**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20450**

** **

**FORM 10-KSB**

** **
| **(Mark  One)** |   |
|-----------------|--------|

 
| **ý** | **Annual  report under section 13 or 15(d) of the Securities Exchange Act of 1934.** |
|------------|--------------------------------------------------------------------------------------|

 

**For thefiscal year ended December 31, 2001 or**

 
| **o** | **Transition  report under  section 13 or 15(d) of  the Securities Exchange Act of 1934.** |
|-------|-------------------------------------------------------------------------------------------------|

 

**For the transition period from                 to                      .**

 

**CommissionFile Number 0-29402**

 

**ON STAGE ENTERTAINMENT, INC.**

(Name of Small BusinessIssuer in its Charter)

 

| **Nevada**                                                      |   | **88-0214292**                             |
|-----------------------------------------------------------------|--------|--------------------------------------------|
| (State or Other  Jurisdiction of Incorporation or Organization) |   | (I.R.S.  Employer Identification No.) |
|                                                            |   |                                       |
| **4625  W.  Nevso Drive Las Vegas, Nevada**                |   | **89103**                                  |
| (Address of principal  executive offices)                       |   | (Zip Code)                                 |

 
| Issuer’s telephone number, including area code:  702-253-1333 |
|--------------------------------------------------------------------|
|                                                               |
| Securities registered pursuant to Section 12(b) of  the Act:       |
|                                                               |
| Title of each class: None                                          |
|                                                               |
| Name of each exchange on which registered: None                    |
|                                                               |
| Securities registered pursuant to Section 12(g) of  the Act:       |

 

Common Stock, par value$0.01 per share

Redeemable Warrants topurchase shares of Common Stock

(Title of Class)

 

Check whether the issuer: (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Exchange Act during the past12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days: YES ý NO o

 

Check if there is no disclosure of delinquent filersin response to Item 405 of Regulation S-B contained in this form, and nodisclosure will be contained, to the best of registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in PartIII of this Form 10-KSB or any amendment to this Form 10-KSB.  o

 

The issuer’s revenues for the most recent fiscal yearended December 31, 2001 were $23,760,555.

 

The aggregate market value of the voting stock held bynon-affiliates computed by reference to the average bid and asked prices ofsuch stock as quoted on the over-the-counter bulletin board on March 14, 2002,was $1,637,368.

 

The number of shares of the issuer’s common stockoutstanding as of March 14, 2002, was 11,307,930.

 

Transitional Small Business Disclosure Format (checkone): Yes o No ý

 

 

 

DOCUMENTS INCORPORATED BYREFERENCE

 

None.

 

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TABLE OF CONTENTS

 
| PART I    |
|-----------|
|      |
| Item 1.   | Description of  Business |
| Item 2.   | Description of  Property |
| Item 3.   | Legal Proceedings |
| Item  4.  | Submission  of Matters to a Vote of Security Holders |
|      |
| PART  II  |
|      |
| Item  5.  | Market  for Common Equity and Related Stockholder Matters |
| Item  6.  | Management’s  Discussion and Analysis or Plan of Operations |
| Item  7.  | Financial  Statements |
| Item  8.  | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure |
|      |
| PART  III |
|      |
| Item  9.  | Directors,  Executive Officers, Promoters and Control Persons, Compliance with Section  16(a) of the Exchange Act |
| Item 10.  | Executive  Compensation |
| Item  11. | Security  Ownership of Certain Beneficial Owners and Management |
| Item  12. | Certain  Relationships and Related Transactions |
| Item 13.  | Exhibits  and Reports on Form 8-K |

 

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**PART I**

 

This document contains certain forward-looking statements that aresubject to risks and uncertainties. Forward-looking statements include certain information relating to ourpotential new show openings, the potential markets for our productions, theexpansion of existing and potential gaming and tourist markets, exposure tovarious trends in the gaming industry, acquisition plans and the benefitsanticipated from these acquisitions, business strategy, outstanding litigationmatters and the available defenses, the seasonality of our business, andliquidity issues, as well as information contained elsewhere in this reportwhere current statements are preceded by, followed by or include the words“believes,” “expects,” “anticipates” or similar expressions.  For these statements, we claim theprotection of the safe harbor for forward-looking statements contained in thePrivate Securities Litigation Reform Act of 1995.  The forward-looking statements in this document are subject torisks and uncertainties that could cause the assumptions underlying theforward-looking statements and the actual results to differ materially fromthose expressed in or implied by the statements.

 

The most important factors that could prevent us from achieving ourgoals and cause the assumptions underlying the forward-looking statements andthe actual results to differ materially from those expressed in or implied bythose forward-looking statements include the information provided under theheading “Description of Business - Risk Factors” in Item 1, as well as thefollowing:

 

•                  Dependenceon our flagship Legends in Concert production and our principal productionvenues;

•                  Theability to successfully produce and market new productions and to manage thegrowth associated with any new productions;

•                  Risksassociated with our acquisition strategy, including our ability to successfullyidentify, complete and integrate strategic acquisitions;

•                  Theability to meet our commitments, obtain alternative and additional financing oncommercially reasonable terms;

•                  Thecompetitive nature of the leisure and entertainment industry and the ability tocontinue to distinguish our services;

•                  Fluctuationsin quarterly operating results and the highly seasonal nature of our business;

•                  Theability to reproduce the performance, likeness and voice of various celebritieswithout infringing on the publicity rights of those celebrities or theirestates, as well as our ability to protect our intellectual property rights;

•                  Theability to avoid future litigation; and

•                  Theresults of operations which depend on numerous factors, including when ourcontracts begin and end, the timing and amount of new business we generate, ourrevenue mix, the timing and level of additional selling, general andadministrative expense and the general competitive conditions in the leisureand entertainment industry, as well as the overall economy.

 

ITEM 1. Description of Business

 

General

 

We produce and market live theatrical productions, and operate livetheaters and dinner theaters in urban and resort tourist locations.  During 2001, we performed full-time shows inthe following locations:

 
| **Tourist Market**               |   | **Production**                            |   | **Location**                    |   | **Leased/  Discontinued/  Contracted** |
|----------------------------------|--------|-------------------------------------------|--------|---------------------------------|--------|----------------------------------------|
| Atlantic City,  New Jersey       |   | Legends in Concert                        |   | Bally’s Park  Place        |   | Contracted                             |
| Branson, Missouri                |   | Legends in Concert                        |   | Legends Theater                 |   | Leased                                 |
| Branson, Missouri                |   | Country Tonite                            |   | Country Tonite  Theater         |   | Leased                                 |
| Branson, Missouri                |   | Ripley’s Live...Believe It Or Not |   | Osmond Family Theater           |   | Discontinued                           |
| Buena Park (Anaheim), California |   | Wild Bill’s Dinner Extravanganza     |   | Wild Bill’s Dinner Theater |   | Leased                                 |
| Las Vegas, Nevada                |   | Legends in Concert                        |   | Imperial Palace                 |   | Contracted                             |
| Las Vegas, Nevada                |   | Bravo                                     |   | Venetian Showroom               |   | Leased                                 |
| Surfside Beach, South Carolina   |   | Legends in Concert                        |   | Legends Theater                 |   | Leased                                 |

 

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We also market our productions to commercial clients.  These include casinos, corporations, fairsand expositions, theme and amusement parks, and cruise lines.  Some of the locations at which we haveperformed include the Illinois State Fair, MGM Grand Theme Park and DollywoodTheme Park.  We have performed inAustralia, Russia, China, Africa, Japan and the Philippines.  We have also performed for such corporateclients as McDonald’s, Bank of America, Hewlett Packard, IBM, Pitney Bowes,Levi Strauss and Texaco.

 

For the years ended December 31, 2000 and 2001, approximately 63% and70%, respectively, of our net revenue was generated from theaters and dinnertheaters operated in resort and urban tourist markets.  Approximately 37% and 30%, respectively, ofour net revenue was generated from live productions performed in gamingmarkets, predominantly in Las Vegas and Atlantic City.  Approximately 1% of our net revenue wasgenerated from sales to commercial clients other than casinos.  The remaining net revenue for each year wasgenerated from merchandise and souvenir photography sales.

 

We were incorporated on October 30, 1985 in Nevada under the nameLegends in Concert, Inc.  On August 7,1996, we changed our name to On Stage Entertainment, Inc.  Our principal executive offices are locatedat 4625 West Nevso Drive, Las Vegas, Nevada 89103, and our telephone number is(702) 253-1333.

 

Developments during 2001

 

During late 2000 and early 2001, weraised  $700,000 and $650,000,respectively, in a private placement. These funds were used to assist withmeeting our capital requirements, paying for expenses associated with ourrestructuring, and making deposits for the acquisition of Country Tonite andthe live licensing rights for Ripley’s Live . . . Believe It or Not. In thisprivate placement, we issued convertible debentures with an annual interestrate of 10%. The debentures are convertible into common stock at $0.79 pershare.  The market price of the stock inrelation to the conversion price of these convertible debentures created abeneficial conversion amount of $87,975, which is amortized over two years. Thematurity dates for  $700,000 of theconvertible debentures were November and December 2001, and the maturity datesfor  $650,000 of the convertibledebentures were January and February 2003.

 

In May 2001, weoffered the holders of the debentures the option to either (1) maintain theoriginal agreement with respect to the convertible debentures, or (2) exchangethe debentures for Series A Preferred Stock with the right to convert thepreferred stock into common stock at $0.50 per share, and receive preferentialdividends, payable quarterly in arrears at a rate of 12% per year, untilconversion.  As of June 2001, $1,200,000of the $1,350,000 in convertible debentures were exchanged for Series APreferred Stock.  The market price ofthe common stock on the day of the transaction in relation to the conversionprice of the preferred stock resulted in a deemed dividend of $202,105. The remaining debentures were extended inDecember 2001, and will now mature in July 2002. Upon maturity, in addition torepayment of principal and interest, we will issue warrants to purchase anumber of shares of common stock equal to the dollar amount of the principalinvestment. The warrants will have an exercise price of $0.54 per share.

 

In February 2001, we acquired substantially all of theassets of CRC of Branson, Inc. and Country Tonite Enterprises, Inc., whichprimarily consisted of all of the rights and title in and to Country Tonite,for a purchase price of $3,800,000.  Theassets acquired were transferred to Country Tonite Branson, LLC, a wholly-ownedsubsidiary of On Stage.  Country Toniteis an award-winning theatrical production, which has been presented in Branson,Missouri, and Pigeon Forge, Tennessee. We took over management of the show in Branson in March 2001. We alsoacquired the right to oversee the Country Tonite production in Pigeon Forge,Tennessee, for quality control purposes. However, the rights to present the Pigeon Forge show were previouslylicensed to an unrelated third party and were not included in this acquisition.The terms of the agreement called for initial payments of $100,000 on November21, 2000, $250,000 on January 29, 2001, $150,000 on February 15, 2001, and$500,000 on March 15, 2001, with the balance of $2,800,000 due on July 31,2001, with 10% interest, payable monthly. In August 2001, we satisfied the note payable with a cash payment of$2,800,000, plus accrued and unpaid interest.

 

Also in February 2001, we entered into an agreement with McCown DeLeeuw & Co., Inc., a private equity investment firm (“MDC”), under whichMDC agreed to invest up to $20 million in the form of convertible preferredsecurities.  The terms of the agreementprovide for funding in four tranches of $6.0 million, $4.0 million, $5.0million and $5.0 million.  The secondand third tranches are in the form of warrants exercisable over a 10-yearperiod, at our option.  The fourth trancheis exercisable only after the third tranche has been funded.  The availability of funds is subject to thefollowing:

 

•                  Wemust submit a notice to our board that includes the proposed funding amount,which must be at least $2 million, and the specific growth or acquisitionopportunity for which the funds will be used;

•                  Wemust have met the EBITDA budget approved by our board for the year-to-dateperiod; and

•                  MDCmust have earned a minimum annualized rate of return of 35% on its fundedinvestment.

 

The convertible preferred stock has an annual dividend rate of 12%, ofwhich 10% is payable in cash and 2% is payable in kind. The convertiblepreferred stock has a liquidation preference of $5.00 per share and isconvertible into shares of common stock at a conversion price of $.50 or $.75per share depending on certain factors. There is a mandatory redemption provision under 

 

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certain circumstances, including a change of control.  We are precluded from using the MDCinvestment to fund operating losses. Our financial projections for 2002, 2003 and 2004 indicate that we willhave net operating profits.  Weimplemented significant cost-cutting measures in 2001 to ensure thisresult.  These included reducing ourstaff to cut corporate overhead by approximately $425,000 per year, eliminatingunnecessary warehouse space for annual savings of approximately $35,000 a year,and other cost-cutting measures that will save us approximately $150,000annually.

 

The first $6 million investment was made in March 2001 and was used tofund new productions.  In connectionwith the investment, we issued MDC 1,200,000 shares of our Series A ConvertiblePreferred Stock at a 5% discount to the face value. We also reimbursed MDC $500,000for fees and expenses and paid a $500,000 transaction fee, resulting in totalnet proceeds of $4.7 million.

 

In March 2001, we entered into an advisory services agreement with MDCunder which we agreed to pay MDC a $250,000 fee for services rendered throughMarch 2002.  After that, for each fiscalquarter we will pay a fee that is the greater of $62,500 or .25% of our grossrevenues for the four most recent fiscal quarters, up to $95,000.  The agreement terminates in March 2006.

 

Also in March 2001, we entered into a 33-month lease with OFT, Ltd. tolease the Osmond Family Theatre in Branson, Missouri from April 1, 2001 throughDecember 31, 2003.  The theater was usedto stage the production Ripleys Live...Believe It or Not from May 2001 throughSeptember 2001, and was sub-leased back to the Osmonds from October 2001through December 2001.  In January 2002,we moved our Legends in Concert production from the Legends Theater in Branson,Missouri, to the Osmond Family Theater. The annual rental is $450,000 payable in monthly installments of$36,250.

 

In August 2001, MDC funded its second investment by exercisingwarrants—per the terms of the prior MDC investment—for 400,000 shares of SeriesA Convertible Preferred Stock in consideration of $2,000,000.  The conversion terms of the Series AConvertible Preferred Stock resulted in a deemed dividend of $1,000,000.  At the time of MDC's second investment, ourfinancial performance failed to meet the minimum EBITDA thresholds set forth inthe agreement as a condition to MDC’s obligation to fund the second tranche ofits investment.   However, MDC agreed toconsummate the funding if we issued it a warrant to purchase an additional400,000 shares of our Series A Convertible Stock at an exercise price of $0.00001, exercisable for a10-year period.  The warrant may only beexercised if we fail to meet our cumulative EBITDA targets for the 2002 and2003 calendar years.  MDC’s $2,000,000 investmentwill be convertible into either 4,000,000 shares of common stock, or, if wefail to achieve certain EBITDA targets, 8,000,000 shares of common stock.  We used the investment to fund the last$2,800,000 payment for the acquisition of Country Tonite due on July 31, 2001.

 

In March 2002, MDC agreed to loan us $1,300,000.  The first loan, in the amount of $700,000,will be used (1) to reimburse MDC for expenses incurred on our behalf,including but not limited to attorneys' fees incurred in connection with thispromissory note, and (2) for working capital purposes within the ordinarycourse of business.  The outstandingprincipal amount of the loan plus the capitalized interest is due and payableon July 1, 2002.  MDC, at its solediscretion, can extend the maturity date to December 31, 2006.  The second loan, in the amount of $600,000,will be deposited in a separate bank account and will be withdrawn only fordirect use in connection with our participation and investment in a futureproject.  Interest on both notes ispayable at the rate of 15% per annum, compounded quarterly.  In connection with the $700,000 and $600,000promissory notes, MDC received warrants to purchase an additional 1,346,154 and1,153,846 shares of our common stock, respectively, at an exercise price of$0.50 per share, exercisable for a 10-year period.

 

### **Our Productions**

 

We develop, produce or acquire live theatrical productions includingtribute shows, musical reviews, magic shows, ice-skating productions andspecialty shows.  The principalproductions we currently produce are described below.

 

#### **Legendsin Concert**

 

Legends in Concert is our flagship production.  It is a live theatrical tribute showfeaturing impersonators who recreate past and present music and motion picturesuperstars.  Legends is the longestrunning independently produced production in Las Vegas and Atlantic City.  Based on our access to approximately 75different Legends tribute acts, we can tailor each tribute show to thedemographics of the target audience and the size of the particular venue.  We attract significant repeat business byvarying the composition of the acts in our shows.  In 2001, full-time resident Legends productions were performed inAtlantic City, New Jersey; Branson, Missouri; Las Vegas, Nevada; and MyrtleBeach, South Carolina.

 

#### **WildBill’s Dinner Extravaganza**

 

Wild Bill’s Dinner Extravaganza is a two-hour dinner show that featuresWild West-related acts, including Indian tribal dances, gun fighting, and showgirls.  The show runs 365 days a year atWild Bill’s Dinner Theater in Buena Park, California.

 

#### **CountryTonite**

 

Country Tonite is a tribute to the history of countrymusic featuring past and present popular country hits.  Country Tonite features high-energy dancing,comedy and favorite country songs.  TheCountry Tonite dancers have won “Dance Troupe of the Year” and the CountryTonite production is a two-time “Show of the Year” winner in Branson,Missouri.  In addition to local awards,the Country Music Organization of America has voted Country Tonite the “BestLive Country Music Show in America” and it was inducted into the Country MusicAssociation of America Hall of Fame in 1996. Country Tonite is in its eighth season in Branson at the Country ToniteTheater.

 

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#### **Bravo**

 

The show stars Charo, and features dancers and a liveorchestra in a fast-paced Latin-style production that includes salsa andcontemporary Latin music.  The show isperformed at the Venetian Showroom in Las Vegas, Nevada.

 

 

**Ripley’s Believe It Or Not!**Ò Live

** **

Presented exclusively by On Stage Entertainment, Inc., *Ripley’sBelieve It Or Not! Live* is a musical stage  production uniting hard-to-believe human acts with theatricalperformances.  With a variety ofperformers from around the world and a selection of stage props, the Ripley’sshow can range from single acts to a full production cast of 22.  We are planning a tour of this interactiveshow, which is suitable for the entire family.

 

 

### **IntellectualProperty**

 

We have filed or obtained the following intellectual property marks**.**

 
| **Name:   Country**                                     |   | **Class (es)**      |   | **Status** |
|---------------------------------------------------------|--------|---------------------|--------|------------|
| Legends in Concert   United States                      |   | 6,16,18,21,25,26,41 |   | Registered |
| Legends in Concert w/ design   United States            |   | 6,16,18,21,25,26,41 |   | Registered |
| Legends in Concert   Canada                             |   | 41                  |   | Registered |
| Legends in Concert   Europe                             |   | 41                  |   | Registered |
| Legends in Concert   Great Britain                      |   | 41                  |   | Registered |
| Legends in Concert   Japan                              |   | 41                  |   | Registered |
| Legends in Concert   Mexico                             |   | 41                  |   | Registered |
| Legends in Concert   Australia                          |   | 41                  |   | Pending    |
| Legends of Country   United States                      |   | 41                  |   | Registered |
| Atlantic City Experience   United States                |   | 41                  |   | Registered |
| Camouflage Aux Folles   United States                   |   | 41                  |   | Published  |
| Wild Bill’s Wild West Extravaganza   United States |   | 41                  |   | Pending    |
| Blazing Pianos   United States                          |   | 41                  |   | Registered |
| Legends Goes Country   United States                    |   | 41                  |   | Pending    |

 

We will file applications for protection of our Legends service mark inother foreign countries, if necessary. We believe we own or have appropriately licensed all of the intellectualproperty rights required to perform our shows in the manner in which they arecurrently produced, including the right to publicly present and perform allnon-dramatic copyrighted musical compositions under musical licenses withBroadcast Music, Inc.  (“BMI”) andAmerican Society of Composers, Authors and Publishers (“ASCAP”).

