UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K/A
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AMENDMENT N0.2 TO
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT: APRIL 1, 2004
(DATE OF EARLIEST EVENT REPORTED)
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AGU ENTERTAINMENT CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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COLORADO 005-79752 84-1557072
(STATE OR OTHER JURISDICTION (COMMISSION FILE NUMBER) (IRS EMPLOYER
OF INCORPORATION) IDENTIFICATION NO.)
11077 BISCAYNE BOULEVARD, SUITE 100, MIAMI, FLORIDA 33161
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(305) 899-6100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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LEXINGTON BARON TECHNOLOGIES, INC.
602 TETON STREET, SUITE 1100
COLORADO SPRINGS, CO 80903
(FORMER NAME AND ADDRESS)
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ITEM 1. CHANGES IN CONTROL OF THE REGISTRANT
The following information supplements the information presented in the current
report on file April 15, 2004.
PMC was formed on May 20, 2003, and thus has not completed a full year of
operations. From the date of inception through March 31, 2004, the Company had
revenues of $93,000 and incurred a net loss of $1.7 million. PMC's financial
condition and operating results, specifically a working capital deficiency of
approximately $1.9 million, a shareholders' deficit of approximately $1.7
million, and net cash used in operations of approximately $1.8 million, raise
substantial doubt about its ability to continue as a going concern. On April 1,
2004 PMC was acquired by AGU Entertainment, through a Share Exchange Agreement.
As a result the audited consolidated financial statements of PMC from the date
of inception through March 31, 2004 are included in this filing.
LIQUIDITY AND CAPITAL RESOURCES
AGU Entertainment was formed as a development stage company with no operating
history. The Company is subject to all the substantial risks inherent in the
development of a new business enterprise within an extremely competitive
industry. No assurances can be given that the business will continue as a going
concern or achieve profitability. Due to the absence of an operating history and
the emerging nature of the market in which it competes, AGU Entertainment
anticipates operating losses until such time as it can develop a substantial and
stable revenue base.
The growth and development of the business will require a significant amount of
additional working capital. AGU Entertainment currently has limited financial
resources and based on the current operating plan, will need to raise additional
capital. AGU Entertainment does not presently have adequate cash to meet its
short or long-term objectives.
AGU Entertainment anticipates that it will have to raise additional capital
during the second half of 2004 to provide for working capital, capital
expenditures and business expansion for a limited period of time, not to exceed
the next six to twelve months. There can be no assurances that AGU Entertainment
will be successful in completing such an offering, in executing the business
plan or achieving profitability. If AGU Entertainment is not successful in
raising additional capital, its financial condition and business operations will
be adversely affected. Additionally, if AGU Entertainment is successful in
implementing its initial business plan, it will need to raise additional funds
in order to finance more rapid expansion, to develop new and enhanced services
and products, and to respond to competitive pressures.
At March 31, 2004, PMC had a working capital deficit of approximately
$1,860,000. Included in PMC's current liabilities at March 31, 2004 are $600,000
of 5% Convertible subordinated notes due November 30, 2004, the holders of which
have subsequently elected to convert to equity during the second quarter of
2004. Also included are promissory notes amounting to $114,400 that are due
November 1, 2004, the holders of which are affiliates of PMC.
For the period from May 20, 2003 (inception) through March 31, 2004, PMC
received loans totaling $620,000 to fund its operations. Additionally, in April
and May of 2004 PMC issued additional debt in the amount of $635,000. These
loans pay interest at 5% per annum.
There are currently no commitments for additional financing, and there can be no
assurances that the Company will be successful in raising additional capital to
operate or grow the business. If adequate funds are not available on acceptable
terms, the Company will not be able to fund expansion, develop or enhance
products and services, and respond to competitive pressures, which would have a
material adverse effect on its ability to continue as a going concern.
