SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number O-28690
HOLLYWOOD PRODUCTIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-3871821
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
14 East 60th Street, Suite 402, New York, NY 10022 (Address of
principal executive offices) (Zip Code)
(212) 688-9223
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
Title of each class Name of each exchange on which registered
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 per share
(Title of Class)
Common Stock Purchase Warrants
(Title of Class)
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Check if no disclosure of delinquent filers in response Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K [ ].
The Registrant=s revenues for its fiscal year ended December 31, 1997 were
$5,262,240. The aggregate market value of the voting stock on March 31, 1998
(consisting of Common Stock, par value $.001 per share) held by non-affiliates
was approximately $3,138,235, based upon the closing price for such Common Stock
on said date ($2.94), as reported by a market maker. On such date, there were
2,336,944 shares of Registrant's Common Stock outstanding.
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Business Development
Hollywood Productions, Inc. (the "Company"), a Delaware corporation, was
organized in December 1995. The Company was formed for the purpose of acquiring
screenplays 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"), 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 subsidiary.
In February 1998, the Company effected a one for three reverse stock split
of the Company=s common stock, par value $.001 per share, (the ACommon Stock@).
Accordingly, unless otherwise noted, all share and per share information
contained in this annual report reflects retroactive application of this reverse
split.
Initial Public Offering
In September 1996, the Company consummated a public offering of 800,000
(pre-split) shares of its Common Stock and 1,600,000 warrants (the AWarrants@)
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.
Included in the Company=s registration statement referenced above were
1,400,000 (pre-split) shares and 2,000,000 Warrants registered for resale by
European Ventures Corp. (AEVC@), the majority stockholder of the Company. As of
March 31, 1998, EVC held 1,200,350 (post-split) shares and 2,400 Warrants.
Acquisition of Breaking Waves, Inc.
Pursuant to a stock purchase agreement, dated May 31, 1996 (the
"Agreement") entered into between the Company and the stockholders of Breaking
Waves, Inc., a New York corporation ("Breaking Waves"), the shareholders of
Breaking Waves delivered to the Company all of the issued and outstanding shares
of Breaking Waves= common stock for 50,000 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 exchanged of all of
its common stock for new common stock and for a series of Preferred Stock, (the
ASeries A Preferred Stock@). 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,
designated as the Series A Preferred Stock. The shares of the Series A Preferred
Stock have the right to redemption. On each of January 1, 1997 and 1998,
Breaking Waves redeemed one half of the outstanding shares of the Series A
Preferred Stock, at a redemption price of $100.00 per share. The Series A
Preferred Stock had no dividend, conversion or voting rights, but shall had a
preference on liquidation equal to $100 per share.
Pursuant to the terms of the Agreement, the Company replaced the personal
guarantees of the prior stockholders of Breaking Waves issued to NationsBanc
Commercial Corp. (ANationsBanc@), in accordance with the Company's then 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
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Waves for the period from January 1, 1996 to the closing date. This was done in
order to pay taxes owed by such stockholders, since Breaking Waves is a
subchapter S corporation.
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. 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" (the AMotion Picture@), and formed D.L.
Productions Inc. (AD.L. Productions ), as its production arm to produce the
Motion Picture. The Company retains all distribution and ancillary rights to the
screenplay and the Motion Picture.
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 pictures, 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 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 and 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 or other distribution channels.
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 that the Company
anticipates producing, including Dirty Laundry, the release may be done in
platforming stages. Initially the film will be released at several theaters in
one or two major markets, where 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.
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The Company anticipates that the films it produces will be distributed and
shown at movie 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 and/or rental of videotapes. 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 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 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.
Production of "Dirty Laundry" Film
In March 1995, 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, 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
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.
<PAGE>
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 April 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 additional 20 weeks. Upon completion
of the Motion Picture, the Company conducted private showings of the Motion
Picture in order to obtain both a foreign and domestic distributor for the film.
In November 1997, with the production of the movie complete, the Company
effected the dissolution of D.L. Productions. The assets of D.L. Productions
were transferred to the Company, and the Company took over the marketing of the
Motion Picture.
After having viewed the Motion Picture in the private showings offered by
the Company, several entities have expressed an interest in obtaining domestic
distribution rights in the Motion Picture. The Company is currently involved in
negotiations with these entities. However, the Company has not entered into any
agreements or arrangements. The Company is also considering self-distribution of
the Motion Picture in the domestic market. In April 1997, the Company=s foreign
sales agent, Trident Releasing, Inc., entered into a license agreement with
TaurusFilm GmbH & Co. for the German language version of the Motion Picture.
Gross receipts from this agreement were $150,000.
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 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.
Option to purchase "Cyclone" Film
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. Mr. Mastroianni who
has orally agreed to direct Cyclone, subject to his availability, and to seek
named talent for the film. The option to purchase the screenplay expires in June
1998.
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.
<PAGE>
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 will not limit or affect the Company's
ability to exhibit such motion pictures.
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.
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Swimwear Business
General
The Company is a designer, manufacturer and distributor of girl=s 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. Beginning in July
1998, the Company will begin selling boy=s and men=s swimwear, wet suits,
cover-ups, and jackets, under its newly licensed AJet Ski@ line.
The Company markets swimwear under its private brand labels, including
"Breaking Waves," "All Waves," "Making Waves," and "Small Waves". Under its
license agreement with Beach Patrol, Inc. (ABeach@), markets and manufactures a
line of swimwear under the name "Daffy Waterwear." Under its license agreement
with Kawasaki Motors Corp., USA (AKawasaki@), the company is manufacturing a
line of swimwear for initial release in July 1998 under the name "Jet Ski@. With
the AJet Ski@ line, the Company will be expanding into the production of
swimwear for boys and men.
Products and Design
Through the Company=s wholly owned subsidiary, Breaking Waves, 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, thereafter 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 the 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 20-25 prints and fabrics are developed for the "Breaking
Waves" line, and 15-18 prints and fabrics are developed for the "All Waves"
line, which lines comprised approximately 33% and 17% of the Company volume for
the year ended December 31, 1997. The Company has a licensing agreement with
Beach which gives Breaking Waves access to the complete "Daffy" woman's line,
which line comprised approximately 33% of the Company's sales for the year ended
December 31, 1997. 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 12-16 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.
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 the fabrics.
The fabrics are then sent to a company in Indonesia for sewing. Approximately
95% and 19% of its piece goods are purchased from one manufacturer in Korea,
Zone Company, Ltd., and approximately 95% and 71% of the sewing is performed by
one Company in Indonesia, P.T. Kizone International, Inc., for the years ended
December 31, 1996 and 1997, respectively. 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. 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.
Financing Arrangements
On April 4, 1991, Breaking Waves entered into an accounts receivable
financing agreement with NationsBanc to sell their interest in all present and
future receivables without recourse. Breaking Waves submitted all sales orders
to NationsBanc for credit approval prior to shipment, and paid NationsBanc .75%
of the gross amount of the receivables. NationsBanc retained from amounts
payable to Breaking Waves a reserve for possible obligations such as customer
disputes and possible credit losses on unapproved receivables. Breaking Waves
took advances of up to 85% of the purchase price on the receivables, with
interest charged at the rate of 1 3/4% over prime. Interest expense charges
totaled approximately $67,173 from September 24, 1996, date of acquisition to
December 31, 1996. For the year ended December 31, 1997 interest expense
amounted to $156,785. In August 1997 the Company terminated its financing with
Nationsbanc and entered into a Factoring and Revolving Inventory Loan and
Security Agreement with Heller Financial, Inc. (AHeller@).
Heller has agreed to (i) purchase all of Breaking Waves accounts
receivables; (ii) provide advances against such accounts receivables; (iii)
provide a revolving loan; and (iv) guaranty letters of credit in excess of
$1,500,000 as well as provide certain other services. The Company is a guarantor
of the obligations of Breaking Waves to Heller. The Company maintains a letter
of credit with a financial institution in support of and as a condition of its
factoring agreement. The financial institution requires the Company to maintain
$1,500,000 on deposit as collateral for such letter of credit. Breaking Waves
may take advances of up to 85% of the purchase price of eligible accounts
receivable. At the time Heller purchases each receivable, it charges Breaking
Waves a factoring commission of 1%, but in no event less than $3.00 per invoice.
In addition to advances, Heller will make revolving loans to Breaking Waves upon
Breaking Waves= request, up to 50% of eligible inventory.
Breaking Waves will pay Heller interest on the daily balance of outstanding
advances and revolving loans at the Base Rate. ABase Rate@ means a variable rate
of interest per annum equal to the higher of (a) the rate of interest from time
to time published by the Board of Governors of the Federal Reserve System as the
ABank Prime Loan@ rate in Federal Reserve Statistical Release H.15 (519)
entitled ASelected Interest Rates@ or any successor publication of the Federal
Reserve System reporting the Bank Prime Loan rate or its equivalent, or (b) the
Federal Funds effective rate. The interest expense totaled approximately $67,611
from August 1997 to December 31, 1997.
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, 1997, the "Breaking
Waves" label accounted from approximately 33% of the Company's volume, the "All
Waves" label 17%, the "Daffy" label 33%, and private labels 17%.
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. For the years ended
December 31, 1997 and 1996, Breaking Waves has two customers which comprise 36%
and 12%, and 16% and 12% of net sales, respectively. 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.
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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, approximately
twenty independent sales representatives throughout the United States sell the
Company=s lines. These representatives service department stores and smaller
specialty retailers. Separate independent representatives sell the ADaffy
Waterwear@ line. 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.
Work in Progress
The Company manufactures its lines during the months 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 January to May. 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 occur from November to May,
with January through March being the peak shipping time.
Trademarks and Licensing; New Product Line
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 to use the trademark "Daffy's Waterwear." Beach supplies prints and
designs used under this agreement 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 the greater of 5% of net sales
or 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 the Company
exercises all extensions.
The Company has also entered into a licensing agreement with Kawasaki to
use the trademark "Jet Ski" for a line of girl=s, boy=s and men=s swimwear. AJet
Ski@ is the brand name used for all of Kawasaki=s personal watercraft though out
the world. The license agreement commenced July 1, 1997 and shall continue
through May 31, 1999. In addition, the Company has the right to extend the
agreement for an additional one year period. Under the terms of the agreement,
the Company shall pay to Kawasaki 5% of the net sales price of the goods sold
under this line.
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The Company has registered trademarks for ABreaking Waves,@ AAll Waves,@
and ASmall Waves.@ There can be no assurance that such trademarks 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 one of its trademarks, 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.
On October 31,1996, Breaking Waves entered into a license agreement with
North-South Books, Inc. for the exclusive use of certain art work and text in
the making of swimsuits and accessories in the United States and Canada. The
agreement expires March 1, 1999. The Company recorded $0 and $355 royalties
under this agreement during the years ended December 31, 1996 and 1997,
respectively.
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.
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.
The Company recent expansion into the boy=s and men=s swimwear industries,
through their AJet Ski@ line, represents an entry into a sector of the swimwear
industry in which the Company has not previously entered. The Company believes
that the men=s swimwear industry is similar to the girl=s and women=s industries
in many respects, however, there may be significant differences of which the
Company is not aware. Although the Company plans on hiring sales personnel with
experience in selling men=s swimwear and products which relate to water sports,
there can be no assurance that the Company will be successful in entering this
new product sector. Additionally, the Company=s use of a nationally recognized
tradename like AJet Ski@ represents an entry into a new type of marketing with
which the Company has no experience and which may produce unforeseen risks.
There are many major brands that now sell products that relate to water sports,
such as ANike,@ AQuicksilver,@ AAddidas,@ ABody Glove,@ and APol Sport.@ Most of
these manufacturers are well established with the customers targeted by the
Company for its AJet Ski@ line, such as sporting good stores, surf shops, and
outlets which sell AJet Ski@ watercrafts.
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 that have brand names that 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 January
to November the Company engages in the process of designing and manufacturing
the following season=s swimwear lines. There can be no assurances that revenues
received during December to June will support the Company's operations for the
rest of the year.
<PAGE>
Employees
Hollywood Productions, Inc. has two executive officers who oversee its
operations and thato of its subsidiary, one administrative assistant and no
other employees. 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 one administrative assistant. Breaking Waves has approximately 20
independent road sales people and accounting and clerical staff.
Business Risks
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. 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.
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 number and popularity of other
films then being distributed may also significantly affect the theatrical
success of a film. 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.
The apparel industry is a cyclical industry, with consumer purchases of
swimwear, 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 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.
The Company believes that its success in the swimwear industry 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
<PAGE>
ITEM 2. DESCRIPTION OF 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 1,800 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 was approximately 1,000 square feet. In January 1998,
Breaking Waves expanded its lease at this address to encompass an aggregate of
2,000 square feet. The extra square footage is being used as a new showroom for
the AJet Ski@ line. The lease is for a term of seven years until December 2004
at a current annual rental payment of $71,600. 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.
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On January 28, 1998, the Company held a special meeting during which it
proposed to elect four Directors to the Board and to authorize a reverse split
of the Company's outstanding shares of Common Stock on a 1 for 3 basis. The
reverse split proposal was adopted, and the following were elected Directors of
the Board for a term of one year: Harold Rashbaum, Robert DiMilia, Alain A. Le
Guillou, and James Frakes.
