AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON May 7, 2000.
REGISTRATION NO. 333-53220
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
- --------------------------------------------------------------------------------
AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
- --------------------------------------------------------------------------------
SOUNDWORKS INTERNATIONAL, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
NEVADA 3652 91-1894164
(State or other jurisdiction of (Primary standard industrial (IRS employer
incorporation or organization) classification code number) identification
number)
8495 ODDFELLOWS ROAD, N.E.
BAINBRIDGE ISLAND, WASHINGTON 98110
(206) 780-0857
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
8495 ODDFELLOWS ROAD, N.E.
BAINBRIDGE ISLAND, WASHINGTON 98110
(206) 780-0857
(ADDRESS OF PRINCIPAL PLACE OF BUSINESS OR INTENDED PRINCIPAL PLACE OF BUSINESS)
GERALD B. DENNON, PRESIDENT
8495 ODDFELLOWS ROAD, N.E.
BAINBRIDGE ISLAND, WASHINGTON 98110
(206) 780-0857
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF AGENT FOR SERVICE)
COPY TO:
DAVID C. THOMAS, ESQ. JULE M. HANNAFORD, ESQ.
Raice Paykin & Krieg LLP Kelly, Hannaford & Battles, P.A
185 Madison Avenue (10th Floor) 222 South 9th Street (Suite 3900)
New York, New York 10016 Minneapolis, Minnesota 55402
(212) 725-4423 Tel. (212) 684-9022 Fax (612) 341-0881 Tel. (612) 341-1041 Fax
COUNSEL TO ISSUER COUNSEL TO UNDERWRITER
-----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
---------------
IF DELIVERY OF THE PROSPECTUS IS EXPECTED TO BE MADE PURSUANT TO RULE 434, CHECK
THE FOLLOWING BOX. |_|
CALCULATION OF REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED SECURITY PRICE REGISTRATION FEE
===============================================================================================================
Units each consisting of one share
of Common Stock, $0.001 Par Value
and a Warrant to acquire one share
of Common Stock(1) 1,500,000 $1.00 $1,500,000 $396.00
- ---------------------------------------------------------------------------------------------------------------
Common Stock Underlying Warrants(2) 1,500,000 $1.20 $1,800,000 475.20
- ---------------------------------------------------------------------------------------------------------------
Common Stock Underlying
Underwriter's Warrants(3) 150,000 $1.25 187,500 12.00
- ---------------------------------------------------------------------------------------------------------------
Total Registration and Fee $3,487,500 $883.20
- ---------------------------------------------------------------------------------------------------------------
(1) The Warrants:(a) may be purchased separately from the Common Stock thirty
days after the effective date of the offering (at which time the units will
automatically separate into a share and warrant ), (b) are exercisable at $1.20
per share during a five-year period commencing thirty days after the effective
date of this Registration Statement, and (c) shall be redeemable, at the option
of the Company, at $.05 per Warrant upon 30 days' prior written notice, (i) if
the closing bid price, as reported on the NASDAQ Electronic Bulletin Board, the
closing bid price as reported by the National Quotation Bureau, Inc., or the
closing sale price, as reported on a national or regional securities exchange,
as applicable, of the shares of the Registrant's Common Stock for 30 consecutive
trading days ending within ten days of the notice of redemption of the Warrants
averages in excess of $2.40 per share, subject to adjustment, and (ii) after a
then current registration statement has been declared effective by the
Commission with regard to the shares of Common Stock to be received by the
holder upon exercise. Pursuant to Rule 416 under the Securities Act of 1933, as
amended ("Securities Act"), such additional number of these securities are also
being registered to cover any adjustment resulting from stock splits, stock
dividends or similar transactions. The indeterminate number of additional shares
shall be issuable pursuant to Rule 416 to prevent dilution resulting from stock
splits, stock dividends or similar transactions.
(2) Reserved for issuance upon exercise of the Warrants. Pursuant to Rule 416
under the Securities Act, such additional number of shares of Common Stock
subject to the Warrants are also being registered to cover any adjustment
resulting from stock splits, stock dividends or similar transactions. The
indeterminate number of additional shares shall be issuable pursuant to Rule 416
to prevent dilution resulting from stock splits, stock dividends or similar
transactions.
(3) In connection with the offering the underwriter is to receive a warrant to
purchase Common Stock equal to 10% of the number of Units sold. The exercise
price is 125% of the Unit Price. Such Warrant is exercisable for a four year
period beginning on the first anniversary of the effective date of the offering.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
1,500,000 Units
[GRAPHIC OMITTED] SoundWorks International, Inc.
This is an initial public offering of 1,500,000 units. The offering price per
unit is $1.00. Each unit consists of:
o one share of common stock; and
o one redeemable common stock purchase warrant.
Soundworks common stock is currently traded in the over the counter market in
the "pink sheets."
Protective Group Securities Corporation is underwriting the offering on a best
efforts basis. This means that we may not receive any proceeds at all from the
offering if none of the units are sold. The offering will end on December 31,
2001 if all of the units are not sold by that date.
Investing in the units involves significant risks. See "Risk Factors" beginning
on page 7.
================================================================================
Per Unit Total
- --------------------------------------------------------------------------------
Offering Price of units ........................ $1.00 $1,500,000
- --------------------------------------------------------------------------------
Underwriting discount on units .................. $0.10 $ 150,000
- --------------------------------------------------------------------------------
Proceeds to Soundworks from the sale of units ... $0.90 $1,350,000
================================================================================
The underwriter will also receive a non-accountable expense allowance of $0.03
per unit for each unit sold.
The prospectus also covers the shares of common stock that may be issued upon
exercise of the warrants sold as part of the units. If all of the units are sold
and all of the warrants are exercised, Soundworks will receive $3,105,000 after
the underwriter's discount and non-accountable expense.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
--------------------
May___, 2001
---------------
PROTECTIVE GROUP SECURITIES CORPORATION
4
Prospectus Summary
The following summary highlights information from this Prospectus. Because this
is a summary, it does not contain all of the information that you should
consider before investing in the units. You should read the entire Prospectus
carefully, including the "Risk Factors" section, beginning at page 7, the
financial statements and the notes to financial statements. For the year ended
December 31, 2000, Soundworks had total revenue of $262,697 and had a loss of
$328,728.
Soundworks
SoundWorks International, Inc. ("Soundworks"), is a Nevada corporation formed on
March 19, 1997, with principal offices located at 8495 Oddfellows Road N.E.,
Bainbridge Island, WA 98110. It is the successor to SoundWorks USA, Inc., a
company formed in 1992. Its telephone number is (206) 780-0857.
Soundworks produces and markets music and spoken word discs and cassettes, under
the trade name Jerden Records, and recordings of interviews/speeches under the
name SpeechWorks (TM), to targeted and mass markets. Soundworks produces its
music discs and cassettes from a library of master recordings it owns comprised
of over 200 name artists such as The Kingsmen, Pete Fountain and the Brothers
Four and covering the Pop, Country, Rock, Jazz, Big Band, Instrumental, Folk and
Blues genres. The music recordings have, for the most part, not been released on
compact disc and are copyrighted. Soundworks' SpeechWorks line encompasses
interviews with well known music personalities such as Elvis Presley and
speeches of historical figures such as John F. Kennedy and Franklin Delano
Roosevelt which are largely in the public domain and not copyrighted.
Market Opportunity
Soundworks' growth and development is now and has been, frustrated by:
o inadequate financial resources; and
o reliance on part time personnel to exploit and develop its music library
of master recordings and SpeechWorks (TM) spoken word market.
If Soundworks sells all of the units it intends to use the proceeds to:
o develop and market products from its library;
o produce and market the SpeechWorks (TM) products it has identified; and
o acquire Santa Fe Acquisitions Inc.
There is no minimum offering amount and if SoundWorks raises only a nominal
amount in the offering we will not be able to acquire Santa Fe Acquisitions and
will have to scale back or marketing and production from what we have planned.
See "Use of Proceeds" on page 11.
The Offering
Except as otherwise indicated, information in this Prospectus has not been
adjusted to give effect to a one for five reverse stock split to be effective on
May 31, 2001.
Securities Offered 1,500,000 units. Each unit consists of one
share of common stock
5
and one warrant to purchase an additional share of
common stock. The Common Stock and Warrants may
not be sold separately until 30 days from the date
of this Prospectus. After that date the common
stock and warrants in the units will trade
separately.
Warrants The warrants included in the units will be
exercisable beginning 30 days after the offering.
The exercise price of a warrant is $1.20. The
Warrants expire on the fifth anniversary of the
date of this Prospectus. Soundworks may redeem
some or all of the outstanding warrants if
Soundworks provides the holders with 30 days'
prior written notice but it may only do this if
the closing price of Soundworks common stock
averages at least $2.40 per share for 30
consecutive days ending within ten days of the
notice of redemption. The redemption price will be
$0.05 per warrant. No redemption can occur until
six months after the date of this Prospectus.
Capitalization Soundworks has 50,000,000 authorized shares of
common stock $0.001 par value. 8,425,331 shares of
common stock were issued and outstanding before
the offering. After this offering, there will be
9,925,331 shares outstanding (assuming all units
offered are sold). Both of these numbers exclude
1,500,000 shares of common stock issuable upon
exercise of the 1,500,000 warrants which will be
outstanding immediately after the offering, if all
units offered are sold.
Key Personnel Soundworks' President and CEO is Gerald B. Dennon.
Robert L. Wikstrom is its Vice President,
Secretary-Treasurer and General Manager. See
Management on page 31.
Risks An investment in these securities is highly
speculative and involves a high degree of risk and
immediate substantial dilution. Soundworks'
accountants have placed a "going concern"
reservation on their opinion that raises
substantial doubt about our ability to continue as
a going concern. See Risk Factors on page 7.
Dividend Policy Soundworks does not plan to pay dividends in the
foreseeable future.
Use of Proceeds Soundworks expects to use the proceeds from the
offering, approximately $1,305,000 to:
o complete product development;
o launch products and cover related marketing
and advertising expenses;
o complete the acquisition of Santa Fe
Acquisitions, Inc.;
6
o expand its office and warehouse facilities;
o build inventory;
o acquire needed personnel,
o acquire related businesses; and
o provide working capital.
There is no minimum amount of proceeds from this
offering. If only a nominal amount is raised in
the offering we will have to revise our plans
substantially. See Use of Proceeds on page 11.
Proposed Symbol for Common Stock SOWK
Proposed Symbol for Warrants SOWK.W
Proposed Symbol for Units SOWK.U
Summary Financial Data
The following table presents summary financial information for Soundworks. You
should read this data together with the financial statements and related notes
included in this Prospectus.
YEARS ENDED DEC. 31
2000 1999
Statement of Earnings Data:
Net sales $262,697 $137,676
Operating profit (loss) (306,030) (169,425)
Earnings (loss) before income taxes (328,728) (177,574)
Net earnings (loss) (328,728) (177,574)
Earnings (loss) per share (.01) (.00)
Shares outstanding 42,126,555 42,096,655
Balance Sheet Data:
Working capital: $(112,857) $340,213
Total assets 657,538 726,298
Total liabilities 389,576 100,723
Stockholders' equity (deficiency) 267,962 625,575
7
No calculation has been made of average weighted shares outstanding, as changes
in outstanding shares during the applicable years were immaterial.
Risk Factors
An investment in the units involves many risks. These risks are substantial. You
should carefully consider the following information about these risks, together
with the other information in this Prospectus, before buying units.
If any of the following risks happen Soundworks' business and prospects could
suffer, the trading price of the units, common stock or warrants could decline,
and you might lose all or part of your investment.
Soundworks has never earned a profit and may never become profitable.
o Soundworks has been operating at a loss since its inception and is not yet
profitable.
o Management does not expect SoundWorks to become profitable until product
sales exceed $500,000 per year.
o Soundworks sales for the fiscal year ended December 31, 2000 were only
$262,697.
Soundworks' competition from traditional companies may limit the number of
records we can sell.
Soundworks major competitors are:
o Rhino Records,
o Heartland Music,
o Sony's Columbia Legacy,
o Curb Records,
o DCC Compact Classics, and
o K-Tel International.
Most of these companies are better known than Soundworks and have far greater
assets which enable them to produce a broader range of records, secure more
shelf space from retail distributors and gain more value from their advertising
expenditures. If Soundworks cannot gain enough shelf space for display of its
products in retail outlets, sales will be limited and we may not be able to earn
a profit. See "Competition," page 28.
Competition from the internet and direct exchange of recorded music between
consumers may make it difficult for Soundworks to sell records.
The internet and file sharing technology such as used by Napster, Inc., permits
individuals to transmit high quality music to other people without payment to
artists and traditional sellers. The impact this will have on the music industry
and on Soundworks and its traditional competitors is uncertain. See "Competition
- - the Internet", page 30.
Soundworks shares are traded at low volumes and this may make it difficult for
investors to sell their shares.
8
The shares of Soundworks are traded on the pink sheets and at very low volumes.
There is no assurance that trading, in volume, will ever develop either in
shares or warrants. As a result, investors in the shares in this offering may
not be able to sell their shares or warrants when they want to, or to sell them
at all, as interested buyers are scarce.
Soundworks is dependent on two key men.
Soundworks is dependent on the services of Gerald B. Dennon, President, and
Robert L. Wikstrom, Vice President, Secretary/Treasurer and General Manager. Mr.
Dennon has over 40 years of experience as a senior executive, promoter,
developer and producer of music products and artists in the industry. The loss
of their services could be very harmful to Soundworks as their experience in the
industry would be difficult to replace, particularly at their current
compensation levels of $55,000 and $36,000, respectively.
Soundworks needs additional people to carry out its business plan and we may not
raise enough in this offering to hire them.
Soundworks has only a small marketing and customer support staff, and it will
have to establish marketing and customer functions with enough experienced and
motivated people to put into effect its business strategy to penetrate its
targeted market. There is no assurance that Soundworks will raise enough from
this offering to hire the additional people needed by Management to grow
Soundworks' business.
Soundworks might have to reimburse its officers and directors for claims made
against them by others.
Soundwork's Articles of Incorporation and By-laws provide that it must indemnify
its officers, directors, and employees to the full extent provided by Nevada law
if someone makes a claim against them because of their employment with
Soundworks. The Articles of Incorporation also provide that officers and
directors have no liability to Soundworks or its shareholders for cash damages
to the full extent permitted under Nevada law. This requirement to defend
officers and directors can be expensive in terms of legal fees, to Soundworks,
even if it wins and it could also divert needed cash from our operations.
Indemnification could keep us from getting cash for damages we might otherwise
have recovered against directors or officers for negligence which harms the
corporation.
We may not raise enough in this offering to carry out our business program.
This offering is being made strictly on a "best-efforts" basis. There is no
commitment by anyone to purchase any part of the securities being offered.
Soundworks can give no assurances that any part, let alone a significant part,
of this offering can be sold. There is no minimum number of units that must be
sold and no escrow arrangement until that minimum is met. Therefore, you might
put your money in and find that we only have enough to operate the way we are
operating now. We would not be able to hire the additional people we need to
expand our operations and would not be able to afford needed advertising and
other marketing expense. Even if too little money is raised to enable Soundworks
to carry out its business program those who do buy its units in this offering
will not get their money back.
Penny Stock Rules may make it difficult for you to resell.
Penny stock rules may make it more difficult to resell units, shares, or
warrants purchased in this offering. Trading of Soundworks' stock will be
subject to the "Penny Stock Rules" of the
9
Securities and Exchange Commission. Penny stocks generally are equity securities
with a price of less than $5.00 that are not listed on national securities
exchanges or quoted on the NASDAQ system. The penny stock rules require a
broker/dealer, before a transaction in a penny stock, to deliver a standardized
risk disclosure document that provides information about penny stocks and the
risks in the penny stock market. The broker/dealer also must provide its
customer with current bid and offer quotations for the penny stock, the
compensation of the broker/dealer and its salesperson in the transaction, and
monthly account statements showing the market value of each penny stock. The
rules also require the broker/dealer to make a special written determination
that the penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction. These rules, as a result, may
make it difficult for broker-dealers to make effective markets in common stock
of Soundworks, and also may make it harder for purchasers to resell their stock
in secondary markets.
Soundworks may not be able to manage its expanding operations.
Soundworks operations have been on a limited scale. Soundworks will need to
expand its operations to achieve market acceptance for its products. In
particular, it will need to add additional employees in the areas of marketing
and finance. Whereas it was possible with Soundworks' current five employees to
exercise direct oversight of each employee by senior management, Soundworks will
need to develop more formal procedures for approval of expenditures and
undertaking delivery commitments, such as requirements for more than one
signature on checks, etc. and written approval by an officer of some contracts.
In addition Soundworks will have to fill important management positions which
are currently vacant.
Future sales of shares by management and others could lower market price.
A large number of Soundworks' outstanding shares are "restricted securities", as
defined by the Securities Act of 1933 and eligible for sale, from time to time,
subject to volume, holding period and other limitations imposed under Rule 144
of that Act. Sales of large amounts of common stock after the offering, or even
the potential for those sales, are likely to lower the market price of common
stock. In addition, the Warrants being offered in this Prospectus may be
exercised at a price of $1.20 per share. If and when the price of SoundWorks's
common stock rises above the level needed to become profitable, holders of
warrants may exercise their warrants and sell the common stock. As a result, it
can be expected that any price increase above $1.20 would bring additional
shares of common stock into the market and limit further price increases. After
the offering, Soundworks will have, if all units are sold, 9,925,331 shares of
common stock outstanding. In addition to the 1,500,000 shares that will be
freely tradable after the offering, and the 1,500,000 additional shares that may
be issued if the warrants sold in the offering are exercised, 8,425,331
currently outstanding or reserved shares may be sold in the future subject to
compliance with the Securities Act of 1933 and Rule 144. The Shares may come on
the market as follows:
o within 90 days 4,913,429 shares or 58.3 %
o within 180 days 157,956 shares or 1.9 %
o within 270 days 84,253 shares or 1 %
Control of Soundworks by management could conflict with your interests.
