U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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 Small Business Issuer as Specified in its Charter)
Delaware 13-3871821
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
14 East 60th Street, Suite 402, New York, New York 10022
------------------------------------------------------------------
(Address of Principal Executive Offices)
(212) 688-9223
(Issuer's Telephone Number, Including Area Code)
N/A
(Former Name, Former Address, and Former Fiscal Year,
if Changed Since Last Report)
Check whether the Issuer (1) 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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the Issuer's classes of
common equity, as of the latest practicable date: Common Stock, $.001 par value:
2,686,944 shares outstanding as of November 6, 1998.
<PAGE>
HOLLYWOOD PRODUCTIONS, INC. AND SUBSIDIARY
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page Number
Item 1. FINANCIAL STATEMENTS
<S> <C>
Consolidated balance sheets at September 30, 1998 (unaudited) and December 31, 1997. 3
Consolidated statements of operations (unaudited) for the three months ended September 30, 1998 and 1997.
4
Consolidated statements of operations (unaudited) for the nine months ended September 30, 1998 and 1997.
5
Consolidated statements of stockholders' equity (unaudited) for the nine months ended September 30, 1998
6
Consolidated statements of cash flows (unaudited) for the nine months ended September 30, 1998 and 1997
7
Notes to consolidated financial statements 8-13
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
14-16
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS 17
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 17
Item 3. DEFAULTS UPON SENIOR SECURITIES 17
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
Item 5. OTHER INFORMATION 17
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 17
Signatures 18
</TABLE>
<PAGE>
HOLLYWOOD PRODUCTION, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
(Unaudited)
September 30, December 31,
1998 1997
Current assets:
<S> <C> <C>
Cash $ 83,029 $ 352,981
Cash - restricted 1,500,000 1,500,000
Accounts receivable 3,908 23,317
Prepaid expenses 54,310 41,608
Inventory 1,683,292 2,383,192
Advances to officer and affiliate 51,500 67,445
Loans receivable - other 275,000 - _
--------------- ----------------
Total current assets 3,651,039 4,368,543
--------------- -----------------
Office equipment and fixtures, net 80,766 17,818
--------------- -----------------
Deferred compensation, net - 54,166
Advances to officer - non-current portion 9,250 32,083
Film production and distribution costs, net 2,086,094 1,745,970
Organizational costs, net 56,250 75,000
Excess of cost over net assets acquired, net 922,379 975,593
Deferred offering costs - 67,385
Other assets 23,015 23,735
--------------- -----------------
Total assets $ 6,828,793 $ 7,360,293
=============== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 709,214 $ 133,918
Accrued expenses 76,467 203,461
Due to factor 863,693 1,750,894
Capital lease obligations, current 12,688 -
Deferred taxes payable 17,161 17,161
--------------- -----------------
Total current liabilities 1,679,223 2,105,434
--------------- -----------------
Capital lease obligations, net of current portion 47,218 -
--------------- ---------------
Total liabilities 1,726,441 2,105,434
--------------- -----------------
Redeemable preferred stock of subsidiary:
Series A redeemable preferred stock, 5,600 shares
authorized, 0 and 280,000 shares 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,
2,686,944 and 2,045,278 shares issued and outstanding, respectively 2,687 2,045
Additional paid-in capital 6,310,103 5,618,263
Accumulated deficit (1,210,438) (645,449)
--------------- -----------------
Total stockholders' equity 5,102,352 4,974,859
--------------- -----------------
Total liabilities and stockholders' equity $ 6,828,793 $ 7,360,293
=============== =================
</TABLE>
See notes to consolidated financial statements (unaudited).