The results of the proposal to elect four (4) Directors to the Company's
Board of Directors to hold office for a period of one year or until their
successors are duly elected and qualified are as follows:
<TABLE>
<CAPTION>
Votes Cast
For Abstentions
<S> <C> <C>
Harold Rashbaum 5,762,907 500
Robert DiMilia 5,762,907 500
Alain A. Le Guillou 5,762,907 500
James B. Frakes 5,762,907 500
</TABLE>
4
<PAGE>
The results of the proposal to authorize a reverse split of the Company's
outstanding shares of Common Stock on a 1 for 3 basis, are as follows:
<TABLE>
<CAPTION>
Votes Cast Votes Cast
For Against Abstentions
<S> <C> <C> <C>
5,762,907 500 0
</TABLE>
<PAGE>
PART II
ITEM 5. 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 sale
prices as reported by a market maker for the Company's Common Stock and
Warrants, during the period from September 23, 1996 through March 18, 1998. Sale
prices reflect prices between dealers, do not include resale mark-ups, markdowns
or other fees or commissions. <TABLE> <CAPTION>
Common Stock Warrants
Calendar Period Low High Low High
<S> <C> <C> <C> <C>
09/23/96 - 12/31/96 6 11 3/8 3 1/4 6 3/4
01/01/97 - 03/31/97 3 1/4 8 1/8 1 5 1/2
04/01/97 - 06/30/97 1 1/16 5 1/8 1 1/2
07/01/97 - 09/30/97 1 1 7/8 3/8 1 1/16
10/01/97 - 12/31/97 5/16 1 7/8 1/8 5/8
01/01/98 - 03/31/98 (1) 7/32 3 3/16 1/32 7/32
- ----------------
</TABLE>
The above prices reflect the price per pre-split shares through February 4,
1998. The Company=s one for three reverse stock split became effective on
February 5, 1998, and accordingly the above table reflects the price for
post-split shares commencing on that date.
Each Warrant entitled the holders thereof to purchase one share of the
Company's Common Stock at an exercise price of $6.50 per share, until September
9, 2001. On June 23, 1997, the Board of Directors approved a reduction in the
exercise price of the Warrants from $6.50 to $3.00. On February 5, 1998, the
Company effected a one for three reverse split of the Company=s Common Stock.
Accordingly, the Company adjusted the terms of the Warrants to reflect the
reverse split. The new terms provided that three Warrants would entitle the
holder to purchase one share of Common Stock at the exercise price of $9.00.
As of March 31, 1998 the number of post reverse split shares of Common
Stock outstanding of the Company was 2,336,944.
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.
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>
ITEM 6. MANAGEMENT=S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATIONS
Hollywood Productions, Inc. 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 September 1996, in connection with
the completion of its Initial Public Offering ("IPO"), the Company acquired all
the capital stock of 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. D.L. Productions was formed in the State of New York for the
purpose of purchasing and producing the motion picture ADirty Laundry@. As of
December 31, 1997, the motion picture Dirty Laundry was completed and all of
D.L. Production=s assets and liabilities were effectively merged into the
Company. Accordingly, as of November 30, 1997 D.L. Productions was dissolved.
The financial information,as well as share and per share information, give
retroactive effect to a 1 for 3 reverse stock split effectuated during February
1998.
Year ended December 31, 1997 as compared to the year ended December 31, 1996
The consolidated financial statements at December 31, 1997 and 1996
include the accounts of the Company and its wholly owned subsidiary, 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: <TABLE> <CAPTION>
Increase
<S> <C>
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)
===========
</TABLE>
For the year ended December 31, 1997, the Company=s subsidiary,
Breaking Waves, generated net sales of $5,262,240 with a cost of sales amounting
to $3,222,478. From September 24, 1996 (the date the Company acquired Breaking
Waves) to December 31, 1996 Breaking Waves generated sales amounting to
$1,217,152, with cost of sales amounting to $667,722. Breaking Waves generated
operating profit amounting to $638,851 for the year ended December 31, 1997 and
$294,908 for the period September 24, 1996 to December 31, 1996. Operating
profit is total revenue less cost of sales and operating expenses and excludes
general corporate expenses, interest expenses, and income taxes. The gross
profit for the year ended December 31, 1997 amounted to $2,045,898 or 39%, as
compared to the year ended December 31, 1996 which amounted to $549,430 or 45%.
Breaking Wave=s gross profit for 1996 represents only the sales and related
costs from September 24, 1996 (date of acquisition) to December 31, 1996. This
period represents a portion of Breaking Waves peak season as far as sales are
concerned and accordingly, the products are sold at a higher gross profit. When
comparing the full year of 1996 to the full year 1997, the difference in gross
profit is an increase of 2% for 1997 over 1996. Of the total selling, general
and administrative expenses during the year ended December 31, 1997 amounting to
$2,193,495, $1,400,911 were incurred by Breaking Waves, with the remainder
amounting to $792,584, incurred by the Company, and of the total selling,
general and administrative expenses during the year ended December 31, 1996
amounting to $668,697, $246,654 were incurred by Breaking Waves, with the
remainder amounting to $422,043, incurred by the Company. Accordingly, Breaking
Waves= income before income taxes amounts to $341,148 and $201, 814, for the
years ended December 31, 1997 and 1996, respectively.
<PAGE>
The major components of the Company=s general and administrative
expenses during the year ended December 31, 1997 are composed of the following:
$78,500 of consulting paid to affiliates, $367,216 of officer salaries, $118,056
of officers salaries paid in stock, $352,074 of payroll, related taxes and
benefits, $188,460 of warehousing costs, $111,000 of royalties, $151,679 of
rent, $107,200 of consulting, $97,099 of legal and professional fees, $186,760
of miscellaneous selling and design expenses, and $435,451 of other general and
corporate administrative expenses.
The major components of the Company=s general and administrative
expenses during the year ended December 31, 1996 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 2,500 shares of common stock at $2.50 per
share; $62,500 of consulting expenses paid to two officers of the Company paid
in the form of 33,333 shares of common stock which vest on June 30, 1997 and
1998; and amortization of organization costs and acquisition costs of $25,000.
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
other general corporate overhead amounting to $57,901.
For the years ended December 31, 1997 and 1996, the Company reported
consolidated losses amounting to $423,467 and $221,982, respectively.
Liquidity and Capital Resources
On September 24, 1996, the Company successfully completed its public
offering. As a result, the Company sold 800,000 pre-split shares and 1,840,000
Warrants (pre-split) of which 240,000 Warrants were sold pursuant to the
underwriter's over-allotment option. The Company yielded total net proceeds of
$3,813,294 after deducting underwriter selling expenses and non-accountable
expense allowance. Simultaneously with the offering, the Company charged all
deferred offering costs incurred to additional paid-in capital, which totaled
$996,182.
At December 31, 1997 and 1996, the Company has a working capital amounting
to $2,263,109 and $4,629,441, respectively. The Company received $195,000
pursuant to a private placement transaction during February 1998 by selling
shares of common stock.
On April 4, 1991, Breaking Waves entered into an accounts receivable
financing agreement with NationsBanc to sell their interest in all present and
future receivables without recourse. Interest expense in connection with such
financing arrangement amounted to approximately $156,785 for the year ended
December 31, 1997. Effective on or about August 20, 1997, such financing
agreement was cancelled and replaced with factoring and revolving inventory loan
and security agreement with Heller to sell their interest in all present and
future receivables without recourse. Breaking Waves submits all sales offers to
Heller for credit approval prior to shipment, and pays Heller 1% of the net
amount of the receivable. Heller retains from amount payable to Breaking Waves a
reserve for possible obligations such as customer disputes and possible credit
losses on unapproved receivable. Breaking Waves may take advances of up to 85%
of the purchase price on the receivable, with interest charges at the rate of 1
3/4% over prime. Interest charged to expense totaled approximately $67,611 from
August 1997 to December 31, 1997. Heller has a continuing interest in Breaking
Waves=s inventory as collateral for the advances. As of December 31, 1997, the
net advances to Breaking Waves from the factors amounted to $1,750,894. The
Company maintains a letter of credit with a financial institution in support of
and as a condition of its factoring agreement. The financial institution
requires the Company to maintain $1,500,000 on deposit as collateral for such
letter of credit.
On October 16, 1995, Breaking Waves entered into a license agreement with
Beach for the exclusive use of certain trademarks in the United States. The
agreement expires June 30, 1998 with options to extend to June 30, 2001. The
agreement calls for minimum annual royalties of $75,000 to $200,000 over the
life of the agreement with options. The Company recorded royalties and
advertising under this agreement totaling $25,500 and $111,000 during the years
ended December 31, 1996 and 1997, respectively.
<PAGE>
On October 31,1996, Breaking Waves entered into a license agreement with
North-South Books, Inc. for the exclusive use of certain art work and text in
the making of swimsuits and accessories in the United States and Canada. The
agreement expires March 1, 1999. The Company recorded $0 and $355 royalties
under this agreement during the years ended December 31, 1996 and 1997,
respectively.
On October 17, 1997, Breaking Waves entered into a license agreement with
Kawasaki for the exclusive use of certain trademarks in the making of swimwear
in the United States. The agreement expires May 31, 1999. No royalties were paid
under the agreement during the year ended December 31, 1997.
During May, 1996, the Company established the 1996 Senior Management
Incentive Plan ("Incentive Plan") pursuant to which 83,333 shares 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 the plan the Company issued 16,667 shares to
each of two officers of the Company, subject to vesting, all of which have
vested. Such shares were valued at 50% of the IPO price of $2.50. Accordingly,
the Company recorded deferred compensation expense in the amount of $250,000,
which expense is being amortized as the shares vest. During January 1997, one of
the officers resigned, and as a result, 8,333 shares were cancelled. As of
December 31, 1996 and 1997, $62,500 and $93,750, respectively, has been
amortized as a compensation expense.
In March 1997, pursuant to the plan, the Company granted an aggregate
50,000 options to two officers of the Company: each option was initially
exercisable at $5.125 per share which were subsequently amended to $2.93 per
share. The exercise price equaled the market value at the grant date and no
additional compensation was recorded.
Pursuant to co-production and property purchase agreements dated March 15,
1996, as amended, the Company, through is wholly owned subsidiary, D.L.
Productions, 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 of the costs of production. The
Company retains all rights to the motion picture, the screenplay, and all
ancillary rights attached thereto. As of December 31, 1997, the motion picture
was completed and the Company has begun the marketing and distribution process.
Subsequent to year end, the motion pictures was licensed to certain foreign
countries for $205,000. As of December 31, 1996 the Company had invested a total
of $1,381,750 in D.L. Productions for the co-production and distribution of such
motion picture. As of December 31, 1997 this amount had increased, through
additional investments, to $1,687,236. The co-producers have invested $100,000
which has been recorded as a capital contribution to the Company.
For the years ended December 31, 1997 and 1996, the Company used cash for
operating activities amounting to $484,375 and $1,899,878, respectively. The
major component of such use of cash for 1997 was the Company=s net operating
loss of $423,467. The major components of such use of cash during the year ended
December 31, 1996 was for the acquisition of Breaking Waves inventory and the
costs incurred for the production of the motion picture which totaled
$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, 1997, the Company used $81,189 of cash for financing
activities primarily for offering costs related to Breaking Waves IPO. For the
year ended December 31, 1996, the Company provided $4,548,204 of cash from
financing activities which was primarily from the Company=s initial public
offering and the initial investment by the Company=s majority stockholder, EVC.
ITEM 7. FINANCIAL STATEMENTS
See attached Financial Statements.
ITEM 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTORS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
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 71 President, CEO and Director
Robert DiMilia 52 Vice President, Secretary and Director
Alain A. Le Guillou, M.D. 41 Director
James Frakes 41 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 outside directors are Alain D. Le Guillou, M.D
and James Frakes. 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.
Harold Rashbaum has been the President, Chief Executive Officer, and
director of the Company since January 1997. Mr. Rashbaum served as Secretary and
Treasurer of the Company from May 1996 until January 1997 when he was elected as
President and Chief Executive Officer. From May 1996, until its dissolution in
November 1997, Mr. Rashbaum served as the secretary, treasurer and a director of
D.L. Productions and became President in January 1997. 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. (APlay Co.@), since June 1995 and became the Chairman of the
board in October 1996, which company is a wholesaler and retailer of children=s
toys. From January 1991 to March 1992, he was a consultant for National
Wholesale Liquidators, Inc., a retailer of household goods and housewares.
Robert DiMilia, has been a Director, Vice President and Secretary of the
Company since January 10, 1997, prior thereto he was a consultant to the Company
with respect to the 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.
<PAGE>
James Frakes was elected Director of the Company in January 1998. Mr.
Frakes has been the Chief Financial Officer and a Director of Play Co. since
June 1997 and August 1997 respectively. Prior thereto, from June 1990 to March
1997, Mr. Frakes was Chief Financial Officer of Urethane Technologies, Inc.
(AUTI@) and two of its subsidiaries: Polymer Development Laboratories, Inc.