10
The interests of Soundworks' directors and executive officers, and its principal
stockholders could conflict with the interests of other Soundworks stockholders,
including the purchasers in the offering. Following completion of the offering,
Soundworks' directors and executive officers, together with the principal
stockholders of Soundworks, will own or control approximately 43.5 % of its
outstanding common stock. Accordingly, these stockholders may be able to
influence the outcome of stockholder votes, including votes to elect directors,
some amendments to Soundworks' charter and bylaws, and the approval of
significant corporate transactions such as a merger or a sale of Soundworks'
assets. This influence could delay, defer or prevent a change in control of
SoundWorks
Statute, charter and by-laws may delay or prevent an acquisition of Soundworks.
Soundworks is subject to the anti-takeover provisions of Section 203 of the
Nevada General Corporation Law. Section 203 could delay or prevent a third party
or a significant stockholder from acquiring control of Soundworks In addition,
Soundworks' charter and by-laws have provisions that may discourage, delay or
prevent a merger, tender offer or proxy contest involving SoundWorks. Any of
these anti-takeover provisions could lower the market price of the common stock
and keep shareholders from receiving the premium a person intent on a takeover
might offer.
Soundworks needs additional financing to survive.
Soundworks has a "going concern" qualification in its accountant's opinion that
raises substantial doubt about our ability to continue as a going concern. That
means that without additional financing and enough sales to remain in business
Soundworks will go out of business and you could lose your entire investment.
Currently, Soundworks' "burn rate" is approximately $28,000 per month, meaning
that SoundWorks is currently not in a position to survive for even an additional
month without additional funds or a change in its operations. Generally as sales
increase a company's burn rate increases because of the lag time between
marketing and production efforts and the collection of revenue. As a result,
SoundWorks may find it difficult to meet its obligations if less than the full
amount of the offering is raised.
Soundworks' Warrants can be redeemed on short notice.
Soundworks can redeem your warrants for $0.05 per warrant on 30 days' notice, if
the closing price of the common stock has been at least $2.40 for the ten
consecutive trading days immediately preceding the date of notice of redemption.
If we redeem the warrants you would be forced to sell or exercise the warrants
or accept the redemption price. This kind of redemption cannot occur until six
months after the date of this prospectus. Soundworks will not be able to redeem
your warrants unless it has in effect a registration statement covering exercise
of the warrant so that you could exercise before any redemption.
You will not be able to exercise warrants unless Soundworks maintains an
effective registration statement.
Soundworks will be able to issue shares of its common stock upon exercise of
your warrants only if there is a then current prospectus relating to the common
stock under an effective registration statement filed with the Securities and
Exchange Commission, and only if the common stock is qualified for sale or
exempt from qualification under applicable state securities laws. Soundworks has
agreed to use its best efforts to meet these requirements but cannot assure you
11
that it will be able to do so. The warrants may lose all of their value and the
market for the warrants may be limited if Soundworks does not meet these
requirements.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Some of the statements contained in this Prospectus discuss future events and
developments, including Soundworks' ability to generate revenue, income and cash
flows, or state other "forward-looking" information. Soundworks generally
identifies these forward-looking statements by using the words "anticipate,"
"believe," "estimate," "expect," and similar expressions. Many known and unknown
risks, uncertainties and other factors could cause the actual results to be very
different from those contemplated by the statements. Soundworks does not promise
to update forward-looking information to reflect actual results or changes in
assumptions or other factors that could affect those statements.
Use of Proceeds
Soundworks will receive net proceeds from the sale of units in the offering of
approximately $1,305,000 after the deduction of underwriting costs. Soundworks
expect to use the proceeds as follows (in order of priority):
Offering Expenses:
Filing Fees $1,710
Transfer & Warrant Agent Fees 2,500.00
Financial Printing 10,000
Accounting Fees and Expenses 6,000
Legal Fees and Expenses 50,000
Blue Sky Fees and Expenses 5,000
Miscellaneous 4,790
Acquisition of Santa Fe Acquisitions, Inc. 380,000
--------
Subtotal 460,000
If we are able to raise at least $460,000, from sale of the units,
the excess will be applied proportionately to the following:
Product Development 125,000
Product Launch (Marketing and Advertising) 200,000
Retention of needed personnel 120,000
Inventory 100,000
Working Capital/Possible future Acquisition of other
Related Businesses 300,000
-------
TOTAL $1,305,000
We intend to close the acquisition of Santa Fe Acquisitions as soon as we have
raised enough money in this offering to pay the purchase price and expenses of
the offering. Santa Fe is owned by our President, Mr. Dennon, and has an
agreement to acquire a library of material complementary to Soundworks' product
lines. Mr. Dennon negotiated the purchase price of this
12
material in arms length negotiations with an unrelated third party, and we will
be acquiring Santa Fe at a price equal to the amount Santa Fe is to pay to the
third party for these assets. If we are not able to raise at least $460,000, we
will not be able to acquire Santa Fe Acquisitions. If that happens we will need
to revise our business strategy, and we may not be able to operate above our
present level or even continue our operations at all.
The inventory to be purchased consists of recorded media containing material
from our libraries, and is intended to allow us to fill orders in an expeditious
fashion.
If warrants included in units are exercised, the total proceeds to Soundworks
from the exercise of the warrants included in all units will be approximately
$1,800,000 . Management expects to allocate whatever proceeds are generated from
warrant exercises as follows:
o 25% repay debt;
o 25% for further product development;
o 25% working capital; and
o 25% other acquisitions which would complement Soundworks' business.
The debt to be repaid includes $7,375 on a short-term promissory note due on
December 26, 1998, bearing interest at 12% per annum and currently in default,
and $250,000 which will become due and payable on November 30, 2001, bearing
interest at 15 percent per annum. Interest on this note was paid at the time of
issuance and is included in the $250,000.
There are no pending or probable acquisitions or current negotiations to acquire
any related businesses.
Until the net proceeds are used management intends to invest the funds in short
term bank deposits, investment grade securities, United States government
securities and other short term income producing securities.
The discussion above is an estimate based on Soundworks' current business plans.
Actual expenditures may vary depending on the circumstances which may arise.
Underwriting
The Underwriter named below has agreed, subject to the terms of an underwriting
agreement, to purchase from us and we have agreed to sell to the underwriter, at
the initial offering price less the underwriting discounts set forth below and
on the cover page of this prospectus up to 1,500,000 units consisting of one
share of Common Stock and one Warrant to purchase one share of Common Stock.
The underwriting agreement provides that it is a best efforts undertaking on the
underwriter's part and there is no commitment to acquire a single Unit of our
securities. As a result, we might receive nothing if the underwriter cannot sell
any units, or we might receive only a nominal amount. See Use of Proceeds on
page 11 for a description of our plans if less than the entire number of units
is sold. The underwriting agreement provides that we will indemnify the
underwriter against certain liabilities, including liabilities under the
Securities Act. These liabilities include any loss the underwriter might suffer,
including counsel fees, as a result of
13
information in this prospectus unless that information was supplied by the
underwriter to us in writing specifically for use in the prospectus.
The underwriter has informed us that it proposes to offer the units directly to
the public at the public offering price stated on the cover sheet of this
prospectus and to certain dealers at such public offering price less a selling
concession not to exceed $____ a Unit. The underwriter may allow and such
dealers may re-allow, a concession of not more than $____ per Unit to certain
other dealers. Rules of the Securities and Exchange Commission require that each
dealer participating in the offering must promptly remit the proceeds, less the
dealer's concession, to the underwriter, and that the underwriter promptly remit
the purchase price, less the underwriter's discount, to Soundworks.
The following table lays out the amount of the underwriting discount and the
compensation paid to the underwriter for each Unit sold and in total.
Compensation to be paid to the Underwriter
------------------------------------------
Per Unit Total
-------- -----
Underwriter's Discount $.10 $150,000
Underwriter's Warrant (1) 1/10th Wrnt 150,000 Wrnts
Non-accountable Expense Allowance (2) $.03 $45,000
- ----------
(1) In connection with the offering we have agreed to issue warrants to the
underwriter to acquire Common Shares in an amount equal to 10% of the number of
Units sold. The Warrant will be exercisable for four (4) years beginning on the
first anniversary of the effective date of the offering, at 125% of the offering
price per unit if the underwriter realizes a gain from the resale of the shares
exercisable upon the exercise of the Warrants, the gain may be considered
additional underwriting compensation.
(2) We have agreed to pay the underwriter a non-accountable expense allowance of
3% of the gross amount raised in this offering. This allowance will be reduced
by any investment banking fees and deposits the underwriter receives within one
year from this offering. In addition, we have agreed to pay all accountable
expenses incurred by the underwriter, including legal and accounting.
Prior to this offering there has been no public market for our Units or
Warrants. There has been a market for our shares of Common Stock on the Bulletin
Board. The initial public offering price of our Units was determined by
negotiations with our underwriter and does not necessarily bear any relationship
to our assets, book value, financial condition, or other established criteria of
value. Consideration was given to:
o prevailing market conditions,
o the prospects for the business and industry in which we compete,
o an assessment of our management, our capital structure, our past and
present operations, and
o our prospects for future earnings
14
The offering price of our Units and exercise price of the Warrants does not,
therefore indicate our actual value. There is no assurance that a trading market
will develop for our Units or Warrants or that any of the securities being
offered, will sell, in any market that may develop, at a price equal to or
higher than the price the securities are being offered to you.
In connection with this offering the underwriter and selling group members, if
any, may engage in transactions that stabilize, maintain or otherwise affect the
market price of our Units, Common Stock and/or Warrants. These transactions may
include stabilization transactions effected in accordance with Regulation M of
the Securities Exchange Act of 1934, in which these people may bid for or
purchase Units, Common Stock, or Warrants for the purpose of pegging, fixing or
maintaining the price of our Units, Common Stock, or Warrants at a level that is
higher than the market would dictate in the absence of these transactions.
If the underwriter engages in these actions it may keep the price levels for
Units, Common Stock and Warrants above what might otherwise prevail in the open
market. We and the underwriter make no representation as to how the described
transactions will affect the price of the securities being offered. Nor do we or
the underwriter make any representation that any of these transactions will be
engaged in, or that if they are commenced, they will not be discontinued without
notice.
Protective Group Securities Corporation, the underwriter, was organized in 1989.
It is a member firm of the NASD.
Dividend Policy
Soundworks has never paid any cash dividends on its shares of common stock and
does not expect to pay any cash dividends on its shares of common stock in the
foreseeable future. We intend to keep future earnings, if any, for reinvestment
in our business. Future cash dividends will depend on Soundworks' financial
condition, results of operations, capital requirements and other factors that
the Board of Directors thinks are relevant.
Capitalization
The following table sets forth as of December 31, 2000 the capitalization of
Soundworks International, Inc. and subsidiary:
Indebtedness
Notes Payable $257,375
-----------
Total Indebtedness 257,375
-----------
Stockholders Equity
Common Stock 42,126,555 shares of $.001 par value 42,126
Paid in Capital $1,292,753
Accumulated Deficit (1,066,925)
-----------
Total Stockholders Equity 267,962
-----------
Total Indebtedness and Stockholders Equity $525,337
===========
15
This table should be read in conjunction with our Financial Statements included
elsewhere in this prospectus. Shares of common stock in the above table do not
reflect the anticipated 1 for 5 reverse split.
Dilution
The initial public offering unit price is substantially higher than the net
tangible book value per share of common stock. As of December 31, 2000,
Soundworks' net tangible book value was $267,962 or $0.03 per share of common
stock. Net tangible book value per share is Soundworks total tangible assets
less total liabilities divided by the total number of shares of common stock
outstanding. If Soundworks had sold the units on December 31, 2000 at the
initial public offering price of $1.00 per unit and applied the net proceeds of
the offering, the net tangible book value of Soundworks as of March 31, 2000,
would have been $1,572,962 or $.16 per share. This represents an immediate
increase of $.13 per share of common stock to existing stockholders and an
immediate dilution of $.84 per share of common stock to the new stockholders who
purchase units in the offering. The following table illustrates this per share
dilution:
Public offering price per unit of the securities in this offering $1.00
Net tangible book value per share, before the offering $.03
Increase per share attributable to the sale by Soundworks in this
offering $.13
Pro forma net tangible book value per share, after the offering $.16
Dilution per share to new investors $.84
If the warrants are exercised in full, dilution per share to new stockholders
would be $.71 per share of common stock.
The following table summarizes, as of December 31, 2000, the number of shares of
common stock purchased, the total consideration paid, and the average price per
share paid by existing shareholders and by new shareholders after the offering.:
PERCENTAGE PERCENT AVERAGE
SHARES OF TOTAL AGGREGATE OF TOTAL PRICE PER
PURCHASED SHARES CONSIDERATION INVESTED SHARE
Present
Stockholders 8,425,311 85.1% $1,334,875 47.1% $.16
New
Stockholders 1,500,000 14.9% 1,500,000 52.9% $1.00
Total 9,925,311 100% 2,834,875 100.0% $.29
The above computations assume no exercise of outstanding options or warrants to
purchase common stock or the warrants included in units sold in the offering.
16
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Overview
Soundworks International, Inc. was originally formed as a subsidiary of E/S
Corporation for the purpose of acquiring Soundworks USA, Inc. E/S Corporation
subsequently changed its plans and spun off Soundworks International, Inc. to
its shareholders. Soundworks International, Inc. as an independent entity then
acquired Soundworks USA, Inc. in a merger. Soundworks International, Inc. had no
business operations before the merger. In the merger, it became the parent of
Soundworks, USA., which had been formed in 1992. References to Soundworks in
this discussion refers to Soundworks USA, Inc. before that merger and to the
combined Soundworks International, Inc. and Soundworks, USA after that merger.
Soundworks has, from its beginnings, in December 1992, devoted most of its
resources to developing, manufacturing and marketing its music and spoken word
CD's, audio cassettes and videos. Through December 31, 2000, Soundworks has
accumulated a deficit of $(1,066,925).
Soundworks' sales revenues have increased over the last two years (from $137,676
to $262,697), but it operated at a loss in each annual period and continues to
operate at a loss. This is because Soundworks' spending for marketing, product
development, and general and administrative costs have exceeded our gross
revenues. Soundworks expects the operating deficit to continue and increase over
the next 12 months as we spend more to support the development and growth of our
product line.
Although Soundworks expects substantial growth in both revenues and expenses,
management anticipates that expenses will increase more rapidly than revenues
over the short term. We do not expect to earn a profit until annual sales exceed
$500,000.
In March, 2000, Soundworks entered into a letter of intent to acquire Santa Fe
Acquisitions, Inc. for $348,000. The purchase price was subsequently
renegotiated to $380,000 as a result of delays enclosing the transaction. Santa
Fe Acquisitions Inc. is presently wholly owned by Gerald B. Dennon, Soundworks'
Chairman, President and CEO. Santa Fe's sole asset is an agreement to purchase
the assets of Sunset Productions, Inc. for a renegotiated price of $380,000.
Sunset owns a music library viewed by Management to be complimentary to that
owned by Soundworks and an Audio Book line of products. Originally, Santa Fe
Acquisitions was to raise $500,000 in a private placement in order to purchase
Sunset's assets and provide operating capital. Santa Fe Acquisitions was not
able to raise these funds. As a result, Soundworks has been lending money to
Santa Fe Acquisitions which it has in turn been advancing as a loan to Sunset to
cover operating expenses. Through December 31, 2000 Soundworks had lent Santa Fe
approximately $89,000 to cover operating expenses of Sunset. We will use part of
the proceeds of this offering to acquire all of the outstanding shares of Santa
Fe Acquisitions, Inc. The acquisition of Santa Fe is contingent on our raising
enough in proceeds from this offering to cover the purchase price and offering
expenses. See Use of Proceeds for a description of how our plans will be
affected if we are unable to raise the needed amounts for this acquisition.
Results of Operations
Years ended December 31, 2000 and 1999
The following table shows the results of operations expressed as a percentage of
revenues:
Years Ended December 31, 2000 1999
---- ----
Total Cost of Goods Sold 4.09% 5.44%
17
Gross Profit 95.91% 94.56%
Advertising & Promotion 39.42% 54.22%
General & Administrative 8.29% 21.09%
Legal, Accounting, Audit & Professional Fees 68.45% 41.35%
Plant & Equipment Expense 35.15% 26.12%
Printing, Reproduction, Production & Shipping 20.43% 27.28%
Wages, Commissions & Consulting Fees 33.85% 46.37%
Interest 15.47% 7.12%
Although wholesale prices were relatively constant, volume increased
significantly. Our customer base grew during the year 2000 due to increased
marketing and promotional efforts and the types of new releases. For example the
release of Volume II "The Reagan Years" created additional interest from the
Ronald Reagan Library, which began purchasing product. "The Greatest Speeches"
audio and video continued to attract new customers, including The Smithsonian.