<PAGE>
HOLLYWOOD PRODUCTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
1998 1997
------------------- -------------
<S> <C> <C>
Net sales $ - $ 48,207
Cost of sales - 10,973
------------------- --------------------
Gross profit - 37,234
------------------- --------------------
Expenses:
Selling, general and administrative expenses 632,572 437,025
Amortization of excess of costs over net assets acquired 17,738 17,738
--------- --------
Total expenses 650,310 454,763
------------------- --------------------
Loss before interest expense
and provision for income taxes (650,310) (417,529)
Other income (expense):
Interest and finance expense (25,404) (29,426)
Interest income 24,623 24,006
--------- ---------------
Total other income (expense) (781) (5,420)
-------------------- --------------------
Loss before provision for
income taxes (651,091) (422,949)
Provision for income taxes - 33,683
------------------- --------------------
Net loss $ (651,091) $ (456,632)
==================== ====================
Basic:
Net loss $ (.24) $(.23)
=================== =====
Weighted average number of
common shares outstanding 2,686,944 2,030,833
=================== ====================
</TABLE>
See notes to consolidated financial statements (unaudited).
<PAGE>
HOLLYWOOD PRODUCTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
1998 1997
------------------- -------------
<S> <C> <C>
Net sales $ 4,092,491 $ 3,420,492
Cost of sales 2,646,279 2,168,580
------------------- --------------------
Gross profit 1,446,211 1,251,912
------------------- --------------------
Expenses:
Selling, general and administrative expenses 1,856,236 1,647,472
Amortization of excess of costs over net assets acquired 53,214 53,214
---------- --------
Total expenses 1,909,450 1,700,686
------------------- --------------------
Loss before interest expense
and provision for income taxes (463,239) (448,774)
Other income (expense):
Cancellation of stock previously expensed as compensation 62,500 -
Interest and finance expense (216,286) (193,551)
Interest income 71,236 77,994
--------- ---------------
Total other income (expense) (82,550) (115,557)
------------------- ---------------------
Loss before provision for
income taxes (545,789) (564,331)
Provision for income taxes (19,200) (73,460)
------------------- ---------------------
Net loss $ (564,989) $ (637,791)
==================== ====================
Basic:
Net loss $ (.23) $(.31)
=================== =====
Weighted average number of
common shares outstanding 2,427,684 2,030,833
=================== ====================
</TABLE>
See note to consolidated financial statements (unaudited).
<PAGE>
HOLLYWOOD PRODUCTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
<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, 1997 2,045,278 2,045 5,618,263 (645,449) 4,974,859
Sale of common stock 650,000 650 754,332 - 754,982
Cancellation of common stock
in connection with Senior
Management Plan (8,334) (8) (62,492) - (62,500)
Net loss for the nine months
ended September 30, 1998 - - - (564,989) (564,989)
-------- ------- -------- ------------ -----------------
</TABLE>
See notes to consolidated financial statements (unaudited).
<PAGE>
HOLLYWOOD PRODUCTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
1998 1997
------------------ -----------
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (564,989) $ (637,791)
Adjustments to reconcile net income to
net cash provided by operating activities
Amortization and depreciation 252,954 176,907
Forgiveness of note receivable in lieu of compensation - 30,130
Deferred income taxes - 64,544
Write off of deferred offering costs 67,385 -
Cancellation of stock issued for compensation (62,500) -
Decrease (increase) in:
Accounts receivable 19,409 22,039
Prepaid expenses (8,069) 42,763
Inventory 699,900 (344,920)
Film production costs (462,250) (175,142)
Other assets (3,913) (7,310)
Increase (decrease) in:
Accounts payable 575,296 516,980
Accrued expenses (126,994) (89,819)
Due to factor (887,201) 104,638
Income tax payable - (35,279)
------------------ -----------------
Net cash provided by operating activities (500,972) (332,260)
------------------ -----------------
Cash flows from investing activities:
Increase in loans receivable-other (550,000) -
Proceeds from loans receivable-other 275,000
Acquisition of machinery and equipment (7,740) (13,483)
Subsidiary's redemption of preferred stock (280,000) (280,000)
------------------ -----------------
Net cash used for investing activities (562,740) (293,483)
------------------ -----------------
Cash flows from financing activities:
Proceeds from sale of common stock 754,982 -
Repayments from (advances to) related parties 38,778 (19,542)
Deferred offering costs - (58,461)
------------------ -----------------
Net cash provided by (used for) financing activities 793,760 (78,003)
------------ ---------
Net decrease in cash (269,952) (703,746)
Cash, beginning of period 1,852,981 2,717,629
------------------ -----------------
Cash, end of period $ 1,583,029 $ 2,013,883
================== =================
Supplemental disclosure of non-cash flow information: Cash paid during the year
for:
Interest $ 165,847 $ 129,819
================== =================
Income taxes $ 34,741 $ 23,650
================== =================
Schedule of non-cash investing activities:
Acquisition of office equipment and software in
connection with capital lease obligations $ 61,506 $ -
================== ================
</TABLE>
See notes to consolidated financial statements (unaudited).
