Securities and Exchange Commission
Washington, D.C. 20549
Form 8-K
Amendment Number 1
Current Report Pursuant
to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) December 20, 2000
Celebrity Entertainment Group, Inc.
(Exact name of registrant as specified in its charter)
WYOMING 0-28829 65 0970516
(State or other jurisdiction (Commission File (IRS Employer
or incorporation) Number) Identification No.)
5120 Woodway, Suite 9029, Houston, Texas 77056
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code (713) 960-9100
18870 Still Lake Drive, Jupiter, Florida 33458
(Former name or former address, if changed since last report)
Item 7. Financial Statements
In December 2000, we and our wholly-owned subsidiary, Sharp Florida
Acquisition Corp., entered into an Agreement and Plan of Merger and
Reorganization with Sharp Technology, Inc., a Delaware corporation ("Sharp")
whereby we acquired all of the issued and outstanding shares of Sharp and Sharp
became our wholly-owned subsidiary. We previously reported this transaction on
Form 8-K dated December 20, 2000 and filed on January 2, 2001. This Amendment
No. 1 to Form 8-K contains the audited financial information in connection with
this transaction. No pro forma information is included because the transaction
was accounted for as our recapitalization. The audited financial information
begins on page F-1.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereto duly authorized.
CELEBRITY ENTERTAINMENT GROUP, INC.
By: /s/ George Sharp
-------------------------
George Sharp, President
Dated: March 2, 2001
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Sharp Technology, Inc.:
We have audited the accompanying balance sheets of Sharp Technology, Inc. (a
Delaware corporation), as of December 31, 2000 and 1999, and the related
statements of operations, stockholders' equity (deficit) and cash flows for the
year ended December 31, 2000, and for the period from inception (October 13,
1998) through December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sharp Technology, Inc., as of
December 31, 2000 and 1999, and the results of its operations and its cash flows
for the year ended December 31, 2000, and for the period from inception (October
13, 1998) through December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has accumulated a deficit of $6,546,367 during
its initial years of operations, has had negative cash flows from operations of
$1,535,877 and $1,039,296 for the periods ended December 31, 2000 and 1999,
respectively, and has a working capital deficit of $1,899,731 as of December 31,
2000. From time to time, the Company has made payroll tax deposits with the
Internal Revenue Service after the due date and is delinquent on such payments
at December 31, 2000. This amount has increased in 2001, and the Company is
subject to interest and penalties in connection therewith. The Company may
experience negative cash flows as it pursues its business strategy, which would
necessitate additional financing. The Company has not secured any commitments
for any such additional financing requirements. These events raise substantial
doubt as to the Company's ability to continue as a going concern. Management's
plans with regard to these matters are also described in Note 1. The financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.
/s/ Arthur Andersen LLP
Houston, Texas
January 29, 2001
F-1
SHARP TECHNOLOGY, INC.
----------------------
BALANCE SHEETS--DECEMBER 31, 2000 AND 1999
------------------------------------------
2000 1999
------------ ------------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 55,586 $ 25,716
Accounts receivable 721,465 205,800
Other - 15,843
------------ ------------
Total current assets 777,051 247,359
PROPERTY AND EQUIPMENT, net 117,849 101,668
SOFTWARE DEVELOPMENT COSTS AND OTHER, net 266,611 145,000
------------ ------------
Total assets $ 1,161,511 $ 494,027
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 724,840 $ 268,543
Accrued liabilities 254,167 105,263
Due to related party 300,000 388,434
Software obligations payable 100,000 196,698
Notes payable to related parties 100,000 132,150
Notes payable 833,750 1,060,000
Current portion of deferred revenue 364,025 -
------------ ------------
Total current liabilities 2,676,782 2,151,088
DEFERRED REVENUE, net of current portion 242,683 -
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.001 par value, 10,000,000 shares authorized, no
shares issued and outstanding - -
Common stock, $.001 par value, 50,000,000 shares authorized,
6,520,913 shares and 5,666,667 shares issued and outstanding,
respectively 6,521 1,000
Additional paid-in capital 4,781,892 -
Accumulated deficit (6,546,367) (1,658,061)
------------ ------------
Total stockholders' equity (deficit) (1,757,954) (1,657,061)
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 1,161,511 $ 494,027
============ ============
The accompanying notes are an integral part of these financial statements.
F-2
SHARP TECHNOLOGY, INC.