ITEM 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT
(A) TERMINATION OF PREVIOUS INDEPENDENT ACCOUNTANTS
On June 8, 2004, AGU Entertainment Corp.("AGU Entertainment"),
formerly known as Lexington Barron Technologies, Inc. ("Lexington")
notified its principal accountants, Cordovano and Honeck, P.C., that
it was terminating their engagement as principal accountants and
engaging Weinberg & Company, P.A. ("Weinberg") as its new principal
accountants. The termination of Cordovano and Honeck, P.C. and the
engagement of Weinberg were approved by the AGU Entertainment's Audit
Committee. The reports of Cordovano and Honeck, P.C on AGU
Entertainment's consolidated financial statements for the past two
fiscal years did not contain an adverse opinion or a disclaimer of
opinion, nor were they qualified or modified as to uncertainty, audit
scope, or accounting principles, except as follows: Cordovano and
Honeck, P C's report on the consolidated financial statements of AGU
Entertainment as of and for the two fiscal years ended December 31,
2002 and 2003 contained a separate paragraph stating that "the
accompanying consolidated financial statements have been prepared
assuming that AGU Entertainment will continue as a going concern. As
discussed in AGU Entertainment's notes to the financial statements,
AGU Entertainment has suffered significant operating losses since
inception, which raises a substantial doubt about its ability to
continue as a going concern." Management's plans in regard to this
matter are also described in Note 9 in the audited financial
statements of Pyramid Music Corp. and Subsidiaries ("PMC") included
herein. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
In connection with its audits of the two fiscal years ended December
31, 2002 and 2003, and the review of the consolidated financial
statements through March 31, 2004, there were no disagreements with
Cordovano and Honeck, P.C on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or
procedure which disagreements, if not resolved to their satisfaction
would have caused them to make reference in connection with their
opinion to the subject matter of the disagreement. AGU Entertainment
has requested Cordovano and Honeck, P.C to furnish a letter addressed
to the Securities and Exchange Commission stating whether Cordovano
and Honeck, P.C. agrees with the above statements. A copy of that
letter, dated June 11, 2004, is filed as Exhibit 16 to this Form 8-K.
(b) ENGAGEMENT OF NEW INDEPENDENT ACCOUNTANTS
On June 8, 2004, AGU Entertainment engaged the firm of Weinberg and
Company P.A. as its new independent principal accountants to audit
AGU Entertainment's financial statements for the 2004 fiscal year.
During the two most recent fiscal years and the first quarter 2004,
AGU Entertainment, or anybody on its behalf, did not consult the
newly engaged accountants regarding the application of accounting
principles to a specified transaction, either completed or proposed,
or the type of audit opinion that might be rendered on AGU
Entertainment's financial statements.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements of business acquired
As previously reported in a Current Report on Form 8-K filed with the Securities
and Exchange Commission on April 15, 2004, as amended, on April 1, 2004, AGU
Entertainment entered into a Share Exchange Agreement with Pyramid Music Corp.,
a Florida corporation ("PMC" or the "Company"). Under the terms of the Share
Exchange Agreement, AGU Entertainment acquired 100% of the stock of PMC in
exchange for 16,922,464 shares of common stock of AGU Entertainment (the "Share
Exchange"). As a result of the Share Exchange, the former shareholders of PMC
owned on a fully diluted basis approximately 80% of the then issued and
outstanding shares of common stock of AGU Entertainment. In accordance with Rule
3.05(b) of Regulation S-X audited financial statements of PMC are attached in
Exhibit 99.1 and incorporated by reference herein.
At March 31, 2004 AGU Entertainment had $0 assets and $3,000 of liabilities.
Proforma financial information has been omitted due to the fact that the
financial position and results of the operations of AGU Entertainment are
insignificant and the proforma balance sheet and operating results would
essentially be the same as PMC's historical operating results.
(b) Exhibits:
Regulation S-K Exhibit Number Description
- ----------------------------- -----------
16.1 Letter regarding change in certifying
accountant.
99.1 Pyramid Music Corp. and Subsidiaries
Consolidated Financial Statements, March 31,
2004
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.
Date: June 15, 2004
AGU Entertainment Corp.
-----------------------
(Registrant)
By: s/ David C. Levy
------------------------------
Name: David C. Levy
Title: Chief Executive Officer
SK EXHIBIT INDEX
Regulation S-K
Exhibit Number Description
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16.1 Letter regarding change in Certifying Accountant
