As filed with the Securities and Exchange Commission on July 23, 1997
Registration No. 333-5098
SECURITIES AND EXCHANGE COMMISSION
Washington DC 20549
POST EFFECTIVE AMENDMENT NO. 1
TO FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
HOLLYWOOD PRODUCTIONS, INC.
(Exact name of Small Business Issuer as specified in its Charter)
Delaware 5130 13-3871821
(State or Jurisdiction (Primary standard Industrial I.R.S. Employer
of Incorporation) Classification Code) Identification No.
14 East 60th Street, Suite 402
New York, New York 10022
(212) 466-6794
(Address and telephone number of principal offices)
Harold Rashbaum, Chief Executive Officer
14 East 60th Street, Suite 402
New York, New York 10022
(212) 466-6794
(Name, address and telephone number of agent for service)
Copies To:
David S. Klarman, Esq
Klarman & Associates
2694 Bishop Drive
San Ramon, CA 94583
(510) 830-8801
(510) 830-8821 (Fax)
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the Securities
Act registration number of the earlier effective registration statement for the
same offering. [X]
If delivery of a prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
Cross Reference Sheet Pursuant to Rule 404 (a)
Showing the Location In Prospectus of
Information Required by Items of Form SB-2
<TABLE>
<CAPTION>
Item in Form SB-2 Prospectus Caption
<S> <C>
1. Front of Registration
Statement and Outside Front
Cover Page of Prospectus Cover Page and Cover Page of Registration Statement
2. Inside Front and Outside
Back Cover Pages of
Prospectus Continued Cover Page, Table of Contents
3. Summary Information and
Risk Factors Prospectus Summary, Risk Factors, Summary
Financial Information
4. Use of Proceeds Use of Proceeds
5. Determination of Offering
Price Not Applicable
6. Dilution Risk Factors
7. Selling Securityholders Principal Securityholders
8. Plan of Distribution Cover Page, Plan of Distribution
9. Legal Proceedings Business
10. Directors, Executive Officers,
Promoters and Certain Control
Persons Management
11. Security Ownership of
Certain Beneficial Owners Principal Securityholders
and Management
12. Description of Securities Description of Securities
-ii-
<PAGE>
13. Interest of Named Experts
and Counsel Legal Opinions, Experts
14. Disclosure of Commission Position Management and Item 24. Indemnification
on Securities Act Liabilities Officers and Directors
15. Organization Within Five Years Prospectus Summary, Business, Principal
Securityholders, Certain Relationships and Related
Transactions, Risk Factors
16. Description of Business Business
17. Management's Discussion
and Analysis or Plan of Operation Management's Discussion and Analysis of Financial
Condition and Results of Operations
18. Description of Property Business
19. Certain Relationships and Related
Transactions Certain Relationships and Related Transactions
20. Market for Common Equity Not Applicable
and Related Stockholder
Matters
21. Executive Compensation Management
22. Financial Statements Financial Statements
23. Changes in and Disagreements Not Applicable
with Accountants and Financial
Disclosure
</TABLE>
-iii-
<PAGE>
Preliminary prospectus subject to completion, dated July , 1997
PROSPECTUS
HOLLYWOOD PRODUCTIONS, INC.
4,451,000 shares of Common Stock and
1,154,000 Redeemable Common Stock Warrants
The Company consummated a public offering of 800,000 shares (the
"Shares") of common stock, par value $.001 per share (the "Common Stock"), of
Hollywood Productions, Inc. (the "Company") and 1,600,000 redeemable Common
Stock purchase warrants (the "Warrants") in September 1996. Of the securities
offered hereby, 3,600,000 shares of common stock, par value $.01 per share are
deliverable by the Company from time to time upon the exercise of the Warrants.
In addition the Selling Securityholder is offering 851,000 shares of Common
Stock and 1,154,000 Warrants, which may be sold from time to time by the Selling
Securityholder. Initially the Selling Securityholder registered the resale of
1,400,000 shares of Common Stock and 2,000,000 Warrants, of which it sold
549,000 shares and 846,000 Warrants. The Company will not receive any of the
proceeds from the sale of any securities sold by the Selling Securityholder.
Each Warrant entitles the holder thereof to purchase one share of
Common Stock at a price of $3.00 for a period of four years commencing one year
from the date hereof, until September 9, 2001. On June 23, 1997, the board of
directors of the Company voted to decrease the exercise price of the Warrants
from $6.50 to $3.00. See "Description of Securities - Warrants." The Warrants
are redeemable by the Company at any time commencing one year from the date
hereof upon 30 days' prior notice at a redemption price of $.05 each, provided
that the closing bid quotation of the Common Stock for at least 20 consecutive
trading days ending on the third day prior to the date on which the Company
gives notice has been at least 170% of the exercise price of the Warrants being
redeemed. The Warrants will remain exercisable during the 30 day notice period
The Company's securities are quoted on the Nasdaq SmallCap Stock Market
("Nasdaq") under the symbols "FILM" and "FILMW", for the Shares and Warrants,
respectively. Quotation on Nasdaq does not imply that a meaningful sustained
market for the Company's Securities has or will develop or if developed, that it
will be sustained for any period of time. In the absence of a listing on Nasdaq,
the Company's Securities will be available for trading in the over-the-counter
market on the OTC Bulletin Board. See "Risk Factors."
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND
IMMEDIATE SUBSTANTIAL DILUTION TO INVESTORS.
SEE "RISK FACTORS" AND "DILUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is _______________, 1997
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 under the Securities Act,
with respect to the shares of Common Stock and Warrants to which this Prospectus
relates. As permitted by the rules and regulations of the Commission, this
Prospectus does not contain all of the information set forth in the Registration
Statement. For further information with respect to the Company and the
Securities offered hereby, reference is made to the Registration Statement,
including the exhibits thereto, which may be copied and inspected at the Public
Reference Section of the Commission at its principal office at 450 Fifth Street,
N.W., Washington, D.C., 20549.
The Company's fiscal year end is December 31. The Company is subject to
the informational reporting requirements of the Exchange Act, and in accordance
therewith, files periodic reports, proxy statements and other information with
the Commission. In the event the Company's obligation to file such periodic
reports, proxy statements and other information is suspended, the Company will
voluntarily continue to file such information with the Commission. The Company
will distribute to its stockholders annual reports containing audited financial
statements, together with an opinion by its auditing accountants. In addition,
the Company may, in its discretion, furnish quarterly reports to stockholders
containing unaudited financial information for the first three quarters of each
year.
<PAGE>
PROSPECTUS SUMMARY
The following summary is intended to set forth certain pertinent facts and
highlights from material contained in the body of this Prospectus. The summary
is qualified in its entirety by the detailed information and financial
statements appearing elsewhere in this Prospectus. Unless otherwise indicated,
the information in this Prospectus gives effect to the 50,000-for-1 forward
stock split in June 1996.
Hollywood Productions, Inc. (the "Company") is a Delaware Corporation which
was organized in December, 1995. The Company was formed for (i) the purpose of
acquiring screen plays and producing independent motion pictures with budgets
ranging between $1,000,000 to $3,000,000, using named talent and (ii) to acquire
Breaking Waves, Inc., a New York corporation ("Breaking Waves"). The Company
consummated a public offering of its securities in September 1996 at which time
it sold 800,000 shares of Common Stock and 1,600,000 Warrants. Unless the
context otherwise requires, all references to the "Company" include its wholly
owned subsidiaries, Breaking Waves and DL Production, Inc.
DL Production was formed by the Company in April 1996 to finance, produce
and distribute a motion picture based on the "Dirty Laundry" screen play. In
March 1995, the Company entered into a property acquisition agreement and a
co-production agreement with Rogue Features, Inc., an unaffiliated entity, to
acquire the rights to and co-produce a motion picture (the "Motion Picture") of
the Dirty Laundry screenplay. Pursuant to the terms of the purchase agreement
and production agreement, the Company provided all but $100,000 of the financing
for the production of the Motion Picture. The Company completed the filming of
the Motion Picture in June, 1996 and completed the editing in December, 1996.
The Company is presently seeking to obtain distribution for the Motion Picture
and has entered into an agreement with Trident Licensing Inc., with respect to
its distribution abroad.
In June 1997 the Company entered into an option agreement to purchase the
screenplay "Cyclone" written by Frank Tumminia. Cyclone is a stylized mystery
involving the Russian crime syndicate and the theft and sale of human organs,
set in Brooklyn and Long Island. The Company has engaged John Andrew Gallagher
to collaborate with Mr. Tumminia on a re-write of the screenplay. In addition,
the Company has contacted film director Armand Mastroianni who has orally agreed
to direct Cyclone, subject to his availability, and to seek named talent for the
film.
Simultaneously with the closing of the Company's initial public offering in
September 1996 the Company acquired Breaking Waves. Breaking Waves designs,
manufactures and distributes a line of private label, including "Breaking
Waves," "All Waves," "Making Waves," "Small Waves" and "Huk-A-Poo" and a line of
a brand name label called "Daffy Waterwear", girls swimwear and accessory items.
The Daffy Waterwear label is used pursuant to a licensing agreement between the
Company and Beach Patrol, Inc. The Company sells its swimwear and accessory
items through its showroom sales staff and through independent sales
representatives. The Company's customers include the Dillard and Federated
department store groups as well as Kids R Us, Sears, Wal-Mart, T.J. Maxx and
Marshalls.
The Company's executive offices are located at 14 East 60th Street, Suite
402, New York, New York 10022. Breaking Waves has a showroom is located at 112
West 34th Street, New York, New York 10016 and leases an office at 8410 N.W.
53rd Terrace, Miami, Florida 33166. The Company's telephone number at its
principal office is (212) 688-9223.
<PAGE>
The Offering (1)
Securities Offered (2): 851,000 shares of Common Stock and
1,154,000 Warrants being
offered by the Selling
Securityholder. Upon the
exercise of the Warrants
the Company will issue up
to an aggregate of
3,600,000 shares of Common
Stock.
Common Stock and Warrants
Outstanding (1):
Prior to the Exercise
of the Warrants:
Common Stock ........... 6,092,500
Warrants (2)................ 3,600,000
After the Exercise of
the Warrants:
Common Stock .......... 9,692,500
Use Of Proceeds ......... The Company will not receive any of
the proceeds from the sale of any of
the shares or Warrants by the Selling
Securityholder. The net proceeds
from the exercise of any Warrants
will be used by the Company for working
capital. All the expenses of this Offering
will be paid by the Company. See "Use of
Proceeds."
Terms of the Warrants Each Warrant entitles the holder
thereof to purchase
one share of Common Stock at $3.00
for a period of
four years, commencing one year from the date
hereof, until 09/09/01. The Warrants are redeemable
by the Company at any time commencing 09/09/97,
upon 30 days prior notice at a price of $.05 per
Warrant, provided that the closing bid quotation of
the Common Stock for at least 20 consecutive
trading days ending on the third day prior to the day
on which the Company gives notice has been at least
170% of the then effective exercise price of the
Warrants. The Warrants will remain exercisable
during the 30 day notice period. Any holder who
<PAGE>
does not exercise his
Warrants prior to their
expiration or redemption,
as the case may be, will
forfeit his right to
exercise his Warrants.
Risk Factors An investment in the Securities offered hereby is
highly speculative and involves immediate
substantial dilution. The statements contained in this
Prospectus which are not historical facts contain
forward looking information with respect to plans,
projections or future performances of the Company,
the occurrences of which involve certain risks and
uncertainties as detailed herein. See "Risk Factors"
and "Dilution."
NASDAQ Symbol(3) Common Stock..................FILM
Warrants.....................FILMW
(1) Unless otherwise indicated, no effect is given in this Prospectus to
the issuance of (i) 3,600,000 shares of Common Stock reserved for issuance upon
the exercise of the Warrants and (ii) 250,000 shares of Common Stock reserved
for issuance under the Company's 1996 Senior Management Incentive Plan, except
for 75,000 shares which have been issued, subject to certain vesting schedules
and 150,000 shares are reserved for issuance pursuant to options granted. See
"Management - Senior Management Incentive Plan."
(2) Includes 1,600,000 Warrants sold by the Company in its initial public
offering and 2,000,000 Warrants owned by the Selling Securityholder of which
854,000 have been sold and the remaining 1,154,000 are being offered herein. See
"Principal and Selling Securityholders" -- "Plan of Distribution."
(3) The Company securities are listed on the Nasdaq SmallCap Stock Market
("NASDAQ"). Quotation on NASDAQ does not imply that a meaningful, sustained
market for the Shares or Warrants has or will develop. In addition, continued
inclusion in NASDAQ is subject to certain maintenance criteria. The failure to
meet these maintenance criteria in the future may result in the discontinuance
of the listing of the Company's Shares and Warrants on NASDAQ, which may have an
adverse effect on the market for the Company's Securities. See "Risk Factors."
<PAGE>
Summary Financial Data:
The Company was incorporated on December 1, 1995 in the State of Delaware.
The Company's fiscal year end is December 31. The Company was formed for the
purpose of acquiring screen plays and producing motion pictures. During
September 1996, simultaneously with the completion of its initial public
offering ("IPO") the Company acquired the capital stock of Breaking Waves. The
Company's Financial Statements as of December 31, 1996 and for the year then
ended and as of December 31, 1995 and from December 1, 1995 (date of inception)
to December 31, 1995 have been audited in each case by Scarano & Lipton, P.C.,
Independent Certified Public Accountants. In July 1997 Scarano & Tomaro, P.C.
was formed and is considered a successor firm for auditing. All of the Summary
Financial Data should be read in conjunction with the detailed historical
financial statements and notes thereto included elsewhere in this Prospectus.
Summary Balance Sheet Data:
<TABLE>
<CAPTION>
March 31 December 31 December 31
1997 1996 1995
<S> <C> <C> <C>
Total assets ..................................................... $ 6,078,694 $ 7,643,082 $1,100,000
Total current assets ............................................. 4,867,198 6,276,697 __
Total current liabilities ........................................ 316,182 1,647,256 __
Working Capital .................................................. 4,551,016 4,629,441 __
Redeemable preferred stock ....................................... 280,000 560,000 __
Retained earnings (Deficit) ...................................... (94,603) (221,982) __
Stockholders equity .............................................. 5,500,705 5,435,826 1,100,000
Summary Operations Data:
From 12/01/95
Three Months Year Ended (Date of Inception)
Ended 3/31/97 12/31/96 (1) to 12/31/95
Total revenues ................................................... $ 2,441,081 $ 1,217,152 $ __
Cost of sales .................................................... 1,465,799 667,722 __
Operating expenses ............................................... 688,681 675,416 __
Interest expenses/Loan Acquisition ............................... 122,999 85,099
Income (loss) before taxes ....................................... 197,206 (172,699) __
Income tax ....................................................... 67,827 49,283 __
Net income (loss) ................................................ 127,379 (221,982) __
Earnings (loss) per share ........................................ .02 (.04) __
</TABLE>
(1) Includes the operation of Breaking Waves for the period from 9/24/96 (Date
of Acquisition) to 12/31/96.
<PAGE>
RISK FACTORS
The Securities offered hereby are speculative and involve a high degree
of risk. In addition to the other information contained in this Prospectus, the
following factors regarding "Risks Associated with the Motion Picture Industry,"
"Risks Associated with the Company's Swimwear Business" and "Risk Related to the
Offering" should be carefully considered before purchasing the Securities
offered by this Prospectus. The purchase of Securities should not be considered
by anyone who cannot afford the risk of loss of his entire investment. The
statements contained in this Prospectus which are not historical facts contain
forward looking information with respect to plans, projections or future
performances of the Company, the occurrences of which involve certain risks and
uncertainties as detailed herein.
Risks Associated with the Motion Picture Industry
1. No Significant Operating History; Limited Experience of Management.
Prior to the acquisition and production of the Motion Picture Dirty Laundry and
the acquisition of Breaking Waves the Company, had limited operations,
consisting primarily of its formation and the consummation of its initial public
offering. The Company's officers had limited experience, prior to the production
of the Motion Picture of assessing the potential of a screenplay, producing a
motion picture, or in distributing and marketing a motion picture. The lack of
experience of management may adversely affect the operations of the Company and
ultimately, the value of an investment in the Company. In addition, the
likelihood of success of the Company must be considered in light of the
problems, expenses, difficulties, complications and delays frequently
encountered in connection with a business with a limited operating history and
the competitive environment in which the Company operates. Further, there can be
no assurances that the Company's management will be able to successfully
implement its business plan or that unanticipated result in increased costs,
material delays in its implementation or ability to implement such plan. See
"Management."
2. No Guarantee of Return of Initial Investment; No Assurances of the
Receipt of Revenues; Need for Additional Capital. The Purchase Agreement and
Production Agreement provide that the Company and the co-producer shall have the
right to recover 100% of their investment with respect to the production costs
of the Motion Picture from revenues, if any, from the release, distribution and
exploitation of the film, after the payment of $50,000 to each of Jay Thomas and
Tess Harper pursuant to their participation agreements. Additional proceeds
received shall be distributed pursuant to the terms of the agreements.
The production release of a motion picture is subject to numerous
uncertainties, and there can be no assurance that the Company's strategy will be
successful, that its release schedule will be met or that it will achieve its
financial goals. There can be no assurance that any revenues will be realized
from the distribution of the Motion Picture, or any motion picture produced by
the Company, therefore, there can be no assurances that an investment in the
production of a motion picture will be repaid. Even in the event revenues are
generated from the distribution of a film, there can be no assurances that the
Company will receive any of such revenues, due to revenue sharing rights of
artists and creative personnel in additional to arrangements with other
investors. In addition, in the event that the Company receives revenues from the
distribution of a film, there can be no assurances that such revenues will be
sufficient to return to the Company the full
<PAGE>
amount of its investment in the Motion Picture or that future motion pictures
acquired, produced and released by the Company will earn sufficient revenues to
repay any investment or cost incurred in their production. Though aggregate
revenues in the film industry from all markets are substantial, the costs of
producing films are also substantial. The combination of these and other factors
has caused a large portion of films produced to be unprofitable. See "Business -
Division of Dirty Laundry Revenues."
The Company estimates that between 36 and 52 weeks will elapse between
the commencement of expenditures by the Company in the acquisition of a
screenplay, the production of a motion picture and the release of such film.
Additionally, it is anticipated that no revenues will be received from the
exploitation of such film for an additional period of between 16 weeks and 36
weeks thereafter, if at all. Therefore, the Company may not have the capital
needed, at times, for production or distribution costs of additional films due
to the delay in the receipt of revenues from its prior investments. See
"Business - Production of Motion Picture."
3. High Costs of Motion Picture Production; Likelihood of going over
Budget. The Company anticipates that the motion pictures it produces will cost
between $1,000,000 and $3,000,000, depending on the film. The likelihood of the
success of each film and the Company's ability to stay on budget and on schedule
for each film must be considered in light of the problems, expenses,
difficulties, complications and delays frequently encountered in connection with
the production of a motion picture. Currently, the Motion Picture is
approximately $250,000 over budget and an additional $300,000 has been used for
the costs of distribution. Due to unforeseen problems and delays including;
illness, weather, technical difficulty and human error, most films go over
budget. In addition, the lack of experience of management in this industry, the
limited operating history and capital of the Company, and the competitive
environment in which the Company operates, may cause increased expenses due to
mistakes and delays in the production of the films. See "-- No Significant
Operating History; Limited Experience of Management."
4. Inability to Obtain Distribution of the Films; Consumer Preferences.
The success of a film in theatrical distribution, television, home video and
other ancillary markets is dependent upon public taste which is unpredictable
and susceptible to change. The theatrical success of a film may also be
significantly affected by the number and popularity of other films then being
distributed. Accordingly, it is impossible for anyone to predict accurately the
success of any film at the time it enters production. The production of a motion
picture requires the expenditure of funds based largely on a pre-production
evaluation of the commercial potential of the proposed project.
There is intense competition within the film industry for exhibition
time at theaters, as well as for distribution in other media, and for the
attention of the movie-going public and other viewing audiences. Competition for
distribution in other media is as intense as the competition for theatrical
distribution and not all films are licensed in other media. There are numerous
production companies and numerous motion pictures produced, all of which are
seeking full distribution and exploitation. Despite the large number of films
produced, only a small number of films receive widespread consumer acceptance,
and thereby account for a large percentage of total box office receipts. See
"Business - Competition in Film Industry."
<PAGE>
5. Labor disputes in Film Industry. Most screenwriters, performers,
directors and technical personnel who will be involved in the films are members
of guilds or unions which bargain collectively with producers on an
industry-wide basis from time to time. Any work stoppages or other labor
difficulties could delay the production of the films, resulting in increased
production costs and delayed return of investments. See "Business - Employees."
6. Competition in Film Industry. The Company will be in competition
with other which produce, distribute and exploit and finance films, some of
which have substantial financial and personnel resources, which are greater and
more extensive than the Company's. These companies include the major film
studios, including Disney, Universal, MGM, and Sony as well as the television
networks. There is substantial competition in the industry for a limited number
of producers, directors, actors and properties which are able to attract major
distribution in all media and all markets throughout the world. See "Business -
Competition in Film Industry."
Risks Associated with the Company's Swimwear Business
7. Cyclical Apparel Industry; Dependence on Single Product Line. The
apparel industry is a cyclical industry, with consumer purchases of swimwear and
accessory items and related goods tending to decline during recessionary periods
when disposable income is low. Accordingly, a prolonged recession would in all
likelihood have an adverse effect on the operations of the Company. Some of the
Company's customers, including large retail department store chains, have
recently experienced financial difficulties and some have filed for protection
under Chapter XI of the federal bankruptcy laws. The Company is unable to
predict what effect, if any, the financial difficulties encountered by such
retailers and other customers will have on the Company's future business.
Additionally, the Company operates in only one segment of the apparel industry,
specifically girls swimwear and is therefore dependent on the demand for such
goods. Decreases in the demand for swimwear products would have a material
adverse affect on the Company's business. See- Marketing and Sales."
8. Uncertain Fashion Trends; Inability to Keep Pace with Consumer's
Changing Preferences. The Company believes that its success depends in
substantial part on its ability to anticipate, gauge and respond to changing
consumer demands and fashion trends in a timely manner. The Company designs its
swimwear lines during the months from January to March each year for delivery of
products between November and May of the following year. The Company is
anticipating in advance consumer preferences for the following year. There can
be no assurance, however, that the Company will be successful in this regard. If
the Company misjudges the market for any of its products, it may be faced with
unsold finished goods, inventory and work in process, which could have an
adverse effect on the Company's operations.
See "Business - Products and Design."
9. Dependence on Suppliers. The swimwear designs are sent to a
manufacturer in Korea, which Company provides the knitting and printing for
approximately 65% of the fabrics ordered by the Company. Previously during
fiscal 1996 and 1995 this company provided approximately 95% knitting and
printing. Once the fabrics are produced, they are shipped to a company in
Indonesia which company sews the garments into finished products. This company
provides approximately 65% of the Company's sewing needs. Previously during
fiscal 1996 and 1995 this company provided approximately 95% knitting and
printing. Although the management of Breaking Waves is of the opinion that there
are numerous manufacturers of fabrics and
<PAGE>
companies which provide sewing on similar terms and prices, there can be no
assurances that management is correct in such belief. The unavailability of
fabrics or the sewing thereof at current price levels could adversely affect the
operations of the Company. See "Business - Manufacturing and Suppliers."
10. Risks Associated with Concentration of Customers. For the years
ended December 31, 1996 and 1995 the Company had one customer, Dillards
Department Stores, which accounted for approximately 16% and 20%, respectively,
of total revenues. For the three months ended March 31, 1997, the Company had
two customers, Dillards Department Stores and WalMart Department Stores which
accounted for 14% and 23%, respectively, of revenues. The loss of either
customer or any group of customers could have a material adverse affect on the
Company's results of operations. See "Business - Marketing and Sales".
11. Seasonality. The Company believes that its business may be
considered seasonal with a large portion of its revenues and profits being
derived between December and June for shipments being made between November and
May. Each year from June to November the Company engages in the process of
designing and manufacturing the following seasons swimwear lines, during which
time the Company incurs the majority of its expenses, with limited revenues.
There can be no assurances that revenues received during December to June will
support the Company's operations for the rest of the year. See "Business -
Seasonality."
12. Competition. The Company's business is highly competitive, with
relatively insignificant barriers to entry and with numerous firms competing for
the same customers. The Company is in direct competition with local, regional,
national and international swimwear manufacturers, many of which have greater
resources and more extensive distribution and marketing capabilities than the
Company. Competitive factors include quality, price, style, design, creativity,
originality and service at the wholesale level. In addition, many large
retailers have recently commenced sales of "store brand" products which compete
with those sold by the Company. Management believes that the Company's market
share is insignificant in the markets in which it sells. See "Business -
Competition."