----------------------
STATEMENTS OF OPERATIONS
------------------------
FOR THE YEAR ENDED DECEMBER 31, 2000, AND
-----------------------------------------
FOR THE PERIOD FROM INCEPTION (OCTOBER 13, 1998)
------------------------------------------------
THROUGH DECEMBER 31, 1999
-------------------------
2000 1999
------------ ------------
REVENUES:
Subscriptions $ 1,414,200 $ 262,294
Licenses 121,341 400,000
Services and other 283,153 2,053
------------ ------------
Total revenues 1,818,694 664,347
OPERATING EXPENSES:
Cost of sales and services 760,391 456,844
Selling, general and administrative, including stock-based
consideration of $2,465,673 in 2000 5,387,211 1,542,852
------------ ------------
Total operating expenses 6,147,602 1,999,696
------------ ------------
Loss from operations (4,328,908) (1,335,349)
INTEREST EXPENSE, including stock-based consideration
of $351,305 in 2000 477,750 277,928
OTHER EXPENSE 81,648 44,784
------------ ------------
Net loss $(4,888,306) $(1,658,061)
============ ============
BASIC AND DILUTED NET LOSS PER SHARE $ (0.80) $ (0.32)
============ ============
WEIGHTED AVERAGE SHARES USED IN COMPUTING BASIC AND
DILUTED NET LOSS PER SHARE 6,098,645 5,186,030
============ ============
The accompanying notes are an integral part of these financial statements.
F-3
SHARP TECHNOLOGY, INC.
----------------------
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
--------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2000, AND
-----------------------------------------
FOR THE PERIOD FROM INCEPTION (OCTOBER 13, 1998)
------------------------------------------------
THROUGH DECEMBER 31, 1999
-------------------------
Total
Common Stock Additional Stockholders'
---------------------- Paid-In Accumulated Equity
Shares Value Capital Deficit (Deficit)
--------- ----------- ----------- --------------- ------------
BALANCE, October 13, 1998 - $ - $ - $ - $ -
Issuance of common stock for cash,
February 1999 5,666,667 1,000 - - 1,000
Net loss - - - (1,658,061) (1,658,061)
--------- ----------- ----------- --------------- ------------
BALANCE, December 31, 1999 5,666,667 1,000 - (1,658,061) (1,657,061)
Capital contribution concurrent with
change in par value - 4,667 11,333 - 16,000
Issuance of common stock for cash and
conversion of notes payable, May 2000
through November 2000 254,000 254 1,142,746 - 1,143,000
Issuance of common stock and warrants
for services 350,247 351 2,175,024 - 2,175,375
Issuance of common stock for purchase
of assets, April 1, 2000 70,333 70 274,229 - 274,299
Issuance of common stock for conversion
of notes payable and exercise of related
warrants, June 2000 through November
2000 146,333 146 438,854 - 439,000
Exercise of warrants to purchase common
stock 33,333 33 (33) - -
Issuance of warrants with debt,
January 2000 through December 2000 - - 351,305 351,305
Forgiveness of payables by
related parties - - 388,434 - 388,434
Net loss - - - (4,888,306) (4,888,306)
--------- ----------- ----------- --------------- ------------
BALANCE, December 31, 2000 6,520,913 $ 6,521 $4,781,892 $ (6,546,367) $(1,757,954)
========= =========== =========== =============== ============
The accompanying notes are an integral part of these financial statements.
F-4
SHARP TECHNOLOGY, INC.
----------------------
STATEMENTS OF CASH FLOWS
------------------------
FOR THE YEAR ENDED DECEMBER 31, 2000, AND
-----------------------------------------
FOR THE PERIOD FROM INCEPTION (OCTOBER 13, 1998)
------------------------------------------------
THROUGH DECEMBER 31, 2000
-------------------------
2000 1999
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,888,306) $(1,658,061)
Adjustments to reconcile net loss to net cash used in operating
activities-
Stock-based consideration 2,816,978 -
Depreciation 41,673 26,470
Changes in operating assets and liabilities-
Increase in accounts receivable (515,665) (205,800)
Decrease (increase) in other current assets 15,843 (15,843)
Increase in other assets (121,611) (145,000)
Increase in accounts payable and accrued liabilities 605,201 762,240
(Decrease) increase in software obligations payable (96,698) 196,698
Increase in deferred revenue 606,708 -
------------ ------------
Net cash used in operating activities (1,535,877) (1,039,296)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (57,855) (128,138)
------------ ------------
Net cash used in investing activities (57,855) (128,138)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 655,500 1,000
Proceeds from borrowings 3,313,252 1,974,117
Repayment of borrowings (2,345,150) (781,967)
------------ ------------
Net cash provided by financing activities 1,623,602 1,193,150
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 29,870 25,716
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 25,716 -
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 55,586 $ 25,716
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 94,387 $ 20,027
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Purchase of assets with common stock 274,299 -
Payables converted to common stock and paid-in capital 1,314,934 -
The accompanying notes are an integral part of these financial statements.