99.1 Pyramid Music Corp and subsidiaries.
Consolidated financial statements March 31, 2004
PYRAMID MUSIC CORP AND SUBSIDIARIES
Consolidated Financial Statements
March 31, 2004
PAGE
----------------
Independent Auditors' Report F-1
Financial statements
Consolidated balance sheet as of March 31, 2004 F-2
Consolidated statement of operations for the period
May 20, 2003 (inception) through March 31, 2004 F-3
Consolidated statement of changes in shareholders' deficit
for the period May 20, 2003 (inception) through March 31, 2004 F-4
Consolidated statements of cash flows for the period May 20, 2003 F-5
(inception) through March 31, 2004
Notes to financial statements as of March 31, 2004 F-6
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of Pyramid Music Corp. and Subsidiaries:
We have audited the accompanying consolidated balance sheet of Pyramid Music
Corp. and Subsidiaries (the "Company"), as of March 31, 2004 and the related
consolidated statements of operations, changes in shareholders' deficit and cash
flows from May 20, 2003 (inception) to March 31, 2004. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatements. 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 audit provides 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 Pyramid Music Corp. and
Subsidiaries as of March 31, 2004, and the results of their operations and their
cash flows from May 20, 2003 (inception) to March 31, 2004, in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 9 to the
financial statements, the Company's working capital deficiency of approximately
$1.9 million, shareholders' deficit of approximately $1.7 million, net loss from
operations of approximately $1.7 million and net cash used in operations of
approximately $1.8 million raise substantial doubt about its ability to continue
as a going concern. Management's plan in regards to these matters is also
described in Note 9. These financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Weinberg & Company, P.A.
/s/ Weinberg & Company
- ----------------------
Boca Raton, Florida
June 11, 2004
F-1
PYRAMID MUSIC CORP AND SUBSIDIARIES
( A Development Stage Company )
Consolidated Balance Sheet
MARCH 31, 2004
ASSETS
Current assets:
Cash $ 48,440
Note receivable, related party 15,500
Prepaid expenses 200,000
Other current assets 200
-----------
Total current assets 264,140
Property and equipment, net of accumulated depreciation
of $28,796 147,655
Distribution agreement 350,000
Other assets 24,189
-----------
TOTAL ASSETS $ 785,984
===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities $ 410,602
Subordinated convertible notes 650,000
Notes payable, related parties 114,400
Notes payable, other 909,387
Accrued interest 9,962
Lease payable, current 10,084
Other current liabilities 30,000
-----------
Total current liabilities 2,134,435
Lease payable-non current 19,826
Notes payable, non current 311,794
-----------
TOTAL LIABILITIES 2,466,055
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Commitments and contingencies
Shareholders' deficit
Preferred stock, no par value; 10,000,000 shares authorized,
-0- shares issued and outstanding --
Common stock, no par value; 50,000,000 shares authorized,
16,922,464 shares issued and outstanding 29,077
Additional paid-in capital --
Deficit accumulated during development stage (1,709,148)
-----------
Total shareholders' deficit (1,680,071)
-----------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 785,984
===========
See Independent Auditors' Report and Accompanying Notes
F-2
PYRAMID MUSIC CORP AND SUBSIDIARIES
( A Development Stage Company )
Consolidated Statement of Operations
For the Period May 20, 2003 (Inception) Through March 31, 2004
Revenues $ 93,209
------------
General and administrative expenses:
Payroll 531,667
Consulting 299,366
Legal fees 215,954
Rent and maintenance 123,496
Travel 219,745
Promotion and advertising 164,270
Professional services 51,997
Royalties 28,312
Other general and administrative expenses 122,277
Depreciation 28,796
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Total general and administrative expenses 1,785,880
------------
Loss from operations (1,692,671)
------------
Other expenses
Interest expense 16,477
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Total other expenses 16,477
------------
Loss before income taxes (1,709,148)
------------
Income tax provision --
------------
Net loss $ (1,709,148)
============
Basic and diluted loss per share $ (0.12)
============
Weighted average common shares outstanding 14,743,031
============
See Independent Auditors' Report and Accompanying Notes
F-3
PYRAMID MUSIC CORP AND SUBSIDIARIES
( A Development Stage Company )
Consolidated Statement of Changes in Shareholders Deficit
For the Period May 20, 2003 (Inception) Through March 31, 2004
COMMON STOCK ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
----------- ----------- ----------- -----------
Issuance of shares of common stock
in exchange for cash on May 20, 2003
14,628,324 $ 400 $ -- $ 400
Issuance of shares of common stock 2,294,140 28,677 -- 28,677
for services, March 22, 2004 @ .0125
Net loss -- -- (1,709,148) (1,709,148)
----------- ----------- ----------- -----------
Balance at March 31, 2004 16,922,464 $ 29,077 $(1,709,148) $(1,680,071)
=========== =========== =========== ===========
See Independent Auditors' Report and Accompanying Notes
F-4
PYRAMID MUSIC CORP AND SUBSIDIARIES
( A Development Stage Company )
Consolidated Statement of Cash Flows
