peak Entertainment, Ltd. Bagshaw; Hall, Bagshaw Hill, Bakewell, Derbyshire, UK DE45 1DL.
----------------------------------------------------------------------------------------------------------------
Additional Shares
Name and Address Amount and Nature Acquirable Percent
of Beneficial Owner of Beneficial Owner Within 60 days Of Class
----------------------------------------------------------------------------------------------------------------
Wilfred Shorrocks (1)(2)(3) 8,361,899 0 26.8%
Paula Shorrocks (1)(2)(3) 8,361,899 0 26.8%
Phil Ogden (1) 476,792 0 1.5%
Alan Shorrocks (1)(3) 476,792 0 1.5%
Nicola Yeomans (1) 0 0 0%
Platinum Partners Global Macro Fund LP (4)(5) 650,000 3,500,000 12.0%
152 West 57th Street
New York, NY 10019
Dan Brecher (5)(6) 1,196,667 1,570,000 8.4%
c/o Law Offices of Dan Brecher
99 Park Ave
New York, NY 10016
----------------------------------------------------------------------------------------------------------------
All officers and directors as a group (5 persons) 17,677,382 0 56.7%
----------------------------------------------------------------------------------------------------------------
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(1) Officer and/or director of Peak.
(2) For purposes of reporting beneficial ownership in the table, the ownership of shares of common stock by Wilfred and Paula Shorrocks are listed separately. Wilfred and Paula Shorrocks are each other's spouse. Accordingly, each may be deemed the beneficial owner of the shares held by the other.
(3) Alan Shorrocks is the brother of Wilfred Shorrocks. Alan Shorrocks disclaims beneficial ownership of shares held by Wilfred and Paula Shorrocks. Each of Wilfred and Paula Shorrocks disclaims beneficial ownership of shares held by Alan Shorrocks.
(4) Platinum Partners Global Macro Fund LP owns $600,000 in principal amount of 8% convertible debentures, which are convertible at $0.30 per share into 2,000,000 shares, and warrants exercisable at $0.50 per share into 1,500,000 shares. Does not include shares potentially issuable for accrued interest on the debentures.
(5) Person is subject to an agreement restricting the ability to convert debentures or exercise warrants so that the person would not own more than 4.9% of our common stock at a given time.
(6) Mr. Brecher owns $171,000 in principal amount of 8% convertible debentures, which are convertible at $0.30 per share, into 570,000 shares and warrants exercisable at $0.50 per share into 1,000,000 shares. Does not include shares potentially issuable for accrued interest on the debentures.
Changes in Control
We do not have any arrangements that may result in a change in control.
Securities Authorized for Issuance under Equity Compensation Plans
The following table summarizes stock options and warrants outstanding as of December 31, 2004.
Number of securities Weighted average
to be issued upon exercise exercise price of Number of securities
of outstanding options, outstanding options, remaining available
warrants and rights warrants and rights for future issuance
------------------- ------------------- -------------------
Plan category
-------------
Equity compensation plans
approved by securities holders 0 $0 0
Equity compensation plans not
approved by security holders 7,300,000 $0.51 0
Total 7,300,000 $0.51 0
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Plans Not in the Shareholder Approved Category
In July 2003, pursuant to a consulting agreement with POW! Entertainment LLC and Stan Lee, we issued to POW warrants to purchase 750,000 shares of our common stock, exercisable for five years at $0.35 per share. Warrants to purchase 375,000 shares vested upon execution of the consulting agreement, and the remaining warrants to purchase the remaining 375,000 shares vested in July 2004.
In December 2003, we entered into an Amendment to the Consulting Agreement, dated as of December 17, 2003, amending a July 2003 consulting agreement with Jack Kuessous pursuant to which we issued to Kuessous warrants to purchase 240,000 shares of common stock, exercisable for three years at $1.20 per share. Under the amendment, we issued warrants to purchase 240,000 shares of common stock, exercisable for three years at $0.50 per share in exchange for the previously issued warrants.
In December 2003, we entered into a Cancellation of Debt in Exchange for Securities Agreement, dated as of December 17, 2003, whereby we exchanged a debt of $100,000 owed to Jack Kuessous in exchange for 583,333 shares of common stock and 150,000 common stock purchase warrants exercisable for three years at $0.50 per share. Kuessous had loaned $100,000 to us in or about July 2003.