As we released "Babe Ruth" and "Joe DiMaggio", The Baseball Hall of Fame began
stocking their store. In addition, during the year 2000 Soundworks picked up a
new distributor, Bayside Distributing, which has begun promoting and selling our
product to retail outlets that lost their ability to buy when our previous
distributor got out of the audio distribution business.
Royalties Received represents amounts received by Soundworks for licensing its
proprietary recordings to others. During the period since 1998 it has licensed
these recordings to Columbia House, Delta Music, Rhino Records, Sundazed
Records, Ace Records and Harper Collins. This item increased from $1,647 in 1999
to $17,938 in 2000.
Cost of operation for these two periods are in no way comparable. The year
ending December 31, 2000 reflects efforts to acquire Santa Fe Acquisitions, Inc.
and through it, Sunset Productions, an audio book company based in Santa Fe, New
Mexico.
Significant increases of travel expenses were experienced as several trips to
New Mexico were required in connection with inspection of the assets and
inventory of Sunset and the negotiation of the purchase agreement resulting in
an increase in Travel & Entertainment Expense (included in Advertising &
Promotion) from $7,083 in 1999 to $29,777 in 2000.
Expenses also reflect an increase in legal and accounting fees in connection
with the review of Sunset's business. This resulted in Professional Fees to
increase from $56,926 in 1999 to $81,750.
Advertising and Promotion Expense. Advertising and Promotion expenses increased
from $74,647 in 1999 to $103,543 in 2000. In an effort to find alternative means
of product distribution, Soundworks increased its internet presence by promoting
its web site, resulting in additional costs when compared to the 1999 period. In
2000, Soundworks also continued a series of television advertisements begun in
1999 promoting some of its products, in an effort to sell product directly to
the consumer.
Printing, Reproduction, Production and Shipping Expenses. With additional
releases of spoken word products in 2000, printing, reproduction, production,
and shipping increased from $37,558 in 1999 to $53,658 in 2000. These expenses
include design, artwork, printing, mastering, recording and manufacturing of the
finished product.
18
Interest Expense. The increase in interest expense from $9,796 for the year
ended December 31, 1999 to $40,636 for the year ended December 31, 2000 reflects
indebtedness of $250,000 incurred in October of 2000 which is evidenced by a
promissory note due in November 2001.
Liquidity and Capital Resources
Soundworks' liquidity is extremely limited. As of December 31, 2000 it had
negative working capital of $(112,857). It is not in a position to get a bank
loan. To date it has funded its operations primarily through limited offerings
of its common stock and through loans, as described in Note 4 to the financial
statements. Soundworks' President and Chief Executive Officer has periodically
funded the Company over the past six years with loans, but he is not legally
obligated to provide further funding to the Company in the future. If we are
able to sell the maximum number of units covered by this prospectus, management
believes the proceeds will be sufficient to allow Soundworks' to continue
operations for at least twelve months. If less than the maximum number of units
is sold, we will have to scale back operations and may (depending upon the
amount raise) be unable to complete the acquisition of Santa Fe or even to
continue operating at all.
Business
The Company
Soundworks was incorporated in Nevada on March 19, 1997. Its corporate offices
are located at 8495 Oddfellows Road, N.E. Bainbridge Island, Washington 98110.
Its mailing address is P.O. Box 4608, Rolling Bay, WA 98061-0608. Its telephone
number is 206-780-0857.
History
Soundworks was founded to produce and market recordings selected from a large
library of master recordings from the period 1940 - 1980 owned by SoundWorks'
founder, Mr. Dennon. This master recording library includes over 2000 recordings
by such artists as The Kingsmen, The Brothers Four, Wes Montgomery, Glenn
Yarbrough, Pete Fountain, Stephane Grappelli, Thelonious Monk, Ian Whitcomb,
Danny O'Keefe, Martin Denny, Scott Cossu, and many others, most of which have
not previously been released on Compact Disc ("CD"). The genres include Pop,
Country, Rock, Jazz, Big Band, Instrumental, Folk, and Blues.
Shortly after its founding, Soundworks began appropriating from the public
domain and/or acquiring rights to issue spoken word materials, primarily
speeches by American Presidents and well-known persons from recent American
history.
The Industry
Soundworks' products presently fall within the niche "Nostalgia" area of the
audio and video industry. "Nostalgia" releases are Compact Discs (CDs), cassette
recordings, and videos containing entertainment or materials from the past. The
nostalgia market target is comprised of the more than 65 million Americans - 34%
of the population - who are over the age of 50. According to a recent CNN
report, these people represent the fastest growing market segment for CD and
Video products. Soundworks is currently seeking to sell the Nostalgia market
through tailored products:
o audio or video material previously released, but no longer generally
available to the public; and
19
o material from an artists, musical era, or historical period which has
never been released publicly before.
Products
Soundworks presently produces and markets:
o music recordings and videos under its trade name Jerden Records, and
o spoken word products under its trade name SpeechWorks .
Music Products. Exclusive music product releases on the Jerden label consist
primarily of original music from the Soundworks' extensive library of original
master recordings performed by some of the top names of the 1950's and `60's,
including The Kingsmen, Don & the Goodtimes, The Brothers Four, Wes Montgomery,
Pete Fountain, and many more. Soundworks' President acquired most of these
master recordings over his many years in the record business and licensed them
to Soundworks for release. This library of original master recordings includes
copyrighted recordings of more than 200 name artists of the 1950's, 60's and
70's, and forms the basis for many marketable releases of known artists from the
past for the "nostalgia" market." Some of the recordings produced by Jerden are
"Greatest Hits" compilations, or songs from popular albums that have never
before been produced on CD format. Soundworks also seeks to license other music
recordings, past and present, Soundworks' management believes can be marketed
successfully by Soundworks.
Soundworks has produced and released eleven music titles including The Kingsmen,
Don & The Goodtimes, The Sonics (two volumes), Willie Nelson, History of the
Northwest Rock (three volumes), Jukebox Saturday Night-Big Bands (two volumes),
and Jimmy Dorsey/Woody Herman "Live At The Edgewater". Soundworks' Library of
Master Recordings includes recordings in the following genres by the following
artists:
Big Band Artists
----------------
Louis Armstrong Duke Ellington Jack Teagarden
Tex Beneke Woody Herman Pete Fountain
Jimmy Dorsey Ralph Flanagan Stan Kenton
Bobby Sherwood Pee Wee Erwin Tony Pastor
Buddy Morrow Vaughn Monroe Ray Anthony
Art Mooney Claude Thornhill Connie Haines
Henry Jerome Artie Shaw Enoch Light
Red Nichols Shep Fields Hugo Winterhalter
Del Courtney Russ Morgan Jonah Jones
Country Music
-------------
Slim Pickens Mickey Gilley Johnny Lee
George Jones Kitty Wells Hank Locklin
Alabama Faron Young Johnny Horton
Bobby Wayne Last Mile Ramblers T. Texas Tyler
Webb Pierce Conway Twitty Buddy Redbow
Buck Owens Freddy Fender Tom T. Hall
Marvin Rainwater Carl Belew Ferlin Husky
John D. Loudermilk Maddox Bros. & Rose Jimmy Wakely
20
Jazz Music
----------
Dizzy Gillespie Charlie Barnett Quincy Jones
Charlie Mingus Don Cherry Jerry Frank
Oscar Moore Trio George Voumard Don Mock
Diane Schuur Mark Winkler Arnold Ross
Andre Previn Grachan Moncur III Jimmy Lyons
Jazz All-Stars Otis Spahn Dave Burrell
Wes Montgomery Teddy Wilson Kitty White
Stephanie Grappelli Overton Berry Memphis Slim
Freddie Hubbard Chamber Jazz Sextet Lena Horn
Rock Music
----------
The Kingsmen Ian Matthews Magic Fern
Ian Whitcomb Diamond Reo Lucky Pierre
Spirit The Sonics Dave Lewis
Bobby Lewis PH Phactor Jug Band The Juveniles
Leon Russell Ron Davies The Bards
Don & The Goodtimes Hi Fi Lucky Pierre
Springfield Rifle The Small Faces Pepper Porter
Charlie Ryan Danny O'Keefe Barry "The Fish" Melton
Pop Music
---------
Ray Charles Tom Jones The Crewcuts
The Hudson Brothers Vic Damone Al Jolson
Gladys Knight & Pips Mac Davis Evie Sands
Martin Denny Suzie Nichols Kay Starr
Frankie Laine Roy Thoreson Michael Parks
Kostas Papaya
Blues Music
-----------
Jimmy Witherspoon Issac Scott "Gatemouth" Brown
Lightnin' Hopkins Memphis Slim
Folk Music
----------
The Brothers Four Glenn Yarbrough Jim Page
Mark Pearson
21
Instrumental
------------
Banjo King Vision Jac Murphy
Scott Cossu Banjo Greats Waltz Kings
Bronn Journey Klaus Lendzian
Spoken Word Products. Spoken word products released to date by Soundworks under
its SpeechWorks (TM) label consist primarily of public domain and licensed
recordings of speeches made by rock and roll icons ("Rock Icons") and people
important to U.S. history (Historical Icons"). Although most of the material
included in this product line is in the public domain and available to anyone,
the configuration, duration and packaging is exclusive to SoundWorks. Releases
include JFK: The Kennedy Tapes (3 volumes); FDR: Nothing to Fear; Harry S.
Truman: Give 'Em Hell, Harry; Martin Luther King, Jr. (2 volumes): Ronald
Reagan: The Great Speeches (2 volumes); The Greatest Speeches of All-Time;
Apollo 13: The Real Mission; Winston Churchill; Richard Nixon; Robert Kennedy;
William Jefferson Clinton; Douglas MacArthur; Joe DiMaggio; Michael Jordan; Babe
Ruth; Mohamed Ali; The Beatles: The Beatles Tapes (5 volumes); Jimi Hendrix;
Elvis Presley: The Elvis Tapes; Buddy Holly: The Buddy Holly Tapes; and Gene
Vincent:"Be Bop a Lula".
The Historical Icon series features live recordings of major speeches by
historical figures - mainly U.S. Presidents and major political figures, and
will be expanded to feature business leaders, military leaders, coaches,
religious speakers, celebrities, etc. Historical Icon products are sold to:
o audio book buyers;
o history buffs; and
o educational institutions
o through various traditional channels, such as direct marketing television,
retail stores, catalogs, etc.; and non-traditional channels, such as the
Internet.
Soundworks is making a marketing effort, in the Historical Icon area, to
educational institutions, in order to reach beyond the nostalgia market and
break into the educational, sports and business markets.
The Rock Icon series features live recordings of special interviews and press
conferences with Rock 'n' Roll legends such as Elvis Presley, The Beatles, Buddy
Holly, and others. These products are sold to nostalgia rock 'n' roll
enthusiasts via television promotions, catalog and retail distribution, and the
Internet.
New Products
Soundworks is involved in a continuing process of evaluating its library of
master recordings, and remastering and producing new releases from this library
as Soundworks' resources, both financial and personnel, permit. We give priority
to releases which Management believe can be profitable to Soundworks, but there
can be no assurance that any particular release will be profitable. Soundworks
intends to expand its product line into video releases, as its resources permit.
Soundworks has produced its first video product - "The Greatest Speeches of
All-Time, Part I" designed to be sold initially on television via direct
response advertising and then through
22
retail outlets. Soundworks also is trying to locate and secure rights for spoken
word business, educational, historical and/or nostalgia releases
Soundworks presently has the following products in pre-production for
manufacturing and marketing in 2001:
Audio/Spoken Word: Audio Music:
- ------------------ ------------
President Dwight Eisenhower/"Ike" Various Artists/"Northwest Rocks"
President Lyndon Baines Johnson/"LBJ" Bobby Wayne/"Classic Country & Rockabilly"
President Gerald Ford Dave Lewis/"The Dave Lewis Trio"
President Jimmy Carter Various Artists/"The History of Northwest
Rock, Vol II".
President George Bush Various Artists/"The Jerden Records Story"
(Hits from 60's & 70's)
John Lennon/"Exclusive Interviews" Wes Montgomery/"Untitled"
The Beatles/"Beatles Tape V" Pete Fountain/"Untitled".
Jac Murphy/"A Child's Gift".
Video:
- ------
"Presidential Speeches"
Frank Sinatra/"Ol Blue Eyes in Black & White"
Audio Books, Sports Albums, Acquisition of a Music Library
Soundworks' Management has entered into a letter of intent, dated February 11,
2000, to acquire the assets of Sunset Productions from Santa Fe Acquisitions,
which in turn has a contract to acquire those assets. Sunset Productions is
based in Santa Fe, New Mexico. Over the past nine years, Sunset has distributed
over 1 million individual audio books representing 250 titles in contemporary
literature, for which it holds copyrighted audio reproduction rights. In
addition, Sunset holds the mechanical licenses to more than 250 albums
containing more than 2,500 classic songs by artists such as Chuck Berry, The
Grateful Dead, Merle Haggard, The Jefferson Airplane, Willie Nelson and Jonis
Joplin. Sunset also has the rights to reproduce 102 sports albums giving sports
buffs the ability to relive some great moments in sports history. Sunsets' music
library will complement Soundworks' current library. Management plans to
digitize both libraries and market them through a combination of :
o artist specific internet web sites
o direct marketing and
o mass retailers. Soundworks is currently seeking to acquire additional
music and audio literature libraries that will complement its business.
Video Products. Soundworks intends to produce additional video products for
release in videotape and DVD home video formats. Motion picture and/or video
recordings exist for many of the historical events in the U.S. and around the
world since the advent of the motion picture and videotape eras. Film and video
footage also exist of music performances. Management believes that rights to
release this material on home video formats can be obtained for enough
commercially viable productions to justify Soundworks' pursuing releases in this
field when it is financially able to do so. Video production and release can
involve significantly more production
23
and manufacturing expenses than an audio only release. No video products other
than The Greatest Speeches of All Time I have, as yet, been released.
Copyrights, Royalties
Soundworks' library of master recordings is copyrighted and Soundworks must
acquire rights for its release and pay royalties to the artist (or other
copyright holder) before use. Accordingly, when Soundworks begins production on
a particular release, it must verify the standing of its copyrights on material
where it is the copyright holder, or acquire "mechanical license" rights to
issue copyrighted material owned by others. Soundworks can obtain a "mechanical
license" as to any previously recorded and released material relatively easily
under U.S. copyright law. Where ownership of the copyright is not clear,
Soundworks may have to engage copyright clearance experts. Much of the
historical spoken word material that would be released on the SpeechWorks (TM)
label is in the public domain and no copyright clearance is required for its
release. This is not the case with motion pictures or videotapes of historic
speeches.
Soundworks pays royalties to the copyright holders for copyrighted material
released on its labels. These royalties range from $0.50 to $2.00 per selection,
per record released.
Soundworks does not intend to release any material for which it has not obtained
full rights and any "mechanical licenses" permitting legal release.
Pricing
Soundworks' Compact Disks (CD's) have an "industry standard" suggested retail
price of $15.98, and its cassettes a suggested retail price of $10.98.
Management expects to set $19.95 as the suggested retail price for videotape
releases. We expect direct television marketing to be priced at about $15.98 per
CD and $10.98 per cassette. The pricing structure for CD's, cassettes, and
videos is fairly well established by the industry, and Soundworks intends,
generally, to follow this pricing structure.
Product Development
Markets
Soundworks presently competes in the nostalgia voice and music markets and
intends to expand its product line offerings into the education (general and
business) market and general entertainment markets through audio books and video
offerings.
The Nostalgia Music Market
Soundworks produces CDs and audio cassettes from its library of master
recordings, recorded by many name artists of the 40's, 50's, 60's and 70's.
Typically, consumers who purchase products in this niche market already are fans
of the particular recording artist, and their decision to buy is, for the most
part, a subjective one. Because much of our music nostalgia material is being
released on CD for the first time, the decision to buy may be based on replacing
an old long-play (LP) album to take advantage of the new technology and better
sound and convenience offered by the CD format, or simply on the fact that they
don't have the recording and want to fill out their collection of works by the
artist or from the particular period. Often, we make nostalgia sales because a
particular song or style of music reminds consumers of a significant time in
their lives. These products are not sold based on the product's present day hit
status. Therefore, sales will never be "hot", as in a "million-seller", but
sales are continuous and long lasting. For
24
example, artists such as Duke Ellington and Count Basie will continue to appeal
to Jazz fans for many years and the prospect of a different version of a song
that is already in a consumer's collection will, in many cases, eventually
prompt the buying decision if continuously presented.
The Spoken Word Market
The market for spoken word products is a niche market within the overall
non-music sector of the record industry, which includes audio books. Management
feels the consumer market for the SpeechWorks(TM) series, like the audio book
market, is typically 40-plus-years-old, professional, and intelligent. We have
designed and positioned our SpeechWorks(TM) products to go beyond mere
nostalgia, to be perceived as living history.
Management believes the explosive growth in popularity of audio books and the
enthusiastic early response we have received from our retail customers indicates
an untapped market demand at the consumer level for this type of product.
Management believes that additional markets can be developed in:
o the educational community
o museums
o the internet and other non-traditional retail outlets.