For the Period May 20, 2003 (Inception) Through March 31, 2004
Cash flows from operating activities:
Net loss $ (1,709,148)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 28,796
Common stock issued as payment for services 28,677
Increase in prepaid expenses and other current assets (200,200)
Increase in accounts payable and accrued liabilities 410,602
Increase in other current liabilities and accrued interest 39,962
------------------
Net cash used in operating activities (1,401,311)
------------------
Cash flows from investing activities:
Disbursements for property and equipment (79,249)
Increase in notes receivable, related party (15,500)
Increase in distribution agreement and other assets (374,189)
------------------
Net cash used in investing activities (468,938)
------------------
Cash flows from financing activities:
Proceeds from subordinated convertible notes 650,000
Proceeds from notes payable 1,284,400
Repayments on notes payable (12,694)
Payments on capital leases (3,417)
Net proceeds from sale of common stock 400
------------------
Net cash provided by financing activities 1,918,689
------------------
Net increase in cash 48,440
Cash, beginning of period -
------------------
Cash, end of period $ 48,440
==================
Supplemental disclosure of cash flow information: Cash paid for:
Income taxes $ -
==================
Interest $ (26,439)
==================
Non-cash investing and financing activities:
Common stock issued as payment for services $ 28,677
==================
Property and equipment acquired through capital lease obligations $ 33,327
==================
Property and equipment acquired through notes payable $ 63,875
==================
See Independent Auditors' Report and Accompanying Notes
F-5
PYRAMID MUSIC CORP. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM MAY 20, 2003 (INCEPTION) THROUGH MARCH 31, 2004
(1). SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Pyramid Music Corp. (together with its subsidiaries, "The Company") is a
development stage company incorporated under the laws of the state of Florida on
May 20, 2003, under the name of CRNA, Inc. The Company was formed for the
purpose of developing market share in the recording and broadcast media
industries through the development of a media distribution channel and archived
video and music collection libraries. The Company changed its name to Pyramid
Music Corp. effective June 30, 2003. In August 2003 the Company formed two
wholly owned subsidiaries, The Tube Music Network, Inc. ("The Tube"), and
Pyramid Records International, Inc. ("PRI"), for the purpose of conducting its
operations. The Company's offices are in Miami, Florida, its only primary
location.
On April 1, 2004, the Company entered into a Share Exchange Agreement (the
"Share Exchange") with Lexington Barron Technologies, Inc. ("Lexington"), a
public development stage, Colorado company (see Note 11). Under the terms of the
Share Exchange, Lexington acquired 100% of the common stock of the Company and
the shareholders of the Company received 16,922,464 shares of common stock of
Lexington.
On March 26, 2004, in anticipation of the completion of the Share Exchange,
Lexington changed its name to AGU Entertainment Corp. ("AGU Entertainment")
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Pyramid Music Corp. and its subsidiaries (The Tube and PRI). All significant
inter-company transactions have been eliminated.
METHOD OF ACCOUNTING
The Company reports the results of its operations using the accrual method of
accounting for both financial reporting and income tax purposes. Under this
method, income is recognized when earned and expenses are deducted when
incurred. The accounting policies of the Company are in accordance with
generally accepted accounting principles and conform to the standard applicable
to development stage companies.
REVENUE RECOGNITION
The Company recognizes revenue when products are shipped or services are
provided to the customer and collectibility is assured.
F-6
PYRAMID MUSIC CORP. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM MAY 20, 2003 (INCEPTION) THROUGH MARCH 31, 2004
COMPUTATION OF NET LOSS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per
Share. The Company has reflected the provisions of SFAS No. 128 in the
accompanying financial statements for the period presented. SFAS No. 128
replaces the presentation of primary Earnings Per Share ("EPS") with a
presentation of basic EPS, which excludes dilution and is computed by dividing
income or loss available to common shareholders by the weighted average number
of common shares outstanding for the period. The Statement also requires the
dual presentation of basic and diluted EPS on the face of the statement of
operations for all entities with complex capital structures. During the period
presented, the Company did not have a complex capital structure.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid securities with original maturities of
three months or less, when acquired, to be cash equivalents.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of long-lived assets under the
provisions of SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. SFAS No. 144 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted future cash flows estimated to be generated by those assets
are less than the assets' carrying amount. If such assets are impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying value or fair value, less costs to
sell.
INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No. 109,
Accounting for Income Taxes. SFAS No. 109 requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of temporary
differences between the financial statement carrying amounts and tax bases of
assets and liabilities. The deferred tax asset arising from the Company's
available net operating loss carryforward has been fully offset by a valuation
allowance because management has determined that the deferred tax asset will not
be realized.
F-7
PYRAMID MUSIC CORP. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM MAY 20, 2003 (INCEPTION) THROUGH MARCH 31, 2004
FINANCIAL INSTRUMENTS
At December 31, 2003 the carrying value of the Company's financial instruments,
which include cash, note receivable, accounts payable, accrued expenses, and
short term debt, approximates their fair value due to the short-term maturity of
those instruments.
STOCK-BASED COMPENSATION
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation, which encourages but does not require companies to recognize
compensation expense for stock-based awards based on their fair market value at
the date of grant. SFAS No. 123 allows companies to continue to employ the
intrinsic value method under APB No. 25 provided that pro-forma disclosures of
net income and earnings per share under the fair value method are included in
the notes to the financial statements. The required disclosures were amended in
December 2002 with the issuance of SFAS No. 148, Accounting for Stock Based
Compensation - Transition and Disclosure. The Company has adopted the disclosure
requirements of SFAS No. 123 as amended by SFAS No. 148, but will continue to
account for stock-based compensation using the intrinsic value method prescribed
under APB No. 25. During the reporting period, the Company recognized $28,677 of
compensation expense for shares issued during the first quarter of 2004.
(2) PREPAID EXPENSES
Prepaid expenses include a deposit to an escrow account in connection with a
joint venture agreement (See Note 6) . On March 25, 2004, PRI committed to a
marketing and promotion budget of $400,000, in connection with the Havana Bridge
Project, (see Notes 5 and 6) of which $200,000 was deposited into an escrow
account with an independent trustee. The escrow funds were advanced by a
promissory note holder under a separate trust agreement. The entire promotional
budget is anticipated to be expended in 2004.
(3) PROPERTY AND EQUIPMENT, NET
Property, plant and equipment consist primarily of office equipment, computers
and software, a vehicle, and leasehold improvements, and are stated at cost less
accumulated depreciation. Depreciation is calculated using the straight-line
method over the estimated useful lives of the assets. Expenditures for repairs
and maintenance are charged to expense when incurred. Expenditures for major
renewals and betterments, which extend the useful lives of existing equipment,
are capitalized and depreciated.
Property and equipment consisted of the following at March 31, 2004:
Furniture and equipment $ 144,186
Leasehold improvements 18,265
Software 14,000
--------------
176,451
Less accumulated depreciation and
amortization 28,796
--------------
$ 147,655
==============
F-8
PYRAMID MUSIC CORP. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM MAY 20, 2003 (INCEPTION) THROUGH MARCH 31, 2004
Depreciation expense for the period from May 20, 2003 (Inception) through March
31, 2004 was $28,796.
(4) CAPITAL LEASES
The Company is obligated under various capital leases, primarily computer
equipment. For financial reporting purposes, minimum lease payments relating to
the equipment have been capitalized. Capital lease obligations totaling $29,910
require minimum monthly lease payments ranging from $80 to $382 with interest
rates ranging from 15.5% to 17.8%. Capital lease payments, including interest,
for the period from May 20, 2003 (inception) through March 31, 2004 was
approximately $4,845.
Future capital lease obligations are as follows for the year ending March 31:
2005 $ 10,084
2006 11,178
2007 7,875
2008 773
-------------
Total $ 29,910
=============
(5) DEBT
At March 31, 2004, the Company had outstanding $650,000 of 5% Convertible
Subordinated Notes. The Notes are due on November 30, 2004 provided the Company
remains privately owned. Upon the Company becoming listed as a publicly traded
corporation on a U.S. Stock Exchange, the Notes provide an option, by The
noteholders, for conversion of the outstanding principal and accrued interest
into common stock of the Company at $3.00 per share.
