Grand Entertainment & Music, Inc. - Is Hurricane Relief A Hip-Hop Away?
Investigative Reports
September 11 2005
stockpatrol.com
A roster of well-respected, firmly established organizations have taken the lead in providing relief to victims of Hurricane Katrina. The Red Cross, the Salvation Army and a lengthy list of credible faith-based organizations already have begun to deliver needed goods and services to Gulf Coast victims of the storm. Americans, and concerned citizens of the world, moved by what they have seen, are stepping to the plate to contribute to these efforts. One need only turn on any cable news channel, or visit the MSNBC, CNN, and Fox News websites (among many others) to find credible charities poised to help.
Most everyone wants to help – but not everyone is in a position to provide meaningful assistance. Not every "relief fund" can boast a credible track record or history of success. Some are newcomers with vague plans and no discernible charitable history. They too have captured headlines – albeit briefly – but are they offering a meaningful contribution or simply exploiting an avenue for self-promotion?
The GEM Collection
Take, for example, a company called Grand Entertainment & Music, Inc. (Pink Sheets: GENM), also known as GEM, a tiny over-the-counter company whose shares trade at a fraction of a cent. On September 2, 2005, Grand Entertainment issued a press release declaring that it is "committed to making a difference in the world and not just the entertainment industry." The Company said it would establish the "Gem Music Relief Fund" and would "designate a percentage of future sales to help the victims of Hurricane Katrina." GEM also announced that it "may also pursue the idea of a benefit concert that will feature a host of Gem, Gem-Latina, and Mango Music World signed artists."
Although these plans were only "in the preliminary stage," GEM said that it would set up "the necessary framework" to receive donations on the Company's web site, encouraging shareholders "to pull together and donate anything you can." GEM, however, is not a philanthropic organization or, as best we can determine, a charitable not-for-profit entity. So why would GEM establish a fund for investors rather than simply direct them to the nearest established charities? Is the Company simply asking people to "send money now and we'll figure out what to do with it later?"
The details of the program are fuzzy – as are the mechanics. What percentage of future revenues would be earmarked for hurricane relief, and for how long? What does that mean in raw dollars, based upon the Company's past performance? The Company stated that donations would be sent directly to people in need - but did not say how they would be identified or how it could assure that all of the funds would reach the victims. GEM also stated that it "would like the money to be used to repair roofs, interiors, and any other structural damage for un-insured individuals, as well as to provide food and shelter to the thousands who are homeless during the rebuilding period" – but offered no indication that it would have the resources, or accumulate sufficient funds, to address such a broad and massive task.
The Company's CEO, Fred Berlin, conceded that GEM would not be administering the funds itself, but would post a running total of contributions on its web site, and promised more details "once the specific legalities are determined." Mr. Berlin also claimed that the Company was asking various oil and gas companies to contribute $1 a barrel of their future production to the relief campaign. He did not, however, identify the oil and gas companies with which GEM had "begun talks."
GEM's web site now boasts a section entitled "Relief Fund for Victims of Hurricane Katrina," where it "encourages shareholders to be as generous as possible" and asks visitors to provide their names, e-mail address, telephone numbers and comments, so that someone can contact them "in the next few days with further information." As of September 7, GEM claimed that $5250 had been pledged by 5 public and private companies and 27 individuals" – apparently reflecting pledges during in the days following its September 2 press release. By September 10 the amount pledged had increased to $5500. The Company did not state whether those companies included GEM and its affiliates or whether those individuals included GEM's management team, principal shareholders and employees.
Is this just the case of an obscure company seeking headlines in the wake of overwhelming tragedy and human loss? Or a device to obtain names and telephone numbers from prospective investors? Any contribution to Hurricane Katrina relief is laudable, but considering the absence of details here, and the fact that GEM has no discernible track record as a charitable fund raiser, or as an entertainment company, the Company's shareholders and other thoughtful observers are likely to opt for more recognizable channels of giving.
Perhaps such cynicism is unwarranted. After all, GEM could be a thriving enterprise, a budding giant in the recording industry with a healthy list of liquid assets, substantial operations, an historic revenue stream, and the capacity to finance, fuel, and organize a meaningful relief effort.
Or perhaps not.
Searching for a GEM
The value of GEM's pledge hinges, to a great extent, on the viability of GEM. Unfortunately, information on the Company is sparse. GEM, which is incorporated in Florida and headquartered in Montreal, Canada, trades on the Pink Sheets. It does not file public reports with the Securities and Exchange Commission or provide financial reports to the Pink Sheets. Consequently, its financial condition, revenues and operating status are a mystery.