(APDL@) and BMC Acquisition, Inc. These were specialty chemical companies which
focused on the polyurethane segment of the plastics industry. Mr. Frakes was
also Vice President and a Director of UTI during this period. In March 1997,
three unsecured creditors of PDL filed a petition for the involuntary bankruptcy
of PDL. This matter is pending before the United States Bankruptcy Court,
Central District of California. In 1989, Mr. Frakes and his wife purchased JLJ
Enterprises d/b/a TME Travel (AJLJ@), a travel agency which provided services
primarily for the business community. Mr. Frakes was the Vice President, Chief
Financial Officer, and a Director of JLJ; his wife was the President and a
Director. In November 1992, Mr. Frakes and his wife sold JLJ. From 1985 to 1990,
Mr. Frakes was a manager for Berkeley International Capital Corporation, an
investment banking firm specializing in later stage venture capital and
leveraged buyout transactions. In 1980, Mr. Frakes obtained a Masters in
Business Administration from University of Southern California. He obtained his
Bachelor of Arts degree in history from Stanford University from which he
graduated with honors in 1978.
Significant Employees
Malcolm Becker, 62, has been the vice-president of design, merchandising
and production of Breaking Waves, Inc., since its inception in 1991.
Michael Friedland, 60, 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.
7
<PAGE>
ITEM 10. 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 periods ended December 31, 1995,
1996, and 1997 to each of the named executive officers of the Company.
Summary Compensation Table
<TABLE>
<CAPTION>
Securities Restricted
Name and Principal Underlying Stock All Other
Position Year Salary($) Options/SARS (#) Award(s) ($) Compensation
- -------- ---- --------- ---------------- ------------ ------------
<S> <C> <C> <C>
Harold Rashbaum 1997 (1) 147,000 33,333 (2) -- --
Chief Executive Officer 1996 (1) 26,000 -- 100,000 (3) --
President
Robert DiMilia 1997 81,000 16,667 (2) -- --
Vice President 1996 (4) -- -- -- --
Secretary
Robert Melillo 1997 (5) 4,000 -- -- --
Former Chief Executive 1996 (5) 69,200 -- -- (6) --
Officer
</TABLE>
Commenced employment in May 1996. 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. See ASenior Management
Incentive Plan@.
Includes 16,667 shares issued under the Senior Management Incentive Plan in
June 1996, subject to a two year vesting schedule.
The shares were valued on issuance at $100,000. See ASenior Management
Incentive Plan@.
Commenced employment in January 1997.
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 $600
per week. See ACertain Relationships and Related Transactions@.
Mr. Melillo received 16,667 shares of Common Stock in the Company pursuant
to the Company=s Senior Management Incentive Plan, subject to a vesting
schedule, whereby 8,333 shares would vest in each of June of 1997 and 1998. Upon
the resignation of Mr. Melillo on January 10, 1997, he agreed to return 8,333
the shares to the Company, however, since Mr. Melillo failed to comply with his
agreement, the Company had all 16,667 shares cancelled.
<PAGE>
Stock Options
The following table sets forth certain information concerning the grant
of stock options made during the year ended December 31, 1997 under the
Company's Senior Management Incentive Plan.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(Individual Grants)
<TABLE>
<CAPTION>
====================================================================================================================================
Individual Grants
- ------------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) )
% of Total
Options/SAR's
# of Securities Granted to
underlying Employees in
Options/SAR's Fiscal Year
Granted (1) Exercise or Base
Name Price ($/SH) (2) Expiration Date
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Harold Rashbaum 33,333 67% $5.125 March 14, 2002
Robert DiMilia 16,667 33% $5.125 March 14, 2002
====================================================================================================================================
- ------------------------
</TABLE>
(1) Represents incentive stock options granted under the Company's Senior
Management Incentive Plan. Options granted under the Management Plan are
intended to qualify as incentive stock options under the Internal Revenue Code
of 1986, as amended. Under the terms of the Management Plan, the option price
per share may not be less than the fair market value of the Corporation's shares
on the date the option is granted. However, options granted to persons owning
more than 10% of the Corporation's Common Stock may not have a term in excess of
five years and may not have an option price of less than 110% of the fair market
value per share of the Company's shares on the date the option is granted.
(2) On March 10, 1998, the Board of Directors approved a revision of the
terms of the options granted to Harold Rashbaum and Robert DiMilia. The exercise
price was changed to $2.93. In accordance with the February 1998 one for three
reverse split of the Company=s Common Stock, the number of shares underlying the
options was decreased to 33,333 and 16,667 for Mr. Rashbaum and Mr. DiMilia,
respectively.
The following table contains information with respect to employees of the
Corporation concerning options held as of December 31, 1997.
<PAGE>
AGGREGATE OPTION/SAR EXERCISE IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
=================================================================================================================================
(a) (b) (c) (d) (e)
- ---------------------------------------------------------------------------------------------------------------------------------
Value of Unexercised
Number of In-The-Money Options/SAR=s
Unexercised at FY-End ($)
Options/SAR's Exercisable/
Shares Acquired Value Exercisable/ Unexercisable /
Name on Exercise Realized($) Unexercisable at FY-End (#)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Harold Rashbaum 0 0 33,333/0 (1) 0/0 (2)
Robert DiMilia 0 0 16,667/0 (1) 0/0 (2)
=================================================================================================================================
</TABLE>
On March 10, 1998, the Board of Directors approved a revision of the terms
of the options granted to Harold Rashbaum and Robert DiMilia. The exercise price
was changed to $2.93. In accordance with the February reverse split of the
Company=s Common Stock, the number of shares underlying the options was
decreased to 33,333 and 16,667 for Mr. Rashbaum and Mr. DiMilia, respectively.
The closing price on December 31, 1997 was $0.47 per pre-split share. Therefore
the options had no value.
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. From October 1996 until March 1997, Mr. Rashbaum received a salary of
$104,000 per annum for being an officer and director of the Company. In March
1997 Mr. Rashbaum=s salary was raised to $156,000 per annum. 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. The terms of this option were revised subsequent to the February
1998 reverse split of the Company=s Common Stock. See ACertain Relationships and
Related Transactions@.
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. 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 was paid in
weekly installments. On January 1, 1998, the term of the consulting agreement
expired and Mr. Stone=s relationship with the company was terminated.
<PAGE>
In November 1997, Breaking Waves entered into three 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 is as follows; (i) half of the shares received on November 27,
1996 vested 90 days from issuance with the balance vesting 270 days from the
date of issuance and (ii) on each subsequent annual issuance commencing November
27, 1997, half of the shares vest six months from issuance with the balance
vesting on the following anniversary. In November 1997, 7,222 shares were issued
to each of Messrs. Becker and Friedland, subject to vesting. The shares vest
pursuant to restricted share agreements. AMarket 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 non-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 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.
<PAGE>
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 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 pre-split 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. In March 1998, the exercise price was decreased to $2.93
and pursuant to the February 1998 one for three reverse split of the Company=s
Common Stock, the number of shares was reduced to 33,333 and 16,667,
respectively. See ACertain Relationships and Related Transactions@.
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 exercisable for a period of 12 months
thereafter.
<PAGE>
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 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.
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 had issued an aggregate of 41,667 restricted
shares of which (i) each of Mr. Rashbaum and Mr. Melillo received 16,667 shares
and (ii) Charles Rosen, a consultant to the Company received 8,333 shares. All
such shares were subject to a vesting schedule whereby, half of the shares were
to vest in each of June 1997 and 1998. Upon the termination of Mr. Rosen=s
consulting agreement the 8,333 shares were returned to the Company. In addition,
upon the resignation of Mr. Melillo, the 16,667 shares were cancelled by the
Company.
<PAGE>
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.
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).
<PAGE>
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.
Non-Executive Director Stock Option Plan
In April 1997, the Company=s Board of Directors unanimously adopted the
Company=s Non-Executive Director Stock Option Plan (the ADirector=s Plan@),
which was adopted by stockholder consent. The following is a summary of the
principal features of the Director=s Plan and is qualified by and subject to the
actual provisions of the Director=s Plan. As of January 1998, no options had
been granted.
Purpose and Eligibility
The Director=s Plan provides for the grant of stock options as a means of
attracting and retaining highly qualified independent Directors for the Company.
The only persons eligible to participate in the Director=s Plan are Directors
who are not employees of the Company and who have within the past fiscal year,
neither received any equity securities of the Company under any plan of the
Company, nor been an employee of the Company nor otherwise been eligible to
receive equity securities under any plan of the Company (the AEligible
Directors@).
The Company currently has two Eligible Directors under the Director=s Plan,
Dr. Alain Le Guillou and Mr. James Frakes. Grants under this plan shall have
exercise prices equal to the market price on the date of grant.
Option Awards
The Director=s Plan provides that each Eligible Director automatically
receives an option to purchase up to 5,000 shares of Common Stock immediately on
January 1 of each year in which the Director has been a member of the Board for
a continuous 12 month period.
All options granted under the Director=s Plan are to be evidenced by
written option agreements or confirming memoranda, each of which must be
consistent with the Director=s Plan but which may otherwise contain such
additional or unique features as the Company determines. Options granted under
the Director=s Plan are not transferable.
Vesting and Exercise
Options granted under the Director=s Plan vest and become exercisable upon
issuance. The option exercise price may be paid in cash or in any other
consideration the Company deems acceptable as provided in the Director=s Plan,
including shares of Common Stock surrendered by the optionee or withheld from
the shares otherwise deliverable upon exercise. The Company is permitted to loan
the exercise price to the optionee or to allow exercise in a broker=s
transaction in which the exercise price will not be received until after
exercise and subsequent sale of the underlying Common Stock. Consideration
received by the Company upon exercise of options granted under the Director=s
Plan will be used for general working capital purposes.
Options granted under the Director=s Plan may be exercised at any time and
before the expiration of five years from the date of their grant.
Securities Subject to Directors Plan
No more than 150,000 shares of Common Stock may be issued upon exercise of
options granted under the Director=s Plan. The number of shares of Common Stock
available to individual optionees or under the Director=s Plan in general, as
well as the number of shares for which issued or unissued options may be
exercised, and the exercise price per share of such options, will be
proportionately adjusted to reflect stock splits, stock dividends, and similar
capital stock transactions.
<PAGE>
Administration, Amendment, and Termination
Two Officers of the Company who are also Directors but who are not eligible
under the plan will administer the Director=s Plan. These Officers will have the
power to discontinue, suspend, or amend the Director=s Plan in any manner,
except that the Company may not alter the Director=s Plan or exercise any
discretion with respect to persons eligible to receive grants of options, the
number of shares of Common Stock subject to options, the timing of such grants,
the exercise price of options, or the final date upon which options may be
granted. Options may be granted under the Director=s Plan until January 1, 2007.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information as of March 31, 1998,
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) by each officer and director; and (iii) by all officers and directors as a
group. All numbers reflected herein and in the footnotes hereto have been
adjusted to reflect the 1 for 3 reverse split, which the Company effected on
February 5, 1998
<TABLE>
<CAPTION>
Name and Address of Amount and Nature Percent of
Beneficial Owner of Beneficial Owner Class (1)
- ---------------------- ------------------- ---------
<S> <C> <C>
European Ventures Corp. (2) 1,200,350 58.2%
P.O. Box 47
Road Town, Tortola, British
Virgin Islands
Harold Rashbaum (2) 52,500 (3) 2.6%
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 16,667 (4) *
c/o Hollywood Productions, Inc.
14 East 60th Street, Suite 402
New York, New York 10022
All Officers and Directors 69,167 (4) 3.3%
(3 as a Group) (2)-(4)
* Less than 1%
</TABLE>
(1) Does not give effect to the issuance of (i) 1,466,667 shares of Common
Stock reserved for issuance upon the exercise of the Warrants; (ii) 83,333
shares of Common Stock reserved for issuance under the Company's 1995 Senior
Management Incentive Plan; or (iii) 50,000 shares of Common Stock reserved for
issuance upon the grant of options underlying the Non-Executive Director Stock
Option Plan.
(2) Harold Rashbaum is the father-in-law of Ilan Arbel, the sole officer
and director of EVC, and Alain Le Guillou.
<PAGE>
(3) Includes (i) 33,333 shares of Common Stock underlying an option granted
under the Company=s Senior Management Incentive Plan and (ii) 2,500 shares
issued to H.B.R. Consultants Sales Corp. in September 1996. See AExecutive
Compensation@.
Includes 16,667 shares of Common Stock issuable upon the exercise of an
option granted to Robert DiMilia under the Company=s Senior Management Incentive
Plan. See AExecutive Compensation@.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company entered into a two year consulting agreement with Dan Stone,
the former president and majority stockholder of Breaking Waves, as of January
1996, pursuant to which he oversaw the operation of Breaking Waves in return for
a yearly consulting fee of $100,000. On January 1, 1998, the term of the
consulting agreement expired and Mr. Stone=s relationship with the company was
terminated.
In June 1996, the Company issued 16,667 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 8,333 in each of June 1997 and 1998. On January 10, 1997,
Mr. Melillo resigned and agreed to return 8,333 shares to the Company. Mr.
Melillo failed to comply with the terms of his resignation, therefore, all
16,667 shares have been cancelled.
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 2,500 shares of the Company's Common Stock from the Company at the
closing of the Acquisition. In June 1996 Mr. Rashbaum received 16,667 shares of
Common Stock under the Company's Senior Management Incentive Plan which shares
vest at the rate of 8,333 shares on each of June 1997 and 1998.