F-5
SHARP TECHNOLOGY, INC.
----------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
DECEMBER 31, 2000
-----------------
1. ORGANIZATION AND OPERATIONS:
------------------------------
Sharp Technology, Inc. (Sharp or the Company), a Delaware corporation, was
incorporated on October 13, 1998, but did not commence operations until January
1999. The Company was organized to license, develop and market Internet-related
software products and provide innovative marketing solutions to strategic
partners.
On December 18, 2000, all of the outstanding stock of the Company was acquired
by Sharp Florida Acquisition Corp. (Florida), a wholly owned subsidiary of
Celebrity Entertainment Group, Inc. (Celebrity), a publicly traded shell
corporation, in a transaction whereby the Company's shareholders received one
share of Celebrity common stock for every three shares of the Company's common
stock. In addition, outstanding options and warrants to purchase common stock
of the Company were exchanged for options and warrants to purchase Celebrity
common stock based on the exchange ratio discussed above.
The acquisition was accounted for as a recapitalization of Sharp for financial
reporting and accounting purposes; therefore, Sharp is considered the
predecessor company. As such, the capital accounts in the accompanying balance
sheets, including all share information presented in the notes to the financial
statements, have been reflected on an equivalent share basis to give effect to
the exchange ratio discussed above. Celebrity did not have significant
operations prior to the acquisition; therefore, pro forma presentation of
combined results of operations for the periods presented is not considered
meaningful and has been omitted.
Sharp has financed its operations from inception primarily through private
financing transactions and payments related to its agreement with Qwest
Communication Services, Inc. (Qwest) (see Note 4). Sharp's future success is
dependent upon many factors including, but not limited to, its ability to
continue to develop and market products and services, reliance on collaborative
partnerships with strategic partners, satisfaction of delinquent payroll taxes
and any associated interest and penalties, and the obtaining of the funds
necessary to complete these activities. As a result of the aforementioned
factors and the related uncertainties, there can be no assurance of Sharp's
future success.
The Company had an accumulated deficit of $6,546,367 through December 31, 2000,
has had negative cash flows from operations of $1,535,877 and $1,039,296 for the
periods ended December 31, 2000 and 1999, respectively, and had a working
capital deficit of $1,899,731 at December 31, 2000. Operating losses and
negative cash flow have continued during 2001, and delinquent payroll taxes have
increased (see Note 9). Management is currently pursuing a business strategy
which includes increasing the Company's sales and marketing efforts while
monitoring operating expenses. While pursuing this business strategy, the
Company is expected to experience cash flow deficits, which will necessitate
additional financing. There can be no assurances that future debt or equity
funding will be available or have favorable terms. These events raise
substantial doubt as to the Company's ability to continue as a going concern.
2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES:
---------------------
Use of Estimates
- ------------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
- ----------------------------
The Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
Concentration of Credit Risk
and Significant Customer
- --------------------------
Credit risk represents the accounting loss that would be recognized at the
reporting date if counterparties failed to perform as contracted. The principal
financial instrument subject to credit risk is accounts receivable. At December
31, 2000 and 1999, the Company relied on one significant customer for
substantially all of its revenues; however, management believes that the
likelihood of incurring a material loss due to the concentration of credit risk
is remote.
Property and Equipment
- ------------------------
Property and equipment are carried at cost and depreciated using the
straight-line method over the estimated useful life of the assets, which ranges
from one to five years. Significant expenditures that extend the useful lives
of existing assets are capitalized; whereas, maintenance and repair costs are
expensed as incurred. The cost and accumulated depreciation applicable to
assets retired or sold are removed from the respective accounts, and any gain or
loss is recognized in income.
F-6
Software Development Costs
- ----------------------------
The costs of internally developed software for resale are expensed until the
technological feasibility of the software product has been established.
Thereafter, software development costs are capitalized and subsequently reported
at the lower of unamortized cost or net realizable value. The capitalized
software costs are amortized generally over 12 to 24 months. At December 31,
2000 and 1999, accumulated amortization was $1,270,073 and $612,803,
respectively. These expenses were reported within cost of sales and services in
the accompanying statements of operations.
Revenue Recognition
- --------------------
The Company generates revenues from licensing software and providing
postcontract customer support (PCS) and other professional services. The
Company uses written contracts to document the elements and obligations of
arrangements with its customers. At times, arrangements that include the
licensing of software also include PCS, such as the right to technical support.