On January 5, 2004, we entered into Securities Purchase Agreements with four accredited investors: Platinum Partners Global Macro Fund LP, Gary Barnett, Millstones Brands Inc. and Dan Brecher. Pursuant to the agreements, we sold $1,500,000 in 8% convertible debentures due January 5, 2007 and 3,000,000 common stock purchase warrants. The purchase price totaled $1,500,000. The warrants are exercisable for three years at $0.50 per share.
On January 23, 2004, we entered into an agreement for services with Vintage Filings, LLC. We issued 300,000 common stock purchase warrants, exercisable for three years at $0.50 per share pursuant to the agreement.
On January 29, 2004, we entered into a Securities Purchase Agreement with Shai Stern. Pursuant to the agreement, we sold $50,000 in 8% convertible debentures due January 29, 2007 and 100,000 common stock purchase warrants. The warrants are exercisable for three years at $0.50 per share.
On March 10, 2004, we entered into Securities Purchase Agreements with eleven accredited investors: Kenneth Grief, Wayne Saker, Gilad Ottensoser, Samuel F. Ottensoser, Boro Durakovic, JG Products, Inc., Gerald Griffin, Al Lehmkuhl, Kevin Bostenero, Eisenberger Investments, and David Herzog. Pursuant to the agreements, we sold an aggregate of 1,000,000 shares of common stock and 600,000 common stock purchase warrants, exercisable for three years at $0.75 per share, for the total purchase price of $500,000. Legend Merchant Group, Inc. acted as the placement agent for these transactions. We paid Legend a fee of $25,000, and 100,000 common stock purchase warrants exercisable for three years at $.50 per share and 60,000 common stock purchase warrants exercisable for three years at $0.75 per share, for its services.
On September 28, 2004, we entered into Securities Purchase Agreements with three accredited persons for the sale of 1,666,666 shares of common stock and 1,750,000 common stock purchase warrants, exercisable for three years at $0.50 per share, for the aggregate purchase price of $500,000.
On November 2, 2004, we sold to Dan Brecher 250,000 warrants, exercisable for three years at $0.50 per share, for $2,500.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
From time to time, Mr. and Mrs. Shorrocks loaned money to Peak Entertainment to fund day-to-day operations, as well as for the acquisition of certain properties. Since company inception through December 31, 2002, the Shorrocks loaned to Peak Entertainment an aggregate of $972,386, and we repaid $78,193 to the Shorrocks in 2002 and $71,206 in 2003. As of December 31, 2003, we owed $916,634 to the Shorrocks. As of December 31, 2004, we owed $752,522 to the Shorrocks. These monies are loaned without interest and do not have a due date, and are due on demand. In March 2004, we gave the Shorrocks an unsecured promissory note for the monies due establishing a repayment schedule. The amount due is to be repaid in installments, consisting of six periodic payments of $25,000 from January 31, 2005 through September 30, 2006, two payments of $100,000 on March 31, 2007 and September 30, 2007, and the balance due on January 31, 2008. The promissory note provides for earlier repayment of any unpaid balance subject to various future financial results of Peak Entertainment, such as Peak Entertainment obtaining a shareholders' equity in excess of 150% of the amount due, or positive net income from operations in excess of 150% of the amount due.
On April 30, 2002, we entered into a license agreement with Wilfred and Paula Shorrocks whereby we acquired from the Shorrocks the exclusive rights to apply various intellectual properties to the manufacture, distribution and sale of products on a worldwide basis. Under the terms of the agreement, we undertook to pay to Wilfred and Paula Shorrocks 10% of the royalties payable quarterly in perpetuity, with a guaranteed minimum royalties amount of $1,000,000. There were no set payment terms in the original license agreement for payment of the minimum royalties. In April 2004, the Company amended the license agreement to establish a minimum quarterly royalty payment of $12,500, to be credited against the guaranteed minimum, due beginning September 30, 2004. Through March 31, 2005, the Shorrocks elected to defer receipt of the September 30, 2004, December 31, 2004 and March 31, 2005 quarterly payments.
