As filed with the Securities and Exchange Commission on December 2, 1997
Registration No. 333-29071
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
AMENDMENT NO. 1 to
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
UNITED FILM DISTRIBUTORS, INC.
(Exact name of registrant as specified in its charter)
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Delaware 7812 63-1145439
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
------------------------
</TABLE>
1990 Westwood Blvd., Penthouse Brian Shuster
Los Angeles, California 90025 United Film Distributors, Inc.
(310) 441-0900 1990 Westwood Blvd., Penthouse
Los Angeles, California 90025
(310) 441-0900
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(Address and telephone number of (Name, address and telephone number of agent for service of
principal executive offices) principal executive offices)
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------------------------
Copies to:
Gerald M. Chizever, Esq. Michael Beckman, Esq.
Howard J. Kern, Esq. Laurence D. Paredes, Esq.
Madge S. Beletsky, Esq. Beckman & Millman, P.C.
Richman, Lawrence, Mann, Greene, 116 John Street, 13th Floor
Chizever & Phillips New York, New York 10038
9601 Wilshire Blvd., Penthouse (212) 227-6777
Beverly Hills, CA 90210
(310) 274-8300
------------------------
Approximate date of proposed sale to
the public: As soon as possible after the effective
date of this Registration Statement.
------------------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number under the earlier
effective registration statement for the same offering.[ ]
------------------------
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering.[ ]
------------------------
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box.[ ]
------------------------
<PAGE>
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registation
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
UNITED FILM DISTRIBUTORS, INC.
------------------------
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-B
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Item Number and Captions Location in Prospectus
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1. Front of Registration Statement and Outside
Front Cover Page of Prospectus....................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus........................................ Inside Front and Outside Back Cover
Pages
3. Summary Information and Risk Factors................... Prospectus Summary; Risk Factors
4. Use of Proceeds........................................ Prospectus Summary; Use of Proceeds
5. Determination of Offering Price........................ Outside Front Cover Page; Underwriting
6. Dilution............................................... Dilution
7. Selling Security Holders............................... Not Applicable
8. Plan of Distribution................................... Outside Front Cover Page; Underwriting
9. Legal Proceedings...................................... Business
10. Directors, Executive Officers, Promoters and Control
Persons.............................................. Management
11. Security Ownership of Certain Beneficial Owners and
Management........................................... Security Ownership of Certain Beneficial Owners and
Management
12. Description of Securities.............................. Description of Capital Stock
13. Interest of Named Experts and Counsel.................. Not Applicable
14. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities....................... Not Applicable
15. Organization Within Last Five Years.................... Certain Relationships
16. Description of Business................................ Prospectus Summary; Business
17. Management's Discussion and Analysis or Plan of
Operation............................................ Management's Discussion and Analysis of
Financial Condition and Results of
Operations
18. Description of Property................................ Business
19. Certain Relationships and Related Transactions......... Certain Relationships
20. Market for Common Equity and Related Stockholder
Matters.............................................. Description of Capital Stock
21. Executive Compensation................................. Executive Compensation
22. Financial Statements................................... Financial Statements
23. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................. Not Applicable
</TABLE>
<PAGE>
SUBJECT TO COMPLETION, DATED DECEMBER 2, 1997
PROSPECTUS
500,000 Shares of Common Stock
UNITED FILM DISTRIBUTORS, INC.
COMMON STOCK
United Film Distributors, Inc. ("UFD" or the "Company") is offering
500,000 shares of Common Stock, $0.01 par value ("Common Stock") (this
"Offering"). See "Description of Capital Stock."
Prior to this Offering, there has been no public market for the Common
Stock. It is currently anticipated that the initial public offering price of the
Common Stock will be $6.00 per share. The public offering price of the Common
Stock was determined by negotiation between the Company and Millennium
Securities Corp., the representative (the "Representative") of the Underwriters
(the "Underwriters"), and is not necessarily related to the Company's asset
value, net worth, results of operations or other established criteria of value.
See "Underwriting."
Application has been made to have the Common Stock approved for
quotation on the NASD Electronic Bulletin Board System under the symbol "HITS"
upon effectiveness of this Offering. However, there can be no assurance that the
Common Stock will be accepted for quotation, or, if accepted, that an active
trading market will develop, or if developed, will be sustained. See "Risk
Factors."
-----------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
AND SUBSTANTIAL DILUTION. SEE "RISK FACTORS" ON PAGE 4 FOR A
DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED
BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK
OFFERED HEREBY AND "DILUTION" ON PAGE 10.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
====================================================================================================================================
Title of Each Class of Security Underwriting Discounts and Proceeds to Issuer
Being Registered Price to Public Commissions(1) or Other Person(2)
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<S> <C> <C> <C>
Common Stock .............. $6.00 $ .60 $ 5.40
- ------------------------------------------------------------------------------------------------------------------------------------
Totals ................. $3,000,000 $300,000 $2,700,000
====================================================================================================================================
</TABLE>
(1) See "Underwriting" for additional compensation to the Underwriters,
including a non-accountable expense allowance of $90,000. The Company
has agreed to indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
(2) Before deducting expenses estimated at $717,000, including the
Underwriters' non-accountable expense allowance of $90,000.
-----------------
The Common Stock being offered by the Company is being offered on a
"firm commitment" basis by the Representative, when, as and if delivered to and
accepted by the Underwriters, and subject to their right to reject orders in
whole or in part and to certain other conditions.
-----------------
Millennium Securities Corp.
The date of this Prospectus is December 2, 1997
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of securities in any
State in which such offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any such State.
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICES OF THE COMMON STOCK OF
THE COMPANY AT LEVELS ABOVE THOSE THAT MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE OVER-THE-COUNTER MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
TABLE OF CONTENTS
ADDITIONAL INFORMATION.........................................................1
PROSPECTUS SUMMARY.............................................................2
RISK FACTORS...................................................................4
USE OF PROCEEDS ...............................................................9
DIVIDEND POLICY...............................................................10
DILUTION .....................................................................10
CAPITALIZATION................................................................11
SELECTED FINANCIAL DATA.......................................................12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................................13
BUSINESS .....................................................................16
MANAGEMENT....................................................................25
EXECUTIVE COMPENSATION........................................................26
CERTAIN RELATIONSHIPS.........................................................27
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.......................................................28
DESCRIPTION OF CAPITAL STOCK..................................................29
UNDERWRITING..................................................................31
CERTAIN PROVISIONS OF THE COMPANY'S
ARTICLES OF INCORPORATION AND BYLAWS.................................32
LEGAL MATTERS.................................................................32
EXPERTS .....................................................................32
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 under the Securities Act, as
amended (the "Securities Act"), with respect to the Common Stock offered hereby.
This Prospectus does not contain all of the information set forth in the
Registration Statement. For further information with respect to the Company and
the Common Stock offered hereby, reference is made to such Registration
Statement. Copies of the Registration Statement may be obtained from the
Commission's principal office at 450 Fifth Street, N.W., Washington, D.C. 20549
and at its regional offices at Northwestern Atrium Center, 500 West Madison
Street, Chicago, Illinois 60661-2511 and at 7 World Trade Center, New York, New
York 10048 upon payment of the fees prescribed by the Commission, or may be
examined without charge at the offices of the Commission or at the Commission's
Web site located at "http://www.sec.gov."
The Company is not currently subject to the informational requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). As a
result of this Offering, the Company will become subject to the informational
requirements of the Exchange Act, and in accordance therewith will file reports
and other information with the Commission in accordance with the Commission's
rules. Such reports and other information concerning the Company may be
inspected at the public reference facilities referred to above as well as
certain regional offices of the Commission, and copies of such materials may be
obtained upon payment of certain prescribed rates.
No person is authorized to give any information or make any
representation not contained in this Prospectus, and, if given or made, such
information or representation should not be relied upon as having been
authorized. This Prospectus does not constitute an offer to sell, or a
solicitation of an offer to purchase, the securities offered by this Prospectus,
in any jurisdiction, to or from any person to whom it is unlawful to make such
offer or solicitation of an offer in such jurisdiction. Neither the delivery of
this Prospectus nor any distribution of securities made hereunder shall, under
any circumstances, create an implication that there has been no change in the
affairs of the Company since the date of this Prospectus.
Certain statements contained in this Prospectus that are not related to
historical results, including, without limitation, statements regarding the
Company's business strategy and objectives, future financial position and
estimated cost savings, are forward-looking statements and involve risks and
uncertainties. Although the Company believes that the assumptions on which these
forward-looking statements are based are reasonable, there can be no assurance
that such assumptions will prove to be accurate and actual results could differ
materially from those discussed in the forward-looking statements. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed under "Risk Factors," "Management's Discussion and Analysis and
Results of Operations" and "Business," as well as those discussed elsewhere in
this Prospectus. All forward-looking statements contained in this Prospectus are
qualified in their entirety by this cautionary statement.
Until [ ], 1998 (90 days after the Effective Date of this Offering),
all dealers effecting transactions in the Common Stock may be required to
deliver a Prospectus. This is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
1
<PAGE>
PROSPECTUS SUMMARY
The following summary does not purport to be complete and is qualified
in its entirety by the more detailed information and financial data appearing
elsewhere in this Prospectus. An investment in the Common Stock offered hereby
is highly speculative in nature, involves a high degree of risk and should only
be made by investors who can bear the economic risk of a potential loss of their
entire investment. Prospective purchasers should carefully consider the
information set forth under "Risk Factors" on page 4 before purchasing such
securities.
THE COMPANY
United Film Distributors, Inc. (together with its subsidiaries, the
"Company") is engaged in the acquisition, development, financing, production,
distribution and licensing of motion pictures for exhibition in domestic and
international theatrical markets and for subsequent worldwide release in
different media, including, but not limited to, home video and pay and free
television. See "Business--Company History" and "--Strategic Objective." The
Company was incorporated in Delaware in May 1995 under the name "Hit
Entertainment, Inc."
During the Company's first two years of operations, the Company has
completed production of eight films, consisting of The Secret Agent Club, Prey
of the Jaguar, Blood Money, The Elevator, Firestorm, Chase Morran, Santa with
Muscles, and Skeletons. See "Business--Motion Picture Production." Santa with
Muscles was released in movie theaters in November 1996; Chase Morran was
released in February 1997 on the SCI-Fi channel; and Skeletons was released on
HBO in April 1997. Prey of the Jaguar, Blood Money, and Firestorm have been
licensed to HBO by Cabin Fever Entertainment, Inc. ('CFE"), a distributor of six
of the Company's motion pictures, but release dates have not yet been
determined. See "Business--Financing of Motion Picture Production." The other
movies are expected to be distributed in 1998. In addition, the Company is
currently in pre-production of several films, one of which is Wrong Turn, which
should be completed in early 1998 and released soon thereafter. All of the films
produced by the Company to date have been in a budget range of between $390,000
and $3,620,000 and have generally taken between three and six weeks to film. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The Company intends to continue production of low-budget feature
length motion pictures as its principal business focus. See "Business--Motion
Picture Production" for the Company's current slate of motion picture projects.
To produce a project, the Company first acquires the rights to a story,
book or script ("property"). The Company then typically secures a financing or
production commitment for the project from third parties, such as private
investors, studios, and distributors, prior to expending substantial funds in
the development process. However, the Company does advance its own funds to meet
the interim costs of development and production which amounts are generally
repaid to the Company pursuant to the production contracts. See
"Business--Financing of Motion Picture Production" for a description of the
Company's financing activities.
The Company's strategy is to (i) develop long-term relationships with
talent who have demonstrated the ability to attract widespread audience
interest, both domestically and in significant international markets, (ii) seek
to limit the financial risk to the Company inherent in any one motion picture
project while preserving potential returns through the strategic use of its
long-term distribution agreements with companies such as HBO covering the United
States and Canada, and their respective territories, possessions, and
protectorates (the "Domestic Territories") as well as such foreign distributors
such as Highlight Communications (Germany), Saehan/Hollyvision/Digital Media
(South Korea), Consorcio Europa Serviano Ribiero (Brazil), Manga Films (Spain)
and Italian International Films (Italy), and (iii) exercise strong management
control of production costs of its motion pictures, as well as of general
overhead. See "Business--Strategic Objective."
The Company's principal goal is to produce and arrange for the release
of three to five commercially successful low-budget motion pictures per year.
See "Business--Strategic Objective." Although there can be no assurances, the
Company believes that over time these films will become the core of a library of
films which management believes have the capacity of generating revenues from
their worldwide exploitation in existing and future media and markets. The
Company, as a small independent film company, anticipates that many, if not all
of its films, will not be released in theaters but instead, will be released, if
at all, on cable television, television and other similar media. See "Risk
Factors--Risks of Motion Picture Production."
The Company's principal executive offices are located at 1990 Westwood
Boulevard, Penthouse, Los Angeles, California 90025 and its telephone number is
(310) 441-0900.