<PAGE>
NOTE 1 - ORGANIZATION
Hollywood Productions, Inc. (the "Company") was
incorporated in the State of Delaware on December 1, 1995.
The accompanying financial statements include the accounts
of the Company and its wholly-owned subsidiary Breaking
Waves, Inc. ("Breaking Waves") after elimination of all
significant inter-company transactions and accounts. The
year end of the Company and its subsidiary is December 31.
The accompanying unaudited financial statements have
been prepared in accordance with generally accepted
accounting principles for interim financial information and
with instructions to Form 10-QSB. Accordingly, they do not
include all of the information and footnotes required by
generally accepted accounting principles for complete
financial statements. In the opinion of management, the
interim financial statements include all adjustments
necessary in order to make the financial statements not
misleading. The results of operations for the three and nine
months ended is not necessarily indicative of the results to
be expected for the full year. For further information,
refer to the Company's audited financial statements and
footnotes thereto at December 31, 1997, included in the
Company's Annual Report on form 10-KSB, filed with the
Securities and Exchange Commission.
NOTE 2 - 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 (6
1/2%) 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 September 30, 1998, the remaining note
amounted to $38,250, $29,000 of which has been classified as
current with the remaining balance of $9,250 classified as
non-current.
As of September 30, 1998, the Company's President had
been advanced funds totaling $3,000 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 3 - LOANS RECEIVABLE - OTHER
i) On March 1, 1998, Breaking Waves loaned funds to a third party in return
for an unsecured promissory note in the amount of $250,000. Such note requires
monthly payments beginning March 31, 1998 of $25,000 principal plus interest at
15% per annum. The balance of the note at September 30, 1998 amounted to
$75,000. Interest has been paid through September 30, 1998.
NOTE 3 - LOANS RECEIVABLE - OTHER (Cont'd)
ii) On July 15, 1998, Breaking Waves loaned additional funds to the same
third party in return for an unsecured promissory note in the amount of
$300,000. Such note requires monthly payment beginning August 15, 1998 of
$50,000 principal plus interest at 9% per annum through November 15, 1998 and a
lump-sum payment of $100,000 plus interest on December 15,1998. The balance of
the note at September 30, 1998 amounted to $200,000. Interest has been paid
through September 30, 1998.
NOTE 4 - DUE TO FACTOR
On August 20, 1997, Breaking Waves entered into a
factoring and revolving inventory loan and security
agreement with Heller Financial, Inc. ("Heller") to sell its
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
amounts payable to Breaking Waves a reserve for possible
obligations such as customer disputes and possible credit
losses on unapproved receivables. Breaking Waves may take
advances of up to 85% of the purchase price on the
receivable, with interest charges at the rate of 1 3/4% over
prime. Interest charged to expense totaled approximately
$202,158 for the nine months ended September 30, 1998.
Heller has a continuing interest in Breaking Wave's
inventory as collateral for the advances. As of September
30, 1998, the net advances to Breaking Waves from the factor
amounted to $863,693.
NOTE 5 - CAPITALIZED LEASE OBLIGATIONS
During the three months ended September 30, 1998, the
Company acquired computer equipment and proprietary software
pursuant to the following terms for its subsidiary, Breaking
Waves:
On August 13, 1998, the Company acquired various
computer and related components for $28,583 by entering into
a capital lease obligation with interest at approximately
9.2% per annum, requiring 48 monthly payments of principal
and interest of $713. The lease is secured by the related
computer equipment. As of September 30, 1998 the lease
payable amounted to $28,088.