For the period from May 20, 2003 (inception) through March 31, 2004, the Company
received loans totaling $798,275 to fund its operations. The Company executed
promissory notes that are due on June 30, 2004. With the exception of a $40,000
loan, interest at 5% per annum, commences on May 1, 2004. Interest on the
$40,000 loan is payable from inception (March 18, 2004) to maturity, at 5% per
annum.
On March 25, 2004, the Company executed a promissory note for $200,000 that is
due on June 30, 2004. The $200,000 was deposited into an escrow account with an
independent Trustee. The escrow funds were advanced by the promissory note
holders under a separate trust agreement in connection with the Havana Bridge
Project (see Notes 2 & 6).
In connection with the Distribution Agreement and assignment of certain assets
of PMG, as defined in Note 6, the Company assumed the obligation to repay
$350,000 of notes payable to two shareholders of the Company. The notes have an
annual rate of interest of 8%. Payments commenced in March of 2004 (see Note 8).
F-9
PYRAMID MUSIC CORP. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM MAY 20, 2003 (INCEPTION) THROUGH MARCH 31, 2004
Aggregate maturities of the Company's long term debt as of March 31, are as
follows:
Year ended March 31, Amount
-------------------- ------
2005 $ 1,673,787
2006 96,551
2007 104,408
2008 104,663
2009 6,172
-------------
Total $ 1,985,581
=============
(6) COMMITMENTS AND CONTINGENCIES; CERTAIN TRANSACTIONS
JOINT VENTURE - BRIDGE TO HAVANA
On May 15, 2003, PRI entered into a joint venture agreement with GSMB, LLC,
("GSMB") a third party California limited liability company, whereby PRI
acquired the worldwide rights for both audio and live concert DVD related to the
historic music project known as the Havana Bridge project ("Havana Bridge").
After a 4% service fee payable to the Company, and 10% allocation fee to various
charities, the proceeds will be distributed to PRI and GSMB equally, as defined
in the agreement. The Havana Bridge agreement commits PRI to expend
approximately $400,000 in marketing and promotional costs, of which $200,000 has
beed escrowed (See Note 2).
ASSIGNMENT AND ASSUMPTION AGREEMENT, ARK 21 RECORDS, L P
On March 3, 2004, PRI entered into an Assignment and Assumption Agreement with
Pyramid Media Group, Inc. ("PMG"), whereby the Company agreed to assume all of
the covenants and obligations of a Distribution Agreement between PMG and ARK 21
Records, L P, a California Limited Partnership ("ARK21"). The Distribution
Agreement dated May 1, 2003, provides the terms and conditions relating to the
distribution of records. In exchange for the rights to the Distribution
Agreement and certain assets of PMG, the Company assumed the obligation to repay
$350,000 of notes payable to certain principals of PMG. the notes have an annual
rate of interest of 8%. An officer of the Company is an owner and controlling
shareholder of PMG.
ARK21 is the exclusive manufacturer and distributor of records for the Company
through normal retail channels throughout the United States. During the initial
three-year term of the agreement, which can be automatically extended, PRI has
the exclusive right and license to manufacture and distribute, sell, market,
promote, and otherwise advertise records on behalf of the Company. Pursuant to
this Agreement, the Company is required to provide ARK21 with a sample of every
record to be released and distributed by the Company, in each configuration
(e.g., CD, DVD, cassette, etc.), as soon as they are available. The Company will
pay ARK21 a distribution fee equal to twenty three percent (23%) of net record
sales, as defined in the Distribution Agreement.
F-10
PYRAMID MUSIC CORP. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM MAY 20, 2003 (INCEPTION) THROUGH MARCH 31, 2004
RECORDING PROJECT INVESTMENT AGREEMENT
On March 16, 2004, PRI and Balaji Productions, LLC ("Balaji") entered into a
Recording Project Investment Agreement, whereby Balaji invested $150,000 to form
a project entitled the "Stephen Stills Project". PRI will use the funds to
develop a record album. Balaji will recoup its investment in the project at the
rate of sixty percent (60%) of the net profits from the sale of the master
recordings in all medium generated from the project. The project will be managed
by the Company. The Stephen Stills project is scheduled for release in the
fourth quarter of 2004.