When several elements are sold to a customer through a single contract, the
revenues from such multiple-element arrangements are allocated to each element
based upon vendor-specific objective evidence of fair value, if available. The
Company has not established sufficient vendor-specific objective evidence of
fair value for PCS since this element is not sold separately from software
licenses. Accordingly, software licenses that include PCS are recognized
ratably each month over the term of technical support.
F-7
Amounts received from Qwest for distribution to its new customers (see Note 4)
are nonrefundable and are classified as subscriptions. Subscriptions revenue is
recognized ratably each month over the course of the respective customer's
contract term. The Company also licenses software under noncancelable license
agreements. License fee revenues are recognized when a noncancelable license
agreement is in force, the product has been shipped, the license fee is fixed or
determinable, collectibility is reasonably assured and no significant
postdelivery performance obligations exist.
The Company has adopted Securities and Exchange Commission (SEC) Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." The adoption of this standard did not have a material impact on
the Company's financial position or results of operations.
Realization of Long-Lived Assets
- -----------------------------------
The impairment of tangible assets is assessed when changes in circumstances
indicate that their carrying value may not be recoverable. Under the Financial
Accounting Standards Board (FASB) Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," a determination of impairment, if any, is
made based on estimated future cash flows, salvage value or expected net sales
proceeds depending on the circumstances. The Company's policy is to record
asset impairment losses, and any subsequent adjustments to such losses as
initially recorded, as well as net gains or losses on sales of assets as a
component of operating income. As of December 31, 2000 and 1999, there has been
no adjustment to the carrying value of the Company's long-lived assets.
Accounting for Stock-Based Compensation
- ------------------------------------------
In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company can adopt either of two methods for accounting for stock options granted
to employees. The Company has elected to account for its stock-based
compensation plans under Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and to provide pro forma disclosures
required by SFAS No. 123 (see Note 8).
Loss Per Share
- ----------------
SFAS No. 128, "Earnings Per Share," requires dual presentation of basic and
diluted earnings per share (EPS). Basic EPS is computed by dividing net income
by the weighted average number of shares of common stock outstanding during the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock, calculated using the treasury stock method. In applicable
periods, all common stock equivalents were antidilutive and, accordingly, were
not included in the computation for the Company.
3. PROPERTY AND EQUIPMENT:
-------------------------
Property and equipment consists of the following:
December 31
Useful Lives --------------------
in Years 2000 1999
------------ --------- ---------
Computer equipment 3 $ 78,264 $ 33,718
Furniture and fixtures 5 106,008 92,700
Leasehold improvements 1 1,720 1,720
--------- ---------
185,992 128,138
Less- Accumulated depreciation (68,143) (26,470)
--------- ---------
Property and equipment, net $117,849 $101,668
========= =========
F-8
4. TECHNOLOGY AND INTERNET
APPLICATION AGREEMENTS:
------------------------
In December 1998, Sharp entered into a co-branded site development and revenue
sharing agreement (the Agreement) with Qwest. Under specified provisions of the
Agreement, in September 1999, Sharp delivered a collection of three Internet
software applications (the Collection) to current Qwest Internet access
customers. Consideration paid by Qwest for the distribution of the Collection
to its current Internet access customers, in the amount of $400,000, was
recognized as license revenue in 1999. In September 1999, Sharp licensed Qwest
the rights to distribute the Collection to customers who purchase Qwest's
Internet access during the period from August 1, 1999, through December 31,
2000. Total consideration for distribution of the Collection to customers who
purchase Qwest's Internet access during the period from August 1, 1999, through
December 31, 2000, is $1,440,000. For the periods ended December 31, 2000 and
1999, Sharp recognized $1,234,000 and $206,000, respectively, in conjunction
with this distribution agreement.
On March 30, 1999, Sharp entered into a purchase agreement (the Purchase
Agreement) with Netsnitch, LLC (Netsnitch). Pursuant to the provisions of the
Purchase Agreement, Netsnitch transferred ownership of specified proprietary
Internet technology (the Proprietary Technology) to Sharp. In consideration for
the acquisition of the Proprietary Technology, Sharp agreed to pay Netsnitch (a)
royalties based on usage of the Proprietary Technology, (b) $256,800 as a
lump-sum royalty in association with Sharp's Agreement with Qwest, (c) issue
Netsnitch 133,333 shares of Sharp's common stock and (d) issue Netsnitch a
warrant to purchase 266,667 shares of common stock at an exercise price of $5.10
per share. For the periods ending December 31, 2000 and 1999, Sharp recognized
$171,000 and $91,000, respectively, in expense related to this agreement. The
warrant issued to Netsnitch was not assigned a dollar value, as management
determined the value of the warrant was de minimis at the date of issuance (see
Note 8).