In March 1997, Harold Rashbaum and Bob DiMilia were granted options to
purchase shares of the Company=s Common Stock pursuant to the Company=s Senior
Management Incentive Plan. Mr. Rashbaum was granted an option to purchase 33,333
shares of Common Stock and Mr. DiMilia was granted an option to purchase 16,667
shares of Common Stock. All of the options are exercisable at the closing bid
price of March 14, 1998, the day of the grant ($5 1/8). The terms of these
options were revised subsequent to the February 1998 reverse split of the
Company=s Common Stock. The revised terms, as approved by the Board of Directors
on March 10, 1998, provide for a reduction in the exercise price to $2.93.
In February 1998, the Company completed a private placement of 300,000
shares of the Company=s Common Stock at a price of $.65 per share. American
Telecom Corporation, a company of which Ilan Arbel, the son-in-law of Harold
Rashbaum, is President, Secretary, and a Director, purchased 100,000 shares
during this offering.
See AExecutive Compensation-Employment and Consulting Agreements@ for a
discussion of the Company=s employment and consulting arrangements.
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following financial statements of the Company are included as Part II,
Item 8:
<TABLE>
<CAPTION>
<S> <C>
Index to Financial Statements ............................................ F-0
Report of Independent Certified Public Accountants ....................... F-1
Balance Sheets ........................................................... F-2
Statements of Operations ................................................. F-3
Statements of Stockholders' Equity ....................................... F-4
Statements of Cash Flows ................................................. F-5
Notes to Financial Statements ............................................ F-6
</TABLE>
(b) During the last quarter, the Company has not filed any reports on Form 8-K.
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, as appropriately marked herein, the Registration Statement
on Form SB-2 file No. 333-5098-NY, Post-Effective Amendment No.1; the
Registration Statement on Form SB-2 file No. 333-5098-NY, Post-Effective
Amendment No.2; the Proxy Statement for the Company=s June 1997 Annual Meeting,
filed on May 23, 1997 (SEC file number 000-28690), or the Company's Form 10-KSB
for the year ended December 31, 1996; and pursuant to 17 C.F.R. 230.411, are
incorporated by reference herein. The exhibits designated by an asterisk (*)
have been filed with this Form 10-KSB for the year ended December 31, 1997.
<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.
3.4 - By-Laws of the Company
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.
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.
10.6(a) - Amendment to lease at 8410 N.W. 53rd Terrace, Miami, Florida.(k)
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.
10.13 - 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-KSB for the year ended December 31, 1996).
<PAGE>
10.17 - Employment Agreement with Malcolm Becker. (Incorporated by reference to the indicated exhibit in
the Company=s 10-KSB 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-KSB for the year ended December 31, 1996).
10.19 - Trident Releasing, Inc. License Agreement. (Incorporated by reference to the indicated exhibit
in the Post-Effective Amendment No.1).
10.20 - Cyclone Option Agreement. (Incorporated by reference to the indicated exhibit in the Post-
Effective Amendment No.1).
10.21 - Cyclone Co-Writer Agreement. (Incorporated by reference to the indicated exhibit in the Post-
Effective Amendment No.1).
10.22 - Heller Financial Agreement. (Incorporated by reference to the indicated exhibit in the Post-
Effective Amendment No.2).
10.23 - Non-Exectutive Director Stock Option Plan. (Incorporated by reference to Appendix B in the Proxy
Statement for the Company=s June 1997 Annual Meeting).
10.24 * - Kawasaki Motors Corp., USA AJet Ski@ License Agreement.
10.25 * - Amendment to lease at 112 West 34th Street, New York, New York.
10.26 * - Form of Subscription Agreement used in connection with the Company=s February 1998 Private
Placement.
27.1 - Financial Data Schedule.
</TABLE>
<PAGE>
HOLLYWOOD PRODUCTIONS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
number
<S> <C>
Independent auditors' report F-1
Consolidated balance sheet at December 31, 1997 F-2
Consolidated statements of operations for the years ended
December 31, 1997 and 1996 F-3
Consolidated statement of stockholders' equity for the years ended
December 31, 1997 and 1996 F-4
Consolidated statements of cash flows for the years ended
December 31, 1997 and 1996 F-5
Notes to consolidated financial statements F-6 - F-17
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Hollywood Productions, Inc. and subsidiary
We have audited the accompanying consolidated balance sheet of Hollywood
Productions, Inc. and subsidiary, (the "Company") as of December 31, 1997 and
the related consolidated statements of operations, stockholders' equity and cash
flows for years ended December 31, 1997 and 1996. 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, 1997 and the consolidated results of
its operations and cash flows for the years ended December 31, 1997 and 1996 in
conformity with generally accepted accounting principles.
Scarano & Tomaro, P.C.
Syosset, New York
March 9, 1998
F-1
<PAGE>
HOLLYWOOD PRODUCTION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
ASSETS
Current assets:
<S> <C>
Cash 352,981
Cash - restricted 1,500,000
Accounts receivable 23,317
Prepaid expenses 41,608
Inventory 2,383,192
Advances to officer and affiliate 67,445
-----------------
Total current assets 4,368,543
Deferred compensation, net 54,166
Advances to officer - non-current portion 32,083
Film production and distribution costs, net 1,745,970
Organizational costs, net 75,000
Excess of cost over net assets acquired, net 975,593
Deferred offering costs 67,385
Other assets 41,553
-----------------
Total assets $ 7,360,293
LIABILITIES AND STOCKHOLDERS= EQUITY
Current liabilities:
Accounts payable $ 133,918
Accrued expenses 203,461
Due to factor 1,750,894
Deferred taxes payable 17,161
-----------------
Total current liabilities 2,105,434
Redeemable preferred stock of subsidiary:
Series A redeemable preferred stock, 2,800 shares
authorized, issued and outstanding, full liquidation
value $280,000 280,000
Commitments and contingencies (Note 6) -
Stockholders= equity:
Common stock - $.001 par value, 20,000,000 shares authorized,
2,045,278 shares issued and outstanding 2,045
Additional paid-in capital 5,618,263
Accumulated deficit (645,449)
-----------------
Total stockholders= equity 4,974,859
Total liabilities and stockholders= equity $ 7,360,293
</TABLE>
See notes to consolidated financial statements
<PAGE>
HOLLYWOOD PRODUCTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
Additional Total
Common Stock Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995 .............. 1,666,667 $ 5,000 $ 1,095,000 $ -- $ 1,100,000
Contributed capital in connection with
co-production and property purchase
agreement ................................. -- -- 100,000 -- 100,000
Issuance of common stock as
consideration for services
rendered to the Company ................... 16,667 50 124,950 -- 125,000
Issuance of common stock and warrants in
connection with the initial public offering 266,667 800 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 ........ 50,000 150 574,850 -- 575,000
Issuance of common stock in connection
with senior management incentive plan ..... 33,333 100 249,900 -- 250,000
Issuance of common stock pursuant to a
consulting agreement ...................... 2,500 8 18,742 -- 18,750
Issuance of common stock pursuant to a
management employment agreement ........... 3,333 10 24,990 -- 25,000
Net loss for the year
ended December 31, 1996 ................... -- -- -- (221,982) (221,982)
----------- ----------- ----------- ----------- -----------
Balances at December 31, 1996 .............. 2,039,167 6,118 5,651,690 (221,982) 5,435,826
Cancellation of common stock in
connection with senior management
incentive income plan ..................... (8,333) (25) (62,475) -- (62,500)
Issuance of common stock pursuant to a
management employment agreement ........... 14,444 43 24,957 -- 25,000
Effect of 1 for 3 reverse stock split ...... -- (4,091) 4,091 -- --
Net loss for the year ended
December 31, 1997 ......................... -- -- -- (423,467) (423,467)
----------- ----------- ----------- ----------- -----------
Balances at December 31, 1997 .............. 2,045,278 $ 2,045 $ 5,618,263 $ (645,449) $ 4,974,859
=========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
HOLLYWOOD PRODUCTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1997 1996
Cash flows from operating activities:
<S> <C> <C>
Net loss ................................................................... $ (423,467) $ (221,982)
Adjustments to reconcile net loss to
net cash used for operating activities
Issuance of common stock for services ...................................... -- 18,750
Amortization and depreciation .............................................. 257,480 108,490
Deferred income taxes ...................................................... 4,852 12,309
Forgiveness of note receivable in lieu of compensation ..................... 30,130 --
Decrease (increase) in:
Accounts receivable ................................................... (966) (22,351)
Prepaid expenses ...................................................... 42,319 (86,698)
Inventory ............................................................. (567,666) (1,815,526)
Film production costs ................................................. (268,597) (1,518,639)
Security deposits ..................................................... (9,924) (9,178)
Increase (decrease) in:
Accounts payable ...................................................... 72,130 61,788
Accrued expenses ...................................................... 98,405 103,194
Due to factor ......................................................... 316,208 1,434,686
Income taxes payable .................................................. (35,279) 35,279
Net cash used for operating activities ................................ (484,375) (1,899,878)
Cash flows from investing activities:
Acquisition of furniture and fixtures ...................................... (19,084) (1,414)
Decrease (Increase) in restricted cash ..................................... 200,000 (1,700,000)
Net assets acquired from subsidiary ........................................ -- 70,717
Subsidiary=s redemption of preferred stock ................................. (280,000) --
Net cash used for investing activities ................................ (99,084) (1,630,697)
Cash flows from financing activities:
Advances to related parties ................................................ (13,804) (115,854)
Proceeds from issuance of common stock and warrants ........................ -- 5,560,240
Offering costs incurred .................................................... (67,385) (996,182)
Proceeds from capital contributions ........................................ -- 100,000
Net cash provided from financing activities ........................... (81,189) 4,548,204
Net (decrease) increase in cash ................................................ (664,648) 1,017,629
Cash, beginning of period ...................................................... 1,017,629 --
Cash, end of period ............................................................ $ 352,981 $ 1,017,629
Supplemental disclosure of non-cash flow information: Cash paid during the year
for:
Interest .............................................................. $ 224,397 $ 85,098
Income taxes .......................................................... $ 57,528 $-
Schedule of non-cash operating activities:
In connection with the recognition of deferred compensation, 14,444 and
55,833 shares of common stock were issued as
consideration for services ................................................. $ 25,000 $ 418,750
In connection with the cancellation of deferred compensation,
8,333 shares of common stock were cancelled ............................... $ (62,500) $ --
</TABLE>
See notes to consolidated financial statements
<PAGE>
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 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 ADirty Laundry@. As of
December 31, 1997, the motion picture Dirty Laundry was completed and all of
D.L.=s assets and liabilities were effectively merged into the Company.
Accordingly, as of November 30, 1997 D.L. was dissolved. The financial
statements give retroactive effect to a 1 for 3 reverse stock split effectuated
during February 1998.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Basis of presentation
The consolidated financial statements at December 31, 1997 and 1996 include
the accounts of the Company and its wholly owned subsidiaries after elimination
of all significant intercompany transactions and accounts. Purchase accounting
requires the elimination of all operating activity of the acquired subsidiary
from the inception of its fiscal year to the date of acquisition. Hence, the
consolidated statements of operations and cash flows for the year ended December
31, 1996 reflect the transactions of the subsidiary, Breaking Waves, only from
the period from September 24, 1996, the acquisition date.
<PAGE>
If the operating transactions from January 1, 1996 to September 24, 1996
were included in the December 31, 1996 consolidated statements of operations,
the effect by major components would be as follows:
<TABLE>
<CAPTION>
Increase
<S> <C>
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)
</TABLE>
b) Cash and cash equivalents
The Company considers highly liquid investments with maturities of three
months or less at the time of purchase to be cash equivalents. Included in these
amounts are certificate of deposits of $1,752,033 and mutual funds of $75,820.
The Company maintains its cash deposits in accounts which are in excess of
Federal Deposit Insurance Corporation limits by $1,658,873. The Company
maintains a letter of credit with a financial institution in support of, and as
a condition of, its factoring agreement. The financial institution requires the
Company to maintain $1,500,000 on deposit as collateral for the letter of
credit. Accordingly, such cash is designated as restricted.
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont=d)
c) Inventory
Inventory amounting to $2,383,192 at December 31, 1997 consists of finished
goods, and is valued at the lower of cost (using the first-in, first-out method)
or market. All inventory is pledged as collateral for factored receivables
pursuant to an agreement with a financial institution.
d) 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. Film costs
include the costs of production, prints, pre-release and other advertising
expected to benefit future periods and capitalized overhead and interest. These
costs, as well as participation and talent residuals, are charged against
earnings on an individual film basis in the ratio that the current year=s gross
film revenues bear to management=s estimate of total remaining ultimate gross
film revenues from all sources.
Film costs are stated at the lower of cost or estimated net realizable
value on an individual film basis. Revenue and cost forecasts are continually
reviewed by management and revised when warranted by changing conditions.
Estimates of total gross revenues can change significantly due to the level of
market acceptance of film products. Accordingly, revenue estimates are reviewed
periodically and amortization is adjusted. Such adjustments could have a
material effect on results of operations in future periods. When estimates of
total revenue and costs indicate that a feature film will result in an ultimate
loss, additional amortization is recognized to the extent required to produce a
zero gross margin over the remaining life of the film.
As of December 31, the Company has amortized $41,266 of film production and
distribution costs.
e) Income taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (ASFAS@) 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.
<PAGE>
HOLLYWOOD PRODUCTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont=d)
f) Revenue and cost recognition
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.