13. Protection of Intellectual Property. The Company relies on common
law trademarks for use of its private label swimwear lines. In addition, the
Company has entered into a licensing agreement with Beach Patrol, Inc., to use
the trademark "Daffys Waterwear." In the event the Company or Beach Patrol,
Inc., breaches the licensing agreement and the Company is unable to continue to
use the Daffy's label, the loss thereof may adversely affect the Company's
operations. The Company has also filed to register additional trademarks in the
United States, which applications are currently pending. There can be no
assurance that such additional trademarks will be registered or if registered,
that such marks, as well as the Company's registered mark or marks licensed by
the Company will be adequately protect against infringement. In addition, there
can be no assurance that the Company will not be found to be infringing on
another company's trademark. In the event the Company finds another party
infringing upon its trademark, if registered, or is found by another company to
be infringing upon such company's trademark, there can be no assurances that the
Company will have the financial means to litigate such matters. See "Business -
Trademarks."
<PAGE>
Risks Relating to the Offering
14. Non-U.S. Residence of Principal Stockholder May Result in Special
Risks. Ilan Arbel, is the sole officer and director of European Ventures Corp.
("EVC"), a British Virgin Island corporation, the Selling Securityholder and
majority stockholder of the Company. Substantially all of the assets of EVC are
or may be located outside of the United States. As a result, it may be difficult
for investors to effect service of process within the United States upon any of
such persons or affiliates, or to enforce against any of them any judgments that
may be obtained in the United States courts predicated upon the civil liability
provisions of the Act, or the Exchange Act. In addition, there can be no
assurance that foreign courts would enforce such judgments, either predicated
upon the civil liability provisions of the federal securities laws or otherwise.
15. Indemnification of Officers and Directors. As permitted under the
Delaware General Corporation Law, the Company's Certificate of Incorporation
provides for the indemnification and elimination of the personal liability of
the directors to the Company or any of its shareholders for damages for breaches
of their fiduciary duty as directors. As a result of the inclusion of such
provision, shareholders may be unable to recover damages against directors for
actions taken by them which constitute negligence or gross negligence or that
are in violation of their fiduciary duties. The inclusion of this provision in
the Company's Certificate of Incorporation may reduce the likelihood of
derivative litigation against directors and other types of shareholder
litigation. See "Management."
16. Limited Public Market for Securities. At present there is a limited
public market for the Company's Securities. There is no assurance that a regular
trading market will develop, or if one does develop, that it will be sustained
for any period of time. Therefore, purchasers of the Company's securities may be
unable to resell such securities at or near their original offering price or at
any price. Furthermore, it is unlikely that a lending institution will accept
the Company's securities as pledged collateral for loans even if a regular
trading market develops. The underwriter of the Company's public offering, was a
dominant influence in the market for the Company's securities until February
1997. In February 1997, Euro-Atlantic's clearing firm WS Clearing Corp., ceased
operations, which froze all the accounts of Euro-Atlantic including its client's
accounts and firm trading account. Euro-Atlantic ceased operations immediately
thereafter. The market for the Company's securities have been significantly
affected and may continue to be affected by the loss of Euro-Atlantic's
participation in the market. The loss of Euro-Atlantic's market making
activities of the Company's securities has decreased significantly the liquidity
of an investment in such securities. Since the ceasing of operations by the
Underwriter, the Company considers the Underwriting Agreement and Underwriter's
Warrant Agreement terminated.
17. No Dividends and None Anticipated. The Company has not paid any
dividends nor, because of its present financial status and its contemplated
financial requirements, does it contemplate or anticipate paying any dividends
upon its Common Stock in the foreseeable future.
See "Dividend Policy."
18. Liquidation Preference; Restriction on Breaking Waves Paying of
Dividends. Pursuant to the terms of the Breaking Waves Series A Preferred Stock,
the holders of such shares have a liquidation right and the right to have such
shares redeemed by Breaking Waves. The
<PAGE>
shares of the Series A Preferred Stock have the right to redemption on January
1, 1998. On January 1, 1997 one half of the outstanding shares of the Series A
Preferred Stock were redeemed at a redemption price of $100.00 per share. The
Series A Preferred Stock shall have no dividend, conversion or voting rights,
but shall have a preference on liquidation equal to $100 per share. The shares
of Series A Preferred Stock were issued to the prior stockholders of Breaking
Waves upon the consummation of the acquisition thereof. The shares of the Series
A Preferred Stock do not affect the Company's right to own or operate Breaking
Waves, except, that Breaking Waves will not be able to issue any dividend until
all the shares of the Series A Preferred Stock are redeemed. See "Business -
Acquisition of Breaking Waves, Inc."
19. Shares Available for Resale. A total of 6,092,500 shares of Common
Stock have been issued by the Company of which 4,693,500 shares may be deemed
"restricted securities" (as such term is defined in Rule 144 issued under the
Act) and, in the future, may be publicly sold only if registered under the Act
or pursuant to an exemption from registration. Any such sales under Rule 144
would, in all likelihood, have a depressive effect on the market price for the
Company's Common Stock and Warrants. See "Shares Eligible for Future Sale."
20. Possible Future Dilution. The Company has authorized capital stock
of 20,000,000 shares of Common Stock, par value $.001 per share. Inasmuch as the
Company may use authorized but unissued shares of Common Stock without
stockholder approval in order to acquire businesses, to obtain additional
financing or for other corporate purposes, there may be further dilution of the
stockholders' interests.
21. Restrictions on Exercise of Warrants; Necessity for Updating
Registration Statement. The Warrants offered hereby are not exercisable unless,
at the time of the exercise, the Company has a current prospectus covering the
shares of Common Stock issuable upon exercise of the Warrants and such shares
have been registered, qualified or deemed to be exempt under the securities laws
of the state of residence of the exercising holder of the Warrants. The Company
is filing this post-effective amendment and must have same declared effective
before the Warrants may be exercised. The Company has undertaken to use its best
efforts to have all of the shares of Common Stock issuable upon exercise of the
Warrants registered or qualified on or before the exercise date and to maintain
a current prospectus relating thereto until the expiration of the Warrants,
there is no assurance that it will be able to do so. The Company will notify all
Warrantholders and its transfer agent that the Warrants may not be exercised in
the event there is no current.
Although the Warrants will not knowingly be sold to purchasers in
jurisdictions in which the Warrants are not registered or otherwise qualified
for sale, purchasers may buy Warrants in the after-market or may move to
jurisdictions in which the shares underlying the Warrants are not so registered
or qualified during the period that the Warrants are exercisable. In this event,
the Company would be unable to issue shares to those persons desiring to
exercise their Warrants unless and until the shares could be qualified for sale
in the jurisdictions in which such purchasers reside, or an exemption from such
qualification exists in such jurisdictions, and Warrantholders would have no
choice but to attempt to sell the Warrants in a jurisdiction where such sale is
permissible or allow them to expire unexercised. See "Description of Securities
- - Warrants."
22. Possible delisting of Securities from NASDAQ System; Risks of Low
Priced Stocks. In order to continue to be listed on Nasdaq, the Company is
required to maintain (i) total
<PAGE>
assets of at least $2,000,000, (ii) total stockholders' equity of $1,000,000,
(iii) a minimum bid price of $1.00, (iv) one market maker, (v) 300 stockholders,
(vi) at least 100,000 shares in the public float and (vii) a minimum market
value for the public float of $200,000. In the event the Company's Securities
are delisted from Nasdaq, trading, if any, in the Securities would thereafter be
conducted in the over-the-counter market on the OTC Bulletin Board.
Consequently, an investor may find it more difficult to dispose of, or to obtain
accurate quotations as to the price of the Company's Securities. The Company has
applied for a listing on Nasdaq of the Securities being offered hereby.
Quotation on Nasdaq does not imply that a meaningful, sustained market for the
Company's Securities will develop or if developed, that it will be sustained for
any period of time.
23. Penny Stock Regulation. Broker-dealer practices in connection with
transactions in "penny stocks" are regulated by certain penny stock rules
adopted by the Securities and Exchange Commission. Penny stocks generally are
equity securities with a price of less than $5.00 (other than securities
registered on certain national securities exchanges or quoted on Nasdaq provided
that current price and volume information with respect to transactions in such
securities is provided by the exchange or system). The penny stock rules require
a broker-dealer, prior to a transaction in a penny stock not otherwise exempt
from the rules, to deliver a standardized risk disclosure document that provides
information about penny stocks and the risks in the penny stock market. The
broker-dealer also must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in connection with the transaction, and monthly account statements
showing the market value of each penny stock held in the customer's account. In
addition, the penny stock rules generally require that prior to a transaction in
a penny stock, the broker-dealer must make a special written determination that
the penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction. These disclosure requirements
may have the effect of reducing the level of trading activity in the secondary
market for a stock that becomes subject to the penny stock rules. If the
Company's securities become subject to the penny stock rules, investors in this
Offering may find it more difficult to sell their securities.
24. Potential Adverse Effect of Redemption of Warrants. The Warrants
may be redeemed by the Company at any time during the period they are
exercisable upon notice of not less than 30 days, at a price of $.05 per
Warrant, provided the closing bid quotation of the Common Stock for at least 20
consecutive trading days ending on the third day prior to the day on which the
Company gives notice has been at least 170% of the then effective exercise price
of the Warrants. Redemption of the Warrants could cause the holders to exercise
the Warrants and pay the exercise price at a time when it may be disadvantageous
for the holders to do so, to sell the Warrants at the then current market price
when they might otherwise wish to continue to hold the Warrants, or to accept
the redemption price, which is likely to be substantially less than the market
value of the Warrants at the time of redemption. The Company will not redeem the
Warrants at any time in which its registration statement is not current, so that
investors will be able to exercise their Warrants during the 30-day notice
period in the event of a Warrant redemption by the Company. See "Description of
Securities - Warrants."
DIVIDEND POLICY
The Company has not paid cash dividends and intends to retain earnings,
if any, in the foreseeable future for use in its activities. Payment of cash
dividends on the Company's Common
<PAGE>
Stock in the future will be wholly dependent upon the Company's earnings,
financial condition, capital requirements and other factors deemed relevant by
the Board of Directors. It is not likely that cash dividends will be paid on the
Company's Common Stock in the foreseeable future.
USE OF PROCEEDS
In September 1996, the Company consummated a public offering of
800,000 shares of its Common Stock and 1,600,000 warrants at purchase prices of
$5.00 per share and $.25 per warrant, respectively, through Euro-Atlantic
Securities, Inc. ("Euro-Atlantic"). The Company received net proceeds of
$3,813,294 from the offering. The proceeds from the Company's offering have been
apportioned as follows: (i) $1,700,000 as security for the issuance of a letter
of credit to replace the personal guarantees provided to Nationsbank (ii)
$50,000 was paid to Daniel Stone pursuant to his consulting agreement (iii)
$100,000 capital contribution to Breaking Waves pursuant to the acquisition
thereof and (iv) $1,963,294 was used for the Company's working capital needs.
The Company will not receive any of the proceeds from the sales made by
the Selling Securityholder. The net proceeds to the Company with respect to the
exercise of any of the Warrants will be used for general working capital, in
order to pay administrative costs of operating the Company, including salaries,
rent, legal and accounting fees and expenses. The maximum net proceeds to be
received if all the Warrants are exercised is $10,800,000. However, there can be
no assurances that any or any portion of the Warrants will be exercised and due
to the current bid price of the Common Stock the Company does not expect any of
the Warrants to be exercised at this time. The expenses of this offering will be
paid solely by the Company, estimated at $50,000.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information.
The Company's Common Stock is quoted on the SmallCap Market of the
Nasdaq Stock Market. The following table sets forth representative high and low
closing bid quotes as reported by a market maker for the Company's Common Stock
and Warrants, during the period from September 23, 1996 through June 25, 1997.
Bid quotations reflect prices between dealers, do not include resale mark-ups,
mark-downs or other fees or commissions, and do not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
Common Stock Warrants
Calendar Period Low High Low High
<S> <C> <C> <C> <C>
09/23/96 - 12/31/96 6 11 1/2 3 1/4 6 3/4
01/01/97 - 03/31/97 4 1/4 7 1/2 1 4 3/4
04/01/97 - 06/25/97 1 1/16 4 1/2 1/4 1 1/4
</TABLE>
Each warrant entitles the holders thereof to purchase one share of the
Company's Common Stock at an exercise price of $3.00 per share, until September
9, 2001. The Warrants and the underlying shares of Common Stock are in
registered form, pursuant to the terms of a warrant agreement between the
<PAGE>
Company and Continental Stock Transfer & Co., as warrant agent, so that the
holders of the warrants will receive upon their exercise and payment therefor,
unrestricted shares of Common Stock. See "Description of Securities."
As of March 31, 1997, the number of shares of Common Stock outstanding
of the Company was 6,092,500, which takes into account the return of shares
pursuant to consulting and employment arrangements which did not vest.
The Company has paid no dividends and has no present plan to pay
dividends. Payment of future dividends will be determined from time to time by
its board of directors, based upon its future earnings, if any, financial
condition, capital requirements and other factors. The Company is not presently
subject to any contractual or similar restriction on its present or future
ability to pay such dividends.
<PAGE>
BUSINESS
General
Hollywood Productions, Inc. (the "Company") is a Delaware Corporation
which was organized in December, 1995, by European Ventures Corp. ("EVC"). EVC
invested $1,100,000 for 5,000,000 shares of the Company's Common Stock. The
Company was formed for the purpose of acquiring screen plays and producing
independent motion pictures with budgets ranging between $1,000,000 and
$3,000,000, using named talent. The Company acquired all the capital stock of
Breaking Waves, Inc., a New York corporation ("Breaking Waves"), which
acquisition was consummated simultaneously with the closing of the Company's
initial public offering in September 1996. Unless the context otherwise
requires, all references to the "Company" include its wholly owned subsidiaries,
Breaking Waves and D.L. Productions, Inc.
Initial Public Offering
In September 1996, the Company consummated a public offering of 800,000
shares of its Common Stock and 1,600,000 warrants at purchase prices of $5.00
per share and $.25 per warrant, respectively, through Euro-Atlantic Securities,
Inc. ("Euro-Atlantic"). The Company received net proceeds of $3,813,294 from the
offering. The proceeds from the Company's offering have been apportioned as
follows: (i) $1,700,000 as security for the issuance of a letter of credit to
replace the personal guarantees provided to Nationsbank (ii) $50,000 was paid to
Daniel Stone pursuant to his consulting agreement (iii) $100,000 capital
contribution to Breaking Waves pursuant to the acquisition thereof and (iv)
$1,963,294 was used for the Company's working capital needs.
Included in the Company's registration statement referenced above were
1,400,000 shares and 2,000,000 warrants registered for resale by the EVC, the
majority stockholder of the Company. Pursuant thereto between September 1996 and
February 1997. EVC sold an aggregate of 549,000 shares of Common Stock and
832,000 warrants.
Euro-Atlantic Securities, Inc., the underwriter of the Company's public
offering, was a dominant influence in the market for the Company's securities
until February 1997. In February 1997, Euro-Atlantic's clearing firm WS Clearing
Corp., ceased operations, which froze all the accounts of Euro-Atlantic
including its client's accounts and firm trading account. Euro-Atlantic ceased
operations immediately thereafter. The market for the Company's securities have
been significantly affected and may continue to be affected by the loss of
Euro-Atlantic's participation in the market. The loss of Euro-Atlantic's market
making activities of the Company's securities has decreased significantly the
liquidity of an investment in such securities.
Formation of D.L. Productions, Inc.; Production of "Dirty Laundry" Film.
In March 1996, the Company entered into a property acquisition
agreement (the "Purchase Agreement") and a co-production agreement (the
"Production Agreement") with Rogue Features, Inc., an unaffiliated entity, to
acquire the rights to and co-produce a motion picture of the screenplay entitled
"Dirty Laundry". In April 1996, the Company formed D.L. Productions, Inc., a New
York corporation, as a wholly-owned subsidiary, for the purpose of producing and
arranging for the distribution of Dirty Laundry. In addition the Company and
<PAGE>
Rogue entered into a right of first refusal agreement with respect to the two
next products of Rogue and/or its principals.
The Purchase Agreement conveyed all rights to the screenplay and the
Motion Picture to Hollywood Production, Inc., in return Rogue directed the
Motion Picture and has the right to 25% of the profits of the Motion Picture as
described in the co-production agreement. Rogue retained the right to produce a
live comedy or musical after five years of the Motion Picture's release or upon
the earlier approval of the Company. In addition, Michael Normand, a principal
of Rogue, retained the right to produce a novel of the Motion Picture as long as
the Company agrees to its compensation. The co-production agreement provided for
the principals of Rogue to direct and retain creative control of the production
of the film, with the Company retaining final approval.
Pursuant to the terms of the Purchase Agreement and Production
Agreement, the Company financed all but $100,000, which was invested by the
co-producer, for the production of the Motion Picture. Pursuant to such
agreements as well as the terms of the participation agreements entered into
with the two stars of the Motion Picture, each of Jay Thomas and Tess Harper
shall have the right to receive $50,000 against a 5% participation fee from the
first revenues received by the Company. This $100,000 will be paid out of the
first proceeds received from the distribution of the Motion Picture by the
Company. Thereafter, the Company and the co-producer shall have the right to all
subsequent revenues, pro rata, until their initial investment is repaid.
The next proceeds received by the Company after the talent had been
paid $50,000 each and the co-producers have each received their investment back,
shall be distributed as follows; (i) 5% of revenues to each of the stars up to a
maximum of $250,000, at which time their distribution decreases to 2%
thereafter; (ii) the Company and the co-producer shall each receive 25% and 35%,
respectively, of each parties investment, from revenues generated, as payment of
an investment premium for their financing of the Motion Picture and (iii) all
revenues above (i) and (ii) shall be first used to repay any distribution costs
incurred and then distributed 2% to each of the two stars with the remainder to
the Company and the co-producer at the rate of 75% and 25%, respectively.
The filming of the Motion Picture commenced in May 1996 and took
approximately five weeks to complete. After completion of the filming of the
Motion Picture the Company undertook the process of editing, adding sound,
special effects and music, which took an addition 20 weeks. Upon completion of
the Motion Picture, the Company made arrangements for private showings of the
Motion Picture in order to obtain both a foreign and domestic distributor for
the film. The Company has entered into a licensing agreement with Trident
Licensing, Inc. for the foreign distribution of the Motion Picture. As a result
of the private showings of the Motion Picture by the Company, the Company is
currently involved in negotiations with several entities who have expressed an
interest in obtaining domestic distribution rights in the Motion Picture, though
no agreements or arrangements have been entered into.
The Motion Picture is a romantic comedy which was shot in the New York
tri-state area, stars Jay Thomas as Joey Green, a dry cleaner going through a
mid-life crises and Tess Harper as his wife, Beth, of 15 years, who is a sex
advice columnist for a woman's magazine. Mr. Thomas has most recently co-starred
in the motion picture "Mr. Holland's Opus" is known for his
<PAGE>
television work in "Love & War", "Cheers", "Murphy Brown" and "Mork & Mindy".
Ms. Harper earned a Golden Globe nomination for her performance in the film
"Tender Mercies" and an Oscar nomination for her role in the film "Crimes of the
Heart". Joey owns a dry cleaning business which is doing poorly and is convinced
that he is aging prematurely. Do to their lack of intimacy, Beth tells Joey to
seek counseling, which he does unbeknownst to Beth, who herself has become
attracted to her chiropractor. Throughout the Motion Picture there are a variety
of bizarre mishaps which occur causing the couple to go from separation to back
in love.
Acquisition of Breaking Waves, Inc.
Pursuant to a stock purchase agreement, dated May 31, 1996 (the
"Agreement") entered into between Hollywood Productions, Inc. and the prior
stockholders of the Company, the prior stockholders delivered to the Company all
of the issued and outstanding shares of Breaking Wave's common stock for 150,000
shares of common stock in the Company. The consummation of the acquisition took
place contemporaneously with the closing of the Company's initial public
offering.
Pursuant to the terms of the Agreement, on the closing date of the
acquisition, Breaking Waves performed a recapitalization and exchange of all of
its common stock for new common stock and for a series of Preferred Stock,
whereby for each share of Breaking Wave's common stock exchanged the holder
received one share of new common stock and 28 shares of the Series A Preferred
Stock. In connection therewith Breaking Waves amended its certificate of
incorporation to authorize 5,600 shares of Preferred Stock, par value $.01 per
share, designated as the "Series A Preferred Stock". The shares of the Series A
Preferred Stock have the right to redemption, whereby, on each of January 1,
1997 and 1998, Breaking Waves shall redeem one half of the outstanding shares of
the Series A Preferred Stock, at a redemption price of $100.00 per share on a
pro rata basis, from legally available funds. The Series A Preferred Stock shall
have no dividend, conversion or voting rights, but shall have a preference on
liquidation equal to $100 per share. The shares of Series A Preferred Stock
issued to the stockholders of Breaking Waves does not affect the Company's
rights to control, own or operate Breaking Waves, except, that Breaking Waves
will not be able to issue dividends or other distributions to the Company until
all the shares of the Series A Preferred Stock are redeemed. In January 1997
2,800 shares of the Series A Preferred Stock were redeemed by the Company.
Pursuant to the terms of the Agreement, the Company replaced the
personal guarantees of the prior stockholders of Breaking Waves issued to
Nationsbank, in accordance with the Company's line of credit. The Company
replaced the guarantees with letters of credit secured by bank deposits. The
Company contributed $100,000 of the proceeds to the capital of Breaking Waves
and simultaneously therewith, Breaking Waves repaid loans made by Daniel Stone
and Susan Stone in the aggregate amount of $100,000. Immediately preceding the
consummation of the Acquisition, Breaking Waves distributed to its stockholders
an amount equal to 45% of the net income before taxes of Breaking Waves for the
period from January 1, 1996 to the closing date, in order to pay taxes owed by
such stockholders due to Breaking Waves being a subchapter S corporation.
<PAGE>
Film Business
General
The Company anticipates that in general it will seek to acquire
screenplays and produce motion pictures which have budgets in the range of
between $1,000,000 and $3,000,000. However, projects will be reviewed on a case
by case basis by the Company, whereby, the Company may invest in the production
of motion pictures where it does not receive total ownership of either the
screenplay, the motion picture or certain ancillary rights thereto. The Company
acquired the rights to the screenplay "Dirty Laundry", and formed D.L.
Productions, Inc., as its production and distribution arm to produce and market
the Motion Picture. The Company will retain all distribution and ancillary
rights to the screenplay and the Motion Picture.
The distribution of proceeds received by the Company from the
distribution of future films will most likely be different then the distribution
of Dirty Laundry, as when there are different partners involved, there will be
different agreements and terms negotiated. As in the case of Dirty Laundry, the
distribution of the proceeds from other films will be made pursuant to
negotiated agreements between the Company, the co-producers, if any, and the
hired talent.
Production of Motion Pictures
The Company has been actively soliciting and reviewing screenplays for
the production of motion pictures. The Company shall attempt to acquire the
rights to screenplays for the production of motion picture, which it anticipates
either producing or co-producing. After the screenplay is acquired; a budget
will be prepared; revisions to the screenplay made; the talent, production crews
and all ancillary items required for the filming of the motion picture obtained;
and a filming scheduled set. Once the filming of the motion picture is complete,
the film will be edited, sound and special effects added and a final print
produced. Upon completion, the Company will arrange for private showings of the
film as well as other arrangements made for the purpose of finding both foreign
and domestic distribution for the film.
The Company estimates that the production of each motion picture will
take between 5 and 8 weeks to film, with an additional 14 weeks to edit, add
sound and special effects. Upon completion of the print the Company estimates
that it will take between 8 and 12 weeks to obtain a distributor for the film,
if one is obtained and between 8 to 24 weeks thereafter until the film is
released to the theaters.
Distribution Methods; Billings
Distribution of a film may be performed either by one of the motion
picture studios, an independent distributor or by the Company itself through an
agent. The distributors or agent, in the event the Company self-distributes its
films, have agreements with the theaters to provide the theaters with films to
show the public. Most theaters have multiple screens and can show multiple
movies at the same time. There is continuously a demand for new films. In
negotiating with a distributor to sign on to a project, the Company and the
distributor determine who will incur what portion of the costs of marketing a
film, at which time a budget is prepared and the extent of the release of the
film is determined. For most high budget, top name talent pictures, there is a
wide release of the film typically between 1,500 to 2,500 theaters nationwide.
For films which
<PAGE>
the Company anticipates producing, including Dirty Laundry, the release may be
done in platforming stages. Initially the film will be released in one or two
markets in several theaters in each market, in which advertising and marketing
will be done. A screening will be held and critics invited to the film in
anticipation of a review. If the film receives a favorable response from either
the critics and/or the audience, the film's distribution will expand gradually
into additionally markets and theaters.
Once a film has been distributed throughout theaters in the United
States, it may be distributed in markets throughout the world. In addition, the
film may be further distributed through cable television including pay-per-view,
premium channels and standard channels, public television and through the sale
of video tapes. There are many avenues for the distribution of a film and the
exploitation of all ancillary rights thereto. The Company may enter into
agreements with different distributors for different markets or sell all the
rights to one distributor. Revenues generated are distributed to all parties
involved, including the distributor, the producers, the owners and the talent
pursuant to extensive formulas previously agreed upon.