Marketing
We market our music and spoken word products through normal record market
distribution channels and direct marketing. Management believes there is also
great sales potential in marketing "nostalgia" releases through direct
television marketing. Management believes that the key to sales in the record
market is promotion, advertising, and maintaining good working relationships
with marketers in this field. The conventional record market is composed of
record distributors, retail stores, record clubs, and mail order catalog
sellers. A less conventional market, but one Management feels suits Soundworks'
products, is direct marketing by Soundworks to the consumer, both through direct
marketing programs of Soundworks, and direct marketing programs under
arrangements with experienced direct marketing organizations. The following is a
summary discussion of how Soundworks distributes its products in the
conventional record industry, and its direct marketing program.
Sales to Distributors. In the conventional record market, distributors buy
recorded product from the "label" at a distributor's discount, and resell the
product to record retailers at a markup. The pricing structure for this is
fairly well established and uniform in the industry. Distributors usually have
their own representatives who service record retail stores. It is up to the
"label," however, to promote its products so the retailers will have an
incentive to order its products from the distributor. We intend to employ a
distributor sales representative who will be responsible for continuing and
developing distributor relations, and servicing the needs of the distributors,
including furnishing them sales materials. Soundworks' Jerden Records and
SpeechWorks(TM) products are currently represented by over twenty distributors
nationwide. Management believes that with the expanded product line and the
addition of a distributor sales representative, we can increase sales through
distributors, especially when we have adequate capital to design and distribute
professional sales materials for the distributors to share with their retail
customers and to buy advertising space in their catalogs to heighten visibility.
25
To sell distributors Soundworks needs to promote its products to the public and
heighten the awareness of retail marketers to these products so they will order
from the distributor. If we raise enough capital through this offering, we plan
an intensive telemarketing/fax-marketing campaign at the retail level to
familiarize store managers with our product line. We also plan to influence
retail store manager's purchasing decisions with direct telephone contact and
in-store marketing assistance, such as posters, etc.
Sales to Retail Stores and Through the Internet. We plan to sell products
directly to retailers who may not be able to get our products easily from
distributors. These include:
o record stores
o book store
o educational stores
o museums, etc.
We will use a telemarketing sales force to establish and service retail
accounts, using commercially available qualified lists of retail prospects in
our target market. Soundworks' marketing department will systematically contact
our active and prospective retail accounts to promote Soundworks' products. We
plan to produce sample cassettes and CDs,
o in-store posters and flyers,
o in-store displays, and information on new products.
We also plan to use fax and e-mail to keep in contact with our retail accounts.
Our retail customers include Costco, Tower Records, Borders, Barnes & Noble,
Store of Knowledge, Columbia House, PBS Home Video, The Sixth Floor Bookstore,
The Smithsonian Shops, West point Military Academy, FDR Library, Winston
Churchill Library, and many more traditional record and book outlets.
Soundworks' products are available on the internet at its website
www.soundworks.net as well through web sites maintained by Borders, Barnes and
Nobel, Amazon.com and others.
Sales to Consumers. We believe that a major source of sales will be direct sales
to consumers. Sales to consumers would be at "retail" prices, with product
shipped directly to the consumer by Soundworks, or a shipper or "fulfillment
house" with whom Soundworks would contract for this service. Direct consumer
sales generally are made by distributing catalogs and flyers of Soundworks'
products to potential customers. Soundworks intends to reach this market,
assuming the proceeds from this offering are sufficient by buying a large,
commercially available, list of bona-fide nostalgia and historical product
buyers for initial and continued mailings to people who have been "qualified" as
buyers. Soundworks' marketing department plans on using customary direct
marketing strategies to make these sales and to refine its consumer mailing
lists on a continuing basis to be able to predict with greater accuracy the
probable success of its direct mail marketing campaigns.
Sales via Direct Response Television and Publications. Management believes that
"direct response" promotions on television and other publications media can be a
major source of sales for nostalgia products. We have begun to design and
produce products for this marketing approach. Direct response marketing uses TV,
radio, magazines or newspapers to persuade, the buyer to buy a product directly
from the producer. The purchase is usually made using a 1-800
26
telephone number, or - a mail-in order form. Shoppers in the over-50 age group
are particularly appropriate for this marketing method as they seek convenience
and have money to spend. We have not used this selling method before but believe
it offers the greatest opportunity for capitalizing on Sounworks' library of
master recordings. It is the source of greatest profit for many of the
Soundworks' competitors.
Typically, before undertaking a direct response marketing campaign, the seller
conducts a test marketing program at relatively low cost to determine whether
the direct marketing approach proposed will work and to provide a basis for
predicting how many units might be sold in a full scale campaign. Sales volumes
through direct response marketing can be very high - even with marginally
popular artists - if the marketing is executed correctly. For example, USA Today
reports that Roger Whitaker's Best Loved Ballads sold approximately 800,000
units through direct response television promotion at $24.95 each. That
translates to sales revenues of $20 million. Gross profits on these sales would
be in excess of $10 per unit, or $8 million. Albums by flute artist Zamfir, of
the Pan Flute, have sold more than 1 million copies. According to USA Today,
Heartland Music sold over 600,000 copies of Stage Door Canteen - an album of
hits from the 1940's. Soundworks is ready to manufacture a sequel to this album
with a collection of World War II hits from the period 1940-1945 called Juke Box
Saturday Night. We have also identified other products from our library of
master recordings which will be targeted at specific buyer niches. We have
extensive research on which broadcast media - and which geographic markets -
represent Soundworks' target audience. Soundworks plans to undertake direct
response television marketing through marketing and distribution arrangements
with established independent television marketing companies.
Direct Response Marketing Agreement
We have entered into a comprehensive marketing and distribution agreement with
WNR, a Los Angeles company, to joint venture direct response marketing of our
video, "The Greatest Speeches of All-Time". For their services, Soundworks will
pay WNR fifty percent (50%) of the net profits from sale of this product.
This Direct Response program will include:
o Production: Production of a 60 and 120 second direct response
commercial. It includes all elements of production including script,
talent, voice over, directing and editing. This also includes post
production services such as dubbing and video distribution.
o Media: WNR will plan, purchase and manage all media from test phase
through full roll out and provide complete media analysis and
reports. Reports will detail spots run and sales on a station by
station basis. This will be a comprehensive media analysis to
optimize cost per response and media efficiency.
o Telemarketing: WNR will manage telemarketing operations and customer
support. Also included in this function is credit card processing,
check clearing and report generation.
o Fulfillment: WNR will provide order processing, warehousing and
fulfillment services. They will coordinate telemarketing and
fulfillment to clear payment and ship to individual customers.
o Manufacturing: WNR will assist with manufacturing of product,
packaging, shipping boxes, etc. Production management and inventory
planning will also be performed.
27
o Electronic Retailing: This aspect of television direct response
sales will include consideration and possible use of shopping
channels, such as QVC and HSN to promote sales.
Liability and Property Insurance
We have liability insurance covering our property and operations with coverage
and deductible amounts and exclusions that Management believe are customary for
companies of our size and adequate for our industry. We cannot give any
assurance that our current insurance coverage is adequate or that Soundworks
will be able to maintain insurance at an acceptable cost.
Employees
As of March 31, 2001, we employed four full-time employees, and one part time
employee all of whom were engaged in research and development and manufacturing
activities and three of whom were engaged in administrative activities. None of
our' employees is covered by a collective bargaining agreement, and we believe
that our relations with our employees are good.
Properties
We acquired our master tape library from Gerald B. Dennon, our President, for
stock when we were organized. Ownership of the library is subject to the normal
royalty interests in the recording business.
We lease, on a month to month basis, approximately 4,000 square feet of office
and warehouse space on Oddfellows Road, Bainbridge Island, Washington, from
Montcalm LLC, an entity owned by Gerald B. Dennon, at $2,000 per month. We
believe that the rental payments are at or below market for such location.
The only other property or equipment Soundworks leases is a Canon fax and a
Canon copying machine under a 5 year lease with an unrelated third party for
$280. a month plus copying charges (should more then 3,000 copies be made a
month) of $0.02222 a copy.
Competition
Many major record labels and record clubs offer Greatest Hits packages and
Vintage Classics, but there are only a few niche companies with which Soundworks
competes directly.
o Rhino Records
Rhino, a privately held company, is a major force in our market niche. It
has used direct TV to sell collections of such artists as Aretha Franklin
and Manhattan Transfer, as well as Christmas music. It also publishes a
catalog of its releases and has acquired a very small library of master
recordings. Rhino was founded in 1980 and released it's first CD in 1984.
It has grown dramatically since then to approximately $50 million in sales
on more than 200 releases. Since 1991, the company has expanded into
packaging beat poetry and music, nostalgia rock 'n roll, blues, punk,
new-wave, power pop, doo-wop, and just about anything that was popular.
According to the Wall Street Journal, "Rhino got started with titles like
The Best of Louie Louie... assembling 10 versions of the Kingsmen's
classic."
SoundWorks licenses a Slim Pickens song from its master recording library
to Rhino for use in its boxed set, Songs of the West. Rhino has reported
sales of more than 10,000 units.
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o Heartland Music
This company was founded by Lawrence Welk Jr. in 1983 and is a market
leader. According to USA Today, Heartland sells four to five million album
sets per year. Heartland markets exclusively via direct TV and follow-up
mailings. The company, we believe, has compiled a list of over one million
buyers. Heartland produces for four markets. We compete in two of these:
o Legendary Artists-such as Nat King Cole, Patsy Cline, Jim
Reeves, Mario Lanza, etc.
o Compilation-such as Feel Good Rock, Country Nights, Wacky
Favorites, etc.
o Sony's Columbia Legacy
As a result of Rhino's success, Sony was attracted into the
nostalgia arena and has had some notable successes including blues
man Robert Johnson, which sold more than 600,000 units.
o Curb Records
This company was founded and is owned by Mike Curb, producer and
former Lt. Governor of the State of California. The label has
concentrated on building a "Gold Catalog" as part of their marketing
strategy-mostly licensing Greatest Hits packages from major labels.
o DCC Compact Classics
This is a specialty label that began operations in 1986. DCC has
approximately 100 "vintage classics" in its catalog, plus 15 Gold Releases
and 30 other releases that are marketed separately.
o K-Tel International
K-Tel is an international marketing company listed on the NASDAQ stock
exchange. Approximately 60% of K-Tel's revenues are derived from sales of
entertainment products, primarily compilations of music into themes, such
as Today's Hit Country and The Fabulous 50's. The company markets these
products in Europe and North America through several labels including
K-Tel, Dominion, and Era.
Soundworks' Competitive Position-Music
Each of the above companies enjoys a competitive advantage over Soundworks in
three ways:
o They are able to market their products through direct response TV.
o They are financially able to pursue new products and promote them as
necessary.
o They command the attention of the major distributors when they
release product.
Soundworks enjoys an important advantage over these producers:
o Soundworks has a library of proprietary master recordings.
These recordings are exclusive to SoundWorks and no other competitor can copy,
manufacture and distribute copies made from these masters without obtaining a
master recording license and
29
paying royalties to SoundWorks. A partial list of master recordings owned by
SoundWorks is listed in the "Music Products" section of this document.
Rhino, Heartland, and other producers which specialize in nostalgia material
have built a market for products that sell in 10,000 to 30,000 unit range, but
unlike Soundworks, they do not have a library of master recordings to draw
product from. They must negotiate and pay for a master recording license for
each song they release on an album.
Sony and other majors, have extensive libraries but are unable to compete in
products that sell less than 50,000 units.
Based on its own experience, SoundWorks believes that the major recording
library owners have become less interested in supplying their product to other
labels. SoundWorks has tried on several occasions to obtain licenses from the
majors for release on compilation products. Although the majors are willing to
license, the royalty rate they demanded was so high that the profit margin on
low-budget compilation albums would have been unacceptable.
Competitors-Spoken Word
Rhino is the only competitor now producing material which is roughly comparable
to Soundworks' SpeechWorks(TM) Historical Icon series.
o Rhino Records
Rhino presently produces beat poetry, lectures, and audio tapes, and they
have released a series which they call Great Speeches of the 20th Century.
Other new endeavors include infomercials and a partnership with a radio
network for the release of audio books and concert tapes compiled by the
network. They don't mind trying something new and we must expect that our
penetration of new markets will be noticed. At the present time, Rhino is
concentrated in other product areas and in limited marketing channels.
o Others
Time-Life and other majors can be expected to enter this market if
Soundworks' performance and/or Rhino's performance in this area
demonstrates substantial market demand. Demand of something more than
30,000 units per release would justify their interest. Management believes
the market may be that large, but that Soundworks has the ability to
establish its brand and take substantial market share long before the
competition can get organized.
SoundWorks' Competitive Position-Spoken Word
Soundworks' competitors enjoy the same advantages with respect to
SpeechWorks(TM) products as Soundworks' Jerden Records competitors do with
respect to music products. However, we bring focus of effort to this market
niche which Management believes that our competitors have not shown. This is
demonstrated by our discovery of many buyers in the distribution channel for
SpeechWorks(TM) products that our competitors are either unaware of or not
interested in pursuing, such as museum stores, EDSA and libraries.
Competition - the Internet
Management shares the view of David Geffen, one of the founders of DreamWorks
SKG and a veteran music industry executive who is quoted in the Wall Street
Journal of July 28, 2000 as
30
saying, " All that happened [as a result of Napster] is that the record business
has expanded, and more records will be sold."
BUSINESS COMBINATION WITH
SOUNDWORKS USA, INC.
On September 1, 1997, Soundworks International, Inc. agreed to acquire and merge
with SoundWorks USA, Inc. dba Jerden Records (formerly The Great Northwest Music
Company), a Washington corporation.
The acquisition was effected through a stock exchange. In the acquisition
SoundWorks USA, Inc. became a wholly-owned subsidiary of Soundworks
International, Inc. Shareholders of SoundWorks USA, Inc. received 4 million
shares of common stock of SoundWorks USA, Inc. Upon completing this acquisition,
the former shareholders of SoundWorks USA, Inc. became the majority shareholders
of Soundworks International, Inc. as they acquired approximately 74% of the
combined companies. Shareholders of SoundWorks USA, Inc. received "restricted
securities", in accord with federal and relevant state securities laws.
Directors, Officers and controlling shareholders are subject to the holding
period and volume limitations established by Rule 144 enacted under the
Securities Act of 1933 should they wish to sell
The principal founders of SoundWorks USA, Inc., Gerald B. Dennon and Robert L.
Wikstrom, were elected to the Board of Directors of Soundworks International,
Inc., and they now have full control of all operations, management, policies and
other affairs of Soundworks. See "Management" on page 31.
Legal Proceedings
Soundworks is not a party to any material legal proceedings.
Management
Directors, Executive Officers and Key Employees
The following table provides information about our directors, executive officers
and key employees:
Name Age Served From Position
- ---- --- ----------- --------
Gerald B. Dennon 62 1997 Director, Chairman, President & CEO
Robert L. Wikstrom 54 1997 Director, Vice President, Secretary-
Treas. & Gen Mgr. (COO & CFO)
Robert Flick 62 1999 Director
Dianne Botefuhr 49 1995 Product and Administrative Manager
Daniel Dennon 29 1999 E-Commerce Manager & Art Director
Prior to September 1, 1997, Mr. Dennon and Mr. Wikstrom held similar positions
with SoundWorks USA, Inc. since 1992 and 1993, respectively.
Background of Management and Key Employees
31
Gerald B. Dennon, CEO. Mr. Dennon has held positions in record production,
promotion and distribution, and various other sales and management positions in
the broadcasting and entertainment industries. In 1963 he founded Jerden Music
which discovered, produced, developed and marketed recording artists such as The
Hudson Brothers, Danny O'Keefe, Gail Davies, The Sonics, Don & The Goodtimes,
The Springfield Rifle, The Bards, and Dave Lewis. Mr. Dennon has two Gold
Records as a producer of recordings by The Kingsmen and another Gold Record as a
producer for Ian Whitcomb. He has two CLIOs-the international broadcasting award
honoring the world's best broadcast advertisements. In 1977 Mr. Dennon created
First American Records, Inc. which under several labels-including The Great
Northwest Music Company label-won several Grammy Awards. Since 1982 he has
served as a radio and television media broker and as a consultant to major
companies. He has been Soundworks' President, Chairman and CEO, on a full time
basis, since September 1, 1997.
Robert L. Wikstrom, COO. Mr. Wikstrom is an operations specialist who has
founded radio stations, taken several from bankruptcy to profitability, written
and marketed traffic/billing and music rotation software systems and produced
local television programs. Prior to joining SoundWorks USA, Inc., in March 1993,
and for the previous seven years he was the General Manager of radio station
KKFX in Seattle. Previously, he worked in radio station management for KHIT,
KYYX, and KXA. He has served on the boards of directors of the Puget Sound Radio
Broadcasters, The Washington State Association of Broadcasters and the Northwest
Area Music Association. He has served as Soundworks' Vice President, Director,
Secretary Treasurer and Chief Operating Officer, on a part time basis, since
September 1, 1997. Mr. Wikstrom joined Soundworks, on a full time basis, on May
1, 2000.
Robert Flick, Director. Mr. Flick is, and has for more than the past five years
been a music producer, songwriter and screenwriter. He is a founding member of
the singing group, The Brothers Four. Mr. Flick is also available to serve
Soundworks as an audio and music producer.
Diane Botefuhr. Ms. Botefuhr has been SoundWorks' Product and Administrative
Manager since September 1, 1997. She coordinates all aspects of the production
of audio compact discs, cassettes and videos, from the source master through art
direction, printing and replication. From 1980 to 1986 Ms. Botefuhr served as an
executive for a major magazine distribution company. From 1986-1991 she operated
her own franchising business and from 1991-1993 she worked in the video
production field. From 1993 until joining SoundWorks USA, Inc. in May, 1994, she
served as a real estate investor for her own account. Ms. Botefuhr is a graduate
of the University of Dayton, Dayton, Ohio, where she was awarded a Bachelor of
Science degree in 1974.