 

We typically require our independent contractors, employees,consultants and advisors to sign appropriate confidentiality andnon-competition agreements in connection with their employment, consulting oradvisory relationship with us.

 

### **GovernmentRegulation**

 

Providing entertainment to the gaming industry subjects us to variouslicensing regulations.  We are regulatedand required to obtain a casino industry license from the New Jersey CasinoControl Commission under the New Jersey Casino 

 

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Control Act.  Our currentservice industry license from the New Jersey Casino Control Commission is validthrough September 30, 2003.  We do notbelieve that we are required to obtain a license to provide our services tocasinos in Nevada or in any other jurisdictions in which we operate, other thanNew Jersey.  The Nevada Gaming ControlBoards and similar authorities in other jurisdictions, however, have broadauthority to order providers of services to casinos to file applications, beinvestigated, have their suitability determined, obtain licenses and ceaseproviding their services, if they find the service providers to be unfit.  Additionally, many of the casinos require aproduction company to be properly licensed under the local gaming laws beforeit will contract for their services.

 

We lease certain of the theaters for our new brand-name residentproductions.  We absorb all costs andrisks associated with producing the show in order to retain 100% of the show’sprofits.  Producing shows under this“four-wall” arrangement may require us to obtain and maintain certain locallicenses and permits.  We had to obtainthese licenses to open our Myrtle Beach and Branson shows, both of which are“four-wall” productions.  These licensesand permits could include amusement licenses, music licenses (i.e., BMI orASCAP), business licenses, liquor licenses, retail sales tax licenses, food andbeverage licenses and a health inspection rating (if we sell dairy products orhot food, other than popcorn). Difficulties or failure in obtaining required licenses or regulatoryapprovals could delay or prevent the opening of a new show or, alter, delay orhinder our expansion plans.  Inaddition, the suspension of, or inability to renew, a license needed to operateany of our currently running productions would adversely affect our operations.

 

 

### **Employees**

 

As of March 15, 2002, we employed approximately 536employees – 304 full-time and 232 part-time - including 230 entertainers, 10theater operations personnel, 84 production personnel, 57 food and beveragepersonnel, 34 administrative personnel, three marketing personnel, 114 boxoffice/concession personnel and four executive officers.  None of our current employees are covered bya collective bargaining agreement.  Webelieve that our relationship with our employees is good.

 

RISK FACTORS

 

**Increasedoperating expenses in connection with introducing new productions may adverselyaffect our operating results.**

 

There are significant costs associated with staging anew production.  These costs occur wellbefore we generate any revenue from the production.  Delays in the introduction of new productions and factorsadversely affecting our current productions, could have a material adverseeffect on our future operating results. There can be no assurance that we will generate significant net incomein the future or that our future operations will be profitable.

 

**We mustproduce and market Legends shows in other venues to achieve success.**

 

Most of our revenue is derived from our Legendsproduction.  Our future success dependson our ability to successfully produce and market Legends shows in othervenues.  If we are unsuccessful inexpanding the Legends production, or if the Legends production concept ceasesto be profitable, our business may not be successful.

 

**Losing any of our principal venues would harm ourbusiness.**

 

We rely primarily on our Legends’ shows in Las Vegas,Nevada; Branson, Missouri; Myrtle Beach, South Carolina; and Atlantic City, NewJersey; our Country Tonite show in Branson, Missouri; and our Wild Bill’sDinner Extravaganza in Buena Park, California, for the majority of ourrevenue.  If any of these venues becomeunavailable or less desirable and we are unable to produce the shows in otheror more desirable venues, our business will be adversely affected.

 

 

**Ourability to implement our acquisition strategy will be severely limited if wecannot obtain the necessary financing.**

 

Our expansion strategy includes acquiring established,brand-name shows.  Because our abilityto use our stock as consideration is limited by its current price, we will needadditional financing to pursue strategic acquisitions or enter into jointventures with independent production companies.  We also need financing to market our brand name products to theestablished customer bases of any acquired companies to increase revenues andmarket share.   We may not be able toobtain financing on acceptable terms, or at all.   Our strategy also involves entering into revenue sharing arrangements,or joint ventures, which will also be difficult without adequatefinancing.  In addition, we may not beable to enter into beneficial joint ventures on commercially reasonable termsor in a timely manner.  Significantcapital investments for new productions or joint ventures may not result inincreased revenue or market share.

 

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**Acquiringa new production or entering into a joint venture will require significantresources.**

 

If new productions or arrangements do not generate theexpected revenue or achieve the expected popularity, our business could beharmed. We can provide no assurance that any acquired customer bases will bereceptive to our productions or that we will be able to successfully developany acquired shows.  Further, we may notbe able to successfully integrate any business or productions that weacquire.  Any inability to do so,particularly where we have made significant capital investments, could have amaterial adverse effect on us.  Inaddition, acquired business may not increase our revenue or market share orotherwise improve our financial condition.

 

**We mustcompete effectively to be successful.**

 

Many of our competitors in the leisure andentertainment industry have greater resources than we do, which puts us at acompetitive disadvantage.  We may not beable to produce shows or hire talent with the name recognition that ourcompetitors can.  In addition, we maynot be able to secure the most desirable venues for our productions.  If we cannot produce the types of shows orhire the talent that attract a significant audience, we will not generatesufficient revenues to succeed.

 

**We mustattract talented performers and headliners to succeed.**

 

Our future success depends largely upon our ability toattract and retain performers, choreographers and technical personnel with alevel of experience that ensures consistency, quality and professionalism inour productions.  Our success alsodepends on casting impersonators that look, sound and act like specificcelebrity superstars for our Legends productions.  If we are unable to retain talented performers, our business willbe adversely affected.  In addition,while our musicians, singers, dancers and production personnel are generally employees,our headline acts are independent contractors who enter into new contracts withus for each new show or venue in which they perform.  We do not maintain any long-term contracts with our performers.  We will need to hire additional performersand production technicians as we continue to open new productions, as well asto supplement personnel in our existing productions.  Our inability to attract and retain needed personnel, for eithernew or existing productions, could have an adverse effect on us.

 

**Theseasonality of our business may result in a net loss.**

 

To avoid a net loss for the year, we must generaterevenues sufficient to offset the periods when some of our venues are dark. Ifour revenues during the busy season are significantly lower than we expect, wemay not earn profits or we may lose money and have a net loss. Our business,and the live theatrical production industry in general, is seasonal. Inaddition, significant resources are spent up to six months in advance of newshow openings, which causes our operating results to fluctuate.  To avoid losses, we need to generatesufficient revenue to offset the lag time between pre-opening expenses andpost-opening ticket sale revenues.

 

**We mustanticipate and respond rapidly to trends in our industry to be successful.**

 

The live entertainment industry is subject to changingconsumer demands and trends.  Oursuccess depends on our ability to address these changing consumer desires andother factors affecting the live entertainment industry by incorporatingchanges into our productions.  Failureto respond to these factors in a timely manner could have an adverse effect onus.

 

**Ourrevenues could decline if consumers spend less on entertainment due to economicconditions.**

 

The live entertainment industry is cyclical andconsumer spending tends to decline during recessionary periods when disposableincome is low.  Although we believe ourmoderate ticket prices may enhance the appeal of our productions to consumersin a recessionary environment, the general economic climate may have an adverseimpact on our ability to compete for limited consumer resources.

 

**Asignificant decline in casino gaming could have a material adverse effect onour business.**

 

Approximately one-quarter of our revenues are derivedfrom productions in casino venues. Consequently, we are affected by declines in the gaming industry.  If changes in gaming regulations adverselyaffect that industry, our business will also be harmed.

 

**Oursuccess depends largely on reproducing the performance, likeness and voice ofvarious celebrities without infringing on the publicity rights of thosecelebrities or their estates.**

 

Defending an intellectual property infringement claimcould be expensive and time consuming, even if ultimately decided in our favor.If any of our productions were determined to have infringed on any intellectualproperty rights, we could be 

 

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required to pay damages - including treble or statutory damages - costsand attorneys’ fees.  We may also berequired to modify our productions, or cease certain activities, which couldmake our shows less popular.  We mayalso be required to obtain licenses from the celebrities we impersonate, whichwe may not be able to do on commercially favorable terms, if at all.

 

**If wehave improperly classified our headline acts as independent contractors, wewould be liable for the payment of employment taxes, which would have amaterial adverse effect on us.**

 

We treat the headline acts of our productions asindependent contractors rather than employees, which is consistent with theindustry.  However, there is noassurance that we are qualified to treat the headline acts as independentcontractors.

 

**Time andresources devoted to defending litigation could adversely affect the pursuit ofour strategic goals.**

 

We are involved in certain pending and threatenedlawsuits in which the adverse parties are seeking damages.  There can be no assurance that any of theinstituted or threatened lawsuits will be settled or decided in our favor.  Defending lawsuits also detractsmanagement’s time from pursuing our goals, which could harm our business.

 

**Ourinability to register outstanding warrants or common stock may make oursecurities less desirable.**

 

Holders of outstanding warrants to acquire our commonstock will be able to sell their warrants or the shares of common stockunderlying those warrants only if a registration statement under the SecuritiesAct relating then in effect and those securities are qualified for sale orexempt from qualification under the applicable securities laws of the states inwhich the various holders of those securities reside.  Although we intend to use our best efforts to maintain a currentregistration statement covering the securities underlying the warrants at theearliest practicable date, we may not be able to do so.  The value of the warrants may be greatlyreduced if a registration statement covering the securities issuable upon theexercise of the warrants is not kept current or if the securities are notqualified, or exempt from qualification, in the states in which the holders ofthose securities reside.  Warrantholders who reside in jurisdictions in which those securities are not qualifiedand in which there is no exemption will be unable to sell their warrants in theopen market and may allow them to expire unexercised.  Currently, we have outstanding warrants to purchase 4,410,155shares of common stock of which 1,400,000 are registered.  We are not currently eligible to registerour securities on Form S-3, a short form registration statement.  This may delay our ability to register thewarrants or the common stock issuable upon exercise of the warrants because ofthe increased time and expense associated with registering the securities onanother form.

 

**RestrictiveDebt Covenants.**

 

Our loan agreements contain covenants that, amongother things, restrict the ability of our operating subsidiaries to dispose ofassets, incur additional indebtedness, pay cash dividends, create liens onassets, make investments or acquisitions, engage in mergers or consolidations,make capital expenditures, engage in certain transactions with affiliates orredeem or repurchase the indebtedness of such subsidiaries.

 

**We havegenerated significant net losses and may continue to do so.**

 

For the years ended December 31, 2001 and 2000, we hadnet losses of $1,730,396 and $4,701,666, respectively.  There can be no assurance that we willgenerate net income in the future or that our future operations will beprofitable.

 

**Toachieve profitability, we must produce new shows and manage them effectively.**

 

Our continued growth depends, to a significant degree,on our ability to produce and market new theatrical productions on a profitablebasis.  Our expansion plans includeincreasing both the number of productions in operation at any given time andthe rate at which the productions open. This expansion strategy contemplates opening additional residentproductions.  This will placesignificant pressures on our personnel because that growth will requiredevelopment and operation of a significantly larger business over a broadergeographical area.  The success of ourexpansion strategy depends upon a number of factors, including:

 

•                  ourability to hire and retain additional skilled management, marketing, technicaland performing arts and theatrical production personnel;

•                  ourability to secure suitable venues for new productions on a timely basis and oncommercially reasonable terms; and

•                  ourability to successfully manage our growth (which requires us to develop andimprove our operational, management and financial systems and control).

 

7

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Our prospects and future growth also depend upon theability of our productions to achieve significant market share in targetedtourist and gaming markets and our ability to develop, acquire andcommercialize additional productions. There can be no assurance that we will be able to achieve our expansiongoals or, if we are able to expand our operations, that we will effectivelymanage our growth, anticipate and satisfy all of the changing demands andrequirements that this growth will impose upon us or achieve greater operatingincome or profitability.  If we have todiscontinue new productions, our operations will be adversely affected.  This is because of:

•                  thesignificant up-front capital expenditures and pre-opening costs - estimated tobe approximately $500,000 to $1,000,000 in the case of a leased theater -associated with the establishment of a new resident production;

•                  thetime required to open a new resident production (typically three to sixmonths); and

•                  thetime required for a new resident production to achieve the market acceptanceand name recognition required for successful local ticket wholesalers and tourspecialists.

 

**Controlby Principal Stockholders.**

 

Our Chairman and Founder, and our Chief Executive Officer beneficiallyown approximately 31.4% and 24.9%, respectively, of our outstanding commonstock.  Accordingly, they can controland direct our affairs, including the election of directors, increase ourauthorized capital or they can cause the dissolution, merger or sale of all, orsubstantially all, of our assets.

 

ITEM 2. Description of Property

 

Our corporate headquarters consist of approximately 21,500 square feetof leased office and warehouse space in Las Vegas, Nevada.  This lease expires on February 28, 2003.

 

The following table lists certain information regarding the facilitiesthat we used during 2001.

 
| **Location**        |   | **Square   Footage** |   | **Type of   Possession** |   | **Lease   Expiration** |   | **Principal   Function** |
|---------------------|--------|----------------------|--------|--------------------------|--------|------------------------|--------|--------------------------|
| Atlantic City, NJ   | (1)    | N/A                  |   | Lease                    |   | 06/00                  |   | Residential              |
| Branson, MO         | (2)    | 27,500               |   | Lease                    |   | 12/01                  |   | Theater/Office           |
| Branson, MO         | (3)    | 46,000               |   | Lease                    |   | 12/03                  |   | Theater/Office           |
| Branson, MO         |   | 26,489               |   | Lease                    |   | 12/03                  |   | Theater/Office           |
| Buena Park, CA      | (3)    | 27,599               |   | Lease                    |   | 06/10                  |   | Theater/Office           |
| Las Vegas, NV       |   | 16,150               |   | Lease                    |   | 02/03                  |   | Office/Warehouse         |
| Las Vegas, NV       | (4)    | 5,376                |   | Lease                    |   | monthly                |   | Warehouse                |
| N. Myrtle Beach, SC | (5)    | 15,000               |   | Lease                    |   | 12/04                  |   | Theater/Office           |
| Surfside Beach, SC  |   | 16,171               |   | Lease                    |   | 12/10                  |   | Theater/Office           |

 

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(1)          Consists of sevencondominium units for use by our performers when they are performing in ourLegends show at Bally’s Park Place in Atlantic City, New Jersey. We leased these units from Mr. Stuart and his wife, ata rate equivalent to the fair market value until June and August 2001 when theywere sold.  We are currently leasingfour of the sold units from the new owner.

(2)          Thislease expired on December 31, 2001 and was not renewed.

(3)          OnStage’s wholly-owned subsidiary, On Stage Theaters, Inc., subleases thisproperty from Wild Bill’s California, Inc., a wholly-owned subsidiary of OnStage Theaters.

(4)          Thislease may be terminated at any time after August 31, 1999 by providing writtennotice of that intention.  In November2001, we terminated a portion of the lease, reducing the amount of squarefootage leased from 9,354 to 5,376.

(5)          Weare currently attempting to sub-lease this theater.

 

We believe that our existing facilities are suitable and adequate forour current operations and are adequately insured.

 

 

ITEM 3.  Legal Proceedings

 

                In March 2002, wereceived notice of a civil complaint filed in the Superior Court of NewJersey—Law Division—Atlantic County on January 11, 2002. The complaint wasfiled by former employees of Bally's Park Place, Inc., a venue for one of ourfull time Legends productions, against Bally's, On Stage and several Legendsperformers that we hire as independent contractors.  The complaint alleges violations of the New Jersey Law AgainstDiscrimination, retaliatory termination by conspiracy, misconduct causingsevere emotional distress, assault and battery, and loss of consortium, andseeks damages of $7,750,00, plus costs and attorneys' fees.  We have not yet responded to the complaintand it is too early for management to determine the probability of anunfavorable outcome and range of possible loss, if any.  We believe that the case is without meritwith respect to us, and intend to vigorously defend the action.

 

8

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ITEM 4. Submission of Matters to a Vote of Security-Holders

 

None.

 

**PART II**

 

ITEM 5.  Marketfor Common Equity and Related Stockholder Matters

 

Our common stock trades on the Over-the-Counter Bulletin Board underthe symbol “ONST.OB” The following table sets forth, for the periods indicated,the high and low sales prices as quoted on the OTCBB, which reflectinter-dealer prices, without retail mark-up, mark-down or commission and maynot represent actual transactions.

 

| **Period**     |   | **High** |   | **Low** |   |
|----------------|--------|----------|--------|---------|--------|
| Fiscal 2001:   |   |     |   |    |   |
| First Quarter  |   | 1.19     |   | .47     |   |
| Second Quarter |   | 1.00     |   | .54     |   |
| Third Quarter  |   | .90      |   | .50     |   |
| Fourth Quarter |   | .81      |   | .30     |   |
|           |   |     |   |    |   |
| Fiscal 2000:   |   |     |   |    |   |
| First Quarter  |   | .94      |   | .28     |   |
| Second Quarter |   | .63      |   | .22     |   |
| Third Quarter  |   | .44      |   | .19     |   |
| Fourth Quarter |   | .88      |   | .25     |   |

 

As of March 14, 2002 there were approximately 700 holders of record ofour common stock and the closing sale price of the common stock as reported onthe OTCBB was $0.32.

 

We have never declared or paid any cash dividends on our capitalstock.  We currently intend to retainany earnings to finance future growth and working capital needs.  We do not anticipate paying any cashdividends in the foreseeable future.

 

Recent Sales of Unregistered Securities

 

                In March 2002, weissued warrants to purchase 2.5 million shares of our common stock to MDC inconsideration of a $1.3 million loan. The issuance was made in reliance on an exemption from registrationunder Section 4(2) of the Securities Act as an issuance not involving a publicoffering.

 

ITEM 6. Management’s Discussion and Analysis or Plan of Operation

 

MANAGEMENT’S DISCUSSIONAND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Overview

 

The financial statements included in this reportinclude the accounts of On Stage Entertainment, Inc., a publicly traded Nevadacorporation and its subsidiaries, including, Legends in Concert, Inc., On StageMarketing, Inc., On Stage Theaters, Inc., Wild Bill’s California, Inc., OnStage Merchandise, Inc., On Stage Events, Inc., On Stage Casino Entertainment,Inc., On Stage Productions, Inc., On Stage Theaters North Myrtle Beach, Inc.and On Stage Theaters Surfside Beach, Inc.

 

On Stage derives net revenues from five business unitscategorized by three reportable segments:

 

•                  Casinos.  The Casinos segment primarily sells livetheatrical productions to casinos for fixed fees.  The Casinos segment operates the Legends show at the ImperialPalace in Las Vegas, Nevada, and at Bally’s Park Place in Atlantic City, NewJersey.

•                  Theaters.  The Theaters segment rents live theaters anddinner theaters in urban and resort tourist locations.  The Theaters segment derives revenues fromticket sales along with food and beverages to patrons who attend the livetheatrical productions.

•                  Events.  The Events business unit sells livetheatrical productions to commercial clients, which include corporations, themeand amusement parks and cruise lines for fixed fees.  Revenues generated from the Events business unit are included inthe Casinos segment.

•                  Merchandise.  The Merchandise business unit sellsmerchandise and souvenir photography products to patrons who attend theCasinos, Theaters, and Events productions. Revenues generated from the Merchandise business unit are included inthe Theaters segment.