VISUAL MUSIC, LLC
On March 25, 2004, Visual Music, LLC ("Visual") was formed by PRI, the Company
and Promo Only, Inc., ("Promo") a previously unrelated Florida corporation,
wherein Promo will deliver to Visual access to Promo's music video library of
DVD compilations, finished film for manufacture, and the mastered authorized
source with artwork. The Company will provide distribution, marketing and
promotion services. This agreement provides for distribution services through
the Company's agreement with Universal Music and Distribution, Inc. ("UMVD") and
UMVD's affiliate ARK21. Promo and the Company will share profits equally, after
providing for certain marketing and promotional expenses and a four per cent
(4%) service fee. The project will be managed by the Company.
PROMO ONLY, INC.
On March 25, 2004, The Tube entered into an agreement with Promo, an unrelated
company, to broadcast, distribute and display on and over the Tube's music
network, music videos owned by Promo. Promo has granted to the Tube an exclusive
license to broadcast, distribute and display on and over the Tube's music
network, archived music videos in whatever medium, means or format, now used or
developed in the future. The agreement is for three years and will renew for
three additional one-year periods, unless terminated in accordance with the
termination provisions of the agreement. In connection with the agreement and
the development of Visual, the Company will issue to Promo, 24,000 shares of
common stock of the Company, which will vest over the term of the agreement. The
Company will pay Promo four percent (4%) of the Company's gross advertising
profit as defined in the agreement for the first 24 months. For each month after
24 months, the Company will pay Promo an agreed upon percentage, which will be
agreed upon and negotiated in good faith. Such percentage will not exceed six
percent (6%).
F-11
PYRAMID MUSIC CORP. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM MAY 20, 2003 (INCEPTION) THROUGH MARCH 31, 2004
LICENSING AND DISTRIBUTION AGREEMENTS
The Company has entered into additional licensing and distribution agreements
whereby PRI will provide manufacturing and distribution, marketing and promotion
services in the United States and internationally, of recordings embodying the
performances of various artists. The terms of the agreements are generally for
three years and provide for renewals and termination. PRI generally receives, as
part of these agreements, advances against the sale of future recordings.
LEGAL PROCEEDINGS
The Company is subject to claims and legal actions that arise in the ordinary
course of its business. The Company believes that the ultimate liability, if
any, with respect to these claims and legal actions, will not have a material
effect on the financial position or results of operations of the Company.
EARTH SONG ENTERTAINMENT
On April 21, 2004, PRI entered into a Letter of Intent ("LOI") with Earth Song
Entertainment ("Earth Song") to market and distribute through PRI's ARK21
agreement, an album and concert DVD featuring musical artist Chaka Khan. The LOI
intends that a contract be prepared which will require PRI to advance to Earth
Song $325,000 for Artist Royalties and $25,000 for legal fees. PRI will also
commit to the production costs for the album and will receive fifty percent
(50%) of the net revenues from the sale of the album and concert DVD, after a
four percent (4%) service fee is paid to PRI. Net Revenues are defined as
receipts less distribution, manufacturing, advertising and promotion, discounts
and other royalties.
@RADICAL.MEDIA,INC
On May 24, 2004, the Tube committed to an agreement, which will be finalized in
June 2004, for acquiring certain branding services for the development of the
Tube Music Network. The agreement, when executed, will require the Tube to pay
@radical.media,inc, ("Radical"), $650,000 in cash and stock for services in
connection with this agreement. On May 24, 2004, the Tube provided Radical a
deposit of $50,000.
LEASE AGREEMENTS
The Company leases office space and equipment, under non-cancelable operating
leases that expire at various dates through year 2006. Rent expense for all
operating leases for the period from May 20, 2003 (inception) through March 31,
2004 was approximately $121,600.
Future minimum payments are as follows for the year ending December 31:
2004 114,597
2005 87,164
2006 41,165
-------------
Total $ 242,926
=============
F-12
PYRAMID MUSIC CORP. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM MAY 20, 2003 (INCEPTION) THROUGH MARCH 31, 2004
(7) STOCKHOLDERS EQUITY
The total number of shares of all classes of stock which the Company is
authorized to issue is 60,000,000 shares, consisting of 10,000,000 shares of
preferred stock, no par value, (the "Preferred Stock"), and 50,000,000 shares of
common stock, no par value, (the "Common Stock").