On April 22, 2003, Peak Entertainment Ltd., together with its subsidiaries, was acquired by Palladium Communications, Inc., a Nevada corporation, which subsequently changed its name to Peak Entertainment Holdings, Inc. Under the terms of the agreement, we acquired 100 percent of Peak Entertainment Ltd's stock in exchange for the issuance by us of 19,071,684 shares of our common stock to the holders of Peak Entertainment Ltd. The new shares constituted 90 percent of the outstanding shares of Peak Entertainment Holdings, Inc. after the acquisition. Officers and directors who received shares pursuant to the acquisition are:
o Wilfred Shorrocks, 8,486,899 shares;
o Paula Shorrocks, 8,486,899 shares;
o Phil Ogden, 476,792 shares;
o Alan Shorrocks, 476,792 shares; and
o Terence Herzog, 743,585 shares.
On October 3, 2003, each of Wilf and Paula Shorrocks gifted 125,000 shares to Cary Fields.
On October 6, 2003, Terence Herzog gifted an aggregate of 178,500 shares to six persons, none of whom are affiliates of the Company.
Two former outside directors of the Company, Terence Herzog and Michael Schenkein, are principals of Agora Capital Partners, Inc., a management consulting company. From March 2003 through March 2004, Agora Capital Partners, through Terence Herzog and Michael Schenkein, provided management consulting services to the Company. The Company paid aggregate fees of $46,000 in 2003 for such consulting services. Terence Herzog and Michael Schenkein resigned as directors in December 2004.
ITEM 13. EXHIBITS
Exhibits required to be filed by Item 601 of Regulation S-B are included in Exhibits to this Report as follows:
Exhibit No. Description
----------- -----------
2.1 Agreement and Plan of Reorganization between Corvallis and
USAOneStar, dated October 31, 2000 (Incorporated by reference to
exhibit 2.1 of Form 10-QSB filed on November 14, 2000)
2.2 Agreement and Plan of Reorganization between USAOneStar and
Palladium, dated August 31, 2001 (Incorporated by reference to
exhibit 2.1 of Form 8-K filed on September 14, 2001)
2.3 Agreement and Plan of Acquisition by and among Palladium
Communications, Inc., Peak Entertainment, Ltd., Wilfred Shorrocks
and Paula Shorrocks, made as of the 22nd day of April, 2003
(Incorporated by reference to exhibit 10.1 of Form 8-K filed on
May 7, 2003)
2.4 Asset Purchase Agreement, dated as of April 22, 2003, between
Palladium Communications, Inc. and Palladium Consulting Group LLC
(Incorporated by reference to Exhibit 2.4 of Form SB-2 filed on
February 2, 2004)
3(i)(1) Articles of Incorporation of Corvallis, Inc. (Incorporated by
reference to exhibit 4 of Form S-18 filed on November 9, 1987.)
3(i)(2) Articles of Merger for Corvallis, Inc. (Incorporated by reference
to Exhibit 3(i)(2) of Form 10-KSB filed on April 15, 2005)
3(i)(3) Certificate of Amendment to Articles of Incorporation of
Corvallis, Inc. (Incorporated by reference to Exhibit 3(i)(3) of
Form 10-KSB filed on April 15, 2005)
3(i)(4) Certificate of Amendment to Articles of Incorporation of
USAOneStar.Net, Inc. (Incorporated by reference to Exhibit
3(i)(4) of Form 10-KSB filed on April 15, 2005)
3(i)(5) Articles of Share Exchange (Incorporated by reference to Exhibit
3(i)(5) of Form 10-KSB filed on April 15, 2005)
3(i)(6) Certificate of Amendment to Articles of Incorporation of
Palladium Communications, Inc. (Incorporated by reference to
Exhibit 3(i)(6) of Form 10-KSB filed on April 15, 2005)
3(ii)(1) Bylaws (Incorporated by reference to exhibit 5 of Form S-18 filed
on November 9, 1987)
3(ii)(2) Resolution dated October 20, 2000 amending bylaws (Incorporated
by reference to exhibit 3.1 of Form 10-Q filed on November 14,
2000)
3(ii)(3) Bylaws, as amended and restated (Incorporated by reference to
Exhibit 3.1 of Form 10-KSB filed on April 27, 2004)
4.1 Securities Purchase Agreement, dated as of February 2002
(Incorporated by referenced to exhibit 4.1 of Form SB-2 filed on
February 2, 2004)
4.2 Amendment to Securities Purchase Agreement, dated June 17, 2003