On September 13, 1998, the Company acquired proprietary
software for $32,923 by entering into a capital lease
obligation with interest at approximately 10.9% per annum,
requiring 48 monthly payments of principal and interest of
$850. The lease is secured by the related software. As of
September 30, 1998 the lease payable amounted to $31,818.
NOTE 5 - CAPITALIZED LEASE OBLIGATIONS (Cont'd)
At September 30, 1998, the aggregate future minimum
lease payments due pursuant to the above capital lease
obligations are as follows:
Year ended
December 31:
1998 $ 3,669
1999 13,524
2000 14,953
2001 16,534
2002 11,226
----------
Total $ 59,906
===========
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 September 30, 1998 as follows:
Year ended
December 31,
1998 $ 123,357
1999 141,257
2000 141,257
2001 135,452
2002 71,600
Thereafter 143,200
--------------
$ 756,123
Rent expense charged to operations for the three months
ended September 30, 1998 and 1997 amounted to approximately
$37,421 and $37,700, respectively.
Rent expense charged to operations for the nine months
ended September 30, 1998 and 1997 amounted to approximately
$89,491 and $110,307, respectively.
<PAGE>
HOLLYWOOD PRODUCTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
NOTE 6 - COMMITMENTS AND CONTINGENCIES (Cont'd)
b) Significant vendors and customers
Breaking Waves purchases the majority of its inventory
from two vendors in Indonesia and Korea. For the nine months
ended September 30, 1998 and 1997, Breaking Waves had three
and four customers which comprise 37% and 57%, respectively,
of sales.
c) Seasonality
Breaking Waves' business may be considered seasonal
with a large portion of its revenues and profits being
derived between November and March for shipments made during
the same time. Each year from April through October,
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, with
limited revenues.
d) License agreements
i) On October 16, 1995, Breaking Waves entered into a
license agreement with Beach Patrol, Inc. ("Beach") for the
exclusive use of certain trademarks in the United States.
The initial term of the agreement expired June 30, 1998, at
which time the Company exercised its options to extend the
agreement 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 expenses under this agreement totaling $37,500
and $97,500 for the three and nine months ended September
30, 1998.
ii) On October 31, 1996, Breaking Waves entered into a
license agreement with North-South Books, Inc. ("N-S") 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 $3,839 in royalties under this agreement
during the three and nine months ended September 30, 1998,
respectively.
iii) On October 17, 1997, Breaking Waves entered into a
license agreement with Kawasaki Motors Corp. ("KMC") 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
three and nine months ended September 30, 1998.
<PAGE>
HOLLYWOOD PRODUCTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
NOTE 6 - COMMITMENTS AND CONTINGENCIES (Cont'd)
e) Co-production and property purchase agreements
i) 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
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 September 30, 1998,
the motion picture was completed and, accordingly, the
Company has commenced the marketing and distribution
process, and the sale of the motion picture to certain
foreign countries.
As of September 30, 1998, the Company invested
$1,949,486 for the co-production and distribution of such
motion picture whereas the co-producers have invested
$100,000. For the three months ended September 30, 1998,
revenue and related costs associated with the motion picture
amounted to $0 and $0, respectively.
Pursuant to a co-production agreement dated April 17,
1998, the Company formed a limited liability company as a
joint venture to co-produce a motion picture and to finance
the costs of production and distribution of such motion
picture. The joint venture retains all rights to the motion
picture, the screenplay, and all ancillary rights attached
thereto. As of September 30, 1998, the joint venture had
completed filming and was in post production. As of
September 30, 1998, the Company invested $200,000 for the
co-production and distribution of such motion picture.
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 merchandise. The employment
agreements continue for a term of three years and were
initially for annual salaries 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. The agreements
were amended as of January 1, 1998 to the sole extent that
the salaries of the employees were decreased and increased
to $60,000 and $130,000, respectively.