2
<PAGE>
The Offering
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Common Stock offered by the Company.......................................... 500,000 shares
Common Stock outstanding before this Offering................................ 2,000,000 shares(1)
Common Stock outstanding after this Offering................................. 2,500,000 shares(1)
Price per share being underwritten........................................... $6.00
Comparative Stock Ownership upon completion of this Offering
Present Shareholders................................................ 2,000,000(1)
Public Shareholders................................................. 500,000(1)
Estimated Net Proceeds to the Company........................................ $2,283,000
Use of Proceeds.............................................................. The net proceeds of this Offering will be
used for (1) paying distributions of
$536,536 owed to investors in the
Company's two consolidated limited
partnerships, and (2) film production
costs, including but not limited to, (a)
motion picture development and production,
including, but not limited to, (i)
supplying production financing for the
Company's motion picture projects, (ii)
retaining, generally on a
picture-to-picture basis, the services of
writers, directors and other artistic
elements in the development of motion
picture projects, (iii) purchasing or
obtaining options for rights to books,
screenplays and other artistic properties,
and (iv) general administrative expenses
related to motion picture development.
"See Use of Proceeds" and "Certain
Relationships."
Risk Factors................................................................. An investment in the Common Stock offered
hereby involves a high degree of risk and
immediate and substantial dilution of the
book value of the Common Stock and should
be considered only by persons who can
afford the loss of their entire
investment. See "Risk Factors" and
"Dilution."
Proposed NASD Electronic Bulletin Board Trading Symbol(2).................... "HITS"
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Unless otherwise indicated, all share and per share information in this
Prospectus (i) gives effect to the 5-for-1 stock split of the Company's
Common Stock effected in May 1997 and the 2-for-3 reverse stock split
effected in November 1997 and (ii) does not include Common Stock
issuable upon exercise of outstanding options or warrants or 240,000
shares of Common Stock reserved for issuance pursuant to the Company's
stock option plan, pursuant to which options to purchase an aggregate
of 13,332 shares of Common Stock are currently outstanding, or 324,296
shares of Common Stock issuable upon conversion of the Company's
outstanding Preferred Stock. See "Management--Stock Option Plan" and
"Description of Capital Stock."
(2) Although the Company intends to cause a market maker to apply for
inclusion of the Common Stock on the NASD Electronic Bulletin Board,
there can be no assurance that the Common Stock will be included for
quotation, or if so included, that the Company will be able to continue
to meet the requirements for continued quotation, or that a public
trading market will develop or that if such market develops, it will be
sustained. See "Risk Factors--Negotiated Offering Price" and "--Lack
of Prior Market for Common Stock; No Assurance of Public Trading
Market."
3
<PAGE>
RISK FACTORS
The factors discussed below and elsewhere in this Prospectus could
adversely affect the value of the Common Stock. In addition, the factors
discussed below and elsewhere in this Prospectus may constitute forward-looking
statements and, as such, may involve known or unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Any
forward-looking statements contained in this Prospectus should not be relied
upon as predictions of future events. Such forward-looking statements can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should," "could," "seeks" or "anticipates" or the
negative thereof or other variations thereon or comparable terminology, or by
discussions of strategy. Such statements are necessarily dependent on
assumptions, data or methods that may be incorrect or imprecise and they may be
incapable of being realized. The following factors may constitute or include
cautionary, forward-looking statements identifying important factors with
respect to such forward-looking statements, including certain risks and
uncertainties, that could cause actual results to vary materially from the
future results covered in such forward-looking statements. Other factors could
also cause actual results to vary materially from the future results covered in
such forward-looking statements. Actual results in the future could differ
materially from those described in the forward-looking statements or as a result
of the factors set forth below (which list does not purport to be exhaustive)
and the matters set forth in this Prospectus generally. See "Management's
Discussion and Analysis and Results of Operations" and "Business" for a
description of certain other factors generally affecting the Company's business.
NO ASSURANCE OF PROFITABILITY; LIMITED OPERATING HISTORY
The Company was founded in May 1995 and has a limited history of
operations on which an investor could base an evaluation of an investment in the
Company. See "Business--Company History." Notwithstanding the fact that the
Company had net income of $123,064 and $67,892 for the fiscal years ended July
31, 1997 and 1996, respectively. There can be no assurance that the Company will
remain profitable. As of July 31, 1997, the Company had retained earnings of
$159,428. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business".
BROAD DISCRETION IN APPLICATION OF PROCEEDS
The Company anticipates that it will raise approximately $2,283,000 in
net proceeds through this Offering. Of these proceeds, $536,536 or 23.5% will be
used for distributions due to minority interests. The remaining $1,746,000, or
76.5% will be used for film production costs. See "Use of Proceeds." Management
will have broad discretion as to the application of the $1,746,000.
LITIGATION WITH CABIN FEVER ENTERTAINMENT, INC.
A substantial portion of the Company's film revenue since its inception
on May 10, 1995 has been derived from transactions with Cabin Fever
Entertainment, Inc. ("CFE"). The Company licensed domestic rights to CFE for
seven movies. In November 1996, after the Company already delivered the seven
films licensed, CFE refused to accept delivery of the last of the seven movies.
The relationship between the Company and CFE has subsequently deteriorated,
resulting in a lawsuit wherein the Company claims damages for copyright
infringement, breach of contract and fraud. The case was filed in federal
district court in New York in the first quarter of 1997. CFE did not answer the
complaint but instead moved to dismiss the copyright claim, which was the basis
for federal jurisdiction. Both parties agreed to transfer the case to New York
State Superior Court, where CFE has filed a motion to dismiss all claims except
breech of contract. If CFE is successful on its motion, the Company intends to
move forward with the remaining contract claims in state court. Subsequent to
the deterioration of the relationship with CFE, the Company has licensed two
other films domestically through other distributors. See "Business--Legal
Proceedings." If CFE successfully defends against the Company's lawsuit, the
Company intends to license the domestic rights to another distributor. If the
Company is unable to license the film to another distributor or such distributor
is unable to exploit the picture to the same level as estimated by the Company,
the Company will have to reduce its earnings in a future period.
DEPENDENCE ON KEY PERSONNEL
Harry Shuster is the founder of the Company and serves as its Chairman
and Chief Financial Officer and Brian Shuster is the Company's President and
Chief Executive Officer. See "Management." Virtually all decisions concerning
the conduct of the business of the Company, including the properties and rights
to be acquired by the Company and the arrangements to be made for the
development, financing, production and distribution of the Company's motion
pictures, are made by or significantly influenced by Messrs. Harry or Brian
Shuster. The loss of their services for any reason would have a material adverse
effect on the Company's business and operations and its prospects for the
future. The Company does not have a "key man" life insurance on the lives of any
of its executive officers. The Company has an employment agreement with Brian
Shuster but does not have any employment agreement with Harry Shuster. See
"Executive Compensation--Employment Contracts; Termination of Employment and
Change-In-Control Arrangements" and "Risk Factors--Conflicts of Interest."
4
<PAGE>
INCREASE IN SALARY PAYABLE TO BRIAN SHUSTER
Prior to this Offering, the Company increased the compensation payable
to Brian Shuster by approximately 129% from $90,000 for the year ended July 31,
1996 to $206,000 on an annual basis commencing April 1, 1997. See "Executive
Compensation." This increase in salary is significant given that the Company's
selling, general and administrative expenses for the year ended July 31, 1997
were $825,306, of which Shuster's salary represents $129,000 or 15.6% of such
amount. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations." Given the Company's limited operating history and
revenues, the salary that the Company is committed to pay to Mr. Shuster may
make it difficult for the Company to continue to achieve profitability.
CONFLICTS OF INTEREST
The Company relies on the services of Harry Shuster, the Company's
Chairman. However, Mr. Shuster is the Chairman of the Board and Chief Executive
Officer of two other public companies, United Leisure Corporation ("ULC") and
Grand Havana Enterprises, Inc. ("Grand Havana") , and intends to continue to
devote substantial time to the businesses and affairs of these two other
companies. Mr. Shuster also is involved with several private companies that take
up a portion of his time. Although Mr. Shuster intends to devote such time to
the business of the Company as he deems necessary for its operations, there can
be no assurance that Mr. Shuster will be available to handle any crisis
situation that may arise, and if Mr. Shuster is unavailable, it is possible that
the resolution of such crises may be less favorable than the resolution that
could have been reached had Mr. Shuster been available. See "Certain
relationships" and "Management."
In addition to the conflicts with respect to Mr. Shuster's time, there
are also both actual and potential conflicts of interest with respect to
financing and other operational decisions. Between June 2, 1995 and June 27,
1996, Mr. Shuster personally lent the Company $1,079,667, of which $200,000 was
repaid in November 1996. Additionally, in July 1996 ULC acquired a 50% interest
in HEP, II L.P. for $1,500,000 and lent the Company a total of $750,000. The
Company also leases its office space for $9,477 per month from a corporation in
which Mr. Shuster is the majority stockholder. See "Certain Relationships."
These relationships illustrate how dependent the Company is on the resources of
Mr. Shuster and the entities with which he is affiliated. If Mr. Shuster were
unavailable or unable to assist the Company at a critical time, there can be no
assurance that the Company would be able to adequately compensate for the loss
of either Mr. Shuster's services or resources. Any such loss could have a
material adverse effect on the Company's business, operations and prospects for
the future. In addition, the compensation and fees to be paid to persons and
entities which Mr. Shuster is associated with in the future, if any, will not be
reached by arms length negotiations and therefore may be on terms not as
favorable to the Company than if such agreements were entered into by the
Company with an unaffiliated third party.
In addition to situations where the Company has been the beneficiary of
the relationship with Mr. Shuster and his affiliated companies, there have been
situations in which the Company has loaned money to companies affiliated with
Mr. Shuster. In May 1997, the Company made a $500,000 loan to Grand Havana. The
loan bears interest at prime plus three percent (3%) and is due on demand. As of
July 30, 1997, the loan balance was approximately $502,875. On July 31, 1997,
Grand Havana repaid $450,000 of the loan. However, in August and September of
1997, the Company subsequently lent Grand Havana an additional $500,000.
Additionally, in August and September of 1997, the Company advanced
approximately $275,000 to ULC. These advances will be used to offset
distributions due as of July 31, 1997 of $143,038 and amounts due subsequent to
July 31, 1997 to ULC as a limited partner in HEP II. At the time of the loans to
Grand Havana and ULC, the Company was in arrears of $393,498 ($536,536, which
includes the $143,038 owed to ULC) to the third party limited partners of HEP I
and HEP II. The advance paid to ULC may be deemed a preference because a similar
advance was not made to the other limited partners. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Note 5 to the
Company's Financial Statements and "Use of Proceeds." There can be no assurance
that in the future the Company will not enter into other transactions that could
benefit Mr. Shuster and/or his affiliated companies. These future transactions
may be at a time that the money may be needed by the Company for its operations
or to pay other creditors of the Company.
Delaware law provides that a contract that a corporation enters into in
which its officers and directors have a financial interest (a "Related Party
Contract") is not void or voidable if the material facts as to the relationship
or interest and as to the contract are disclosed or are known to the Board of
Directors, and the Board, in good faith, authorizes the contract or transaction
by the affirmative votes of a majority of the disinterested directors, even
though the disinterested directors be less than a quorum. Delaware law further
provides that a Related Party Contract is not void or voidable if the contract
or transaction is fair to the corporation at the time it is authorized, approved
or ratified by the Board of Directors. Management's policy is to permit the
Company to enter into Related Party Contracts so long as such contracts would
not be void or voidable under Delaware law. Accordingly, with respect to each of
the Related Party Contracts described above, the Company's Board of Directors is
fully aware of the relevant relationships and financial interests involved, and
the disinterested Board members have adopted resolutions, in good faith,
approving each of such Related Party Contracts. Further, the Board of Directors
believes each of the above-described Related Party Contracts was fair as to the
Company at the time it was authorized or ratified by the Board. None of the
Related Party Contracts described above has been submitted to the stockholders
for their approval and the Company does not intend to submit such Related Party
Contracts to the stockholders for their approval in the future. Management may
<PAGE>
enter into additional Related Party Contracts in the future so long as the Board
of Directors is aware of the relationships and financial interests of an officer
and director in the contract and the contract is approved by the disinterested
directors in good faith. The Company is not currently aware of any circumstances
which would make it change its policy with respect to entering into Related
Party Contracts in the future.
RISKS OF MOTION PICTURE PRODUCTION
General. The motion picture industry is highly speculative and
inherently risky. There can be no assurance of the economic success of any
motion picture since the revenues derived from the production and distribution
of a motion picture (which do not necessarily bear a direct correlation to the
production or distribution costs incurred) depend primarily upon its acceptance
by the public, which cannot be predicted. Therefore, there is a substantial risk
that some or all of the Company's motion pictures will not be commercially
successful, resulting in costs not being recouped or anticipated profits not
being realized. Furthermore, the Company, as a small independent film company,
anticipates that many, if not all of its films, will not be released in theaters
but instead, will be released, if at all, on cable television, television and
other similar media. See "Business--Motion Picture Industry Overview."