The Preferred Stock may be issued from time to time in one or more series as may
be designated by the Board of Directors of the Company, each such series to be
distinctly titled and to consist of the number of shares designated by the Board
of Directors. All shares of any one series of Preferred Stock so designated by
the Board of Directors shall be alike in every particular, except that shares of
any one series issued at different times may differ as to the dates from which
dividends thereon (if any) shall accrue or be cumulative (or both).
The Common Stock shall be identical and shall entitle each of the holders
thereof to the same rights and privileges. When and as dividends (if any) are
declared upon the Common Stock, whether payable in cash, in property or in
shares of stock of the Corporation, the holders of Common Stock shall be
entitled to share equally, share for share, in such dividends. Each holder of
Common Stock shall be entitled to one vote per share.
On March 31, 2004 there were 16,922,464 shares of common stock outstanding.
(8) RELATED PARTY TRANSACTIONS
For the period from May 20, 2003 (inception) through March 31, 2004, the Company
received net loans totaling approximately $114,400 from three shareholders of
the Company. On July 25, 2003 the Company executed three promissory notes with
the three shareholders totaling $114,400. The Notes are due November 30, 2004
and do not bear interest.
For the period from May 20, 2003 (inception) through March 31, 2004, the Company
received various computer and internet services totaling $36,000 from a
shareholder. At March 31, 2004 the entire amount was unpaid.
For the period from May 20, 2003 (inception) through March 31, 2004, the Company
received various consulting services totaling approximately $66,800 from a
shareholder. At March 31, 2004 approximately $54,300 was unpaid.
Additionally, an officer and Director of the Company has agreed to defer a
portion of salary, payable under an employment agreement, until such time as
adequate funds have been received by the Company. The amount deferred as of
March 31, 2004 was approximately $89,000.
An officer of the Company is an owner and controlling shareholder of PMC.
On March 3, 2004, in connection with the Distribution Agreement and assignment
of certain assets of PMG (see Notes 5 & 6), the Company assumed the obligation
to repay $350,000 of notes payable to two shareholders of the Company. The notes
have an annual rate of interest of 8%. Payments commenced in March of 2004.
F-13
PYRAMID MUSIC CORP. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM MAY 20, 2003 (INCEPTION) THROUGH MARCH 31, 2004
(9) GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company's financial
condition and operating results, specifically a working capital deficiency of
approximately $1.9 million, a shareholders' deficit of approximately $1.7
million, a net loss from operations of approximately $1.7 million and net cash
used in operations of approximately $1.8 million, raise substantial doubt about
its ability to continue as a going concern. The Company's existence is dependent
on Management's ability to develop profitable operations and resolve the
Company's liquidity problems. Management anticipates that the Company will
attain profitable status and improve its liquidity through the continued
development of market share in the recording and broadcast media industries
through the development of a media distribution channel and archived video and
music collection libraries.
In order to improve the Company's liquidity, management is actively pursuing
additional equity and debt financing through discussions with investment bankers
and private investors. There can be no assurance the Company will be successful
in its efforts to raise additional financing.
These financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
(10) DEVELOPMENT STAGE COMPANY
The Company was formed on May 20, 2003. There have been no significant revenues
since inception and the Company is in the process of raising additional capital
and financing for future operations.
(11) SUBSEQUENT EVENTS
During April and May of 2004, the Company received loans totaling $635,000 to
fund its operations. The Company executed promissory notes that are due on June
30, 2004. With the exception of a $30,000 loan, interest at 5% per annum
commences on May 1, 2004. Interest on the $30,000 loan commences on June 30,
2004, at 5% per annum.
F-14
PYRAMID MUSIC CORP. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM MAY 20, 2003 (INCEPTION) THROUGH MARCH 31, 2004
On April 1, 2004, AGU Entertainment (formerly Lexington) acquired the Company
under a Share Exchange agreement. Lexington issued 16,922,464 of its own shares
(approximately 80% of the then issued and outstanding shares) for 100% of the
issued and outstanding stock of PMC. Upon completion of the Share Exchange, the
former shareholders of Lexington owned 4,130,612 shares or approximately twenty
(20%) of the outstanding common stock of AGU Entertainment, which has 21,053,076
shares of Common Stock outstanding as of April 1, 2004.
In April 2004 the holders of $600,000 of 5% Convertible Subordinated Notes due
November 30, 2004 elected to convert their notes into 200,000 shares of the
Company's common stock.
See Note 6 for subsequent events
F-15