(Incorporated by referenced to exhibit 4.2 of Form SB-2 filed on
February 2, 2004)
4.3 Securities Purchase Agreement, dated as of April 22, 2003
(Incorporated by reference to Exhibit 4.3 of Form SB-2 filed on
February 2, 2004)
4.4 Disclosure Schedules to Securities Purchase Agreement dated April
22, 2003 (Incorporated by reference to exhibit 10.1 of Form
10-QSB filed on November 26, 2003)
4.5 January 2004 Securities Purchase Agreement for $1,000,000
(Incorporated by referenced to exhibit 4.5 of Form SB-2 filed on
February 2, 2004)
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4.6 January 2004 Securities Purchase Agreement for $500,000
(Incorporated by referenced to exhibit 4.6 of Form SB-2 filed on
February 2, 2004)
4.7 January 2004 Securities Purchase Agreement for $50,000
(Incorporated by referenced to exhibit 4.7 of Form SB-2 filed on
February 2, 2004)
4.8 Form of Securities Purchase Agreement, dated as of March 3, 2004
(Incorporated by reference to Exhibit 10.2 of Form 10-KSB filed
on April 27, 2004)
4.9 Stock Purchase Warrant Agreement issued to Legend Merchant Group
in connection with Securities Purchase Agreement, dated as of
March 3, 2004 (Incorporated by reference to Exhibit 10.3 of Form
10-KSB filed on April 27, 2004)
4.10 September 2004 Securities Purchase Agreement for $500,000
(Incorporated by reference to Exhibit 4 of Form 8-K filed on
October 1, 2004)
4.11 Form of Warrant issued November 2, 2004 (Incorporated by
reference to Exhibit 4.11 of Form 10-KSB filed on April 15, 2005)
4.12 Loan Agreement, dated March 1, 2005 (Incorporated by reference to
Exhibit 4.12 of Form 10-KSB filed on April 15, 2005)
4.13 Form of Warrant issued March 2, 2005 (Incorporated by reference
to Exhibit 4.13 of Form 10-KSB filed on April 15, 2005)
10.1 License Agreement with Morrison Entertainment Group, Inc., dated
February 25, 2002 (Incorporated by referenced to exhibit 10.7 of
Form SB-2 filed on February 2, 2004)
10.2 License Agreement with Wilf and Paula Shorrocks, dated April 30,
2002 (Incorporated by reference to Exhibit 10.1 of Form SB-2/A
filed on May 3, 2004)
10.3 License Agreement with Jesco Imports, Inc., dated June 1, 2002
(Incorporated by referenced to exhibit 10.8 of Form SB-2 filed on
February 2, 2004)
10.4 Memorandum of an Agreement, dated July 10, 2002 with CK's
Supermarket (Incorporated by reference to Exhibit 10.4 of Form
10-KSB filed on April 15, 2005)
10.5 License Agreement with Toontastic Publishing Ltd, dated December
5, 2002 (Incorporated by referenced to exhibit 10.9 of Form SB-2
filed on February 2, 2004)
10.6 Distribution Agreement, dated January 20, 2003, with Character
Options Ltd. (Incorporated by referenced to exhibit 10.11 of Form
SB-2 filed on February 2, 2004)
10.7 License Agreement with CCA Group Ltd., dated February 10, 2003
(Incorporated by referenced to Exhibit 10.34 of Form SB-2/A filed
on June 7, 2004)
10.8 Agreement between Peak Entertainment Ltd. and GMTV of the London
Television Centre, dated February 17, 2003 (Incorporated by
referenced to exhibit 10.13 of Form SB-2 filed on February 2,
2004)
10.9 Agreement, dated April 28, 2003, with The Silly Goose Company,
LLC (Incorporated by reference to Exhibit 10.14 of Form SB-2
filed on February 2, 2004)
10.10 Distribution Agreement, dated July 1, 2003 with Perfectly Plush
Inc. (Incorporated by reference to Exhibit 10.15 of Form SB-2
filed on February 2, 2004)
10.11 Consulting Agreement with POW! Entertainment and Stan Lee dated
July 2003 (Incorporated by reference to exhibit 10.2 of Form
10-QSB filed on November 26, 2003)
10.12 Consulting Agreement, dated July 2003, with Jack Kuessous with
Form of Warrant (Incorporated by reference to exhibit 10.3 of
Form 10-QSB filed on November 26, 2003)
10.13 International Representation Agreement with Haven Licensing Pty
Ltd, dated August 19, 2003 (Incorporated by reference to Exhibit
10.16 of Form SB-2 filed on February 2, 2004)
10.14 International Representation Agreement with Character Licensing &