Daniel Dennon. Mr. Dennon, is the son of Gerald B. Dennon, the President of
Soundworks. Daniel Dennon is Soundworks' E-Commerce Warehouse Manager and Art
Director. He manages Soundworks' website "soundworks .net" and is responsible
for developing and implementing Soundworks' internet strategy. Prior to joining
us he was, for the preceding 3 years, a member of the crew that managed and
sailed the world on the 145-foot sailing yacht "Juliet."
Advisory Board
Members and Background
Soundworks has, in addition to its regular Board, an advisory board of four who
have experience in the music and broadcasting business. Three have served in
that capacity since September 1, 1997. The fourth, (Mr. Levitt) joined the
advisory board in April of 2000.
32
Clifford Johnston. Mr. Johnston has been an investor relations consultant to a
variety of publicly held corporations since 1997. From 1985 to 2000 he served
first as Secretary/Treasurer of Quality Tax Service, Inc., a tax preparation and
financial planning firm. From July 1, 1996 to November 1, 1996, he was
Presidentof Ultrexx Corporation, a Utah corporation. Prior to that he held a
variety of management positions with Econocraft Corporation, E/S Corporation and
Health Guard International Marketing Corporation.
Arnold Levitt. Mr. Levitt has been the Senior Vice President, Finance, and Chief
Financial Officer of Franklin Electronic Publishers, Inc. (NYSE:FP), a
publisher, since May 1999. From 1996 until May 1999, he was the principal in the
financial consulting firm ADL Associates. From May 1994 to March 1996 he was the
Chief Operating officer of Wico Gaming Supply Corporation in Las Vegas, Nevada.
Previously, he was the CEO and COO of several publishing and manufacturing
companies of which he was the principal shareholder. From 1978 to 1993 Mr.
Levitt was Senior Vice President, Finance and Chief Operating Officer of LFP
Inc., a $250,000,000 magazine publishing and national distribution company.
Jim Newhouse. Mr. Newhouse is, and has been for more than five years, the
President of KC Sales, a Los Angeles based video and record marketing company.
Gary Taylor. Mr. Taylor is a broadcasting executive and consultant. From 1995 to
2000 he was the Senior Vice President and General Manager of Metro Network.
Prior to that he was the General Manager of several major radio stations,
including KYCW, Seattle; K101, San Francisco; KRPM, Seattle, and KZZU, Spokane.
Prior to that Mr. Taylor was the President and CEO of the Broadcast Marketing
Executives Association in Los Angeles.
Director and Advisory Board Compensation
To date, neither the Directors nor the Members of the Advisory Board have been
compensated for their services as such. They will not receive any remuneration
for the ensuing fiscal year other then reimbursement of expenses for attendance
at meetings and for services performed at the behest of Soundworks. For the year
ended December 31, 2000, Messrs. Dennon and Wikstrom received $55,000 and
$27,000 in salary as President and Vice President, Secretary/Treasurer,
respectively.
Vacant Positions and Soundworks' Intentions
Soundworks' intends to fill the following positions within the next six to
twelve months:
Chief Financial Officer
The CFO will be responsible for the integrity of Soundworks' financial systems,
reporting to the CEO and the Board of Directors on the financial position of
Soundworks, and for anticipation of Soundwork's future financial needs. This
position is presently being filled by Soundworks' chief operating officer until
sales volume and production justifies a full-time executive. Should the
acquisition of Santa Fe Acquisitions occur, the increased responsibilities will
require that this position be filled.
Marketing Manager
33
The Marketing Manager will be responsible for marketing and promoting the full
line of Soundworks products. In addition he/she will coordinate marketing and
promotion activities with the Production Manager and our direct TV partners.
This position involves coordinating news releases, production of radio and TV
commercials, sales sheets, production catalogs, etc. We will fill this position
after we receive the proceeds of this offering, assuming a sufficient number of
units are sold if, as and when a successful candidate is recruited.
Committees of the Board of Directors
There are presently no Committees of the Board of Directors.
Executive Compensation
The following table provides information about compensation awarded to, earned
by, or paid to Soundworks Chief Executive Officer and executive officers during
the years ended December 31, 1997, 1998 and 1999. No executive officer or
officers received individually or in the aggregate $100,000 during any year in
that period.
Securities
Other Under-
Annual Restricted lying
Compen- Stock Options/
Name and Position Year Salary Bonus sation Awards SARs
- ----------------- ---- ------ ----- ------ ------ ----
Gerald Dennon, Pres. & CEO 1998 $40,000 0 0 0 0
1999 $55,000 0 0 0 0
2000 $55,000 0 0 0 0
Robert L. Wikstrom, Vice Pres, 1998 $8,000 0 0 0 0
Sectretary, Treasurer & Gen. Mgr.
1999 $8,000 0 0 0 0
2000 $27,000 0 0 0 0
Stock Options Granted to Executive Officers During 1999
No stock options or warrants / SARS have been issued in the past to officers,
directors or members of the Soundworks' advisory board and no grants are
foreseen for the coming fiscal year. Soundworks does not have an employee stock
option plan.
Principal Stockholders
The following table provides information regarding the beneficial ownership of
common stock as of March 31, 2001 by:
o each person or group of affiliated persons known by us to be the
beneficial owner of more than 5% of Soundworks outstanding common
stock,
o each of Soundworks' directors
34
o each of Soundworks' executive officers and
o all of Soundworks' executive officers and directors as a group.
As of that date, there were 8,425,331 shares of common stock outstanding before
giving effect to the sale of units in the offering. The number of shares of
common stock actually owned by each principal stockholder is listed in Column A,
entitled "Shares of Common Stock." In addition, each principal stockholder is
deemed to be the beneficial owner of common stock that he can acquire upon the
exercise of warrants or options on or within 60 days after March 31, 2001,
including options or warrants which vest upon consummation of the offering.
These option and warrant shares, if any, are listed separately in Column B,
entitled "Shares Underlying Options/Warrants." The total of these two columns is
then set forth in Column C. Each principal stockholder's percentage ownership
before the offering is in Column D and is based on the share numbers in Column
C. Column E presents their percentage ownership of outstanding common stock
immediately after the offering taking into account the 1,500,000 shares of
common stock offered as part of units offered for sale in the offering and
assuming all will be sold. The warrants included in units offered in the
offering are disregarded in calculating the percentages in Column E. Unless
otherwise noted, we believe that all persons named in the table have sole voting
and investment power with respect to all shares beneficially owned.
Total Total
Shares Percentage Percentage
Shares of Underlying Total Owned Owned
Name of Beneficial Common Warrants/ Beneficial Before After
Owner Stock to Options Ownership Offering Offering
- ----- ----- ---------- --------- -------- --------
Gerald B. Dennon * 3,520,452 0 3,520,452 41.8% 35.5%
Robert L. Wikstrom 159,956 0 159,956 1.9% 1.6%
Clifford M. Johnston 3,240,564 0 648,113 7.7% 6.6%
All Executive
Officers and
Directors as a Group
(3 persons) 3,680,408 0 3,680,408 43.7% 37.1%
- ----------
* Excludes 10,000 shares owned by Daniel Dennon, an adult son of Gerald B.
Dennon. Gerald B. Dennon disclaims beneficial interest in those shares.
Certain Transactions
In September 1997 Soundworks acquired the music voice library and Jerden Records
business from a corporation, SoundWorks USA, Inc., owned principally by Gerald
B. Dennon, President and Director of Soundworks for 4 million shares of
Soundworks stock. The Board of Directors valued these assets at $100,000.
In May 1997 Soundworks entered into an agreement with TCKTS, LLC. d.b.a. Bristol
Media, Ltd. under which that firm agreed to provide financial, venture capital,
public relations and brokerage relations consulting services to Soundworks in
return for 400,000 shares of Soundworks stock. The stock was to be divided
equally between three contractors; Toby
35
Investments, L.L.C. (public relations services), 4 Point Lake L.L.C.
(regulation/compliance services), and XXX Enterprises Corp. (brokerage and
investor relations consulting services) The three contractors were issued
warrants to acquire an additional total of one million shares of Soundworks
stock at 50 cents a share for the one year period ended July 31, 1998. Toby
Investments is managed by Gerald B. Dennon for the benefit of the Dennon Family
Trust and 4 Point Lake is owned and controlled by Clifford M. Johnston and his
wife, Judy Morton Johnston. Mr. Johnston is a member of the advisory Board and
Mr. and Mrs. Johnston holds approximately 8% of Soundworks' shares. The options
referred to have been exercised and each of Toby Investments, 4 Point Lake and
XXX Enterprises Corp. have agreed that all transactions they do on behalf of
Soundworks will be done according to industry standards and on terms no more
favorable than if negotiated at arms length.
In February 2000, Soundworks entered into a Letter of Intent to acquire Santa Fe
Acquisitions, Inc. for $380,000. Through March 31, 200 Soundworks has loaned
Santa Fe $55,000 to cover its operating expenses. We will use part of the
proceeds of this offering to acquire all of the outstanding shares of Santa Fe
Acquisitions, Inc. Santa Fe Acquisitions Inc. is presently wholly owned by
Gerald B. Dennon, Soundworks' Chairman, President and CEO. Santa Fe's sole asset
is an agreement to buy the assets of Sunset Productions for $380,000. Sunset
owns a music library viewed by Management to be complimentary to that owned by
Soundworks and an Audio Book line of products. If we do not sell all of the
units we are offering, we may be unable to complete this acquisition. For a more
complete discussion see "Use of Proceeds" at page 11.
Soundworks also leases its 4,000 square feet of office and warehouse space from
Montcalm, LLC, which is wholly owned by Montcalm, Inc. Montcalm, Inc. is the
entity through which Mr. Dennon operates a radio and television station
brokerage business. Montcalm, Inc. conducts substantial operations out of the
same physical premises as SoundWorks International, Inc. and reimburses
SoundWorks International, Inc. for a portion of the rent paid by Soundworks
based on the relative revenues of the two companies. Soundworks believes the
rental charge of $2,000 a month it pays Montcalm LLC (after taking the
reimbursement into account) is at or below market.
Soundworks also acquired its Master Tape Library, as noted above, at a deemed
value of $100,000 from Mr. Dennon for stock at Soundworks inception. In
addition, $50,000 was paid to a third party for accumulated storage and other
expenses associated with the Master Tape Library through issuance to him of
100,000 shares of Soundworks shares.
Mr. Dennon and Montcalm, Inc., as at December 31, 2000, together owe Soundworks
$146,001 as a result of the reapportionment of rental charges for the space
occupied by Soundworks to Montcalm, Inc. and other entities controlled by Mr.
Dennon, as well as other expenses of operation that had been paid entirely by
Soundworks. The reapportionment was for the period from its effective date,
January 1, 1997, through December 31, 2000. This obligation to Soundworks is
represented as an account receivable due. The obligation is not reflected by a
Note and the obligation bears no interest.
On October 18, 2000 the Board of Directors awarded Mr. Dennon 6,000 shares out
of the 30,000 shares of restricted stock of SpeechWorks International, Inc.
stock owned by the Company. The Directors made this award because of his
extraordinary initial efforts in securing the asset for the Company; because of
Mr. Dennon's personal guarantees on a $25,000 bridge loan and a $250,000 bridge
loan secured for the Company; and because of Mr. Dennon agreed to transfer
36
900,000 of his personal shares back to the Company to be held as treasury stock.
These 900,000 shares were approximately equal in value to the 6,000 shares of
SpeechWorks stocks discounted to fifty percent based on the stock being
restricted for one year, and consequently subject to potential market
fluctuations. The award will be implemented following the pay-off of the
$250,000 bridge loan described in Note 8 to the financial statements.
Description of Capital Stock
Upon completion of the offering, Soundworks authorized capital stock will
consist of 50,000,000 shares of common stock, $0.001 par value per share. The
following description of Soundworks' capital stock is a summary only. A detailed
description is to be found in Soundworks' Amended and Certificate of
Incorporation as Amended and By-laws, copies of which have been filed as
exhibits to the registration statement of which this Prospectus forms a part.
Soundworks is not authorized under its articles of incorporation or bylaws to
issue any shares of preferred stock.
Units
Each unit consists of one share of common stock and one warrant to purchase an
additional share of common stock. The units will automatically separate 30 days
from the date of this Prospectus, after which the common stock and warrants in
the units will trade separately.
Common Stock
The issued and outstanding shares of common stock being offered will be, when
sold and issued, validly issued, fully paid for and not subject to assessments
by Soundworks. Each holder of shares of common stock will be entitled to one
vote for each share held of record and may not cumulate votes for election of
directors. This means that if five directors are being elected and the
shareholder owns 1 share, each share may be voted once for each director and
that the shareholder is not entitled to instead vote 5 times for a single
director for each share he holds. Cumulative voting often allows a minority
shareholder to elect a representative director while in Soundworks case a
majority of the shareholders will elect all of the directors. The shares will
not be entitled to preemptive rights under applicable law and will not be
subject to redemption or assessment. The lack of preemptive rights means that if
Soundworks issues additional shares a present shareholder will have no right to
retain his/her percentage interest in Soundworks by purchasing some of the
offered shares. Subject to the rights and preferences of the holders of any
preferred stock outstanding in the future, upon Soundworks' liquidation,
dissolution or winding-up, the holders of shares of common stock will be
entitled to receive, pro rata, its assets which are legally available for
distribution to stockholders. In addition, subject to the rights and preferences
of the holders of any preferred stock outstanding in the future, the holders of
shares of common stock will be entitled to share ratably in dividends as, if and
when declared by its Board of Directors. Soundworks does not anticipate that any
dividends will be paid in the foreseeable future. As of March 31, 2001, there
were approximately 500 holders of common stock.
The following table sets forth, for the period from January 1998 through
December 2000, the high and low bid quotations each quarter for the Common Stock
as reported by the OTC Bulletin Board through May 2000, and in the "pink sheets"
thereafter, as reported by the National Quotation Bureau, Inc. The Company's
stock began trading traded on the OTCBB under the stock symbol "SOWK" until
April, 2000. The Company lost its listing on the OTCBB because of its failure to
file audited financial statements with the Securities and Exchange Commission to
be
37
recognized as a fully reporting company. The prices represent quotations between
dealers, without adjustment for retail markup, mark down or commission, and do
not necessarily represent actual transactions.
2000 HIGH LOW
---- ---- ---
1st Quarter 0.5200 0.165
2nd Quarter 0.5500 0.1
3rd Quarter 0.2100 0.085
4th Quarter 0.1700 0.02
1999
----
1st Quarter 0.8125 0.125
2nd Quarter 0.5000 0.1975
3rd Quarter 0.3600 0.1875
4th Quarter 0.4000 0.11
1998
----
3rd Quarter 0.2500 0.25
4th Quarter 0.5000 0.125
There was no trading in the shares prior to the third quarter of 1998.
Unit Warrants
Each warrant comprising part of the units sold in the offering will entitle the
holder to purchase one share of common stock at an exercise price of $1.20. We
may reduce the exercise price of the warrants for a period of at least 20 days.
If we do reduce the exercise price, we will comply with the SEC's regulations
concerning issuer tender offers to the extent they apply. The warrants will
generally be exercisable at any time commencing 30 days after the date of this
Prospectus until the fifth anniversary of the date of this Prospectus, unless
earlier redeemed. We may redeem all or some of the warrants, pro rata, from all
warrant holders, at a price of $0.05 per warrant, upon 30 days' prior written
notice, if the closing bid price (if the common stock is not traded on an
exchange) or the closing price (if the common stock is traded on an exchange),
per share of common stock for the ten consecutive trading days immediately
before the date of notice of redemption equals or exceeds $2.40. We cannot
redeem any warrants until six months have passed from the date of this
Prospectus. We may give more than one notice of redemption. If given, notices of
redemption must to be mailed by registered or certified mail to record holders
of warrants. If we give notice of our intention to redeem, a holder will have
the choice either to sell or exercise his or her warrants before the date
specified in the redemption notice or to accept
38
the redemption price. After the redemption date, there can be no exercise of the
warrants that were the subject of the redemption.
The warrants will be issued in registered form. The shares of common stock
underlying the warrants, when issued upon exercise of a warrant, will be fully
paid and non-assessable. Soundworks will pay any transfer tax incurred as a
result of the issuance of common stock to the holder upon its exercise.
The warrants contain provisions that protect the holders against dilution by
adjustment of the exercise price. These adjustments will occur in the event of a
merger, consolidation, sale or conveyance of all of the capital stock or
substantially all of the assets of Soundworks, a stock split, or reverse stock
split, stock dividend, capital reorganization or reclassification of our common
stock. If there is a recapitalization or reclassification, the number of shares
that warrant holders may purchase will be increased or decreased indirect
proportion to the increase or decrease is in the number of shares of common
stock outstanding resulting from the recapitalization or reclassification. If
the number of shares is increased, the purchase price per share on exercise of
the warrants will be proportionately decreased; if the number of shares is
decreased, the purchase price per share on exercise of the warrants will be
proportionately increased. If there is a stock split, reverse stock split or
stock dividend, the number of shares that warrant holders may purchase on
exercise of the warrants will equal the number of shares the warrant holder
would have received if he or she had exercise the warrant immediately before the
record date or other date fixing shareholders to be affected by the event. If
there is a merger, consolidation, conveyance of all of the capital stock or
substantially all of the assets of Soundworks, then we must have provisions made
so that on exercise of the warrants the warrant holders will be entitled to
receive the same kind and amount of shares, debt securities or other property
that a holder of the number of shares of common stock covered by the warrant
would have received in the transaction. We have the option to issue fractional
shares or cash for fractional shares upon the exercise of a warrant. The holder
of a warrant will not, as a result of owning a warrant, have any rights as a
Soundworks' shareholder until he or she exercises the warrant.