 

9

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•                  ProductionServices.  The Production Servicessegment sells technical equipment and services to commercial clients.  However, the Production Services segment’sprimary focus is providing technical support for all of the Casinos, Theaters,Events and Merchandise segments.

 

In addition to these five business units, On Stagereports corporate overhead costs through a separate segment, On Stage Entertainment(“OSE”).

 

The accounting policies of the reportable operatingsegments are the same as those described in the Summary of AccountingPolicies.  On Stage’s managementevaluates the performance of its operating segments based upon the profit andloss from operations.

 

Our reportable segments include strategic businessunits and each segment services a different market or performs a specializedfunction in support of a given market.

 

Results of Operations

 

The following table sets forth the various componentsof our net revenue as a percentage of the total net revenue for the periodsindicated:

 
|                                                        |   | **Years  Ended December 31,** |   |
|-------------------------------------------------------------|--------|-------------------------------|--------|
|                                                        |   | **2000**                      |   | **2001** |   |
| Net revenue                                                 |   | 100.0                         | %      | 100.0 | % |
| Costs of  Revenues                                          |   | 85.3                          |   | 90.2 |   |
| Gross profit                                                |   | 14.7                          |   | 9.8 |   |
| Selling, general  and administrative                        |   | 17.2                          |   | 11.1 |   |
| Depreciation and  amortization                              |   | 4.5                           |   | 3.8 |   |
| Expenses at  closed locations                               |   | 2.5                           |   | — |   |
| Operating Income  (loss)                                    |   | (9.5                          | )      | (5.1 | ) |
| Other income                                                |   | 1.4                           |   | — |   |
| Loss on disposal  of fixed assets                           |   | (6.5                          | )      | — |   |
| Interest  expense, net                                      |   | (5.0                          | )      | (2.2 | ) |
| Loss before  income tax and extraordinary item              |   | (19.6                         | )      | (7.3 | ) |
| Income taxes                                                |   | 0.4                           |   | (.1 | ) |
| Loss before  extraordinary item                             |   | (20.0                         | )      | (7.2 | ) |
| Extraordinary  item - trouble debt restructuring gain, net. |   | 0.6                           |   | — |   |
| Net loss                                                    |   | (19.4                         | )%     | (7.2 | )% |

 

Loss before income taxes and extraordinary item forthe year ended December 31, 2000, was $4,751,397, as compared to a loss beforeincome taxes and extraordinary item of $1,749,368 for the year ended December31, 2001.

 

The following tables set forth the results of operationsby On Stage for the reportable segments indicated:

 
|                                                          |       | **Year ended  December 31, 2000** | ** **      | **Operation****Sub-Total****s** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------|-----------------|---------------------------------|------------|
| **Casino**                                                    | ** ** | **OSE**                           | ** **      | **Theaters**                    |
| Net revenues                                                  |       | $                                 | 8,981,520  |                            | $          | 29,719 |   | $ | 15,126,202 |   | $ | 24,137,441 |   |
| Cost of revenues                                              |       | 6,283,811                         |            | 848,820                         |       | 13,460,766 |   | 20,593,397 |   |
| Gross profit                                                  |       | 2,697,709                         |            | (819,101                        | )          | 1,665,436 |   | 3,544,044 |   |
| Selling, general  & administrative                        |       | 379,801                           |            | —                          |       | 902,748 |   | 1,282,549 |   |
| Depreciation  & amortization                              |       | 398,667                           |            | 110,461                         |       | 372,236 |   | 881,364 |   |
| Expenses at  closed locations                                 |       | —                            |            | —                          |       | — |   | — |   |
| Total operating  expenses                                     |       | 778,468                           |            | 110,461                         |       | 1,274,984 |   | 2,163,913 |   |
| Operating income  (loss)                                      |       | 1,919,241                         |            | (929,562                        | )          | 390,452 |   | 1,380,131 |   |
| Other income                                                  |       | —                            |            | —                          |       | — |   | — |   |
| Loss on disposal  of                                          |       | 198,143                           |            | —                          |       | 1,377,485 |   | 1,575,628 |   |
| Interest  expense, net                                        |       | 2,037                             |            | —                          |       | 914,348 |   | 916,385 |   |
| Net income  (loss) before Income taxes and extraordinary item |       | 1,719,061                         |            | (929,562                        | )          | (1,901,381 | ) | (1,111,882 | ) |
| Income taxes                                                  |       | —                            |            | —                          |       | (71,391 | ) | (71,391 | ) |
| Extraordinary  item-trouble debt restructure (loss) gain      |       | —                            |            | —                          |       | (6,918,309 | ) | (6,918,309 | ) |
| Net income  (loss)                                            |       | $                                 | 1,719,061       |                            | $          | (929,562) |   | $ | (8,891,081) |   | $ | (8,101,582 | ) |

 

10

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|                                                          |   | **Year ended  December 31, 2000   (continued)** |        |       |   |
|---------------------------------------------------------------|--------|-------------------------------------------------|-------------|------------|--------|
|                                                          |   | **Operating   Sub-Total**                       |        | **OSE**    |   | **Total  Consolidated** |   |
| Net revenues                                                  |   | $                                               | 24,137,441  |       | $      | — |   | $ | 24,137,441 |   |
| Cost of revenues                                              |   | 20,593,397                                      |        | —     |   | 20,593,397 |   |
| Gross profit                                                  |   | 3,544,044                                       |        | —     |   | 3,544,044 |   |
| Selling, general  & administrative                        |   | 1,282,549                                       |        | 2,873,442  |   | 4,155,991 |   |
| Depreciation  & amortization                              |   | 881,364                                         |        | 195,140    |   | 1,076,504 |   |
| Expenses at  closed locations                                 |   | —                                          |        | 608,878    |   | 608,878 |   |
| Total operating  expenses                                     |   | 2,163,913                                       |        | 3,677,460  |   | 5,841,373 |   |
|                                                          |   |                                            |        |       |   |   |   |
| Operating income  (loss)                                      |   | 1,380,131                                       |        | (3,677,460 | )      | (2,297,329 | ) |
|                                                          |   |                                            |        |       |   |   |   |
| Other income                                                  |   | —                                          |        | (333,657   | )      | (333,657 | ) |
| Loss on disposal  of assets.                                  |   | 1,575,628                                       |        | —     |   | 1,575,628 |   |
| Interest  expense, net                                        |   | 916,385                                         |        | 295,712    |   | 1,212,097 |   |
| Net income  (loss) before Income taxes and extraordinary item |   | (1,111,882)                                     |        | (3,639,515 | )      | (4,751,397 | ) |
| Income taxes                                                  |   | (71,391                                         | )           | (20,000    | )      | (91,391 | ) |
|                                                          |   |                                            |        |       |   |   |   |
| Net income  (loss) before extraordinary item                  |   | (1,183,273)                                     |        | (3,659,515 | )      | (4,842,788 | ) |
|                                                          |   |                                            |        |       |   |   |   |
| Extraordinary  item-trouble debt restructure (loss) gain      |   | (6,918,309)                                     |        | 7,059,431  |   | 141,122 |   |
| Net income (loss)                                             |   | $                                               | (8,101,582) |       | $      | 3,399,916 |   | $ | (4,701,666 | ) |

 

11

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|                                                          |   | **Year ended  December 31, 2001** |      |                       |   |
|---------------------------------------------------------------|--------|-----------------------------------|-----------|----------------------------|--------|
|                                                          |   | **Casino**                        |      | **Production****Services** |   | **Theaters** |   | **Operations****Sub-Total** |   |
| Net revenues                                                  |   | $                                 | 7,114,870 |                       | $      | 11,120 |   | $ | 16,634,565 |   | $ | 23,760,555 |   |
| Cost of revenues                                              |   | 4,949,983                         |      | 835,518                    |   | 15,639,672 |   | 21,425,173 |   |
| Gross profit                                                  |   | 2,164,887                         |      | (824,398                   | )      | 994,893 |   | 2,335,382 |   |
| Selling, general  & administrative                        |   | 131,754                           |      | —                     |   | 115,274 |   | 247,028 |   |
| Depreciation  & amortization                              |   | 373,839                           |      | 80,846                     |   | 463,767 |   | 918,452 |   |
| Expenses at  closed locations                                 |   | —                            |      | —                     |   | — |   | — |   |
| Total operating  expenses                                     |   | 505,593                           |      | 80,846                     |   | 579,041 |   | 1,165,480 |   |
| Operating income  (loss)                                      |   | 1,659,294                         |      | (905,244                   | )      | 415,852 |   | 1,169,902 |   |
| Other income                                                  |   | —                            |      | —                     |   | — |   | — |   |
| Loss on disposal  of                                          |   | —                            |      | —                     |   | — |   | — |   |
| Interest  expense, net                                        |   | (1,315                            | )         | —                     |   | (297,334 | ) | (298,649 | ) |
| Net income  (loss) before Income taxes and extraordinary item |   | 1,657,979                         |      | (905,244                   | )      | 118,518 |   | 871,253 |   |
| Income taxes                                                  |   | —                            |      | —                     |   | 24,592 |   | 24,592 |   |
| Extraordinary  item-trouble debt restructure (loss) gain      |   | —                            |      | —                     |   | — |   | — |   |
| Net income  (loss)                                            |   | $                                 | 1,657,979 |                       | $      | (905,244) |   | $ | 143,110 |   | $ | 895,845 |   |

 

 
|                                                          |   | **Year ended  December 31, 2001   (continued)** |       |       |   |
|---------------------------------------------------------------|--------|-------------------------------------------------|------------|------------|--------|
|                                                          |   | **Operating   Sub-Total**                       |       | **OSE**    |   | **Total   Consolidated** |   |
| Net revenues                                                  |   | $                                               | 23,760,555 |       | $      | — |   | $ | 23,760,555 |   |
| Cost of revenues                                              |   | 21,425,173                                      |       | —     |   | 21,425,173 |   |
| Gross profit                                                  |   | 2,335,382                                       |       | —     |   | 2,335,382 |   |
| Selling, general  & administrative                        |   | 247,028                                         |       | 2,396,622  |   | 2,643,650 |   |
| Depreciation  & amortization                              |   | 918,452                                         |       | (6,813     | )      | 911,639 |   |
| Expenses at  closed locations                                 |   | —                                          |       | —     |   | — |   |
| Total operating  expenses                                     |   | 1,165,480                                       |       | 2,389,809  |   | 3,555,289 |   |
|                                                          |   |                                            |       |       |   |   |   |
| Operating income  (loss)                                      |   | 1,169,902                                       |       | (2,389,809 | )      | (1,219,907 | ) |
|                                                          |   |                                            |       |       |   |   |   |
| Other income                                                  |   | —                                          |       | —     |   | — |   |
| Loss on disposal  of assets.                                  |   | —                                          |       | —     |   | — |   |
| Interest expense,  net                                        |   | (298,649                                        | )          | (230,812   | )      | (529,461 | ) |
| Net income  (loss) before Income taxes and extraordinary item |   | 871,253                                         |       | (2,620,621 | )      | (1,749,368 | ) |
| Income taxes                                                  |   | 24,592                                          |       | (5,620     | )      | 18,972 |   |
|                                                          |   |                                            |       |       |   |   |   |
| Net income  (loss) before extraordinary item                  |   | 895,845                                         |       | (2,626,241 | )      | (1,730,396 | ) |
| Extraordinary  item-trouble debt restructure (loss) gain      |   | —                                          |       | —     |   | — |   |
| Net income  (loss)                                            |   | $                                               | 895,845    |       | $      | (2,626,241 | ) | $ | (1,730,396 | ) |

 

12

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**CriticalAccounting Policies**

 

Financial Reporting Release No. 60, which was recently released by theSecurities and Exchange Commission, requires all companies to include adiscussion of critical accounting policies or methods used in the preparationof financial statements.  The FinancialStatements include a summary of the significant accounting policies and methodsused in the preparation of our Financial Statements. The following is a briefdiscussion of the more critical accounting policies and methods used by us. Inaddition, Financial Reporting Release No. 61 was recently released by the SECto require all companies to include a discussion to address, among otherthings, liquidity, off-balance sheet arrangements, contractual obligations andcommercial commitments.

 

*Impairmentof long-lived assets and valuation of intangible assets.* Weassess the impairment of long-lived assets and identifiable intangible assetswhenever events or changes in circumstances indicate that the carrying valuemay not be recoverable. Factors we consider important which could trigger animpairment review include the following:

 

•             significant underperformance relative toexpected historical or projected future operating results;

•             significant changes in the manner of ouruse of the acquired assets or the strategy for our overall business; and

•             significant negative industry or economictrends.

 

When we determine that the carrying value of intangible assets may notbe recoverable based upon the existence of one or more of the above indicatorsof impairment, we measure any impairment based on a projected discounted cashflow method using a discount rate determined by our management to becommensurate with the risk inherent in our current business model. We hadintangible show rights that amounted to a net $3.4 million as of December 31,2001.  Future events could cause us toconclude that impairment indicators exist and that such intangible assets areimpaired.  Any resulting impairment losscould have an adverse impact on our financial condition and results ofoperations.

 

Year Ended December 31, 2001 versus Year Ended December 31, 2000

 

Net Revenues

 

Net revenues were approximately $23,761,000 for theyear ended December 31, 2001 compared to $24,137,000 for the year endedDecember 31, 2000, a decrease of $376,000, or 1.6%.  Our revenue is derived from five business units—Casinos, Events,Merchandise, Theaters and Production Services—categorized by three reportablesegments—Casinos, Theaters and Production Services.  Revenues from the Events business unit are reported under the Casinossegment and revenues from the Merchandise business unit are reported under theTheaters segment.

 

Casinos revenues were approximately $7,115,000 for theyear ended December 31, 2001 compared to $8,982,000 for the year ended December31, 2000, a decrease of $1,867,000, or 20.8 %. This decrease was primarily attributable to a decrease in limitedengagements and corporate events.

 

Production Services revenues were approximately$11,000 for the year ended December 31, 2001 compared to $30,000 for the yearended December 31, 2000, a decrease of $19,000, or 63.3%.  The decrease was primarily attributable to areduction in equipment rental revenues.

 

Theaters revenues were approximately $16,635,000 forthe year ended December 31, 2001 compared to $15,126,000 for the year endedDecember 31, 2000, an increase of $1,509,000, or 10.0%.  The increase was primarily attributable tothe addition of Country Tonite offset by the discontinuation of the shows inOrlando, Florida.

 

Cost of Revenue

 

Total cost of revenues were $21,425,000 for the yearended December 31, 2001 compared to $20,593,000 for the year ended December 31,2000, an increase of $832,000, or 4.0%. Cost of revenues increased to 90.2% of net revenues for the year endedDecember 31, 2001, as compared to 85.3% for the year ended December 31,2000.  This increase in the cost ofrevenues as a percent of net revenues was primarily attributable to the changein the mix of revenues.

 

Selling, General and Administrative

 

Selling, general and administrative costs wereapproximately $2,644,000 for the year ended December 31, 2001 compared to$4,156,000 for the year ended December 31, 2000, a decrease of $1,512,000, or36.4%.  Selling, general andadministrative costs decreased to 11.1% of net revenues for the year endedDecember 31, 2001, as compared to 17.2%. This decrease in selling, general andadministrative costs as a percent of net revenues was primarily due to theimplementation of cost saving measures and a decrease in professional fees.

 

13

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Depreciation and Amortization

 

Depreciation and amortization was $912,000 for theyear ended December 31, 2001 compared to $1,077,000 for the year ended December31, 2000, a decrease of $165,000, or 15.3%. This decrease was primarily due to having less assets and as a result ofthe foreclosure of certain assets in 2000.

 

Write-off of Acquisition Costs

 

For the year ended December 31, 2000, On Stage wroteoff acquisition costs of approximately $597,000 for a show location that wasput into full production.

 

Operating Loss

 

The operating loss for the year ended December 31,2001, was approximately $1,220,000, as compared to $2,297,000 for the yearended December 31, 2000.

 

Other Income

 

Other income in 2000 represents reduction of pastaccreted liabilities related to professional services.

 

Loss on Disposal of Assets

 

For the year ended December 31, 2000, a loss ondisposition of assets amounted to $1,575,000, of which $648,000 wasattributable to the sale of On Stage Theaters Surfside Beach, Inc. and $927,000related to obsolete equipment.

 

Interest Expense, Net

 

Interest expense was approximately $529,000 for yearended December 31, 2001, as compared to $1,212,000 for the year ended December31, 2000, a decrease of $683,000, or 56.4%. The decrease was primarily due to the restructuring of the outstandingdebts with Imperial Credit Commercial Mortgage Investment Corp. (“ICCMIC”) andFirst Security Bank of Nevada (“First Security”).

 

Income Taxes

 

Income tax was a credit of approximately $19,000 forthe year ended December 31, 2001, compared to $91,000 for the year endedDecember 31, 2000.  The credit in 2001was primarily due to a favorable settlement of past state tax.

 

At December 31, 2001 and December 31, 2000 we hadfederal net operating loss carry-forwards of approximately $16,101,113 and$14,570,050, respectively.  UnderSection 382 of the Internal Revenue Code, certain significant changes inownership that we are currently undertaking may restrict the future utilizationof these tax loss carry-forwards. Because we cannot determine that we are more likely than not torecognize the deferred tax assets, we have provided a full valuation allowanceon the deferred tax assets.

 

Extraordinary Item

 

During the year ended December 31, 2000, we recorded anet gain on troubled debt restructuring of $141,122.

 

Seasonality and Quarterly Results

 

Our business has been, and is expected to remain,highly seasonal, with the majority of our revenue generated during the monthsof April through October.  Our Legendsshows in Branson, Missouri, and Myrtle Beach, South Carolina, are dark duringthe month of January, and our Country Tonite show is dark during the months ofJanuary and February.  Part of ourbusiness strategy is to increase sales in tourist markets that experience theirpeak seasons from November through March to offset the seasonality in ourrevenues.

 

The following table sets forth our net revenue foreach of the last eight quarters ended December 31, 2001:

 
|        |   | **Net  Revenues**     |   |
|-------------|--------|-----------------------|--------|
|        |   | **March 30,**         |   | **June 30,** |   | **September  30,** |   | **December  31,** |   |
|        |   | **($ in  thousands)** |   |
| Fiscal 2000 |   | $                     | 6,106  |   | $ | 7,151 |   | $ | 6,393 |   | $ | 4,487 |   |
| Fiscal 2001 |   | $                     | 4,026  |   | $ | 6,470 |   | $ | 7,322 |   | $ | 5,943 |   |

 

14

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Liquidity and Capital Resources

 

General

 

We have historically met our working capitalrequirements through a combination of cash flow from operations, equity anddebt offerings and traditional bank financing. To ensure meeting future working capital requirements, we have takensignificant cost-cutting measures, including, but not limited to, a reductionin staff to cut overhead by approximately $450,000 per year, elimination ofunnecessary warehouse space for an annual savings of approximately $35,000, andother measures that amount to approximately $150,000 annually.  Based on our proposed plans and assumptionsrelating to our operations, we anticipate that our current cash and cashequivalent balances, and anticipated revenue from operations, are sufficient tofund our ongoing operations for the next 12 months.

 

Cash Flows

 

For the year ended December 31, 2001, we had net cashused in operations of approximately $1,779,000.  The cash used in operations was primarily attributable to the netloss and the paydown of accounts payable. For the year ended December 31, 2000, we had net cash provided byoperations of approximately $137,000. The cash provided by operations was primarily attributable to a decreasein accounts receivable, inventory, deposits, increase in accounts payable and accruedexpenses, partially offset by the net loss for the period and an increase inprepaid and other assets.