Marketing, dated September 17, 2003 (Incorporated by reference to
Exhibit 10.17 of Form SB-2 filed on February 2, 2004)
10.15 International Representation Agreement with Kidz Entertainment,
dated October 31, 2003 (Incorporated by referenced to exhibit
10.18 of Form SB-2 filed on February 2, 2004)
10.16 License Agreement with Radica UK Ltd., dated December 12, 2003
(Incorporated by referenced to exhibit 10.19 of Form SB-2 filed
on February 2, 2004)
10.17 Entertainment Production Agreement, dated as of December 16,
2003, with The Silly Goose Company, LLC (Incorporated by
referenced to exhibit 10.20 of Form SB-2 filed on February 2,
2004)
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10.19 Amended Consulting Agreement, dated as of December 17, 2003, with
Jack Kuessous (Incorporated by referenced to exhibit 10.4 of Form
SB-2 filed on February 2, 2004)
10.20 Cancellation of Debt Agreement, dated December 2003, with Jack
Kuessous (Incorporated by referenced to exhibit 10.5 of Form SB-2
filed on February 2, 2004)
10.21 Settlement of Debt Agreement (Incorporated by referenced to
exhibit 10.6 of Form SB-2 filed on February 2, 2004)
10.22 Agreement for the Provision of Co Production Services with
Cosgrove Hall Films Ltd., dated January 9, 2004 (Incorporated by
referenced to exhibit 10.21 of Form SB-2 filed on February 2,
2004)
10.23 Agreement with POW! Entertainment, entered January 2004
(Incorporated by referenced to exhibit 10.23 of Form SB-2 filed
on February 2, 2004)
10.24 Amendment, dated January 2004, to License Agreement with Radica
UK Ltd. dated December 12, 2003 (Incorporated by reference to
Exhibit 10.24 of Form 10-KSB filed on April 15, 2005)
10.25 Agreement for Services with Vintage Filings, LLC, dated January
23, 2004 (Incorporated by referenced to exhibit 10.25 of Form
SB-2 filed on February 2, 2004)
10.26 License Agreement with Toontastic Publishing Ltd., Renewal, dated
April 1, 2004 (Incorporated by reference to Exhibit 10.5 of Form
10-KSB filed on April 27, 2004)
10.27 Financial Advisor Agreement with Ameristar International Capital,
Inc. dated February 11, 2004 (Incorporated by reference to
Exhibit 10.1 of Form 10-KSB filed on April 27, 2004)
10.28 Financial Advisor Agreement with Source Capital Group, Inc. dated
March 23, 2004 (Incorporated by reference to Exhibit 10.4 of Form
10-KSB filed on April 27, 2004)
10.29 Promissory Note to Shorrocks dated March 2004 (Incorporated by
reference to Exhibit 10.6 of Form 10-KSB filed on April 27, 2004)
10.30 Amendment to Shorrocks License Agreement dated as of April 2004
(Incorporated by reference to Exhibit 10.7 of Form 10-KSB filed
on April 27, 2004)
10.31 Cancellation of Debt in Exchange for Securities Agreement with
Laura Wellington entered into April 2004 (Incorporated by
reference to Exhibit 10.33 of Form SB-2/A filed on May 3, 2004)
10.32 International Representation Agreement with The Sharp Company
Inc., dated April 22, 2004 (Incorporated by reference to Exhibit
10.6 of Form 10-QSB filed on August 26, 2004)
10.33 Distribution Agreement with Cadaco, dated April 27, 2004
(Incorporated by reference to Exhibit 10.7 of Form 10-QSB filed
on August 26, 2004)
10.34 Agreement with Video Collection International Limited, dated
April 29, 2004 (Incorporated by referenced to Exhibit 10.35 of
Form SB-2/A filed on June 7, 2004)
10.35 Agreement for the Provision of Co Production Services Re:
"Monster Quest - The Quest" with Persistence Of Vision Sdn Bhd.,
dated May 18, 2004 (Incorporated by reference to Exhibit 10.3 of
Form 10-QSB filed on December 16, 2004)
10.36 Amendment, dated June 2004, to Distribution Agreement with Radica
UK Ltd. dated 12 December 2003 (Incorporated by reference to
Exhibit 10.36 of Form 10-KSB filed on April 15, 2005)
10.37 Amendment, dated June 2004, to Distribution Agreement with
Character Options Ltd., dated January 20, 2003 (Incorporated by
reference to Exhibit 10.37 of Form 10-KSB filed on April 15,
2005)
10.38 Amendment, dated June 2004, to Distribution Agreement with GMTV,