Distribution rights to motion pictures are granted legal protection
under the copyright laws of the United States and most foreign countries, which
provide substantial civil and criminal sanctions for unauthorized duplication
and exhibition of motion pictures. The Company plans to take all appropriate and
reasonable measures to secure, protect and maintain or obtain agreements from
licenses to secure, protect and maintain copyright protection for all of the
motion pictures distributed by the Company under the laws of all applicable
jurisdictions.
The Company anticipates that the films it produces will be distributed
and shown at movie theaters, including Dirty Laundry. Due to the type of films
and budgets the Company anticipates that the releases may be done in platforming
stages. Initially, such films will be released in one or two major markets in
several theaters in each market. Advertising and marketing will be done in such
markets. The Company will invite film critics to the film screenings, in
anticipation of their revues. If the film receives favorable revues from either
the critics and/or the audiences, the film's distribution may expand gradually
into additional markets and theaters.
Regulations
The Code and Ratings Administration of the Motion Picture Association
of America, an industry trade association, assigns ratings for age-group
suitability for viewing of motion pictures. The Company will follow the practice
of submitting most of its motion pictures for such ratings. However, the Company
may review this policy from time to time.
United Stated television stations and networks, as well as foreign
governments, impose restrictions on the content of motion pictures which may
restrict in whole or in part exhibition on television or in a particular
territory. There can be no assurance that current and future restrictions on
motion pictures released by the Company may not limit or affect the Company's
ability to exhibit such motion pictures.
The Company estimates that between 36 weeks and 58 weeks will elapse
between the commencement of expenditures by the Company in the acquisition of a
screenplay, the production of a motion picture and the release of such film.
Additionally, it is anticipated that no revenues will be received from the
exploitation of such film for an additional period of between
<PAGE>
24 and 36 weeks after release. Billing in the industry is done quarterly,
therefore, the theaters pay the distributors on a quarterly basis and then the
Company is paid the following quarter. However, in the event a distributor
desires to distribute one of the Company's films, such distributor may either
offer an initial payment to the Company against or in addition to future
royalties or purchase the film outright.
Competition in the Film Industry.
The Company is and will continue to be in competition with other
institutions which produce, distribute and exploit and finance films, some of
which have substantial financial and personnel resources, which are greater with
and more extensive than the Company's. These institutions include the major film
studios, including Disney, Universal, MGM, and Sony as well as the television
networks. There is substantial competition in the industry for a limited number
of producers, directors, actors and properties which are able to attract major
distribution in all media and all markets throughout the world.
The motion picture business is highly competitive and extremely high
profile in terms of name recognition, with relatively insignificant barriers to
entry and with numerous firms competing for the same directors, producers,
actors/actresses, distributors and theaters, among other items. There is intense
competition within the film industry for exhibition times at theaters, as well
as for distribution in other media, and for the attention of the movie-going
public and other viewing audiences. Competition for distribution in other media
is as intense as the competition for theatrical distribution and not all films
are licensed in other media. There are numerous production companies and
numerous motion pictures produced, all of which are seeking full distribution
and exploitation. Despite the increase in the number of films, a small number of
films which receive widespread consumer acceptance, account for a large
percentage of total box office receipts.
There is intense competition within the film industry for exhibition
time at theaters, as well as for distribution in other media, and for the
attention of the movie-going public and other viewing audiences. Competition for
distribution in other media is as intense as the competition for theatrical
distribution and not all films are licensed in other media. There are numerous
production companies and numerous motion pictures produced, all of which are
seeking full distribution and exploitation. Despite the large number of films
produced, only a small number of films receive widespread consumer acceptance,
account for a large percentage of total box office receipts.
Swimwear Business
General
The Company is a designer, manufacturer and distributor of girls
swimwear sold throughout the United States. In addition to swimwear, the Company
also makes beach cover ups and accessories to coordinate with its swimwear.
Swimwear is made in children's sizes from 2-16 and pre-teen sizes.
The Company markets swimwear under its private brand labels, including
"Breaking Waves," "All Waves," "Making Waves," "Small Waves" and "Huk-A-Poo."
Under its license
<PAGE>
agreement with Beach Patrol, Inc., markets and manufactures a line of
swimwear under the name "Daffy Waterwear."
Products and Design
Through the Company's wholly owned subsidiary, Breaking Waves, Inc.,
the Company designs, manufactures, and sells both private-label and name brand
girls swimwear and accessories. The designs are sent to a clothing manufacturer
in Korea for prototyping, and the knitting and printing of fabrics, whereafter
they are sent to Indonesia for sewing. Finished goods are then shipped to a
public warehouse in the City of Industry, California. The Company has found that
this process is its most cost-effective means of operating its business. The
Company anticipates, continuing its operations in this manner in the future,
though the Company may use other manufacturers and suppliers in the future in
different countries.
The Company has an office in Miami, Florida where it designs its
swimwear lines and accessory items. Prints and styles are developed for each
line. Each season approximately 12-15 prints and fabrics are developed for the
"Breaking Waves" line, and 10-12 prints and fabrics are developed for the "All
Waves" line, which lines comprised approximately 33% and 38% of the Company
sales for the year ended December 31, 1996. The Company has a licensing
agreement with "Beach Patrol, Inc.," which gives Breaking Waves access to the
complete "Daffy" woman's line, which line comprised approximately 29% of the
Company's sales for the year ended December 31, 1996. The Company select prints
and styles from this line that they feel are appropriate for the children's
market and produces such line under its "Daffy's Waterwear" label. Anywhere from
6-12 prints and styles are usually marketed under the Daffy Waterwear label. The
Company is under no obligation to adapt all or any of the prints and styles used
in the "Daffy" woman's line. Of each fabric or prints chosen, the Company
usually manufacturers two swimsuits, a one piece model and a two piece model.
The Company produces swimwear in basically two blended fabrics, one is
a blend of nylon and lycra spandex ("NL"), and the other a blend of cotton,
polyester and lycra spandex ("CPL"). Each product line manufactured by the
Company uses different designs and emphasizes different fabric blends. The All
Waves line is approximately 80% CPL and 20% NL. The Breaking Waves line is 90%
NL and 10% CPL. The Daffy's line is 60% CPL and 40% NL.
Supplies and Inventory
The swimwear designs are sent to a manufacturer in Korea where
prototype samples of the designs and prints are delivered to the Company for
approval. The Company typically approves between 35-50 prints and fabrics for
all its lines. Once the lines are approved, the manufacturer in Korea knits and
prints and fabrics. The fabrics are then sent to a company in Indonesia for
sewing. Approximately 65% of its piece goods are purchased from one manufacturer
in Korea and approximately 65% of the sewing is performed by one Company in
Indonesia. Although the management of Breaking Waves is of the opinion that the
fabrics and non-fabric sub-materials it uses are readily available and that
there are numerous manufactures for such piece goods on similar terms and
prices, there can be no assurances that management is correct in such belief.
The unavailability of fabrics or the sewing thereof at current prices could
adversely affect the operations of the Company.
<PAGE>
Since the Company purchases finished garments from overseas
contractors, it doesn't buy or maintain an inventory of any sub-materials.
Letters of credit are opened to foreign suppliers for finished garments by
Nationsbank, pursuant to its line of credit, which line is presently, guaranteed
by the Company. The Company has not experienced difficulty in satisfying
finished garment requirements and considers its sources of supply adequate. The
Company's inventory of garments varies depending upon its backlog of purchase
orders and its financial position.
Marketing and Sales
The "Daffy" label is sold to department and specialty stores. The
"Breaking Waves" label is also distributed through better department and
specialty stores. The "All Waves" label is sold to mass merchants and also as
promotional goods in department stores. Private label programs are supplied to
several major chains and department store groups. For the year ended December
31, 1996 the "Breaking Waves" label accounted from approximately 33% of the
Company's volume, the "All Waves" label 38%, the "Daffy" label 29%, private
labels 0% and the "Huk A Poo" label 0%.
The Company sells its swimwear and accessory items through its showroom
sales staff and through independent representatives. The Company's customers
include the Dillard and Federated department store groups, as well as Kids R Us,
Sears, Wal-Mart, T.J. Maxx and Marshalls. For the years ended December 31, 1996
and 1995 the Company had one customer, Dillards Department Stores, which
accounted for approximately 16% and 20%, respectively, of total revenues. For
the three months ended March 31, 1997, the Company had two customers, Dillards
Department Stores and WalMart Department Stores which accounted for 14% and 23%,
respectively, of revenues. The loss of either customer or any group of customers
could have a material adverse affect on the Company's results of operations.
Some of the Company's customers, including large retail department store chains,
have recently experienced financial difficulties and some have filed for
protection under the federal bankruptcy laws. The Company is unable to predict
what effect, if any, the financial difficulties encountered by such retailers
and other customers will have on the Company's future business.
The Company does not have any written or oral agreements with its
customers. All orders are shipped pursuant to purchase orders received by the
Company. Shipments are sent F.O.B. (freight on board, which means that the
Company is not responsible for the goods during shipment or for the delivery
charge) and payment is due 30 days thereafter. No goods are shipped on
consignment, therefore, except for non-conforming or damaged goods, all goods
shipped are considered sold.
In addition to its in-house sales and showroom personnel, the Company's
lines are sold by approximately ten independent sales representatives throughout
the United States. These representatives service department stores and smaller
specialty retailers. The "Daffy Waterwear" line is sold by separate independent
representatives. None of these representatives are under contract to the
Company, nor do they receive a salary from the Company. They are paid a
commission based upon their sales. In addition to showroom sales and sales
representatives calling on customers, the Company exhibits its products at major
trade shows. End of season and discontinued merchandise is sold to off-price
stores.
<PAGE>
Work in Progress
The Company manufactures its lines during the month of June to December
based on the Company's knowledge of the market and past sales histories.
Customer orders start arriving in June and July, goods are reordered by
customers on a continual basis through the following June. The quantity of open
purchase orders at any date may be affected by, among other things, the timing
and recording of orders. The Company does not sell on consignment and does not
accept return of products other than imperfect goods or goods shipped in error.
The major design work takes place from June to November. Goods are
manufactured, printed and sewn overseas from June to December. Finished garments
are shipped from the factory to a public warehouse in Los Angeles for shipments
to retailers. The majority of shipments to retailers occurs from November to
May, with January through March being the peak shipping time.
Trademarks and Licensing
The Company relies on common law trademarks for use of its private
label swimwear lines. In addition, the Company has entered into a licensing
agreement with Beach Patrol, Inc., to use the trademark "Daffy's Waterwear."
Beach Patrol supplies prints and designs under this agreement which are used for
the Daffy's woman's line. Pursuant to the licensing agreement the Company has
the right to use those designs for a children's line under the Daffy's Waterwear
label. The license agreement commenced January 1, 1996, is for an initial period
of 30 months, broken up into an initial six month period with two additional 12
month periods the last of which expires on June 30, 1998. In addition, the
Company has the right to extend the agreement for three additional one year
periods the last of which expires on June 30, 2001. The Company shall pay to
Beach Patrol, Inc., the greater of 5% of net sales and the minimum trademark
royalty fee. The minimum fee is $75,000 for the first six month term and
increases each year to $200,000 in the event all extensions are exercised by the
Company.
The Company has also filed to register additional trademarks in the
United States, which applications are currently pending. There can be no
assurance that such additional trademarks will be registered or if registered,
that such marks, as well as other currently registered marks or marks licensed
by the Company will be adequately protect against infringement. In addition,
there can be no assurance that the Company will not be found to be infringing on
another company's trademark. In the event the Company finds another party
infringing upon its trademark, if registered, or is found by another company to
be infringing upon such company's trademark, there can be no assurances that the
Company will have the financial means to litigate such matters.
Competition
There is intense competition in the swimwear apparel industry in which
the Company participates. The Company competes with many other manufacturers in
these markets, many of which are larger and have greater resources than the
company. Major competitors in the swimwear industry include "Ocean Pacific,"
"Gottex" and "Speedo." Also department store and retailer have their own private
label programs, which are the major competition in the mass merchant business.
<PAGE>
The Company's business is highly competitive, with relatively
insignificant barriers to entry and with numerous firms competing for the same
customers. The Company is in direct competition with local, regional and
national clothing manufacturers, many of which have greater resources and more
extensive distribution and marketing capabilities than the Company. In addition,
many large retailers have recently commenced sales of "store brand" garments
which compete with those sold by the Company. Management believes that the
Company's market share is not significant in its product lines.
Many of the national clothing manufacturers have extensive advertising
campaigns which develop and reinforce brand recognition. In addition, many of
such manufacturers have agreements with department stores and national retail
clothing chains to jointly advertise and market their products. Since the
Company does little advertising and has no agreement with any department store
or national retail chain to advertise any of its products, the Company competes
with companies which have brand names which are well known to the public. It can
be expected that a retail shopper will buy a garment from a "brand name" entity
before that of an unknown entity, if all other factors are equal.
Seasonality
The Company believes that its business may be considered seasonal with
a large portion of its revenues and profits being derived between December and
June for shipments being made between November and May. Each year from June to
November the Company engages in the process of designing and manufacturing the
following seasons swimwear lines, during which time the Company incurs the
majority of its expenses, with limited revenues. There can be no assurances that
revenues received during December to June will support the Company's operations
for the rest of the year.
Employees
The Company has two executive officers which oversees the operations of
its subsidiaries, one administrative assistant and no other employees. D.L.
Productions, Inc. is a movie production company which hires a production staff
and actors/actress per production. Most screenwriters, performers, directors and
technical personnel who will be involved in the films are members of guilds or
unions which bargain collectively with producers on an industry-wide basis from
time to time. Any work stoppages or other labor difficulties could delay the
production of the films, resulting in increased production costs and delayed
return of investments. Breaking Waves has three executive officers, including
two vice-presidents in charge of design, merchandising, marketing and sales, as
well as two administrative assistants. Breaking Waves has approximately 20
independent road sales people.
Property
The Company's executive offices are located at 14 East 60th Street,
Suite 402, New York, New York 10022, (212) 688-9223. The Company entered into a
Lease Agreement for approximately 2,600 square feet. The lease term is for a
period of five years with an option by the Company to terminate after three
years, with a current annual rental payment of approximately $68,000. Breaking
Waves has its executive offices and showroom located at 112 West 34th Street,
New York, New York, which combined is approximately 1,400 square feet.
<PAGE>
The lease is for a term of 10 years until May 31, 2000 at a current annual
rental payment of $46,200, which shall increase to $49,500 for the balance of
the term commencing in June 1997. Breaking Waves has a design office in Miami,
Florida located at 8410 N.W. 53rd Terrace, where it rents approximately 778
square feet at an annual fee of $9,336 for a period of 12 months until February
1997, which it plans on reviewing on an annual basis.
Legal Proceedings
The Company is not a party to any material litigation and is not aware
of any threatened litigation that would have a material adverse effect on its
business.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company was organized in December 1995 and acquired Breaking Waves,
Inc. on September 24, 1996. The results of operations for the year ended
December 31, 1996 are comprised of Breaking Waves from September 24, 1996 (the
acquisition date) and general and corporate overhead expenses of the Company.
The Company has begun to sell and distribute the Motion Picture in foreign
markets and is currently seeking a domestic distribution deal for the Motion
Picture. Results of operations for the Company and Breaking Waves have been
discussed separately.
Results Of Operations
For the year ended December 31, 1996 as compared to the year ended December 31,
1995
The consolidated financial statements at December 31, 1996 include the
accounts of the Company and its wholly owned subsidiaries, D.L. Productions,
Inc. and Breaking Waves after elimination of all significant inter-company
transactions and accounts. Additionally, purchase accounting requires the
elimination of all operating transactions of the acquired subsidiary from the
inception of its fiscal year to the date of acquisition. The consolidated
statement of operations and consolidated statement of cash flows for the year
ended December 31, 1996 reflects the transactions of the subsidiary, Breaking
Waves, for the period from September 24, 1996, the acquisition date, to December
31, 1996.
Since the Company was incorporated on December 1, 1995, and no
operations incurred through December 31, 1995, no discussion is applicable for
the year ended December 31, 1995. From September 24, 1996 (the date Hollywood
acquired Breaking Waves) to December 31, 1996 the Company's subsidiary, Breaking
Waves, generated sales amounting to $1,217,152 with cost of sales amounting to
$667,722. Breaking Waves generated operating profit amounting to approximately
$294,908. Operating profit is total revenue less cost of sales and selling,
general and administrative expenses. Accordingly, of the total selling, general
and administrative expenses amounting to $675,416, $246,654 were incurred by
Breaking Waves with the remainder amounting to $428,762, incurred by the
Company. The major components of the total selling, general and administrative
expenses of the Company are composed of the following: $58,750 of consulting
expenses paid to an officer of the Company whereby $40,000 was paid in cash with
the remainder in 7,500 shares of common stock at $2.50 per share;
<PAGE>
$62,500 of consulting expenses paid to two officers of the Company paid in the
form of 100,000 shares of common stock at $2.50 per share which vest June 30,
1997 and 1998; and amortization of organization costs and acquisition costs of
$42,738. The remainder of expenses amounting to approximately $264,774 is
composed of rent amounting to $15,666, officer's salaries and related payroll
taxes amounting to approximately $105,670, legal and professional fees of
$85,537 and miscellaneous office expenses of $57,901.
For the year ended December 31, 1996, the Company reported a
consolidated loss amounting to $221,982 which was primarily a result of general
and corporate expenses incurred by the Company.
For the three months ended March 31, 1997 as compared to the three
months ended March 31, 1996.
Since the Company was incorporated on December 1, 1995, and no
operations incurred through March 31, 1996, no discussion is applicable for the
three months ended March 31, 1996.
From January 1, 1997, to March 31, 1997 the Company's subsidiary,
Breaking Waves, generated sales amounting to $2,441,081 with cost of sales
amounting to $1,465,799. Breaking Waves generated net income amounting to
approximately $372,000. Of the total selling, general and administrative
expenses amounting to $670,943, $414,279 were incurred by Breaking Waves with
the remainder amounting to $256,664, incurred by the Company.
The major components of the total selling, general and administrative
expenses of the Company are composed of the following: $23,600 of consulting
expenses paid to an officer of the Company; $55,209 of consulting and
compensation expenses paid to officers of the Company paid in the form of common
stock; $30,130 of officer's compensation by forgiveness of note receivable; and
amortization of organization costs of $6,250. The remainder of expenses
amounting to approximately $555,754 is composed of rent amounting to $34,000;
officer's salaries of $89,016; other salaries and related payroll taxes
amounting to approximately $97,170; legal and professional fees of $11,801;
miscellaneous corporate overhead of $113,295; and selling expenses of $210,472.
For the three months ended March 31, 1997, the Company reported a
consolidated net income amounting to $127,379 after an estimated provision for
income taxes amounting to approximately $69,827.
Liquidity And Capital Resources
On September 24, 1996, the Company successfully completed its public
offering. As a result, the Company sold 800,000 shares and 1,840,000 Warrants of
which 240,000 Warrants were sold pursuant to the underwriter's over-allotment
option. The Company yielded a total net proceeds of $3,813,294 after deducting
underwriter discount and non-accountable expense allowance and offering
expenses. Simultaneously with the offering, the Company charged all deferred
offering costs incurred to additional paid-in capital which totaled $996,182. At
March
<PAGE>
31, 1997 and at December 31, 1996, the Company has a working capital amounting
to $4,551,016 and $4,629,441 respectively. It is not anticipated that the
Company will be required to raise any additional capital within the next twelve
months, since no material change in the number of employees or any other
material events are expected to occur.
Pursuant to a stock purchase agreement dated May 31, 1996 among the
Company, EVC, Breaking Waves and its shareholders, the Company on September 24,
1996 issued 150,000 shares of Common Stock in exchange for all of the issued and
outstanding capital stock of Breaking Waves. The transaction has been accounted
for using the purchase method of accounting, and, accordingly, the accompanying
consolidated financial statements include the results of operations of Breaking
Waves from the date of acquisition, September 24, 1996. As a result of the
transaction, excess of cost over net assets acquired totaling $1,064,283 has
been recorded and will be amortized over their useful lives of the related
assets of fifteen (15) years. Amortization expense from September 24, 1996 to
December 31, 1996 totaled $17,738.
In conjunction with such Agreement, a previous stockholder of Breaking
Waves entered into a two year consulting agreement effective January 1, 1996
with Breaking Waves for an annual consulting fee of $100,000. Additionally,
pursuant to the Agreement, the previous stockholders of Breaking Waves agreed
not to compete with the Company for a period of four years from the consummation
thereof. Prior to the consummation of the Company's IPO, during September 1996,
Breaking Waves performed a re-capitalization and exchanged all its common stock
for new common stock, and for a series of preferred stock. Pursuant to the
Agreement, Breaking Waves issued 5,600 shares of its newly authorized Series A
Preferred Stock to its previous stockholders in proportion to their respective
holdings. The holders of the shares of the Series A Preferred Stock shall have
the right to redemption whereby, on each of January 1, 1997 and 1998 subject to
legally available funds, Breaking Waves shall redeem one half of the outstanding
shares of the Series A Preferred Stock, at a redemption price of $100 per share
on a pro rata basis. During January 1997, Breaking Waves redeemed 2,800 shares
of its Series A preferred stock for a total of $280,000.
On April 4, 1991, Breaking Waves entered into an accounts receivable
financing agreement with NationsBanc Commercial Corp. ("Nations") to sell their
interest in all present and future receivables without recourse. Breaking Waves
submits all sales orders to Nations for credit approval prior to shipment, and
pays Nations .75% of the gross amount of the receivables. Nations retains from
amounts payable to Breaking Waves a reserve for possible obligations such as
customer disputes and possible credit losses on unapproved receivables. Breaking
Waves may take advances of up to 85% of the purchase price on the receivables,
with interest charged at the rate of 13/4% over prime. Interest charged to
expense totaled approximately $67,173 from September 24, 1996, date of
acquisition to December 31, 1996. For the three months ended March 31, 1997
interest expense amounted to $72,445. Nations has a continuing interest in
Breaking Waves's inventory as collateral for the advances.
On October 16, 1995, Breaking Waves entered into a license agreement
with Beach Patrol, Inc. ("BPI") for the exclusive use of certain trademarks in
the United States. The agreement commenced January 1, 1996 and is for an initial
period of thirty (30) months divided into one (1) six month, and two (2) twelve
month terms with the option to extend the
<PAGE>
agreement for an additional three (3) 12 month term periods. In exchange,
Breaking Waves will pay BPI the greater of 5% of net sales, as defined, or the
guaranteed minimum trademark royalty ("GMTR"). The GMTR ranges from $75,000 for
the first term to $200,000 for the sixth term. In addition, Breaking Waves is
obligated to pay BPI 2% of net sales for showroom/advertising expenses, and to
spend an additional 1% of net sales for advertising. A minimum guaranteed
showroom/advertising expense will be payable for the first three terms. BPI has
the option to terminate the agreement if Breaking Wave's net sales do not reach
specified levels, ranging from $1,000,000 for the first term to $4,000,000 for
the sixth term. From September 24, 1996 (the date of acquisition) to December
31, 1996, Breaking Waves incurred royalty and advertising expenses amounting to
approximately $26,000. For the three months ended March 31, 1997, royalty and
advertising expense amounted to $35,500.
During May, 1996, the Company established the 1996 Senior Management
Incentive Plan ("Incentive Plan") pursuant to which 250,000 of common stock are
reserved for issuance. The Incentive Plan is designed to serve as an incentive
for retaining qualified and competent key employees, officers and directors of
the Company. During June 1996, pursuant to such plan the Company issued 50,000
shares to each of two officers of the Company. 50% of such shares issued will
vest 12 months from the issuance date and the remaining 50% will vest 24 months
from the issuance date. Such shares were valued at 50% of the IPO price of
$2.50. Accordingly, the Company recorded a deferred compensation amounting to
$250,000 which is being amortized as the shares vest. As of December 31, 1996,
$62,500 has been amortized as a compensation expense. During January 1997,
25,000 of these shares were canceled and the vesting schedule for the remaining
shares terminated whereby the shares became fully vested. For the three months
ended March 31, 1997, $46,875 has been amortized as a compensation expense.
During December 1996, the Company entered into an employment agreement
with two of the officer's of Breaking Waves, whereby 5,000 shares each of common
stock of the Company was issued as compensation for services. Accordingly, the
Company recorded deferred compensation amounting to $25,000, which is being
amortized as the shares vest. For the three months ended March 31, 1997, $8,334
has been amortized as compensation expenses.
On March 14, 1997, the Company granted to two (2) employees, the
Company's President and an officer, options to purchase 100,000 and 50,000
shares of common stock, respectively. Each option provides for an exercise price
equal to the fair market value at the date of grant, or $5.00 per share. The
options are exerciseable upon vesting and expires March 14, 2001. Fifty (50%) of
the underlying shares to the options vest on March 14, 1998 and the remaining
shares vest on March 14, 1999. In accordance with Financial Accounting Standard
No. 123, the Company has estimated that the fair market value of the shares at
the exercise dates will not exceed the per share option exercise price, hence,
no additional compensation expense is recognized by the Company at the date of
grant.