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 Initial Public Offering ("IPO")
with estimated proceeds of $4,000,000. As of June 30, 1998,
Breaking Waves is not pursuing the IPO and has expensed
$71,385 of costs associated therewith.
NOTE 7 - STOCKHOLDER'S EQUITY
a) Reverse stock split
Effective February 5, 1998, the Company effected a 1
for 3 reverse stock split. Accordingly, the financial
statements give retroactive effect of such split.
b) Private placement
During February 1998 and May 1998, pursuant to private
transactions, the Company sold 300,000 and 350,000 shares of
its common stock for a total of $194,982 and $560,000,
respectively.
NOTE 8 - RELATED PARTIES TRANSACTIONS
For the three and nine months ended September 30, 1998,
$4,000 and $21,000 respectively of financial consulting fees
were paid to a related party of the Company's President.
NOTE 9 - SUBSEQUENT EVENTS
On September 30, 1998, Breaking Waves entered into a
sales agreement (the "Agreement") with Play Co. Toys &
Entertainment Corp. ("Play Co."), whereby Play Co. has
agreed to purchase, market, and carry in its retail stores a
minimum number of Breaking Waves' products for a period of
one year with options to renew for subsequent years.
In connection with the Agreement, as amended, Breaking
Waves is to purchase, during the term of the agreement (upon
the Company's attainment of shareholder approval and subject
to Nasdaq's review), an aggregate of 1,400,000 shares of
Play Co. common stock at a price equal to a 50% discount of
the closing bid price per share on the date(s) of the
purchase of the shares. Breaking Waves has the right not to
purchase the shares in the event that Play Co. does not
purchase a minimum of $400,000 worth of swimwear from the
Company.
<PAGE>
HOLLYWOOD PRODUCTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Hollywood Productions, Inc. (the "Company") was incorporated in the State
of Delaware on December 1, 1995. The following management's discussion and
analysis of financial condition and results of operations includes the accounts
of the Company and its wholly-owned subsidiary, Breaking Waves, Inc. ("Breaking
Waves") after elimination of all significant inter-company transactions and
accounts. The year end of the Company and its subsidiary is December 31
Results Of Operations
Three months ended September 30, 1998 as compared to the three months ended
September 30, 1997
For the three months ended September 30, 1998 and 1997, the Company's
subsidiary, Breaking Waves, generated sales amounting to $-0- and $48,207,
respectively with cost of sales amounting to $-0- and $10,973, respectively.
Breaking Waves' business may be considered seasonal with a large portion of its
revenues and profits being derived between November and March for shipments made
between such time. Each year from April through October, 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, with limited
revenues. Breaking Waves generated net losses amounting to approximately
$549,741 and $281,825, respectively for the three months ended September 30,
1998 and 1997. Of the total selling, general, and administrative expenses
amounting to $650,310 and $454,763 for the three months ended September 30, 1998
and 1997, respectively, $528,357 and $311,556, respectively, were incurred by
Breaking Waves with the remainder amounting to $121,953 and $143,207,
respectively, incurred by the Company. The increase in Breaking Waves' selling,
general, and administrative expenses is mainly attributable to the additional
design expenses associated with its new line from Kawasaki Motors Corp.'s ("Jet
Ski") and increased expenses associated with trade shows.
For the three months ended September 30, 1998, the Company did not realize
any sales or cost of sales of its motion picture, Dirty Laundry.
The major components of the total selling, general, and administrative
expenses of the Company for the three months ended September 30, 1998 are
composed of $47,551 of salary and related payroll taxes, with the remainder of
expenses, amounting to $74,402, being composed of professional fees of $27,353,
rent of $17,741, stock related costs of $16,913, and miscellaneous office
expenses of $12,395.