On August 31, 1999, Sharp entered into an original equipment manufacturers
(OEM)/reseller agreement (the OEM/Reseller Agreement) with CBT Systems, Limited
(CBT). Under the provisions of the OEM/Reseller Agreement, CBT granted Sharp
nonexclusive right and license to market and otherwise distribute, pursuant to
the Agreement between Sharp and Qwest, certain of CBT's Internet interactive
training software. In consideration for the OEM/Reseller Agreement, Sharp
agreed to pay CBT a total of $200,000. The costs of these rights are being
expensed over the term of the agreement. For the periods ended December 31,
2000 and 1999, Sharp expensed $130,000 and $70,000, respectively, related to
this license agreement.
In November 1999, Sharp and Qwest entered into a development and distribution
partnership agreement (the Development Agreement). Pursuant to the provisions
of the Development Agreement, Sharp is required to complete the development of a
certain Internet software application which will be offered and marketed to
Qwest Internet access customers. Qwest agreed to pay up to $125,000 for
development costs and 50 percent of all royalties due (see Note 5). The
$125,000 consideration was paid by Qwest and was recognized as services and
other revenue in 2000, while the associated costs were expensed as cost of
sales and services.
On February 8, 2000, Sharp entered into a software development agreement with
the Neoworx Corporation (Neoworx). Pursuant to this agreement, Neoworx
developed, created and delivered certain programming code and materials and
provided software implementation services pursuant to Sharp's agreement with
Qwest. In consideration for this agreement, Sharp paid Neoworx $135,000 and
issued a warrant to purchase 60,000 shares of common stock at an exercise price
$5.10 per share. Upon issuance, 60,000 warrants were valued at $24,660 based on
fair market value as determined by management and use of the Black-Scholes
pricing model. As of December 31, 2000, Sharp had recorded deferred costs
associated with this software development agreement of $102,500. On January 15,
2001, Sharp and Neoworx agreed to terminate future development under the
agreement, whereby Sharp agreed to pay Neoworx $62,500 in accordance with
certain settlement terms.
In August 2000, Sharp licensed Qwest the rights to distribute an Internet
security software application (HackTracer) for a period of two years. Sharp is
required to provide telephone support for the term of the agreement. Total
consideration for distributions of HackTracer during the term of the agreement
is $728,049, plus 50 percent of all gross profits from the sale of HackTracer to
Qwest's customers, with a guaranteed minimum per copy distributed. Sharp agreed
to pay Qwest 10 percent of all gross profits from all sales of HackTracer by
any third party. The $728,049 is being recognized ratably over the two-year
term of the agreement. For the year ended December 31, 2000, Sharp recognized
$121,342 in conjunction with this distribution agreement.
F-9
5. RELATED-PARTY TRANSACTIONS:
----------------------------
On January 1, 1999, Sharp entered into a deferred salary arrangement with its
CEO, in which the CEO agreed to defer his annual salary of $150,000 from January
1, 1999, through December 31, 1999. The accrued salary is due and payable in
full upon the CEO's request on or after January 1, 2000. A liability for the
salary due to the CEO has been included in amounts due to related party at
December 31, 1999. On October 30, 2000, the CEO forfeited and forgave, without
consideration, all rights to the deferred salary at which time $150,000 was
credited to additional paid-in capital.
On January 12, 1999, Sharp entered into a purchase agreement with Commercial
Capital Trading Corporation (CCTC), a company owned by Sharp's CEO, for certain
furniture and equipment. The total purchase price for the furniture and
equipment was $107,250 and was financed through a note agreement between CCTC
and Sharp. The note was due on or before December 31, 1999, and bore interest
at a rate of 10 percent per annum. In October 1999, Sharp paid the principal on
the note in full. Related interest of $8,903 is included in amounts due
to related party at December 31, 1999. During January 1999, Sharp and CCTC also
entered into three separate assumption agreements, whereby Sharp assumed the
leases on certain office space and equipment originally leased by CCTC.
On October 30, 2000, CCTC forfeited rights to the accrued interest on the
note, at which time the amount was credited to additional paid-in capital.
On January 15, 1999, Sharp entered into a revolving credit line agreement (the
Revolving Credit Line) with its CEO in the amount of $750,000. The Revolving
Credit Line bears interest at 10 percent per annum and is payable on demand. In
addition to the interest payable on the Revolving Credit Line, Sharp agreed to
pay the CEO $200,000 and issue a total of 400,000 options at exercise prices
ranging from $9 to $30 per share. At December 31, 1999, there was $200,000 due
to the CEO related to this agreement. The options issued to Sharp's CEO have
not been assigned a dollar value, as management believes the value of the
options was de minimis at the date of issuance (see Note 8). On October 30,
2000, the CEO forfeited his rights to the $200,000 payable and accrued interest
on the Revolving Credit Line, at which time the amounts were credited to
additional paid-in capital. On December 15, 2000, the CEO forfeited his rights
to the 400,000 options issued in connection with the merger.