Completion of a Motion Picture Subject to Uncertainties and Financial
Risks. The production, completion and distribution of motion pictures is subject
to numerous uncertainties, including financing requirements, personnel
availability and the release schedule of competitive films. The Company will be
subject to substantial financial risks relating to the production, completion
and release of motion pictures. In addition, a significant amount of time may
elapse between the expenditure of funds by the Company and the receipt of
revenues from the motion pictures. See "Business--Financing of Motion Picture
Production."
COMPETITION
Motion picture production and distribution are highly competitive. The
competition comes from both companies within the same business and companies in
other entertainment media which create alternative forms of leisure
entertainment. The Company's competition for the acquisition of literary
properties, the services of performing artists, directors, producers and other
creative and technical personnel and production financing includes several
"major" film studios including, but not limited to, The Walt Disney Company,
Paramount Pictures Corporation, MCA, Columbia Pictures, Tri-Star Pictures,
Twentieth Century Fox, Warner Brothers Inc. and MGM/UA, which are dominant in
the motion picture industry, as well as numerous independent motion picture and
television production companies, television networks and pay television systems.
Many of these organizations with which the Company competes have significantly
greater financial and other resources than does the Company. In addition, the
Company's films compete for audience acceptance and exhibition outlets with
motion pictures produced and distributed by other companies, including motion
pictures distributed by CFE, HBO and the Company's foreign distributors. As a
result, the success of any of the Company's films is dependent not only on the
quality and acceptance of that particular film, but also on the quality and
acceptance of other films. See "Business."
SUBSTANTIAL AND IMMEDIATE DILUTION
The initial public offering price is substantially higher than the book
value per share of Common Stock. Investors purchasing shares of Common Stock
pursuant to this Prospectus therefore will incur immediate and substantial
dilution of $3.82 per share (approximately 63.7% of the per share offering
price). Existing stockholders acquired their shares of Common Stock at a price
lower than the offering price and, accordingly, new investors will bear a
substantial portion of the risks inherent in an investment in the Company. See
"Dilution."
ABSENCE OF DIVIDENDS
The Company has never paid cash dividends on the Common Stock and no
cash dividends are expected to be paid on the Common Stock in the foreseeable
future. The Company anticipates that for the foreseeable future all of its cash
resources and earnings, if any, will be retained for the operation and expansion
of the Company's business. See "Dividend Policy."
RISKS OF INTERNATIONAL BUSINESS
At July 31, 1997 and July 31, 1996, foreign sales in Asia, South
America and Europe accounted for 42% and 48%, respectively, of total revenues
for these periods. Management of the Company anticipates that a significant
percentage of the Company's revenues and income, if any, will continue to come
from foreign sources. Accordingly, the Company is subject to the risks inherent
in conducting business across national borders, including, but not limited to,
currency exchange rate fluctuations, international incidents, military
outbreaks, economic downturns, government instability, nationalization of
foreign assets, government protectionism and changes in governmental policy, any
of which could have a material adverse effect on the Company's business and
operations and its prospects for the future.
5
<PAGE>
FLUCTUATION OF OPERATING RESULTS
Most of the Company's revenues are expected to be derived from the
exploitation of a limited number of motion pictures produced by the Company. See
"Business--Strategic Objective." As a result of this factor, as well as
uncertainties in the release schedules of its motion pictures and audience
responses thereto, the Company's revenues and earnings are expected to fluctuate
significantly from quarter to quarter. Accordingly, the Company's revenues and
earnings in any particular period may not be indicative of the results for any
future period.
CONTROL BY MANAGEMENT AND EXISTING STOCKHOLDERS
Upon completion of this Offering assuming no exercise of the
outstanding options or warrants or conversion of Preferred Stock to Common
Stock), management and the existing stockholders of the Company will
beneficially own approximately 82.3% of the outstanding Common Stock. As a
result, management and the existing stockholders will continue to be in a
position to elect all of the members of the Board of Directors of the Company,
to cause an increase in the Company's authorized capital stock, to cause the
dissolution, merger or sale of the assets of the Company and, generally, to
direct the affairs of the Company. This concentration of ownership will likely
have the effect of discouraging third parties from acquiring substantial blocks
of the Company's Common Stock to cause a change in the management and control of
the Company. Such concentration of ownership with management could tend to limit
the price that investors might be willing to pay in the future for shares of
Common Stock as it may reduce the possibility of a change in control of the
Company. A change in control of an issuer frequently occurs at a premium over
the historical trading prices of the issuer's publicly traded Common Stock. See
"Security Ownership of Certain Beneficial Owners and Management," "Certain
Relationships" and "Description of Capital Stock."
POTENTIAL STRIKES
Many individuals associated with the Company's productions, including
actors, writers and directors, are members of guilds or unions which bargain
collectively with producers on an industry-wide basis from time to time. The
Company's operations are dependent upon its compliance with the provisions of
collective bargaining agreements governing relationships with these guilds and
unions. Strikes or other work stoppages by members of these unions could delay
or disrupt the Company's activities. However, the extent to which the existence
of collective bargaining agreements may affect the Company in the future is not
currently determinable. See "Business--Employees."
NEED FOR ADDITIONAL FINANCING
The Company believes that its existing capital resources, together with
the proceeds of this Offering, will enable the Company to maintain its
operations and working capital requirements for at least twelve (12) months.
However, it is possible that additional financing will be required to fund
further growth in the Company's business beyond the next 12 months whether
through equity financing, debt financing or other sources. There can be no
assurance that such sources of financing will be available, or will be available
on terms acceptable to the Company. Inability to obtain additional financing
could limit the Company's ability to produce motion pictures, retain writers,
directors and other artistic elements, purchase rights to books, screenplays and
other artistic properties, or take other actions that would benefit the Company
and its stockholders and could therefore have a material adverse effect on the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
LIMITATION OF LIABILITY; INDEMNIFICATION
The Company's Articles of Incorporation and Bylaws contain provisions
that limit the liability of directors for monetary damages and provide for
indemnification of officers and directors under certain circumstances. Such
provisions may discourage stockholders from bringing a lawsuit against directors
for breaches of fiduciary duty and may also have the effect of reducing the
likelihood of derivative litigation against directors and officers even though
such action, if successful,
6
<PAGE>
might otherwise have benefitted the Company and its stockholders. These
provisions make the Company responsible for costs of settlement and damage
awards against the Company's officers or directors are paid by the Company
pursuant to the indemnification provisions of its Articles of Incorporation and
Bylaws. Accordingly stockholders may be deterred from bringing a lawsuit against
an officer or director of the Company if the potential negative effect on
earnings outweighs the potential gains to be derived from the lawsuit. In
addition, stockholders may be further deterred from bringing a derivative
lawsuit against an officer or director since such suits may be prohibitively
expensive and time consuming for stockholders to pursue. See "Certain Provisions
of the Company's Articles of Incorporation and Bylaws."
EFFECTS OF CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Certificate of Incorporation and
Bylaws and of Delaware law may delay, defer or prevent a change in control of
the Company and may adversely affect the voting and other rights of the holders
of Common Stock. In particular, the ability of the Company's Board of Directors
to issue "blank check" preferred stock without further stockholder approval may
have the effect of delaying, deferring or preventing a change in control of the
Company. See "Description of Capital Stock."
NEGOTIATED OFFERING PRICE
The initial public offering price of the Common Stock to be sold in
this Offering was determined by negotiations between the Company and the
Representative and may not be indicative of the market price of the Common Stock
after this Offering. See "Underwriting--Pricing of the Offering." The initial
public offering price also does not necessarily bear any relationship to the
Company's assets, book value, net worth or results of operations of the Company
or any other established criteria of value. Factors not within the control of
the Company, including public statements from securities analysts and others
concerning the Company's operations, public acceptance of the Company's motion
pictures, interest rates and changes in general market conditions could have a
significant impact on the future market prices for shares of the Common Stock,
which may be volatile.
LACK OF PRIOR MARKET FOR COMMON STOCK; NO ASSURANCE OF PUBLIC TRADING MARKET
Prior to this Offering, no public trading market existed for the Common
Stock. There can be no assurance that a public trading market for the Common
Stock will develop or that a public trading market, if developed, will be
sustained. If a trading market does in fact develop for the Common Stock offered
hereby, there can be no assurance that it will be maintained. Furthermore, if
for any reason the Common Stock is not listed on the NASD Electronic Bulletin
Board or a public trading market does not otherwise develop, purchasers of the
Common Stock may have difficulty in selling their Common Stock should they
desire to do so. In any event, the Company's Common Stock may be subject to
rules affecting securities that sell for under $5.00 per share. See "--'Penny
Stock' Regulations May Impose Certain Restrictions on Marketability of
Securities."
Although they have no legal obligation to do so, the Underwriters from
time to time may act as market makers and may otherwise effect and influence
transactions in the Common Stock. However, there is no assurance that the
Underwriters will continue to effect and influence transactions in the Common
Stock. The prices and liquidity of the Company's Common Stock may be
significantly affected by the degree, if any, of the Underwriters' participation
in the market. The Underwriters may voluntarily discontinue such participation
at any time. Further, the market for, and liquidity of, the Common Stock may be
adversely affected by the fact that a significant amount of the Common Stock may
be sold to customers of the Underwriters.
The Common Stock offered hereby will be traded in the over-the-counter
market in what are commonly referred to as the 'pink sheets' or on the NASD
Electronic Bulletin Board. As a result, an investor may find it more difficult
to dispose of or to obtain accurate quotations as to the price of the Common
Stock offered hereby. The above-described rules may materially adversely affect
the liquidity of the market for the Company's Common Stock. See "Underwriting."
DEPENDENCE ON THE UNDERWRITER
In addition to its market making services, Company has agreed to engage
the Underwriter in connection with rendering future investment banking services
and also agreed to enter into a separate merger and acquisition agreement, and
has agreed to pay the Underwriter significant fees and compensation in
connection with the services to be rendered to the Company by the Underwriter
pursuant to these agreements. The fees payable to the Underwriter pursuant to
these agreements may be greater than if the Company engaged another investment
banking firm to render these services. See "Underwriting." In addition, if the
Underwriter is not available to assist the Company or is unable to assist the
Company to the fullest extent under the investment banking agreements and merger
and acquisition agreement, it is possible that the Company will be unable to
complete any such future transactions or will complete such transactions on
terms less favorable to the Company and its shareholders than the terms that
could have been negotiated if the Underwriter were fully available to assist the
Company.
7
<PAGE>
SHARES AVAILABLE FOR FUTURE SALE
Upon completion of this Offering, there will be 2,500,000 shares of
Common Stock outstanding, excluding shares issuable upon exercise of stock
options and warrants and upon conversion of outstanding shares of Preferred
Stock. Of these shares, the 500,000 shares sold in this Offering will be freely
tradeable under the Securities Act of 1933, as amended (the "Securities Act"),
except for any such shares purchased by an "affiliate" of the Company. The
remaining 2,000,000 shares (the "Restricted Shares") (which were issued and sold
by the Company in private transactions in reliance upon the non-public offering
exemption set forth in Section 4(2) of the Securities Act) and any other shares
hereafter acquired by an "affiliate" of the Company will be eligible for sale
under Rule 144 under the Securities Act, or at any time pursuant to an effective
registration statement relating to such shares. Notwithstanding the above, the
holders of the 2,000,000 shares of Common Stock and 324,296 Shares of Preferred
Stock have agreed with the Representative and the Company not to sell or
otherwise dispose of their shares of Common Stock without the prior written
consent of the Representative and the Company for a period of two years from the
date of this Prospectus. No prediction can be made as to the effect, if any,
that future sales, or the availability of shares of capital stock for future
sale, will have on the market price of the Common Stock prevailing from time to
time. Sales of substantial amounts of stock (including shares issuable upon the
exercise of stock options and warrants), or the perception that such sales could
occur, could adversely affect prevailing market prices for such shares.
SUBSTANTIAL NUMBER OF AUTHORIZED SHARES AVAILABLE FOR FUTURE ISSUANCE; POSSIBLE
DILUTIVE AND ANTI-TAKEOVER EFFECTS
The Company's Articles of Incorporation authorize the issuance of
20,000,000 shares of Common Stock. Upon completion of this Offering, there will
be approximately 17,500,000 authorized but unissued shares of Common Stock
available for future issuance. The Company's Board of Directors has the power to
issue substantial amounts of additional shares without stockholder approval.
Although the Company currently has no commitments to issue any shares of Common
Stock other than as described in this Prospectus, the Company may issue a
substantial number of additional shares in connection with future financings or
acquisitions. To the extent that additional shares of Common Stock are issued,
dilution of the interests of the Company's stockholders will occur.
The Company's Articles of Incorporation also authorize the issuance of
3,000,000 shares of Preferred Stock with such designations, rights, and
preferences as may be determined from time to time by the Board of Directors.