 

The net cash used in investing activities for the yearended December 31, 2001, of $1,142,000 was primarily attributable to capitalexpenditures, in addition to the acquisition of show rights.  The net cash provided by investingactivities for the year ended December 31, 2000, of $1,893,000 was primarilyattributable to proceeds from the sale of the Legends in Concert Theater inSurfside Beach, South Carolina.

 

Net cash provided by financing activities for the yearended December 31, 2001, of $3,359,000 was primarily attributable to theproceeds from the issuance of convertible debentures and Series A ConvertiblePreferred Stock, partially offset by the repayment on short-termborrowings.  Net cash used in financingfor the year ended December 31, 2000, of $1,886,000 was primarily attributableto repayments of long-term debt and the working capital line, offset byproceeds from convertible debentures.

 

Working Capital Deficit

 

At December 31, 2000, we had a working capital deficitof approximately $2,615,000, which resulted primarily from decreases inaccounts receivable, inventory, a note payable due from an officer, andincreases in accrued payroll, other liabilities and long-term debt, which waspartially offset by increases in cash and convertible debentures. At December31, 2001, we had working capital deficit of approximately $1,250,000, whichresulted primarily from a decrease in accounts payable, and an increase in cashfrom the issuance of Series A Convertible Preferred Stock, offset by anincrease in accrued liabilities and dividends payable.

 

 

Subsequent Events

 

In March 2002, MDC agreed to loan us $1,300,000.  The first loan, in the amount of $700,000,will be used (1) to reimburse MDC for expenses incurred on behalf of On Stage,including but not limited to attorneys’ fees incurred in connection with thisloan, and (2) for working capital purposes within the ordinary course ofbusiness.  The outstanding principalamount of the loan plus the capitalized interest is due and payable on July 1,2002.  MDC, at its sole discretion, canextend the maturity date to December 31, 2006. The second loan, in the amount of $600,000, will be deposited in aseparate bank account and will be withdrawn only for direct use in connectionwith our participation and investment in a potential future project.  Interest on both notes is payable at therate of 15% per annum, compounded quarterly. In connection with the $700,000 and $600,000 promissory notes, MDCreceived warrants to purchase an additional 1,346,154 and 1,153,846 shares ofour common stock, respectively, at an exercise price of $0.50 per shareexercisable for a 10-year period.

 

15

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Impact of Inflation

 

We believe that inflation has not had a materialimpact on our operations.  However,substantial increases in material costs could adversely affect our operationsfor future periods.

 

Impact of Terrorist Activities

 

Our business depends on the free flow of products andservices through the channels of commerce. Recently, in response to terrorists’ activities and threats aimed at theUnited States, transportation, mail, financial and other services have beenslowed or stopped altogether.  Furtherdelays or stoppages in transportation, mail, financial or other services couldhave an adverse effect on our business, results of operations and financialcondition.  Furthermore, we mayexperience an increase in operating costs, such as costs for transportation,insurance and security as a result of the activities and potentialactivities.  We may also experiencedelays in receiving payments from our payers that have been affected by theterrorist activities and potential activities. The United States economy in general, and tourism-dependent businessesin particular, are being adversely affected by the terrorist activities andpotential activities and any economic downturn could adversely impact ourresults of operations, impair our ability to raise capital, or otherwiseadversely affect our business.

 

New Accounting Pronouncements

 

In June 2001, the Financial Accounting Standards Board(the “FASB”) finalized FASB Statements No. 141, *Business Combinations* (SFAS141)*,*and No. 142, *Goodwill and Other Intangible Assets* (SFAS 142)*.*SFAS141 requires the use of the purchase method of accounting and prohibits the useof the pooling-of-interests method of accounting for business combinationsinitiated after June 30, 2001. SFAS 141 also requires us to recognize acquiredintangible assets apart from goodwill if the acquired intangible assets meetcertain criteria. SFAS 141 applies to all business combinations initiated afterJune 30, 2001 and for purchase business combinations completed on or after July1, 2001. It also requires, upon adoption of SFAS 142, that we reclassify thecarrying amounts of intangible assets and goodwill based on the criteria inSFAS 141.

 

SFAS 142 requires, among other things, that companiesno longer amortize goodwill, but instead test goodwill for impairment at leastannually. In addition, SFAS 142 requires that we identify reporting units forthe purposes of assessing potential future impairments of goodwill, reassessthe useful lives of other existing recognized intangible assets, and ceaseamortization of intangible assets with an indefinite useful life. An intangibleasset with an indefinite useful life should be tested for impairment inaccordance with the guidance in SFAS 142. SFAS 142 is required to be applied infiscal years beginning after December 15, 2001 to all goodwill and otherintangible assets recognized at that date, regardless of when those assets wereinitially recognized. SFAS 142 requires us to complete a transitional goodwillimpairment test six months from the date of adoption. We are also required toreassess the useful lives of other intangible assets within the first interimquarter after adoption of SFAS 142.

 

16

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Ourprevious business combinations were accounted for using the purchase method. Asof December 31, 2001, the net carrying amount of intangible show rights is$3,366,307. Amortization expense during the twelve-month period ended December31, 2001 was $189,607.  We believe theadoption of SFAS 141 and 142 will have no material impact on our financialposition and results of operations.

 

In August 2001, the FASB issued SFAS No. 143, *Accounting for Asset RetirementObligations*.  SFAS No. 143requires the fair value of a liability for an asset retirement obligation to berecognized in the period in which it is incurred if a reasonable estimate offair value can be made.  The associatedasset retirement costs are capitalized as part of the carrying amount of thelong-lived asset.  SFAS No. 143 iseffective for fiscal years beginning after June 15, 2002.  We believe the adoption of this Statementwill have no material impact on our financial statements.

 

In October 2001, the FASB issued SFAS No. 144*, Accounting for the Impairment orDisposal of Long-Lived Assets*. SFAS No. 144 requires that those long-lived assets be measured at thelower of carrying amount or fair value less cost to sell, whether reported incontinuing operations or in discontinued operations. Therefore, discontinuedoperations will no longer be measured at net realizable value or includeamounts for operating losses that have not yet occurred. SFAS No. 144 iseffective for financial statements issued for fiscal years beginning afterDecember 15, 2001, and, generally, are to be applied prospectively.  We believe the adoption of this Statementwill have no material impact on our financial statements.

 

 

ITEM 7. Financial Statements and Supplementary Data

 

  Submitted ona separate section of this report, commencing on page F-1 and incorporated byreference.

 

ITEM 8. Changes in and Disagreements with Accountants on Accounting andFinancial Disclosure

 

None.

 

#### **PART III**

 

ITEM 9.  Directors, Executive Officers, Promoters andControl Persons; Compliance with Section 16(a) of the Exchange Act

 

The following sets forth biographical informationabout each of On Stage’s directors and executive officers who served during2001 or who are presently serving in those capacities.

 
| **Name**                      |   | **Age** |   | **Position**                                        |
|-------------------------------|--------|---------|--------|-----------------------------------------------------|
| John W.   Stuart         |   | 59      |   | Chairman and Founder                                |
| Timothy J .Parrott            |   | 54      |   | Chief Executive Officer                             |
| Jeffery T. Victor             |   | 38      |   | President & Chief Operating Officer             |
| Margaret A. Freman            |   | 43      |   | Senior Vice President & Chief Financial Officer |
| Gregory McIntosh              |   | 45      |   | Director                                            |
| Robert B.   Hellman, Jr. |   | 40      |   | Director                                            |
| Fred Ordower                  |   | 49      |   | Director                                            |
| John D. Weil                  |   | 54      |   | Director                                            |
| Sigmund Rogich                |   | 57      |   | Director                                            |

 

John W.  Stuarthas served as the Chairman and Chief Executive Officer of On Stage since April1996 and also was the President of On Stage from October 1985 through March1996.  He founded On Stage in 1985.  He has been involved in the theatricalbusiness since age seven and has produced or appeared in over 200 theaterproductions and several feature films. Mr. Stuart received a Bachelor of Arts degree in 1967 from CaliforniaState University at Fullerton.

 

Timothy J. Parrott has served as President, Chief Executive officer and a directorof On Stage since October 2000.  Mr.Parrott has been a director of Pinnacle Entertainment since June 1997;President and Treasurer of Boomtown, Inc. from June 1987 to September 1992; adirector of Boomtown, Inc., since 1987; Chief Executive Officer of ParrottInvestment Company (a family-held investment company with agriculturalinterests in California) since April 1995; and Director of The ChroniclePublishing Company from April 1995 to June 2000.

 

Jeffrey T. Victor has served as the Chief Operating Officer and Executive VicePresident of On Stage since October 2000, and in January 2002, Mr. Victor waspromoted to President of On Stage. Prior to that, Mr. Victor was the Vice President and General Manager ofParamount’s $70 million Star Trek Experience at the Las Vegas Hilton where hemanaged a staff of 300 

 

17

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and increased profitability by 40%, since 1999.  Prior to that, since 1993, Mr. Victor servedin various managerial positions, including Corporate Vice President ofEntertainment, at Boomtown Casinos.

 

Margaret A. Freman has served as Senior Vice Presidentand Chief Financial Officer of On Stage since May 2001.  Prior to that, Ms. Freman was ChiefFinancial Officer and Vice President of Houlihan, Lokey, Howard & Zukin,Inc. since 1993.  Ms. Freman received aBachelor of Science degree in 1981 from Indiana University, and became aCertified Public Accountant in 1983 in the state of California.

 

Gregory J. McIntosh has been a director of On Stage since October 2000.  Mr. McIntosh is a real estate consultant andwas employed from July 1998 through December 2001 by Imperial Credit CommercialMortgage Investment Corp. and its affiliates in various capacities, includingSenior Vice President and consultant. Previously, Mr. McIntosh was Chief Operating Officer and 20% shareholderof a privately held manufacturing company.

 

Robert B. Hellman, Jr. has served as a director of OnStage since March 2001.  Mr. Hellman isa managing director of MDC Management Company III, L.P., which is the generalpartner of McCown De Leeuw & Co. III, L.P.  and  McCown De Leeuw Offshore (Europe) III, L.P.  He is also managing director of MDCManagement Company IIIA, L.P., which is the general partner of McCown De Leeuw& Co.  (Asia), L.P.  These partnerships are engaged in investmentactivities.  Mr. Hellman is also amember of The Gamma Fund LLC, a limited liability company engaged in investmentactivities.  Mr. Hellman has beenassociated with McCown De Leeuw & Co. since 1987.  From 1982 to 1985,he worked for Bain & Company, a management consulting company.  Mr. Hellman has been a director of TeleSpectrum since 1999.

 

Fred Ordower has been a director of On Stage sinceMarch 2001, and has served as an advisor to the company since July 1998.  Mr. Ordower has been a Senior Executive ofABC Family Worldwide, Inc. (formerly, Fox Family Worldwide, Inc.) since August1997.  Since February 1997, Mr. Ordowerhas been the President of Evergreen Events, Inc., which provides businessdevelopment and marketing advisory services related to the convergence oftechnology and entertainment.  From 1992through 1996, Mr. Ordower was Executive Vice President of Universal (formerlyMCA) Music Entertainment Group.  From1987 through 1992, Mr. Ordower was founder and chief operating officer of OgdenPresents, and Vice President, Business Development of Ogden Entertainment Services,both subsidiaries of a Fortune 500 conglomerate.

 

John D. Weil has served as a director of On Stagesince September 2001.  Mr. Weilcurrently serves as an Operating Affiliate of MDC.  From 1999 until 2001, Mr. Weil served as Executive Vice Presidentand Chief Financial Officer of DIMAC Marketing Partners, Inc.  From 1997 until 1999, Mr. Weil served asPresident and Chief Executive Officer of USA Operations for International DataResponse Corporation.  In 1995, Mr. Weiljoined MDC to assist in portfolio management. From 1982 until 1994 Mr. Weilserved as President and Chief Executive Officer of American Envelope Company.

 

Sigmund Rogich has served as a director of On Stagesince October 2001.  Mr. Rogich isPresident of The Rogich Communications Group. In 1973 Mr. Rogich founded R&R Advertising, the largest advertisingagency in the state of Nevada.  Today,R&R Advertising continues to handle all the advertising and media for boththe Las Vegas Convention & Visitor’s Authority and the Nevada State TourismBoard.

 

Compensation of Directors

 

Directors currently are not paid a fee for theirservices, but are reimbursed for all reasonable expenses incurred in attendingboard meetings.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Securities Exchange Act requiresour officers and directors and persons who own more than 10% of our outstandingcommon stock to file reports of ownership and changes in ownership with theSecurities and Exchange Commission. They are also required to furnish us withcopies of all forms they file under Section 16(a). Based solely on our reviewof the copies of forms we received, we believe that Ms. Freman, Mr. McIntosh,Mr. Hellman, Mr. Ordower and Mr. Weil failed to file the required reports onForm 3 when due in 2001, but filed reports on Form 5 in 2002 disclosing theirbeneficial ownership, and that Mr. Rogich did not file his report on Form 3,which was due in October 2001, until March 2002.

 

 

18

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ITEM 10. Executive Compensation.

 
|                                                |   | **Summary  Compensation Table** |   |                             |    | **Long Term   Compensation**               |   |                         |   |
|-----------------------------------------------------|--------|---------------------------------|--------|----------------------------------|---------|--------------------------------------------|--------|------------------------------|--------|
| **Name and Principal Position**                     |   | **Annual  Compensation**        |   | **Other  Annual   Compensation** |    | **Securities    Underlying   Options/SAR** |   | **All Other   Compensation** |   |
| **Year**                                            |   | **Salary**                      |   | **Bonus**                        |
| John W. Stuart                                      |   | 2001                            |   | $                                | 350,000 |                                       | $      | 150,000                 | (5)    | $ | 25,316 | (3) | — |   | — |   |
| Chairman and                                        |   | 2000                            |   | $                                | 308,333 |                                       | $      | 87,500                  | (2)    | $ | 24,612 | (3) | — |   | — |   |
| Founder                                             |   | 1999                            |   | $                                | 250,000 |                                       | — |                         | $      | 35,869 | (4) | 300,000 |   | — |   |
|                                                |   |                            |   |                             |    |                                       |   |                         |   |   |   |   |   |
| Timothy J.  Parrott                                 |   | 2001                            |   | $                                | 215,000 |                                       | — |                         | — |   | — |   | — |   |
| Chief Executive  Officer                            |   | 2000                            |   | $                                | 1       |                                       | — |                         | $      | 23,000 | (1) | — |   | — |   |
|                                                |   |                            |   |                             |    |                                       |   |                         |   |   |   |   |   |
| Jeffrey T.  Victor                                  |   | 2001                            |   | $                                | 150,000 |                                       | — |                         | $8,326 | (6) | — |   | — |   |
| President and  Chief                                |   | 2000                            |   | $                                | 33,461  |                                       |   |                         |   |   |   |   |   |   |
| Operating  Officer                                  |   |                            |   |                             |    |                                       |   |                         |   |   |   |   |   |
|                                                |   |                            |   |                             |    |                                       |   |                         |   |   |   |   |   |
| Margaret A.  Freman                                 |   | 2001                            |   | $                                | 77,885  |                                       | — |                         | 4,248  | (6) | — |   | — |   |
| Senior Vice  President and  Chief Financial Officer |   |                            |   |                             |    |                                       |   |                         |   |   |   |   |   |

 

----

1)                   Representshousing and transportation costs associated with staying in Las Vegas.

2)                   Bonus paid in2000 per employment agreement.

3)                   Represents carand health allowance paid.

4)                   Represents$11,971 in unused vacation time accrued but not paid and $23,898 of carallowance and health allowances accrued, of which $14,895 was paid in1999.  Does not include $149,686 of rentaccrued for the leases to On Stage of which $76,028 was paid in 1999.

5)                   Bonus paid in2001 per employment agreement.

6)      Represents health insurance premiums paid.

 

Option Grants.

 

The table below setsforth the grants of stock options to the persons named in the SummaryCompensation Table during the year ended December 31, 2001:

 
| **Option  Grant in Last Fiscal Year**                                    |   |                 |   |
|--------------------------------------------------------------------------|--------|----------------------|--------|
| **Name and   Principal   Position**                                      |   | **Option   Granted** |   | **Percent of    Options  Granted to   Employees in   Fiscal Year** |   | **Exercise   Price** |   | **Expiration    Date** |   | **Potential   5%** |   | **Potential  realizable value   at assumed rate  of Stock Price   appreciation for   Option Term** |   |
| Margaret A.  Freman  Senior Vice  President and  Chief Financial Officer |   | 150,000              | (1)    | 69.8 | % | $ | 0.58 |   | 90 days after termination  of employment |   | $ | 0.00 |   | $ | 0.00 |   |
|                                                                          |        |                      |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1) Issued in connectionwith her employment.

 

19

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Option Exercise and Fiscal Year-End Option Values

 

The following tablesummarizes the value of vested and unvested in-the-money options for thepersons named in the Summary Compensation Table at December 31, 2001.  Year-end values are based upon a price of$0.81 per share, which was the closing market price of a share of common stockon December 31, 2001.  No options wereexercised by the named executive officers in 2001.

 
| **Aggregated  Option Exercise in Last Year and Year-End Option Values** |
|-------------------------------------------------------------------------|
|                                                                    |   | **Number of  Unexercised   Options at December 31, 2001** |   | **Value of  Unexercised   In-the-Money Options   at December 31, 2001** |   |
| **Name**                                                                |   | **Exercisable** |   | **Unexercisable** |   | **Exercisable** |   | **Unexercisable** |   |
| John W. Stuart                                                          |   | 375,000 |   | — |   | $ | — |   | $ | — |   |
| Timothy J.  Parrott                                                     |   | 250,000 |   | 500,000 |   | $ | 77,500 |   | $ | 155,000 |   |
| Jeffrey T.  Victor                                                      |   | 50,000 |   | 150,000 |   | $ | 15,500 |   | $ | 46,500 |   |
| Margaret A.  Freman                                                     |   | — |   | 150,000 |   | $ | — |   | $ | 34,500 |   |

 

 

ITEM 11. Security Ownership of Certain Beneficial Owners and Management

 

The following table setsforth certain information as of March 14, 2002 regarding the ownership of OnStage common stock by:

 

(1) each person known byus to be the beneficial owner of more than five percent of the outstandingcommon stock;

 

(2) each director;

 

(3) each executiveofficer named in the Summary Compensation Table; and

 

(4) all current executiveofficers and directors as a group.

 

Unless otherwiseindicated, we believe that all persons named in the table have sole voting andinvestment power with respect to all shares of common stock shown asbeneficially owned by them, subject to community property laws whereapplicable.  In accordance with therules of the Securities and Exchange Commission, a person is deemed to be thebeneficial owner of common stock that can be acquired by that person within 60days, upon the exercise of options or warrants.  Each beneficial owner’s percentage ownership is determined byassuming that options and warrants that are held by that person (but not thoseheld by any other person) and which are exercisable within 60 days have beenexercised.  Percentages herein assume abase of 11,307,930 shares of common stock outstanding as of March 14, 2002.  The address of all officers and directors isin care of On Stage at 4625 West Nevso, Las Vegas, NV 89103.

 
| **Name**                                                                                                       |   | **Number of  Shares   Beneficially Owned** |   | **Percentage  of   Class** |   |
|----------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|--------|----------------------------|--------|
| John W. Stuart                                                                                                 |   | 3,551,155                                  |   | 31.4                       | %      |
| Timothy J.  Parrott (1)                                                                                        |   | 2,880,000                                  |   | 24.9                       | %      |
| Jeffrey T.  Victor (2)                                                                                         |   | 50,000                                     |   | *                          |   |
| Imperial Credit  Commercial Mortgage Investment Corp. (3)  23550 Hawthorne Blvd., Bldg. #1  Torrance, CA 90505 |   | 1,756,122                                  |   | 15.1                       | %      |
| Fred Ordower(4)                                                                                                |   | 75,000                                     |   | *                          |   |
| MDC Management  Co. IV, LLC (5)  3000 Sand Hill Road  Building 3, Suite 290  Menlo Park, CA 94025              |   | 1,168,743                                  |   | 9.3                        | %      |
| Robert B.  Hellman, Jr. (6)                                                                                    |   | 1,188,000                                  |   | 9.5                        | %      |
|                                                                                                           |   |                                       |   |                       |   |
| All executive  officers and directors   as a group (4 persons)                                                 |   | 7,744,155                                  |   | 60.2                       | %      |

 

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*Less than one percent

(1) Includes 250,000 shares of common stock issuable upon the exerciseof options.