For the three months ended September 30, 1998 and 1997, the Company
reported a consolidated net loss amounting to $651,091 and $456,632,
respectively
Nine months ended September 30, 1998 as compared to the nine months ended
September 30, 1997
For the nine months ended September 30, 1998 and 1997, the Company's
subsidiary, Breaking Waves, generated sales amounting to $3,972,280 and
$3,412,639 with cost of sales amounting to $2,524,153 and $2,168,580,
respectively. The remainder of sales and cost of sales includes revenue and
costs associated with the motion picture. The Company's gross profit amounted to
$1,448,127 (36% of sales) for the nine months ended September 30, 1998 as
compared to $1,244,059 (36% of sales) for the nine months ended September 30,
1997. Sales have increased by $559,641 (or 16%) primarily as a result of a more
aggressive marketing approach undertaken by Breaking Waves. Breaking Waves
generated net loss amounting to $114,996 and $12,332, respectively, for the nine
months ended September 30, 1998 and 1997. Of the total selling, general, and
administrative expenses amounting to $1,909,450 and $1,700,686, respectively,
for the nine months ended September 30, 1998 and 1997, $1,535,089 and
$1,233,983, respectively, were incurred by Breaking Waves; the remaining
$374,361 and $466,703, respectively, were incurred by the Company.
The consolidated selling, general, and administrative expenses for the nine
months ended September 30, 1998 amounted to $1,909,450 representing an increase
of $208,764 from $1,700,686 for the nine months ended September 30, 1997.
The major components of the total selling, general, and administrative
expenses of the Company for the nine months ended September 30, 1998, amounting
to $374,361, are composed of $128,254 in salary and related payroll taxes with
the remainder of expenses, amounting to $246,107, comprising rent of $41,948,
stock related costs of $49,123, and miscellaneous general corporate overhead
expenses of $155,036.
For the nine months ended September 30, 1998, the Company realized $120,211
from sales of its motion picture, Dirty Laundry. In connection with such
revenue, the Company recorded costs of $122,126.
For the nine months ended September 30, 1998 and 1997, the Company reported
consolidated net losses amounting to $564,989 and $637,791, respectively.
Liquidity and Capital Resources
At September 30, 1998, the Company has a consolidated working capital
amounting to $1,971,816. Although the Company does not expect that it will need
additional capital to fund its current operations, it intends, subject to
shareholder approval to undertake to raise additional capital in a private
offering of its shares of Common Stock. The Company expects that the proceeds of
the offering will be used to enable the Company to fund the expansion of the
operations of its subsidiary, Breaking Waves, and to fund the production and
marketing of additional films.
On August 20, 1997, Breaking Waves entered into a factoring and revolving
inventory loan and security agreement with Heller Financial, Inc. ("Heller") to
sell its 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 amounts payable to Breaking Waves a reserve for possible obligations such
as customer disputes and possible credit losses on unapproved receivables.
Breaking Waves may take advances of up to 85% of the purchase price on the
receivable, with interest charged at the rate of 1 3/4% over prime. Interest
charged to expense totaled approximately $202,158 for the nine months ended
September 30, 1998. Heller has a continuing interest in Breaking Waves'
inventory as collateral for the advances. As of September 30, 1998, the net
advances to Breaking Waves from Heller amounted to $863,693.
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 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 November 30, 1997, the motion picture
was completed; accordingly, the Company has commenced the marketing and
distribution process, and the sale of the motion picture to certain foreign
countries.
As of September 30, 1998, the Company invested $1,949,486 for the
co-production and distribution of such motion picture whereas the co-producers
have invested $100,000. For the nine months ended September 30, 1998, revenue
and related costs associated with the motion picture amounted to $120,211 and
$122,126, respectively.
Pursuant to a co-production agreement dated April 17, 1998, the Company
formed a limited liability company as a joint venture to co-produce a motion
picture and to finance the costs of production and distribution of such motion
picture. The joint venture retains all rights to the motion picture, the
screenplay, and all ancillary rights attached thereto. As of September 30, 1998,
the joint venture had completed filming and was in post production. Lastly, as
of September 30, 1998, the Company invested $200,000 for the co-production and
distribution of such motion picture
For the nine months ended September 30, 1998 and 1997, the Company used
cash for operating activities amounting to $500,972 and $332,260, respectively.