Pursuant to co-production and property purchase agreements dated March
15, 1996, as amended, the Company, through is wholly owned subsidiary, D.L.
Productions, Inc., acquired the rights to co-produce a motion picture and has
agreed to finance the costs of production and
<PAGE>
distribution of such motion picture with the co-producer agreeing to finance
$100,000 of the costs of production. The Company retains all rights to the
motion picture, the screenplay, and all ancillary rights attached thereto.
Pursuant to the terms of the agreements with the stars of the motion picture,
the two stars each have the right to receive $50,000 against a 5% participation
fee based on revenues from the first proceeds received from the distribution of
the Motion Picture. Thereafter, the Company shall have the right to all
subsequent revenues until the first $990,000 of their initial investment is
repaid. The next proceeds received by the Company shall be distributed as
follows: (i) 5% of revenues to each of the two stars up to a maximum of
$250,000, at which time their distribution decreases to 2%; (ii) the Company and
the co-producer shall receive the remainder of their initial investment; (iii)
the Company and the co-producer each receives revenues up to 25% and 35%,
respectively, of each parties initial investment; (iv) the co-producers shall
receive their deferred compensation for writing, production and direction; and
(v) all revenues in excess of (i), (ii) (iii) and (iv) shall first be used to
repay any distribution costs incurred, with the remainder to the Company and
co-producer at a rate of 75% and 25%, respectively. As of March 31, 1997 the
Company has invested a total of $1,556,702 in D.L. Productions, Inc. for the
co-production and distribution of such motion picture whereas the co-producers
have invested $100,000 of such amount in D.L. Productions, Inc. which has been
recorded as a capital contribution by the Company.
For the three months ended March 31, 1997, the Company provided cash
for operating activities amounting to $24,532. The major components of such use
of cash was for the payment of amounts due Breaking Wave's factor of $1,320,604.
The majority of cash for operating activities amounting to $1,127,468 was
provided from sales of inventory. For the three months ended March 31, 1997, the
Company used $291,614 cash for investing activities of which $280,000 was for
the partial redemption of Breaking Wave's preferred stock, pursuant to the
purchase agreement.
For the year ended December 31, 1996, the Company used net cash for
operating activities amounting to $1,899,878. The major components of such use
of cash was for the acquisition of Breaking Waves inventory and the costs
incurred for the production of the motion picture which totaled an aggregate of
$3,334,165. The majority of cash for operating activities amounting to
$1,434,686 was provided from advances from the factor (NationsBanc).
For the year ended December 31, 1996, the Company obtained financing of
$4,548,204 of cash which was primarily from the Company's initial public
offering.
<PAGE>
MANAGEMENT
Officers and Directors.
The names, ages and positions of the Company's executive officers and
directors are as follows:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Harold Rashbaum 70 President, CEO and Director
Robert DiMilia 51 Vice President, Secretary and
Director
Alain A. Le Guillou, M.D. 40 Director
</TABLE>
The directors of the Company are elected annually by its stockholders and
the officers of the Company are appointed annually by its Board of Directors.
Vacancies on the Board of Directors may be filled by the remaining directors.
Each current director and officer will hold office until the next annual meeting
of stockholders, or until his successor is elected and qualified. All outside
directors receive a directors' fee of $1,000 per month, for their participation
as a director. The sole outside director is Alain D. Le Guillou, M.D. The
Company does not have key man insurance on the life of any of its officers or
directors. Harold Rashbaum is the father-in-law of Alain A. Le Guillou, M.D. On
January 10, 1997, Robert Melillo and the Company mutually agreed to the
resignation of Mr. Melillo as the President, Chief Executive Officer and
Director of the Company. At such time, Harold Rashbaum was appointed as
President and Chief Executive Officer of the Company. Mr. Melillo remained as a
consultant to the Company at a weekly fee of $600 until April 1, 1997.
Harold Rashbaum has been the President, Chief Executive Officer, and
director of the Company since January 1997. Mr. Rashbaum had served as Secretary
and Treasurer of the Company since May 1996. When Robert Melillo, former
President and Chief Executive Officer, resigned Mr. Rashbaum was elected as
President and Chief Executive Officer. Since May 1996, Mr. Rashbaum served as
the secretary, treasurer and a director of D.L. Productions, Inc. and became
President in January 1997. From January 1991 to March 1992, he was a consultant
for National Wholesale Liquidators, Inc., a retailer of household goods and
housewares. From February 1996 to present, Mr. Rashbaum has been the president
and a director of H.B.R. Consultant Sales Corp., of which his wife is the sole
stockholder. From March 1992 to June 1995, Mr. Rashbaum was a consultant to 47th
Street Photo, Inc., a retailer of electronics, which position was at the request
of the bankruptcy court, during the time it was in Chapter 11. Mr. Rashbaum was
a consultant for Play Co. Toys & Entertainment Corp., since June 1995 and became
the Chairman of the board in October 1996, which company is a wholesaler and
retailer of children's toys.
Robert DiMilia, has been a Director, Vice President and Secretary of the
Company since January 10, 1997, prior to thereto he was a consultant to the
Company with respect to the
<PAGE>
production of the Motion Picture. From 1991 to 1994 Mr. DiMilia was a
vice-president for The Bon Bon Group a national payroll/accounting entertainment
service company. From March 1995 to May 1996 Mr. DiMilia was a media and
marketing consultant in the film industry working on a variety of projects.
Alain A. Le Guillou, M.D. has been a director of the Company since May
1996. Since July 1995, Dr. Guillou has been a doctor of Pediatrics at Montefiore
Medical Group. From July 1992 to June 1995 Dr. Guillou was a Pediatric resident
at the University of Minnesota, Gillette Hospital, St. Paul, Minnesota. From
July 1991 to June 1992 Dr. Guillou was an intern at Montefiore Medical Center,
Bronx, N.Y. Dr. Guillou is the son-in-law of Harold Rashbaum.
Significant Employees
Dan Stone, 61, had been the chairman of the board of Breaking Waves
since its inception in 1991 until the consummation of the Acquisition in
September 1996, at which time he became a consultant Mr. Stone has been the
president and a director of D. Stone Industries, Inc., and Dan Stone Industries,
Inc. since their inceptions in 1981 and 1991, respectively.
Malcolm Becker, 61, has been the vice-president of design,
merchandising and production of Breaking Waves, Inc., since its inception in
1991.
Michael Friedland, 59, has been the vice-president of design, marketing
and sales of Breaking Waves, Inc., since its inception in 1991.
The Company has agreed to indemnify its officers and directors with
respect to certain liabilities including liabilities which may arise under the
Securities Act of 1933. Insofar as indemnification for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Company pursuant to any charter, provision, by-law, contract,
arrangement, statute or otherwise, the Company has been advised that in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or paid
by a director, officer, or controlling person of the Company in the successful
defense of any such action, suit or proceeding) is asserted by such director,
officer or controlling person of the Company in connection with the Securities
being registered, the Company will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
<PAGE>
Executive Compensation
Summary of Cash and Certain Other Compensation
The following provides certain information concerning all Plan and
Non-Plan (as defined in Item 402 (a)(ii) of Regulation S-B) compensation awarded
to, earned by, paid by the Company during the period ended December 31, 1996 to
each of the named executive officers of the Company.
<TABLE>
<CAPTION>
Summary Compensation Table
Securities Restricted Securities
Name and Principal Underlying Underlying All Other
Position Year Salary($) Options/SARS ($) Award Compensation
- -------- ---- --------- ---------------- ----- ------------
<S> <C> <C> <C> <C> <C>
Harold Rashbaum 1996 (1) 26,000 100,000 (2) 50,000 (3) --
Chief Executive Officer
President
Robert Melillo 1996 (4) 69,200 -- 25,000 (5) --
Former Chief Executive Officer
</TABLE>
1. In October 1996, Mr. Rashbaum began receiving a salary of approximately
$100,000 per annum. At the closing of the Company's initial public offering
H.B.R. Consulting Sales, Corp., a company controlled by Mr. Rashbaum and owned
by his wife received 7,500 shares of Common Stock and a consulting fee of
$40,000.
Includes options to purchase shares of Common Stock issued in March 1997
under the Company's Senior Management Incentive Plan. Includes shares issued
under the Senior Management Incentive Plan in June 1996, subject to a vesting
schedule. See "Senior Management Incentive Plan". 1 Mr. Melillo received an
annual salary of $104,000 per annum up and through January 10, 1997, when he
resigned as an officer and director of the Company. He continued as a consultant
until April 1997 and received a consulting fee of $600 per week. See
"Management". Mr. Melillo received 50,000 shares of Common Stock in the Company
pursuant to the Company's Senior Management Incentive Plan, subject to a vesting
schedule, whereby 25,000 shares would vest in each of June of 1997 and 1998.
Upon the resignation of Mr. Melillo on January 10, 1997, he returned 25,000
shares to the Company and the Company agreed that the remaining shares should be
vested.
Employment and Consulting Agreements
Prior to Harold Rashbaum becoming an officer and director of the
Company, he provided consulting to the Company through H.B.R. Consultant Sales
Corp., ("HBR"), a Company of which he is an officer and director and of which
his wife is the sole stockholder. HBR entered into an oral consulting agreement
with the Company whereby, it will receive 5% of the net profits of the Motion
Picture received by the Company. In addition, HBR received $40,000 and 7,500
shares of the Company's Common Stock at the closing of the Company's initial
public offering. Mr. Rashbaum receives a salary of $156,000 per annum for being
an officer or director of the Company. In addition, Mr. Rashbaum received 50,000
shares of Common Stock under the Company's Senior Management Incentive Plan
which shares vest at the rate of 25,000 shares on each of June 1997 and 1998.
Pursuant to the restricted share agreement the shares only vest if Mr. Rashbaum
continues to provide services to the Company. Shares not vested shall be
returned to the Company's treasury. In March 1997, the Company granted Mr.
Rashbaum as chief executive officer an option to purchase 100,000 shares at $5
1/8 per share, pursuant to the Company's Senior Management Incentive Plan.
Dan Stone entered into a two year consulting agreement with Breaking Waves
as of
<PAGE>
January 1996, pursuant to which he oversees the operation of Breaking Waves in
return for a yearly consulting fee of $100,000. Mr. Stone received $50,000 from
the proceeds of the Company's initial public offering, as payment in advance of
half of the 1997 consulting fee, the balance of which is being paid in weekly
installments.
In November 1997, Breaking Waves entered into 3 year employment
agreements with each of Malcolm Becker and Michael Friedland. The agreements
provide for a salary of $110,000 for the term of employment and the receipt of
shares of the Company's Common Stock in each year of the agreements. The number
of shares of the Common Stock shall be equal to a Market Value (as hereinafter
defined) of $25,000 on the date of issuance, subject to a vesting schedule. The
vesting schedule shall be as follows; (i) 1/2 of the shares received on the date
hereof shall vest 90 days from the date hereof with the balance vesting 270 days
from the date hereof and (ii) on each subsequent annual issuance commencing
November 27, 1997, 1/2 of the shares shall vest six months from issuance with
the balance vesting on the following anniversary. The shares vest pursuant to
restricted share agreements. "Market Value" shall mean (i) $5.00 per share with
respect to the shares issued in November 1996 and (ii) the average of the
closing bid and asked prices for a share of Common Stock for a period of 30 days
ending five days prior to the date of issuance, as officially reported by the
principal securities exchange on which the Common Stock is quoted. The
agreements include no-disclosure and non-compete clauses.
Senior Management Incentive Plan
In May 1996, the Board of Directors adopted the Senior Management
Incentive Plan (the "Management Plan"), which was adopted by stockholder
consent. The Management Plan provides for the issuance of up to 250,000 shares
of the Company's Common Stock in connection with the issuance of stock options
and other stock purchase rights to executive officers and other key employees
and consultants.
The Management Plan was adopted to provide the Board of Directors with
sufficient flexibility regarding the forms of incentive compensation which the
Company will have at its disposal for rewarding executive officers, employees
and consultants of the Company or a subsidiary or the Company, who render
significant services to personnel equity ownership in the Company through the
grant of stock options and other rights pursuant to the Management Plan to
enable the Company to attract and retain qualified personnel without
unnecessarily depleting the Company's cash reserves. The Management Plan is
designed to augment the Company's existing compensation programs and is intended
to enable the Company to offer a personal interest in the Company's growth and
success through awards of either shares of Common Stock or rights to acquire
shares of Common Stock to individuals who provide significant services to the
Company.
The Management Plan is intended to help the Company attract and retain
key executive management personnel whose performance is expected to have a
substantial impact on the Company's long-term profit and growth potential by
encouraging and assisting those persons to acquire equity in the Company. It is
contemplated that only employees who perform services of special importance to
the Company will be eligible to participate under the Management Plan. A total
of 250,000 shares of Common Stock has been reserved for issuance under the
Management
<PAGE>
Plan. It is anticipated that awards made under the Management Plan will be
subject to three-year vesting periods, although the vesting periods are subject
to the discretion of the Administrator (as defined below).
The Management Plan is to be administered by the Board of Directors or
a committee of the Board, if one is appointed for this purpose (the Board or
such committee, as the case may be, will be referred to in the following
description as the "Administrator"). Members of the Board of Directors who are
eligible for awards or have been granted awards may not vote on any matters
affecting the administration of the Management Plan or the grant of any award
thereunder. Subject to the specific provisions of the Management Plan, the
Administrator will have the discretion to determine the recipients of the
awards, the nature of the awards to be granted, the dates such awards will be
granted, the terms and conditions of awards and the interpretation of the
Management Plan, except that any award granted to any employee of the Company
who is also a director of the Company will also be subject, in the event the
persons serving as members of the Administrator of such plan at the time such
award is proposed to be granted do not satisfy the requirements regarding the
participation of "disinterested persons" set forth in Rule 16b-3 ("Rule 16b-3")
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), to the approval of an auxiliary committee consisting of not less than
three individuals (all of whom qualify as "disinterested persons" as defined
under Rule 16b-3. In the event the Board of Directors deems the formation of an
auxiliary committee impractical, the Board is authorized to approve any award
under the Management Plan. As of the date hereof, the Company has not yet
determined who will serve on such auxiliary committee, if one is required. The
Management Plan generally provides that, unless the Administrator determines
otherwise, each option or right granted under the plan will become exercisable
in full upon certain "change of control" events as described in the plan.
If any change is made in respect of the Common Stock subject to the
Management Plan or subject to any right or option granted under the Management
Plan (through merger, consolidation, reorganization, recapitalization, stock
dividend, dividend in property other than cash, stock split, liquidating
dividend, combination of shares, exchange of shares, change in corporate
structure or otherwise), the Administrator will make appropriate adjustments to
the Management Plan and the number of shares and price per share of Common Stock
subject to outstanding rights or options. Generally, the Management Plan may be
amended by action of the Board of Directors, except that any amendment which
would change the class of securities subject to the plan, increase the total
number of shares subject to such plan, extend the duration of such plan,
materially increase the benefits accruing to participants under such plan, or
change the category of persons who can be eligible for awards under such plan
must be approved by the affirmative vote of the owners of a majority of Common
Stock entitled to vote. The Management Plan permits awards to be made thereunder
until November 2004.
Directors who are not otherwise employed by the Company will not be
eligible for participation in the Management Plan. The Management Plan provides
for four types of awards: stock options, incentive stock rights, stock
appreciation rights (including limited stock appreciation rights) and restricted
shares. The Management Plan may be either incentive stock options which qualify
as such under the Code ("ISOs") or options which do not qualify under the Code
as ISOs ("non-ISOs"). ISOs may be granted at an option price of not less than
100% of the
<PAGE>
fair market value of the Common Stock on the date of grant, except that an ISO
granted to any person who owns Common Stock representing more than 10% of the
total combined voting power of all classes of Common Stock of the Company ("10%
Stockholder") must be granted at an exercise price of at least 110% of the fair
market value of the Common Stock on the date of the grant. The exercise price of
non-ISOs may not be less than 85% of the fair market value of the Common Stock
on the date of grant. The Administrator will determine the exercise period of
the options granted which shall be no less than one year from the date of grant.
Non-ISOs may be exercisable for a period of up to 13 years from the date of
grant. ISOs granted to persons other than 10% Stockholders may be exercisable
for a period of up to 10 years from the date of grant; ISOs granted to 10%
Stockholders may be exercisable for a period of up to five years from the date
of grant. The aggregate fair market value (determined at the time an ISO is
granted) of shares of Common Stock that are subject to ISOs held by a plan
participant that may be exercisable for the first time during each calendar year
may not exceed $100,000. In March 1997, the Company granted options to purchase
100,000 and 50,000 shares of Common Stock to Harold Rashbaum and Robert DiMilia
respectively, at $5.125 per share, 100% of the market price on the date of
grant.
Payment for shares of Common Stock purchased pursuant to exercise of
stock options may be paid in full in cash, or by certified check or, at the
discretion of the Administrator, (i) by promissory note, (ii) promissory note
combined with cash, (iii) by shares of Common Stock having a fair market value
equal to the total exercise price or (iv) by a combination of items (i)-(iii)
above. The provision that permits the delivery of already owned shares of stock
as payment for the exercise of an option may permit "pyramiding". In general,
pyramiding enables a holder to use shares of Common Stock owned in order to pay
for the exercise of the stock option. This is done by transferring such shares
to the Company as payment of the exercise price for the shares purchased
pursuant to the exercise of the Option. The value of such shares shall be
determined by the market value of the shares at the time of transfer.
Thereafter, the shares received upon the exercise of the option could then be
used to do the same. Thereby, the holder, may start with as little as one share
of Common Stock and, by using the shares of Common Stock acquired in successive,
simultaneous exercises of the option, to exercise the entire option, regardless
of the number of shares covered thereby, with no additional cash or investment
other than the original share of Common Stock used to exercise the option.
Upon termination of employment, an optionee will be entitled to
exercise the vested portion of an option for a period of up to three months
after the date of termination, except that if the reason for termination was a
discharge for cause, the option shall expire immediately, and if the reason for
termination was death or permanent disability of the optionee, the vested
portion of the option will remain exerciseable for a period of 12 months
thereafter.
Incentive Stock Rights.
Incentive stock rights consist of incentive stock units each of which
is equivalent to one share of Common Stock and may be awarded in consideration
for services performed for the Company or any subsidiary. Each incentive stock
unit shall entitle the holder thereof to receive, without payment of cash or
property to the Company, one share of Common Stock in consideration for services
performed for the Company or any subsidiary by the employee, subject
<PAGE>
to the lapse of the incentive periods, at which time the Company will issue one
share of Common Stock for each unit awarded upon the completion of each
specified period. If the employment with the Company of the holder of the
incentive stock units terminates prior to the end of the incentive period
relating to the units awarded, the rights will thereupon be null and void,
except that if termination is caused by death or permanent disability, the
holder or his/her heirs, as the case may be, will be entitled to receive a pro
rata portion of the shares represented by the units, based upon that portion of
the incentive period which has elapsed prior to the death or disability.
Stock Appreciation Rights (SARs)
SARs may be granted to recipients of stock options under the Management
Plan. In the discretion of the Board of Directors, SARs may be granted
simultaneously with, or subsequent to, the grant of a related stock option and
may be exercised to the extent that the related option is exercisable, except
that no general SAR (as hereinafter defined) may be exercised within a period of
six months of the date of grant of such SAR and no SAR granted with respect to
an ISO may be exercised unless the fair market value of the Common Stock on the
date of exercise exceeds the exercise price of the ISO. An option holder may be
granted general SARs ("general SARs") or limited SARs ("limited SARs"), or both.
General SARs permit the holder thereof to receive an amount (in cash, shares of
Common Stock or a combination of both) equal to the value of the Common Stock on
the exercise date over the exercise price of the related option. Limited SARs
are similar to general SARs, except that, unless the Administrator determines
otherwise, they may be exercised only during a prescribed period following the
occurrence of one or more of the following "change of control" transactions: (i)
the approval of the Board of Directors and stockholders of the Company of a
consolidation or merger in which the Company is not the surviving corporation,
the sale of all or substantially all the assets of the Company, or the
liquidation or dissolution of the Company; (ii) the commencement of a tender or
exchange offer for the Company's Common Stock (or securities convertible into
Common Stock) without the prior consent of the Board; (iii) the acquisition of
beneficial ownership by any person or other entity (other than the Company or
any employee benefit plan sponsored by the Company) of securities of the Company
representing 25% or more of the voting power of the Company's outstanding
securities; or (iv) in the event, during any period of two consecutive years or
less, individuals who at the beginning of such period constitute the entire
Board cease to constitute a majority of the Board, unless the election, or the
nomination for election, of each new director is approved by at least a majority
of the directors then still in office.
An SAR holder may exercise his or her SAR rights by giving written
notice of such exercise to the company which specifies the number of shares of
Common Stock involved. The exercise of any portion of either the related stock
option or the tandem SARs will cause a corresponding reduction in the number of
shares remaining subject to the option or the tandem SARs, thus maintaining a
balance between outstanding options and SARs. SARs have the same termination
provisions as the underlying stock options (as described above) in the event an
SAR holder ceases to be an employee of the Company.
<PAGE>
Restricted Stock Purchase Agreements.
Restricted share agreements provide for the issuance of restricted
shares of Common Stock to eligible participants under the Management Plan. The
Board of Directors may determine the price to be paid by the participant for the
shares or that the shares may be issued for no monetary consideration. The
shares issued shall be subject to restrictions for a stated restricted period
during which the participant must continue employment with the Company in order
to retain the shares. Payment can be made in cash, a promissory note or a
combination of both. The Company issued an aggregate of 125,000 restricted
shares of which (i) each of Mr. Rashbaum and Robert Melillo, former chief
executive officer, received 50,000 shares and (ii) Charles Rosen, a former
consultant to the Company received 25,000 shares. All such shares were subject
to a vesting schedule whereby, 1/2 of the shares were to vest in each of June
1997 and 1998. Upon the termination of Mr. Rosen's consulting agreement the
25,000 shares were returned to the Company. In addition, upon the resignation of
Mr. Melillo, he returned 25,000 shares to the Company and retained 25,000 shares
which became fully vested, pursuant to an agreement.
Restricted shares awarded under the Management Plan will be subject to
a period of time designated by the Administrator (the "restricted period")
during which the recipient vested. The Administrator may also impose other
restrictions, terms and conditions that must be fulfilled before the restricted
shares may vest. Upon the grant of restricted shares, stock certificates
registered in the name of the recipient will be issued and such shares will
constitute issued and outstanding shares of Common Stock for all corporate
purposes. The holder will have the right to vote the restricted shares and to
receive all regular cash dividends (and such other distributions as the
Administrator may designate, other than distributions made solely with respect
to the restricted shares ("retained distributions")), if any, which are paid or
distributed on the restricted shares, and generally to exercise all other rights
as a holder of Common Stock, except that, until the end of the restricted
period: (i) the holder will not be entitled to take possession of the stock
certificates representing the restricted shares or receive retained
distributions and (ii) the holder will not be entitled to sell, transfer or
otherwise dispose of the restricted shares. A breach of any restrictions, terms
or conditions established by the Administrator with respect to any restricted
shares will cause a forfeiture of such restricted shares.
Upon expiration of the applicable restricted period(s) and the
satisfaction of any other applicable conditions, the restricted shares and any
dividends or other distributions not distributed to the holder (the "retained
distributions") thereon will become vested. Any restricted shares and any
retained distributions thereon which do not so vest will be forfeited to the
Company. If prior to the expiration of the restricted period a holder is
terminated without cause or because of a total disability (in each case as
defined in the Management Plan), or dies, then, (unless otherwise provided in
the restricted share agreement providing for the award of restricted shares) the
restricted period applicable to each award of restricted shares will thereupon
be deemed to have expired. Unless the Administrator determines otherwise, if a
holder's employment terminates prior to the expiration of the applicable
restricted period for any reason other than as set forth above, all restricted
shares and any retained distributions thereon will be forfeited. Upon forfeiture
of any restricted shares, the Company will repay to the holder thereof any
amount the holder originally paid for such shares.
<PAGE>
Acceleration of all awards under the Management Plan shares shall
occur, under the provisions of Section 13 the Management Plan, on the first day
following the occurrence of any of the following: (a) the approval by the
stockholders of the Company of an "Approved Transaction"; (b) a "Control
Purchase"; or (c) a "Board Change".
An "Approved Transaction" is defined as (A) any consolidation or merger
of the Company in which the Company is not the continuing or surviving
corporation or pursuant to which shares of Common Stock would be converted into
cash, securities or other property other than a merger of the Company in which
the holders of Common Stock immediately prior to the merger have the same
proportionate ownership of Common Stock of the surviving corporation immediately
after the merger, or (B) any sale, lease, exchange, or other transfer (in one
transaction or a series of related transactions) of all, or substantially all,
of the assets of the Company, or (C) the adoption of any plan or proposal for
the liquidation or dissolution of the Company.