Grand Entertainment has not always declined to file public reports. The Company filed a Form 10-B Registration Statement in October 2000. That, at least, provides a modicum of information about the business – at least as it existed five years ago. The Form 10-B, disclosed that Grand Enterprises, a private Canadian corporation, became public through a reverse-merger with Future Projects II, a public shell company incorporated in Florida, in November 1998. At the time, the Company described itself as an "independent music producer" whose "copyright library consist of a repertoire of over 5,000 titles, covering the field of music; children's songs, pop, urban, rock and classical titles." The Company stated that its studio also produced voice-over commercials for radio and television.
According to the Form 10-B, GEM's business was conducted by three subsidiaries: HITT Records, a record production company founded by GEM's CEO and President, Fred Berlin in 1987; Mint Music International, which created concepts for "alternatively priced markets;" and Cherry Production Studios, which the Company now says has produced 23 gold and platinum records. GEM anticipated that revenues would flow from two principal sources: the production of recordings, and the establishment of an Internet site that would allow the public to purchase and download music.
It was an ambitious undertaking. The record industry is dominated by a handful of major labels (the "Majors) – familiar names like Sony Music and Warner Music Group. Independent operators occasionally make their mark with a hit record or star performer, but more often struggle to survive. And production studios, while they may participate in the creation of successful music, do not always have an ownership or management interest in the artists or material produced. The Registration Statement did not identify any artists under contract with GEM or its subsidiaries, or any hit recordings controlled by the Company.
Similar obstacles would confront GEM in its efforts to establish an Internet music store. To succeed, it would have to compete with established, well-financed entities, like Apple's iTunes and MSN.com.
Did GEM have the financial capacity to meet these challenges? As of April 20, 2000, the Company did not appear to have any cash. Its current assets consisted of accounts receivable ($187,546), record masters and pre-production costs ($616,821), capital assets ($161,573), and web development costs ($21,890). On the other hand, the Company had outstanding liabilities totaling $244,970, consisting principally of accounts payable, loans, and future tax obligations. GEM had enjoyed modest revenues of $41589 between late February and August 30, 2000. The Company's net earnings during that period were $11,877.
Subsequent filings revealed little encouraging news on the revenue front. During the three month period from May 1 to July 31, 2000, the Company realized revenues of $14,337 and net earnings of $292. The Company's Form 10-Q financial statement for the quarter ended October 31, 2000, reflected similar results; GEM enjoyed revenues of $45,274 during the six month period between May 1 and October 30, 2000, with net earnings of $11,085. As of October 31, 2000 the Company still had no cash.
GEM filed one more Form 10-Q - for the period ended January 31, 2001. As of January 31, 2001, GEM still had no cash assets and accounts receivable now totaled $208,485. Liabilities, which still consisted of accounts payable and loans due (including government loans of approximately $80,000), had risen to $359,489. The Company reported revenues of $135,308, and net earnings of $24,465, for the nine month period from May 1, 2000 through January 31, 2001.
These financial reports – reflecting the Company's condition more than five and one half years ago – provide no meaningful guidance for present day investors, shareholders or analysts. In September 2001, GEM advised the SEC that it was withdrawing its Form 10-SB Registration Statement. Then, on October 18, 2001, the Company filed a Form 15, terminating its obligation to make future public filings. GEM advised the SEC that the Company had "approximately" 298 shareholders of record as of the date the Form 15 was filed. That number is significant – and the accuracy of that approximation crucial - since public companies with fewer than 300 shareholders are entitled to terminate or suspend the filing of public reports.
Since that time, GEM has not filed any public reports – although it recently promised to post "unaudited" financial statements on the Company's web site by mid-September 2005. The Company has, however, filed two Registration Statements relating to private securities offerings, the first in October 2004 and the second, recently, July 2005. The details of those offerings are not available on the SEC's Edgar system.
Building A Beta Website
In the absence of public filings, information about GEM must be culled from the Company's web site and periodic press releases. Neither provides an effective substitute for audited financial statements and independent analyst reports. The Company maintains what it has described as a "temporary website," apparently pending its long-delayed introduction of online music sales. As we noted earlier, that web site currently features a plea for Hurricane Katrina relief funds – but little else to create a clear picture of the Company's condition.
The existing web site describes GEM as an "independent music producer with hundreds of clients and artists worldwide. It states that the Company controls the copyrights to a "vast array" of musical recordings and has a "copyright library" consisting of over 3,000 titles. In short, the Company claims that it is poised to take advantage of the "current climate in the entertainment industry" – distribution of music over the Internet.
But GEM has yet to introduce any online distribution system of its own, although it has been promising to do so since at least October 2000, when it filed its initial Form 10-B. At present, the Company maintains a second "beta" web site that it says will allow users to download music – sometime in the future. For now, however, that plan remains, in GEM's words, "a work in progress."