On May 15, 1999, Sharp entered into a software marketing agreement with
Coherence Technology, Inc. (Coherence), in which one of Sharp's stockholders and
officers holds a 43.75 percent interest. The software marketing agreement
provides that Coherence grant Sharp the nonexclusive right and license to market
and otherwise distribute, in association with the Agreement between Sharp and
Qwest, copies of a desktop software program developed by Coherence. The term of
this agreement is through December 31, 2000. As consideration, Sharp agreed to
pay $150,000 and granted Coherence options to purchase 16,667 shares of common
stock at an exercise price of $0.75 per share. For the period ended December
31, 1999, Sharp had expensed the $150,000 due under this agreement. The
options issued to Coherence have not been assigned a dollar value, as management
believes the value of the options was de minimis at the date of issuance (see
Note 8). On December 15, 2000, Coherence voluntarily forfeited its right to
the 16,667 options granted in connection with this agreement.
On June 25, 1999, Sharp entered into a software development agreement with the
Navi-GATES Corporation (Navi-GATES), which is wholly owned by one of Sharp's
stockholders and officers. Pursuant to this agreement, Navi-GATES developed,
created and delivered certain programming codes and materials and provided
software implementation services. In consideration for this agreement, Sharp
agreed to pay Navi-GATES $200,000 and a royalty equivalent to one dollar per
copy of developed software sold or transferred for use to a customer. As of
December 31, 2000 and 1999, Sharp had recorded net costs associated with this
software development agreement of $68,411 and $100,000, respectively.
F-10
On November 30, 1999, Sharp entered into an unsecured credit line agreement (the
Credit Line) with CCTC, whereby CCTC agreed to advance funds to Sharp for use as
operating capital. The note bears interest at 10 percent per annum and is
payable on demand. At December 31, 2000 and 1999, the outstanding balance on
the Credit Line was $- and $132,150, respectively.
On February 2, April 15 and June 28, 2000, Sharp entered into note payable
agreements with a stockholder in the amounts of $100,000, $100,000 and $37,500,
respectively. The notes bore interest at 10 percent per annum and were payable
on demand. On September 29, 2000, all three notes were converted to equity for
the purchase of 52,778 shares. On November 16 and December 12, 2000, Sharp
entered into note payable agreements with this stockholder in the amount of
$60,000 and $40,000, respectively. The notes bear interest at 10 percent per
annum and are payable on demand. As of December 31, 2000, the entire balance of
these notes was outstanding.
On December 19, 2000, Celebrity issued 60,000 shares of common stock at $5 per
share to a third party for gross proceeds of $300,000. Celebrity advanced Sharp
the $300,000, net of transaction costs, for working capital. At December 31,
2000, there was $300,000 due to Celebrity related to this transaction.
6. NOTE PAYABLE:
--------------
Sharp had a stockholder note payable agreement (the Stockholder Note) in the
Amount of $100,000. The Stockholder Note bore interest at 18 percent per annum
and was guaranteed by Sharp and its CEO. In addition to the interest due on the
Stockholder Note, Sharp agreed to issue a warrant to purchase 66,667 shares of
common stock to the stockholder at an exercise price of $5.10 per share. The
Stockholder Note was amended on November 5, 1999, to extend the due date to
February 22, 2000. As of December 31, 1999, the entire balance of the
Stockholder Note was outstanding. The warrant issued to the stockholder was not
assigned a dollar value, as management determined the warrant's value to be de
minimis at the date of issuance (see Note 8). The Stockholder Note was paid in
2000. On September 19, 2000, Sharp entered into a second note payable with this
stockholder in the amount of $200,000. This note, as amended, bears interest
at 10 percent, is payable on demand and is guaranteed by Sharp and its CEO. As
of December 31, 2000, the entire balance of this note was outstanding.
On October 14, 1999, Sharp entered into a note payable agreement (the Note
Payable) with a financial institution in the amount of $960,000. The Note
Payable bore interest at 9.5 percent per annum and was payable on demand but no
later than February 1, 2000. The Note Payable was secured by a certificate of
deposit with the financial institution held by Sharp's CEO, an insurance policy
in the name of Sharp's CEO and all of Sharp's accounts receivable arising from
the Agreement with Qwest. The Note Payable was paid in full upon maturity. On
December 26, 2000, Sharp entered into a note payable agreement, as amended, with
the same financial institution in the amount of $300,000. This note payable
bears interest at 7.5 percent per annum and is payable on demand but no later
than March 26, 2001. The note payable is secured by a certificate of deposit
with the financial institution held by Sharp's CEO.