Revenues from the theatrical distribution of motion pictures are recognized
when motion pictures are exhibited. Revenues from video sales are recognized,
together with related costs, on the date that video units are made widely
available for sale by retailers. Revenues from the licensing of feature films,
together with related costs, are recorded when the material is available for
telecasting by the licensee and when certain other conditions are met.
g) Earnings per share
During the year ended December 31, 1997, the Company adopted the provisions
of SFAS No. 128, AEarnings per Share@. Basic earnings per share is computed by
dividing income (loss) available to common stockholders by the weighted average
number of common shares outstanding. The computation of dilutive earnings per
share is similar to the computation of basic earnings per share except that the
denominator is increased to include the number of additional common shares that
would have been outstanding if the dilutive potential common shares had been
issued. Pursuant to SFAS No, 128 no dilutive shares are computed for years which
have a net loss.
h) 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.
i) Fair value disclosure at December 31, 1997
The carrying value of cash, accounts receivable, inventory, accounts
payable, accrued expenses and short-term debt are a reasonable estimate of their
fair value.
j) 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 using the straight
line method over the period of the vesting rights of the respective shares.
6
<PAGE>
HOLLYWOOD PRODUCTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont=d)
k) 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 on a straight line basis over their estimated useful lives of five
years.
l) Excess of cost over net assets acquired
Excess of cost over net assets acquired are being amortized on a monthly
basis over the estimated useful life of the related assets acquired for a period
of fifteen (15) years.
m) Deferred offering costs
Deferred offering costs consists of professional fees and advances to an
underwriter relating to the IPO of Breaking Waves. Deferred offering costs will
be charged to additional paid-in capital upon successful completion of the
offering or expensed if such offering is not successful.
n) Accounting for stock-based compensation
The Company elected to continue to measure compensation cost using
Accounting Principles Board Opinion (AAPB@) No. 25, AAccounting for Stock Issued
to Employees@, as is permitted by SFAS No. 123, AAccounting for Stock-Based
Compensation@. Accordingly, no compensation cost has been recognized for the
options issued under the 1996 Senior Management Incentive Plan as the exercise
price and market value at date of grant were the same. For companies that choose
to continue applying APB No. 25, SFAS No. 123 requires certain pro forma
disclosures as if the fair value method had been utilized. Had compensation cost
for the Company=s stock-based compensation plan been determined based on the
fair value at the grant dates for awards under the plan consistent with the
method of SFAS No. 123, the Company=s net income and earnings per share would
have been reduced to the pro forma amounts indicated below:
1997 1996
----------- -----------
Net income - as reporte $ (423,467) $(221,982)
=========== ===========
pro forma $ (706,967) $(221,982)
=========== ===========
Basic EPS - as reported $ (.21) $ (.12)
=========== ===========
pro forma $ (.35) $ (.12)
=========== ===========
The Company does not believe that any other recently issued accounting
standards, not yet adopted by the Company, will have a material impact on its
financial position and results of operations when adopted.
o) Reclassifications
Certain reclassifications have been made to the December 31, 1996 financial
statements in order to conform to the December 31, 1997 presentation.
7
<PAGE>
HOLLYWOOD PRODUCTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - ADVANCES TO RELATED PARTIES
During October 1996, pursuant to two promissory notes, the Company loaned
two of its then officers a total of $87,000 bearing interest at six and one-half
percent (62%) payable over three years. During January 1997, the balance of one
of the notes amounting to $30,130 was written off as part of a severance package
for one of its previous officers. As of December 31, 1997, the remaining note
amounted to $50,750 of which, $18,667 has been classified as current with the
remaining balance of $32,083 classified as non-current.
During 1997, the Company=s President was advanced additional funds
amounting to $29,278 which are non interest bearing and due on demand.
The remaining balance, amounting to $19,500 represents advances to an
affiliate of the majority stockholder of the Company which are non-interest
bearing and are due on demand.
NOTE 4 - 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. Interest
expense in connection with such financing arrangement amounted to approximately
$156,785 for the year ended December 31, 1997. Effective on or about August 20,
1997, such financing agreement was cancelled and replaced with a factoring and
revolving inventory loan and security agreement with Heller Financial, Inc.
(AHeller@) to sell their interest in all present and future receivables without
recourse. Breaking Waves submits all sales offers to Heller for credit approval
prior to shipment, and pays Heller 1% of the net amount of the receivable.
Heller retains from amount payable to Breaking Waves a reserve for possible
obligations such as customer disputes and possible credit losses on unapproved
receivable. Breaking Waves may take advances of up to 85% of the purchase price
on the receivable, with interest charges at the rate of 1:% over prime. Interest
charged to expense totaled approximately $67,611 from August 1997 to December
31, 1997. Heller has a continuing interest in Breaking Waves=s inventory as
collateral for the advances. As of December 31, 1997, the net advances to
Breaking Waves from the factors amounted to $1,750,894.
NOTE 5 - PROVISION FOR INCOME TAX
Provision for income tax is comprised of the following for the years ended
December 31,:
1997 1996
-------- -------
Current:
Federal ........................... $ -- $ --
State and local ................... 23,013 24,260
------- -------
$23,013 $24,260
------- -------
Deferred:
Federal ........................... $ 2,257 $ 9,289
State and local ................... 2,595 4,715
------- -------
4,852 14,004
------- -------
Total provision for income taxes $27,865 $38,264
======= =======
The Company's provision for income taxes includes state and local income
taxes.
<PAGE>
NOTE 5 - 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 for the
years ended December 31,:
1997 1996
------------- ---------
U.S. Federal statutory rate applied to
pretax loss ............................... $(129,155) $ (58,718)
State and local income taxes, net of federal
income tax benefit, applied to pretax loss (55,992) (25,456)
Permanent differences ...................... 14,302 3,337
Increase in valuation allowance ............ 170,845 80,837
Current provision for state and local taxes 23,013 24,260
Increase in deferred tax liability ......... 4,852 14,004
--------- ---------
Total provision for income taxes ..... $ 27,865 $ 38,264
========= =========
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,
1997
Net operating loss carryforwards ....... $ 139,098
SEC Section 144 stock compensation ..... 112,584
Valuation allowance .................... (251,682)
---------
Long-term portion of deferred tax assets $ --
=========
8
<PAGE>
HOLLYWOOD PRODUCTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - PROVISION FOR INCOME TAX (Cont=d)
The tax effect of significant items comprising the Company's deferred tax
liability are as follows:
December 31,
1997
Section 263A differential ................. $17,161
-------
Long-term portion of deferred tax liability $17,161
=======
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, 1997, the Company had a net operating loss carryforward
(NOL) for federal tax purposes of approximately $311,000 and a NOL for state tax
purposes of approximately $537,000 which expire in 2011 and 2012. The Company
has recorded a full valuation allowance against the deferred tax asset at
December 31, 1997 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 6 - COMMITMENTS AND CONTINGENCIES
a) Lease commitments
The Company and its subsidiary have entered into lease agreements for
administrative offices. The Company leases its administrative office pursuant to
a 5 year lease expiring November 30, 2001 at annual rent amounting to $69,657.
Breaking Waves leased administrative offices through approximately February 1998
pursuant to a lease requiring annual payments of approximately $64,000. During
October 1997, Breaking Waves cancelled such lease and simultaneously entered
into a new one with the same landlord requiring annual payments of $71,600
expiring December 2004.
The Company and its subsidiary approximate future minimum rentals under
non-cancelable operating leases in effect on December 31, 1997 are as follows:
1998 $141,257
1999 141,257
2000 141,257
2001 135,452
2002 71,600
Thereafter 143,200
--------
$774,023
Rent expense charged to operations for the years ended December 31, 1997
and 1996 amounted to approximately $147,180 and $33,500, respectively.
b) Significant vendors and customers
Breaking Waves purchases the majority of it's inventory from two vendors in
Indonesia and Korea. For the years ended December 31, 1997 and 1996, Breaking
Waves has two customers which comprise 36% and 12%, and 16% and 12% of net
sales, respectively.
<PAGE>
NOTE 6 - COMMITMENTS AND CONTINGENCIES (Cont=d)
c) 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 May to September,
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.
d) License agreements
i) On October 16, 1995, Breaking Waves entered into a license agreement
with Beach Patrol, Inc. (ABeach@) for the exclusive use of certain trademarks in
the United States. The agreement expires June 30, 1998 with options to extend to
June 30, 2001. The agreement calls for minimum annual royalties of $75,000 to
$200,000 over the life of the agreement with options. The Company recorded
royalties and advertising under this agreement totaling $111,000 and $26,000
during the years ended December 31, 1997 and 1996, respectively.
ii) On October 17, 1997, Breaking Waves entered into a license agreement
with Kawasaki Motors Corp. (AKMC@) for the exclusive use of certain trademarks
in the making of swimwear in the United States. The agreement expires May 31,
1999. No royalties were paid under the agreement during the year ended December
31, 1997.
e) Co-production and property purchase agreements
Pursuant to co-production and property purchase agreements dated March 15,
1996, as amended, the Company acquired the rights to co-produce a motion picture
and to financed the costs of production and 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. As of December 31, 1997, the motion picture
was completed and, accordingly, the Company has commenced the marketing and
distribution process.
As of December 31, 1997, the Company invested $1,687,236 for the
co-production and distribution of such motion picture whereas the co-producers
have invested $100,000.
f) Employment agreements
On November 27, 1996, the Company entered into two employment agreements
with two employees of Breaking Waves. Such employees are responsible for the
designing, marketing and sales of Breaking Waves. The employment agreements are
for a term of three years with an annual salary of $110,000 each. In addition to
the salary, the Company agreed to issue on each of November 27, 1996, 1997 and
1998, common stock in the amount equal to the market value of $25,000 on the
date of each issuance, subject to a vesting schedule.
9
<PAGE>
HOLLYWOOD PRODUCTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - COMMITMENTS AND CONTINGENCIES (Cont=d)
g) Letter of Intent
On June 17, 1997, Breaking Waves entered into a letter of intent with an
underwriter to proceed on a firm commitment basis with an IPO with estimated
proceeds of $4,000,000. As of December 31, 1997, Breaking Waves paid $67,385 of
costs associated with the IPO.
NOTE 7 - STOCKHOLDER=S EQUITY
a) Initial public offering
On September 24, 1996, the Company successfully completed its public
offering. As a result, the Company sold 266,667 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 and non-accountable expense allowance.
Simultaneously with the offering, the Company charged all offering costs
incurred to additional paid-in capital which totaled $996,182. Effective June
23, 1997, the Company amended the exercise price of the IPO warrants from $6.50
per share to $3.00 per share. (See Note 10(b) for additional information).
b) 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 September 24, 1996 issued 50,000 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 was recorded and is amortized over the useful lives
of the related assets. Amortization expense from September 24, 1996 to December
31, 1996 totaled $17,738 and for the year ended December 31, 1997, the
amortization expense totalled $70,952.
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 share 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, 2,800 such shares of the Series A
Preferred Stock of Breaking Waves was redeemed for a total of $280,000. (See
Note 10(a) for additional information).
10
<PAGE>
HOLLYWOOD PRODUCTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - STOCKHOLDER=S EQUITY (Cont=d)
c) 1996 Senior Management Incentive Plan
On March 14, 1997, the Company granted 50,000 options to purchase shares of
common stock pursuant to the Company=s Incentive Plan. 33,333 options were
granted to the Company=s President and 16,667 options were granted to another
officer. The exercise price of the options was fixed at $2.93 (as revised) per
share and such options expire March 2002.
A summary of the status of the Company=s stock options outstanding as of
December 31, 1997 and changes during the year ended is as follows:
1997
Weighted
Average
Exercise
Stock Options Shares Price
------------- ------------ ---------
Outstanding at beginning of year ..... -- $ N/A
Additional options granted ........... 50,000 2.93
Options exercised .................... -- N/A
-----------
Outstanding at end of year ........... 50,000
===========
Options exercisable at year end ...... 50,000
===========
Weighted average fair value of options
granted during the year ............ $ 5.67
===========
d) Cancellation of shares
Effective January 10, 1997, upon the resignation of an officer of the
Company, 8,333 of the 16,667 shares originally issued to such officer under the
Incentive Plan were caused to be immediately vested and the remaining 8,334
shares cancelled.
e) Employment agreement
Pursuant to employment agreements, 3,333 and 14,444 shares of common stock
were issued during the years ended December 31, 1996 and 1997. Such shares were
valued at $50,000 with a 50% discount due to the restricted nature of the stock,
resulting in $25,000 being recorded each year as deferred compensation which has
been amortized over the vesting period of the stock issued.
NOTE 8 - RELATED PARTIES TRANSACTIONS
a) During June 1996, pursuant to the Agreement, the Company issued 16,667
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, 1997
and 1996, $93,750 and $62,500, respectively, has been amortized as a
compensation expense.
11
<PAGE>
HOLLYWOOD PRODUCTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - RELATED PARTIES TRANSACTIONS (Cont=d)
b) During September 1996, the company paid $40,000 and issued 2,500 shares
of common stock to an affiliate of the Company's President and Director pursuant
to a consulting agreement. The shares were valued at 50% of the IPO price or
$2.50 per share. Accordingly, during the year ended December 31, 1996, the
Company recorded total consulting expense amounting to $58,750. For the year
ended December 31, 1997, the Company paid $9,000 of consulting fees to this
affiliate.
c) For the year ended December 31, 1997, $69,500 of financial consulting
fees were paid to a relative of the Company=s President.