dated February 17, 2003 (Incorporated by reference to Exhibit
10.38 of Form 10-KSB filed on April 15, 2005)
10.39 Amendment, dated June 2004, to Distribution Agreement with Video
Collection International Ltd., dated April 29, 2004 (Incorporated
by reference to Exhibit - 10.39 of Form 10-KSB filed on April 15,
2005)
10.40 Cancellation of Debt in Exchange for Securities Agreement with
Laura Wellington, dated July 23, 2004 (Incorporated by reference
to Exhibit 10.8 of Form 10-QSB filed on August 26, 2004)
10.41 Consultant Agreement with CEOcast, Inc. dated as of September 1,
2004 (Incorporated by reference to Exhibit 10.4 of Form 10-QSB
filed on December 16, 2004)
10.42 Distribution Agreement with Impact International Ltd 2004, dated
as of November 1, 2004 (Incorporated by reference to Exhibit
10.42 of Form 10-KSB filed on April 15, 2005)
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10.43 License Agreement with Zoo Digital Publishing Limited, dated
October 4, 2004 (Incorporated by reference to Exhibit 10.43 of
Form 10-KSB filed on April 15, 2005)
10.44 Agreement made as of December 22, 2004 with Morrison
Entertainment Group, Inc. (Incorporated by reference to Exhibit
10.44 of Form 10-KSB filed on April 15, 2005)
10.45 Consulting Agreement with Salvani Investments, dated as of
January 4, 2005 (Incorporated by reference to Exhibit 10.45 of
Form 10-KSB filed on April 15, 2005)
10.46 Form of International Representation Agreement, dated August 2,
2004, with Blue Chip Brands Pty Ltd. (Incorporated by reference
to Exhibit 10.46 of Form 10-KSB filed on April 15, 2005)
10.47 Letter of Intent with Maverick Entertainment Group plc, dated
March 1, 2005, and Representation Agreement, dated March 1, 2005
(Incorporated by reference to Exhibit 10.47 of Form 10-KSB filed
on April 15, 2005)
10.48 The Wumblers Deal Memo with 4Kids Entertainment, Inc. dated March
7, 2005 (Incorporated by reference to Exhibit 10.48 of Form
10-KSB filed on April 15, 2005)
11 Statement Concerning Computation of Per Share Earnings is hereby
incorporated by reference to "Financial Statements" of Part II -
Item 7, contained in this Form 10-KSB.
16.1 Letter on change in certifying accountant (Incorporated by
reference to Exhibit 16.1 of Form 8-K filed on February 7, 2002)
16.2 Letter on change in certifying accountant (Incorporated by
reference to Exhibit 1 of Form 8-K filed on June 10, 2003)
16.3 Letter on change in certifying accountant (Incorporated by
reference to Exhibit 16 of Form 8-K/A filed on September 3, 2004)
21 List of Subsidiaries (Incorporated by reference to Exhibit 21 of
Form SB-2 filed on February 2, 2004)
31.1* Certification of Chief Executive Officer Pursuant to Securities
Exchange Act Rule 13a-14(a)/15d-14(a)
31.2* Certification of Principal Financial Officer Pursuant to
Securities Exchange Act Rule 13a-14(a)/15d-14(a)
32.1* Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350
32.2* Certification of Principal Financial Officer Pursuant to 18
U.S.C. Section 1350
----------
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* Filed herewith.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
Fees for audit services provided by Garbutt & Elliott Ltd., our current principal independent registered public accounting firm, during the year ended December 31, 2004 was $92,477. Fees for audit services provided by Goodband Viner Taylor, our former principal accountant, during the years ended December 31, 2003 and 2004 were $250,848 and $148,348, respectively.
Audit services consisted primarily of the annual audits, review of our financial statements, and services that are normally provided by our accountants in connection with statutory and regulatory filings or engagements for those fiscal years.
Audit-Related Fees
There were no fees billed for services reasonably related to the performance of the audit or review of our financial statements outside of those fees disclosed above under the caption Audit Fees for fiscal years ended December 31, 2003 and 2004.