There are currently approximately 324,296 shares of Preferred Stock outstanding
see "Description of Capital stock." The Board of Directors is empowered, without
stockholder approval, to issue Preferred Stock with dividend, liquidation,
conversion, voting, or other rights, which could adversely affect the voting
power or other rights of the holders of the Company's Common Stock. In addition,
the issuance of Preferred Stock and Common Stock could be utilized, under
certain circumstances, as a method of discouraging, delaying, or preventing a
change in control of the Company. Although the Company currently has no
commitments to issue any shares of Preferred Stock or Common Stock, there can be
no assurance that the Company will not do so in the future. See "Description of
Capital Stock."
'PENNY STOCK' REGULATIONS MAY IMPOSE CERTAIN RESTRICTIONS ON MARKETABILITY OF
SECURITIES
The Securities and Exchange Commission (the "Commission"') has adopted
regulations which generally define 'penny stock' to be any security that has a
market price (as defined) less than $5.00 per share or an exercise price of less
than $5.00 per share, subject to certain exceptions. Therefore, if the market
price of the Common Stock is less than $5.00 per security, then such security
would fall within the definition of 'penny stock.' Since it is intended that the
Common Stock offered hereby will be authorized for quotation on the Electronic
Bulletin Board, such securities will not be exempt from the definition of 'penny
stock.' The Company's Common Stock may become subject to rules that impose
additional sales practice requirements on broker-dealers who sell such
securities to persons other than established customers and accredited investors
(generally those with assets in excess of $1,000,000 or annual income exceeding
$200,000, or $300,000 together with their spouse). For transactions covered by
these rules, the broker-dealer must make a special suitability determination for
the purchase of such securities and have received the purchaser's written
consent to the transaction prior to the purchase. Additionally, for any
transaction involving a penny stock, unless exempt, the rules require the
delivery, prior to the transaction, of a risk disclosure document mandated by
the Commission relating to the penny stock market. The broker-dealer must also
disclose the commission payable to both the broker-dealer and the registered
representative, current quotations for the securities and, if the broker-dealer
is the sole market maker, the broker-dealer must disclose this fact and
8
<PAGE>
the broker-dealer's presumed control over the market. Finally, monthly
statements must be sent disclosing recent price information for the penny stock
held in the account and information on the limited market in penny stocks.
Consequently, the 'penny stock' rules may restrict the ability of broker-dealers
to sell the Company's Common Stock and may affect the ability of purchasers in
this Offering to sell the Company's Common Stock in the secondary market and the
price at which such purchasers can sell any such securities.
UNFORESEEN RISKS
In addition to the above risks, businesses are often subject to risks
not foreseen or fully appreciated by management. In reviewing this memorandum,
potential investors should keep in mind other possible risks.
USE OF PROCEEDS
The net proceeds from the sale of the 500,000 shares of Common Stock
offered by the Company in this Offering, after deducting the estimated
underwriting discounts and commissions and expenses payable by the Company to
attorneys and accountants in connection with this Offering, are estimated to be
$2,283,000. The net proceeds of this Offering will be used for (1) paying
$536,536 distributions owed to investors in the Company's two limited
partnerships, and (2) film production costs, including but not limited to, (a)
motion picture development and production, including, but not limited to, (i)
supplying production financing for the Company's motion picture projects, (ii)
retaining, generally on a picture-to-picture basis, the services of writers,
directors and other artistic elements in the development of motion picture
projects, (iii) purchasing or obtaining options for rights to books, screenplays
and other artistic properties, and (iv) general administrative expenses related
to motion picture development.
The Company intends to maintain flexibility in order to adjust its
strategies in response to (i) the financial results of its motion pictures, (ii)
developments in the motion picture and entertainment industries, (iii) changing
needs of the Company, and (iv) new opportunities that may arise in the future.
Accordingly, the specific allocation and expenditure of the proceeds of this
Offering among the foregoing uses will remain within the discretion of
management and cannot be determined as of the date of this Prospectus. Pending
their ultimate application, the net proceeds will be invested in interest or
non-interest bearing accounts or invested in short-term government obligations,
investment-grade securities, money market funds or certificates of deposit.
Management believes that the net proceeds from this Offering, together
with its existing capital, funds from operations, advances from both domestic
and foreign distributors and other available sources of capital, will be
sufficient to enable the Company to fund its planned development, production and
overhead expenditures for the next 12 months.
The following table summarizes the expected use of proceeds described
above:
<TABLE>
<CAPTION>
Dollar Percentage of
Use of Proceeds Amount Net Proceeds
--------------- ------ ------------
<S> <C> <C>
Payment of debt................................................ $ 536,536 23.5%
Film Production Costs............................................ 1,746,464 76.5%
Total...................................................$2,283,000 100.0%
</TABLE>
9
<PAGE>
DIVIDEND POLICY
The Company presently intends to retain future earnings, if any, to
finance the expansion and development of its business and not pay cash dividends
on the Common Stock in the foreseeable future. Any future decision of the
Company's Board of Directors to pay dividends will be made in light of the
Company's earnings, financial position, capital requirements and other relevant
factors then existing.
DILUTION
As of July 31, 1997, the Company has a net tangible book value of $
3.864 million or $1.66 per share. Net tangible book value per share of Common
Stock is defined as the tangible assets of the Company, less all liabilities,
divided by the number of shares of Common Stock outstanding, including the
shares resulting from the assumed exercise of all outstanding warrants, and
options and conversion of Preferred Stock to Common Stock. After giving effect
as of July 31, 1997 to the sale of 500,000 shares of Common Stock offered hereby
and after deducting the estimated offering expenses, the pro forma net tangible
book value of the Common Stock at July 31, 1997 would have been $6.147 million
or $2.18 per share. This represents an immediate increase in net tangible book
value of $0.52 per share to existing stockholders and an immediate dilution of
$3.82 per share or 63.7% of the offering price, to new investors purchasing the
shares offered hereby. The following table illustrates this per share dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Initial public offering price $ 6.00
Net tangible book value per share before offering $1.66
Increase in net tangible book value attributable to new investors 0.52
---------------
Pro forma net tangible book value after giving effect to public offering 2.18
-----------
Dilution per share to new investors $ 3.82
===========
</TABLE>
The following table, calculated as of July 31, 1997 on the same basis
as above, summarizes with respect to existing holders of Common Stock, including
the shares resulting from the assumed exercise of all outstanding warrants,
options and conversion of Preferred Stock to Common Stock, and new investors of
Common Stock in this Offering, a comparison of the number of shares acquired
from the Company, the percentage ownership of such shares, the total
consideration paid, the percentage total consideration paid and the average
price per share.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
----------------- ------------------- Price
Number Percent Amount Percent Per Share
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing Stock holders 2,324,296 82.3% $ 3,864,239 56.3% $ 1.66
New Investors 500,000 17.7% 3,000,000 43.7% $ 6.00
-----------------------------------------------------
2,824,296 100.0% $ 6,864,239 100.0%
=====================================================
</TABLE>
10
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
July 31, 1997, and as adjusted to give effect to the sale of the Common Stock
offered hereby and the application of the estimated net proceeds therefrom. See
"Use of Proceeds." This table should be read in conjunction with the
consolidated financial statements and related Notes thereto and "Management's
Discussion and Analysis and Results of Operation" appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
July 31, 1997
----------------
Actual As Adjusted
------ -----------
(in thousands)
<S> <C> <C>
Minority Interest $ 1,794 $ 1,794
Shareholders' Equity:
Preferred stock, $0.01 par value 3 3
3,000,000 shares authorized,
324,296 of Series A Convertible
Preferred Shares issued and out-
standing.
Common stock, $0.01 par 20 25
value, 20,000,000 shares authorized,
2,000,000 shares issued and
outstanding; 2,500,000 shares
issued and outstanding, as
adjusted.
Additional paid-in capital 3,682 5,960
Retained Earnings 159 159
---------- ----------
Total shareholders' equity 3,864 6,147
---------- ----------
Total Capitalization $ 5,658 $ 7,941
========== ----------
</TABLE>
-----------------------
(1) In accordance with Statement of Financial Accounting Standards No. 53
"Financial Reporting by Producers and Distributors of Motion Pictures,"
the Company has elected to present an unclassified balance sheet. For
information concerning the Company's debt and lease obligations, see
Notes to Consolidated Financial Statements.
11
<PAGE>
SELECTED FINANCIAL DATA
The following selected consolidated financial data are qualified by
reference to, and should be read in conjunction with, the Company's consolidated
financial statements, the Notes thereto, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contained elsewhere
in this Prospectus. The selected financial data for each of the two years ended
July 31, 1997 and 1996 are derived from Company's audited financial statements.
<TABLE>
<CAPTION>
Years Ended
July 31,
---------------------------
Consolidated Statement of Operations Data: 1997 1996
------------ ------------
(in thousands, except per share data)
<S> <C> <C>
Film revenue............................................ $ 6,171 $ 2,626
Film amortization....................................... 5,401 1,609
------------ -------------
Gross Profit............................................ 770 1,017
General, administrative and selling expenses....... 844 755
Interest expense................................... 61 127
Other income net................................... 7 48
Income (loss) before income taxes....................... (128) 183
Provision for income taxes.............................. 123 27
------------ -------------
Income (loss) before minority interests................. $ (251) $ 156
============ =============
Minority interests (1).................................. $ 374 $ (88)
Net Income ............................................. $ 123 $ 68
Net income per share.................................... $ 0.06 $ 0.04
============ =============
Weighted average shares outstanding..................... 2,057 1,563
============ =============
</TABLE>
<TABLE>
<CAPTION>
July 31, 1997
----------------------------
Actual Proforma(2)
------------- ------------
(Unaudited) (Unaudited)
Consolidated Balance Sheet Data:
<S> <C> <C>
Film costs, net......................................... $ 5,832 $ 5,832
Total assets............................................ 6,908 8,654
Total stockholders' equity ............................. 3,864 6,147
</TABLE>
- ----------
(1) Certain related and third parties own minority interests in two limited
partnerships that financed three of the Company's motion pictures. See
"Business--Financing of Motion Picture Production."
(2) Adjusted to reflect the sale of the 500,000 shares of Common Stock
offered by the Company hereby and the application of the estimated net
proceeds therefrom. See "Use of Proceeds" and "Capitalization."
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Company's consolidated financial statements and the Notes thereto appearing
elsewhere in this Registration Statement on Form SB-2 of which this Prospectus
forms a part. Certain statements contained in this Registration Statement on
Form SB-2 of which this Prospectus forms a part that are not related to
historical results, including, without limitation, statements regarding the
Company's business strategy and objectives, future financial position and
estimated cost savings, are forward-looking statements and involve risks and
uncertainties. Although the Company believes that the assumptions on which these
forward-looking statements are based are reasonable, there can be no assurance
that such assumptions will prove to be accurate and actual results could differ
materially from those discussed in the forward- looking statements. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed under "Risk Factors" and "Business," as well as those discussed
elsewhere in this Registration Statement on Form SB-2 of which this Prospectus
forms a part. All forward-looking statements contained in this Registration
Statement on Form SB-2 of which this Prospectus forms a part are qualified in
their entirety by this cautionary statement.
The period from May 10, 1995, the Company's inception, to July 31, 1995
is referred to herein as FY 1995 and the fiscal years ended July 31, 1996 and
July 31, 1997 are referred to herein as FY 1996 and FY 1997, respectively.
OVERVIEW
The Company is primarily engaged in the production and distribution of
motion pictures in domestic and foreign markets. The Company produces low budget
movies striving for stories with wide appeal and high production quality. The
Company has produced and released eight movies through July 31, 1997 ranging in
production costs from $390,000 to $3,620,000. The Company is in pre-production
for its ninth production and is in the development stage of several more
projects.
The Company plans to produce three to five low budget movies per year.
The Company expects its next several films to have budgets equal to or less than
$1.0 million. The Company also believes that low budget films require less
capital resources, less general and administrative costs and limit the financial
risk to the Company in any one motion picture. Furthermore, the Company has had
more favorable experiences with film costing equal to or less than $1.0 million.
For example, through the year ending July 31, 1997, the Company estimates films
costing equal to or less than $1.000 million each or $2.124 million in the
aggregate will generate revenues of approximately $3.657 million. The
contribution to gross margin will be $1.533 million or 72% of costs. For films
costing in excess of $1.000 million, the Company estimates total revenues of
approximately $11.472 million for films with an aggregate cost of $10.125
million. The contribution to gross margin will be $1.347 million or 13% of
costs.
A substantial portion of the Company's film revenue since its inception
on May 10, 1995 has been derived from transactions with Cabin Fever
Entertainment, Inc. ("CFE"). The Company licensed domestic rights to CFE for
seven movies. In November 1996, after the Company already delivered the seven
films licensed, CFE refused to accept delivery of the last of the seven movies.
The relationship between the Company and CFE has subsequently deteriorated,
resulting in a lawsuit wherein the Company claimed damages for copyright
infringement, breach of contract and fraud. The case was filed in federal
district court in New York in the first quarter of 1997. CFE did not answer the
complaint but instead moved to dismiss the copyright claim, which was the basis
for federal jurisdiction. Both parties agreed to transfer the case to state
court in New York in November 1997, where CFE filed a motion to dismiss all
claims except breach of contract claim. If CFE is successful with its motion,
the company intends to move forward with the remaining contract claims in state
court. Subsequent to the deterioration of the relationship with CFE, the Company
has licensed two other films domestically through other distributors. See,
"Business -- Legal Proceedings."