On February 2, 2000, Sharp entered into a note payable agreement in the amount
of $100,000. The note bore interest at 10 percent per annum and was payable on
demand. On September 29, 2000, the note was converted to equity for the
purchase of 22,222 shares.
On September 25, 2000, Sharp entered into a note payable agreement with another
financial institution in the amount of $450,000. This note bears interest at
prime plus .5 percent (10.0 percent at December 31, 2000) and matures on
February 20, 2001. The note payable is secured by a certificate of deposit with
the financial institution held by Sharp's CEO and all accounts and other
property of Sharp. Sharp paid $150,000 of the principal balance of this note in
2000 such that at December 31, 2000, the outstanding balance on the note was
$300,000.
On April 15 and August 16, 2000, Sharp entered into note payable agreements with
two individuals in the amount of $100,000 and $50,000, respectively. These
notes bear interest at 10 percent per annum and are payable one year from the
date of issuance. On September 29, 2000, the notes were converted to equity for
the purchase of 33,333 shares.
From January 2000 to September 2000, Sharp entered into various note payable
agreements with third parties aggregating $497,750. These notes bear interest
at 10 percent per annum and are payable one year from the date of issuance. In
connection with certain of these notes, Sharp issued warrants to purchase
151,333 shares and 117,333 shares of common stock at exercise prices of $3 per
share and $6 per share, respectively. Upon issuance, the 268,666 warrants were
valued at $351,305 based on fair market value as determined by management and
use of the Black-Scholes pricing model. From June 2000 to November 2000,
holders of note payable balances aggregating $439,000 exercised warrants to
purchase 146,333 shares of common stock at $3 per share. These notes payable
were forgiven by the holders in exchange for the warrant proceeds. At December
31, 2000, the outstanding balance on the notes was $33,750.
F-11
7. INCOME TAXES:
--------------
Sharp recognizes deferred tax liabilities and assets for the expected future tax
consequences of events that have been recognized differently in the financial
statements and tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statement carrying amounts and tax bases of assets and liabilities using enacted
tax rates and laws in effect in the years in which the differences are expected
to reverse. Deferred tax assets are evaluated for realization based on a
more-likely-than-not criteria in determining if a valuation should be provided.
The components of Sharp's deferred tax assets are as follows:
December 31
------------------------
2000 1999
------------ ----------
Net operating loss carryforwards $ 1,744,533 $ 368,389
Technology license 33,490 50,490
Accrued expenses not yet deductible 8,840 136,071
Contributions carryforward 2,040 1,870
Property and equipment (794) (1,912)
------------ ----------
Total deferred tax assets 1,788,109 554,908
Less- Valuation allowance (1,788,109) (554,908)
------------ ----------
Net deferred tax assets $ - $ -
============ ==========
As of December 31, 2000, Sharp has generated net operating loss (NOL)
carryforwards of approximately $5.1 million available to reduce future income
taxes. These carryforwards begin to expire in 2020. A change in ownership, as
defined by federal income tax regulations, could significantly limit Sharp's
ability to utilize its carryforwards. Sharp's ability to utilize its current
and future NOLs to reduce future taxable income and tax liabilities may be
limited. Additionally, because federal tax laws limit the time during which
these carryforwards may be applied against future taxes, Sharp may not be able
to take full advantage of these attributes for federal income tax purposes. As
Sharp has incurred a loss since inception and there is no assurance of future
taxable income, a valuation allowance has been established to fully offset the
deferred tax asset at December 31, 2000 and 1999.
8. COMMON STOCK:
--------------
Capital Contribution
- ---------------------
In February 2000, the Company amended its articles of incorporation to change
the par value of its common stock from no par to $.001 per share. Concurrently,
the Company's CEO forgave $16,000 in amounts due him to increase the capital
contribution of the beneficial owners of the then outstanding shares. No
additional shares were issued upon this conversion.
F-12
Stock Options and Warrants
- -----------------------------
Sharp follows SFAS No. 123, "Accounting for Stock-Based Compensation," which
establishes fair value as the measurement for transactions in which an entity
acquires goods or services from nonemployees in exchange for equity instruments.