NOTE 9 - INDUSTRY SEGMENTS
The Company's operations have been classified into two segments: swimwear
sales and film productions. Information about the two segments for the years
ended December 31, 1997 and 1996, is as follows:
<TABLE>
<CAPTION>
1996 1997
------------- ---------------
Segment Consolidated
Sales:
<S> <C> <C>
Swimwear sales ............. $ 1,217,152 $ 5,262,240
Film production ............ -- 44,875
----------- -----------
$ 1,217,152 $ 5,307,115
=========== ===========
Operating profit:
Swimwear sales ............. $ 294,908 $ 638,851
Film production ............ -- 3,609
----------- -----------
$ 294,908 $ 642,460
Corporate:
General and administrative
expense .................. (414,175) (787,877)
Amortization expense ....... (17,738) (70,952)
Interest income ............ 38,386 98,316
Interest and finance expense (85,099) (277,549)
----------- -----------
Loss from operations before
provision for income tax ... $ (183,718) $ (395,602)
Provision for income tax ..... 38,264 27,865
----------- -----------
Net loss ..................... $ (221,982) $ (423,467)
=========== ===========
Identifiable assets:
Swimwear sales ............. $ 1,947,789 $ 2,525,716
Film productions ........... 1,536,487 1,745,970
Corporate .................. 4,096,306 3,088,607
----------- -----------
Total assets ............. $ 7,580,582 $ 7,360,293
=========== ===========
</TABLE>
<PAGE>
NOTE 9 - INDUSTRY SEGMENTS (Cont=d)
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.
NOTE 10 - SUBSEQUENT EVENTS
a) Redemption of Preferred Stock
During January 1998, Breaking Waves redeemed the remaining 2,800 shares of
its Series A preferred stock for a total of $280,000.
b) Reverse stock split
Effective February 5, 1998, the Company effected a 1 for 3 reverse stock
split. The consolidated financial statements give retroactive effect of the
reverse stock split. As a result of the reverse stock split, the exercise of the
IPO warrants was revised to provide for a of a share on exercise, requiring
three warrants at a total of $9.00 to be exercised for the purchase of one
share.
c) Private placement
During February 1998, pursuant to a private transaction the Company sold
300,000 shares of its common stock for a total of $195,000.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
Undersigned hereunto duly authorized on the 7th day of April, 1998.
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> <C>
\s\ Harold Rashbaum Chief Executive Officer,
Harold Rashbaum President and Director 04/07/98
(Principal Executive Officer) Date
\s\ Robert DiMilia Vice President, Secretary, 04/07/98
Robert DiMilia and Director Date
\s\ Alain A. Guillou, M.D. Director 04/07/98
Alain A. Le Guillou, M.D. Date
\s\ James Frakes Director 04/07/98
James Frakes Date
</TABLE>
EXHIBIT 10.26
HOLLYWOOD PRODUCTIONS, INC.
SUBSCRIPTION AGREEMENT
BY ACCEPTING DELIVERY OF THIS MEMORANDUM, THE RECIPIENT AGREES TO KEEP THE
CONTENTS HEREOF, AND ANY INFORMATION OBTAINED BY SUCH PERSON IN CONNECTION
HEREWITH, IN THE STRICTEST CONFIDENCE.
THE SHARES OFFERED HEREBY WILL BE ISSUED PURSUANT TO A CLAIM OF EXEMPTION
FROM THE REGISTRATION OR QUALIFICATION PROVISIONS OF FEDERAL AND STATE
SECURITIES LAWS AND MAY NOT BE SOLD OR TRANSFERRED WITHOUT COMPLIANCE WITH THE
REGISTRATION OR QUALIFICATION PROVISIONS OF APPLICABLE FEDERAL AND STATE
SECURITIES LAWS OR APPLICABLE EXEMPTIONS THEREFROM.
IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN
EXAMINATION OF THE ISSUER AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS
AND RISKS INVOLVED. THESE SHARES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR
STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING
AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS
DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS OFFERING IS BEING MADE IN RELIANCE UPON THE AVAILABILITY OF AN
EXEMPTION FROM THE REGISTRATION PROVISIONS OF THE SECURITIES ACT OF 1933, AS
AMENDED (THE AACT@) BY VIRTUE OF THE COMPANY'S INTENDED COMPLIANCE WITH THE
PROVISIONS OF SECTIONS 4(2) AND 4(6) THEREOF AND RULE 506 ADOPTED BY THE
SECURITIES AND EXCHANGE COMMISSION (THE ACOMMISSION@) THEREUNDER. THE SHARES
HAVE NEITHER BEEN REGISTERED WITH, NOR APPROVED OR DISAPPROVED BY, THE
COMMISSION OR BY THE SECURITIES REGULATORY AUTHORITY OF ANY STATE, AND NEITHER
THE COMMISSION NOR ANY SUCH STATE AUTHORITY HAS PASSED UPON OR ENDORSED THE
MERITS OF THIS OFFERING OR THE ACCURACY OR ADEQUACY OF THIS CONFIDENTIAL
MEMORANDUM, AND IT IS NOT INTENDED THAT ANY OF THEM WILL. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
INVESTMENT IN THE COMPANY INVOLVES A HIGH DEGREE OF RISK AND ONLY PERSONS
WHO ARE ABLE TO BEAR THE FINANCIAL RISK OF A COMPLETE LOSS OF THEIR INVESTMENT
SHOULD CONSIDER PURCHASING THE SHARES. RISKS INCLUDE, AMONG OTHERS, THAT THERE
IS A LIMITED MARKET FOR THE SECURITIES OF THE COMPANY, THOUGH NO ASSURANCES CAN
BE GIVEN THAT THERE WILL BE ANY MARKET FOR THE COMPANY'S SECURITIES IN THE
FUTURE OR FOR ANY PERIOD OF TIME.
THE CONTENTS OF THIS SUBSCRIPTION AGREEMENT ARE NOT TO BE CONSTRUED AS TAX,
LEGAL, INVESTMENT, OR OTHER ADVICE. EACH INVESTOR SHOULD CONSULT HIS OWN
COUNSEL, ACCOUNTANT, OR TAX OR BUSINESS ADVISOR AS TO TAX, LEGAL, AND RELATED
MATTERS CONCERNING THIS INVESTMENT.
SALES OF THE SHARES CAN BE CONSUMMATED ONLY BY ACCEPTANCE BY THE COMPANY OF
OFFERS TO PURCHASE SUCH SECURITIES WHICH ARE TENDERED TO THE COMPANY BY
PROSPECTIVE INVESTORS. NO SOLICITATION OF ANY SUCH OFFER (INCLUDING ANY
SOLICITATION WHICH MAY BE CONSTRUED AS AN AOFFER@ UNDER FEDERAL AND/OR STATE
SECURITIES LAWS) TO SUCH PROSPECTIVE INVESTORS IS AUTHORIZED WITHOUT THE PRIOR
APPROVAL BY THE COMPANY. THE COMPANY RESERVES THE RIGHT TO REVOKE THE OFFER MADE
HEREBY AND TO REJECT ANY OFFER TO PURCHASE THE SHARES BY ANY PROSPECTIVE
INVESTOR, IN WHOLE OR IN PART.
<PAGE>
HOLLYWOOD PRODUCTIONS, INC.
SUBSCRIPTION AGREEMENT
February ___, 1998
Ladies/Gentlemen:
The following sets forth the terms and conditions of an offering (the
AOffering@) by the Company to purchase an aggregate of 300,000 shares (the
AShares@) of Common Stock, par value $.001 per share (the ACommon Stock@) of
Hollywood Productions, Inc., a Delaware corporation (the ACompany@), at a
purchase price of $0.65 per Share. The Offering is being made by the Company on
its own behalf by its Officers and Directors.
1. Subscription: the Offering.
(a) By your signature hereto, you hereby subscribe for and agree to
purchase ________ Share(s) at a purchase price of $0.65 per Share for an
aggregate purchase price of $_______, subject to the terms and conditions set
forth in this AAgreement.@ The list of subscribers to this Offering is listed in
Paragraph 7. -
(b) The Shares purchased hereunder are part of a plan to infuse capital
into the Company to be used for general working capital.
(c) The Shares purchased shall be delivered against the receipt of payment
therefor, in the form of cash, certified check, or electronic wire of funds
delivered to Hollywood Productions, Inc.
(d) This Offering is comprised of up to an aggregate of 300,000 shares of
Common Stock for an aggregate purchase price of $195,000. Prior to this
Offering, there were 2,022,500 shares of Common Stock outstanding after giving
effect to the 1 for 3 reverse split -effected on February 5, 1998. All
references to share and per share information takes into account the 3 for 1
reverse split.
(e) Within 90 days of the Closing, the Company shall use its best efforts
to file a registration statement with the Securities and Exchange Commission
(the ASEC@) with respect to the shares being purchased herein, and the Company
shall use its best efforts to have such registration statement declared
effective by the SEC and the appropriate state securities agencies.
<PAGE>
2. Conditions. It is understood and agreed that this subscription is made
subject to the following conditions:
(a) The Company shall have the right to accept or reject this subscription
in whole or in part. Unless this subscription is accepted in whole or in part or
rejected by the Company within 30 days from the receipt hereof by the Company,
the subscription shall be deemed rejected in whole.
(b) In the event a subscription is not accepted in whole or in part by the
Company, the full or ratable amount, as the case may be, of any subscription
payment received will be promptly refunded to the subscriber without deduction
therefrom or interest thereon.
(c) In the event this subscription is accepted, the Company shall deliver
to you, against payment therefor, the number of Shares purchased, along with a
fully executed copy of this Agreement.
(d) In the event there are any breaches of this Agreement or you fail to
comply with any of the representations and warranties stated in Paragraph 4 of
this Agreement, you hereby agree, at the sole request of the Company, to rescind
this subscription and return any and all Shares issued upon the return of the
subscription amount paid.
3. Representations and Warranties of the Company. The Company represents
and warrants to, and agrees with, you as follows:
(a) The Company is duly organized, validly existing, and in good standing
under the laws of the State of Delaware, with all requisite power and authority
to own, lease, license, and use its properties and assets and to carry out the
business in which it is engaged.
(b) The Company has authorized capital stock of 20,000,000 shares of Common
Stock of which 2,022,500 post-reverse split shares are outstanding prior to this
Offering.
(c) The Company has all requisite power and authority to execute, deliver,
and perform its obligations under this Agreement, and to issue, sell, and
deliver the Shares being sold pursuant to this Agreement. This Agreement has
been duly authorized by the Company, and (subject, with respect to
enforceability, to the provisions of bankruptcy and similar laws) when executed
and delivered by the Company, will constitute the legal, valid, and binding
obligation of the Company, enforceable as to the Company in accordance with its
terms. The Shares have been duly authorized by the Company and (subject, with
respect to enforceability, to the provisions of bankruptcy and similar laws)
will be duly and validly issued, fully paid, and non-assessable.
(d) No consent, authorization, approval, order, license, certificate, or
permit of or from, or declaration or filing with any federal, state, local, or
other governmental authority or any court or any other tribunal is required by
the Company for the execution, delivery, or performance by the Company of this
Agreement or the execution, issuance, sale, or delivery of the Shares.
(e) No consent of any party to any contract, agreement, instrument, lease,
license, arrangement, or understanding to which the Company is a party or to
which any of its properties or assets are subject is required for the execution,
delivery, or performance by the Company of this Agreement, or the execution,
issuance, sale, or delivery of the Shares or the Shares underlying same.
(f) The execution, delivery, and performance of this Agreement will not
violate, result in a breach of or conflict with (with or without the giving of
notice or the passage of time or both), or entitle any party to terminate or
cause a default under any contract, agreement, instrument, lease, license,
arrangement, or understanding or violate or result in a breach of any term of
the Certificate of Incorporation or By-Laws of, or conflict with any law, rule,
regulation, order, judgment, or decree binding upon the Company or to which any
of its operations, businesses, properties, or assets are subject.
<PAGE>
4. Representations and Warranties of the Subscriber. You hereby represent
and warrant to and agree with the Company as follows:
(a) You are an AAccredited Investor@ as that term is defined in Section
501(a) of Regulation D promulgated under the Securities Act of 1933, as amended
(the ASecurities Act@). Specifically you are (check appropriate items(s)):
____(i) A bank as defined in Section 3(a)(2) of the Securities Act, or a
savings and loan association or other institution as defined in Section
3(a)(5)(A) of the Securities Act, whether acting in its individual or fiduciary
capacity; a broker or dealer registered pursuant to Section 15 of the Securities
Exchange Act of 1934, as amended (the AExchange Act@); an insurance company as
defined in Section 2(13) of the Securities Act; an investment company registered
under the Investment Company Act of 1940 or a business development company as
defined in Section 2(a)(48) of that Act; a small Business Investment Company
licensed by the U.S. Small Business Administration under Section 301(c) or (d)
of the Small Business Investment Act of 1958; a plan established and maintained
by a state, its political subdivisions, or any agency or instrumentality of a
state or its political subdivisions, for the benefit of its employees, if such
plan has total assets in excess of $5,000,000; an employee benefit plan within
the meaning of the Employee Retirement Income Security Act of 1974, if the
investment decision is made by a plan fiduciary, as defined in Section 3(21) of
such Act, which is either a bank, savings and loan association, insurance
company, or registered investment advisor, or if the employee benefit plan has
total assets in excess of $5,000,000 or, if a self-directed plan, with
investment decisions made solely by persons that are accredited investors;
_____(ii) A private business development company as defined in Section
202(a)(22) of the Investment Advisers Act of 1940;
_____(iii) An organization described in Section 501(c)(3) of the Internal
Revenue Code, corporation, Massachusetts, or similar business trust, or
partnership, not formed for the specific purpose of acquiring the securities
offered, with total assets in excess of $5,000,000;
_____(iv) A Director or executive Officer of the Company (circle
appropriate item);
_____(v) A natural person whose individual net worth, or joint net worth
with that person's spouse, at the time of his or her purchase exceeds
$1,000,000;
_____(vi) A natural person who had an individual income in excess of
$200,000 in each of the two most recent years or joint income with that person's
spouse in excess of $300,000 in each of those years and has a reasonable
expectation of reaching the same income level in the current year;
_____(vii) A trust with total assets in excess of $5,000,000, not formed
for the specific purpose of acquiring the securities offered, whose purchase is
directed by a sophisticated person as described in Rule 506(b)(2)(ii); or
_____(viii) An entity in which all of the equity owners are accredited
investors. (If this alternative is checked, you must identify each equity owner
and provide statements signed by each demonstrating how each qualified as an
accredited investor.)