Tax Fees
Fees for tax services provided by Garbutt & Elliott Ltd., our current principal independent registered public accounting firm, during the year ended December 31, 2004 was $0. Fees for tax services provided by Goodband Viner Taylor, our former principal accountant, during the year ended December 31, 2003 was $5,397.
Tax services related primarily to the preparation of company tax filings with regulatory agencies.
All Other Fees
There were no other fees billed for services.
Audit Committee Procedure
The Board of Directors is responsible for matters typically performed by an audit committee. We do not have a separate audit committee of the Board of Directors. The Board of Directors considered whether, and determined that, the auditor's provision of non-audit services was compatible with maintaining the auditor's independence. All of the services described above for fiscal years ended 2003 and 2004 were approved by the Board of Directors. We intend to continue using our principal accountant, Garbutt & Elliott Ltd., solely for audit and audit-related services, tax consultation and tax compliance services, and, as needed, for due diligence in acquisitions and similar transactions.
Pre-Approval Policies and Procedures
The Board of Directors approved all of the services described above, and all fees paid. The Board of Directors did not have pre-approval policies and procedures in place during our fiscal years ended 2003 and 2004. In fiscal year 2005, we intend to implement a policy whereby, we will, prior to engaging our accountants to perform a particular service, obtain an estimate for the service to be performed and begin pre-approving all services.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PEAK ENTERTAINMENT HOLDINGS, INC.
By: /s/ WILFRED SHORROCKS
---------------------
Wilfred Shorrocks,
Chairman and Chief Executive Officer
Dated: January 19, 2006
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In accordance with the Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated:
SIGNATURE TITLE DATE --------- ----- ---- /s/ WILFRED SHORROCKS President, Chairman, and Chief Executive Officer January 19, 2006 --------------------- Wilfred Shorrocks /s/ PAULA SHORROCKS Vice President and Director January 19, 2006 ------------------- Paula Shorrocks /s/ PHIL OGDEN Vice President and Director January 19, 2006 -------------- Phil Ogden /s/ ALAN SHORROCKS Vice President January 19, 2006 ------------------ Alan Shorrocks /s/ NICOLA YEOMANS Vice President January 19, 2006 ------------------ (Principal Financial Officer) Nicola Yeomans |
EXHIBIT 31.1
CERTIFICATION
I, Wilfred Shorrocks, certify that:
1. I have reviewed this report on Form 10-KSB/A for the fiscal year ended December 31, 2004 of Peak Entertainment Holdings, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) [omitted];
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: January 18, 2006
/s/ Wilfred Shorrocks
-----------------------
Wilfred Shorrocks
Chief Executive Officer
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EXHIBIT 31.2
CERTIFICATION
I, Nicola Yeomans, certify that:
1. I have reviewed this report on Form 10-KSB/A for the fiscal year ended December 31, 2004 of Peak Entertainment Holdings, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) [omitted];
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: January 18, 2006
/s/ Nicola Yeomans
---------------------------
Nicola Yeomans
Principal Financial Officer
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EXHIBIT 32.1
CERTIFICATION
PURSUANT TO SECTION 13a-14(b) OF THE SECURITIES EXCHANGE ACT OF 1934
AND 18 U.S.C. SECTION 1350
In connection with the Annual Report of Peak Entertainment Holdings, Inc. (the "Company") on Form 10-KSB/A for the fiscal year ended December 31, 2004, as filed with the Securities and Exchange Commission on the date therein specified (the "Report"), the undersigned, Wilfred Shorrocks, as Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Wilfred Shorrocks ----------------------- Wilfred Shorrocks Chief Executive Officer Date: January 18, 2006 |
EXHIBIT 32.2
CERTIFICATION
PURSUANT TO SECTION 13a-14(b) OF THE SECURITIES EXCHANGE ACT OF 1934
AND 18 U.S.C. SECTION 1350
In connection with the Annual Report of Peak Entertainment Holdings, Inc. (the "Company") on Form 10-KSB/A for the fiscal year ended December 31, 2004, as filed with the Securities and Exchange Commission on the date therein specified (the "Report"), the undersigned, Nicola Yeomans, as Principal Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Nicola Yeomans --------------------------- Nicola Yeomans Principal Financial Officer Date: January 18, 2006 |