Management of the Company anticipates that the majority of the total
estimated revenues for the Company will be from licensing to foreign
distributors. The Company attends film markets such as the Cannes Film Festival
to promote and license its films to territories such as Germany, South Korea,
Latin America and Spain. As of July 31, 1997, the Company has not licensed films
in some major territories such as Japan and Scandinavia. Although there can be
no assurances, the Company hopes to have licensing agreements in these
territories by December 1998.
The Company generally amortizes film costs using the
individual-film-forecast computation method, under which film costs are
amortized for each film in the proportion that revenue recognized during the
current period for the film bears to management's estimate of the total film
revenue to be realized from all media and markets for that film. Film costs
include acquisition costs, print and advertising costs (including costs for
advertising which is intended to benefit the films in other markets such as home
video or television), and, with respect to home video, the costs of
manufacturing (if applicable) and distributing the motion picture. Management
regularly reviews and revises its revenue estimates for each film, which may
result in a change in the rate of amortization and a write-down of the asset
(thereby affecting stockholders' equity and the Company's gross profit).
13
<PAGE>
The Company's unamortized film costs are comprised as of the dates set
forth below of the following:
July 31, 1997 July 31, 1996
---------------- -------------
(In thousands)
Film costs, net............. $5,832 $9,200
The Company believes gross film revenue with respect to a motion
picture is typically realized in the first few years following the film's
availability. As of July 31, 1997, approximately 57% of film costs have been
amortized for films available for delivery prior to July 31, 1997.
RESULTS OF OPERATIONS
The table sets forth, for the periods indicated, the percentage of
total revenues represented by certain items included in the Statement of
Operations.
Years Ended
July 31,
-----------------------
1997 1996
----------- ---------
Film Revenue 100.0% 100.0%
Amortization of Film Costs 87.5% 61.3
Gross Margin 12.5 38.7
Selling, General and Administrative 13.6 28.7
Expenses
Interest, Net 1.0 (4.4)
Income (Loss) Before Income Taxes (2.1) 6.9
Benefit (Provision) for taxes (2.0) (1.0)
Minority Interests 6.1 (3.3)
Net Income (Loss) 2.0% 2.6%
YEAR ENDED JULY 31, 1997 COMPARED TO YEAR ENDED JULY 31, 1996
Film revenue. Film revenue for the year ended July 31, 1997 was $6.171 million,
an increase of $3.545 million from the revenue during the year ended July 31,
1996 of $2.626 million. Their were four films available for foreign and domestic
distribution in FY 1996 compared to eight films available in FY 1997.
Film amortization. Film amortization primarily represents the amortization of
the Company's film costs. Film amortization was $5.401 million and $1.609
million in FY 1997 and FY 1996, respectively. The increase in amortization
correlates to the increase in film revenue.
Interest. Interest expense for the year ended July 31, 1997 decreased to $0.061
million for FY 1997 from $0.114 million for FY 1996. The decrease was primarily
attributable to the decrease in stockholders' advances from repayments and
exchange of debt for preferred stock. See "Certain Relationships."
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to approximately $0.845 million for FY 1997
from approximately $0.755 million for FY 1996. For each fiscal year ending July
31, 1997 and 1996, the total selling, general and administrative costs, in
absolute dollars were approximately $2.0 million. However, in connection with
the production and pre-release marketing efforts during FY 1996, the Company
capitalized certain selling, general and administrative attributable to the
production or initial marketing of films. During FY 1997, less costs were
capitalized as the Company's selling, general and administrative costs were
allocated to both production and selling efforts for previously released films.
The Company expects selling, general and administrative expenses, in absolute
dollars, to remain level in the near future.
YEAR ENDED JULY 31, 1996 COMPARED TO INCEPTION (MAY 10, 1995) THROUGH JULY 31,
1995
Film revenue. Film revenue for the year ended July 31, 1996 was $2.626 million.
For the period from inception in May 1995 to July 31, 1995 there was no revenue
recognized. There were four films available for foreign and domestic
distribution in FY 1996. During FY 1995, the Company's efforts were directed to
production of films and start-up of the Company. Approximately 74.6% of the
Company's film revenue for the year ended July 31, 1996 was attributable to one
film released in the period.
Film Amortization. Film amortization primarily represents the amortization of
the Company's film costs. Film amortization was $1.610 million in FY 1996 and
there was no amortization for the period ended July 31, 1995.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to approximately $0.755 million for FY 1996
from approximately $0.032 for FY 1995, which represented only three months.
During FY 1995, which represented only three months, the Company's efforts were
directed to production of films and start-up of the Company.
Interest. Interest expense for the year ended July 31, 1996 increased to
approximately $0.117 million from $0 for the period ended July 31, 1995. The
increase was primarily attributable to the increase in stockholders' advances
used to fund production efforts.
14
<PAGE>
INFLATION.
The Company believes that inflation, including periodic increases in
movie admission and video rental prices, has not had a material impact on the
Company's financial condition or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception on May 10, 1995, the Company has satisfied its
liquidity requirements principally through advances and equity financing
provided from its shareholders or investments from the sale of limited
partnership interests in two limited partnerships. The Company's cash flow from
operating, investing, and financing activities for FY 1997 and FY 1996 were as
follows:
Fiscal Year Ended
July 31,
1997 1996
--------------- --------------
(In thousands)
Cash Flow Provided by (Used in):
Operating activities $ 5,327 $ 2,186
Investing activities (2,033) (10,810)
Financing activities (2,494) 8,155
As set forth above, cash flows provided by financing (primarily equity
and advances from shareholders, investments in limited partnership interests in
its subsidiaries) and cash provided from operating activities (mostly film
revenues in domestic and international markets) have been sufficient to cover
cash flows used for the Company's investing activities (primarily the Company's
film acquisition and production costs). The Company experienced positive cash
flow from operations of $5.327 million for the year ending July 31, 1997. As the
Company increases the number of films it acquires or produces, it can be
expected that net negative cash flow from investing will continue to be offset,
in part by cash flows provided by operating activities.
The Company will continue to be significantly dependent upon its
ability to deliver movies to its customers. As of July 31, 1997, the Company had
licenses with its customers for approximately $10.782 million, of which
approximately $9.069 million was collected and recorded as revenue or deposits.
The remaining $1.713 million will be collected at various periods depending on
license terms between the Company and its customers and when movies are
delivered. As the Company continues its selling efforts in film markets such as
Cannes, America Film Market and Milan International Film, backlog is expected to
increase, offset by collections upon delivery of movies to its customers.
The Company actively seeks to acquire motion pictures to produce and
distribute. The Company's ability to acquire suitable films for production or
distribution has, in the past, been limited by its ability to raise capital (see
"Financing of Motion Picture Production - Limited Partnerships") and its
founding stockholders ability to provide adequate capital. The founding
stockholders do not currently intend to make any further advances or investments
to the Company.
15
<PAGE>
The Company has no material commitments for capital expenditures at
July 31, 1997. The Company has no specific plans, proposals, arrangements or
understandings with respect to future acquisitions or mergers with other
companies.
The Company believes that its existing capital resources, together with
the proceeds of this Offering, will enable the Company to maintain its
operations and working capital requirements for at least twelve (12) months.
However, it is possible that additional financing will be required to fund
further growth in the Company's business beyond the next 12 months whether
through equity financing, debt financing or other sources. There can be no
assurance that such sources of financing will be available, or will be available
on terms acceptable to the Company. Inability to obtain additional financing
could limit the Company's ability to produce motion pictures, retain writers,
directors and other artistic elements, purchase rights to books, screenplays and
other artistic properties, or take other actions that would benefit the Company
and its stockholders and could therefore have a material adverse effect on the
Company.
As a general rule, all transactions among the Company and its officers,
directors or 5% or greater stockholders and their affiliates have been, and in
the future will be, made on terms no less favorable than terms available from
unaffiliated third parties. In accordance with such policy, all agreements
between the Company and any entity in which a director, executive officer or
principal stockholder of the Company or a member of the immediate family of such
person is a director, executive officer or principal stockholder of the Company
or a member of the immediate family of such person is a director, executive
officer or principal stockholder must be approved by all disinterested
directors. A "member of the immediate family" is defined as a person's spouse,
parents, children, siblings, mothers and fathers-in-law, sons and daughters-in-
law, and brothers and sisters-in-law. See "Risk Factors- Conflicts of Interest."
BUSINESS
MOTION PICTURE INDUSTRY OVERVIEW
GENERAL
The motion picture industry consists of two principal activities:
production, which involves the development, financing and production of motion
pictures; and distribution, which involves the promotion and exploitation of
feature-length motion pictures in a variety of media, including theatrical
exhibition, home video, television and other ancillary markets, both
domestically and internationally. The United States motion picture industry is
dominated by the "major" studios, including The Walt Disney Company, Paramount
Pictures Corporation, Warner Brothers, Inc., MCA, Twentieth Century Fox,
Columbia Pictures, Tri-Star Pictures and MGM/UA. The major studios are typically
large diversified corporations that have strong relationships with creative
talent, exhibitors and others involved in the entertainment industry and whose
libraries of motion pictures provide a stable source of earnings which offset
the variations in the financial performance of their motion picture releases and
other aspects of their motion picture operations. The major studios have
historically produced and distributed the vast majority of high grossing
theatrical motion pictures released annually in the United States.
In recent years, "independent" films have been successfully marketed
and have received commercial acclaim. Of the five pictures nominated for "best
picture" in 1996, four, Fargo, The English Patient, Shine and Secrets and Lies,
are independent films. In addition, an independent film, The English Patient,
won the Oscar for the Best Picture of 1996. Furthermore, the major recipients of
Oscar nominations were independent films rather than the films produced by the
larger studios. The public's acceptance of these movies not produced by a major
studio indicates that companies such as the Company can be competitive in an
industry that traditionally has been dominated by the larger studios. Harvey
Weinstein, co-Chairman of Miramax, the New York based and Disney-owned company,
commented that the Oscar nominations indicate "that there are actually two movie
businesses now: the big studio event movies and the smaller, more innovative
independent film." He added that all the nominations "have one thing in common:
they were writer-driven with good sound stories." The
16
<PAGE>
results of the 1996 Oscars further solidify the importance of independent film
makers. The independent studios earned most of the major Oscars, including, best
picture, best actor, best actress, best supporting actress, and best director.
The Company has also profited from the success of the independent film
companies in 1996. Since the nominations were announced, management of the
Company has been able to speak with well-known actors, actresses, and directors
about working with the Company to develop independent productions. In the past,
these people would not have discussed any possible projects with the Company.
However, management of the Company believes that the success of the independents
in 1996 may be the beginning of a cycle from which the Company will be able to
benefit. Management of the Company believes that over time the Company can
develop a solid reputation for producing quality, market-accepted lower-budget
movies.
MOTION PICTURE PRODUCTION AND FINANCING
The production of a motion picture begins with the screenplay
adaptation of a popular novel or other literary work acquired by the producer or
the development of an original screenplay having its genesis in a story line or
scenario conceived or acquired by the producer. In the development phase, the
producer typically seeks production financing and tentative commitments from a
director, the principal cast members and other creative personnel. A proposed
production schedule and budget are also prepared during this phase. Upon
completing the screenplay and arranging financing commitments, pre-production of
the motion picture begins. In this phase, the producer engages creative
personnel to the extent not previously committed; finalizes the filming schedule
and production budget; obtains insurance and secures completion guaranties, if
necessary; establishes filming locations and secures any necessary studio
facilities and stages; and prepares for the start of actual filming. For the
Company, principal photography (the actual filming of the screenplay) generally
extends from three to six weeks, depending upon such factors as budget,
location, weather and complications inherent to the screenplay. This varies
considerably from the major studios which may be in principal photography for as
long as 30 to 40 weeks. Following completion of principal photography in what is
typically referred to as post-production, the motion picture is edited,
opticals, dialogue, music and any special effects are added, and voice, effects
and music sound tracks and pictures are synchronized. This results in the
production of the negative from which release prints of the motion picture are
made.
Production costs consist of acquiring or developing the screenplay,
film studio rental, principal photography, post-production and the compensation
of creative and other production personnel. Distribution expenses, which consist
primarily of the costs of advertising and preparing release prints, are not
included in direct production costs. The major studios generally fund production
costs from cash flow generated by motion picture and related activities or, in
some cases, from unrelated businesses or through off-balance sheet methods.
Substantial overhead costs, consisting largely of salaries and related costs of
the production staff and physical facilities maintained by the major studios,
also must be funded. Independent production companies generally avoid incurring
overhead costs as substantial as those incurred by the major studios by hiring
creative and other production personnel and retaining the other elements
required for pre-production, principal photography and post-production
activities on a picture-by-picture basis. Sources of funds for independent
production companies may include bank loans, "pre-licensing" of distribution
rights, equity offerings and joint ventures. Independent production companies
generally attempt to obtain all or a substantial portion of their financing of a
motion picture prior to commencement of principal photography, at which point
substantial production costs begin to be incurred and require payment.