A warrant may be exercised upon surrender of the warrant certificate on or
before the expiration or redemption date of the warrant at the offices of the
warrant agent, with the form of "Election to Purchase" on the reverse side of
the warrant certificate completed and executed as indicated, accompanied by
payment of the exercise price (by certified or bank check payable to the order
of Soundworks, Inc.) for the number of shares for which the warrant is being
exercised.
For a holder to exercise the warrants, there must be a current registration
statement in effect with the Securities and Exchange Commission and
qualification in effect under applicable state securities laws (or applicable
exemptions from state qualification requirements) with respect to the issuance
of common stock or other securities underlying the warrants. We intend to use
all commercially reasonable efforts to cause the registration statement, of
which this Prospectus forms a part, to remain effective before the exercise of
the warrants and to take other actions under the laws of various states as may
be required to cause the sale of common stock upon the exercise of warrants to
be lawful. We will not be required to honor the exercise of warrants if, in the
opinion of our Board of Directors, acting with the advice of counsel, the sale
of securities upon exercise would be unlawful. If the securities underlying the
warrants are not registered under a current effective registration statement or
qualified under applicable state securities laws and securities of the same
class are listed on a securities exchange or there are at least two
39
independent market makers for the securities of the same class, we may elect to
redeem warrants submitted for exercise instead of obtaining registration and
qualification. If we elect to redeem the warrants instead of registering and
qualifying the common stock the redemption price of the warrants would be equal
to the difference between the aggregate low asked price or closing price of the
securities underlying the warrants and the exercise price of the warrants.
The form of warrant agreement with The Fidelity Transfer Company has been filed
as an exhibit to the registration statement of which this Prospectus is a part.
For the life of the warrants, the holders have the opportunity to profit from a
rise in the market price of the common stock without assuming the risk of owning
of the shares of common stock underlying the warrants. The warrant holders may
be expected to exercise their warrants at a time when we would, in all
likelihood, be able to obtain any needed capital by an offering of common stock
on terms more favorable than those provided for by the warrants. Furthermore,
the terms on which Soundworks could obtain additional capital during the life of
the warrants may be adversely affected by the existence of the warrants.
Federal Income Tax Considerations
The following discussion sets forth the material federal income tax
consequences, under current law, relating to the purchase and sale of the units
and the underlying common stock and warrants. The discussion is a summary and
does not deal with all aspects of federal taxation that may be applicable to an
investor. It does not consider specific facts and circumstances that may be
relevant to a particular investor's tax position. Some holders, such as dealers
in securities, insurance companies, tax exempt organizations, foreign persons
and those holding common stock or warrants as part of a straddle or hedge
transaction, may be subject to special rules that are not addressed in this
discussion. This discussion is based only on current provisions of the Internal
Revenue Code of 1986, as amended, and on administrative and judicial
interpretations as of the date of this prospectus, all of which are subject to
change. You should consult your own tax advisor as to the specific tax
consequences to you of this offering, including the applicability of federal,
state, local and foreign tax laws.
Allocation of Purchase Price
Each unit as a whole will have a tax basis equal to the cost of the unit. The
measure of income or loss from some of the transactions described below depends
on the tax basis in each of the warrant and the common stock comprising the
unit. Soundworks has allocated the purchase price between the warrant and the
common stock so that the tax basis for the warrant will be $0.05 and the tax
basis for the common stock will be equal to $0.95. If you disagree with the
allocation, please see your tax advisor for advice on how to notify the Internal
Revenue Service that you disagree with the allocation and claim a different
basis.
Exercise or Sale of Warrants
No gain or loss will be recognized by a holder of a warrant on the purchase of
shares of common stock for cash on an exercise of a warrant, except that gain
will be recognized to the extent cash is received in the place of fractional
shares. The tax basis of common stock received upon exercise of a warrant will
equal the sum of the holder's tax basis for the exercised warrant and the
exercise price. The holding period of the common stock acquired will begin on
the date the warrant is exercised and the common stock is purchased. It does not
include the period during which the warrant was held.
40
Gain or loss from the sale or other disposition of a warrant will be capital
gain or loss to its holder if the common stock to which the warrant relates
would have been a capital asset in the holder's hands. This capital gain or loss
will be long-term capital gain or loss if the holder has held the warrant for
more than one year at the time of the sale, disposition or lapse. If we redeem a
warrant, the holder generally will realize capital gain or loss. Individuals
generally have a maximum federal income tax of 20% on long term capital gains.
The deduction of capital losses is subject to limitations.
Sale of Common Stock
A holder who sells common stock other than in connection with a tax free
reorganization of Soundworks will recognize gain or loss in an amount equal to
the difference between the amount realized and the holder's tax basis in the
common stock. If the common stock is a capital asset in the holder's hands gain
or loss upon the sale of the common stock will be a long-term or short-term
capital gain or loss, depending on whether the common stock has been held for
more than one year. Individuals generally have a maximum federal income tax of
20% on long term capital gains. The deductions of capital losses is subject to
limitations.
Expiration of Warrants Without Exercise
If a holder of a warrant allows it to expire without exercise, the expiration
will be treated as a sale or exchange of the warrant on the expiration date. The
holder will have a loss equal to the amount of such holder's tax basis in the
lapsed warrant. If the warrant is a capital asset in the hands of the holder,
the loss will be a long-term or short-term capital loss, depending on whether
the warrant was held for more than one year. The deduction of capital losses is
subject to limitations.
Takeover Protection and Certain Charter and By-law Provisions
Provisions of the Nevada General Corporation Law (the "NGCL"), Soundworks
Certificate of Incorporation (the "Charter") and its By-Laws (the "By-Laws") may
delay, deter or prevent a tender offer, proxy contest or other takeover attempt.
This may be true even if a takeover attempt is at a premium over market price
for shares held by stockholders.
We are subject to the provisions of Section 203 of the NGCL which prohibits,
subject to exceptions, a Nevada corporation from engaging in any business
combination with any interested stockholder for a period of three years
following the date that such stockholder became an interested stockholder. A
business combination includes mergers, asset sales and other transactions that
may result in a financial benefit to stockholders. A person is an interested
stockholder triggering this protection if the person together with any of his
affiliates or associates, beneficially owns, directly or indirectly, 15% or more
of Soundworks' outstanding voting stock. There are three exceptions to these
provisions. First, if Soundworks' Board of Directors gives prior approval to
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder then the restrictions do not
apply. Second, the restrictions will not apply if, upon the consummation of the
transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owns at least 85% of Soundworks'
outstanding voting stock. Finally, the restrictions will not apply if, at the
time of or following completion of the transaction in which the stockholder
became an interested stockholder, Soundworks' Board of Directors approves the
business combination and stockholders holding at least 66 2/3% of Soundworks'
outstanding voting stock not owned by the
41
interested stockholder authorize the business combinations. Section 203 will not
prevent the proposed acquisition of Santa Fe Acquisitions, Inc., since that
transaction will be completed only if it is approved by Soundworks' Board of
Directors.
Our Certificate of Incorporation does not permit stockholders to act by written
consent in lieu of a meeting. Our Certificate of Incorporation and By-laws also
provide that special meetings of stockholders may only be called by a majority
of its Board of Directors, its Chairman or its Chief Executive Officer.
Stockholders will not be permitted to call a special meeting or to require that
Soundworks' Board of Directors call a special meeting of stockholders. These
provisions make it difficult for you to compel the calling of a meeting to
discuss grievances you may have with management.
The provisions of the Certificate of Incorporation and the By-laws summarized in
the preceding paragraphs may delay, deter or prevent a merger or other business
combination that might be attractive to you but not to management. These
provisions are intended to encourage any person interested in acquiring
Soundworks' to negotiate with and obtain the approval of its Board of Directors
in connection with the transaction. These provisions could also discourage bids
for our common stock at a premium, as well as depress the market price of our
common stock. See "
Balance Sheet Data:
Working capital: $(112,857) $340,213
Total assets 657,538 726,298
Total liabilities 389,576 100,723
Stockholders' equity (deficiency) 267,962 625,575
No calculation has been made of average weighted shares outstanding, as changes
in outstanding shares during the applicable years were immaterial.
Risk Factors--Statute, Charter and By-laws May Delay or Prevent Acquisition of
SoundWorks."
Our By-laws establish an advance notice procedure for nomination, other than by
or at the direction of its Board of Directors, of candidates for election as
directors. Advance notice procedures also exist for other stockholder proposals
to be considered at annual or special meetings of stockholders. In general, we
must receive notice of intent to nominate a director or raise business at an
annual meeting not less than 60 nor more than 90 days prior to the scheduled
annual meeting. In the case of a special meeting called to elect directors, the
notice of intent must be received not later than the close of business on the
fifth day following the day on which notice of the date of the meeting was
mailed. The notice of intent must contain specific information about the person
to be nominated or the matter to be brought before the meeting.
Transfer Agent
The transfer and warrant agent for our units, common stock and warrants is The
Fidelity Transfer Company 1800 South West Temple (Suite 301), Salt Lake City,
Utah 84115
42
Shares Eligible for Future Sale
Upon completion of the offering, we expect to have 9,925,331 shares of common
stock outstanding, assuming no exercise of outstanding options or warrants. Of
these shares, the 1,500,000 shares of common stock, and the 1,500,000 shares of
common stock issued upon exercise of the warrants, issued as part of the units
sold in the offering will (assuming a registration is in effect when the
warrants are exercised) be freely tradable without restrictions or further
registration under the Securities Act, except that any shares purchased by
people who control us, may generally only be sold in compliance with the
limitations of Rule 144 under the Securities Act. All of the remaining
outstanding shares of common stock are restricted securities within the meaning
of Rule 144 and may not be sold unless they are either registered under the
Securities Act or an exemption from registration is available, including the
exemption from registration offered by Rule 144.
In general, under Rule 144, as currently in effect, beginning 90 days after the
date of this Prospectus, a person who has beneficially owned restricted shares
for at least one year, including a controlling person, may sell within any
three-month period a number of shares of common stock that does not exceed a
maximum number of shares. This maximum is equal to the greater of 1% of the then
outstanding shares of Soundworks' common stock . Sales under Rule 144 are also
subject to restrictions relating to manner of sale, notice and availability of
current public information about us. In addition, under Rule 144(k) of the
Securities Act, a person who is not our affiliate, has not been an affiliate of
ours within three months prior to the sale and has beneficially owned shares for
at least two years, would be entitled to sell those shares immediately without
regard to volume limitations, manner of sale provisions, notice or other
requirements of Rule 144.
Prior to this offering, our shares have traded on the NASDAQ Electronic Bulletin
Board and Pink Sheets. We expect that after this offering we will apply to
resume trading of our securities on the Bulletin Board. There has been no
significant trading in volume of our common stock and there can be no assurance
that a significant public market for the common stock will develop or be
sustained after the offering. Future sales of substantial amounts of common
stock, including shares issued upon exercise of outstanding warrants in the
public market after the offering, or the perception that such sales may occur,
from time to time, could adversely affect market prices of our securities and
impair our ability to raise capital by selling securities.
Legal Matters
The validity of units offered hereby will be passed upon for us by Raice Paykin
& Krieg LLP of New York, New York, which has acted as counsel for Soundworks in
connection with the offering.
Experts
The audited financial statements included in this prospectus and elsewhere in
the registration statement for the fiscal years ended December 31, 1997-1999
have been audited by William L. Butcher, CPA, P.S., independent public
accountants, as indicated in the reports with respect thereto, and are included
herein in reliance upon the authority of that firm as experts in accounting and
auditing. The report contained elsewhere in this Prospectus on Soundworks
contains an explanatory paragraph regarding its ability to continue as a going
concern.
43
Where You Can Get More Information
Our fiscal year ends on December 31. We will file annual, quarterly and current
reports, proxy statements and other information with the Securities and Exchange
Commission. You may read and copy any reports, statements or other information
on file at the SEC's public reference room in Washington, D.C. You can request
copies of those documents, upon payment of a duplicating fee, by writing to the
SEC.
We have filed a registration statement on Form SB-2 with the SEC. This
prospectus, which forms a part of that registration statement, does not contain
all of the information included in the registration statement. References made
in this Prospectus to any contract or other document relating to us, such
references are not necessarily complete. You should refer to the exhibits
attached to the registration statement for copies of the actual contract or
document. You may review a copy of the registration statement at the SEC's
public reference room in Washington, D.C., and at the SEC's regional offices in
Los Angeles, California and New York, New York. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the public reference
rooms. Our SEC filings, including the registration statement, can also be
reviewed by accessing the SEC's Internet site at http://www.sec.gov.
44
SOUNDWORKS INTERNATIONAL, INC.
AND SUBSIDIARY
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Public Accountants................................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Loss and Accumulated Deficit.................... F-4
Consolidated Statements of Cash Flows...................................... F-5
Consolidated Statements of Changes in Stockholders' Equity ................ F-7
Notes to Financial Statements.............................................. F-8
F-1
WILLIAM L. BUTCHER, CPA P.S.
-------------Certified Public Accountant------------
Everett-(425) 335-0603 Fax- (425) 335-3567
Marysville-(360) 683-9460 Fax -(360) 658-1165
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
SoundWorks International, Inc.
Rolling Bay, Washington
I have audited the accompanying Consolidated Balance Sheet of SoundWorks
International, Inc. and subsidiary as of December 31, 1999, 1998 and 1997 and
the related Consolidated Statements of Loss and Deficit, Consolidated Statement
of Cash Flows for the periods than ended, and the Consolidated Statement of
Changes in Stockholders' Equity. My responsibility is to express an opinion on
those financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing
standards. Those standards require that I 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.
I believe that my audit provide a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of SoundWorks International,
Inc. and subsidiary as of December 31, 1999, 1998 and 1997 and the results of
its operations and its cash flows for the periods than ended in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
SoundWorks International, Inc. will continue as a going concern. As discussed in
Note 4 to the financial statements, SoundWorks International, Inc. is engaged in
new operations, and the ability to continue to exist as a going concern relies
on the company's ability to retain adequate financing and to generate sufficient
sales. These conditions raise substantial doubt about the company's ability to
continue as a going concern. Management plans in this regard are described in
Note 4. The financial statements do not include any adjustment that might result
from the outcome of the uncertainty of future agreements, financings or sales.
/S/ William L. Butcher
William L. Butcher, CPA, P.S.