For the nine months ended September 30, 1998 and 1997, the Company used $562,740
and $293,483, respectively, of cash for its investing activities. The use of
cash for investing activities for the nine months ended September 30, 1998 was
primarily for the payment of the redemption of Breaking Waves' preferred stock
and the net advances associated with the loans to a third party at interest
rates between 9% and 15%. Cash provided from financing activities amounted to
$793,760 for the nine months ended September 30, 1998 which was primarily from
the selling of stock pursuant to private transactions.
On September 30, 1998, Breaking Waves entered into a sales agreement (the
"Agreement") with Play Co. Toys & Entertainment Corp. ("Play Co."), whereby Play
Co. has agreed to purchase, market, and carry in its retail stores a minimum
number of Breaking Waves' products for a period of one year with options to
renew for subsequent years. In connection with the Agreement, as amended,
Breaking Waves is to purchase, during the term of the agreement (upon the
Company's attainment of shareholder approval and subject to Nasdaq's review), an
aggregate of 1,400,000 shares of Play Co. common stock at a price equal to a 50%
discount of the closing bid price per share on the date(s) of the purchase of
the shares. Breaking Waves has the right not to purchase the shares in the event
that Play Co. does not purchase a minimum of $400,000 worth of swimwear from the
Company.
<PAGE>
PART II
Item 1. Legal Proceedings:
Neither the Company nor any of its Directors, Officers, or affiliates of
the Company is a party to, or has a material interest in, any proceeding adverse
to the Company. No owner of record or beneficially of more than five percent of
any class of voting securities of the Company is a party to, or has a material
interest in, any proceeding adverse to the Company.
Item 2. Changes in Securities and Use of Proceeds: None
Item 3. Defaults Upon Senior Securities: None
Item 4. Submission of Matters to a Vote of Security Holders:
The Company scheduled its annual meeting for November 10, 1998, which
meeting has been adjourned to November 24, 1998.
Item 5. Other Information: None
Item 6. Exhibits and Reports on Form 8-K:
(a) The following exhibit is filed with this Form 10-QSB for the quarter
ended September 30, 1998:
Exhibit 27.1 - Financial Data Schedule
(b) During the quarter ended September 30, 1998, no reports on Form 8-K
were filed with the Securities and Exchange Commission. On October 29, 1998,
however, the Company filed a Form 8-K (dated October 27, 1998) reporting the
dismissal of Scarano & Tomaro, P.C. as the Company's independent auditors and
the engagement of Massella, Tomaro & Co., LLP in lieu thereof.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, this 13th day of November 1998.
HOLLYWOOD PRODUCTIONS, INC.
By: /s/ Harold Rashbaum
Harold Rashbaum
President and Chief Executive Officer
By: /s/ Robert DiMilia
Robert DiMilia
Vice President and Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Exhibit 27
FINANCIAL DATA SCHEDULE
This schedule contains summary financial information extracted from the
Balance Sheet, Statement of operations, Statement of Cash Flows, and Notes
thereto incorporated in Part I, Item I of this Form 10-QSB and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> dec-31-1998
<PERIOD-END> sep-30-1998
<CASH> 1,583,029
<SECURITIES> 0
<RECEIVABLES> 3,908
<ALLOWANCES> 0
<INVENTORY> 1,683,292
<CURRENT-ASSETS> 3,651,039
<PP&E> 80,766
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,828,793
<CURRENT-LIABILITIES> 1,679,223
<BONDS> 0
<COMMON> 2,687
0
0
<OTHER-SE> 5,099,665
<TOTAL-LIABILITY-AND-EQUITY> 6,828,793
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 650,310
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 781
<INCOME-PRETAX> (651,091)
<INCOME-TAX> 0
<INCOME-CONTINUING> (651,091)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> (.24)
<EPS-DILUTED> (.24)
</TABLE>