"Pre-Licensing" of film rights is often used by independent film
companies to finance all or a portion of the direct production costs of a motion
picture. By "pre-licensing" film rights, a producer obtains amounts from third
parties in return for granting such parties a license to exploit the completed
motion picture in various markets and media. Production companies with
distribution divisions may retain the right to distribute the completed motion
picture either domestically or in one or more international markets. Other
production companies may separately license theatrical, home, video, television
and all other distribution rights among several licensees. See "Business --
Financing of Motion Picture Production."
In connection with the production and distribution of a motion picture,
major studios and independent production companies often grant contractual
rights to actors, directors, screen writers, and other creative and financial
contributors to share in revenues or net profits (as defined in their respective
agreements) from such motion picture. Except for the most sought-after talent,
these third-party participations are generally payable after all distribution
fees, marketing expenses, direct production costs and financing costs are
recouped in full.
17
<PAGE>
MOTION PICTURE DISTRIBUTION
General
-------
Distribution of a motion picture involves domestic and international
licensing of the picture for (a) theatrical exhibition, (b) non-theatrical
exhibition, which includes airlines, hotels and armed forces facilities, (c)
video cassettes, (d) presentation on television, including pay-per-view, pay,
network, syndication or basic cable and (e) marketing of the other rights in the
picture and underlying literary property, which may include books, merchandising
and soundtracks. In recent years, revenues from the licensing of rights to
distribute motion pictures in ancillary (i.e., other than domestic theatrical)
markets, particularly international pay and free television, have increased
significantly.
The distributor typically acquires rights from the producer to
distribute a motion picture in one or more markets and/or media. For its
distribution rights, the distributor generally agrees to pay to the producer a
certain minimum advance or guarantee upon the delivery of the completed motion
picture, which amount is to be recouped by the distributor out of revenues
generated from the distribution of the motion picture in particular media or
territories. After the distributor has recouped the amount advanced (if any)
plus its distribution costs, the distributor is then entitled to retain ongoing
distribution fees computed as a percentage of the gross revenues generated from
its distribution of the picture. The producer is thereafter entitled to receive
all remaining revenues in excess of the ongoing distribution fee retained by the
distributor.
A substantial portion of a film's ultimate revenues are generated in a
film's initial distribution cycle (generally the first five years after the
film's initial domestic theatrical release). Commercially successful motion
pictures, however, may continue to generate revenues after the film's initial
distribution cycle from the relicensing of distribution rights in certain media,
including television and home video, and from the licensing of distribution
rights with respect to new media and technologies.
Below is a summary of the potential distribution cycle of a motion
picture. It is important to realize that the distribution cycle of a motion
picture varies from picture to picture and from company to company. The Company,
as a small independent film company, anticipates that many, if not all, of its
films will not be released in theaters and instead, will be released, if at all,
on television or other similar media. The movie industry is highly competitive,
and there is no guarantee that any of the Company's movies will be released in
any media, or if released, will be able to generate enough revenues to recoup
the direct negative costs associated with the movie's production. See
"--Competition" and "Risk Factors--Risks of Motion Picture Production."
Theatrical
----------
The theatrical distribution of a motion picture involves the licensing
and booking of the motion picture to theatrical exhibitors, the promotion of the
picture through advertising and publicity campaigns and the manufacture of
release prints from the film negative. Expenditures on these activities,
particularly on promotion and advertising, are often substantial and may have a
significant impact on the ultimate success of the film's theatrical release.
Moreover, as the vast majority of these costs (primarily advertising costs) are
incurred prior to the first weekend of the film's domestic theatrical release,
there is not necessarily a correlation between these costs and the film's
ultimate box office performance. In addition, the ability to distribute a
picture during peak exhibition seasons, including the summer months and the
Christmas holidays, may affect the theatrical success of the picture.
While arrangements for the exhibition of a film vary greatly, there are
certain fundamental economic relationships applicable to domestic theatrical
distribution. Theater owners (the "exhibitors") retain a portion of the
admission paid at the box office ("gross box office receipts"). The share of the
gross box office receipts retained by an exhibitor generally includes a fixed
amount per week (in part to cover overhead), plus a percentage of receipts that
escalates over time. The balance ("gross film rentals") is remitted to the
distributor. The distributor then retains a distribution fee from the gross film
rentals and recoups the costs incurred in distributing the film which consist
primarily of the cost of advertising and the cost of release prints for
exhibition. The balance of gross film rentals, after deducting distribution fees
and any additional distribution costs recouped by the distributors ("net film
rentals"), is then remitted to the producer of the film.
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<PAGE>
Home Videos
-----------
A motion picture typically becomes available for videocassette
distribution within four to six months after its initial domestic theatrical
release. Home video distribution consists of the promotion and sale of video
cassettes to local, regional and national video retailers which rent or sell
video cassettes to consumers primarily for home viewing.
Television
----------
Television rights are generally licensed first to pay-per-view for an
exhibition period within six to nine months following initial domestic
theatrical release, then to pay television approximately twelve to fifteen
months after initial domestic theatrical release, thereafter in certain cases to
free television for an exhibition period, and then to pay television again.
These films are then syndicated to either independent stations or basic cable
outlets. Pay-per-view allows subscribers to pay for individual programs. Pay
television allows cable television subscribers to view such services as HBO,
Cinemax, Showtime, The Movie Channel or Encore Media Services offered by their
cable system operators for a monthly subscription fee. Since groups of motion
pictures are typically packaged and licensed as a group for exhibition on
television over a period of time, revenues from these television licensing
"packages" may be received over a period that extends beyond five years from the
initial domestic theatrical release of a particular film. Motion pictures are
also "packaged" and licensed for television broadcast in international markets.
Non-Theatrical and Other Rights
--------------------------------
Films may be licensed for use by airlines, schools, public libraries,
community groups, the military, correctional facilities, ships at sea and
others. Music contained in a film may be licensed for sound recording, public
performance and sheet music publication. Rights in motion pictures may be
licensed to merchandisers for the manufacture of products such as video games,
toys, T-shirts, posters and other merchandise. Rights may also be licensed to
create novelizations of the screenplay and other related book publications.
International Markets
---------------------
In addition to their domestic distribution activities, motion picture
producers and distributors generate substantial revenues from distribution of
motion pictures in international markets (in the same media in which films are
distributed in the domestic market).
COMPANY HISTORY
The Company was organized under the laws of the State of Delaware in
May 1995 under the name "Hit Entertainment, Inc." In June 1997, the Company
changed its name to its current name, "United Film Distributors, Inc." At
November 14, 1997, the Company had a total of thirteen wholly-owned subsidiaries
through which it operates its business. The Company generally creates a separate
subsidiary corporation to contract for the different rights connected to
specific projects. The Company itself generally does not enter into agreements
with respect to specific projects.
The Company is engaged in the acquisition, development, financing,
production, distribution and licensing of motion pictures for exhibition in
domestic and international theatrical markets and for subsequent worldwide
release in different media, including, but not limited to, home video and pay
and free television. Harry Shuster, the Company's Chairman, has produced or
co-produced 20 movies during the past 25 years. Brian Shuster, President and
Chief Executive Officer of the Company, has been involved in various aspects of
film production for approximately 15 movies during the past eight years. See
"Management."
During the Company's first two years of operations, the Company has
completed production of eight films, consisting of The Secret Agent Club, Prey
of the Jaguar, Blood Money, The Elevator, Firestorm, Chase Morran, Santa with
Muscles, and Skeletons. Santa with Muscles was released in movie theaters in
November 1996; Chase Morran was released in February 1997 on the SCI-Fi channel;
and Skeletons was released on HBO in April 1997. Prey of the Jaguar, Blood
Money, and Firestorm have been licensed by HBO from CFE, but release dates have
not yet been determined. See "Business--Financing of Motion Picture Production
("and Risk Factors - Litigation with Cabin Fever Entertainment, Inc.")." The
other movies are expected to be distributed by the end of the year. In addition,
the Company is currently in pre-production of several films, one of which is
Wrong Turn, which should be completed in early 1998 and released soon
thereafter. All of the films produced by the Company to date have been in a
budget range of between $390,000 and $3,620,000. See "--Motion Picture
Production" for the Company's current slate of motion picture projects.
To produce a project, the Company first acquires the rights to a story,
book or script ("property"). The Company then typically secures a financing or
production commitment for the project from third parties, such as private
investors, studios, and distributors, prior to expending substantial funds in
the development process. However, the Company does advance its own funds to meet
the interim costs of development and production which amounts are generally
repaid to the
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<PAGE>
Company pursuant to the production contracts. See "Business--Financing of Motion
Picture Production" for a description of the Company's financing activities.
STRATEGIC OBJECTIVE
The Company's strategy is to (i) develop long-term relationships with
talent who have demonstrated the ability to attract widespread audience
interest, both domestically and in significant international markets, (ii) seek
to limit the financial risk to the Company inherent in any one motion picture
project while preserving potential returns through the strategic use of
long-term distribution agreement with companies such as HBO covering the United
States and Canada, and their respective territories, possessions, and
protectorates (the "Domestic Territories") as well as such foreign distributors
such as Highlight Communications (Germany), Saehan/Hollyvision/Digital Media
(South Korea), Consorcio Europa Serviano Ribiero (Brazil), Manga Films (Spain)
and Italian International Films (Italy), and (iii) exercise strong management
control of production costs of its motion pictures, as well as of general
overhead.
The Company's principal goal is to produce and arrange for the release
of three to five commercially successful low-budget motion pictures per year.
Although there can be no assurances, the Company believes that over time these
films will become the core of a library of films which management believes have
the capacity of generating revenues from their worldwide exploitation in
existing and future media and markets. The Company, as a small independent film
company, anticipates that many, if not all of its films, will not be released in
theaters but instead, will be released on cable television, television and other
similar media.
The Company attempts to balance the financial risk in its productions
with the potential return from exploitation of the rights in its motion pictures
by entering into selective, strategic financing and distribution arrangements
with certain domestic and international distributors. These distributors provide
advances and minimum guarantees in return for the right to distribute the
Company's motion pictures in the licensed territory or media. Generally, the
Company's goal is to receive licensing advances and guarantees (referred to
herein as "prelicensing") in an amount equal to no less than 40% of the
aggregate direct negative cost of its motion pictures and, in this way, arrange
for distribution of the Company's motion pictures without incurring the
financial risk often associated with distribution.
Management believes, based upon its experience, that it can obtain
deposits from foreign distributors of 10% to 20% pursuant to distribution
agreements. The aggregate of said deposits provides from 5% to 30% percent of
the aggregate direct negative cost of each motion picture. However, there can be
no assurance with respect to any particular motion picture that such advances
continue to cover such film's direct negative cost.
The Company attempts to strictly control the cost of each motion
picture through active management involvement in all phases of the production
process. Management is actively involved in the budgeting process, including the
development of economic assumptions used in determining whether a particular
project is approved for production.
Management of the Company believes that its extensive experience in the
motion picture industry will enable the Company to control and maintain its
general overhead expenditures at appropriate levels given its production
schedule. For each motion picture that is approved for production, additional
personnel are employed to work on that motion picture only, and the costs of
these personnel are included in the budgeted cost for such motion picture.
Management of the Company believes that there will be adequate qualified
personnel available from time to time to meet the Company's needs for additional
personnel. As a result, when no motion pictures are in production, the Company
maintains a relatively small staff (currently four full-time employees), which
management believes is sufficient to conduct the Company's current business
activities. Management intends to keep its permanent, full-time staff members
needed to operate the Company on a day-to-day basis at a small number in order
to keep its fixed overhead expenses low. See "Business--Employees."
MOTION PICTURE PRODUCTION
Much of the Company's first two years of operations was spent acquiring
the rights to and developing motion picture projects, as well as producing eight
motion pictures. The Company has completed production of eight motion pictures
to date, consisting of: The Secret Agent Club, Prey of the Jaguar, Blood Money,
The Elevator, Firestorm, Chase Morran, Santa with Muscles, and Skeletons. In
addition, as indicated below, the Company has several projects in
pre-production, one of which is entitled Wrong Turn, which should be completed
in early 1998 and released soon thereafter. The aggregate direct negative costs
of the Company's eight completed films was approximately $12,249,000.
20
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<TABLE>
<CAPTION>
Completed and Pending Motion Picture Productions
Title Major Creative Elements Storyline Status
----- ----------------------- --------- ------------
<S> <C> <C> <C>
Skeletons Director: David DeCoteau After suffering a heart attack, a Pulitzer Released on HBO in
(Prey of the Jaguar, Puppet Prize winning journalist relocates his family April 1997.
Master 3, Lady Avenger) to a picture perfect town in Maine. When he
becomes involved in a murder investigation he
Cast: Ron Silver discovers the evil truth behind the town.
(Time Cop, Reversal of Since the 19th Century, the residents have
Fortune) kept the outside world away by murdering
anyone who attempts to infiltrate their
James Coburn pristine village.