In the interim, other companies have established a strong presence in the online music industry – a fact that the GEM website does not address. Giant companies like Apple's iTunes, MSN.com and AOL all offer visitors the opportunity to buy music online – as do smaller independent entities like Napster. iTunes boasts over 2 million downloadable songs, while MSN.com and AOL's MusicNet each offer more than one million songs. GEM's 3,000 titles would seem to pale in comparison.
Financial information about each of these entities - Apple, Microsoft and AOL Time Warner – is readily available. That is not the case with GEM, which provides few details of its operations. The Company has promised to provide unaudited financial statements on the web site by mid-September, but that information has yet to appear. How does GEM plan to compete with these giant companies? Have GEM's revenues increased manifold since it stopped providing public reports? Does its library include a lengthy list of hit songs and bankable artists? The Company's web site offers no financial information and little insight into the details of the GEM "catalog" - other than a relatively recent plan to establish a strong presence in the Latin music market.
The GEM web site does characterize seven entities as "affiliates," although it provides no further information about the nature of those affiliations, or how they are likely to benefit the Company. Those affiliates include a video production studio, a dance production house, an audio-visual company, and a company that provides live entertainment. It is not clear how any of these businesses will enhance GEM's business plan or generate revenues.
Periodic press releases have supplied a smattering of additional information about GEM – although no meaningful insight into the Company's financial condition or the likelihood that its revenues will support any meaningful contributions to the Hurricane Katrina relief effort. The earliest press release we were able to locate, dated March 3, 2004, said that the Company had the capability to produce DVD's, and described GEM as "one of the top 20 music production houses in North America." It did not indicate how that "ranking" was determined, whether it was the product of an independent study, or the relative sizes and revenues of those top 20 entities.
The next press release we discovered, dated October 12, 2004, announced a five year distribution agreement between GEM and a company identified as MAGADA Distributors. MAGADA, according to the press release, was an established music distributor which enjoyed a relationship with the Export Development Corporation of Canada. The Company predicted that this contract would yield revenues of approximately $1,650,000 over the next year – although it did not say how the relationship would lead to those numbers or how the money would be divided. GEM also projected that this association would enable it to achieve revenues of "$1,348,500 for the next two quarters."
Does GEM currently have a relationship with MAGADA? Has the Company realized any of the projected revenues? We were unable to find any subsequent press releases that mentioned MAGADA and the GEM web site makes no reference to the relationship. MAGADA is not listed on that web site as one of GEM's "affiliates."
A January 5, 2005 press release offered some insight into GEM's corporate structure. It stated that the Company's founders, CEO Fred Berlin and Peter Stocola, had agreed to retire a total of 620,192,857 shares by January 7, 2005 in exchange for "a 3-year convertible note to both founders in the amount of $384,000." The note was convertible into 38,400 shares. In addition, Berlin and Stocola agreed to change the conversion rate on 150,000 Class A Preferred Shares held by them. The preferred shares now would be convertible into common shares at a rate of three preferred shares for each common share rather than on a one for one basis as originally contemplated.
What does this tell us about the evolving capital structure at GEM? At the time of its last Form 10-Q filing, for the quarter ended January 31, 2001, GEM had 17,683,000 shares of common stock outstanding. There were no shares of preferred stock reported as outstanding. Since then, the Company evidently has issued hundreds of millions of shares of preferred stock (if not billions) as well as the Class A Preferred shares. Who has received those shares – and why? Were some or all of the shares sold through the Company's private placements – and, if so, to whom? How much stock has been issued o the founders and other executives or advisors?
We did discover one recipient of those shares. MacReport.net, which describes itself as "an information and media company that provides a Web-based forum for public and private issuers to communicate corporate audio and video news content to the business, financial and investing community through its Web site," received 24.1 million shares of GEM stock in early 2004 as compensation for promoting the Company.
Hip-Hop Hooray
Other press releases this year have reflected the Company's efforts to establish meaningful relationships that, hopefully, will result in revenues. On March 5, the Company announced that it had signed an agreement with Sygenics Corp. of Montreal to create an online site for the distribution of more than 5,000 titles at 99 cents per track. The Company said that it expected the site to be operating by the summer of 2005. As summer draws to a close, however, a functional site has yet to appear.
The March 5 press release also included several statements by GEM's founder and President, Fred Berlin, who declared that "[w]e believe GEM will see a significant increase in revenues in the current fiscal year with this new sales effort." Unfortunately, investors have no frame of reference for such "growth" since Berlin did not specify the Company's current or historical revenues.