A summary of Sharp's stock options and warrants as of December 31, 1999 and
2000, is as follows:
Price
Options Warrants Per Share
--------- ---------- ------------
Outstanding at October 13, 1998 - - $ -
Granted 435,000 333,333 $0.75-$30.00
--------- ----------
Outstanding at December 31, 1999 435,000 333,333 $0.75-$30.00
Granted 49,000 1,340,556 $ 3.00-$6.00
Exercised - (206,556) $ 3.00
Forfeited/canceled (416,667) (333,333) $0.75-$30.00
--------- ----------
Outstanding at December 31, 2000 67,333 1,134,000 $ 4.50-$6.00
========= ==========
Exercisable at December 31, 2000 67,333 1,134,000 $ 4.50-$6.00
========= ==========
The following table summarizes information about stock options outstanding at
December 31, 2000:
Options Outstanding Options Exercisable
- ------------------------------------------- ---------------------------------
Weighted
Outstanding Average Weighted Exercisable Weighted
Range of as of Remaining Average as of Average
Exercise December 31, Contractual Exercise December 31, Exercise
Prices 2000 Life (In Years) Price 2000 Price
- ----------- ------------- --------------- -------- ------------ ---------
$5.10-$6.00 67,333 7.7 $ 5.24 67,333 $ 5.24
The fair value of each option and warrant grant was estimated on the date of
grant using the Black-Scholes option pricing model. The following weighted
average assumptions were used for the grants in the periods ended December 31,
2000 and 1999: risk-free interest rate of 5.0 percent; dividend rates of zero;
expected lives of 7.7 years; and expected volatility of 35 percent. The 67,333
options and 1,134,000 warrants outstanding as of December 31, 2000, have a
remaining contractual life of between .1 and 6.2 years.
The Black-Scholes option pricing model and other existing models were developed
for use in estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of and are highly sensitive to subjective assumptions
including the expected stock price volatility. Sharp's stock options have
characteristics significantly different from those of traded options, and
changes in the subjective input assumptions can materially affect the fair value
estimate.
Had compensation cost for the stock options and warrants granted to employees
been determined under SFAS No. 123, net loss and basic and diluted net loss per
share for the periods ended December 31, 2000 and 1999, would have changed as
indicated in the following pro forma amounts:
2000 1999
---------- ----------
Net loss-
As reported $4,888,306 $1,658,061
Pro forma 4,970,284 1,658,061
Basic and diluted net loss per share-
As reported $ 0.80 $ 0.32
Pro forma 0.81 0.32
Sharp recorded approximately $1,261,245 in compensation and interest expense
relating to warrants issued to nonemployee consultants during the year ended
December 31, 2000, at the fair value of the warrants granted. The fair values
were estimated by management using the Black-Scholes pricing model. The
warrants issued during the period ended December 31, 1999, have not been
assigned a dollar value as management believes the value of the warrants at the
date of issuance was de minimus.
F-13
9. COMMITMENTS AND CONTINGENCIES:
--------------------------------
Services Agreement
- -------------------
In August 1999, the Company entered into a one-year software support outsourcing
services agreement (the Outsourcing Agreement) with Stream Services Corporation
(Stream). The Outsourcing Agreement automatically renews for successive
additional one-year terms unless either party provides written notice 30 days
prior to the date of termination. Under the provisions of the Outsourcing
Agreement, Stream agreed to provide technical support and general product
information for specified software products. Fees associated with the
Outsourcing Agreement are based on a per-minute pricing schedule, with a monthly
fee for services equivalent to the greater of (a) a specified rate times the
actual number of minutes incurred, (b) a specified rate times 90 percent of the
expected number of minutes as forecasted by Sharp or (c) $5,500. For the
periods ended December 31, 2000 and 1999, Sharp had incurred $59,950 and
$30,890, respectively, in fees associated with this agreement.
Operating Leases
- -----------------
Sharp leases office space and certain equipment under operating leases with
various parties. Rental expense for the periods ended December 31, 2000 and
1999, was $132,734 and $117,537, respectively. At December 31, 2000, future
minimum lease payments under noncancelable operating leases are $36,239 in 2001.
Contingencies
- -------------
At December 31, 2000, the Company was delinquent on approximately $193,000 in
payroll tax deposits, which has increased by approximately $90,000 through
February 2001. The Company is subject to interest and penalties for making
payroll tax deposits with the Internal Revenue Service after the due date. The
Company has accrued estimated interest and penalties through December 31, 2000.
Management believes additional interest and penalties, if any are levied, will
not be material to the Company's financial position or results of operations.
Sharp is periodically involved in various claims and other actions arising in
the ordinary course of business. Management believes these matters will not
have a material adverse effect on the financial position or results of
operations of Sharp.
F-14
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CELEBRITY ENTERTAINMENT GROUP, INC.
(signed) ________________________________
By: /s/ George Sharp
George Sharp, President
Dated: March 2, 2001