(Maverick, Eraser)
Christopher Plummer
(12 Monkeys, Wolf)
Santa with Muscles Director: John Murlowski When a small town falls victim to the devious Released domestically
(Automatic, Amityville: A New plans of an arch villain, they must turn to in November 1996.
Generation, The Secret Agent the only person capable of helping
Club) them...Santa Claus. Two weeks before
Christmas, a miracle arrives in the form of a
Cast: Hulk Hogan mysterious stranger -- who is convinced he is
(No Holds Barred, Suburban the real Santa Claus. In no time at all,
Commando, Mr. Nanny, The criminals are quaking in fear and the town
Secret Agent Club) begins to come alive again.
The Elevator Directors: Arthur Borman A desperate young writer traps a movie mogul Completed, no current
(...And God Spoke) in an elevator in order to read him a series anticipated release dates.
of shorts that he had written.
Nigel Dick
(Private Investigations)
Rafal Zielinski
(Fun)
Cast: Martin Landau
(Ed Wood, Crimes and
Misdemeanors)
Martin Sheen
(The American President,
Apocalypse Now)
The Secret Agent Director: John Murlowski Ray (Hulk Hogan) leads a double life. Known Completed, and licensed
Club (Automatic, Amityville: A New by his community and son as a clumsy toy domestically in 1997.
Generation, Santa with Muscles) store owner, he is really the best secret
agent in 1997. America. After returning from
Tibet and seizing the most powerful weapon
Cast: Hulk Hogan ever invented, Ray is kidnapped by evil-doers
(No Holds Barred, Suburban who want the weapon to control the universe.
Commando, Mr. Nanny, With help from his friend, Ray's son locates
Santa with Muscles) the super-weapon and rescues Ray.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Title Major Creative Elements Storyline Status
----- ----------------------- --------- ------------
Prey of the Jaguar Director: David DeCoteau Damien Bandera escapes from prison and Completed, and licensed
(Skeletons, Puppet Master 3, murders the family of Special Operations domestically in 1997.
Lady Avenger) agent Derek Leigh, the man who put him in
prison. Filled with grief, Leigh assumes the
Cast: Stacy Keach identity of JAGUAR, a fantasy super-hero, to
(Escape from L.A., Up in upon seek revenge upon Bandera and his entire
Smoke, The Heart is a Lonely operation.
Hunter)
Blood Money Director: John Shepphird Lester Grisam escapes from prison and holds Completed, and licensed
(Firestorm, Teenage Bonnie & hostage the girlfriend of the man who domestically in 1997.
Klepto Clyde) testified against him. Grisam demands a
ransom of $100,000. However, as the plot
Cast: James Brolin unfolds it becomes apparent that the man's
(The Amityville Horror, girlfriend was quite different than how she
Westworld) appeared.
Chase Morran Director: Gilbert Po A psychotic criminal escapes from the highest Released on the
(Magnificent Scoundrel) security prison of the 24th Century in a SCI-FI network in
stolen shuttle. He lands on Dome 4, a small February 1997.
Cast: Bruce Campbell and peaceful space colony. Within minutes he
(Army of Darkness, McHale's kills the head of security, enslaves the
Navy) residents and takes control of the Dome. His
plans begin to fall apart, when Chase Morran,
a peacekeeper from Earth, arrives on Dome 4
to surprise his wife.
Firestorm Director: John Shepphird In the early 21st Century, on the planet Completed, and lincensed
(Firestorm, Teenage Bonnie & Markus 4, a group of androids capable of domestically in 1997.
Klepto Clyde, Blood Money) human feelings and emotions are enslaved by a
heartless villain named Brinkman (John
Cast: John Savage Savage). Tarmac, the android leader starts a
(White Squall, The Onion rebellion to free his people aided by an
Field) employee of Brinkman's.
Wrong Turn Director: David DeCoteau A housewife finds out her husband is cheating Not yet in production.
(Skeletons, Prey of the on her. She kills her husband and becomes a Scheduled to commence
Jaguar, Puppet Master 3, fugitive with a man with a secret. production in late 1997
Lady Avenger) and released in the first
half of 1998.
Cast: Lorraine Bracco (Someone
to Watch Over Me,
GoodFellas)
John Heard
(Home Alone, Home Alone2:
Lost in New York)
</TABLE>
All films listed are complete with the exceptions of Wrong Turn. Wrong
Turn's production costs are estimated at $1,000,000.
There can be no assurance that the Company will be able to complete any
future pictures or that future pictures will be completed in accordance with the
anticipated schedules or budgets, as the production, completion and distribution
of motion pictures is subject to numerous uncertainties, including financing
requirements, personnel availability and the release schedule of competitive
films. There also is no assurance that the Company's motion pictures will be
profitable and enable the Company to recoup its direct negative costs. See
"--Competition" and "Risk Factors--Risks of Motion Picture Production."
22
<PAGE>
FINANCING OF MOTION PICTURE PRODUCTION
General
Prior to the commencement of production of a motion picture, the
Company attempts to enter into license agreements with distributors pursuant to
which distributors acquire the right to distribute such motion picture (or
series of motion pictures pursuant to an output agreement) in a certain
geographic territory and media for a specific term. In consideration for these
distribution rights, the distributor is typically required to pay the producer a
fixed amount upon delivery of the motion picture to the distributor ("Minimum
Guarantee"). Once the distributor has recouped an amount equal to its Minimum
Guarantee and costs of distribution, the distributor is entitled to retain
ongoing distribution fees computed as a percentage of the gross revenues
generated from the distribution of the motion picture. The Company is thereafter
entitled to receive all remaining revenues generated from distribution of the
picture in such territory in excess of the ongoing distribution fee retained by
the distributor. In connection with each license agreement, the Company also
receives an advance generally equal to 20% of the Minimum Guarantee (the
"Advance"). The Company typically utilizes the Advance toward the production
costs of the motion picture and records the amounts received as deferred
revenues on the Company's financial statements. The Company seeks to obtain
minimum guarantees totaling no less than the cost of production.
Distribution Agreements
From 1995 to the present, the Company entered into both domestic and
foreign licensing agreements. The Company has been able to license each of its
motion pictures, including the pictures that are still in pre-production. Among
the licensees of the Company's motion pictures are Cabin Fever Entertainment,
Inc. ("CFE") and HBO (United States), Highlight Communications (Germany),
Saehan/Hollyvision/Digital Media (Korea), Consorcio Europa Serviano Ribiero
(Brazil), Manga Films (Spain), and Italian International Films (Italy). Revenues
received by the Company pursuant to its licensing agreements during the fiscal
years ended July 31, 1996 and 1997 were $2.626 and $6.171 million, respectively.
However, revenues are only realized at the time the motion pictures are
delivered to the respective licensee. Backlogs, which indicate the revenues that
will be realized upon delivery of the motion pictures, were $5.448 and $1.713
million, respectively, for the same periods. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Limited Partnerships
In addition to the licensing agreements and the advances thereunder,
the Company also raised approximately $4,105,000 in connection with the sale of
limited partnership interests in two (2) limited partnerships, HEP I, L.P. ("HEP
I") and HEP II, L.P. ("HEP II") (collectively, the "Partnerships") of which the
Company is the sole general partner. The affiliated and third party limited
partners of HEP I and HEP II invested an aggregate of $1,050,000 and $3,000,000,
respectively, in the Partnerships. The Company also invested $1,200,000 and
$3,510,000, respectively as limited partners in HEP I and HEP II. HEP I partners
financed and participate in the exploitation of the movie The Secret Agent Club.
HEP II partners financed and participate in the exploitation of the movies Santa
with Muscles and Skeletons. Pursuant to the distribution agreement between the
Company and the Partnerships, the Partnerships are entitled to receive revenue
collected from sales net of a 20% distribution fee and selling expenses not to
exceed $75,000 per film (collectively, "Net Partnership Revenue"). Pursuant to
terms of the limited partnership agreements, ninety-nine percent (99%) of Net
Partnership Revenue is to be distributed to the limited partners and one percent
(1%) to the Company as the sole general partner until the limited partners have
received 110% of their original investment. After the limited partners have been
disbursed their original investment plus ten (10%) percent, the distribution of
Net Partnership Revenue is to be distributed equally between the general partner
and the limited partners as a group. Both Partnerships terminate when the
limited partners receive a return equal to 200% of their investment.
United Leisure Corporation ("ULC"), a company in which Harry Shuster is
also Chairman of the Board, is one of three limited partners of HEP II. The
other limited partners are a third party and the Company. ULC originally
invested $1,500,000 in May 1996. In October 1996, the Company paid the third
party limited partner and ULC approximately $379,000 each pursuant to HEP II's
partnership agreement and the Company's exploitation of Santa with Muscles and
Skeletons. As of July 31, 1997, approximately $143,000 is payable to ULC and the
third party limited partner for distributions. See "Certain Relationships" and
"Risk Factors - Conflicts of Interest."
MAJOR CUSTOMERS
For the year ended July 31, 1997, revenue from one customer, Cabin
Fever Entertainment, accounted for $2,515,000 or 40.8% of total revenues for the
period. For the year ended July 31, 1997, revenues from two customers, Cabin
Fever and Highlight Communications (Germany), accounted for $1,225,000 and
$275,000, or 47% and 10%, respectively, of total revenues for the year.
Management of the Company believes that it can negotiate new distribution
agreements on terms similar to those contained in existing agreements in the
event that any such existing agreement is terminated or expires. Accordingly,
management of the Company believes that the profitability of the Company is not
dependent on any single customer.
23
<PAGE>
EMPLOYEES
The Company, like other independent production companies, does not
maintain a substantial staff of creative or technical personnel. Management of
the Company believes that sufficient motion picture properties and creative and
technical personnel (such as screenwriters, directors and performers) are
available in the market at acceptable prices to enable the Company to produce as
many motion pictures as it currently plans or anticipates, at the level of
commercial quality the Company may require.
At November 14, 1997, the Company employed a total of four full-time
employees. The Company also hires additional employees on a picture-by-picture
basis in connection with the production of the Company's motion pictures. The
salaries of these additional employees, as well as the salaries of certain
full-time employees of the Company who provide direct production services, are
typically allocated to the capitalized cost of the related pictures. The Company
and certain of its subsidiaries are subject to the terms in effect from time to
time of various industry-wide collective bargaining agreements, including the
Writers Guild of America, the Directors Guild of America, the Screen Actors
Guild and the International Alliance of Theatrical Stage Employees. A strike,
job action or labor disturbance by the members of any of these organizations may
have a material adverse effect on the production of a motion picture within the
United States. None of the Company's full-time employees are represented by a
labor union. The Company believes that its current relationship with its
employees is satisfactory.
COMPETITION
Motion picture production and distribution are highly competitive. The
competition comes from both companies within the same business and companies in
other entertainment media which create alternative forms of leisure
entertainment. The Company's competition for the acquisition of literary
properties, the services of performing artists, directors, producers and other
creative and technical personnel and production financing includes several
"major" film studios including, but not limited to, The Walt Disney Company,
Paramount Pictures Corporation, MCA, Columbia Pictures, Tri-Star Pictures,
Twentieth Century Fox, Warner Brothers Inc. and MGM/UA, which are dominant in
the motion picture industry, as well as numerous independent motion picture and
television production companies, television networks and pay television systems.
Many of these organizations with which the Company competes have significantly
greater financial and other resources than does the Company. In addition, the
Company's films compete for audience acceptance and exhibition outlets with
motion pictures produced and distributed by other companies, including motion
pictures distributed by CFE, HBO and the Company's foreign distributors. As a
result, the success of any of the Company's films is dependent not only on the
quality and acceptance of that particular film, but also on the quality and
acceptance of other films.
PROPERTIES
The Company leases office space in Westwood, California. The total
office space is approximately 3,446 square feet. The leases expire on various
dates through June 30, 2001. Total rental on the office space is $9,477 per
month. The office building is owned by 1990 Westwood Blvd, Inc., which is a
private corporation, of which Harry Shuster, the Company's Chairman, is a
majority shareholder. See "Certain Relationships."
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings that could have a
material adverse affect on the Company's operations or financial condition. It
is anticipated that from time to time it will be subject to claims, suits and
complaints that arise in the ordinary course of business. A substantial portion
of the Company's film revenue since its inception on May 10, 1995 has been
derived from transactions with Cabin Fever Entertainment, Inc. ("CFE"). The
Company licensed domestic rights to CFE for seven movies. In November 1996,
after the Company already delivered the seven films licensed, CFE refused to
accept delivery of the last of the seven movies. The relationship between the
Company and CFE has subsequently deteriorated, resulting in a lawsuit wherein
the Company claims damages for copyright infringement, breach of contract and
fraud. The case was filed in federal district court in New York in the first
quarter of 1997. CFE did not answer the complaint but instead moved to dismiss
the copyright claim, which was the basis for federal jurisdiction. The parties
voluntarily agreed to transfer the case to state court in New York in November
1997, where CFE filed a motion to dismiss all claims except the breech of
contract claims. If CFE is successful on its motion, the Company intends to move
forward with the remaining contract claims in state court. Subsequent to the
deterioration of the relationship with CFE, the Company has licensed two other
films domestically through other distributors.