(2) Includes 50,000 shares of common stock issuable upon the exerciseof options.

(3) Includes 325,000 shares of common stock issuable upon the exerciseof warrants.

(4) Includes 75,000 shares of common stock issuable upon the exerciseof options.

(5) Includes 1,168,743 shares of Series A Convertible Preferred Stock,which is convertible into shares of common stock.

(6) Mr. Hellman is a managing director or officer of (1) Delta Fund LLC("Delta"), which directly holds 17,012 shares of our Series AConvertible Stock, which is convertible into shares of common stock, securitiesand (2) MDC Management Co. IV LLC which is the sole general partner of (A)McCown De Leeuw and Company IV Associates LP ("MDC Associates"),which directly holds 17,541 shares of our Series A Convertible Stock, which isconvertible into shares of common stock, securities and (B) McCown De Leeuw andCompany IV LP ("MDC LP"), which directly holds 1,153,447 shares ofour Series A Convertible Stock, which is convertible into shares of commonstock. Mr. Hellman may be deemed to have indirect beneficial ownership of thesecurities held by Delta, MDC Associates and MDC LP. However, Mr. Hellman,acting alone, does not have voting or investment power with respect to thosesecurities directly beneficially owned by Delta, MDC Associates and MDC LP, anddisclaims beneficial ownership of those securities, except to the extent of hispecuniary interest in Delta, MDC Associates and MDC LP.

 

20

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ITEM 12.  Certain Relationships and RelatedTransactions

 

None

 

ITEM 13. Exhibits and Reports on Form 8-K

 

(a) Exhibits

 
| **Exhibit   Number** |   | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|----------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1                  |   | Asset Purchase Agreement  by and among on Stage Entertainment, Inc., Country Tonite Branson, LLC,  Bounce Back Technologies.com, Inc., Country Tonite Enterprises, Inc. and CRC  of Branson, Inc. dated as of January 29, 2001 (incorporated by reference to  Exhibit 2.1 to the Current Report on Form 8-K dated February 1, 2001 filed  with the SEC on May 29, 2001).                                                                              |
| 3.1                  |   | Articles of Incorporation of the Registrant, as  amended (incorporated by reference to Exhibit 3.1 to the Registration  Statement on Form SB-2 (File No. 333-24681)(the "SB-2")).                                                                                                                                                                                                                                                           |
| 3.2                  |   | Amended and Restated Bylaws of the Registrant  (incorporated by reference to Exhibit 3.2 to the Amendment No. 3 to SB-2).                                                                                                                                                                                                                                                                                                                             |
| 3.3                  |   | Certificate of Designation of the Relative Rights  and Preferences of the Series A Convertible Preferred Stock (incorporated by  reference to Exhibit 3.3 filed as an exhibit to Amendment No. 1 to the Annual  Report on Form 10-KSB/A for the fiscal year ended December 31, 2000).                                                                                                                                                                 |
| 4.1                  |   | Specimen Stock Certificate Representing the Common  Stock (incorporated by reference to Exhibit 4.1 to Amendment No. 3 to Form  SB-2 (the "Amendment No. 3 to SB-2")).                                                                                                                                                                                                                                                                      |
| 4.2                  |   | Specimen Warrant Certificate Representing the  Warrants (incorporated by reference to Exhibit 4.2 to the Amendment No. 3 to  SB-2).                                                                                                                                                                                                                                                                                                                   |
| 4.3                  |   | Form of Public Warrant Agreement (incorporated by  reference to Exhibit 4.3 to Amendment No. 3 to SB-2).                                                                                                                                                                                                                                                                                                                                              |
| 4.4                  |   | Form of Underwriter’s Warrant Agreement  (incorporated by reference to Exhibit 4.4 to the Amendment No. 3 to   SB-2).                                                                                                                                                                                                                                                                                                                            |
| 4.5                  |   | Form of Warrant issued to McCown De Leeuw and  Company IV, LP, McCown De Leeuw and Company IV Associates, LP, and Delta Fund,  LP*                                                                                                                                                                                                                                                                                                                    |
| 10.1                 |   | Employment Agreement between the Registrant and John  W.  Stuart (incorporated by reference  to Exhibit 10.1 to the SB-2).                                                                                                                                                                                                                                                                                                                       |
| 10.2                 |   | Employment Agreement dated September 27, 2000  between the Registrant and Jeffrey Victor (incorporated by reference to  Exhibit 10.1 filed as an exhibit to the Quarterly Report on Form 10-QSB for  the period ended September 30, 2001 (the "September 30, 2001  10-QSB")).                                                                                                                                                               |
| 10.3                 |   | Confidentiality and Non-Competition Agreement  between the Registrant and Jeffrey Victor (incorporated by reference to  Exhibit 10.2 to the September 30, 2001 10-QSB).                                                                                                                                                                                                                                                                               |
| 10.4                 |   | Amended and Restated 1996 Stock Option Plan  (incorporated by reference to Exhibit 10.7 to the SB-2).                                                                                                                                                                                                                                                                                                                                                 |
| 10.5                 |   | Entertainment Production Agreement between the  Registrant, Imperial Palace, Inc.  and  John W.  Stuart dated December, 1995  (Filed in redacted form pursuant to Rule 406 promulgated under the Securities  Act.  Filed separately in unredacted  form subject to a request for confidential treatment pursuant to Rule 406  under the Securities Act.) (incorporated by reference to Exhibit 10.14 to the  Amendment No. 3 to SB-2). |
| 10.6                 |   | Agreement between the Registrant and Bally’s Park  Place, Inc.  dated September 1, 1994  and subsequent renewal letters (Filed in redacted form pursuant to Rule 406  promulgated under the Securities Act.   Filed separately in unredacted form subject to a request for  confidential treatment pursuant to Rule 406 under the Securities Act.)  (incorporated by reference to Exhibit 10.15 to the Amendment No. 3 to SB-2).       |
| 10.7                 |   | Common Stock Purchase Agreement between Registrant  and Interactive Events, Inc. (incorporated by reference to Exhibit 10.18 to  Amendment No. 1 to SB-2).                                                                                                                                                                                                                                                                                            |
| 10.8                 |   | First Security Bank Agreement (incorporated by  reference to Exhibit 10.20 to Annual Report on Form 10-KSB for the fiscal  year ended December 31, 1999 (the "1999 10-KSB")).                                                                                                                                                                                                                                                               |
| 10.9                 |   | Common Stock Purchase Agreement with Whale  Securities dated December 1998 (incorporated by reference to Exhibit 10.21 to  the 1999 10-KSB).                                                                                                                                                                                                                                                                                                          |
| 10.10                |   | Common Stock Purchase Agreement between On Stage  Entertainment, Inc. and Richard S. Kanfer (incorporated by reference to  Exhibit 10.22 to the 1999 10-KSB).                                                                                                                                                                                                                                                                                         |
| 10.11                |   | Stock and Warrant Purchase Agreement between the  Registrant and Purchasers dated March 13, 2001 (incorporated by reference to  Exhibit 10.23 filed as an exhibit to the Annual Report on Form 10-KSB for the  fiscal year ended December 31, 2000 (the "2000 10-KSB")).                                                                                                                                                                    |
| 10.12                |   | Investor Rights Agreement between the Registrant and  Investors dated March 13, 2001 (incorporated by reference to Exhibit 10.24 to  the 2000 10-KSB).                                                                                                                                                                                                                                                                                                |
| 10.13                |   | Right of First Refusal and Co-Sale Agreement between  the Registrant and Investors dated March 13, 2001 (incorporated by reference  to Exhibit 10.25 to the 2000 10-KSB).                                                                                                                                                                                                                                                                             |
| 10.14                |   | Voting Agreement between the Registrant and Key  Holders dated March 13, 2001 (incorporated by reference to Exhibit 10.26 to  the 2000 10-KSB).                                                                                                                                                                                                                                                                                                       |
| 10.15                |   | Advisory Services Agreement between the Registrant  and MDC Management Company IV, L.P.   dated March 13, 2001 (incorporated by reference to Exhibit 10.27 to  the 2000 10-KSB).                                                                                                                                                                                                                                                                 |
| 10.16                |   | Co-Sale Agreement between the Registrant and  Investors and Imperial Credit Commercial Mortgage Investment Corporation  dated March 13, 2001 (incorporated by reference to Exhibit 10.28 to the 2000  10-KSB).                                                                                                                                                                                                                                        |
| 10.17                |   | Form of Series A Preferred Stock Warrant  (incorporated by reference to Exhibit 10.29 to the 2000 10-KSB).                                                                                                                                                                                                                                                                                                                                            |
| 10.18                |   | Form of Preferred Stock Warrant (incorporated by  reference to Exhibit 10.30 to the 2000 10-KSB).                                                                                                                                                                                                                                                                                                                                                     |
| 10.19                |   | Lease Agreement between the Registrant and OFT,  Ltd.  dated March 2001 (incorporated  by reference to   Exhibit 10.31 to the 2000 10-KSB).                                                                                                                                                                                                                                                                                                      |
| 10.20                |   | Form of Promissory Note to McCown De Leeuw and  Company IV, LP, McCown De Leeuw and Company IV Associates, LP, and Delta  Fund, LP*                                                                                                                                                                                                                                                                                                                   |
| 21.1                 |   | Subsidiaries of the Registrant *                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 23.1                 |   | Consent of Independent Certified Public Accountants*                                                                                                                                                                                                                                                                                                                                                                                                  |

 

----

* Filed herewith

 

(b) None.

 

21

----

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the Registrant has duly caused this Reportto be signed on its behalf by the undersigned, thereunto duly authorized.

 

ON STAGE ENTERTAINMENT, INC.

 
| Dated: March 28, 2002 |   | By:/s/ Timothy J.   Parrott                   |   |
|-----------------------|--------|----------------------------------------------------|--------|
|                  |   | Timothy J.   Parrott, Chief Executive Officer |
|                  |   |                                               |
| Dated: March 28, 2002 |   | By: /s/ Margaret Ann Freman                        |   |
|                  |   | Margaret Ann Freman, Senior Vice                   |
|                  |   | President and Chief Financial Officer              |
|                       |        |                                                    |        |  |

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the Registrant and in the capacities and on the datesindicated.

 
| **Signature**                     |   | **Title**                                         |   | **Date**              |   |
|-----------------------------------|--------|---------------------------------------------------|--------|-----------------------|--------|
|                              |   |                                              |   |                  |   |
| /s/ Timothy J.   Parrott     |   | Chief Executive Officer                           |   |  March 28,  2002 |   |
| Timothy J.   Parrott         |   |                                              |   |                  |   |
|                              |   |                                              |   |                  |   |
| /s/ John W.   Stuart         |   | Chairman and Founder                              |   |  March 28,  2002 |   |
| John W.   Stuart             |   |                                              |   |                  |   |
|                              |   |                                              |   |                  |   |
| /s/ Jeffrey T. Victor             |   | President and Chief Operating Officer             |   |  March 28,  2002 |   |
| Jeffrey T. Victor                 |   |                                              |   |                  |   |
|                              |   |                                              |   |                  |   |
| /s/ Margaret Ann Freman           |   | Senior Vice President and Chief Financial Officer |   |  March 28,  2002 |   |
| Margaret Ann Freman               |   |                                              |   |                  |   |
|                              |   |                                              |   |                  |   |
| /s/ Gregory J.   McIntosh    |   | Director                                          |   |  March 28,  2002 |   |
| Gregory J.   McIntosh        |   |                                              |   |                  |   |
|                              |   |                                              |   |                  |   |
| /s/ Robert B.   Hellman, Jr. |   | Director                                          |   |  March 28,  2002 |   |
| Robert B.   Hellman, Jr.     |   |                                              |   |                  |   |
|                              |   |                                              |   |                  |   |
| /s/ Fred Ordower                  |   | Director                                          |   |  March 28,  2002 |   |
| Fred Ordower                      |   |                                              |   |                  |   |
|                              |   |                                              |   |                  |   |
| /s/ John D. Weil                  |   | Director                                          |   |  March 28,  2002 |   |
| John D. Weil                      |   |                                              |   |                  |   |
|                              |   |                                              |   |                  |   |
| /s/ Sigmund Rogich                |   | Director                                          |   |  March 28,  2002 |   |
| Sigmund Rogich                    |   |                                              |   |                  |   |

 

22

----

 

On Stage Entertainment,Inc. and Subsidiaries

 

-----------------------

 

Consolidated FinancialStatements

 

For the Years EndedDecember 31, 2000 and 2001

 

----------------------

 

 

ON STAGE ENTERTAINMENT,INC.  AND SUBSIDIARIES

 

TABLE OF CONTENTS

 

 
| Report  of Independent Certified Public Accountants |
|-----------------------------------------------------|
|                                                |
| Consolidated  Financial Statements                  |
| Balance  Sheets                                     |
| Statements  of Operations                           |
| Statements  of Stockholders’ Equity (Deficit)  |
| Statements  of Cash Flows                           |
| Summary  of Accounting Policies                     |
| Notes  to Financial Statements                      |

 

F-1

----

 

Report of IndependentCertified Public Accountants

 

Board of Directors and Stockholders of On Stage Entertainment, Inc. andSubsidiaries

 

We have audited the accompanying consolidated balance sheets of OnStage Entertainment, Inc. and subsidiaries as of December 31, 2000 and 2001,and the related statements of operations, stockholders’ equity (deficit) andcash flows for each of the years then ended. These financial statements are the responsibility of the Company’smanagement.  Our responsibility is toexpress an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of On StageEntertainment, Inc. and Subsidiaries at December 31, 2000 and 2001, and theresults of their operations and their cash flows for each of the years thenended, in conformity with accounting principles generally accepted in theUnited States of America.

 
|                    |   |   |   | /s/ BDO SEIDMAN, LLP |   |
|-------------------------|--------|--------|--------|----------------------|--------|
|                    |   |   |   |
| Los Angeles, California |   |   |   |                 |   |   |   |
| March 1, 2002           |   |   |   |                 |   |   |   |

 

F-2

----

 

ON STAGE ENTERTAINMENT, INC.  AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 
|                                                                                                                                                           |   | **Years  ended December 31,** |      |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------|-----------|
|                                                                                                                                                           |   | **2000**                      |      | **2001** |   |
| Assets                                                                                                                                                         |   |                          |      |   |   |
| Current assets                                                                                                                                                 |   |                          |      |   |   |
|  Cash and cash equivalents                                                                                                                                |   | $                             | 517,353   |   | $ | 955,363 |   |
|  Accounts receivable, net                                                                                                                                 |   | 561,239                       |      | 650,188 |   |
|  Inventory                                                                                                                                                |   | 89,996                        |      | 90,423 |   |
|  Deposits                                                                                                                                                 |   | 166,092                       |      | 223,601 |   |
|  Prepaid and other assets                                                                                                                                 |   | 291,652                       |      | 343,307 |   |
|                                                                                                                                                           |   |                          |      |   |   |
| Total current assets                                                                                                                                           |   | 1,626,332                     |      | 2,262,882 |   |
| Property,  equipment and leasehold improvements (Notes 1 and 2)                                                                                                |   | 6,185,424                     |      | 7,081,925 |   |
| Less:  Accumulated depreciation and amortization                                                                                                          |   | (5,346,133                    | )         | (6,070,919 | ) |
| Property,  equipment and leasehold improvements, net                                                                                                           |   | 839,291                       |      | 1,011,006 |   |
| Due from officer  (Note 10)                                                                                                                                    |   | —                        |      | 203,318 |   |
| Direct  acquisition costs (Note 11)                                                                                                                            |   | 100,000                       |      | — |   |
| Show rights, net  of accumulated amortization of $189,607                                                                                                      |   | —                        |      | 3,366,307 |   |
| Total Assets                                                                                                                                                   |   | $                             | 2,565,623 |   | $ | 6,843,513 |   |
| Liabilities,  Convertible Preferred Stock, and Stockholders’ Deficit                                                                                      |   |                          |      |   |   |
|                                                                                                                                                           |   |                          |      |   |   |
| Current  liabilities                                                                                                                                           |   |                          |      |   |   |
|                                                                                                                                                           |   |                          |      |   |   |
|  Accounts payable                                                                                                                                         |   | $                             | 1,625,040 |   | $ | 205,223 |   |
|  Accrued payroll and other liabilities                                                                                                                    |   | 1,316,329                     |      | 1,853,726 |   |
|  Accrued dividends payable (Notes 4 and 6)                                                                                                                |   | —                        |      | 758,000 |   |
|  Convertible debentures, net of beneficial  conversion (Note 4)                                                                                           |   | 700,000                       |      | 143,353 |   |
|  Current maturities of long-term debt (Note  3)                                                                                                           |   | 600,000                       |      | 552,662 |   |
| Total current  liabilities                                                                                                                                     |   | 4,241,369                     |      | 3,512,964 |   |
| Long-term debt,  less current maturities (Note 3)                                                                                                              |   | 551,798                       |      | — |   |
| Total liabilities                                                                                                                                              |   | 4,793,167                     |      | 3,512,964 |   |
| Commitments and  contingencies (Note 7)                                                                                                                        |   |                          |      |   |   |
|                                                                                                                                                           |   |                          |      |   |   |
| Series A  Convertible Preferred Stock, par value $.01 per share, 10,000,000 Shares  authorized; 1,852,632 issued and outstanding, liquidation price $8,000,000 |   | —                        |      | 8,056,014 |   |
|                                                                                                                                                           |   |                          |      |   |   |
| Stockholders’  deficit (Notes 2 and 8)                                                                                                                    |   |                          |      |   |   |
|  Common stock; par value $0.01 per share;  authorized 100,000,000 shares; 11,307,930 shares issued and outstanding                                        |   | 113,079                       |      | 113,079 |   |
|  Additional paid-in capital                                                                                                                               |   | 12,652,111                    |      | 16,754,991 |   |
|  Accumulated deficit                                                                                                                                      |   | (14,992,734                   | )         | (21,593,535 | ) |
| Total  stockholders’ deficit                                                                                                                              |   | (2,227,544                    | )         | (4,725,465 | ) |
| Total  liabilities and stockholders’ deficit                                                                                                              |   | $                             | 2,565,623 |   | $ | 6,843,513 |   |

 

See accompanying summaryof accounting policies and notes toconsolidated financial statements.