A "Control Purchase" is defined as circumstances in which any person
(as such term is defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act),
corporation or other entity (other than the Company or any employee benefit plan
sponsored by the Company) (A) shall purchase any Common Stock of the Company (or
securities convertible into the Company's Common Stock) for cash, securities or
any other consideration pursuant to a tender offer or exchange offer, without
the prior consent of the Board of Directors, or (B) shall become the "beneficial
owner" (as such term is defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Company representing twenty-five percent
(25%) or more of the combined voting power of the then outstanding securities of
the Company ordinarily (and apart from rights accruing under special
circumstances) having the right to vote in the election of directors (calculated
as provided in paragraph (d) of such Rule 13d-3 in the case of rights to acquire
the Company's securities).
A "Board Change" is defined as circumstances in which, during any
period of two consecutive years or less, individuals who at the beginning of
such period constitute the entire Board shall cease for any reason to constitute
a majority thereof unless the election, or the nomination for election by the
Company's stockholders, of each new director was approved by a vote of at least
a majority of the directors then still in office.
<PAGE>
PRINCIPAL SECURITYHOLDERS
The following table sets forth certain information at June 30, 1997 and
as adjusted to reflect the sale of the 800,000 shares of Common Stock and
1,600,000 Warrants offered by the Company, based upon information obtained by
the persons named below, with respect to the beneficial ownership of shares of
Common Stock by (i) each person known by the Company to be the owner of 5% or
more of the outstanding shares of Common Stock; (ii) each officer and director;
and (iii) all officers and directors as a group.
<TABLE>
<CAPTION>
Percent of Percent of
Common Stock Common Stock
Number of Owned Before Owned After
Name Shares Offering Offering (1)
- ---- --------- ------------ ------------
<S> <C> <C> <C>
European Ventures Corp. (2) 6,019,000 (3) 78.6% 59.1 (4)
P.O. Box 47
Road Town, Tortolla, British
Virgin Islands
Harold Rashbaum (2) 157,500 (5) 2.5% 2.5%
c/o Hollywood Productions, Inc.
14 East 60th Street, Suite 402
New York, New York 10022
Alain A. Le Guillou, M.D. (2) -- -- --
c/o Hollywood Productions, Inc.
14 East 60th Street, Suite 402
New York, New York 10022
Robert DiMilia 50,000 (6) * *
c/o Hollywood Productions, Inc.
14 East 60th Street, Suite 402
New York, New York 10022
All Officers and Directors 207,500 (6) 3.3% 3.3%
(3 as a Group) (2)-(5)
* Less than 1%
</TABLE>
(1) Does not give effect to the issuance of (i) 4,400,000 shares of Common
Stock reserved for issuance upon the exercise of the Warrants, (ii) 240,000
shares of Common Stock reserved for issuance upon the exercise of the
underwriter's warrants and the Warrants underlying the underwriter's warrants
and (iii) 250,000 shares of Common Stock reserved for issuance under the
Company's 1995 Senior Management Incentive Plan, except for the 75,000 shares
issued thereunder and the 150,000 shares underlying option grant pursuant
thereto.
(2) Harold Rashbaum is the father-in-law of Ilan Arbel, the sole officer
and director of EVC.
(3) Includes 1,568,000 shares of Common Stock issuable upon the exercise of
Warrants owned by EVC.
(4) Assume sale of 851,000 shares of Common Stock being offered herein. See
"Plan of Distribution."
<PAGE>
(footnotes continued from previous page)
(5) Includes (i)50,000 shares of Common Stock under the Senior Management
Incentive Plan, pursuant to a vesting schedule, none of which have vested and
(ii) 100,000 shares of Common Stock pursuant to an option granted under the
Company's Senior Management Incentive Plan and (iii) 7,500 shares issued to
H.B.R. Consultants Sales Corp. in September 1996. See "Executive Compensation-
Employment and Consulting Agreements" and "Senior Management Incentive Plan."
(6) Includes 50,000 shares of Common Stock issuable upon the exercise of an
option granted to Robert DiMilia under the Company's Senior Management Incentive
Plan.
Plan of Distribution for the Securities of the Selling Securityholder
This Prospectus also covers the offering of 851,000 shares of Common
Stock and 1,154,000 Warrants and the shares of Common Stock issuable upon the
exercise of Warrants, owned by one securityholder, EVC, whereby this Prospectus
shall be delivered by said Selling Securityholder upon the sale of any
securities by said holder. The shares of Common Stock, Warrants and the shares
of Common Stock issuable upon the exercise of such Warrants, may be sold, from
time to time by the Selling Securityholder. Sales of such securities or even the
potential of such sales at any time may have an adverse effect on the market
prices of the Securities offered hereby. See "Risk Factors."
The sale of the securities by the Selling Securityholder may be
effected from time to time in negotiated transactions, at fixed prices which may
be changed, and at market prices prevailing at the time of sale, or a
combination thereof. The Selling Securityholder may effect such transactions by
selling directly to purchasers or to or through broker-dealers which may act as
agents or principals, including in a block trade transaction in which the broker
or dealer will attempt to sell the securities as agent but may position and
resell a portion of the block as principal to facilitate the transactions or
purchases by a broker or dealer as principal and resale by such broker or dealer
for its own account pursuant to this Prospectus, or in ordinary brokerage
transactions and transactions in which the broker solicits purchasers. In
effecting sales, brokers or dealers engaged by the Selling Securityholder may
arrange for other brokers or dealers to participate. Such broker-dealers may
receive compensation in the form of discounts, concessions, or commissions from
the Selling Securityholder and/or the purchasers of the securities, as
applicable, for which such broker-dealers may act as agents or to whom they sell
as principal, or both (which compensation as to a particular broker-dealer might
be in excess of customary commissions). The Selling Securityholder and any
broker-dealers that act in connection with the sale of the shares of Common
Stock and/or by the Selling Securityholder might be deemed to be "underwriters"
within the meaning of Section 2(11) of the Act. In that connection, the Company
has agreed to indemnify the Selling Securityholder and the Selling
Securityholder has agreed to indemnify the Company, against certain civil
liabilities including liabilities under the Act.
At the time a particular offer of its securities is made by or on
behalf of the Selling Securityholder, to the extent required, a prospectus
supplement will be distributed which will set forth the number of shares of
Common Stock and/or Warrants being offered and the terms of the offering,
including the name or names of any underwriters, dealers or agents, the purchase
price
<PAGE>
paid by any underwriter for shares purchased from the Selling Securityholder and
any discounts, commission or concessions allowed or reallowed or paid to
dealers, and the proposed selling price to the public.
Under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the rules and regulations thereunder, any person engaged in a
distribution of Company's Securities offered by this Prospectus may not
simultaneously engage in market-making activities with respect to such Company
securities during the applicable "cooling off" period (nine days) prior to the
commencement of such distribution. In addition, and without limiting the
foregoing, the Selling Securityholder will be subject to applicable provisions
of the Exchange Act and rules and regulations thereunder, including without
limitation, Rules 10b-6 and 10b-7, in connection with transactions in such
securities, which provisions may limit the timing of purchases and sales of
Company securities by the Selling Securityholder.
DESCRIPTION OF SECURITIES
The Company's authorized capitalization consists of 20,000,000 shares
of Common Stock, par value $.001 per share. The following summary description of
the Common Stock and Warrants are qualified in their entirety by reference to
the Company's Articles of Incorporation and all amendments thereto.
Common Stock
The Company is authorized to issue 20,000,000 shares of Common Stock,
par value $.001 per share. As of June 30, 1997, there were 6,092,500 shares
issued and outstanding, all of which were fully paid and non-assessable. Holders
of Common Stock are entitled to one vote for each share held. There are no
preemptive, subscription, conversion or redemption rights pertaining to the
Common Stock. Holders of shares of Common Stock are entitled to receive such
dividends as may be declared by the Board of Directors out of assets legally
available therefor and to share ratably in the assets of the Company available
upon liquidation. See "Certain Relationships and Related Transactions."
The holders of shares of Common Stock do not have the right to cumulate
their votes in the election of directors and accordingly, the holders of more
than 50% of all the shares outstanding can elect all of the directors. Remaining
stockholders will not be able to elect any directors.
Warrants
The Warrants and the underlying shares of Common Stock will be in
registered form, pursuant to the terms of a warrant agreement (the "Warrant
Agreement") between the Company and Continental Stock Transfer & Trust Company,
as "Warrant Agent", so that the holders of Warrants will receive upon exercise,
registered shares of Common Stock. The following statements are summaries of
certain provisions of the Warrant Agreement, copies of which may be examined at
the principal corporate offices of the Warrant Agent and a form of which is
filed
<PAGE>
as an exhibit to the Registration Statement of which this Prospectus forms a
part. The following statements are subject to the detailed provisions of the
Warrant Agreement.
Each Warrant entitles the holder thereof to purchase one share of
Common Stock at a price of $3.00 for a period of four years commencing one year
from the date hereof, until September 9, 2001. On June 23, 1997 the Company's
board of directors authorized the Company to decrease the exercise price of the
Warrants to $3.00 per share. The Warrantholders will not be requested to
exchange their current certificates, but will be notified by mail of the change.
Unexercised Warrants will automatically expire at the end of such four year
period. Although the Company has no current intention of making any additional
changes in reducing the exercise price or extending the exercise period of the
Warrants, it is possible that either or both of such changes may be effected by
resolution of the Board of Directors in the future. In the event that the
exercise price of the Warrants is reduced, or the exercise period of the
Warrants is extended, the Company will be required to have a post-effective
amendment filed and declared effective before the Warrants could be exercised.
During the term of the Warrants, the Company may, on 30 days prior
notice, commencing September 9, 1997, redeem each Warrant at a price of $.05 per
Warrant, provided that the closing bid quotation of the Common Stock for at
least 20 consecutive trading days ending on the third day prior to the day on
which the Company gives notice of redemption has been at least 170% of the then
effective exercise price of the Warrants. The Warrants, however, will be
exercisable during such 30-day notice period. In the event that the Company
decides to redeem the Warrants, it will notify all Warrantholders thereof by
mail and will additionally publish a Notice of Redemption in the Wall Street
Journal as to the date of redemption. Redemption of the Warrants could cause the
holders to exercise the Warrants and pay the exercise price at a time when it
may be disadvantageous for the holders to do so, to sell the Warrants at the
then current market price when they might otherwise wish to continue to hold the
Warrants, or to accept the redemption price, which is likely to be substantially
less than the market value of the Warrants at the time of redemption. The
Company will not redeem the Warrants at any time in which its registration
statement is not current, enabling investors to exercise their Warrants during
the 30 day notice period in the event of a warrant redemption by the Company.
The exercise price and the number of shares or other securities
purchasable upon exercise of any Warrants are subject to adjustment upon the
occurrence of certain events, including the issuance of shares of Common Stock
as a dividend and any recapitalization, reclassification or split-up or reverse
split of the Common Stock. No adjustment in the exercise price will be required
to be made with respect to the Warrants until cumulative adjustments amount to
$0.01 or more per Warrant; however, any such adjustment not required to be made
at any given time due to such exception will be carried forward and taken into
account in any subsequent adjustment.
In the event of any reclassification, capital reorganization, or other
similar change of outstanding Common Stock, any consolidation or merger
involving the Company (other than a consolidation or merger which does not
result in any reclassification, capital reorganization or
<PAGE>
other similar change in the outstanding Common Stock), or a sale or conveyance
to another corporation of the property of the Company as, or substantially as,
an entirety, each Warrant will thereupon become exercisable only for the kind
and number of shares of stock or other securities, assets, or cash to which a
holder of the number of shares of Common Stock purchasable (at the time of such
reclassification, reorganization, consolidation, merger or sale) upon exercise
of such Warrant would have been entitled upon such reclassification,
reorganization, consolidation, merger or sale. In the case of a cash merger of
the Company into another corporation or any other cash transaction of the type
mentioned above, the effect of these provisions would be that the holder of a
Warrant would thereafter be limited to exercising such Warrant at the exercise
price in effect at such time for the amount of cash per share that a
Warrantholder would have received had such holder exercised such Warrant and
received shares of Common Stock immediately prior to the effective date of such
cash merger or transaction. Depending upon the terms of such cash merger or
transaction, the aggregate amount of cash so received could be more or less than
the exercise price of the Warrant.
The Warrant Agreement contains provisions permitting the Company and
the Warrant Agent without the consent of any Warrantholder to supplement the
Warrant Agreement in order to cure any ambiguity, to correct any provision
contained therein which may be defective or inconsistent with any other
provisions therein, or to make other provisions which the Company and the
Warrant Agent may deem necessary or desirable and which does not adversely
affect the interested Warrantholders by virtue of their ownership of Warrants
alone have no right to vote on matters submitted to the Company's stockholders
and have no right to receive dividends. The holders of Warrants are also not
entitled to share in the Company's assets in the event of dissolution,
liquidation or winding up.
In order for him or her to be able to exercise his or her Warrant, the
Company must have a current Registration Statement on file with the Securities
and Exchange Commission and, unless otherwise exempt, the State securities
commission of the State in which the Warrantholder resides. Accordingly, the
Company would be required to file post-effective amendments to its Registration
Statement when subsequent events require such amendments in order to continue
the registration of the Common Stock underlying the Warrants. Although the
Company has undertaken and intends to keep its Registration Statement current,
there can be no assurance that the Company will keep its Registration Statement
current and, if for any reason it is not kept current, the Warrants will not be
exercisable and will lose all value. The Company's Transfer Agent has also been
appointed as its Warrant Agent responsible for all record keeping and
administrative functions in connection with the Warrants.
Transfer Agent and Warrant Agent.
The Company's Transfer Agent for its Common Stock and its Warrant Agent
is Continental Stock Transfer & Trust Company.
Reports to Stockholders.
The Company has adopted December 31 as its fiscal year end. The Company
furnishes
<PAGE>
annual reports to its stockholders containing audited financial statements,
together with an opinion by an independent certified public accountant. In
addition, the Company may, in its discretion, furnish to stockholders interim
quarterly reports containing unaudited financial information.
SHARES ELIGIBLE FOR FUTURE SALE
A total of 6,092,500 shares of Common Stock have been issued by the
Company of which 4,693,500 shares may be deemed "restricted securities" (as such
term is defined in Rule 144 issued under the Act) and, in the future, may be
publicly sold only if registered under the Act or pursuant to an exemption from
registration thereunder. Rule 144 provides that restricted securities may be
sold after having been held for at least one year. Rule 144 also provides that,
with respect to "restricted securities" sold for the account of the aggregate
amount of securities sold, together with all sales of restricted and other
securities of the same class for the account of the "affiliate" within the
preceding three months of such sale, shall not exceed the greater of (i) 1%
percent of the outstanding shares or other units of such class of securities, or
(ii) the average weekly reported volume of trading in such securities during the
four weeks prior to the filing of a Notice of Sale by such "affiliate." As of
the date hereof, the Selling Securityholder has 851,000 shares of Common Stock
and 1,154,000 Warrants registered for resale, which may be sold from time to
time. Initially the Selling Securityholder registered the resale of 1,400,000
shares of Common Stock and 2,000,000. In addition, all of the remaining
restricted shares, except for the 150,000 shares issued to the prior
stockholders of Breaking Waves in September 1996, have been owned by the holders
for in excess of one year. Therefore, after taking into account the shares to be
sold by the Selling Securityholder (and without giving effect to any shares of
Common Stock which may be issued upon exercise of the Warrants) in each
three-month period at least 60,925 shares may be publicly sold under Rule 144 by
each holder of "restricted securities" who has held such shares for at least two
years.
A person who is a "non-affiliate" of the Company at the time of sale
and for the three months prior thereto and who beneficially owns the securities
to be sold for at least three years prior to resale is not subject to any
restrictions on the resale of shares. Any such sales under Rule 144 would, in
all likelihood, have a depressive effect on the market price for the Company's
Common Stock and Warrants.
All officers, directors and stockholders of the Company, except for the
shares owned by EVC being sold herein, have entered into "lock-up" agreements,
agreeing not to offer, sell or otherwise dispose of, directly or indirectly, any
of their shares of Common Stock or securities convertible into Common Stock for
a period of two years until September 1999, excluding the securities being
registered for sale by the Selling Securityholder, without the prior written
consent of the underwriter of the Company's initial public offering. Though this
underwriter has ceased operation, the Company still recognizes these lock-up
agreements due to representations made in its prospectus.
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In December 1995, in connection with the incorporation of the Company, EVC
acquired 5,000,000 shares of the Company's Common Stock and 2,000,000 Warrants
for aggregate consideration of $1,100,000. The sale of 1,400,000 shares of
Common Stock and 2,000,000 Warrants was registered for resale in the Company's
initial public offering of which 549,000 shares and 432,000 Warrants were
resold.
During September 1996, the Company contributed $100,000 to Breaking Waves
pursuant to the Agreement whereby simultaneously therewith, Breaking Waves
repaid its stockholders' loans amounting to $100,000.
Prior to the acquisition by the Company, Breaking Waves, along with an
affiliate, D. Stone, an entity wholly owned by the previous majority
stockholders of Breaking Waves, had issued cross-corporate guarantees to
NationsBanc Commercial Corp. for trade acceptances payable. In connection with
the acquisition by the Company, such cross-corporate guarantees were replaced by
letters of credit issued by the Company.
During January 1997, Breaking Waves redeemed 2,800 shares of its Series A
preferred stock for a total of $280,000.
Effective March 14, 1997, the Company granted 150,000 options to purchase
shares of common stock pursuant to the Company's Incentive Plan. 100,000 options
were granted to the Company's President and 50,000 options were granted to an
officer.
Dan Stone entered into a two year consulting agreement with Breaking Waves
as of January 1996, pursuant to which he oversees the operation of Breaking
Waves in return for a yearly consulting fee of $100,000, which fee is currently
being paid in weekly installments. At the closing of the Acquisition, Mr. Stone
received $50,000 from the proceeds of the Offering, as payment in advance of
half of the 1997 consulting fee.
In June 1996, the Company issued 50,000 shares of Common Stock to Robert
Melillo, the former chief executive officer, president and director of the
Company under the Company senior management incentive plan. The shares were to
vest at the rate of 25,000 in each of June 1997 and 1998. On January 10, 1997,
Mr. Melillo resigned and returned 25,000 shares to the Company. Pursuant to Mr.
Melillo's agreement with the Company, the remaining 25,000 shares became fully
vested.
Prior to Harold Rashbaum becoming an officer and director of the Company,
commencing in March 1996 he provided consulting to the Company through H.B.R.
Consultant Sales Corp., ("HBR"), a Company of which he is an officer and
director and of which his wife is the sole stockholder. HBR entered into an oral
consulting agreement with the Company whereby it will receive 5% of the net
profits of the Motion Picture received by the Company. In addition, HBR received
$40,000 and 7,500 shares of the Company's Common Stock at the closing of the
Acquisition from the Company. In June 1996 Mr. Rashbaum received 50,000 shares
of Common
<PAGE>
Stock under the Company's Senior Management Incentive Plan which shares vest at
the rate of 25,000 shares on each of June 1997 and 1998.
See "Executive Compensation-Employment and Consulting Agreements" for a
discussion of the Company's employment and consulting arrangements.
All transactions between the Company and any officer, director or 5%
stockholder will be on terms no less favorable than could be obtained from
independent third parties and will be approved by a majority of the independent
disinterested directors of the Company. The Company believes that all prior
affiliated transactions were made on terms no less favorable to the Company than
available from unaffiliated parties.
LEGAL OPINIONS
Legal matters relating to the shares of Common Stock and Warrants will
be passed on for the Company by its counsel, Klarman & Associates, New York, New
York.
EXPERTS
The financial statements of the Company as of and for the period from
December 31, 1996 and for the year then ended and from the December 1, 1995
(date of inception) to December 31, 1995 have been audited by Scarano & Lipton,
P.C., Independent Certified Public Accountants, to the extent and for the period
set forth in their report appearing elsewhere herein and are included in
reliance upon such report given upon the authority of that firm as experts in
giving said reports. In July 1997, Scarano & Tomaro, P.C. was formed and is
considered a successor firm for auditing purposes, which firm has executed the
report referenced above and consent annexed hereto.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission
(the "Commission") a Registration Statement on Form SB-2 under the Securities
Act of 1933, as amended, with respect to the shares of Common Stock and Warrants
to which this Prospectus relates. As permitted by the rules and regulations of
the Commission, its Prospectus does not contain all of the information set forth
in the Registration Statement. For further information with respect to the
Company and the Shares and Warrants offered hereby, reference is made to the
Registration Statement, including the exhibits thereto, which may be copied and
inspected at the Public Reference Section of the Commission at its principal
office at 450 Fifth Street, N.W., Washington, D.C., 20549.
<PAGE>
HOLLYWOOD PRODUCTIONS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
number
<S> <C>
Independent auditors' report F-1
Consolidated balance sheets at March 31, 1997 (Unaudited)
and December 31, 1996 F-2
Consolidated statements of operations for the three months ended March 31, 1997
and 1996 (Unaudited) and for the year ended December 31, 1996 and from December
1, 1995 (date of inception)
to December 31, 1995 F-3
Consolidated statement of stockholders' equity for the three months ended March
31, 1997 (Unaudited) and for the year ended December 31, 1996
and from December 1, 1995 (date of inception) to December 31, 1995 F-4
Consolidated statements of cash flows for the three months ended March 31, 1997
and 1996 (Unaudited) and for the year ended December 31, 1996 and from December
1, 1995 (date of inception)
to December 31, 1995 F-5 - F-6
Notes to consolidated financial statements F-7 - F-19
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Hollywood Productions, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Hollywood
Productions, Inc. and Subsidiaries (the "Company") as of December 31, 1996 and
the related consolidated statements of operations, stockholders' equity and cash
flows for year ended December 31, 1996 and from December 1, 1995 (date of
inception) to December 31, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, based on our audits, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of the Company as of December 31, 1996 and the consolidated results of
its operations and cash flows for the year ended December 31, 1996 and from
December 1, 1995 (date of inception) to December 31, 1995 in conformity with
generally accepted accounting principles.
Scarano & Tomaro, P.C.