(b) If you are a natural person, you are: a bona fide resident of the
state/country of ___________/____________ contained in your address set forth on
the signature page of this Agreement as your home address; at least 21 years of
age; and legally competent to execute this Agreement. If an entity, you are duly
authorized to execute this Agreement and this Agreement, when executed and
delivered by you, will constitute your legal, valid, and binding obligation
enforceable against you in accordance with its terms.
<PAGE>
(c) You have received, read carefully, and are familiar with this
Agreement, and respecting the Company, its business, plans, and financial
condition, the terms of the Offering and any other matters relating to the
Offering. You have reviewed all materials which have been requested by you, and
the Company has answered all inquiries that you or your representatives have put
to it. You have had access to all additional information necessary to verify the
accuracy of the information set forth in this Agreement and any other materials
furnished herewith, and you have taken all the steps necessary to evaluate the
merits and risks of an investment as proposed hereunder.
(d) You or your purchaser representative have such knowledge and experience
in finance, securities, investments, and other business matters so as to be able
to protect your interests in connection with this transaction, and your
investment in the Company hereunder is not material when compared to your total
financial capacity.
(e) You understand the various risks of an investment in the Company as
proposed herein and can afford to bear such risks, including the Common Stock,
though there can be no assurances that a more liquid market will develop or that
any market which may develop will be maintained for any period of time. You may
find it impossible to liquidate your investment at a time when it may be
desirable to do so, or at any other time.
(g) You have been advised by the Company that the Shares have not been
registered under the Securities Act, that the Shares will be issued on the basis
of the statutory exemption provided by Sections 4(2) and 4(6) of the Securities
Act and/or Regulation D promulgated thereunder relating to transactions by an
issuer not involving any public offering and under similar exemptions under
certain state securities laws, that this transaction has not been reviewed by,
passed on, or submitted to any Federal or state agency or self-regulatory
organization where an exemption is being relied upon, and that the Company's
reliance thereon is based in part upon the representations made by you in this
Agreement. You acknowledge that you have been informed by the Company of, or are
otherwise familiar with, the nature of the limitations imposed by the Securities
Act and the rules and regulations thereunder on the transfer of securities. In
particular, you agree that no sale, assignment, or transfer of the Shares shall
be valid or effective, and the Company shall not be required to give any effect
to any such sale, assignment, or transfer, unless (i) the sale, assignment, or
transfer of the Shares is registered under the Securities Act, it being
understood that the Shares are not currently registered for sale and that the
Company has no obligation or intention to so register the Shares except as
contemplated herein; or (ii) the Shares are sold, assigned, or transferred in
accordance with all the requirements and limitations of Rule 144 under the
Securities Act, it being understood that Rule 144 is not available at the
present time for the sale of the Shares; or (iii) such sale, assignment, or
transfer is otherwise exempt from registration under the Securities Act. You
acknowledge that the Shares shall be subject to a stop transfer order and the
certificate or certificates evidencing any Shares shall bear the following or
substantially similar legends and such other legends as may be required by state
blue sky laws:
AThese securities have not been registered under the Securities Act of
1933, as amended (the AAct@). Such securities may not be sold or offered for
sale, transferred, hypothecated, or otherwise assigned in the absence of an
effective registration statement with respect thereto under such Act or an
opinion reasonably acceptable to the Company of counsel reasonably acceptable to
the Company that an exemption from registration for such sale, offer, transfer,
hypothecation, or other assignment is available under such Act.@
(h) You will acquire the Shares for your own account (or for the joint
account of you and your spouse either in joint tenancy, tenancy by the entirety,
or tenancy in common) for investment and not with a view to the sale or
distribution thereof or the granting of any participation therein, and that you
have no present intention of distribution or selling to others any of such
interest or granting any participation therein, except as provided for herein.
(i) It never has been represented, guaranteed, or warranted by any broker,
the Company, any of the Officers, Directors, shareholders, employees, or agents
of either, or any other persons, whether expressly or by implication, that:
(1) the Company or you will realize any given percentage of profits and/or
amount or type of consideration, profit, or loss as a result of the Company's
activities or your investment in the Company; or
(2) the past performance or experience of the management of the Company, or
of any other person, will in any way indicate the predictable results of the
Company's activities.
(j) You understand that the net proceeds from all subscriptions paid and
accepted pursuant to the Offering, after deduction for expenses of the Offering,
will be used as general working capital for the Company.
(k) You hereby acknowledge receipt of the Company's Form 10-KSB annual
report for the year ended December 31, 1996 and quarterly report of Form 10-QSB
for the nine months ended September 30, 1997.
(l) Without limiting any of your other representations and warranties
hereunder, you acknowledge that you have reviewed and are aware of the following
recent developments of the Company:
(i) Simultaneously with the closing of the Company=s initial public
offering in September 1996 [comprising 800,000 shares of its Common Stock and
1,600,000 of its Warrants offered at $5.00 per share and $.25 per Warrant,
respectively, through Euro-Atlantic Securities, Inc. (AEuro-Atlantic@) and
1,400,000 shares and 2,000,000 warrants registered for resale by European
Ventures Corp. (AEVC@), the majority stockholder of the Company], the Company
acquired (the AAcquisition@) all of the capital stock of Breaking Waves, Inc., a
New York corporation (ABreaking Waves@), pursuant to a stock purchase agreement
dated May 31, 1996. The Company received net proceeds of $3,813,294 from the
offering. Same were apportioned as follows: (i) $1,700,000 was used 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) a $100,000 capital contribution to Breaking Waves
was made pursuant to the acquisition thereof; and (iv) $1,963,294 was used for
the Company's working capital needs.
Pursuant to the terms of the Acquisition, 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 (ASeries A 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 ASeries A Preferred Stock.@ The shares
of the 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 , at
a redemption price of $100.00 per share on a pro rata basis, from legally
available funds. The shall have no dividend, conversion or voting rights, but
shall have a preference on liquidation equal to $100 per share. The shares of
issued to the stockholders of Breaking Waves do 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 are redeemed. In January 1997, 2,800 shares of the Series A Stock
were redeemed by the Company. In January 1998, the remaining 2,800
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.
Breaking Waves designs, manufactures, and distributes a line of private
labels including ABreaking Waves,@ AAll Waves,@ AMaking Waves,@ ASmall Waves@
and AHuk-A-Poo@ and a line of a brand name label called ADaffy 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.
(ii) In March 1996, the Company entered into a property acquisition
agreement (the APurchase Agreement@) and a co-production agreement (the
AProduction Agreement@) with Rogue Features, Inc., an unaffiliated entity, to
acquire the rights to and co-produce a motion picture of the screenplay entitled
ADirty Laundry@ (the AMotion Picture@). 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 Rogue entered into a right of first refusal agreement
with respect to the two next products of Rogue and/or its principals.
Pursuant to the Purchase Agreement, all rights to the screenplay and the
Motion Picture are held by the Company, and Rogue held the right to direct the
Motion Picture and to hold 25% of the profits of the Motion Picture as described
in the 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 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 of the Motion Picture, this amount 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 in excess of (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 filming, the Company
undertook the process of editing and adding sound, special effects, and music,
which took an additional 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 at this juncture.
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 crisis 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 AMr. Holland's Opus@ and is known for his television work
in ALove & War,@ ACheers,@ AMurphy Brown,@ and AMork & Mindy.@ Ms. Harper earned
a Golden Globe nomination for her performance in the film ATender Mercies@ and
an Oscar nomination for her role in the film ACrimes of the Heart.@ Joey owns a
dry cleaning business which is doing poorly and is convinced that he is aging
prematurely. Due 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 fall back in love with one another
(iii) Effective February 5, 1998, the Company effected a reverse split, 1
for 3, of all of its outstanding shares of Common Stock. As a result of same,
prior to consummation of this Offering, the Company had 2,022,500 shares of
Common Stock outstanding.
5. Risk Factors
The Shares offered hereby are speculative and involve a high degree of
risk. In addition to the other information contained in this Agreement, the
following factors should be carefully considered before purchasing the
securities offered by this Agreement. The purchase of the Shares or the Shares
underlying same should not be considered by anyone who cannot afford the risk of
loss of his entire investment.
Risks Associated with the Motion Picture Industry
(a) No Significant Operating History; Limited Experience of Management.
Prior to the Company=s acquisition of the rights to the Motion Picture and the
commencement of the production of same, the Company had limited operations,
consisting primarily of its formation and the acquisition of Breaking Waves.
None of the Company=s Officers had any experience, prior to producing the Motion
Picture, in assessing the potential of a screenplay, producing a motion picture,
or in distributing and marketing a motion picture. Management=s lack of
experience 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 implement its business plan successfully or
that unanticipated expenses, problems, or difficulties will not result in
increased costs or material delays in the implementation or the ability to
implement such plan. As of June 30, 1997, the Company had an accumulated deficit
of $403,141 which could adversely affect the Company=s ability to conduct its
operations.
(b) 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 Motion Picture, after the payment of $50,000 to each of Jay
Thomas and Tess Harper pursuant to their participation agreements. Additional
proceeds received, if any, by the Company after Mr. Thomas and Ms. Harper have
each been paid $50,000 and the co-producers have each received their investment
back, shall be distributed as follows: (i) 5% of revenues to each of Jay Thomas
and Tess Harper up to a maximum of $250,000 each, (inclusive of the $50,000
initial payment) at which time their distribution decreases to 2% each of
revenues thereafter; (ii) the Company and the co-producer shall each receive 25%
and 35%, respectively, of their investment, from revenues generated, as payment
of an investment premium for their financing of the Motion Picture and (iii) all
revenues in excess of (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 distribution of proceeds received by the Company from the
distribution of future films most likely will be different than the distribution
of Dirty Laundry.
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 a motion picture; 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 addition 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 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 and distribution. Though
aggregate film industry revenues from all markets are substantial, the costs of
producing films is also substantial. In addition, revenue sharing rights of
creative and artistic personnel may reduce revenues available for the repayment
of the costs of financing the films. The combination of these and other factors
has caused a large portion of films produced to be unprofitable. Therefore,
revenues from the exploitation of the Motion Picture and future motion pictures
does not guarantee the Company will receive repayment of its investment made in
the production of the film or the repayment of other expenses incurred in its
distribution or that the Company will profit from such distribution.
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 a motion picture.
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, due to industry payment and accounting schedules.
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.
(c) 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. Due to unforeseen problems and delays
including illness, weather, technical difficulty, and human error, most films go
over budget. In addition, management=s lack of experience 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.
(d) 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 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.
(e) 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 and decreased returns on investments.
(f) Competition in Film Industry. The Company will be in competition with
other companies which produce, distribute, 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.
Risks Associated with the Company=s Swimwear Business
(g) Change in Management; Lack of Experience of Management. Upon
consummation of the Acquisition, the management of Breaking Waves was replaced
by the Company. None of the Company=s Officers has any experience in operating
the type of business presently operated by Breaking Waves. The likelihood of the
success of Breaking Waves must be considered in light of the limited experience
of its management, especially with respect to such a limited product line and
market, as well as problems, expenses, difficulties, complications, and delays
which may be encountered due to management=s inexperience and the seasonality
and competitive nature of the Company=s business. There can be no assurances
that Breaking Waves will operate successfully under its new management and
ownership or that the Company will be profitable.
(h) 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 Breaking Waves and,
hence, the Company. Some of Breaking Waves= customers, including large retail
department store chains, have recently experienced financial difficulties and
have filed for protection under Chapter XI of the federal bankruptcy laws.
Breaking Waves 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, Breaking Waves 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 Breaking Waves= and, hence, the
Company=s business.
(i) Uncertain Fashion Trends; Inability to Keep Pace with Consumer=s
Changing Preferences. Breaking Waves 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. Breaking Waves designs
its swimwear lines from January to March each year for delivery of products
between November and May of the following year. It anticipates consumer
preferences for the following year. There can be no assurance, however, that
Breaking Waves will be successful in this regard. If it misjudges the market for
any of its products, it may be faced with unsold finished goods, inventory,
and/or work in process, which could have an adverse effect on the Company=s
operations.