 

F-3

----

 

ON STAGE ENTERTAINMENT, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS

 
|                                                               |   | **Years  Ended December 31,** |       |
|--------------------------------------------------------------------|--------|-------------------------------|------------|
|                                                               |   | **2000**                      |       | **2001** |   |
| Net revenues                                                       |   | $                             | 24,137,441 |   | $ | 23,760,555 |   |
| Cost of revenues                                                   |   | 20,593,397                    |       | 21,425,173 |   |
| Gross profit                                                       |   | 3,544,044                     |       | 2,335,382 |   |
| Operating  expenses                                                |   |                          |       |   |   |
|   Selling, general and administrative                         |   | 4,155,991                     |       | 2,643,650 |   |
|   Depreciation and amortization                               |   | 1,076,504                     |       | 911,639 |   |
|   Expenses at closed locations (Note 11)                      |   | 608,878                       |       | — |   |
| Total operating  expenses                                          |   | 5,841,373                     |       | 3,555,289 |   |
| Operating loss                                                     |   | (2,297,329                    | )          | (1,219,907 | ) |
| Other income                                                       |   | 333,657                       |       | — |   |
| Loss on disposal  of assets (Note 10)                              |   | (1,575,628                    | )          | — |   |
| Interest  expense, net (Notes 3 and 4)                             |   | (1,212,097                    | )          | (529,461 | ) |
| Loss before  income taxes and extraordinary item                   |   | (4,751,397                    | )          | (1,749,368 | ) |
| Income taxes  (Note 13)                                            |   | 91,391                        |       | (18,972 | ) |
| Loss before  extraordinary item                                    |   | (4,842,788                    | )          | (1,730,396 | ) |
| Extraordinary  item - troubled debt restructure gain, net (Note 2) |   | 141,122                       |       | — |   |
| Net loss                                                           |   | (4,701,666                    | )          | (1,730,396 | ) |
|                                                               |   |                          |       |   |   |
| Deemed dividends  for preferred stock                              |   | —                        |       | (4,014,905 | ) |
| Dividends  accreted for preferred stock                            |   | —                        |       | (97,500 | ) |
| Dividends  accrued for preferred stock                             |   | —                        |       | (758,000 | ) |
| Net loss  applicable to common shares                              |   | $                             | (4,701,666 | ) | $ | (6,600,801 | ) |
|                                                               |   |                          |       |   |   |
| Basic and  diluted loss per share from continuing operations       |   | $                             | (.58       | ) | $ | (.58 | ) |
| Basic and  diluted income per share from extraordinary item        |   | $                             | .01        |   | $ | — |   |
| Basic and  diluted loss per share                                  |   | $                             | (.57       | ) | $ | (.58 | ) |
| Basic and  diluted average number of common shares outstanding     |   | 8,298,336                     |       | 11,307,930 |   |

 

See accompanying summaryof accounting policies and notes toconsolidated financial statements.

 

F-4

----

 

ON STAGE ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTSOF STOCKHOLDERS’ EQUITY (DEFICIT)

 

 
|                                                                                  |   | **Common  Stock** |   | **Additional  Paid in Capital** |    | **Accumulated  Deficit** |   | **Total**  |   |
|---------------------------------------------------------------------------------------|--------|-------------------|--------|---------------------------------|---------|--------------------------|--------|------------|--------|
|                                                                                  |   | **Shares**        |   | **Amount**                      |    |                     |   |       |
| Balance, January  1, 2000                                                             |   | 7,226,808    |   | $                               | 72,268  |                     | $      | 11,430,336 |   | $ | (10,291,068 | )  | $ | 1,211,536 |   |
|                                                                                  |   |              |   |                            |    |                     |   |       |   |   |   |
| Issuance of  common stock in connection with Debt Restructuring with ICCMIC (Note 2)  |   | 4,061,122         |   | 40,611                          |    | 1,177,725                |   | —     |   | 1,218,336 |   |
| Issuance of  common stock in connection with services rendered                        |   | 20,000            |   | 200                             |    | 6,050                    |   | —     |   | 6,250 |   |
| Beneficial  conversion feature (Note 4)                                               |   | —            |   | —                          |    | 38,000                   |   | —     |   | 38,000 |   |
| Net loss for the  year                                                                |   | —            |   | —                          |    | —                   |   | (4,701,666 | )      | (4,701,666 | ) |
| Balance,  December 31, 2000                                                           |   | 11,307,930   |   | $                               | 113,079 |                     | $      | 12,652,111 |   | $ | (14,992,734 | ) | $ | (2,227,544 | ) |
|                                                                                  |   |              |   |                            |    |                     |   |       |   |   |   |
| Deemed dividends  recognized on Series A  Convertible Preferred Stock (Notes 4 and 6) |   | —            |   | —                          |    | 4,014,905                |   | (4,014,905 | )      | — |   |
| Accrued  dividends on Series A Convertible  Preferred Stock                           |   | —            |   | —                          |    | —                   |   | (758,000   | )      | (758,000 | ) |
| Beneficial  conversion on Convertible  Debentures (Note 4)                            |   | —            |   | —                          |    | 87,975                   |   | 87,975     |   |   |   |
| Dividends  accreted on Series A  Convertible Preferred Stock                          |   | —            |   | —                          |    | —                   |   | (97,500    | )      | (97,500 | ) |
| Net loss for the  year                                                                |   | —            |   | —                          |    | —                   |   | (1,730,396 | )      | (1,730,396 | ) |
| Balance,  December 31, 2001                                                           |   | 11,307,930   |   | $                               | 113,079 |                     | $      | 16,754,991 |   | $ | (21,593,535 | ) | $ | (4,725,465 | ) |

 

See accompanying summaryof accounting policies and notes to consolidatedfinancial statements.

 

F-5

----

 

ON STAGE ENTERTAINMENT, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS

 

Increase (Decrease) inCash and Cash Equivalents

 
|                                                                                       |   | **Years  ended December 31,** |       |
|--------------------------------------------------------------------------------------------|--------|-------------------------------|------------|
|                                                                                       |   | **2000**                      |       | **2001** |   |
| Cash flows from  operating activities                                                      |   |                          |       |   |   |
| Net loss                                                                                   |   | $                             | (4,701,666 | ) | $ | (1,730,396 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities: |   |                          |       |   |   |
| Common stock  issued for services                                                          |   | 6,250                         |       | — |   |
| Beneficial  conversion                                                                     |   | 38,000                        |       | — |   |
| Depreciation and  amortization                                                             |   | 1,076,504                     |       | 914,393 |   |
| Amortization of  beneficial conversion                                                     |   | —                        |       | 81,328 |   |
| Write off of  direct acquisition costs                                                     |   | 597,328                       |       | — |   |
| Extraordinary  gain on debt restructure                                                    |   | (141,122                      | )          | — |   |
| Loss on disposal  of property, plant and equipment                                         |   | 1,575,628                     |       | — |   |
| Increase  (decrease) from changes in operating assets and liabilities:                     |   |                          |       |   |   |
| Accounts  receivable                                                                       |   | 688,380                       |       | (88,949 | ) |
| Inventory                                                                                  |   | 144,583                       |       | (427 | ) |
| Deposits                                                                                   |   | 32,431                        |       | (21,240 | ) |
| Prepaid and  other assets                                                                  |   | (53,378                       | )          | (48,901 | ) |
| Accounts payable                                                                           |   | 180,162                       |       | (1,419,817 | ) |
| Accrued payroll  and other liabilities                                                     |   | 693,451                       |       | 534,643 |   |
| Total  adjustments                                                                         |   | 4,838,217                     |       | (48,970 | ) |
| Net cash  provided by (used in) operating activities                                       |   | 136,551                       |       | (1,779,366 | ) |
| Cash flows from  investing activities                                                      |   |                          |       |   |   |
| Proceeds from  sale of assets                                                              |   | 2,000,000                     |       | — |   |
| (Advances on)  proceeds received on receivable from officer                                |   | 117,906                       |       | (203,318 | ) |
| Capital expenditures                                                                       |   | (125,288                      | )          | (688,684 | ) |
| Acquisition of  show rights                                                                |   | (100,000                      | )          | (250,000 | ) |
| Net cash  provided by (used in) investing activities                                       |   | 1,892,618                     |       | (1,142,002 | ) |
| Cash flows from  financing activities:                                                     |   |                          |       |   |   |
| Repayment on  long-term borrowing                                                          |   | (2,127,257                    | )          | (599,136 | ) |
| Repayment on  working capital line                                                         |   | (459,146                      | )          | — |   |
| Proceeds  received from convertible debentures                                             |   | 700,000                       |       | 650,000 |   |
| Conversion of  debentures                                                                  |   | —                        |       | 58,514 |   |
| Proceeds from  issuance of Series A Preferred Stock                                        |   | —                        |       | 6,700,000 |   |
| Repayment of  short term borrowing                                                         |   | —                        |       | (3,450,000 | ) |
| Net cash  provided by (used in) financing activities                                       |   | (1,886,403                    | )          | 3,359,378 |   |
| Net increase  (decrease) in cash and cash equivalents                                      |   | 142,766                       |       | 438,010 |   |
| Cash and cash  equivalents at beginning of year                                            |   | 374,587                       |       | 517,353 |   |
| Cash and cash  equivalents at end of year                                                  |   | $                             | 517,353    |   | $ | 955,363 |   |
| Supplemental  Disclosure of Cash Flow Information Cash paid during the year for:           |   |                          |       |   |   |
| Interest                                                                                   |   | $                             | 2,020,926  |   | $ | 529,461 |   |
| Taxes                                                                                      |   | $                             | 91,391     |   | $ | — |   |

 

See accompanying summaryof accounting policies and notes to consolidatedfinancial statements.

 

F-6

----

 

##### **Supplemental Disclosure of Non-Cash Investing andFinancing Activities**

 

In June 2000, ICCMIC foreclosed on properties with assets having a netbook value of $13,918,309.  The Companyreceived an aggregate credit of $9.0 million and correspondingly wrote off debtfinancing costs of $927,190.

 

On October 12, 2000, 4,061,122 shares were issued to ICCMIC in exchangefor its remaining outstanding debt of $8.2 million.

 

Issuance of $1,350,000 convertible debentures during late 2000 andearly 2001 resulted in a beneficial conversion of $87,975 in 2001.

 

Issuance of short-term note of $3,450,000 (and cash of $350,000) toacquire intangible show rights and equipment in February 2001.

 

Issuance of $7,958,514 of Series A Convertible Preferred Stock resultedin a deemed dividend of $4,014,905 in 2001.

 

Accretion of discount and fees on Series A Convertible Preferred Stockof $97,500 in 2001.

 

Accrued dividends of $758,000 on Series A Convertible Preferred Stockwere recognized in 2001.

 

F-7

----

 

ON STAGE ENTERTAINMENT, INC. AND SUBSIDIARIES

SUMMARY OF ACCOUNTING POLICIES

 

BUSINESS ACTIVITY

 

On Stage Entertainment, Inc. (the “Company”) produces and sells live entertainment and operates livetheaters and dinner theaters worldwide. The Company has continuous running shows in gaming and resort venues inCalifornia, Missouri, Nevada, New Jersey, and South Carolina.  The Company was incorporated on October 30,1985 in the state of Nevada.

 

PRINCIPLES OF CONSOLIDATION

 

The financial statements include the amounts of On Stage Entertainment,Inc., a publicly traded Nevada corporation (the “Company” or “OSE”) and itssubsidiaries, Legends in Concert, Inc., a Nevada corporation (“LIC”); On StageMarketing, Inc., a Nevada corporation (“Marketing”); On Stage Theaters, Inc., aNevada corporation (“Theaters”); Wild Bill’s California, Inc., a Nevadacorporation (“Wild Bills”); On Stage Merchandise, Inc., a Nevada corporation(“Merchandise”); On Stage Events, Inc., a Nevada corporation (“Events”); OnStage Casino Entertainment, Inc.  a Nevadacorporation (“Casino”); On Stage Productions, Inc., a Nevada corporation(“Productions”); On Stage Theaters North Myrtle Beach, Inc., a Nevadacorporation (“North Myrtle”); and On Stage Theaters Surfside Beach, Inc., aNevada corporation (“Surfside”); (collectively, the “Subsidiaries”).  All significant intercompany transactionsand balances have been eliminated in consolidation.  The consolidated group is referred to collectively andindividually as the “Company.”

 

ACCOUNTS RECEIVABLE AND REVENUE RECOGNITION

 

Accounts receivable and revenue are recorded as the stage productionsare run.  Accounts receivable representscash collected subsequent to the date on which the show ran.

 

ESTIMATES

 

The preparation of financial statements in conformity with generallyaccepted accounting principles requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosures of contingent assets and liabilities at the date of the financialstatement and the reported amounts of revenues and expenses during thereporting period.  Actual results coulddiffer materially from those estimates.

 

INVENTORY

 

Inventory consists of gift shop and concession items, as well as foodand beverage supplies, and are stated at cost on a first-in, first-out basis.

 

PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

 

Property and equipment are stated at cost.  Expenditures for maintenance and repairs are charged to expenseas incurred.  Renewals or betterments ofsignificant items are capitalized.  Whenassets are sold or otherwise disposed, the cost and related accumulateddepreciation or amortization are removed from the respective accounts, and anyresulting gain or loss is recognized.

 

Depreciation and amortization of property and equipment purchased priorto January 1, 1996 are provided using accelerated methods while property andequipment purchased from January 1, 1996 are depreciated on a straight linebasis over the estimated useful lives, as indicated below.  Leasehold improvements are amortized overthe lesser of the related assets useful life or the remaining lease term.

 
|                   |   | **Years** |
|------------------------|--------|-----------|
| Stage equipment        |   | 3-7       |
| Scenery and wardrobe   |   | 3-7       |
| Furniture and fixtures |   | 3-7       |
| Vehicles               |   | 3-5       |
| Leasehold improvements |   | 5-10      |

 

IMPAIRMENT OF LONG-LIVED ASSETS

 

The Company follows the guidelines set forth in SFAS No.  121, “Accounting for the Impairment ofLong-Lived Assets and Long-Lived Assets to be Disposed Of” (“SFAS 121”) whenreviewing its long-lived assets and certain related intangibles for impairmentwhenever changes in circumstances indicate that the carrying amount of an assetmay not be fully recoverable.  Themeasurement of impairment losses to be recognized is based on the differencebetween the fair value and the carrying amount of the assets.  Impairment would be recognized in operatingresults if a diminution in value occurred.

 

F-8

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STOCK BASED COMPENSATION

 

Statements of Financial Accounting Standards No.  123, “Accounting for Stock-BasedCompensation” (“SFAS No.  123”)establishes a fair value method of accounting for stock-based compensationplans and for transactions in which an entity acquires goods or services fromnon-employees in exchange for equity instruments.  SFAS No.  123 alsoencourages, but does not require companies to record compensation cost forstock-based employee compensation.  TheCompany has chosen to continue to account for stock-based compensationutilizing the intrinsic value method prescribed in Accounting Principles BoardOpinion No.  25, “Accounting for StockIssued to Employees, and comply with pro forma disclosure requirements.”Accordingly, compensation cost for stock options is measured as the excess, ifany, of the fair market price of the Company’s stock at the date of grant overthe amount an employee must pay to acquire the stock.

 

LOSS PER SHARE

 

Statement of Financial Accounting Standard No. 128, Earning per Share,provides for the calculation of Basic and Diluted earnings per share.  Basic earnings per share includes nodilution and is computed by dividing income available to common shareholders bythe weighted average number of common shares outstanding for the period.  Diluted earnings per share reflects thepotential dilution of securities that could share in the earnings of theentity, similar to fully diluted earnings per share.

 

For the year ended December 31, 2000, potential diluted securitiesrepresenting 5,850,005 outstanding options and warrants are not included sincetheir effect would be anti-dilutive. For the year ended December 31, 2001, potential dilutive securitiesrepresenting 1,624,400 outstanding stock options, 4,410,155 outstanding commonstock warrants and 1,852,632 shares of preferred stock, which are convertibleinto 18,526,326 shares of common stock, are not included, since their effectwould be anti-dilutive.  Furthermore, OnStage has preferred stock warrants which convert into 13,600,000 shares ofpreferred stock which further convert into 27,200,000 shares of common stockcontingent upon On Stage achieving certain EBITDA levels.  These potential dilutive securities are notincluded, since their effect would be anti-dilutive.

 

FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The carrying amounts of financial instruments including cash, accountsreceivable, current maturities of long-term debt, and accounts payable,approximate fair value because of their short maturity.

 

The carrying amount of long-term debt and convertible debt approximatesfair value because the interest rates on these instruments approximate the ratethe Company could borrow at December 31, 2000 and 2001.

 

INCOME TAXES

 

The Company follows Statement of Financial Accounting StandardsNo.  109 (“SFAS No.  109”), “Accounting for Income Taxes.” SFASNo.  109 requires an asset and liabilityapproach to providing deferred income taxes and specifies that all deferred taxbalances be determined by using the tax rate expected to be in effect when thetaxes will actually be paid or refunds received.

 

CASH EQUIVALENTS

 

The Company considers all liquid assets with an initial maturity ofthree months or less to be cash and/or cash equivalents.

 

CONCENTRATION OF CREDIT RISK

 

The Company places its cash and temporary cash investments with bankinginstitutions.  At December 31, 2000, theCompany had $194,600 and $125,300 on deposit at two different banks.  At December 31, 2001, the Company had$702,500 on deposit at one bank. Account balances at an individual bank are insured by the FederalDeposit Insurance Corporation (FDIC) up to $100,000.

 

SEGMENT REPORTING

 

Statement of Financial Accounting Standards No.  131, “Disclosures about Segments of anEnterprise and Related Information” (“SFAS No. 131”) requires that the public companies report certain informationabout operating segments, products, services and geographical areas in which theyoperate and their major customers.

 

NEW ACCOUNTING STANDARDS

 

In June 2001, the Financial Accounting Standards Board (the “FASB”)finalized FASB Statements No. 141, *Business Combinations* (SFAS 141)*,*and No. 142, *Goodwill and Other Intangible Assets* (SFAS 142)*.*SFAS141 requires the use of the purchase method of accounting and prohibits the useof the pooling-of-interests method of accounting for business combinationsinitiated after June 30, 2001. SFAS 141 also requires that On Stage recognizeacquired intangible assets apart from goodwill if the acquired intangibleassets meet certain criteria. SFAS 141 applies to all business combinationsinitiated after June 30, 2001 and for purchase business combinations completedon or after July 1, 2001. It also requires, upon adoption of SFAS 142, that OnStage reclassify the carrying amounts of intangible assets and goodwill basedon the criteria in SFAS 141.

 

SFAS 142 requires, among other things, that companies no longeramortize goodwill, but instead test goodwill for impairment at least annually.In addition, SFAS 142 requires that On Stage identify reporting units for thepurposes of assessing potential future impairments of goodwill, reassess theuseful lives of other existing recognized intangible assets, and ceaseamortization of intangible assets with an indefinite useful life. An intangibleasset with an indefinite useful life should be tested for impairment inaccordance with the guidance in SFAS 142. SFAS 142 is required to be applied infiscal years beginning after December 15, 2001 to all goodwill and otherintangible assets recognized at that date, regardless of when those assets wereinitially recognized. SFAS 142 requires On Stage to complete a transitionalgoodwill impairment test six months from the date of adoption. On Stage is alsorequired to reassess the useful lives of other intangible assets within thefirst interim quarter after adoption of SFAS 142.

 

F-9

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On Stage’s previous business combinations were accounted for using thepurchase method. As of December 31, 2001, the net carrying amount of intangibleshow rights is $3,366,307. Amortization expense during the twelve-month periodended December 31, 2001 was $189,607. On Stage believes the adoption of SFAS 141 and 142 will have no materialimpact on its financial position and results of operations.

 

In August 2001, the FASB issued SFAS No. 143, *Accounting for Asset RetirementObligations*.  SFAS No. 143requires the fair value of a liability for an asset retirement obligation to berecognized in the period in which it is incurred if a reasonable estimate offair value can be made.  The associatedasset retirement costs are capitalized as part of the carrying amount of thelong-lived asset.  SFAS No. 143 iseffective for fiscal years beginning after June 15, 2002.  On Stage believes the adoption of thisStatement will have no material impact on its financial statements.