Mitchel Field, New York
March 19, 1997
<PAGE>
HOLLYWOOD PRODUCTION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
(Unaudited)
March 31, 1997 December 31, 1996
Current assets:
<S> <C> <C>
Cash and cash equivalents .......................................... $ 2,441,181 $ 2,717,629
Accounts receivable ................................................ 4,155 22,351
Prepaid expenses ................................................... 82,012 86,698
Inventory .......................................................... 688,058 1,815,526
Film production and distribution costs ............................. 1,556,702 1,518,639
Advances to related parties ........................................ 95,090 115,854
----------- -----------
Total current assets .......................................... 4,867,198 6,276,697
Deferred compensation, net ............................................. 92,013 209,722
Organizational costs, net .............................................. 93,750 100,000
Excess of cost over net assets acquired, net ........................... 1,028,807 1,046,545
Other assets ........................................................... 15,119 10,118
----------- -----------
Total assets ........................................................... $ 6,096,887 $ 7,643,082
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................... $ 38,430 $ 81,398
Accrued expenses ................................................... 52,317 83,584
Due to factor ...................................................... 114,082 1,434,686
Income taxes payable ............................................... 99,044 35,279
Deferred taxes payable ............................................. 12,309 12,309
----------- -----------
Total current liabilities ..................................... 316,182 1,647,256
----------- -----------
Redeemable preferred stock of subsidiary:
Series A redeemable preferred stock, 5,600 shares
authorized, 2,800 and 5,600 issued and outstanding, respectively,
full liquidation value of $280,000 and $560,000, respectively ..... 280,000 560,000
Commitments and contingencies (Note 7) ................................. -- --
Stockholders' equity:
Common stock - $.001 par value, 20,000,000 shares authorized,
6,092,500 and 6,117,500 shares issued and outstanding, respectively 6,093 6,118
Additional paid-in capital ......................................... 5,589,215 5,651,690
Accumulated deficit ................................................ (94,603) (221,982)
----------- -----------
Total stockholders' equity .................................... 5,500,705 5,435,826
----------- -----------
Total liabilities and stockholders' equity ............................. $ 6,096,887 $ 7,643,082
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
<TABLE>
<CAPTION>
<PAGE>
HOLLYWOOD PRODUCTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
From December 1,
For the Three Months For the year ended 1995 (date of
Ended March 31, December 31, 1996 inception) to
1997 1996 (Note 2a) December 31, 1995
------------- ------ ------------------- --------------------
<S> <C> <C> <C> <C>
Net sales ................................. $ 2,441,081 $-- $ 1,217,152 $ --
Cost of sales ............................. 1,465,799 -- 667,722 --
Gross profit .............................. 975,282 -- 549,430 --
Expenses:
Selling, general and administrative
expenses ............................. 670,943 -- 657,678 --
Amortization of excess of costs over
net assets acquired .................. 17,738 -- 17,738 --
Total expenses ............................ 688,681 -- 675,416 --
Income (loss) before other income
(expenses) and provision for income taxes 286,601 -- (125,986) --
Other income (expense):
Interest and finance expense .......... (122,999) -- (85,099) --
Interest income ....................... 33,604 -- 38,386 --
Total other income (expense) ..... (89,395) -- (46,713) --
Income (loss) before provision for
income taxes ............................. 197,206 -- (172,699) --
Provision for income taxes ................ 69,827 -- 49,283 --
Net income (loss) ......................... $ 127,379 $-- $ (221,982) $ --
Income (loss) per common equivalent shares:
Net income (loss) ..................... $ .02 $ nil $ (.04) $ Nil
Weighted average number of
common shares outstanding ................ 6,092,500 5,000,000 5,331,877 5,000,000
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
HOLLYWOOD PRODUCTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED) AND
FOR THE YEAR ENDED DECEMBER 31, 1996
AND FROM DECEMBER 1, 1995 (DATE OF INCEPTION) TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
Additional Total
Common Stock Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
<S> <C> <C> <C> <C> <C>
Issuance of shares upon
capitalization at the Company .............5,000,000 $ 5,000 $ 1,095,000 $ -- $ 1,100,000
Balances at December 31, 1995 ..............5,000,000 5,000 1,095,000 -- 1,100,000
Contributed capital in connection with
co-production and property purchase
agreement (Note (7e)) ..................... -- -- 100,000 -- 100,000
Issuance of common stock as
consideration for services
rendered to the Company ...................50,000 50 124,950 -- 125,000
Issuance of common stock and warrants in
connection with the initial public
offering ..................................800,000 800 4,459,440 -- 4,460,240
Costs associated with initial
public offering ........................... -- -- (996,182) -- (996,182)
Issuance of common stock in connection
with acquisition of Breaking Waves ........150,000 150 574,850 -- 575,000
Issuance of common stock in connection with
Senior Management Incentive Plan as
consideration for services rendered
to the Company ............................100,000 100 249,900 -- 250,000
Issuance of common stock pursuant to a
consulting agreement as consideration for
services rendered to the Company .......... 7,500 8 18,742 -- 18,750
Issuance of common stock pursuant to a
management employment agreement for
services rendered to the Company .......... 10,000 10 24,990 -- 25,000
Net loss for the year
ended December 31, 1996 ................... -- -- -- (221,982) (221,982)
Balances at December 31, 1996 ............6,117,500 6,118 5,651,690 (221,982) 5,435,826
Cancellation of common stock in connection
with the Senior Management Incentive
Plan as consideration for
services rendered to the Company ........ (25,000) (25) (62,475) -- (62,500)
Net income for the three months ended
March 31, 1997 .......................... -- -- -- 127,379 127,379
Balances at March 31, 1997 ...............6,092,500 $ 6,093 $ 5,589,215 $ (94,603) $ 5,500,705
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
HOLLYWOOD PRODUCTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) For the year From December
For the three months ended ended December 1, 1995 (date
March 31, 31, 1996 of inception) to
1997 1996 (Note 2a) December 31, 1995
------------ ------------- --------------- -------------------
Cash flows from operating activities:
<S> <C> <C> <C> <C>
Net income (loss) ................................ $ 127,379 $ -- $ (221,982) $--
Adjustments to reconcile net loss to
net cash used for operating activities
Forgiveness of note receivable in lieu
of compensation ................................. 30,130 -- -- --
Issuance of common stock for services ............ -- -- 18,750 --
Amortization and depreciation .................... 79,253 -- 108,490 --
Decrease (increase) in:
Accounts receivable ........................... 18,196 -- (22,351) --
Prepaid expenses .............................. 4,686 -- (86,698) --
Inventory ..................................... 1,127,468 -- (1,815,526) --
Film production costs ......................... (38,063) -- (1,518,639) --
Security deposits ............................. 4,300 -- (9,178) --
Other assets .................................. 2,257 -- -- --
Increase (decrease) in:
Accounts payable .............................. (42,968) -- 81,398 --
Accrued expenses .............................. (31,267) -- 83,584 --
Due to factor ................................. (1,320,604) -- 1,434,686 --
Income taxes payable .......................... 63,765 -- 35,279 --
Deferred tax payable .......................... -- -- 12,309 --
Net cash provided by (used for)
operating activities ......................... 24,532 -- (1,899,878) --
Cash flows from investing activities:
Net assets acquired from acquisition of subsidiary -- -- 70,717 --
Subsidiary redemption of preferred stock ......... (280,000) -- -- --
Acquisition of furniture and fixtures ............ (11,614) -- (1,414) --
Net cash used for investing activities ........ (291,614) -- 69,303 --
Cash flows from financing activities:
Advances to related parties ...................... (11,866) -- (115,854) --
Proceeds from issuance of common stock
and warrants .................................... -- -- 5,560,240 --
Offering costs incurred .......................... -- -- (996,182) --
Proceeds from capital contributions .............. -- -- 100,000 --
Proceeds from advances from related parties ...... 2,500 -- -- --
Net cash provided from financing activities ... (9,366) -- 4,548,204 --
Net (decrease) increase in cash ..................... (276,448) -- 2,717,629 --
Cash, beginning of period ........................... 2,717,629 -- -- --
Cash, end of period ................................. $ 2,441,181 $ -- $ 2,717,629 $--
Supplemental disclosure of non-cash flow information:
Cash paid during the year for:
Interest ...................................... $ 72,455 $ -- $ 85,098 $--
Income taxes .................................. $ 2,154 $ -- $ -- $--
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
HOLLYWOOD PRODUCTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited) For the year From December
For the three months ended ended December 1, 1995 (date
March 31, 31, 1996 of inception) to
1997 1996 (Note 2a) December 31, 1995
Schedule of non-cash operating activities:
<S> <C> <C> <C> <C>
In connection with the issuance of common stock,
167,500 shares of common stock
were issued as
consideration for services $ - $ - $ 418,750 $-
In connection with the Senior Management
Incentive Plan, 25,000 shares
originally issued as consideration
for services rendered to the Company were
cancelled $(62,500) $ - $ - $-
Schedule of non-cash investing activities:
In connection with the acquisition of
a subsidiary, 150,000 shares of
common stock were issued $ - $ - $575,000 $-
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
HOLLYWOOD PRODUCTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1996 IS UNAUDITED
NOTE 1 - ORGANIZATION
Hollywood Productions, Inc. (the "Company") was incorporated in the State
of Delaware on December 1, 1995. The Company was formed for the purpose of
acquiring screen plays and producing motion pictures. During December 1995, the
Company issued 5,000,000 shares of its $.001 par value common stock to European
Ventures Corp. ("EVC") for an investment of $1,100,000. An officer and director
of EVC is the former President and Director of the Company. During September
1996, simultaneously with the completion of its Initial Public Offering ("IPO"),
the Company acquired all the capital stock of Breaking Waves, Inc. ("Breaking
Waves"). Breaking Waves designs, manufactures and distributes a line of private
label swimwear.
On April 8, 1996, the Company formed a wholly-owned subsidiary named D.L.
Productions, Inc. ("D.L."). D.L. was formed in the State of New York for the
purpose of purchasing and producing the motion picture "Dirty Laundry". As of
December 31, 1996 and March 31, 1997, the Company has presented consolidated
financial statements.
The Company's and its subsidiaries' year end is December 31.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Basis of presentation
The consolidated financial statements at December 31, 1996 and March 31,
1997 include the accounts of the Company and its wholly owned subsidiaries, D.L.
and Breaking Waves after elimination of all significant intercompany
transactions and accounts. Additionally, purchase accounting requires the
elimination of all operating transactions of the acquired subsidiary from the
inception of its fiscal year to the date of acquisition. Hence, the consolidated
statement of operations and consolidated statement of cash flows for the year
ended December 31, 1996 reflects the transactions of the subsidiary, Breaking
Waves, for the period from September 24, 1996, the acquisition date, to December
31, 1996. If the operating transactions from January 1, 1996 to September 24,
1996 were included in the December 31, 1996 consolidated statement of
operations, the effect by major components would be as follows: Increase
Net sales $ 3,596,982
Cost and expenses:
Cost of sales 2,401,586
Operating and interest expense 1,221,040
Net Loss $ (25,644)
b) Basis of presentation - Three months ended March 31, 1997 and 1996
The unaudited interim financial statements for the three months ended March
31, 1997 and 1996 included herein have been prepared by the Company, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission and, in the opinion of the Company, reflect all adjustments
(consisting only of normal recurring
<PAGE>
HOLLYWOOD PRODUCTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1996 IS UNAUDITED
NOTE 2 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
adjustments) and disclosure which are necessary for a fair presentation.
The results of operations for the three months ended are not necessarily
indicative of the results for the full year.
c) Cash and cash equivalents
The Company considers highly liquid investments with maturities of six
months or less at the time of purchase to be cash equivalents. At March 31, 1997
money market accounts and mutual funds amounted to $2,298,047 and $151,469,
respectively. Included in these amounts at December 31, 1996 are certificate of
deposits of $2,229,310 and mutual funds of $372,943. The Company at March 31,
1997 and December 31, 1996 maintains its cash deposits in accounts which are in
excess of Federal Deposit Insurance Corporation limits by $2,314,801 and
$2,562,852, respectively.
d) Inventory
Inventory at March 31, 1997 and December 31, 1996 amounting to $688,058 and
$1,815,526, respectively, consists of finished goods which are valued at the
lower of cost (using the first-in, first-out method) or market. All inventory is
pledged as collateral for factored receivables under an agreement with a
commercial bank. (See Note 5).
e) Film production and distribution costs
The Company follows industry standards in capitalizing film production and
distribution costs. Film production and distribution costs include all costs
associated with the writing, producing and distribution of the film. As of March
31, 1997, the Company has not amortized any film production and distribution
costs.
f) Deferred compensation
Deferred compensation consists of common stock issued in lieu of
compensation pursuant to the 1996 Senior Management Incentive Plan and
management employment agreements. Such costs are amortized monthly using the
straight line method over the period of the vesting rights of the respective
shares.
g) Organizational costs
Organizational costs consist of common stock issued in lieu of legal costs
incurred in the establishment of the Company. Organizational costs are being
amortized monthly on a straight line basis over their estimated useful lives of
five years.
h) Excess of cost over net assets acquired
Excess of cost over net assets acquired is being amortized on a monthly
basis over the estimated useful life of the related assets acquired for a period
of fifteen (15) years.
<PAGE>
HOLLYWOOD PRODUCTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1996 IS UNAUDITED
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
i) Income taxes
Effective December 1, 1995 (date of inception) the Company accounts for
income taxes in accordance with Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" which requires the use of the "liability
method" of accounting for income taxes. Accordingly, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities, using enacted tax rates in
effect for the year in which the differences are expected to reverse. Current
income taxes are based on the respective periods taxable income for Federal,
State and City income tax reporting purposes.
j) Revenue and cost recognition
i) Breaking Waves
Sales are recognized upon the transfer to the customer of title to the
goods (generally upon shipment to the customer from warehouse). Sales returns
are recorded upon acceptance of the goods (generally upon receipt of goods in
the warehouse with prior approved authorization). Duty costs, which are a
component of cost of sales, are recorded upon the clearance of such goods
through customs.
ii) D.L.
D.L. recognizes revenue when amounts are realized and earned. As of March
31, 1997 and December 31, 1996 no revenue associated with the motion picture
have been recognized.
k) Allowance for returns and chargebacks
The Company records allowance for returns and chargebacks at the end of
each month based on the actual returns and chargebacks received through the end
of the following month. Allowances for returns and chargeback more than thirty
days after the end of month have historically not been material.
l) Net income (loss) per common share
In calculating primary income (loss) per share, the Company uses the
weighted average number of shares of common stock outstanding during each
respective period.
m) Use of estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
which affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
<PAGE>
HOLLYWOOD PRODUCTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1996 IS UNAUDITED
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
n) Fair value disclosure at December 31, 1996
The carrying value of cash, accounts receivable, inventory, accounts
payable, accrued expenses and short-term debt are a reasonable estimate of their
fair value.
o) Impact of recently issued accounting standards
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount.
Statement 121 also addresses the accounting for long-lived assets that are
expected to be disposed of. The Company adopted Statement 121 January 1, 1996
and there was no effect to the Company.
p) Accounting for stock-based compensation
The Company has elected earlier adoption of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation", which
requires the recognition of compensation expense for stock-based awards based
upon the fair value of the award at the grant date. The Company elected adoption
of Statement 123 effective January 1, 1996.
NOTE 3 - ADVANCES TO RELATED PARTIES
During October 1996, pursuant to two promissory notes, the Company loaned
two of its officers a total of $87,000 bearing interest at six and one-half (6
1/2) percent payable over three years. During January 1997, the balance of one
of these notes amounting to $30,130 was written off as part of a severance
package for one of its previous officer. As of March 31, 1997 and December 31,
1996 the balance of such promissory notes amounted to $57,834 and $83,397,
respectively.
The remaining balance at March 31, 1997 and December 31, 1996 amounting to
$37,256 and $32,457, respectively, represents advances to affiliates of an
officer and other related parties. Such advances are non-interest bearing and
are due on demand.
<PAGE>
HOLLYWOOD PRODUCTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1996 IS UNAUDITED
NOTE 4 - ACCRUED EXPENSES
Accrued expenses consist of the following at:
March 31, December 31,
1997 1996
Professional fees $ 32,500 $ 54,205
Payroll taxes 4,248 7,946
Royalty and commission fees 11,402 19,833
Other 4,167 1,600
$ 52,317 $ 83,584
NOTE 5 - DUE TO FACTOR
On April 4, 1991, Breaking Waves entered into an accounts receivable
financing agreement with NationsBanc Commercial Corp. ("Nations") to sell their
interest in all present and future receivables without recourse. Breaking Waves
submits all sales orders to Nations for credit approval prior to shipment, and
pays Nations 3/4 of 1% fee on the gross amount of the receivables. Nations
retains from amounts payable to Breaking Waves a reserve for possible
obligations such as customer disputes and possible credit losses on unapproved
receivables. Breaking Waves may take advances of up to 85% of the purchase price
on the receivables, with interest charged at the rate of 13/4% over prime.
Interest charged to expense totalled approximately $67,173 from September 24,
1996 date of acquisition to December 31, 1996. For the three months ended March
31, 1997, interest expense amounted to $72,445. Nations has a continuing
interest in Breaking Waves's inventory as collateral for the advances.
NOTE 6 - PROVISION FOR INCOME TAX
Provision for income tax is comprised of the following for the year ended
December 31, 1996:
Current:
Federal $ -
State and local 35,279
---------
$ 35,279
Deferred:
Federal $ 9,289
State and local 4,715
---------
14,004
Total provision for income taxes $ 49,283
==========
The Company's provision for income taxes includes state and local income,
capital and minimum franchise taxes.
<PAGE>
HOLLYWOOD PRODUCTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1996 IS UNAUDITED
NOTE 6 - PROVISION FOR INCOME TAX (Cont'd)
A reconciliation of the provision for income taxes on income per the U.S.
Federal statutory rate to the reported income tax expense is as follows:
<TABLE>
<CAPTION>
December 31,
1996
<S> <C>
U.S. Federal statutory rate applied to
pretax loss ............................... $(58,718)
State and local income taxes, net of federal
income tax benefit, applied to pretax loss (25,456)
Permanent differences ...................... 3,337
Increase in valuation allowance ............ 80,837
Current provision for state and local taxes 35,279
Increase in deferred tax liability ......... 14,004
--------
Total provision for income taxes ..... $ 49,283
========
</TABLE>
The Company has adopted SFAS No. 109, "Accounting for Income Taxes",
effective December 1, 1995. Management has evaluated the effect of
implementation and has determined that there is no material impact on the
Company's financial position except for the effect of Breaking Waves IRC Section
263A inventory capitalization adjustment, the differential between book and tax
treatment with respect to SEC Section 144 stock issued as compensation for
services and the different lives used for book and tax purposes for amortization
of the excess of cost over net assets acquired.
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred taxes
related to differences between the financial and tax basis of assets and
liabilities for financial and income tax reporting purposes. Deferred tax assets
and liabilities represent the future tax return consequences of these temporary
differences, which will either be taxable or deductible in the year when the
assets or liabilities are recovered or settled.
The Company has a policy of capitalizing certain indirect costs to
inventory attributable to the current year for tax reporting purposes and
expensing such amounts currently for financial statement purposes. The Company
expects to continue this policy for an indeterminable time period. Accordingly,
measurement of the deferred tax liability attributable to the book-tax basis
differentials is computed at a rate of 34% federal and 11% state and local
pursuant to SFAS No. 109.
The tax effect of significant items comprising the Company's deferred tax
assets are as follows: December 31, 1996
Net operating loss carryforwards $ 37,389
SEC Section 144 stock compensation 43,448
Valuation allowance (80,837)
Long-term portion of deferred tax assets $ -
<PAGE>
HOLLYWOOD PRODUCTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1996 IS UNAUDITED
NOTE 6 - PROVISION FOR INCOME TAX (Cont'd)
The tax effect of significant items comprising the Company's deferred tax
liability are as follows:
December 31, 1996
Section 263A differential $ 12,309
Long-term portion of deferred tax liability $ 12,309
The Company and its subsidiaries file a consolidated tax return for federal
tax purposes. For state and local purposes, the Company and its subsidiaries
file separate tax returns. As such, each entity computes its state and local tax
based on its own taxable income or loss.
At December 31, 1996, the Company had a net operating loss carryforward
(NOL) of approximately $94,000 which expires in 2011. The Company has recorded a
full valuation allowance against the deferred tax asset at December 31, 1996
pursuant to SFAS 109, since management could not determine that it was "more
likely than not" that the deferred asset would be realized in the future.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
a) Lease commitments
The Company and its subsidiaries' approximate future minimum rentals under
non-cancelable operating leases in effect on March 31, 1997 are as follows:
Year ended
December 31,
1997 $ 85,380
1998 119,157
1999 119,157
2000 90,282
2001 69,657
--------------
$ 483,633
Rent expense charged to operations for the three months ended March 31,
1997 and for the period from September 24, 1996 (date of acquisition) to
December 31, 1996, amounted to approximately $34,000 and $33,500, respectively.
<PAGE>
HOLLYWOOD PRODUCTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1996 IS UNAUDITED
NOTE 7 - COMMITMENTS AND CONTINGENCIES (Cont'd)
b) License agreement
On October 16, 1995, Breaking Waves entered into a license agreement with
Beach Patrol, Inc. ("BPI") for the exclusive use of certain trademarks in the
United States. The agreement commenced January 1, 1996 and is for an initial
period of thirty (30) months divided into one (1) six month, and two (2) twelve
month terms with the option to extend the agreement for an additional three (3)
12 month term periods. In exchange, Breaking Waves will pay BPI the greater of
5% of net sales, as defined, or the guaranteed minimum trademark royalty
("GMTR"). The GMTR ranges from $75,000 for the first term to $200,000 for the
sixth term. In addition, Breaking Waves is obligated to pay BPI 2% of net sales
for showroom/advertising expenses, and to spend an additional 1% of net sales
for advertising. A minimum guaranteed showroom/advertising expense will be
payable for the first three terms. BPI has the option to terminate the agreement
if Breaking Wave's net sales do not reach specified levels, ranging from
$1,000,000 for the first term to $4,000,000 for the sixth term. For the three
months ended March 31, 1997, Breaking Waves incurred royalty and advertising
costs amounting to approximately $35,500. From September 24, 1996 (date of
acquisition) to December 31, 1996, Breaking Waves incurred royalty and
advertising costs amounting to approximately $26,000.
c) Concentration of risk
Breaking Waves purchases the majority of it's inventory from one vendor
located in Indonesia. For the three months ended March 31, 1997 and for period
from September 24, 1996 (date of acquisition) to December 31, 1996, Breaking
Waves purchased approximately 100% and 91%, respectively, of its merchandise
from this vendor.
For the three months ended March 31, 1997 and for the period from September
24, 1996 (date of acquisition) to December 31, 1996, approximately 36% and 10%,
respectively, of sales were derived from two and one unrelated customers,
respectively, who are in the retail industries.
d) Seasonality
Breaking Waves's business may be considered seasonal with a large portion
of its revenues and profits being derived between December and June for
shipments being made between November and May. Each year from June to November
Breaking Waves engages in the process of designing and manufacturing the
following seasons swimwear lines, during which time it incurs the majority of
its expenses, with limited revenues.
e) Co-production and property purchase agreements
Pursuant to co-production and property purchase agreements dated March 15,
1996, as amended, the Company, through is wholly owned subsidiary, D.L.,
acquired the rights to co-produce a motion picture and has agreed to finance the
costs of production and distribution of such motion picture with the co-producer
agreeing to finance $100,000
<PAGE>
HOLLYWOOD PRODUCTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1996 IS UNAUDITED
NOTE 7 - COMMITMENTS AND CONTINGENCIES (Cont'd)
of the costs of production. The Company retains all rights to the motion
picture, the screenplay, and all ancillary rights attached thereto.
Pursuant to the terms of the agreements with the stars of the motion
picture, the two stars each have the right to receive $50,000 against a 5%
participation fee based on revenues from the first proceeds received from the
distribution of the Motion Picture. Thereafter, the Company shall have the right
to all subsequent revenues until the first $990,000 of their initial investment
is repaid. The next proceeds received by the Company shall be distributed as
follows: (i) 5% of revenues to each of the two stars up to a maximum of
$250,000, at which time their distribution decreases to 2%; (ii) the Company and
the co-producer shall receive the remainder of their initial investment; (iii)
the Company and the co-producer each receives revenues up to 25% and 35%,
respectively, of each parties initial investment; (iv) the co-producers shall
receive their deferred compensation for writing, production and direction; and
(v) all revenues in excess of (i), (ii) (iii) and (iv) shall first be used to
repay any distribution costs incurred, with the remainder to the Company and
co-producer at a rate of 75% and 25%, respectively. As of March 31, 1997 and
December 31, 1996, the Company's cumulative contribution amounted to $1,456,702
and $1,418,639, respectively, for the co-production and distribution of such
motion picture whereas the co-producers have invested $100,000 in D.L. which has
been recorded as a capital contribution.
f) Employment agreements
On November 27, 1996, the Company entered into two employment agreements
with two officers of Breaking Waves. Such officers are responsible for the
designing, production, marketing and sales of the Breaking Wave's lines. The
employment agreements are for terms of three years with annual salaries of
$110,000 each. In addition to the salary, the Company has agreed to issue on
each of November 27, 1996, 1997 and 1998, shares of Common Stock, with a market
value equal to (as hereinafter defined) $25,000 on the date of issuance, subject
to a vesting schedule. The vesting schedule shall be as follows; (i) 1/2 of the
shares received on November 27, 1996 vested 90 days thereafter with the balance
vesting 270 days thereafter and (ii) on each subsequent annual issuance
commencing November 27, 1997, 1/2 of the shares shall vest six months from
issuance with the balance vesting on the following anniversary. "Market Value"
shall mean (i) $5.00 per share with respect to the shares to be issued on
November 27, 1996 and (ii) the average of the closing bid and asked prices for a
period of 30 days ending five days prior to the date of issuance for shares to
be issued on November 27, 1997 and 1998. For the three months ended March 31,
1997 and for the period September 24, 1996 (date of acquisition) to December 31,
1996 compensation costs in incurred by the Company in connection with the
issuance of the common stock amounted to $8,334 and $2,778, respectively,
g) Guarantees
Prior to the acquisition by the Company, Breaking Waves, along with an
affiliate of Breaking Waves, D. Stone Industries, Inc., ("D. Stone"), an entity
wholly-owned by the previous majority stockholder of Breaking Waves, had issued
cross-corporate
<PAGE>
HOLLYWOOD PRODUCTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1996 IS UNAUDITED
NOTE 7 - COMMITMENTS AND CONTINGENCIES (Cont'd)
guarantees to Nations for trade acceptances payable. In connection with the
acquisition by the Company, such cross-corporate guarantees were replaced by a
letter of credit issued by the Company.
NOTE 8 - STOCKHOLDER'S EQUITY
a) Articles of Incorporation
In June 1996, the Company amended its Articles of Incorporation increasing
its authorized common stock from 200 common shares, no par value, to 20,000,000
common shares, $.001 par value. In addition, the Company effected a 50,000 for 1
stock split of all issued and outstanding shares of common stock. The financial
statements give retroactive effect to these items.
b) Initial public offering
On December 21, 1995, the Company signed a Letter of Intent, which was
subsequently amended during June 1996, with an underwriter to proceed on a "Firm
Commitment" basis with the IPO of the Company's Common Stock and redeemable
common stock purchase Warrants ("the Warrants"). The Company offered 800,000
shares and 1,600,000 Warrants. The 800,000 shares and 1,600,000 Warrants were
offered to the public at a price of $5.00 per share and $.25 per Warrant,
respectively. The total gross offering proceeds to the Company was $4,400,000.
Each Warrant entitled the holder thereof to purchase one share of Common
Stock at a price of $6.50 during the four year period commencing one year from
the ("Effective Date") of the IPO. The Warrants are redeemable by the Company at
any time commencing one year from the Effective Date upon thirty (30) days
notice at a redemption price of $.05 per warrant, provided that the closing bid
quotation of the common stock for each of the thirty (30) trading days on which
the Company gives notice is at least 170% of the then exercise price of the
warrants.