Everett, Washington
May 23, 2000
See accompanying notes and auditor's report
F-2
SOUNDWORKS INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
December 31, 2000 and 1999 Audited
ASSETS
Audited
-------
12/31/00 12/31/99
-------- --------
CURRENT ASSETS
Accounts Receivable $98,478 16,682
Inventory 47,212 48,579
Deposits & Prepaid Expenses -0- 1,931
Notes Receivable (Note 4) 131,029 373,744
----------- -----------
Total Current Assets 276,719 438,301
----------- -----------
FIXED ASSETS
Equipment 22,465 19,791
Furniture & Fixtures 3,126 2,800
Leasehold Improvements 3,,039 2,024
Less: Accumulated Depreciation (22,506) (21,813)
Master Tape Library (N.3) 150,000 150,000
Less: Accumulated Depreciation (107,940) (55,644)
----------- -----------
Total Fixed Assets 92,161 97,161
----------- -----------
OTHER ASSETS
Investment-SpeechWorks (Note 3) 85,000 -0-
Loan Rec. Santa Fe (N.4) 89,353 -0-
Loan Rec Montcalm 158,012 188,201
----------- -----------
Total Other Assets 332,365 188,201
----------- -----------
TOTAL ASSETS $657,538 $726,298
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $104,592 $62,717
Notes Payable (N.7) 257,375 7,375
Adv. Royalties Payable (N 9) 27,609 30,631
----------- -----------
Total Current LiabilitieS 389,576 100,723
----------- -----------
LONG TERM LIABILITIES -0- -0-
----------- -----------
STOCKHOLDERS EQUITY
Common Stock, $0.001 par value, 42,126 42,096
50,000,000 shares authorized; 42,096,655
shares issued and outstanding at
December 31,1999; 42,126,555 shares
issued and outstanding at December 31, 2000
Paid in Capital 1,292,761 1,286,779
Accumulated Deficit (1,066,925) (703,300)
----------- -----------
Total Stockholders' Equity $267,962 625,575
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $649,482 $726,298
=========== ===========
See accompanying notes and auditor's report
F-3
SOUNDWORKS INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF LOSS AND ACCUMULATED DEFICIT
December 31, 2000 and 1999 Audited
Year Ended Year Ended
12/31/00 12/31/99
-------- --------
Revenues
Sales - Videos $47,174 $39,183
Sales - Spoken Word 175,911 79,087
Sales - Music 21,674 17,736
Sales - Other -0- 23
Royalties Received 17,938 1,647
----------- -----------
Total Sales $262,697 $137,676
Cost of Goods Sold
Cost of Goods Sold 31,890 24,269
Vendor Adjustments (21,145) (16,775)
----------- -----------
Total Cost of Goods Sold $10,745 $7,494
----------- -----------
GrossProfit $251,952 $130,182
Expenses
Advertising & Promotion 103,543 74,647
General & Administrative 21,786 29,036
Legal, Accounting, Audit & 179,807 56,926
Professional Fees
Plant & Equipment Expense 92,339 35,955
Printing, Reproduction, 53,658 37,558
Production & Shipping
Wages, Commissions
& Consulting Fees 88,911 63,838
----------- -----------
Total Operating Expenses $540,044 $297,960
----------- -----------
Other Income & Expense
Interest Expense $(40,636) $(9,796)
----------- -----------
Net Loss (328,728) (177,574)
----------- -----------
Net Loss Per Share (.01) (.00)
----------- -----------
Accumulated Deficit, end of period (703,300) (525,726)
Adjustment-Accumulated Deficit to (34,897) -0-
reconcile tax and book ----------- -----------
depreciation (Note 11)
Accumulated Deficit, end of period $(1,066,925) $(703,300)
----------- -----------
See accompanying notes and auditor's report
F-4
SOUNDWORKS INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE PERIODS ENDED
December 31, 2000 and 1999 Audited
YearEnded YearEnded
12/31/00 12/31/99
-------- --------
Cash Flows From Operating
Activities:
NetLoss $(328,728) $(177,574)
--------- ---------
Adjustment to Reconcile Net Loss to
Net Cash Provided by Operating
Expenses:
Depreciation 52,992 9,903
(Increase) Decrease In:
Accounts Receivable (81,796) 28,163
Leasehold Improvements (1,285) 0
Inventory 1,367 (10,775)
Deposits, Prepaid Expense 1,931 0
Equipment (2,674) 0
Furniture & Fixtures (326) 0
Increase (Decrease) In:
Accounts Payable 36,454 8,005
Adjustment-Retained
Earnings (34,897) 0
--------- ---------
Total Adjustments (28,234) 35,296
--------- ---------
Net Cash Used In Operating (356,962) (142,278)
Activities:
Cash Flows From Financing
Activities:
NotesReceivable 242,715 (373,744)
NotesPayable 250,000 (1,100)
Advance Royalties Payable (3,022) (900)
LoanRec.-SantaFe (89,353) 0
LoanRec.-Shareholder 30,189 (57,754)
Common Stock 30 34,842
Paid in Capital 5,982 541,233
Deposits on Options -0- (2,591)
--------- ---------
Net Cash Received From
Financing Activities: 351,541 139,986
Cash Beginning of Periods (2,635) (343)
Cash End of Periods (8,056) (2,635)
========= =========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
On March 19, 1997, SoundWorks International, Inc. issued 1,012,531 shares of its
common stock and was formed as a result of a spin-off to stockholders of E/S
Corporation.
On September 1, 1997 SoundWorks International, Inc. issued 4,000,000 shares of
its common stock valued at $(429,253) to stockholders of SoundWorks USA, Inc. to
acquire 100% of the issued and outstanding common stock of SoundWorks USA, Inc.
dba Jerden Records.
See accompanying notes and auditor's report
F-5
Also on September 1, 1997 SoundWorks International, Inc. issued 400,000 shares
of its common stock (133,334 to Toby Investments, L.L.C., 133,333 to 4 Point
Lake, L.L.C., and 133,333 to XXX Enterprises Corp.) valued at $400 for
consulting services rendered incident to the acquisition of SoundWorks USA, Inc.
On February 10, 1999, SoundWorks International, Inc. issued 31,400 shares of its
common stock valued at $15,700 for consulting services rendered to the Company
and 14,000 shares of its common stock valued at $7,000 for website development
services rendered to the Company.
On February 10, 1999 SoundWorks International Inc. issued a stock dividend of 4
shares of its common stock for each 1 share of common stock. No value was
ascribed for this stock dividend.
In March 1999 SoundWorks International, Inc. issued 64,000 shares of its common
stock to correct inequities to individuals trading in the Company's common stock
as a result of a confusion over the Company's record date for its stock
dividend.
In March 2000 SoundWorks International, Inc. issued 30,000 shares of its common
stock valued at $6,000 for consulting services to the Company.
See accompanying notes and auditor's report
F-6
SOUNDWORKS INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
SEPTEMBER 30, 2000 AND 1999 UNAUDITED AND DECEMBER 31, 1999 AND 1998 AUDITED
Par Value Paid In Accumulated
Shares Amount Capital Losses Total
------ ------ ------- ------ -----
BALANCE DEC. 31,1998 7,254,381 7,254 745,546 (525,726) 227,074
February 10, 1999 - Issuance of 31,400 31,400 31 15,669 - 0- 15,700
shares of $0.001 par value common stock
for $15,700 in services from 504 Reg
D offering
February 10, 1999 - Issuance of 14,000 14,000 14 6,986 -0- 7,000
of Restricted Rule 144 shares for
services (Web site development)
February 10, 1999 - Issuance of 1,106,750 1,107 552,268 -0- 553,375
1,106,750 shares of $0.001 par value
common stock for $553,375 from 504
Reg D offering
Subtotal 8,406,531 8,406 1,320,469 (525,726) 803,149
February 12, 1999 - Issuance of a 4 33,626,124 33,626 (33,626) -0- -0-
shares for 1 share stock dividend
March, 1999 - Issuance of stock, record 64,000 64 (64) -0- -0-
date corrections
Net Loss - Year Ended December 31, 1999 (177,574) (177,574)
---------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1999 42,096,655 42,096 1,286,779 (703,300) 625,575
March, 2000 - Issuance of 30,000 shares 30,000 30 5,970 -0- 6,000
of restricted Rule 144 stock for
services
Adjustment - Accumulated Deficit to -0- -0- 12 (34,897) (34,885)
reconcile tax and book depreciation
Net Loss - Year Ended December 31, 2000 -0- -0- -0- (328,728) (328,728)
---------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 2000 42,126,655 42,126 1,292,761 1,066,925 267,962
========== ========== ========== ========== ==========
See accompanying notes and auditor's report
F-7
SOUNDWORKS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1998
Note 1. The Company
SoundWorks USA, Inc. ("the Company") is a Washington corporation founded
December 16, 1992. The Company produces and markets spoken word and music
products on audio compact disc, cassette tapes, and video. These products are
marketed under the Company's trade names Jerden Records and SpeechWorks(TM). Its
focus is on "nostalgia" products.
The Jerden Records products consist of original music from the company's
extensive library of original master recordings performed by some of the top
names of the 50's and 60's, including The Kingsmen, Don & The Goodtimes,
Shocking Blue, The Brothers Four, Wes Montgomery, Pete Fountain, etc. Some of
the products are "Greatest Hits" compilations, or songs from popular albums that
have never before been produced on CD format.
The Company's library of master recordings contains a wealth of original
material, which will allow the Company to produce marketable releases of
favorite nostalgia artists for years to come. Some of the material will be
distributed through normal channels, and some will be designed and produced
specifically for direct TV marketing. Material in the master library is
copyrighted and royalties are payable upon the sale of the recording. As one
would expect with a library of original recordings this large, the Company will
need to verify the legal standing of its copyrights before production is begun
on any particular title. The Company believes its copyrights are in order but
also recognizes that its library contains some material where copyrights are
clouded. Historical Icon material is in the public domain, and therefore
requires no payment of royalties.
Jerry Dennon is the founder of the Company and brings demonstrated experience
and ability to the task of President. His experience includes positions in
record production, promotion and distribution as well as various positions in
the broadcasting and entertainment industries. He has worked in sales and
management and has founded and led other successful companies.
In 1963 Mr. Dennon founded Jerden Music as a production company to produce and
develop recording artists. His first major hit was "Louie Louie" by The
Kingsmen. Artists discovered, developed, produced, or marketed by Mr. Dennon
from 1962 to 1970 include The Hudson Brothers, Danny O'Keefe, Gail Davies, The
Sonics, Don & The Goodtimes, The Springfield Rifle, The Bards, Dave Lewis, and
many more. Mr. Dennon has two Gold Records as a producer of recordings by The
Kingsmen and another Gold Record as a producer for Ian Whitcomb. He has two
CLIOs-the international broadcasting award honoring the world's best broadcast
advertisements.
F-8
SOUNDWORKS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1998
In 1977 Mr. Dennon created First American Records, Inc. which under several
labels--including The Great Northwest Music Company label--won several Grammy
Awards. Under his leadership, that company became the predominant record company
in the Northwest. With First American Records, Mr. Dennon acquired and marketed
recordings of many more name artists. Before selling First American in 1982, he
also discovered, developed, produced or marketed many new artists including
Diane Schuur, Jennifer Rush, Scott Cossu, and many more.
SoundWorks International, Inc. ("SoundWorks"), a Nevada corporation, was formed
on March 19, 1997 as a subsidiary of E/S Corporation for the purpose of
acquiring SoundWorks USA, Inc., a Washington corporation, by issuing shares of
E/S Corporation for such acquisition. E/S Corporation changed its plans for this
acquisition, and on April 17, 1997 it spun off to its shareholders by means of a
dividend 100% (1,012,531 shares) of the issued and outstanding common stock of
SoundWorks International, Inc. SoundWorks International, Inc., as a separate
corporate entity, then acquired SoundWorks USA, Inc. in a merger transaction in
which it issued 4,000,000 shares to the shareholders of SoundWorks USA, Inc.
pursuant to an Agreement and Plan of Business Combination. The effective date of
the acquisition was September 1, 1997. E/S Corporation remains a separate legal
entity with its own business plan.
SoundWorks International, Inc. also issued 400,000 shares to its investor
relations subcontractors (Toby Investments, L.L.C. 133,334 shares; 4 Point Lake,
L.L.C. 133,334; shares XXX Enterprises Corp. 133,333 shares) as a consulting fee
incident to the above mentioned Agreement and Plan of Business Combination.
On December 17, 1997 SoundWorks, through its sponsoring market maker, West
America Securities Corp. filed its 15(c)2-11 application with the NASD to have
its stock quoted on the NASD's Electronic Bulletin Board (NASD:OTC:BB). On
September 16, 1998 SoundWorks obtained the trading symbol "SOWK". In April 2000,
the company's stock was removed from the Electronic Bulletin Board and is
currently being traded on the "pink sheets" as a result of its not being an SEC
reporting company. SoundWorks is in the process of preparing an SB-2
registration statement and offering. When completed, SoundWorks' intends to
reapply to have its stock quoted on the Electronic Bulletin Board.
Note 2. Summary of Significant Accounting Policies
This summary of significant accounting policies of SoundWorks International,
Inc. (the Company) is presented to assist in understanding the Company's
financial statements. The financial statements and notes are representations of
the company's management who is responsible for their integrity and objectivity.
These accounting policies conform to generally accepted accounting principles
and have been consistently applied in the preparation of the financial
statements.
F-9
SOUNDWORKS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1998
Nature of Operations
See The Company above.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
short-term debt securities purchased with a maturity of three months or less to
be cash equivalents.
Property and Equipment
Property and equipment are stated at the lower of cost or fair market value.
Depreciation is computed for financial statement purposes as well as for federal
income tax purposes using the MACRS (Modified Accelerated Cost Recovery System)
method of depreciation. Equipment is depreciated over five years; Furniture and
Fixtures over seven years; and Leasehold Improvements over 39 years. The master
tape library is classified as Furniture and Fixtures and is being depreciated
over a seven year period. The leasehold improvements for the old facility were
written off on September 30, 1998. The leasehold improvements for the new
facility began on October 1, 1998 along with the related depreciation for three
months. Inventory consists primarily of tapes and compact discs held for resale
and is valued at the lower of actual cost or market value.
Income Taxes
The Company and its subsidiary each file separate tax returns and have filed all
tax returns due. SoundWorks International, Inc. (parent) has incurred net
operating losses through December 31, 2000 of $273,896 which will begin expiring
in the year 2012. SoundWorks USA, Inc. (wholly owned subsidiary) has incurred
net operating losses through December 31, 2000 of $771,909 which will begin
expiring in the year 2007.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
effect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
Web Site Development Costs
F-10
SOUNDWORKS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1998
Web site development costs are not significant and are expensed as they are
incurred.
Operating Expenses
Montcalm, Inc. is wholly owned by Mr. Dennon, SoundWorks' President, and is the
entity through which Mr. Dennon, operates a radio and television station
brokerage business. Montcalm, Inc. conducts substantial operations out of the
same physical premises as SoundWorks International, Inc. Montcalm, L.L.C., also
owned by Mr. Dennon, is the building owner and rents the 4,000 square foot
facilities housing Montcalm, Inc. and SoundWorks International, Inc. to them.
Operating expenses are allocated between the Company and Montcalm, Inc. based on
the percentage of gross revenues generated by each of the Company and Montcalm,
Inc. SoundWorks' management believes this basis of allocation is reasonable.
Only the portion of operating costs allocated to SoundWorks is reflected in the
Statement of Loss. See Note 5.
Note 3. Acquisition of Master Tape Library
The Master Tape Library of the Company was acquired at a deemed value of
$100,000 from Jerry Dennon for stock in the Company at the Company's inception.
Ownership of the Master Tape Library is subject to the normal royalty interests
in the recording business and was also subject to a $0.25 per unit royalty
interest of $50,000 in payment of prior years' accumulated expenses and storage
charges. This $50,000 has been paid via 100,000 shares of stock from the
Company's 504 Reg D Offering at $0.50 per share.
Note 4. Going Concern and Financings
The Company requires adequate financing and sufficient sales to remain in
operation. The Company has completed a corporate development plan involving a
reverse takeover of a Nevada corporation named SoundWorks International, Inc.
which was finalized on September 1, 1997, and two subsequent Reg D 504
financings. SoundWorks is now a public company with its stock quoted on the
NASD's "pink sheets". The first 504 Reg D financing scheduled for 5,000,000
shares at $0.01 for a total of $50,000 was closed on December 5, 1997 at $10,000
to avoid excessive dilution to existing shareholders. A second 504 Reg D
Offering was then filed with the State of New York for 1,980,000 shares at $0.50
per share or $990,000. As of December 31, 1998, 841,850 shares were sold at
$0.50 per share for $420,925. As of December 31, 1999, 1,138,510 shares were
sold (total 1,980,000) at $0.50 per share for $569,075. Of this amount,
1,106,750 shares were bought with three collateralized notes for $184,458.50,
$184,458.50, and $184,458.00 (total $553,750). These notes were adequately
collateralized using collateral other than the stock being purchased. During
1999 $180,000 was paid and during 2000, $242,721 was paid against these notes,
leaving a balance of $131,029.
F-11
SOUNDWORKS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1998
In February 2000, SoundWorks entered into an agreement to acquire Santa Fe
Acquisitions, Inc. using part of the proceeds from its upcoming SB-2 offering.
Through December 31, 2000 SoundWorks had loaned Santa Fe $89,353 to cover its
operating costs under an interim operating agreement.
Soundworks has a "going concern" qualification in its accountant's opinion. That
means that without additional financing and enough sales to remain in business
Soundworks will go out of business. Current monthly expenses average $22,000. If
additional funds are not receive, management intends to stop expanding, or
reduce its marketing expense. With this change, and elimination of the
extraordinary Legal and Accounting expenses associated with this filing, the
company could bringing its "burn rate" down to a level that could be sustained
for the foreseeable future.
Note 5. Company Facilities
The Company currently occupies approximately 4,000 square feet of office and
warehouse space located on Oddfellows Road on Bainbridge Island, which is 7
miles (across Puget Sound) from downtown Seattle, Washington. The Company rents
these facilities on a month-to-month basis for $2,000.00 per month commencing
January 1, 1999 from Montcalm, LLC, the owner of the property. The Company's
mailing address is P. O. Box 4608, Rolling Bay, WA 98061-0608. The Company's
phone and fax numbers are (206) 780-0857 and (206) 780-0859 respectively.
Montcalm, LLC is owned by Gerald B. Dennon, President of the Company. The
monthly rental amount was set at or below the fair market value rent for
Bainbridge Island.
Note 6. Equipment Lease
The Company entered into an equipment lease agreement with the Wm. Dierickx Co.
(now IKON Office Solutions, Inc.) on December 18, 1996 for the lease of a Canon
NP6030 copier and a Canon L-4000 fax machine. The lease agreement provides for a
minimum monthly payment, excluding taxes, of $280.80 per month for sixty (60)
months plus a monthly charge per copy of $0.0222 for copies in excess of 3,000
copies per month.
Note 7. Notes Payable
Wilma J. Akin is owed $7,375 on a six-month promissory note due December 26,
1998 with interest at 12% . The note is now past due and will be paid out of the
upcoming SB-2 offering.
F-12
SOUNDWORKS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1998
On October 20, 2000 the Company borrowed $223,000 from Special Services, Inc.
and prepaid $27,000 of interest resulting in the Company signing a $250,000 note
which will come due and payable on November 30, 2001. The note bears interest at
the rate of 15% per annum which was prepaid on the date of execution.
In addition and by way of extra consideration, the Company shall issue 20,000
shares of its common stock from the 1,500,000 shares to be registered in the
Company's upcoming SB-2 offering at $1.00 per share (this $20,000 in additional
interest will be booked on the date of the stock issuance). The note is
collateralized by the 30,000 shares of SpeechWorks International, Inc. stock as
shown in the above Note 10. Investment - SpeechWorks.