 

In October 2001, the FASB issued SFAS No. 144*, Accounting for the Impairment orDisposal of Long-Lived Assets*. SFAS No. 144 requires that those long-lived assets be measured at thelower of carrying amount or fair value less cost to sell, whether reported incontinuing operations or in discontinued operations. Therefore, discontinuedoperations will no longer be measured at net realizable value or includeamounts for operating losses that have not yet occurred. SFAS No. 144 iseffective for financial statements issued for fiscal years beginning afterDecember 15, 2001, and, generally, are to be applied prospectively.  On Stage believes the adoption of thisStatement will have no material impact on its financial statements.

 

NOTE 1 - PROPERTY,EQUIPMENT AND LEASEHOLD IMPROVEMENTS

 

Property, equipment and leasehold improvements consist of thefollowing:

 
|                                                       |   | **December  31,** |      |
|------------------------------------------------------------|--------|-------------------|-----------|
|                                                       |   | **2000**          |      | **2001** |   |
| Stage equipment                                            |   | $                 | 3,127,015 |   | $ | 3,320,847 |   |
| Scenery and  wardrobe                                      |   | 1,332,121         |      | 1,375,065 |   |
| Furniture and  fixtures                                    |   | 830,808           |      | 1,376,946 |   |
| Vehicles                                                   |   | 8,234             |      | 8,234 |   |
| Leasehold  improvements                                    |   | 887,246           |      | 1,000,833 |   |
|                                                       |   |              |      |   |   |
|                                                       |   | 6,185,424         |      | 7,081,925 |   |
| Less accumulated  depreciation and amortization            |   | (5,346,133        | )         | (6,070,919 | ) |
| Total property,  equipment and leasehold improvements, net |   | $                 | 839,291   |   | $ | 1,011,006 |   |

 

 

NOTE 2 - DEBT RESTRUCTURE

 

As of October 7, 1998, the Company had borrowed anaggregate of $14,150,000 from Imperial Credit Commercial Mortgage InvestmentCorp. (“Mortgage Lender”).  On May 24,1999 the Company received notice of default from its Mortgage Lender.  On November 5, 1999, the Company received aformal demand from its Mortgage Lender to pay them the sum of $16,163,305 as aguarantor under the loan, which represented all of the indebtedness, includinglate charges and default interest, due the Mortgage Lender as of that date.  On November 12, 1999, the Mortgage Lenderfiled a complaint against the Company in the District Court for Clark County,Nevada, alleging, among other things, that the Company breached theguaranty.  On December 10, 1999, theCompany agreed to allow the Mortgage Lender to obtain a judgment against theCompany for the amount of the guaranty, in return for a forbearance on thecollection of this judgment until March 31, 2000.  The Mortgage Lender extended the date for collection on this judgmentuntil May 1, 2000.

 

On December 9, 1999, the Mortgage Lender obtained judgment offoreclosure against the subsidiaries, Fort Liberty, Inc. and King Henry’s,Inc., for the sale of the Fort Liberty Shopping Complex and Wild Bill’s DinnerTheater in Kissimmee, Florida and The King Henry’s Feast in Orlando, Florida.

 

On January 5, 2000, the Mortgage Lender obtained a foreclosure decreefor the judicial sale of the Legends in Concert Family Theater in SurfsideBeach, South Carolina.

 

During the period, the Company continued to attempt to renegotiate theterms of the credit facilities, to obtain extensions of the terms of thosefacilities and to seek alternative additional financing.

 

On January 24, 2000, the Company reached an agreement with its MortgageLender to extend the foreclosure sale date on the King Henry’s Feast Theater inOrlando, Florida from January 26, 2000 until March 8, 2000. On March 7, 2000,the Company reached an agreement with its Mortgage Lender to extend theforeclosure sale date on the King Henry’s Feast Theater from March 7, 2000until April 5, 2000. On March 30, 2000, the Company reached an agreement withits Mortgage Lender to extend the foreclosure sale date on the King Henry’sFeast Theater from April 4, 2000 until May 3, 2000.

 

F-10

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On January 25, 2000, the Company reached an agreement with its MortgageLender to extend the foreclosure sale date on the Fort Liberty ShoppingComplex/Wild Bill’s Dinner Theater Extravaganza in Kissimmee, Florida fromJanuary 25, 2000 until March 7, 2000. On March 7, 2000, the Company reached anagreement with its Mortgage Lender to extend the foreclosure sale date on theFort Liberty property from March 7, 2000 until April 4, 2000. On March 30,2000, the Company reached an agreement with its Mortgage Lender to extend theforeclosure sale date on the Fort Liberty property from April 4, 2000 until May2, 2000.

 

On February 1, 2000, the Company reached an agreement with its MortgageLender to extend the foreclosure sale date on the Legends Family Theater inSurfside Beach, South Carolina from February 7, 2000 until March 6, 2000. OnMarch 3, 2000, the Company reached an agreement with its Mortgage Lender toextend the foreclosure sale date on the Legends Family Theater from March 6,2000 until April 3, 2000.  On March 30,2000, the Company reached an agreement with its Mortgage Lender to extend theforeclosure sale date on the Legends Family Theater from April 3, 2000 untilMay 2000.

 

On May 1, 2000, the Company entered into a partial settlement with itsMortgage Lender, pursuant to which the Company agreed not to take measures toprevent its Mortgage Lender from foreclosing upon the Fort Liberty, KingHenry’s Feast and Legends in Concert Surfside Beach theaters in exchange for anaggregate credit of $9.0mm for its Fort Liberty ($3.0mm), King Henry’s Feast($4.0mm) and Legends in Concert Surfside Beach ($2.0mm) theaters.  Additionally, the Company agreed to operatethe King Henry’s and Fort Liberty Theaters until June 21, 2000, at which timethe theaters were closed to the public. In connection with the transfer of assets to its Mortgage Lender, theCompany incurred a troubled debt restructuring loss of approximately $6,918,309(of which $6,861,418 had been accrued at March 31, 2000 based on a preliminaryestimate and $56,591 was recorded on September 30, 2000 upon completion of theCompany’s final analysis of the foreclosure) representing the differencebetween the estimated fair value of the assets transferred and the carryingvalue of the debt settled.

 

On September 15, 2000, the Company was able to sell the assets of theSurfside Beach Theater independently and used the proceeds to pay off its debtwith its Mortgage Lender (see Note 12).

 

On October 12, 2000, the Company restructured its remaining debt withits Mortgage Lender, and First Security Bank of Nevada (“First Security”).  Under the terms of the agreement itsMortgage Lender agreed to convert its outstanding loan and accrued interest ofapproximately $8.2 million for 4,061,122 shares of common stock with a marketvalue of $1,218,336, which resulted in a trouble debt restructuring gain of$7,059,431.  As part of the transaction,Timothy J. Parrott, the new President and CEO of the Company, purchased 2,630,000shares of common stock, at market value, from the Mortgage Lender for $1.0million.

 

As a result of the debt restructuring, the Company recorded a nettroubled debt restructuring gain of $141,122 for the year ended December 31,2000, in the following quarters:

 
| **Quarter ended**   |   | **Gain (Loss)** |       |
|---------------------|--------|-----------------|------------|
| March 31, 2000      |   | $               | (6,861,418 | ) |
| June 30, 2000       |   | —          |       |
| September 30,  2000 |   | (56,591         | )          |
| December 31,  2000  |   | 7,059,431       |       |
|                |   | $               | 141,122    |   |

 

Furthermore, the Company restructured its remaining debt ofapproximately $1.2 million with First Security.  Under the terms of the agreement with First Security, effectiveAugust 1, 2000, the Company is paying $50,000 per month, maturing September 1,2002.  The loan accrues interest at therate of prime plus 2% (6.75% at December 31, 2001).

 

NOTE 3 - NOTES PAYABLE AND LONG-TERM DEBT

 
| Long-term debt consists of the following:                                                                                                                                                                                                                   |   | **December  31,** |      |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|-----------|
|                                                                                                                                                                                                                                                        |   | **2000**          |      | **2001** |   |
| First Security  Bank debt with a interest rate of Prime plus 2% (9.5% at December 31, 2000,  and 6.75% at December 31, 2001) due in monthly installments of approximately  $50,000, maturing September 1, 2002, secured by first lien position in  property |   | $                 | 1,151,798 |   | $ | 552,662 |   |
|                                                                                                                                                                                                                                                        |   |              |      |   |   |
| Less current  maturities                                                                                                                                                                                                                                    |   | 600,000           |      | 552,662 |   |
|                                                                                                                                                                                                                                                        |   |              |      |   |   |
| Long-term debt,  less current maturities                                                                                                                                                                                                                    |   | $                 | 551,798   |   | $ | — |   |

 

F-11

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NOTE 4 – PRIVATE PLACEMENT

 

During late 2000and early 2001, On Stage raised $700,000 and $650,000, respectively, from accredited private investorsto assist with meeting its capital requirements, paying for expenses associatedwith its restructuring, and making deposits for the acquisition of CountryTonite and the live licensing rights for Ripley’s. This private placement wasissued in the form of convertible debentures, which accrue interest at the rateof ten percent (10%) per annum and feature a conversion rate of $0.79.  The market price of the stock in relation tothe conversion price of these convertible debentures created a beneficialconversion amount of $87,975, which is amortized over two years. The maturitydates for  $700,000 of the convertibledebentures were November and December 2001, and the maturity dates for  $650,000 of the convertible debentures areJanuary and February 2003.

 

On Stage offered the holders of thedebentures convertible into common stock the choice to either (a) maintain theoriginal agreement with respect to the notes, or (b) exchange the debentureswith Series A Preferred Stock which contains the right to convert the preferredstock into common stock at $0.50 per share, and receive preferential dividends,payable quarterly in arrears at a rate of 12% annum, until conversion.  On June 1, 2001, $1,200,000 of the$1,350,000 in convertible debentures were exchanged for Series A PreferredStock.  The market price of the commonstock on the day of the transaction in relation to the conversion price of thepreferred stock resulted in a deemed dividend of $202,105. The remainingdebentures were extended in December 2001, and will now mature in July 2002.Upon maturity, in addition to repayment of principal and interest, warrants topurchase common stock will be issued in an amount equal to the principalinvestment at an exercise price of $.54 per share.

 

NOTE 5 – ACQUISITION OF COUNTRY TONITE

 

In February 2001, On Stage acquired substantially all the assets of CRCof Branson, Inc. and Country Tonite Enterprises, Inc., which primarilyconsisted of all of their rights and title in and to Country Tonite, for apurchase price of $3,800,000.  Theassets acquired were transferred to Country Tonite Branson, LLC, a wholly-ownedsubsidiary of On Stage.  Country Toniteis an award-winning theatrical production, which has been presented in Branson,Missouri and Pigeon Forge, Tennessee.

 

The terms of the agreement called for initial payments of $100,000 onNovember 21, 2000, $250,000 on January 29, 2001, $150,000 on February 15, 2001and $500,000 on March 15, 2001, with the balance of $2,800,000 due on July 31,2001, with interest at ten percent (10%) payable monthly.  On Stage took over management of the show inBranson, Missouri in March 2001. On August 2, 2001, On Stage satisfied, infull, its 10% interest bearing note payable by remitting cash payments totaling$2,800,000, plus accrued and unpaid interest.

 

F-12

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On Stage also acquired the right to oversee the Country Toniteproduction in Pigeon Forge, Tennessee for quality control purposes.  However, the rights to present the PigeonForge show were previously licensed to an unrelated third party and were notincluded in this acquisition.

 

The acquisition has been accounted for as a purchase and, accordingly,the operating results of Country Tonite have been included in our consolidatedfinancial statements since the date of acquisition. The show rights acquired(approximately $3,556,000) are being amortized on a straight-line basis over 15years.

 

The following unaudited pro forma consolidated results of operationsfor the year ended December 31, 2000 and 2001 assume the acquisition occurredas of January 1, 2000:

 
|                                 |   | **Year ended  December 31, 2001** |       | **Year ended  December 31, 2000** |   |
|--------------------------------------|--------|-----------------------------------|------------|-----------------------------------|--------|
|                                 |   |                              | ** ** |
| Net revenues                         |   | $                                 | 23,760,555 |                              | $      | 30,141,946 |   |
| Net loss from  continuing operations |   | (1,893,317                        | )          | (3,330,197                        | )      |
| Loss per common  share:              |   |                              |       |                              |   |
|   Basic and diluted             |   | (.60                              | )          | (.38                              | )      |
|                                      |        |                                   |            |                                   |        |  |  |

 

The unaudited proforma results are not indicative of the results thatwould have been obtained had the acquisition happened as of an earlier date,nor are they indicative of future results.

 

Country Tonite had no revenue for the months of January 2000 and 2001,as the show was closed during the off-season month.

 

NOTE 6 – CONVERTIBLE PREFERRED STOCK

 

On February 28, 2001, On Stage entered into an agreement withMcCown De Leeuw & Co., Inc., a private equity investment firm (“MDC”),pursuant to which MDC agreed to invest up to $20,000,000 in On Stage in theform of convertible preferred securities. According to the terms of the MDC investment, MDC will have anopportunity to stage its funding in four separate investments of $6.0 million,$4.0 million, $5.0 million, and $5.0 million, respectively.  The second and third tranches of theinvestment are in the form of warrants exercisable during the next ten (10)years at the option of On Stage, contingent on, among other things, its achievingcertain EBITDA levels.   The fourthtranche is exercisable by On Stage during the next ten (10) years only afterfunding of the third tranche.  Theconvertible preferred securities bear dividends at the rate of twelve percent(12%) per annum (10% cash plus 2% paid in kind), carry a liquidation preferenceof $5.00 per share, and are convertible into common stock of On Stage at aconversion price of $0.50 or $0.75 per share, depending on certainfactors.  A change in control provisioncould under certain circumstances require the redemption of the preferredstock.

 

The first $6,000,000 investment was made on March 13, 2001, with theissuance of 1,200,000 shares of Series A Convertible Preferred Stock with aface value of $6,000,000 which was issued at a 5% discount of the face value.  In connection with the transaction, theCompany agreed to reimburse MDC for fees and expenses incurred with thetransaction, in the amount of $500,000, and agreed to pay MDC a transaction feeof $500,000.  These fees were deductedfrom the gross proceeds of the first investment funding resulting in netproceeds from the Series A Convertible Preferred Stock of $4,700,000.  For accounting purposes, the fees andexpenses are being accreted over a 10 year period of time and will result inthe Series A Convertible Preferred Stock accreting to its liquidation value. Asof December 31, 2001, $97,500 of these fees have been accreted.  The conversion terms of the Series AConvertible Preferred Stock resulted in a deemed dividend of $2,812,800.

 

F-13

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On March 13, 2001, On Stage entered into an advisory services agreementwith MDC. On Stage agreed to pay MDC a fee of $250,000 for services renderedthrough March 30, 2002, and thereafter, a fee for each fiscal quarter equal tothe greater of $62,500 or one-fourth of one percent (0.25%) of On Stage’s grossrevenues reported for the four most recent fiscal quarters then ended.  In no event shall the fee exceed $95,000 forany one fiscal quarter.  As of December31, 2001, $62,500 of advisory fees have been accrued. This agreement expires onMarch 13, 2006.

 

On August 1, 2001, MDC funded its second investment in On Stage byexercising warrants (per the terms of the prior MDC investment) for 400,000shares of Series A Convertible Preferred Stock in the amount of$2,000,000.  The conversion terms of theSeries A Convertible Preferred Stock resulted in a deemed dividend of$1,000,000.  At the time, On Stage’s financialperformance failed to meet the minimum EBITDA thresholds set forth in theagreement as a condition to MDC’s obligation to fund the secondinvestment.   However, MDC agreed toconsummate the funding on the condition that MDC receive a warrant to purchasean additional 400,000 shares of On Stage’s Series A  Convertible Stock at an exercise price of $0.00001 exercisablefor a 10-year period.  The warrant mayonly be exercised if On Stage fails to meet its cumulative EBITDA targets forthe 2002 and 2003 calendar years.  Thus,MDC’s $2,000,000 investment will be convertible into either 4,000,000 commonshares, or, if On Stage fails to achieve certain EBITDA targets, 8,000,000common shares.  On Stage used theinvestment to fund the last $2,800,000 payment for the acquisition of CountryTonite due on July 31, 2001.

 

NOTE 7 - COMMITMENTS AND CONTINGENCIES

 

Leases

 

The Company leases various offices, condominiums, warehouses andtheaters under operating leases ranging in monthly payments from $3,141 to$70,000.  Rent and lease expenseincluded in cost of revenues for the years ended December 31, 2000 and 2001 was$1,129,267 and $2,581,509, respectively. Rent and lease expense included in selling, general and administrativeexpense for the years ended December 31, 2000 and 2001 was $216,827 and $94,183,respectively.

 

The total minimum rental commitment at December 31, 2001 is as follows:

 
| **Year  ending December 31,** |   | **Amount** |       |
|-------------------------------|--------|------------|------------|
| 2002                          |   | $          | 2,600,679  |   |
| 2003                          |   | 2,603,922  |       |
| 2004                          |   | 1,355,816  |       |
| 2005                          |   | 1,275,410  |       |
| 2006 and  Thereafter          |   | 3,943,824  |       |
|                          |   | $          | 11,779,651 |   |

 

In March 2001, On Stage entered into a 33-month leasewith OFT, LTD, to lease the Osmond Family Theater in Branson, Missouribeginning on April 1, 2001 and continuing through December 31, 2003.  The annual rental is $400,000, payable inmonthly installments of approximately $33,333.

 

 

Employment Contracts

 

On October 12, 2000, the Company renewed the employment agreement withthe principal stockholder, John W. Stuart, to employ him as its Chairman ofBoard and Founder until October 12, 2003. In accordance with this employment agreement, Mr. Stuart will receive anannual salary of $350,000 and will be eligible to participate each calendaryear in executive annual bonus plan approved by the Board.  In no event will the executive annual bonusbe less than $150,000.

 

On October 12, 2000, the Company entered into an agreement with theprincipal stockholder, Timothy J. Parrott, to employ him as its President andChief Executive Officer until October 12, 2003.  In accordance with this employment agreement, Mr. Parrott willreceive an annual salary of $1.00 per the period of the date of this agreementthrough December 31, 2000, and $120,000 for the period January 1, 2001 throughDecember 31, 2001, and an annual salary to be determined by the compensationcommittee of the Board for the period of January 1, 2002 through December 31,2002.  On March 30, 2001, the Companyagreed to increase Mr. Parrott’s salary from $120,000 per annum to $250,000,effective April 1, 2001. In October 2000, Mr. Parrott was granted 750,000options to purchase the Company’s common stock at a strike price of $.50 asfurther consideration for his employment.

 

On October 12, 2000, the Company entered into an agreement with JeffreyVictor, to employ him as its Chief Operating Officer and Executive VicePresident, commencing on November 1, 2001, and continuing indefinitelythereafter.  In accordance with thisemployment agreement, Mr. Victor will receive an annual salary of $150,000.