On September 24, 1996, the Company successfully completed its public
offering. As a result, the Company sold 800,000 shares and 1,840,000 Warrants of
which 240,000 Warrants were sold pursuant to the underwriter's over-allotment
option. The Company yielded a total net proceeds of $3,813,294 after deducting
underwriter selling expenses. Simultaneously with the offering, the Company
charged all offering costs incurred to additional paid-in capital which totalled
$996,182
Upon the closing of the sale of the Shares and Warrants offered, the
Company sold to the underwriter, underwriter's warrants to purchase up to 80,000
shares of Common Stock and 160,000 Warrants
c) Acquisition of Breaking Waves, Inc.
Pursuant to a stock purchase agreement dated May 31, 1996 (the "Agreement")
among the Company, EVC, Breaking Waves and it's respective shareholders, the
Company on
<PAGE>
HOLLYWOOD PRODUCTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1996 IS UNAUDITED
NOTE 8 - STOCKHOLDER'S EQUITY (Cont'd)
September 24, 1996 issued 150,000 shares of Common Stock in exchange for
all of the issued and outstanding capital stock of Breaking Waves. The
transaction has been accounted for using the purchase method of accounting, and,
accordingly, the accompanying consolidated financial statements include the
results of operations of Breaking Waves from the date of acquisition, September
24, 1996. As a result of the transaction, excess of cost over net assets
acquired totalling $1,064,283 have been recorded and are amortized over the
useful lives of the related assets. Amortization expense for the three months
ended March 31, 1997 and for the period from September 24, 1996 (date of
acquisition) to December 31, 1996 totalled $17,738 for each period.
In conjunction with such Agreement, a previous stockholder of Breaking
Waves entered into a two year consulting agreement effective January 1, 1996
with Breaking Waves for an annual consulting fee of $100,000. Additionally,
pursuant to the Agreement, the previous stockholders of Breaking Waves agreed
not to compete with the Company for a period of four years from the consummation
thereof. The Agreement stipulates that the previous stockholders of Breaking
Waves will not engage directly or indirectly in any business in which Breaking
Waves is conducting or in the process of forming.
Prior to the consummation of the Company's IPO, during September 1996,
Breaking Waves performed a recapitalization and exchanged all its common stock
for new common stock, and for a series of preferred stock. Pursuant to the
Agreement, Breaking Waves issued 5,600 shares of its newly authorized Series A
Preferred Stock to its previous stockholders in proportion to their respective
holdings. The holders of the shares of the Series A Preferred Stock have the
right to redemption whereby, on each of January 1, 1997 and 1998 subject to
legally available funds, Breaking Waves shall redeem one half of the outstanding
shares of the Series A Preferred Stock, at a redemption price of $100 per share
on a pro rata basis. During January 1997, Breaking Waves redeemed 2,800 shares
of its
Series A preferred stock for a total of $280,000.
Lastly, the Company contributed $100,000 to the capital of Breaking Waves
whereby simultaneously therewith, Breaking Waves repaid its stockholders' loans
amounting to $100,000.
d) 1996 Senior Management Incentive Plan
During May, 1996, the Company established the 1996 Senior Management
Incentive Plan ("Incentive Plan") pursuant to which 250,000 of common stock are
reserved for issuance. The Incentive Plan is designed to serve as an incentive
for retaining qualified and competent key employees, officers and directors of
the Company.
During June 1996, pursuant to such plan the Company issued 50,000 shares to
each of two officers of the Company. 50% of such shares vesting 12 months from
the issuance date and the remaining 50% vesting 24 months from the issuance
date. Such shares were valued at 50% of the IPO price of $2.50. Accordingly, the
Company recorded a
<PAGE>
HOLLYWOOD PRODUCTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1996 IS UNAUDITED
NOTE 8 - STOCKHOLDER'S EQUITY (Cont'd)
deferred compensation amounting to $250,000 which is being amortized as the
shares vest. For the three months ended March 31, 1997 and for the year ended
December 31, 1996 $46,875 (which included compensation resulting from the
acceleration of shares caused to be vested upon resignation of an officer as
discussed below) and $62,500, respectively, has been expensed as a compensation.
Effective January 10, 1997, upon the resignation of an officer of the
Company, 25,000 of the 50,000 shares originally issued to such officer under the
Incentive Plan were immediately caused to be vested and the remaining 25,000
shares were returned to the treasury.
On March 14, 1997, the Company granted to two (2) employees, the Company's
President and an officer, options to purchase 100,000 and 50,000 shares of
common stock, respectively. Each option provides for an exercise price equal to
the fair market value at the date of grant, or $5.00 per share. The options are
exercisable upon vesting and expires March 14, 2001. Fifty (50%) of the
underlying shares to the options vest on March 14, 1998 and the remaining shares
vest on March 14, 1999. In accordance with Financial Accounting Standard No.
123, the Company has estimated that the fair market value of the shares at the
exercise dates will not exceed the per share option exercise price, hence, no
additional compensation expense is recognized by the Company at the date of
grant.
e) Consulting Services
During September 1996, the Company paid $40,000 and issued 7,500 shares of
common stock to an affiliate of the Company's President and Director pursuant to
a consulting arrangement. The shares have been valued at 50% of the IPO price or
$2.50 per share. Accordingly the Company recorded total consulting expense
amounting to $58,750 for the year ended December 31, 1996.
NOTE 9 - RELATED PARTIES TRANSACTIONS
a) During September 1996, the Company contributed $100,000 to Breaking
Waves pursuant to the Agreement whereby simultaneously therewith, Breaking Waves
repaid its stockholders' loans amounting to $100,000.
b) During June 1996, pursuant to the 1996 Senior Management Incentive Plan,
the Company issued 50,000 shares to each of two officers of the Company. 50% of
such shares issued will vest 12 months from the issuance date and the remaining
50% will vest 24 months from the issuance date. Such shares were valued at 50%
of the IPO price of $2.50. Accordingly, the Company recorded a deferred
compensation amounting to $250,000 which is being amortized as the shares vest.
For the three months ended March 31, 1997 and for the year ended December 31,
1996 $46,875 and $62,500, respectively has been expensed as a compensation.
Effective January 10, 1997, upon the resignation of an officer of the
Company, 25,000
<PAGE>
HOLLYWOOD PRODUCTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1996 IS UNAUDITED
NOTE 9 - RELATED PARTIES TRANSACTIONS
of the 50,000 shares originally issued to such officer under the Incentive
Plan were immediately vested and the remaining 25,000 shares were returned to
the treasury.
On March 14, 1997, the Company granted to two (2) employees, the Company's
President and an officer, options to purchase 100,000 and 50,000 shares of
common stock, respectively. Each option provides for an exercise price equal to
the fair market value at the date of grant, or $5.00 per share. The options are
exercisable upon vesting and expires March 14, 2001. Fifty (50%) of the
underlying shares to the options vest on March 14, 1998 and the remaining shares
vest on March 14, 1999. In accordance with Financial Accounting Standard No.
123, the Company has estimated that the fair market value of the shares at the
exercise dates will not exceed the per share option exercise price, hence, no
additional compensation expense is recognized by the Company at the date of
grant.
c) Prior to the acquisition by the Company, Breaking Waves, along with an
affiliate, D. Stone, an entity wholly owned by the previous majority
stockholders of Breaking Waves, had issued cross-corporate guarantees to Nations
for trade acceptances payable. In connection with the acquisition by the
Company, such cross-corporate guarantees were replaced by letters of credit
issued by the Company.
d) During September 1996, the Company paid $40,000 and issued 7,500 shares
of common stock to an affiliate of the Company's President and Director pursuant
to a consulting arrangement. The shares have been valued at 50% of the IPO price
or $2.50 per share. Accordingly the Company recorded total consulting expense
amounting to $58,750 for the year ended December 31, 1996.
<PAGE>
HOLLYWOOD PRODUCTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1996 IS UNAUDITED
NOTE 10 - INDUSTRY SEGMENTS
The Company's operations have been classified into two segments: swimwear
sales and film productions. Information about the two segments for the year
ended December 31, 1996, is as follows: Swimwear Film Sales Production
Consolidated
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Sales $ 1,217,152 $ - $ 1,217,152
============== ============= ==============
Operating profit $ 294,908 $ - $ 294,908
============== ============= ==============
Corporate general and
administrative expense (403,156)
Amortization expense (17,738)
Interest income 38,386
Interest and finance expense (85,099)
Loss from operations
before provision for income taxes (172,699)
Provision for income taxes 49,283
Net loss $ (221,982)
==============
Identifiable assets at December
31, 1996 $ 1,947,789 $ 1,536,487 $ 3,484,276
============== =============
Corporate assets 4,158,806
--------------
Total assets at December 31, 1996 $ 7,643,082
</TABLE>
Total revenue by segment includes only sales to unaffiliated customers as
there are no intersegment sales.
Operating profit is total revenue less cost of sales and operating
expenses, and excludes general corporate expenses, interest expense and income
taxes.
Identifiable assets are those used by each segment of the Company's
operations. Corporate assets are primarily cash and marketable securities.
<PAGE>
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING CONTAINED HEREIN, AND IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY STATE TO ANY PERSON TO WHOM IT
IS UNLAWFUL TO MAKE SUCH AN OFFER. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME
DOES NOT IMPLY THAT THE INFORMATION STATED IS CORRECT AS OF ANY TIME SUBSEQUENT
TO THE DATE HEREOF.
--------------------
TABLE OF CONTENTS
PROSPECTUS SUMMARY............................................
RISK FACTORS..................................................
DIVIDEND POLICY...............................................
DILUTION......................................................
USE OF PROCEEDS...............................................
CAPITALIZATION................................................
BUSINESS......................................................
MANAGEMENT....................................................
PRINCIPAL SECURITYHOLDERS.....................................
DESCRIPTION OF
SECURITIES ...................................................
SHARES ELIGIBLE FOR
FUTURE SALE...................................................
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................
UNDERWRITING..................................................
LEGAL OPINIONS................................................
EXPERTS.......................................................
AVAILABLE INFORMATION.........................................
INDEX TO FINANCIAL STATEMENTS.................................
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
As permitted under the Delaware Corporation Law, the Company's
Certificate of Incorporation and By-laws provide for indemnification of a
director or officer under certain circumstances against reasonable expenses,
including attorneys fees, actually and necessarily incurred in connection with
the defense of an action brought against him by reason of his being a director
or officer. In addition, the Company's charter documents provide for the
elimination of directors' liability to the Company or its stockholders for
monetary damages except in certain instances of bad faith, intentional
misconduct, a knowing violation of law or illegal personal gain.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the Company pursuant to any charter, provision, by-law,
contract, arrangement, statute or otherwise, the Company has been advised that
in the opinion of the Securities and Exchange Commission, such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or paid
by a director, officer, or controlling person of the Company in the successful
defense of any such action, suit or proceeding) is asserted by such director,
officer or controlling person of the Company in connection with the Securities
being registered pursuant to this Registration Statement, the Company will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication by such court of such issue.
Item 25. Other Expenses of Issuance and Distribution.
Registration Fee $ -
Printing and Engraving $ 5,000 (1)
Legal Fees $35,000 (1)
Accounting $ 7,500 (1)
Transfer Agent $ -- (1)
NASD Filing Fees $ --
Miscellaneous $ 2,500 (1)
--------
Total $50,000 (1)
(1) Estimated.
- ------------------------
<PAGE>
II-2
Item 26. Recent Sales of Unregistered Securities.
The sales of securities of the Company described below were exempt from
registration under the Act, in reliance upon the exemption afforded by Section
4(2) of the Act for transactions not involving a public offering. All
certificates evidencing such sales bear an appropriate restrictive legend.
In December 1995, in connection with the incorporation of the Company, EVC
acquired 5,000,000 shares of the Company's Common Stock and 2,000,000 Warrants
for aggregate consideration of $1,100,000. The sale of 1,400,000 shares of
Common Stock and 2,000,000 Warrants has been registered herein but are not being
underwritten by the Underwriter, whereby such securities may be sold from time
to time by the Selling Securityholder.
In April 1996 the Company issued to Lampert & Lampert 50,000 shares for
legal fees of $500 in forming and organizing the Company.
In June 1996, the Company issued 50,000 shares of Common Stock to each of
Robert Melillo and Harold Rashbaum, the chief executive officer, president and
treasurer, respectively, of the Company, under the Company's senior management
incentive plan. The shares were to vest at the rate of 25,000 in each of June
1997 and 1998. Upon the termination of Mr. Rosen's consulting agreement the
25,000 shares were returned to the Company. In addition, upon the resignation of
Mr. Melillo, he returned 25,000 shares to the Company and retained 25,000 shares
which became fully vested, pursuant to an agreement. See "Principal
Stockholders."
In June 1996, the Company entered in to a consulting agreement with Charles
Rosen to perform consulting services with regards to the acquisition of
screenplays for the production of future motion pictures. Mr. Rosen received
25,000 shares of Common Stock, under the Company's Senior Management Incentive
Plan which shares vest at the rate of 12,500 in each of June 1997 and 1998.
In March 1997, the Company granted options to purchase 100,000 and 50,000
shares of Common Stock to Harold Rashbaum and Robert DiMilia respectively, at
$5.125 per share, 100% of the market price on the date of grant.
Item 27. Exhibits.
The following exhibits have previously been filed with the Securities and
Exchange Commission either with the Registration Statement on Form SB-2 file No.
333-5098-NY or with the Company's Form 10-KSB for the year ended December 31,
1996, as appropriately marked herein, and pursuant to 17 C.F.R. 230.411, are
incorporated by reference herein. The exhibits designated by an asterisk (*)
have been be filed with this Post- Effective Amendment No.1.
<TABLE>
<CAPTION>
<S> <C>
3.1 - Certificate of Incorporation of the Company
3.2 - Amendment to Certificate of Incorporation of the Company, filed in
June 7, 1996.
3.3 - Certificate of Incorporation of D.L. Productions, Inc.
<PAGE>
3.4 - By-Laws of the Company
3.5 - By-Laws of D.L. Productions, Inc.
3.6 - Certificate of Incorporation of Breaking Waves, Inc.
3.7 - By-Laws of Breaking Waves, Inc.
4.1 - Specimen Common Stock Certificate.
4.2 - Specimen Warrant Certificate.
4.4 - Form of Warrant Agreement between the Company,
the Underwriter and Continental Stock Transfer &
Trust Company.
4.5 - Form of Restricted Stock Agreement.
5.0 - Opinion of Klarman & Associates.
10.1 - Form of Lock-up Agreement.
10.2 - The Company's Senior Management Incentive Plan.
10.4 - Consulting Agreement between Breaking Waves, Inc., and Dan Stone.
10.5 - Lease at 112 West 34th Street, New York, New York.
- Lease at 8410 N.W. 53rd Terrace, Miami, Florida.
10.7 - Stock Purchase Agreement between the Company, European Ventures
Corp., Breaking Waves, Inc., and the stockholders of Breaking Waves,
Inc., dated May, 1996.
10.9 - Property Acquisition Agreement between the Company and Rogue
Features, Inc., dated March, 1996.
10.10 - Co-production agreement between the Company and
Rogue Features, Inc., dated March, 1996 and all amendments thereto.
10.11 - Right of First Refusal Agreement with principals of Rogue Features, Inc.
10.12 - Form of Assignment of right to Huk-A-Poo line.
10.13 - Shippers Agency Agreement between Hollywood Productions, Inc., and
Third Party Enterprises, Inc.
10.14 - License Agreement between Breaking Waves, Inc. and Beach Patrol, Inc.
10.16 - Employment agreement with Michael Friedland. (Incorporated by
reference to the indicated exhibit in the Company's
10-K for the year ended December 31, 1996).
10.17 - Employment agreement with Malcolm Becker. (Incorporated by
reference to the indicated exhibit in the Company's 10-K for the year
ended December 31, 1996).
10.18 - Termination of Employment Agreement with Robert Melillo.
(Incorporated by reference to the indicated exhibit in the Company's 10-K
for the year ended December 31, 1996).
10.19* - Trident Licensing, Inc. Agreement.
10.20* - Cyclone Option Agreement.
10.21* - Cyclone Co-Writer Agreement.
23.01* - Consent of Scarano & Tomaro, P.C.
23.02 - Consent of Klarman & Associates, as annexed to Exhibit 5.0.
</TABLE>
<PAGE>
Item 28. Undertakings.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
Post-Effective Amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Act");
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent Post-Effective
Amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the Registration Statement;
and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement, including but
not limited to any addition or deletion of a managing Underwriter.
(2) That, for the purpose of determining any liability under the Act, each
such Post-Effective Amendment shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of such securities
at the time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of Post-Effective Amendment any of
the securities being registered which remain unsold at the termination of the
offering.
(4) That, for the purpose of determining any liability under the Act, each
such Post-Effective Amendment that contains a form of prospectus shall be deemed
to be a new Registration Statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
The undersigned Registrant hereby undertakes to provide to the Underwriter
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Company,
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the Securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by
<PAGE>
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue by such court. See Item 24.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended
the Registrant certifies that it has reasonable grounds to believe that it meets
all the requirements for filing on Form SB-2 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized in New York, New York on the 15th day of July, 1997.
HOLLYWOOD PRODUCTIONS, INC.
By: \s\ Harold Rashbaum
Harold Rashbaum,
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933 as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C>
\s\ Harold Rashbaum Chief Executive Officer,
Harold Rashbaum 07/15/97
(Principal Executive Officer) Date
\s\ Robert DiMilia Secretary and Director 7/15/97
Robert DiMilia Date
\s\ Alain A. Le Guillou, M.D. Director 07/15/97
Alain A. Le Guillou, M.D. Date
</TABLE>
<PAGE>
Exhibit 10.19
Trident Licensing, Inc. Agreement.
<PAGE>
AGENCY AGREEMENT
An AGREEMENT dated the 3rd day of February 1997.
PARTIES:
1. TRIDENT RELEASING INC. of 8401 Melrose Place, 2nd Floor, Los Angeles,
California 90069 (hereinafter "Trident") AND
2. HOLLYWOOD PRODUCTIONS, INC. (hereinafter "Producer'). of 14 East 60th
St., Suite 402, New York, NY 10022.
TERMS:
1. PICTURE: "DIRTY LAUNDRY" (hereinafter "the Picture") a feature length
motion picture.
2. TERM: Three years from Delivery (as defined below). The Term may be
extended upon both parties written agreement to such.
3. TERRITORY & MEDIA: Producer grants to Trident the exclusive rights to
enter into and service license agreements for the Picture throughout the world
less only the United States, Canada and their respective territories and
possessions (the "Foreign Territory") and to exploit the Picture in all media
now known or to be invented including theatrical, non-theatrical, video, laser
disc, CD, television, pay-per-view, pay television, cable and satellite. Such
exploitation is described herein as exploitation of Picture in the Foreign
Territory.
a) The Territory Price List, Schedule 'A' forms part of this
Agreement. Trident is empowered to enter into distribution
agreements with distributors in its discretion, however,
Trident must obtain approval from Producer before licensing
the Picture in any territory at a price below the Minimum
Price listed therein.
b) Trident must get prior written approval from the Producer
before entering into any outright sale (not licensing) of
rights to a distributor in perpetuity. If Producer approves
such a sales contract the commission payable to Trident shall
be 12.5% of the sales price.
c) All License Agreements entered into by Trident for the
Producer will be subject to all of the terms and conditions
contained in Exhibit C attached hereto as well as being
subject to all of the AFMA Standard Terms and Conditions and
limitations set forth in this Agreement including instructions
for payment to the Account.
<PAGE>
4. COMMISSIONS: To Trident a sum equal to 12.5% of all gross receipts of
all sums received from exploitation of the Picture in the Foreign Territory
including but not limited to any royalty receipts (the "Commission").
5. COSTS: Trident will advance marketing Costs and recoup them as set out
below. These Costs include but are not limited to:
a) Customary Sales Costs such as tape duplication, telephone, telex, fax,
photocopying, registered international mail, messenger, courier, notary, and
consultations.
b) Marketing Costs such as creation of the campaign (flyer, poster and
trailer), advertising and associated Costs, promotional materials, press kits,
screenings and associated Costs, mass mailings, any charges arising out of late
delivery or non delivery of materials by producer.
c) Market Participation Costs at $4,000 per market in the first year with
the exception of The Cannes Film Festival which will be $5,000. Costs for the
second year are $1,500 per market and for the third year $750 per market
including in both cases the Cannes Film Festival. The Picture will be presented
at all markets that Trident exhibits at.
d) Estimates for Marketing Costs including Advertising and Promotion will
be presented to the Producer for Producer's prior written approval prior to
expenditure which will be deemed granted if Producer does not respond within
five days. Any individual Marketing Cost under $2,500 will not be subject to
prior approval.
e) Once Costs (excluding Trailer, Key Art and any Delivery Items per
Schedule B) have accumulated to $50,000 ("the Cap") Trident shall be required to
receive written authorization from Producer to recoup any greater amount.
f) In the event of early termination of this Agreement, Trident will be
reimbursed by Producer for all outstanding Costs incurred by Trident which
either (i) do not exceed the Cap or (ii) were approved in writing by Producer
subject to paragraphs 5 d) and 5e above.
Distribution of Gross Receipts ("Gross Receipts") shall be defined as all
monies actually received by Trident from the exploitation of the Picture in the
Foreign erritory) including the repayment of Costs shall be prioritized as
follows:
First: From Gross Receipts Trident shall receive its Commission.
Second: Producer shall receive 20% of the balance of Gross Receipts.
Third: Trident shall receive an amount equal to un-reimbursed Costs, if any
Fourth: The balance, if any, to be remitted to Producer.
<PAGE>
6. DISTRIBUTION LICENSES: To be prepared and signed by Trident as agent for
Producer and to provide for payment of deposits and license fees to a Trust
Account in the name of Trident and Producer. If Trident and Producer are unable
to set up a Trust Account, then the account shall be no less than a joint bank
account in the name of Trident and Producer at Mercantile National Bank, Los
Angeles (the "Account"), exclusively for receipts from the licenses concluded on
the Picture. The "Account" is to be a joint account requiring no less than two
signatures with one authorized signature for and on behalf of Producer and one
authorized signature for and on behalf of Trident. Disbursement of funds shall
be done on a timely basis with distribution in accordance to terms and
conditions set forth in the Agency Agreement.
a) At the end of any license or agreement period entered into by Trident on
behalf of Producer all rights shall automatically revert back to Producer and
Trident shall have no further interest in the Picture other than the right to
collect commission earned but not yet paid. Trident shall have the right subject
to paragraph 5(f) to collect any Costs not reimbursed during the Term from as
provided for in Paragraph 5, on all licenses concluded during the Term but
received after the Term expires.
b) Trident has the right to enter into distribution licenses for a period
no longer than fifteen years.
7. DELIVERY OF PICTURE: Producer warrants that it holds all of the
technically acceptable delivery elements for the manufacture of first-class
materials on the Picture as per Schedule 'B' attached and said elements will be
delivered to Trident (hereinafter "Delivery") on or before April 30th 1997.
a) If a delivery element as stated on Schedule 'B' is requested by a
Distributor and Producer does not have the element(s) or a delivery element(s)
is deemed technically unsatisfactory for Delivery under standard international
industry requirements, Producer will manufacture said element(s). Producer will
have five (5) business days to comply with such a request in writing before
Trident shall have the right to manufacture the elements itself. Any Costs
incurred by Trident in the manufacturing of delivery elements will be deducted
from the gross receipts on the Picture after commissions including the cost of
an initial full quality control check of the Picture by a laboratory of
Trident's choice to assure that the Picture is of standard, deliverable,
international broadcast quality. Any Costs incurred by Trident in connection
with Delivery of the Picture will be in addition to those Costs detailed in
Paragraph 5 of this Agreement and Costs associated with Delivery will not be
computed as part of the Cap. Delivery will occur on or before April 30th, 1997.
Costs incurred by Trident for the manufacture of elements will be treated as
Costs. These Costs for the manufacture of elements will not be subject to the
Cap. Delivery is of the essence of this Agreement. Materials manufactured by
Trident for the Producer will be the Property of the Producer once Trident has
been reimbursed in full for all such costs incurred.