Note 8. Certain Relationships
Gerald B. Dennon, through Montcalm, Inc., has periodically funded the Company
over the past six years by loans. Such loans have been paid back periodically
consistent with the Company's working capital requirements. In addition, Gerald
B. Dennon, through Montcalm, LLC, owned by Montcalm, Inc., owns and rents the
Company's office and warehouse facility to the Company at a fair market rental
(see Note 5). There are no formal agreements or contracts between Montcalm, Inc.
and SoundWorks International, Inc. Both companies use all personnel, all
facilities and share all operating expenses. Substantially all expenses are
allocated between the companies on a pro rata basis based on the percentage of
income generated by each entity. The loans due the Company are carried as an
open account and are paid back as possible consistent with the Company's working
capital requirements.
The Company's financial statements show a $158,012 loan receivable owed to the
Company by Gerald B. Dennon and Montcalm, Inc. at December 31, 2000. This was
the result of the reallocation of expenses from SoundWorks to Montcalm, Inc. and
the recognition of wages to officers.
On October 18, 2000 the Board of Directors awarded Mr. Dennon 6,000 shares out
of the 30,000 shares of restricted stock of SpeechWorks International, Inc.
stock owned by the Company as discussed in Note 10 : Investment - SpeechWorks.
Mr. Dennon abstained from the voting. The Directors made this award because of
his extraordinary initial efforts in securing the asset for the Company; because
of Mr. Dennon's personal guarantees on a $25,000 bridge loan and a $250,000
bridge loan secured for the Company; and because of Mr. Dennon in return
agreeing to transfer 900,000 of his personal shares back to the Company for
retirement into treasury stock. These 900,000 shares were approximately equal in
value to the 6,000 shares of SpeechWorks stocks discounted to fifty percent
based on the stock being restricted for one year, and consequently subject to
potential market fluctuations. The award will be implemented following the
pay-off of the $250,000 bridge loan described in Note 7.
F-13
SOUNDWORKS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1998
Note 9. Advance Royalties Payable
The following are non-refundable advances to be recouped over 5 years against
future sales:
Delta Music, Inc. $7,382
Columbia House 3,827
Sub Pot Records 2,400
Sundazed Music 4,000
Ace Music 10,000
-------
$27,609
Note 10. Investment - SpeechWorks
On October 20, 2000 the Company announced its securing of $250,000 of bridge
financing personally guaranteed by Mr. Dennon, a principal use for which was to
exercise its 30,000 warrants in SpeechWorks International, Inc. (NASD: SPWK) for
$85,000. The Company had received these warrants in 1998 along with $45,000 as a
result of the Company's sale of its domain name SpeechWorks.com to Applied
Language Technologies, Inc., a private company. On August 1, 2000 after changing
its name to SpeechWorks International, Inc., it went public in a $100,000,000
offering, thus giving the 30,000 warrants a substantial value. This value was
not shown on the Company's books; however, the Company has now exercised these
warrants and $85,000 is shown on the Company's books as Investment -
SpeechWorks.
Note 11. Adjustment Accumulated Deficit
During the years 1992 through 1998 and the years 1999 and 2000, the depreciation
taken for book purposes was not in line with the depreciation taken for tax
purposes. Since it is the Company's accounting policy under Note 2 that the
amounts be the same, adjustments were made to the accumulated deficit in the
amount of the depreciation discrepancy.
F-14
- --------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give any
information or represent anything not contained in this prospectus. You must not
rely on any unauthorized information. This prospectus does not offer to sell or
buy any units in any jurisdiction where it is unlawful. The information in this
prospectus is current as of May ___ 2001.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Prospectus Summary ............................................................5
Risk Factors ..................................................................7
Use of Proceeds ..............................................................12
Underwriting .................................................................13
Dividend Policy ..............................................................15
Capitalization ...............................................................15
Dilution .....................................................................16
Business .....................................................................19
Legal Proceedings ............................................................31
Management ...................................................................31
Principal Stockholders .......................................................34
Certain Transactions .........................................................35
Description of Capital Stock .................................................37
Shares Eligible for Future Sale ..............................................43
Legal Matters ................................................................43
Experts ......................................................................43
Where You Can Get More Information ...........................................44
PROSPECTUS
SOUNDWORKS
INTERNATIONAL, INC.
ISSUER
1,500,000 Units
Each Unit Consisting of One Share of Common
Stock $.001 Par Value and One Redeemable
Warrant to Acquire a Share
May ___, 2001
----------------
Until, 2001 (25 days after the date of this prospectus), all dealers that buy,
sell or trade these securities, whether or not participating in this offering,
may be required to deliver a prospectus. This is in addition to the dealers'
obligation to deliver a prospectus when acting as underwriters and with respect
to their unsold allotments or subscriptions.
Soundworks International, Inc.
PART TWO
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As permitted by Nevada law, Soundworks' Certificate of Incorporation includes a
provision which provides that a director of Soundworks shall not be personally
liable to or its stockholders for monetary damages for a breach of fiduciary
duty as a director, except (i) for any breach of the director's duty of loyalty
to the Company or its stockholders, (ii) for acts or omissions not in good faith
or that involve intentional misconduct or a knowing violation of the law, (iii)
under Section 174 of the General Corporation Law of the State of Nevada, which
prohibits the unlawful payment of dividends or the unlawful repurchase or
redemption of stock, or (iv) for any transaction from which the director derives
an improper personal benefit. This provision is intended to provide directors
with protection against, and to limit their potential liability for monetary
damages resulting from, suits alleging a breach of the duty of care by a
director. As a consequence of this provision, stockholders of Soundworks will be
unable to recover monetary damages against directors for action taken by them
that may constitute negligence or gross negligence in performance of their
duties unless such conduct falls within one of the foregoing exceptions. The
provision, however, does not alter the applicable standards governing a
director's fiduciary duty and does not eliminate or limit the right of
Soundworks or any stockholder to obtain an injunction or any other type of
non-monetary relief in the event of a breach of fiduciary duty. Management of
Soundworks believes this provision will assist Soundworks in securing and
retaining qualified persons to serve as directors. Soundworks is unaware of any
pending or threatened litigation against Soundworks or its directors that would
result in any liability for which such director would seek indemnification or
similar protection.
Such indemnification provisions are intended to increase the protection provided
directors and, thus, increase Soundworks' ability to attract and retain
qualified persons to serve as directors. Because directors liability insurance
is only available at considerable cost and with low dollar limits of coverage
and broad policy exclusions, Soundworks does not currently maintain a liability
insurance policy for the benefit of its directors although Soundworks may
attempt to acquire such insurance in the future. Sounworks believes that the
substantial increase in the number of lawsuits being threatened or filed against
corporations and their directors and the general unavailability of directors
liability insurance to provide protection against the increased risk of personal
liability resulting from such lawsuits have combined to result in a growing
reluctance on the part of capable persons to serve as members of boards of
directors of public companies. Soundworks also believes that the increased risk
of personal liability without adequate insurance or other indemnity protection
for its directors could result in overcautious and less effective direction and
management of Soundworks. Although no directors have resigned or have threatened
to resign as a result of the Soundworks' failure to provide insurance or other
indemnity protection from liability, it is uncertain whether Soundworks'
directors would continue to serve in such capacities if improved protection from
liability were not provided.
The provisions affecting personal liability do not abrogate a director's
fiduciary duty to the Soundworks and its shareholders, but eliminate personal
liability for monetary damages for breach of that duty. The provisions do not,
however, eliminate or limit the liability of a director
for failing to act in good faith, for engaging in intentional misconduct or
knowingly violating a law, for authorizing the illegal payment of a dividend or
repurchase of stock, for obtaining an improper personal benefit, for breaching a
director's duty of loyalty (which is generally described as the duty not to
engage in any transaction which involves a conflict between the interest of
Soundworks and those of the director) or for violations of the federal
securities laws. The provisions also limit or indemnify against liability
resulting from grossly negligent decisions including grossly negligent business
decisions relating to attempts to change control of Soundworks.
The provisions regarding indemnification provide, in essence, that Soundworks
will indemnify its directors against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
in connection with any action, suit or proceeding arising out of the director's
status as a director of Soundworks, including actions brought by or on behalf of
Soundworks (shareholder derivative actions). The provisions do not require a
showing of good faith. Moreover, they do not provide indemnification for
liability arising out of willful misconduct, fraud, or dishonesty, for
"short-swing" profits violations under the federal securities laws, or for the
receipt of illegal remuneration. The provisions also do not provide
indemnification for any liability to the extent such liability is covered by
insurance. One purpose of the provisions is to supplement the coverage provided
by such insurance. However, as mentioned above, Soundworks does not currently
provide such insurance to its directors, and there is no guarantee that
Soundworks will provide such insurance to its directors in the near future
although Soundworks may attempt to obtain such insurance.
The provisions diminish the potential rights of action which might otherwise be
available to shareholders by limiting the liability of officers and directors to
the maximum extent allowable under Nevada law and by affording indemnification
against most damages and settlement amounts paid by a director of Soundworks in
connection with any shareholders derivative action. However, the provisions do
not have the effect of limiting the right of a shareholder to enjoin a director
from taking actions in breach of his fiduciary duty, or to cause Soundworks to
rescind actions already taken, although as a practical matter courts may be
unwilling to grant such equitable remedies in circumstances in which such
actions have already been taken. Also, because Soundworks does not presently
have directors liability insurance and because there is no assurance that
Soundworks will procure such insurance or that if such insurance is procured it
will provide coverage to the extent directors would be indemnified under the
provisions, Soundworks may be forced to bear a portion or all of the cost of the
director's claims for indemnification under such provisions. If Soundworks is
forced to bear the costs for indemnification, the value of Soundworks' stock may
be adversely affected. In the opinion of the Securities and Exchange Commission,
indemnification for liabilities arising under the Securities Act of 1933 is
contrary to public policy and, therefore, is unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is an itemization of expenses, payable by Soundworks from the
proceeds of this offering, incurred by Soundworks in connection with the
issuance and distribution of the securities of Soundworks being offered hereby.
All expenses are estimated except the SEC and the NASD Registration and Filing
Fees. See "Use of Proceeds."
SEC Registration and Filing Fee $883.20
NASD Registration and Filing Fee 830.00
Transfer & Warrant Agent Fees 2,500.00
Financial Printing 10,000.00
Accounting Fees and Expenses 6,000.00
Legal Fees and Expenses 50,000.00 (1)
Blue Sky Fees and Expenses 5,000.00
Miscellaneous
TOTAL $80,000.00
(1) $15,000.00 of which was paid prior to the initial filing of this
Registration Statement and related Prospectus.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
1. (a) On March 7, 2000 Soundworks issued 30,000 shares of its Common
Stock to four employees as follows: Robert L.Wikstrom, 10,000 shares; Scott
Schmidt, 5,000 shares; Daniel Dennon, 5,000 shares; and Diane Botefuhr, 10,000
shares. Mr. Dennon is the son of Gerald B. Dennon, President of Soundworks.
(b) There was no underwriter involved. All shares were issued to
employees for past services. Each employee was required to provide suitable
investment representations
(c) The shares were valued at $6000 or $20 per share.
(d) The shares were all taken for investment, bear a legend to that
effect and were issued in reliance upon Section 4 (2) of the Securities Act of
1933, as amended as only four persons were involved two of whom are either
Management or related to Management.
2. (a) On February 10, 1999 Soundworks issued 31,400 shares of its Common
Stock
(b) There was no underwriter involved.
(c) The shares were issued for $15,700 in services.
(d) The shares were issued in reliance on an exemption from
registration under Rule 504 of Regulation D of the Securities Act of 1933.
3. (a) On February 10, 1999, Soundworks issued 14,000 shares of its Common
Stock to one person.
(b) There was no underwriter involved .The shares were issued for
web site development to one person .
(c) There was no underwriter. The shares were issued to one person
for services valued at $7,000.
(d) The shares were taken for investment, bear a legend to that
effect, and were issued in reliance upon Section 4 (2) of the Securities Act of
1933
4. (a) On February 10, 1999, Soundworks issued 1,106,750 shares of its
Common Stock for $ 553,375
(b) There was no underwriter involved.
(c) The shares were issued by the company for $553,375. There was no
underwriter involved
(d) The shares were issued pursuant to the exemption from
registration provided under Rule 504 of Regulation D.
5. (a) In May 1997, Soundworks issued 400,000 shares of its Common Stock
to be divided equally between Toby Investments, L.L.C., 4 Point Lake L.L.C. and
XXX Enterprises Corp.
(b) There was no underwriter involved. The shares were issued to
entities related to executive officers or members of the Board of Directors or
Advisory Board of Soundworks.
(c) All shares were issued for financial, venture capital, public
relations and brokerage services to be rendered valued at $400.00. In addition,
as past and future consideration for such services rendered and to be rendered
the above mentioned contractors were provided with warrants to acquire an
additional 1,000,000 shares of Soundworks Common Stock. Such warrants were
subsequently exercised on February 10, 1999, as indicated in item 4 above.
(d) The shares and warrants were issued in reliance on Section 4 (2)
of the Securities Act of 1933, as amended, to a limited number of entities (3)
controlled by Management.
6. (a) In September 1997, Soundworks issued 4,000,000 shares of its Common
Stock to an entity controlled by Gerald B. Dennon which owned the music and
voice library and business currently being pursued by Soundworks in return for
such library and business
(b) There was no underwriter involved and Gerald B. Dennon is
President and CEO of the company.
(c) The music and voice library were "booked" at $100,000 although
the value to be considerably higher.
(d) The shares were issued in reliance on Section 4 (2) of the
Securities Act of 1933, as amended as no public offering was involved.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
1. Underwriting Agreement (to be filed by amendment).
3.(i)* Certificate of Incorporation (Nevada), March 19, 1997.
3.(i)(a) Certificate of Incorporation, as amended (to be filed by amendment).
3.(ii)* By-laws, as amended.
3.(ii)(a) Amended and Restated By-laws (to be filed by amendment).
4.(i) Specimen Copy of Common Stock Certificate (to be filed by
amendment).
4.(ii) Form of Warrant Agreement.
5.* Opinion of Raice Paykin & Krieg LLP for Registrant.
10.(i) Agreement to acquire Santa Fe Acquisitions, Inc.
10.(ii) Letter of intent to acquire Santa Fe Acquisitions, Inc.
10.(iii) Contractors Agreement with TCKTS, L.L.C. dba Bristol Media, Ltd. and
XXX Enterprises Corp.
10.(iv) Representation Agreement between TCKTS, L.L.C. dba Bristol Media,
Ltd. and SoundWorks International, Inc
10.(v) Contractors Agreement with TCKTS, L.L.C. dba Bristol Media, Ltd. and
Toby Investments, L.L.C.
10.(vi) Contractors Agreement with TCKTS, L.L.C. dba Bristol Media, Ltd. and
4 Point Lake, L.L.C.
10.(vii) Contract with "WnR" Direct Response Consultants
10.(viii) Loan and Note Modification Agreement No. 2, effective as of October
8, 2000, among Sunset Productions, Inc., Jerome J. Ruther, Robert K.
Mueller, and Bank of America, N.A.
21. Subsidiaries of the Registrant (to be filed by amendment).
23.(i)* Consent of Raice Paykin & Krieg LLP is included in Exhibit 5.
23.(ii) Consent of ____________ .
* Previously filed
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to participating
broker-dealers, at the closing, certificates in such denominations and
registered in such names as required by the participating broker-dealers, to
permit prompt delivery to each purchaser.
The undersigned Registrant also undertakes:
1. To file, during any period in which it offers or sells
securities, a post-effective amendment to this registration
statement to:
i. Include any prospectus required by section 10(a)(3) of
the Securities Act;
ii. Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change
in the information in the registration statement; and
notwithstanding the forgoing, any increase or decrease
in volume of securities offered (if the total dollar
value of securities offered would not exceed that which
was registered) and any deviation from the low or high
end of the estimated maximum offering range may be
reflected in the form of prospects filed with the
Commission pursuant to Rule 424(b) if, in the aggregate,
the changes in the volume and price represent no more
than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of
Registration Fee" table in the effective registration
statement.
iii. Include any additional or changed material information
on the plan of distribution.
2. For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of
the securities offered, and the offering of the securities at
that time to be the initial bona fide offering .
3. File a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the
offering.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors,
officers and controlling persons of the small business issuer
pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore,
unenforceable.
In the event that a claim for indemnification against such
liabilities (other than the payment by the small business issuer of
expenses incurred or paid by a director, officer or controlling
person of the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of
its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final adjudication of
such issue.
This Registration Statement consists of the following:
1. Facing page.
3. Prospectus.
4. Complete text of Items 24-28 in Part Two of Registration Statement.
5. Exhibits.
6. Signature page.
7. Consents of:
Raice Paykin & Krieg LLP
----------------------------
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Seattle, State of Washington, on May 7, 2001
Soundworks, International, Inc.
By: /s/ Gerald B. Dennon
------------------------------------
Gerald B. Dennon
Chairman of the Board
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated:
Principal Executive Officer:
/s/ Gerald B. Dennon Chairman, President, CEO,
- ---------------------------------- Director May 7, 2000
Gerald B. Dennon
Principal Financial and Accounting
Officer:
Vice President, Secretary/
/s/ Robert L. Wikstrom Treasurer, CFO, COO and
- ---------------------------------- Director May 7, 2000
Robert L. Wikstrom
/s/ Robert Flick
- ---------------------------------- Director, May 7, 2000
Robert Flick
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
[To be supplied by amendment].