 

Aggregate commitments related to employment contracts are as follows:

 
| **Year  ending December 31,** |   | **Amount** |    |
|-------------------------------|--------|------------|---------|
| 2002                          |   | $          | 900,000 |   |
| 2003                          |   | 900,000    |    |
| 2004                          |   | 733,561    |    |
|                               |        |            |         |  |

 

F-14

----

 

Legal Proceedings

 

                In March 2002, wereceived notice of a civil complaint filed in the Superior Court of NewJersey—Law Division—Atlantic County on January 11, 2002, filed by formeremployees of Bally's Park Place, Inc., a venue for one of our full time Legendsproductions, against Bally's, On Stage and several Legends performers that wehire as independent contractors.  Thecomplaint alleges violations of the New Jersey Law Against Discrimination,retaliatory termination by conspiracy, misconduct causing severe emotionaldistress, assault and battery, and loss of consortium, and seeks damages of$7,750,00, plus cost of attorneys' fees. We have not yet responded to the complaint and its too early formanagement to determine the probability of an unfavorable outcome and range ofpossible loss, if any.  We believe thatthe case is without merit with respect to us, and intend to vigorously defend theaction.

 

NOTE 8 - STOCKHOLDER’S EQUITY

 

In October 2000, the Company issued 4,061,122 shares of common stock inconnection with the debt restructuring. See Note 2.

 

On October 30, 2000, the Company issued 20,000 shares of common stockin connection with services rendered. The fair market value at date of issuance was $.3125 per share.

 

1996 Stock Option Plan

 

The Board of Directors and the Company’s then sole stockholder approvedthe Company’s Incentive Stock Option Plan on August 7, 1996 (the “OptionPlan”).  Pursuant to an amendment to theOption Plan, effected in 2000, an aggregate of 1,650,000 shares of common stockhave been reserved for issuance pursuant to options granted and available forgrant under the Option Plan.  The OptionPlan is designed to further the interests of the Company by incentivizing theiremployees to continue to work for the betterment of the Company in return forsharing in the success of the Company through the Option Plan.

 

Under the Option Plan, a committee (the “Committee”) has been appointedby the Board of Directors to administer the Option Plan and is authorized, togrant options thereunder to all eligible employees of the Company, includingcertain officers and directors of the Company as well as to others providing servicesto the Company.  The Option Planprovides for the granting of both: (I) “incentive stock options” as defined inSection 422 of the Internal Revenue Code of 1986, as amended, which areintended to qualify for special federal income tax treatment (“ISOs”) toemployees (including officers and employee directors) and (ii) “non-qualifiedstock options” (“NQSOs”) to employees (including officers and employeedirectors) non-employee directors, and consultants.  Options can be granted under the Option Plan on such terms and atsuch prices as determined by the Committee, except that in the case of ISOs,the per share exercise price of such options cannot be less than the fairmarket value of the Common Stock on the date of grant.  In the case of an ISO granted to a 10%stockholder (a “10% Stockholder”), the per share exercise price cannot be lessthan 110% of such fair market value.  Tothe extent that the grant of an option results in the aggregate fair marketvalue of the shares with respect to which incentive stock options areexercisable by a grantee for the first time in any calendar year exceed$100,000, such option will be treated under the Option Plan as an NQSO.

 

Options granted under the Option Plan will become exercisable aftersuccessful completion of the vesting period or periods specified in each optionagreement.  Except as otherwisedetermined by the Committee, options become exercisable as to one-third of theshares subject to the option on each of the first, second and thirdanniversaries of the date of grant of the option.  Options are not exercisable, however, after the expiration of tenyears from the date of grant (or five years from such date in the case of anISO granted to a 10% Stockholder) and are not transferable other than by willor by the laws of descent and distribution.

 

Except as the Committee may determine with respect to NQSOs, if theholder of an option granted under the Option Plan ceases to be an employee,options granted to such holder shall terminate three months (12 months if thetermination is a result of the death or disability of the employee) from thedate of termination of employment and shall be exercisable as to only thoseoptions exercisable as of the date of termination.

 

In April 1999, the former CFO was granted 40,000 new stock options withan exercise price of $1.50 in exchange for his old options, which had anexercise price of $5.00.  The optionsare treated as variable options but have no impact as the market value has notbeen greater than $1.50.

 

In October 2000, the CEO was granted 750,000 options at $.50 per shareand the COO was granted 200,000 options at $.50 per share.

 

In May 2001, the CFO was granted 150,000 options at $.58 per share.

 

In August 2001, 40,000 options were granted to the general manager ofthe Surfside Beach, South Carolina, at $.63 per share.

 

Non-employee Directors’ Options

 

The Company provides for each non-employee director of the Company toreceive, in addition to reimbursement of expenses incurred in attending Boardmeetings, an option to purchase 10,000 shares of Common Stock each year that heor she serves as such a director (each such year, a “Grant Year”), partiallycontingent upon the director’s attendance at the Company’s four scheduled Boardof Director meetings during the Grant Year. One-quarter of the annual option grant shall vest as of each of theGrant Year’s first three scheduled Board of Director meetings and the remainderof such option will vest as of the fourth scheduled meeting, provided, in thelatter case, that the director has attended all four of that Grant Year’sscheduled Board meetings.

 

In June 2000, a director was granted 15,000 options at $5.00 per share.

 

In March 2001, a director was granted 25,000 options at $.50 per share.

 

At the Stockholders’ Annual Meeting on March 30, 2001,the stockholders approved a 2,500,000 increase to the option pool, whichoptions are to be issued at the discretion of the Board of Directors as anincentive to management, employees and Board members.

 

F-15

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The option and warrant activity during the years ended December 31,2000 and 2001 is as follows:

 
|                                                   |   | **Number of  Options and  Warrants** |   | **Weighted  Average  Exercise  Price** |   |
|--------------------------------------------------------|--------|--------------------------------------|--------|----------------------------------------|--------|
|                                                   |
| Options and  warrants outstanding at December 31, 1999 |   | 4,885,755                            |   | $                                      | 3.14   |   |
| Granted                                                |   | 965,000                              |   | .57                                    |   |
| Canceled                                               |   | (750                                 | )      | (5.00                                  | )      |
| Options and  warrants outstanding at December 31, 2000 |   | 5,850,005                            |   | $                                      | 3.08   |   |
| Granted                                                |   | 215,000                              |   | .58                                    |   |
| Canceled                                               |   | (30,450                              | )      | (5.00                                  | )      |
| Options and  warrants outstanding at December 31, 2001 |   | 6,034,555                            |   | $                                      | 3.05   |   |
|                                                   |   |                                 |   |                                   |   |
| Options and  warrants exercisable at December 31, 2001 |   | 5,194,555                            |   | $                                      | 3.45   |   |

 

Information  relating  to stock options  and  warrants at  December  31, 2001 summarized by exercise price are as follows:

 

 
| **Exercise  Price** |   | **Outstanding  Weighed Average** |   | **Exercisable  Weighted Average** |   |
|---------------------|--------|----------------------------------|--------|-----------------------------------|--------|
| **Per Share**       |   | **Shares**                       |   | **Life  (Year)**                  |   | **Exercise  Price** |   | **Shares** |   | **Exercise  Price** |   |
| 0.50                |   | 975,000                          |   | 4.73                              |   | $ | 0.50 |   | 325,000 |   | $ | 0.50 |   |
| 0.58                |   | 150,000                          |   | 9.40                              |   | 0.58 |   | — |   | — |   |
| 0.63                |   | 40,000                           |   | 9.80                              |   | 0.63 |   | — |   | — |   |
| 1.00                |   | 602,500                          |   | 5.00                              |   | 1.00 |   | 602,500 |   | 1.00 |   |
| 1.25                |   | 325,000                          |   | 2.20                              |   | 1.25 |   | 325,000 |   | 1.25 |   |
| 1.50                |   | 1,305,788                        |   | 4.90                              |   | 1.50 |   | 1,305,788 |   | 1.50 |   |
| 4.38                |   | 75,000                           |   | 7.50                              |   | 4.38 |   | 75,000 |   | 4.38 |   |
| 4.44                |   | 250,000                          |   | 2.20                              |   | 4.44 |   | 250,000 |   | 4.44 |   |
| 5.00                |   | 234,267                          |   | 5.50                              |   | 5.00 |   | 234,267 |   | 5.00 |   |
| 5.50                |   | 1,822,500                        |   | 1.60                              |   | 5.50 |   | 1,822,500 |   | 5.50 |   |
| 8.25                |   | 114,500                          |   | 1.70                              |   | 8.25 |   | 114,500 |   | 8.25 |   |
| 9.08                |   | 140,000                          |   | 1.70                              |   | 9.08 |   | 140,000 |   | 9.08 |   |
| Total               |   | 6,034,555                        |   | 2.60                              |   | $ | 3.05 |   | 5,194,555 |   | $ | 3.45 |   |

 

 

All stock options issued to employees have an exercise price not lessthan the fair market value of the Company’s common stock on the date of grant,and in accordance with accounting for such options utilizing the intrinsicvalue method there is no related compensation expense recorded in the Company’sfinancial statements.  Had compensationcost for stock-based compensation been determined based on the fair value atthe grant dates consistent with the method of SFAS 123, the Company’s net lossand loss per share for the years ended December 31, 2000 and 2001 would havebeen reduced to the pro forma amounts presented below:

 
|                                  |   | **2000** |       | **2001** |   |
|---------------------------------------|--------|----------|------------|----------|--------|
| Net loss  applicable to common shares |   |     |       |     |   |
| As reported                           |   | $        | (4,701,666 | )        | $      | (6,600,801 | ) |
| Pro forma                             |   | $        | (4,766,281 | )        | $      | (6,753,867 | ) |
| Basic and  diluted loss per share     |   |     |       |     |   |
| As reported                           |   | $        | (.57       | )        | $      | (.58 | ) |
| Pro forma                             |   | $        | (.57       | )        | $      | (.60 | ) |

 

F-16

----

 

The fair value of option grants is estimated on the date of grantsutilizing the Black-Scholes option-pricing model.  The fair value was calculated in 2000 using the followingassumptions: expected life of 4 to10 years, expected volatility of 203.56%,risk-free interest rates of 4.7% to 6%, and a 0% dividend yield.  The fair value in 2001 was calculated usingthe following assumptions: expected life of 10 years, expected volatility of123.78%, risk-free interest rates of 4.45% to 4.6%, and a 0% dividendyield.  The weighted average fair valueat date of grant for options granted during 2000 and 2001 approximated $.03 and$.40 per option, respectively.

 

NOTE 9 - SIGNIFICANT VENUES AND CONCENTRATION OF CREDIT RISK

 

Revenues from certain venues comprised 10% or more of totalrevenues.  The following table shows thepercentage of revenues of these venues to total revenues.

 
|    |   | **Years  ended December 31,** |   |
|---------|--------|-------------------------------|--------|
|    |   | **2000**                      |   | **2001** |   |
| Venue A |   | 17                            | %      | 19 | % |
| Venue B |   | 13                            |   | 14 |   |
| Venue C |   | 16                            |   | 18 |   |
| Venue D |   | 19                            |   | 18 |   |
| Venue E |   | 27                            |   | 23 |   |
|    |   | 92                            | %      | 92 | % |

 

NOTE 10 - DUE FROM OFFICER

 

As of December 31, 2001, the Company had advanced $203,318 to JohnStuart, an officer of the Company. Included in this receivable balance is a note, dated April 5, 2001, inthe amount of $150,000, payable in full by April 5, 2003, and bearing aninterest rate of 12% per annum.  Inconsideration for this loan, Mr. Stuart agreed to use the funds to regaincertain shares of his stock in On Stage, which he previously pledged inconnection with a margin loss. Once the shares were regained, they weredelivered to On Stage as security for the repayment of the advance. Mr. Stuartalso entered into a post-employment non-compete agreement in favor of On Stage.

 

NOTE 11 - EXPENSES AT CLOSED LOCATION

 

In 2000, the Company wrote off acquisition costs of $608,878 on a showat a location that was not put into full production.

 

NOTE 12 - SALE OF THEATER

 

On September 15, 2000, On Stage Entertainment subsidiary, On StageTheaters Surfside Beach, Inc., sold its Legends in Concert Theater in SurfsideBeach, South Carolina to LIC Theaters, LLC for $2.0mm.  In connection with the sale of the Theater,Legends Surfside entered into a ten (10) year lease agreement with LICTheaters, LLC.  The proceeds from thesale of the Theater were given to the Company’s first mortgage lender, ImperialCredit Commercial Mortgage Investment Corp., in accordance with the terms ofits partial settlement agreement with ICCMIC. Furthermore, the Company recorded a loss on disposal of assets of$648,438.

 

NOTE 13 - INCOME TAXES

 

Income taxes in the statement of operations consists of the following:

 
|    |   | **2000** |   | **2001** |   |
|---------|--------|----------|--------|----------|--------|
| Current |   |     |   |     |   |
| Federal |   | $        | — |     | $      | — |   |
| State   |   | 91,391   |   | (18,975  | )      |
|    |   | $        | 91,391 |     | $      | (18,975 | ) |

 

Deferredtaxes are as follows:

 
|                                       |   | **Years ended December 31,** |    |
|--------------------------------------------|--------|------------------------------|---------|
|                                       |   | **2000**                     |    | **2001** |   |
| Deferred tax  assets                       |   |                         |    |   |   |
| Allowance for  doubtful accounts and other |   | $                            | 314,444 |   | $ | 50,572 |   |
| Net operating  loss                        |   | 5,536,999                    |    | 6,118,423 |   |
| Total deferred  tax assets                 |   | 5,851,443                    |    | 6,168,995 |   |
| Less: valuation  allowance                 |   | (5,851,443                   | )       | (6,168,995 | ) |
|                                       |   | $                            | —  |   | $ | — |   |

 

F-17

----

 

The net deferred tax assets have a 100% valuation allowance asmanagement cannot determine if it is more likely than not that thedeferred  tax assets will be realized.

 

Income taxes in the statement of operations differs from the amountcomputed by applying the U.S. Federal income tax rate (34%) because of theeffect of the following items:

 

 
|                                                         |   | **Years  ended December 31,** |       |
|--------------------------------------------------------------|--------|-------------------------------|------------|
|                                                         |   | **2000**                      |       | **2001** |   |
| U.S. Federal  statutory rate applied to pretax income (loss) |   | $                             | (1,585,646 | ) | $ | (581,777 | ) |
| Permanent  differences                                       |   | (3,220                        | )          | 2,892 |   |
| Effect of State  taxes                                       |   | 91,391                        |       | (18,975 | ) |
| Tax effect of  unrecognized net operating loss carryforward  |   | 1,588,866                     |       | 578,885 |   |
|                                                         |   | $                             | 91,391     |   | $ | (18,975 | ) |

 

 

At December 31, 2001, the Company had Federal net operating losscarryforwards of approximately $16,101,113, which expire in 2021.  Under Federal Tax Law IRC Section 382,certain significant changes in ownership that the Company is currentlyundertaking may restrict the future utilization of these tax losscarryforwards.

 

NOTE 14 - SEGMENT INFORMATION

 

The Company derives its net revenues from five business unitscategorized by three reportable segments. The Casino Division (“Casinos”) primarily sells live theatricalproductions to casinos worldwide for a fixed fee.  In addition this division also operates the Company’s Legendsshow at the Imperial Palace in Las Vegas, Nevada.  The Theaters Division (“Theaters”) owns or rents live theatersand dinner theaters in urban and resort tourist locations primarily in theUnited States.  This division derivesits revenues from the sale of tickets and food and beverage to patrons whoattend live theatrical performances at these venues.  The Events Division (“Events”) sells live theatrical productionsto commercial clients, which include corporations, theme and amusement parksand cruise lines for a fixed fee.  TheMerchandise Division (“Merchandise”) sells merchandise and souvenir photographyproducts to patrons who attend the Company’s productions.  “Events” and “Merchandise” are included in“Casinos” in the following tables.  TheProduction Services Division (“Production”) sells technical equipment andservices to commercial clients; however, this division’s primary focus is totechnically support all of the other divisions.  The Corporate office is responsible for the corporate and financeportion of the Company’s operations.

 

In addition to these five business units, On Stage reports corporateoverhead costs through a separate segment, On Stage Entertainment (“OSE”).

 

On Stage’s reportable segments are strategic business units becauseeach business unit services a different market or performs a specializedfunction in support of a given market.

 

The accounting policies of the reportable operating segments are thesame as those described in the Summary of Accounting Policies.  The Company’s management evaluates theperformance of its operating segments based upon the profit or loss fromoperations.

 

The following table sets forth the segment profit/(loss) and assetinformation:

 

 
|                              |   | **Year Ended  December 31, 2001** |      |
|-----------------------------------|--------|-----------------------------------|-----------|
|                              |   | **Casinos**                       |      | **Production  Services** |   | **Theaters** |   | **OSE** |   | **Total  Consolidation** |   |
|                              |   |                              |      |   |   |   |
| Revenues from  external customers |   | $                                 | 7,114,870 |   | $ | 11,120 |   | $ | 16,634,565 |   | $ | — |   | $ | 23,760,555 |   |
| Interest expense                  |   | 1,315                             |      | — |   | 297,334 |   | 230,812 |   | 529,461 |   |
| Depreciation and  amortization    |   | 373,839                           |      | 80,846 |   | 463,767 |   | (6,813 | ) | 911,639 |   |
| Segment profit  (loss)            |   | 1,657,979                         |      | (905,244 | ) | 143,110 |   | (2,626,241 | ) | (1,730,396 | ) |
| Segment fixed  assets             |   | 2,982,142                         |      | 951,552 |   | 1,992,403 |   | 1,155,828 |   | 7,081,925 |   |
| Additions to  long-lived assets   |   | 14,419                            |      | 95,418 |   | 503,396 |   | 75,451 |   | 688,684 |   |
|                                   |        |                                   |           |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-18

----

 
|                              |   | **Year Ended  December 31, 2000** |      |
|-----------------------------------|--------|-----------------------------------|-----------|
|                              |   | **Casinos**                       |      | **Production  Services** |   | **Theaters** |   | **OSE** |   | **Total  Consolidation** |   |
|                              |   |                              |      |   |   |   |
| Revenues from  external customers |   | $                                 | 8,981,520 |   | $ | 29,719 |   | $ | 15,126,202 |   | $ | — |   | $ | 24,137,441 |   |
| Interest expense                  |   | 2,037                             |      | — |   | 914,348 |   | 295,712 |   | 1,212,097 |   |
| Depreciation and  amortization    |   | 398,667                           |      | 110,461 |   | 372,236 |   | 195,140 |   | 1,076,504 |   |
| Segment profit  (loss)            |   | 1,719,061                         |      | (929,562 | ) | (8,891,081 | ) | 3,399,916 |   | (4,701,666 | ) |
| Segment fixed  assets             |   | 2,967,723                         |      | 856,134 |   | 1,281,187 |   | 1,080,380 |   | 6,185,424 |   |
| Additions to  long-lived assets   |   | 24,292                            |      | 14,553 |   | 66,578 |   | 19,865 |   | 125,288 |   |
|                                   |        |                                   |           |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

NOTE 15 - SUBSEQUENT EVENT

 

In March 2002, MDC agreed to loan the Company$1,300,000.  The first loan, in theamount of $700,000, will be used (1) to reimburse MDC for expenses incurred onbehalf of the Company, including but not limited to attorneys’ fees incurred inconnection with this promissory note, and (2) for working capital purposeswithin the ordinary course of business. The outstanding principal amount of the loan plus the capitalizedinterest is due and payable on July 1, 2002. MDC, at its sole discretion, can extend the maturity date to December31, 2006.  The second loan, in theamount of $600,000, will be deposited in a separate bank account and will bewithdrawn only for direct use in connection with the Company’s participationand investment in connection with a potential future project in Hawaii.  Interest on both notes is payable at therate of 15% per annum, compounded quarterly. In connection with the $700,000 and $600,000 promissory notes, MDCreceived warrants to purchase an additional 1,346,154 and 1,153,846 shares ofthe Company’s common stock, respectively, at an exercise price of $0.50 pershare exercisable for a 10-year period.

 

F-19

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