8. PRODUCERS WARRANTIES: Producer hereby represents, warrants and
undertakes that the Picture and underlying rights to the Picture are free and
clear of all
<PAGE>
encumbrances and will provide Trident with Chain of Title to Trident's
reasonable satisfaction attesting to this. Producer further warrants:
a) That it has right and title to enter into this Agreement and that it has
obtained all necessary clearances and will own or control all rights in and to
the Picture, the literary and dramatic material upon which it is based and all
music and performances contained in the Picture as are necessary to enable it to
grant the free and unhindered distribution rights in all media contemplated
hereby and that Producer will forthwith at Trident's request supply copies of
all documents evidencing such to Trident.
b) Producer hereby agrees that Trident shall have no liability whatsoever
except for the obligations hereunder to any of the artists of the Picture or on
the soundtrack or to any third Party and Trident shall not be responsible for
any of the obligations of Producer or any third party by virtue of the use made
hereunder of the Picture; all residual payments to any union society guild and
other persons being the sole responsibility of Producer.
c) Without limiting the generality of (a) and (b) above, Producer has
obtained all necessary music clearances so that the Picture may be exploited in
all media throughout the territory without the need for payment of mechanical
royalties.
d) Producer shall indemnify Trident against any loss or damage (including
reasonable attorney's fees on a full indemnity basis) incurred by reason of any
breach or claim of breach of these foregoing representations and undertakings,
and Trident shall indemnify Producer against any loss or damage (including
reasonable attorney's fees) incurred by reason of any breach or claim of breach
of Trident's representations and undertakings set forth in this agreement.
e) Producer hereby represents, warrants and undertakes that all of the
Delivery elements including documentation as per Schedule 'B' attached hereto
are in all respects ready to serve in the manufacture of Delivery elements that
are of first class commercial quality for the purposes of Delivery.
9. INSTRUMENTS OF FURTHER ASSURANCE: Producer & Trident shall execute and
deliver to the other promptly upon the request of the other, any other
instruments or documents considered by either party to be reasonably necessary
or desirable to evidence, effectuate or confirm this Agreement or any of its
terms and conditions.
10. PRODUCER'S RESERVATION OF RIGHTS: Producer reserves for his own use
prequel and sequel rights; literary rights including books and novelization
rights; rights to all characters; merchandising rights including but not limited
to toy, comic books; music rights including but not limited to records, audio
cassettes, C.D.'s; and all other rights not specifically granted to Trident.
11. ACCOUNTING: Trident shall prepare a detailed accounting of all payments
and licensing fees deposited in the Account together with a detailed accounting
of all Costs incurred prior to disbursement quarterly, forty-five days after
close of applicable accounting period subject always to technical acceptance of
all elements by the
<PAGE>
distributor. If a dispute arises between Trident and Producer over the
disbursement of funds held in the Account, only such disputed funds will remain
in the Account until such time as there is a resolution to the dispute.
12. TERMINATION: Either party shall have the right of termination in the
event the other party shall become insolvent or be adjudicated bankrupt, or
petition or consent to any relief under any bankruptcy, reorganization,
receivership, liquidation, compromise or arrangement or moratorium statutes,
whether now in force or hereafter enacted, or make an assignment for the benefit
of creditors, or petition for the appointment of a receiver, liquidator, trustee
or custodian for all or a substantial part of its assets, or if either party
defaults or breaches this Agreement and such breach or default remains uncured
fifteen (15) business days after written notice thereof;
a) Either party shall have the right of termination in the event a
receiver, liquidator, trustee or custodian is appointed for all or a substantial
part of the other party's assets; and
b) In the event of termination, Trident shall be entitled to continue to
receive the outstanding Commissions and expenses, subject to Paragraph 5(f), in
connection with the remittances to Producer from agreements for the exploitation
of the Picture in the Foreign Territory entered into or substantially negotiated
by Trident prior to termination.
c) Trident will not have the right to pledge, morgage or encumber its
rights hereunder including but not limited to its rights to Commissions and
payments hereunder.
d) Trident shall have the right of termination and will not be bound to the
Producer for any commitments stated or inferred herein in the event that any
delivery element on Schedule 'B' attached hereto is not of first class broadcast
commercial quality therefore making the Picture undeliverable.
13. PERFORMANCE GUARANTEE: Notwithstanding any of the terms and conditions
contained herein, Producer will have the right to terminate this Agreement with
Trident upon five (5) days prior written notice, if the following performance
conditions are not met during the time specified unless within twenty (20) days
after receipt of a notice of Termination, Trident is able to meet the guarantee
requirements.
Sufficient license agreements shall be executed within the first six months
from Delivery providing for a gross advance or minimum guarantee amount of not
less than $500,000 in executed contracts. An "executed contract" shall be
defined as a license that has been executed by the licensee and licensor, and a
deposit of not less than 10% of such guarantee or advance received into the
Account. Exceptions to the deposit requirement shall be such contracts as are
payable 100% by Letter of Credit, or television licenses which are customarily
payable after delivery.
If such performance level is not reached by Trident in the specified time,
then the Producer has the right, but not the obligation to terminate this
Agreement. Such termination shall be subject to Paragraph 12b in this Agreement.
<PAGE>
14. BREAK-UP FEE - If the Producer in its discretion wishes to terminate
this Agreement for reasons other than those addressed elsewhere in this
Agreement , and/or for Trident's default, the Producer shall have the right to
do so upon 5 days written notice, subject only to the following:
a. Repayment of any outstanding monies owed Trident for funds advanced by
Trident for Costs incurred by the Picture under the terms and conditions
contained in this Agreement.
b. Payment of a fee by the Producer to Trident equal to thirty-three and
one third percent (33 1/3%) of the Commission that would have been earned by
Trident if Trident's services had not been terminated based on Trident's
projected "take" license fees as published in this Agreement for those
territories not yet licensed.
Whenever this Agreement terminated, the Account shall, at the Producer's
option, be terminated and all proceeds therein distributed as required
hereunder. Thereafter, if the Account is so terminated, the Producer may direct
any licensee to pay Producer directly or as otherwise directed by Producer,
subject always to Tridents recoupment of Costs and Commissions as provided
herein.
15. DISPUTES: In the event of any litigation or arbitration arising out of
this Agreement, the prevailing party shall be entitled to recover its reasonable
attorney's fees and court Costs or arbitration from the other party. In the
event of any dispute arising hereunder same shall be resolved by arbitration
pursuant to the laws of the State of California under the AFMA Rules of
Arbitration, all License Agreement shall so provide.
16. NOTICES: Any notices under the terms of this Agreement shall be in
writing and sent by first class airmail post, telex, fax or cable. Any notice to
Producer shall be given at the address specified on the first page hereof. Any
notice to Trident under the terms of this Agreement shall be given at the
address specified on the first page hereof. Notices so given shall be deemed to
have arrived at noon ten business days after the date of mailing or in the case
of notices by telex, fax or cable respectively forty-eight hours after dispatch.
a) Address changes may be made at any time, by either party, by notifying
the other party of such change in writing.
17. FACSIMILE SIGNATURES: In any proceeding, either at law or in equity
between the parties hereto, it is hereby agreed that the parties shall not raise
as a defense the lack of authenticity of facsimile copies of originally executed
copies of this Agreement or any amendment to this Agreement or of any notice
given pursuant to this Agreement.
18. COUNTERPARTS: This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument and shall bind and inure
to the benefit of each of the parties hereto and their respective successors and
assigns.
<PAGE>
19. GOVERNING LAW: This Agreement shall be deemed to have been made in the
State of California and its validity, construction, performance, breach and
operation shall be governed by the laws of California applicable to agreement s
to be performed in California.
20. RELATIONSHIP OF THE PARTIES: Nothing herein contained shall be
construed to create a joint venture or partnership between the parties hereto
nor a third party beneficiary relationship as to any third party.
21. CAPTIONS: The captions of the various paragraphs and sections of the
Agreement are intended to be used solely for convenience of reference and are
not intended and shall not be deemed for any purpose whatsoever to modify or
explain or to be used as an aid in the construction of any provisions.
22. AMENDMENTS IN WRITING: This Agreement cannot be amended, modified or
changed in any way whatsoever except by a written instrument duly signed by an
authorized officer of Trident and Producer.
23. Trident represents and warrants:
(1) It has the right and authority to enter this Agreement.
(2) Trident agrees that Producer shall have no liability whatsoever for any
Costs or for any claims raised by third parties, including but not limited to
Licensees with whom Trident has dealt, Trident shall be solely responsible for
such obligations, except for those Producer obligations defined hereunder. 24.
Trident and Producer each represent and warrant that it has not dealt with a
Broker or Finder in connection with this transaction.
FOR & ON BEHALF OF FOR & ON BEHALF OF TRIDENT RELEASING INC. HOLLYWOOD
PRODUCTIONS, INC
------------------------- --------------------------- (Agent) (Producer)
By: JEAN OVRUM By: ROBERT DI MILIA
Its: CO-PRESIDENT Its: _______________________
Dated: ____________________ Dated: ______________________
<PAGE>
Exhibit 10.20
Cyclone Option Agreement.
<PAGE>
AGREEMENT
AGREEMENT made this __ day of May, 1997 by and among Hollywood
Productions, Inc. (the "Optionee"), a Delaware corporation, with its principle
executive offices located at 14 East 60th Street, New York, New York 10022 and
Frank Tumminia, an individual residing at
_________________________________________________ (the "Optionor").
W I T N E S S E T H :
WHEREAS, Optionor has written a screenplay called "Cyclone" (the "Story");
and
WHEREAS, the Optionee desires to have a screenplay written based on the
Story. The screenplay will contain certain changes, revisions and alterations to
the story and structure of the screenplay as directed and desired by the
Optionee ( the "First Draft Screenplay") ; and
WHEREAS, the Optionee desires to acquire and Optionor agrees to grant to
Optionee an option to purchase the "Screenplay" (the "Screenplay" shall include
all underlying rights including that of the Story, the First Draft Screenplay,
any and all revisions, alterations, rewrites and drafts thereto separately and
collectively), in accordance with the terms and conditions stated herein.
NOW, THEREFORE, the parties hereto agree as follows:
1. Grant of Option. Optionor, upon signing this Agreement and the
concurrent receipt of the consideration specified herein, hereby grants to
Optionee an option (the "Option"), for a period of 12 months commencing from the
date of delivery of the First Draft Screenplay for the consideration specified
in Paragraph 2 (a) below. The Option, at the sole discretion of the Optionee,
may be extended for an additional 12 months upon the payment of the additional
compensation described in Paragraph 2 (b) below. The Optionee must exercise its
right to extend the Option 30 days prior to the initial expiration of the
Option.
2. Consideration. a. In consideration of the forgoing grant of the Option,
Optionee shall pay the Optionor the sum of (i) $500, as payment in full for said
grant of the Option, payment of which is hereby confirmed and (ii) upon the
delivery by the Optionor of the First Draft Screenplay, if such draft is
accepted by the Optionee, in accordance with Paragraph 3 below, the Optionee
shall pay to the Optionor an additional $1,500 in accordance with Paragraph 3,
which payment shall entitle the Optionee to one set of revisions, in accordance
with Paragraph 3(b) below, of the First Draft Screenplay according to comments
issued by the Optionee.
b. The Optionee has the absolute right to extend the original Option
period, for an additional one year period for an amount equal to $1,000 payable
to the Optionor within 30 days of the expiration of the first Option period, at
which time the Option will be automatically extended for an additional 12
months. Optionee shall inform Optionor, in writing, of its wish to extend such
Option no less than 30 days prior to the expiration of the original Option
period.
3. Condition Precedent. a. Optionee's obligation to pay the consideration
<PAGE>
specified in Paragraph 2 (a) (ii) herein is based solely on its receipt of
the First Draft Screenplay from the Optionor, its review and acceptance of same.
Optionee shall have the sole right to accept or reject the First Draft
Screenplay. In the event that the First Draft Screenplay is rejected within
forty-five days of Optionee receipt of the First Draft Screenplay, the Optionee
is not obligated to pay the compensation described in Paragraph 2(a)(ii).
b. In the event that the Optionee accepts the First Draft Screenplay, but
requests amendments to such First Draft Screenplay within forty-five days of
receipt of same, then the Optionee shall pay the Optionor 2 of the consideration
referred to in Paragraph 2(a)(ii) and the balance paid upon receipt of the
amended First Draft Screenplay.
c. In the event that the First Draft Screenplay is not delivered within
sixty (60) days of the date of the signing this Agreement, the Optionee shall
have the right, but not the obligation to replace Optionor as writer and
diminish such compensation as described in Paragraph 2(a)(ii) by fifty percent
(50%).
4. Exercise of Option. If Optionee decides to exercise its Option to
purchase the Screenplay, the Optionee, upon written notice to Optionor will pay
an amount equal to the greater of (i) the Writer's Guild of America (WGA)
minimum for an original screenplay or (ii) Forty-Five Thousand Dollars
($45,000). The Writer's Guild minimum compensation is based on a sliding scale
of payment tied to the budget of the production and the media for which the
Screenplay is intended. Payment of same will be subject to payment terms as
specified by WGA.
5. Turn-around. If Optionee decides not to exercise its Option to purchase
the Screenplay, then Optionee will place the Screenplay in Turn-around. Optionee
will notify Optionor in writing of its decision. All sums advanced by the
Optionee for the re-writing of the First Draft Screenplay will become due and
payable by the new Optionee or purchaser of the Screenplay within thirty (30)
days of commencement of Pre-production of the film based in whole or in part on
the Screenplay including interest calculated for changes of prime rate over time
at one point over prime interest rate from the date that the Screenplay is
placed into Turnaround.
6. Co-Writer Option. If the Optionee decides to engage an additional writer
to co-write with the Optionor the writing of the First Draft Screenplay, then
the price paid upon exercise of the Option, as described in Paragraph 4 above
shall be split equally between the Optionor and the co-writer. The Optionor
shall have the right to accept or reject, in good faith in writing, any
individual submitted to Optionor as a co-writer.
7. Screenplay Credit. If a version of the Screenplay is produced into a
motion picture by Optionee then Frank Tumminia will receive a sole "Story by"
credit, on a single card, in the same size, position, and prominence as that of
the Director of the motion picture and no less than a shared "Screenplay by"
credit, in the same size, position, and prominence as that of the Director of
the motion picture or tele-production. Paid and congratulatory ads will be at
Hollywood's sole discretion.
8. Ownership Rights. (a)The Optionor hereby warrants and guarantees that
Optionor is the originator and creator of the Story currently entitled Cyclone
and that as
<PAGE>
such possess the right and title to enter into this agreement.
(b) During the Option term hereof, Optionor shall remain at all times as
the legal owner of the Screenplay. Optionor shall maintain all rights of
ownership with respect to the Screenplay and shall not sell, assign, transfer,
license, sub-license, distribute or grant any interest in or with respect to the
Screenplay. Upon the exercise of the Option, and payment of the exercise price
(as specified above), all rights, title and interest in the Screenplay shall be
transferred to the Optionee.
In accordance with instructions by the Optionee, the Optionor shall, at the
sole cost and expense of the Optionee, agrees to cooperate with the Optionee in
the preparation and filing any intellectual property with the appropriate
federal, state, local or foreign government agency or authority and all rights
to the intellectual property detailed in such application, upon filing, shall be
immediately and formally assigned as directed by the Optionee or its' designee.
9. Assignability. Optionee may assign its right to the Option to other
persons without the consent of Optionor by providing written notice of such
assignment and the name and address of such assignee to the Optionor.
Notwithstanding the foregoing, no portion of this Option may be assigned to any
person unless the person signs a written acknowledgment of all of the terms and
conditions hereof.
10. Governing Law and Assignment. This Agreement shall be construed in
accordance with and governed by the laws of the State of New York and shall be
binding upon the parties hereto and their respective successors and assigns,
provided, however, that any assignment or transfer by any party of its rights
under this Agreement.
11. Notices. All notices required to be given in connection with this
Agreement shall be sent by registered or certified mail, return receipt
requested, or by hand delivery with receipt acknowledged, or by the Express Mail
service offered by the United States Post Office, and addressed, to the
addresses specified above. In the event the Optionee or Optionor changes its
address, it shall provide notice of such change in accordance with this
paragraph.
12. Severability. If any provision of this Agreement or the application
thereof to any person or circumstance shall be determined to be unpaid or
unenforceable, the remaining provisions of this Agreement or the application of
such provision to persons or circumstances other than those to which it is held
invalid or unenforceable shall not be affected thereby and shall be valid and
enforceable to the fullest extent permitted by law.
13. Pronouns. All pronouns and any variations thereof shall be deemed to
refer to the masculine, feminine, neuter, singular, or plural as the context may
require.
14. Captions. All captions are for convenience only and shall not limit or
define the term thereof.
15. Execution in Several Counterparts. This Agreement may be executed in
several counterparts or by separate instruments and all of such counterparts and
instruments shall constitute one agreement, binding on all of the parties
herein.
<PAGE>
16. Independent Contractor. Nothing contained in the Agreement shall be
construed to constitute the Optionee as a partner, employee, or agent of the
Company, therefore the Optionee shall not have any authority to bind the
Company, it being intended that the Optionee shall remain an Independent
Contractor responsible for its own actions.
17. Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof and
supersedes all prior agreements and understandings (written or oral) of the
parties in connection herewith.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
day and year first above written.
Hollywood Productions, Inc.
By: ______________________ By: ______________________
Robert DiMilia Frank Tumminia
Vice-President Optionee
<PAGE>
Exhibit 10.21
Cyclone Co-Writer Agreement
<PAGE>
AGREEMENT
AGREEMENT made this __ day of May, 1997 by and among Hollywood
Productions, Inc. (the "Company"), a Delaware corporation, with its principle
executive offices located at 14 East 60th Street, New York, New York 10022 and
John Andrew Gallagher, an individual residing at 305 Lexington Avenue New York,
NY 10017 (the "Co-Writer").
W I T N E S S E T H :
WHEREAS, Frank Tamminia ("FT") has written a screenplay called "Cyclone"
(the "Story"); and WHEREAS, the Company has entered into an option agreement
(the "Option Agreement"), dated as of the date of this Agreement whereby FT has
begun the process of drafting a First Draft Screenplay (the "First Draft
Screenplay") for the production of a motion picture based on the Story; and
WHEREAS, the Company desires to engage the Co-Writer to co-write the First
Draft Screenplay with FT, in accordance with the terms and conditions stated
herein.
NOW, THEREFORE, the parties hereto agree as follows:
1. Basic Terms of Engagement. The Company hereby engages the Co-Writer to
co-write the First Draft Screenplay with FT. The initial draft of the First
Draft Screenplay shall be completed within 60 days of signing this contract.
2. Work Product. All work product of the Co-Writer, its employees, agents
or associates, if any, including but not exclusively, all intellectual property
developed, pursuant to Co-Writers engagement by the Company, is and shall be the
sole and exclusive ownership of FT. The Co-Writer agrees and acknowledges that
it (i) has no rights to copy, own, license, sub-license, use, grant or transfer
any right to the First Draft Screenplay. The possession by the Co-Writer of the
First Draft Screenplay and any documentation, products, intellectual property or
other items used to produce the First Draft Screenplay does not transfer any
right to possession or ownership interest in such items or the First Draft
Screenplay except for compensation and purchase of same as indicated below.
In accordance with instructions by the Company, the Co-Writer shall, at the
sole cost and expense of the Company, agrees to cooperate with the Company in
the preparation and filing any intellectual property with the appropriate
federal, state, local or foreign government agency or authority and all rights
to the intellectual property detailed in such application, upon filing, shall be
immediately and formally assigned as directed by the Company or its' designee.
3. Consideration. The Co-Writer shall be paid an aggregate fee of $5,000 of
which:
a. $2,500 shall be payable upon commencement and the execution of this
Agreement document, which is hereby acknowledged as being received; and
b. $2,500 payable upon acceptance of the First Draft by the Company, in
accordance with Paragraph 4, which payment shall entitle the Company to one set
of revisions, in accordance with Paragraph 3(b) below, according to comments
issued by the Company. The fee structure with respect to this arrangement is on
a project basis and has been negotiated between the Parties. This fee is not an
estimate and has been used to establish the budget by the Company.
<PAGE>
4. Condition Precedent. a. The Company's obligation to pay the
consideration specified in Paragraph 3 (b) herein is based solely on its receipt
of the First Draft Screenplay from the Co-Writer and FT, its review and
acceptance of same. The Company shall have the sole right to accept or reject
the First Draft Screenplay. In the event that the First Draft Screenplay is
rejected within 45 days of the Company receipt of the First Draft Screenplay,
the Company is not obligated to pay the compensation described in Paragraph
2(b).
b. In the event that the Company accepts the First Draft Screenplay, but
requests a set of revisions to the First Draft Screenplay within 45 days of
receipt of same, then the Company shall pay the Co-Writer 1/2 of the
consideration referred to in Paragraph 2(b) and the balance paid upon receipt of
the amended First Draft Screenplay.
5. a. Exercise of Option. If Company decides to exercise, upon written
notice, its option to purchase the First Draft Screenplay, together with the
Story and any and all underlying rights (the combined unit hereinafter the
"Screenplay"), in accordance with the Option Agreement, the Co-Writer shall be
entitled to one-half of the compensation paid for the purchase of the Screenplay
by the Company. The purchase price for the Screenplay would equal the greater of
(i) the Writer's Guild of America (WGA) minimum for an original screenplay or
(ii) $45,000. The Writer's Guild minimum compensation is based on a sliding
scale of payment tied to the budget of the production and the media for which
the First Draft Screenplay is intended. Payment terms would be a prescribed by
WGA.
b. Turn-around. If the Company decides not to exercise its Option, upon
written notice, to purchase the Screenplay, then the Company will place the
Screenplay in Turn-around and all sums advanced by the Company for the writing
of the First Draft Screenplay will become due and payable by the new Optionee or
purchaser of the Screenplay within thirty (30) days of commencement of
Pre-production of the film based in whole or in part on the Screenplay including
interest calculated for changes of prime rate over time at one point over prime
interest rate from the date that the Screenplay is placed into Turn-around.
6. Co-Writer's Covenants. The Co-Writer shall:
a. Use its best efforts and devote such time as deemed necessary to
complete the First Draft Screenplay within the time frame as described in
Paragraph 1, in a timely and efficient manner.
b. Upon completion of the First Draft Screenplay, the Co-Writer shall
deliver to the Company all records, designs and other documents of a proprietary
nature, there being no copies of which should be kept by the Co-Writer of the
First Draft Screenplay. Co-Writer acknowledges that all work product of the
Co-Writer, its employees, agents or associates pursuant to this Agreement is the
sole and exclusive ownership of FT and under option or in control of by the
Company as so specified in the Option Agreement.
7. Screenplay Credit. If a version of the First Draft Screenplay is
produced into a motion picture by the Company, the Co-writer shall receive a
shared "Screenplay by" credit, in the same size, position, and prominence as
that of the Director of the motion picture or tele-production. Paid and
congratulatory ads shall be at the Company's sole discretion.
8. Expenses. The Company shall not be responsible for any expenses of the
Co- Writer. Any expenses which the Co-Writer desires reimbursement for must be
previously approved in writing by the Company.
9. Termination. The Company may terminate this Agreement at any time upon 2
days prior notice. Upon termination the Co-Writer shall immediately deliver to
the Company the First
<PAGE>
Draft Screenplay, revisions thereto, and any and all work product as completed
to date.
10. Non-Transferability. This Agreement may not be transferred, assigned or
delegated by the Co-Writer without the prior written consent of the Company. The
Company may assign its right to the First Draft Screenplay to other persons
without the consent of Co-Writer by providing written notice of such assignment
and the name and address of such assignee to the Co-Writer.
11. Independent Contractor. Nothing contained in the Agreement shall be
construed to constitute the Co-Writer as a partner, employee, or agent of the
Company, therefore the Co-Writer shall not have any authority to bind the
Company, it being intended that the Co-Writer shall remain an Independent
Contractor responsible for its own actions.
12. Entire contract. This Agreement and the Appendixes hereto contain the
entire understanding of the parties and supersedes all previous verbal and
written agreements. There are no other agreements, representations, or
warranties not set forth herein.
13. Notices. All notices or other documents under this Agreement shall be
in writing and delivered personally, by facsimile or mailed by overnight mail,
addressed to the Company or the Co-Writer at the addresses first above written,
on any new address designated in like manner by any party hereto.
14. Non waiver. No delay or failure by either party to exercise any right
under this Agreement, and no partial or single exercise of that right, shall
constitute a waiver of that or any other right, unless otherwise expressly
provided herein.
15. Headings. Headings in this Agreement are for convenience only and shall
not be used to interpret or construe its provisions.
16. Execution in Several Counterparts. This Agreement may be executed in
several counterparts or by separate instruments and all of such counterparts and
instruments shall constitute one agreement, binding on all of the parties
herein.
17. Governing law. This Agreement shall be construed in accordance with and
governed by the laws of the State of New York, without conflicts of laws
principles.
18. Binding effect. The provisions of this Agreement shall be binding upon
and inure to the benefit of each of the parties and their respective successors
and assigns.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
day and year first above written.
Hollywood Productions, Inc.
By: ______________________ By: ______________________
Robert E. DiMilia John Andrew Gallagher
Vice-President
<PAGE>
Exhibit 23.01
Consents of Scarano & Tomaro, P.C.
<PAGE>
July 22, 1997
Hollywood Productions, Inc.
448 W. 16th Street, 7th Floor
New York, NY 10011
We hereby consent to the use of our name "as experts", in the "Summary Financial
Data" section and the use of our opinion dated March 19, 1997 for Hollywood
Productions, Inc. to be included in the Post Effective Amendment No. 1 to Form
SB-2 Registration Statement being filed for Hollywood Productions, Inc.
Very truly yours,
Scarano & Tomaro, P.C.
<PAGE>