(j) Reliance Upon Designers; Lack of Employment Agreements. Breaking Waves
is dependent upon the personal efforts and abilities of Malcolm Becker and
Michael Friedland who design and oversee the production, merchandising, and
marketing of its swimwear lines. Breaking Waves has employment agreements with
both individuals. Breaking Waves= business could be adversely affected by a loss
of the services of either of these individuals. Moreover, Breaking Waves may be
unable to replace the services of these individuals in the event their services
are no longer available to it, or Breaking Waves may experience delays in
finding suitable replacements therefor.
(k) Dependence on Suppliers. Breaking Waves= swimwear designs are
principally sent to a manufacturer, Zone Company, Ltd. (AZCL@), a Korean company
which provides the knitting and printing for approximately 65% of the fabrics
ordered by the Company. During fiscal 1996 and 1995, ZCL provided approximately
95% of the knitting and printing required by the Company. Once the fabrics are
produced, they are shipped to P.T. Kizone International, Inc.(APTKII), an
Indonesian company which sews the garments into finished products. PTKII
provided 100% of the Company's sewing needs for the six months ended June 30,
1997. During fiscal 1996 and 1995, PTKII provided approximately 91% and 95%,
respectively, of Breaking Waves= sewing needs. Although management of Breaking
Waves is of the opinion that there are numerous manufacturers of fabrics and
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 Breaking Waves and, hence, the Company.
(l) Risks Associated with Concentration of Customers. For the years ended
December 31, 1996 and 1995, Breaking Waves had one customer, Dillards Department
Stores, which accounted for approximately 16% and 20%, respectively, of total
revenues. For the six months ended June 30, 1997, Breaking Waves had two
customers, Dillards Department Stores and Wal-Mart 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
Breaking Waves= and, hence, the Company's results of operations.
(m) Seasonality. Breaking Waves 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 January to November, Breaking Waves engages in the process
of designing and manufacturing the following season=s swimwear lines, during
which time it incurs the majority of its expenses, and generates limited
revenues. There can be no assurances that revenues received during December to
June will support Breaking Waves= operations for the rest of the year.
(n) Competition in Swimwear Industry. Breaking Waves= business is highly
competitive, with relatively insignificant barriers to entry and with numerous
firms competing for the same customers. Breaking Waves 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 Breaking Waves. 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 Astore brand@
products which compete with those sold by Breaking Waves. Management believes
that Breaking Waves= market share is insignificant in the markets in which it
sells.
(o) Protection of Intellectual Property. Breaking Waves relies on common
law trademarks for use of its private label swimwear lines. In addition,
Breaking Waves has entered into a licensing agreement with Beach Patrol, Inc.,
to use the trademark ADaffys Waterwear.@ In the event Breaking Waves or Beach
Patrol, Inc., breaches the licensing agreement and Breaking Waves is unable to
continue to use the Daffy=s label, the loss thereof may adversely affect its
operations. Breaking Waves 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 Breaking Waves= registered mark or marks licensed by
Breaking Waves will be adequately protected against infringement. In addition,
there can be no assurance that Breaking Waves will not be found to be infringing
on another company=s trademark. In the event Breaking Waves 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
Breaking Waves will have the financial means to litigate such matters.
General Risks
(p) 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 duties 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.
(q) 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 that if one does develop, 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 resulted in a freeze of all of the accounts of the
Underwriter, including client and firm trading accounts. The Underwriter ceased
operations immediately thereafter. The market for the Company's securities has
been significantly affected and may continue to be affected by the loss of the
Underwriter=s participation. The loss of the Underwriter's market making
activities of the Company's securities has decreased significantly the liquidity
of an investment in such securities. Since the cessation of operations by the
Underwriter, the Company considers the Underwriting Agreement and Underwriter's
Warrant Agreement terminated.
(r) 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.
(s) Possible Delisting of Securities from NASDAQ System; Risks of Low
Priced Stocks. The Securities and Exchange Commission has approved rules
imposing more stringent criteria for listing of the Securities on the Nasdaq
SmallCap Stock Market (ANasdaq@). In order to continue to be listed on Nasdaq,
the Company would be required to maintain (i) total 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.
(t) Penny Stock Regulation. Broker-dealer practices in connection with
transactions in Apenny 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.
6. Management.
The following table sets forth, as of February 1, 1997, the management of
the Company:
<TABLE>
<CAPTION>
Position with Corporation;
Name Principal Occupation
<S> <C>
Harold Rashbaum President, CEO, and Director
Robert DiMilia Vice President, Secretary and
Director
Alain A. Le Guillou, M.D. Director
James B. Frakes Director
</TABLE>
The Directors of the Corporation are elected annually by the stockholders,
and the Officers of the Corporation are appointed annually by the 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.
Harold Rashbaum has been the President, Chief Executive Officer, and a
Director of the Corporation since January 1997. He was elected President and
Chief Executive Officer when Robert Melillo, former President and Chief
Executive Officer, resigned. From May 1996 to January 1997, Mr. Rashbaum served
as Secretary and Treasurer of the Corporation. From May 1996 until its
dissolution, Mr. Rashbaum has served as the Secretary, Treasurer, and a Director
of D.L. Productions, Inc., the production company for the Dirty Laundry movie.
Since February 1996, Mr. Rashbaum has also been the President and a Director of
H.B.R. Consultant Sales Corp. (AHBR@), of which his wife is the sole
stockholder. Mr. Rashbaum was a consultant to Play Co. Toys & Entertainment
Corp. (APlayco@), a wholesaler and retailer of children=s toys, since July 1995.
He became Chairman of the Board of Playco in September 1996. Prior thereto, from
February 1992 to June 1995, Mr. Rashbaum was a consultant to 47th Street Photo,
Inc., an electronics retailer. Mr. Rashbaum held this position at the request of
the bankruptcy court during the time 47th Street Photo, Inc. was in Chapter 11.
Robert DiMilia has been a Director, Vice President, and Secretary of the
Corporation since January 10, 1997. Prior thereto, he was a consultant to the
Corporation with respect to the production of Dirty Laundry, the Corporation=s
first motion picture. From March 1995 to May 1996, Mr. DiMilia was a media and
marketing consultant in the film industry working on a variety of projects. From
1991 to 1994, Mr. DiMilia was a Vice President for the Bon Bon Group, a national
payroll/accounting entertainment service Corporation.
Alain A. Le Guillou, M.D. has been a Director of the Corporation 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, New York. Dr. Guillou is the son-in-law of Harold Rashbaum.
James B. Frakes was elected as a Director of the Corporation in January
1998. Mr. Frakes was elected Chief Financial Officer of Playco in June 1997 and
was appointed as a Director of Playco to fill an existing vacancy in August
1997. Prior thereto, from June 1990 to March 1997, Mr. Frakes was Chief
Financial Officer of Urethane Technologies, Inc. (AUTI@) and two of its
subsidiaries: Polymer Development Laboratories, Inc. (APDL@) and BMC
Acquisition, Inc. These were specialty chemical companies which focused on the
polyurethane segment of the plastics industry. Mr. Frakes was also Vice
President and a Director of UTI during this period. In March 1997, three
unsecured creditors of PDL filed a petition for the involuntary bankruptcy of
PDL. This matter is pending before the United States Bankruptcy Court, Central
District of California. In 1980, Mr. Frakes obtained a Masters in Business
Administration from University of Southern California. He obtained his Bachelor
of Arts degree in history from Stanford University from which he graduated with
honors in 1978.
Significant Employees
Dan Stone, 61, Chairman of the Board of Breaking Waves, Inc. from its
inception in 1991 until the consummation of the Corporation=s acquisition of
Breaking Waves, Inc. in September 1996 (Athe Acquisition@), became a consultant
to the Corporation in September 1996. Mr. Stone=s consulting agreement
terminates on December 31, 1997. 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 marketing and sales
of Breaking Waves, Inc. since its inception in 1991.
The Corporation 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 Corporation pursuant to any charter, provision, by-law, contract,
arrangement, statute or otherwise, the Corporation 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 Corporation of expenses incurred or
paid by a Director, Officer, or controlling person of the Corporation in the
successful defense of any such action, suit, or proceeding) is asserted by such
Director, Officer, or controlling person of the Corporation in connection with
the Securities being registered, the Corporation 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. The Corporation will be
governed by the final adjudication of such issue.
7. Capitalization; Principal Stockholders. The following shall provide a
list of the principal stockholders of the Company prior to this Offering. It
does not include the exercise of any options. Assuming the Offering is
consummated, there will be 2,322,500 post-reverse split shares outstanding. All
numbers reflected herein and in the footnotes hereto have been adjusted to
reflect the 1 for 3 reverse split which the Company effected on February 5,
1998:
<TABLE>
<CAPTION>
Name And Address of Amount and Nature Percent of
Beneficial Owner Of Beneficial Owner Class (1)
- ---------------------- ------------------- ---------
<S> <C> <C>
European Ventures Corp. (2) 1,200,350 51.7%
P.O. Box 47
Road Town, Tortola, British
Virgin Islands
Harold Rashbaum (2) 52,500 (3) 2.3%
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 16,667 (4) *
c/o Hollywood Productions, Inc.
14 East 60th Street, Suite 402
New York, New York 10022
All Officers and Directors 69,167 (4) 3.0%
(3 as a Group) (2)-(5)
* Less than 1%
</TABLE>
<PAGE>
(footnotes from previous page)
(1) Does not give effect to the issuance of (i) 1,466,667 shares of Common
Stock reserved for issuance upon the exercise of the Warrants; (ii) 80,000
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) 83,333 shares of Common Stock reserved for issuance under the
Corporation's 1995 Senior Management Incentive Plan, except for the 25,000
shares issued thereunder and the 50,000 shares underlying options granted
pursuant thereto.
(2) Harold Rashbaum is the father-in-law of Ilan Arbel, the sole officer
and director of EVC.
(3) Includes (i) 16,667 shares of Common Stock under the Senior Management
Incentive Plan, pursuant to a vesting schedule, of which 8,333 shares have
vested; (ii) 33,333 shares of Common Stock underlying an option granted under
the Corporation=s Senior Management Incentive Plan; and (iii) 2,500 shares
issued to H.B.R. Consultants Sales Corp. in September 1996.
(4) Includes 16,667 shares of Common Stock issuable upon the exercise of an
option granted to Robert DiMilia under the Corporation=s Senior Management
Incentive Plan.
(5) Represents all shares purchased in this Offering.
8. Indemnification. You acknowledge that you understand the meaning and
legal consequences of the representations and warranties contained herein, and
you hereby agree to indemnify and hold harmless the Company and each
incorporator, Officer, Director, employee, agent, and controlling person
thereof, past, present, or future, from and against any and all loss, damage, or
disability due to or arising out of a breach of any such representation or
warranty. ---------------
9. Transferability. Neither this Agreement, nor any of your interests
herein, shall be assignable or transferable by you in whole or in part except by
operation of law. ---------------
10. Commissions. There will be no commissions paid with respect to the sale
of the Shares.
11. Miscellaneous.
(a) All notices or other communications given or made hereunder shall be in
writing and shall be delivered or mailed to you at your address set forth on the
signature page of this Agreement and to the Corporation at the address set forth
below. Notices hand delivered shall be deemed given upon receipt, and notices
sent by mail shall be deemed given on the second business day following deposit
in the Shared States mail.
(b) This Agreement shall be construed in accordance with and governed by
the laws of the State of New York without reference to that State's conflicts of
laws provisions.
(c) This Agreement constitutes the entire agreement between the parties
hereto with respect to the subject matter hereof and may be amended only by a
writing executed by all parties hereto.
(d) This Agreement may be executed in one or more counterparts
representing, however, one and the same agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year this subscription has been accepted by the Company.
Very truly yours, HOLLYWOOD PRODUCTIONS,
INC.
By:
Harold Rashbaum
President
AGREED TO AND ACCEPTED THIS ____ DAY OF 1998.
Number of Shares Subscribed For: _________
Name:
Subscription Paid: $_______
Title:
Stock Certificate to be made out as follows:
(Print name and address)
(Print social security number of Employer Id No.)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
FINANCIAL DATA SCHEDULE
HOLLYWOOD PRODUCTIONS, INC.
This schedule contains summary financial information extracted from Balance
Sheet, Statement of operations, Statement of Cash Flows and Notes thereto
incorporated in Part I, Item 7 of this Form 10-KSB and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> dec-31-1997
<PERIOD-END> dec-31-1997
<CASH> 1,852,981
<SECURITIES> 0
<RECEIVABLES> 23,317
<ALLOWANCES> 0
<INVENTORY> 2,383,192
<CURRENT-ASSETS> 4,368,543
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,360,293
<CURRENT-LIABILITIES> 2,105,434
<BONDS> 0
0
0
<COMMON> 2,045
<OTHER-SE> 4,972,814
<TOTAL-LIABILITY-AND-EQUITY> 7,360,293
<SALES> 5,307,115
<TOTAL-REVENUES> 5,307,115
<CGS> 3,263,744
<TOTAL-COSTS> 3,263,744
<OTHER-EXPENSES> 2,264,447
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 272,842
<INCOME-PRETAX> (395,602)
<INCOME-TAX> 27,865
<INCOME-CONTINUING> (423,467)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (423,467)
<EPS-PRIMARY> (0.21)
<EPS-DILUTED> (0.21)
</TABLE>