The next press release offered more vague references to projected revenues. On March 9, 2005 GEM announced that it planned to launch a new division which would supply sound equipment for live music events. The Company said that it would pursue a strategic alliance with an existing entity called "Special Events Services" (SES) of Montreal, which is listed on the GEM website as an "affiliate." SES, which sells and rents lighting, sound and audio visual equipment, maintains its own Internet site - which makes no reference to a relationship with GEM.
Although GEM did not explain how it would benefit from the strategic alliance with SES, GEM's other founder, Vice-President, Peter Stocola, proclaimed that "[w]e believe this will become a major new source of revenue in the next fiscal year for GEM."
GEM issued its next series of press releases in August 2005 – shortly after the Company's private sale of securities in July 2005. On August 10, 2005, the Company issued a press release announcing a joint venture and updating shareholders. According to the press release, GEM and an entity called Plein Sud Inc. had "jointly signed" the single "Maria" from Cuban hip-hop artist QBANITO to Universal Music France, a division of Universal Music Group. The Company predicted that the artist and album would "produce several chart topping singles," and expressed hope that Universal Music would exercise its option on QBANITO's entire album. One week later, GEM disclosed that the option had been exercised.
The Company did not state how revenues from the project would be shared.
The August 10 press release stated that the Company's "long awaited GEM Music website will launch officially this afternoon," and would "eventually" produce several revenue streams. As we noted earlier, those revenue sources have yet to materialize.
The press release also promised that GEM would post unaudited financial statements on its website by mid-September 2005, in an "effort to become a very transparent public company." That financial information would provide considerably greater insight into the Company's current condition, its ability to develop its business, and, of course, the significance of its commitment to Hurricane Katrina's victims. GEM also promised to begin sending a weekly newsletter to shareholders.
GEM seems to be focusing on development of its GEM-Latina division. On August 25, 2005, the Company issued a press release announcing that it had acquired "100% administrative rights" to the music catalog of Mango Music World. According to GEM, Mango Music is a Canadian-based company that holds publishing and distribution rights to an array of Cuban and Latin American artists. GEM did not describe the "administrative rights" being acquired, or explain how they would translate into revenues.
Regrets, We've Had A Few
The August 25 press release also noted that the Company intended to release a letter to shareholders on its web site on Tuesday, August 30, explaining upcoming officer and director appointments the current status of all projects, and future overall growth plans. That letter, from CEO Fred Berlin, provides, in broad strokes, a summary of the Company's past problems and current programs, but no details of its financial condition. In short, the letter explains that:
• Going public was arduous, time-consuming and costly – and caused the Company to become involved with "an array of dishonest individuals." GEM did not identify those individuals, or provide meaningful details of its travails, but it conceded that going public had been "more of an obstacle than a blessing."
• The Company barely survived from 2000 to 2004, downsized during that period, and jettisoned one unidentified partner and his division.
• In 2004 the Company increased its outstanding shares "significantly" and diluted public investors in order to build its Latin American division. The Company did not say how many shares were issued, but conceded that it had been a "costly mistake."
• The Company has high expectations for Latin hip-hop artist, QBANITO, and his music. (On August 23, 2005, in a separate press release, the Company announced the appointment of Raul J. Cuza as head of its Gem-Latina division.)
• The Company has great expectations for QBANITO's act, Convoy Cubano. GEM expected to release a Convoy Cubano album earlier this year, but delayed that project to focus on QBANITO's solo recording.
• GEM, which has half a dozen albums in production or post-production, expected to release a dozen albums in 2005 but has shelved "some" of these projects until a later date.
• GEM will receive a "rolling percentage of sales" from the Universal Music Agreement and projects that its revenues will average $3 to $4 per sale. The Universal Music agreement only applies to the French market, leaving GEM with 100% ownership of other potential revenue streams. The Company anticipates that it will receive "millions" in revenue from this one project.
• The Company expects to benefit from its agreement with Mango Music, which distributes music by a list of Latin American artists.
• The Company continues to work on development of a web site that will enable it to achieve revenues by selling music.
• GEM plans to add to its Board of Directors of Board of Advisors, an unidentified individual who has knowledge of the microcap markets.
On September 1, the Company issued a press release incorporating highlights of Berlin's letter. And while the Company anticipates considerable revenues from its latest projects – and, in particular QBANITO - the success of those artists and appeal of their albums remains to be tested. Projected revenue figures appear to rely considerably on the market for Cuban hip-hop music in France. With a handful of artists and few albums scheduled for release, GEM could be hinging its future on a slender thread.
Perhaps the Company's potential will come into clearer focus once those financial statements are posted online – and once the viability of the QBANITO project is demonstrated. Until then, observers can only wonder whether GEM ever will be able to recover from the ill effects of becoming public, or if there will be any revenues to contribute to the Hurricane Katrina Relief effort.
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