24
<PAGE>
MANAGEMENT
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Harry Shuster....................................... 60 Chairman, Chief Financial Officer
Brian Shuster....................................... 39 President, Chief Executive Officer, Director
J. Brooke Johnston, Jr.............................. 57 Director
George Folsey, Jr................................... 52 Director
</TABLE>
Harry Shuster has been Chairman of the Company since its inception in
May 1995 and Chief Financial Officer and Secretary since October 1997. Mr.
Shuster has been Chairman, President and Chief Executive Officer of United
Leisure Corporation ("United Leisure"), a publicly-traded leisure time services
company, for over 20 years. Mr. Shuster also acts as a consultant and as
Chairman, President and Chief Executive Officer of Grand Havana Enterprises,
Inc., a publicly traded company formed in 1993, that operates private membership
cigar rooms. In 1990, Lion Country Safari, Inc., California, a subsidiary of
United Leisure, in connection with major litigation with its landlord, was
forced to seek protection under the United States Bankruptcy Code by the filing
of a voluntary petition under Chapter 11 of such Code. By filing the petition,
the subsidiary was able to protect its assets from the claims of the landlord.
The bankruptcy petition has been dismissed by stipulation of the parties, but
the litigation still is pending.
Brian Shuster has served as Chief Executive Officer, President and a
director of the Company since its inception in May 1995. Since he has been with
the Company, Mr. Shuster has served as the producer of seven films. Prior to
joining the Company, he served as President of Beverly Hills Producers Group, a
private production company, where he produced one motion picture, served as
executive producer of another motion picture, and oversaw production of three
other motion pictures. From 1990 until 1993, he served as vice president of
Worldwide Entertainment Group, where he produced three motion pictures. Mr.
Shuster also is a director of United Leisure.
J. Brooke Johnston, Jr. has been a director of the Company since April
1997. Since April 1996, Mr. Johnston has served as Senior Vice President and
General Counsel of MedPartners, Inc., a physician practice management company.
Prior to joining MedPartners, Inc., Mr. Johnston was a senior principal in the
law firm of Haskell Slaughter Young & Johnston, Professional Association,
Birmingham, Alabama, where he practiced corporate and securities law for over
seventeen years. Before joining Haskell Slaughter, Mr. Johnston practiced law in
New York, New York and at another firm in Alabama. Mr. Johnston is a member of
the Alabama State Bar and the New York and American Bar Associations. Mr.
Johnston is a member of the Board of Directors of United Leisure. See "Certain
Relationships."
George Folsey, Jr. has been a director of the Company since April 1997.
Mr. Folsey is the son of the late Hollywood cinematographer, George Folsey, who
received fourteen Academy Award nominations. After graduating from Pomona
College, Mr. Folsey worked as an editor at KABC-TV in Los Angeles and formed a
company that filmed and edited all the filmed segments of Laugh-In. Mr. Folsey's
work as a film editor includes: Animal House; The Blues Brothers; Coming to
America; Michael Jackson's Thriller; Bulletproof; the American version of
Michelangelo Antonioni's The Passenger; and re-editing The Great Santini and
John Duigan's Romero. Among Mr. Folsey's producing credits are: An American
Werewolf in London; Trading Places; Spies Like Us; Thriller; Clue; Greedy; The
Three Amigos; Into the Night; and Grumpier Old Men. He is currently producing a
TV pilot based on the motion picture Fargo. After fifteen years of
25
<PAGE>
partnership with director John Landis, Mr. Folsey was asked, in 1988, to become
Chairman of QSound Labs, a Canadian corporation specializing in sound
enhancement and localization, where he continues to serve as a member of the
Board of Directors. Mr. Folsey also is a member of the Directors Guild of
America and a member of the Board of Directors of Paulist Productions, which
produced Romero.
Harry Shuster is the father of Brian Shuster. There are no other
relationships between the executive officers and the directors.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation for the Chief Executive
Officer of the Company. No other executive officer received remuneration in
excess of $100,000 for the fiscal year ended July 31, 1997 and July 31, 1996
(the "Named Executive"):
SUMMARY COMPENSATION TABLE
Annual
Compensation
Name and Principal Position Year Salary (1)
--------------------------- ---- ----------
Brian Shuster 1997 $129,000
President and Chief 1996 $90,000
Executive Officer 1995(2) $12,500
----------
(1) Mr. Shuster was paid as a consultant from May 1995 through March 31,
1997. See "Employment Contracts; Termination of Employment and
Change-in-Control Arrangements." Furthermore, as a consultant, Mr.
Shuster's duties included those consistent with those currently
performed as President and Chief Executive Officer. Through July 3,
1997 the Company has deferred approximately $28,000 of Mr. Shusters'
salary.
(2) The amount paid for 1995 was for the period from May 1995 through July
1996.
DIRECTOR COMPENSATION
Each non-employee director of the Company receives options to purchase
6,666 shares of Common Stock upon his election to the Board of Directors plus
reimbursement of reasonable expenses for each meeting they attend. The options
vest in equal quarterly installments on the anniversary date of the grant date
over four years. The exercise price of the options is equal to the fair market
value of the Common Stock as of the grant date.
1997 STOCK OPTION PLAN
The Company has a Stock Option Plan that is designed to provide
incentive to officers, key employees, consultants, and directors of the Company
or the Company's subsidiaries. There are 240,000 shares of Common Stock
authorized for issuance under the plan, and to date options to purchase 13,332
shares have been issued under the plan in May 1997.
Under the plan, such persons may be granted, at the discretion of the
Board or the Compensation Committee, options at an exercise price equal to at
least 100% of the fair market value of the Common Stock covered by the option on
the grant date, as determined by the Board or the Compensation Committee. In
addition, non-employee Directors of the Company are automatically granted
options to purchase 6,666 shares of Common Stock on the date they become
Directors. Options granted under the plan may be incentive stock options or
non-statutory stock options. Options granted under the plan become immediately
exercisable upon a "change of control" of the Company, as defined in the plan.
26
<PAGE>
EMPLOYMENT CONTRACTS; TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
On April 1, 1997, the Company entered into a three year employment
agreement with Brian Shuster, the Company's President, Chief Executive Officer
and a director. The agreement is for a term of three years and provides for an
annual salary of Two Hundred Six Thousand Four Hundred Dollars ($206,400),
subject to annual increases at the sole discretion of the Board of Directors.
The agreement is terminable by the Company for good cause including, but not
limited to, dishonesty, improper disclosure of confidential information, or
neglect of duties under certain circumstances. The agreement is also terminable
by Mr. Shuster for any reason upon 60 days written notice. The agreement is
binding upon any successor corporation to the Company and may have the effect of
discouraging, delaying, or preventing a change of control of the Company.
CERTAIN RELATIONSHIPS
The Company leases certain of its executive office space at a rental of
$9,477 per month, from a corporation of which Harry Shuster, the Company's
Chairman of the Board, Chief Financial Officer and Secretary, is the majority
shareholder. The Company is advised that the rental paid by the Company for its
Westwood, California executive offices is no more favorable to Mr. Shuster than
could have been obtained in a similar location from an unrelated third party.
Between June 2, 1995 and June 27, 1996, the founders of the Company
lent the Company approximately $3,184,333, of which $1,459,333 remained
outstanding at June 12, 1997. The loans were made to fund the Company's
operations and bore interest at the rate of approximately 7% per annum. On June
16, 1997 the founders agreed to exchange their loans totaling $1,459,333 for
shares of preferred stock and to forgive unpaid interest. See "Description of
Capital Stock."
In April 1996, United Leisure Corporation ("ULC") acquired a limited
partnership interest in HEP II, L.P. ("HEP II") for a capital contribution of
$1,500,000. HEP II made a capital distribution to ULC of $379,500 on July 25,
1996. As of July 31, 1997, a distribution is due ULC of approximately $143,000.
However, in August and September of 1997, the Company advanced approximately
$275,000 to ULC. These advances will be used to offset distributions due as of
July 31, 1997 of $143,038 and amounts due subsequent to July 31, 1997 to ULC as
a limited partner in HEP II. The advance paid to ULC may be deemed a preference
because a similar advance was not made to the other limited partner. See "Risk
Factors -- Conflicts of Interest." The Company is the general partner and a
limited partner of HEP II. Harry Shuster, the Chairman of the Board, Chief
Financial Officer and Secretary of the Company, is the Chairman of the Board and
the Chief Executive Officer of ULC, and Brian Shuster, the President, Chief
Executive Officer and a director of the Company, is a director of ULC. In
addition, J. Brooke Johnston, Jr. is a director of both the Company and ULC. See
"Business--Limited Partnerships."
On July 9, 1996, ULC made a loan to HEP II of $250,000, which loan was
repaid in October 1996. ULC made an additional loan to HEP II of $500,000 on
July 22, 1996, which loan was repaid on July 25, 1996.
In May 1997, the Company made loans to Grand Havana Enterprises, Inc.
(GHE), a Company of which Harry Shuster, the Company's Chairman of the Board, is
President and Chairman of the Board, aggregating approximately $500,000. The
loans are payable upon demand. The loans bear interest at prime plus 3%. As of
November 14, 1997, the loan balance was approximately $550,000. See "Risk
Factors -- Conflicts of Interest."
Certain employees of Grand Havana Enterprises, Inc. provide accounting
and financial advisory services to The Company. The Company paid in each of FY
1997 and FY 1996 approximately $24,000 to GHE for said services. The Company is
advised that the fees paid by the Company are no more favorable than could have
been obtained from an unrelated third party.
As a general rule, all transactions among the Company and its
officers, directors or 5% or greater stockholders have been, and in the future
will be, made on terms no less favorable than terms available form unaffiliated
third parties. In accordance with such policy, all agreements between the
Company and any entity in which a director, executive officer or principal
stockholder of the Company or a member of the immediate family of such person is
a director, executive officer or principal stockholder must be approved by all
disinterested directors. A "member of the immediate family" is defined as a
person's spouse, parents, children, siblings, mothers and fathers-in-law, sons
and daughters-in-law, and brothers and sisters-in-law. See "Risk
Factors--Conflicts of Interest."
27
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth certain information with respect to (i)
each director of the Company, (ii) the Named Executive, (iii) all directors and
executive officers of the Company as a group at November 19, 1997, including the
number of shares of Common Stock beneficially owned by each of them, and (iv)
each person known by the Company to own beneficially or of record more than 5%
of the outstanding shares of Common Stock. Unless otherwise indicated below, the
business address of each individual is the same as the address of the Company's
principal executive offices.
<TABLE>
<CAPTION>
Prior to the Offering After the Offering
--------------------- ------------------
Number of Number of
Shares Shares
Beneficially Beneficially
Beneficial Owner Owned Percentage(1) Owned Percentage(1)(2)
---------------- ------------ ------------- ------------ ----------------
<S> <C> <C> <C> <C>
Harry Shuster(3) 333,333 16.7% 333,333 13.3%
Brian Shuster(4) 500,000 25.0% 500,000 20.0%
J. Brooke Johnston(5) 0 * 0 *
George Folsey, Jr.(6) 0 * 0 *
Executive Officers and Directors as a Group 833,333 41.7% 833,333 33.3%
(4 people)
5% Shareholders
---------------
Stanley Shuster(7) 333,333 16.7% 333,333 16.7%
Mona Axelrod(8) 500,000 25.0% 500,000 20.0%
Nadine Belfort(9) 500,000 25.0% 500,000 20.0%
</TABLE>
- ----------
* Less than one percent.
(1) Based on 2,000,000 shares outstanding and shares issuable upon the
exercise of options or warrants that are exercisable within 60 days of
the date of this prospectus which are deemed to be outstanding for the
purpose of computing the percentage of outstanding stock owned by such
persons individually and by each group of which they are a member, but
are not deemed to be outstanding for the purpose of computing the
percentage ownership of any other person.
(2) Includes 500,000 shares to be issued in connection with this Offering,
but does not include any shares issuable upon exercise of the
Underwriter's over-allotment option.
(3) Chairman, Chief Financial Officer and Secretary of the Company. Does
not include 195,482 shares of Common Stock issuable upon conversion of
195,482 shares of Preferred Stock because such Preferred Stock is not
convertible until 90 days following the Effective Date of this
Offering.
(4) President, Chief Executive Officer and a director of the Company.
Includes 166,667 shares of Common Stock held by The Stanley Shuster
Trust of which Mr. Shuster is the sole trustee and 166,667 shares of
Common Stock held by the Bardene Shuster Klein Trust of which Mr.
Shuster is a co-trustee with Stanley Shuster. Mr. Shuster disclaims
beneficial ownership of the shares of Common Stock held by these
trusts.
(5) Director of the Company. Mr. Johnston's address is 3000 Galeria Tower,
Suite 1000, Birmingham, Alabama 35244.
(6) Director of the Company. Mr. Folsey's address is 350 North Cliffwood
Avenue, Los Angeles, California 90049-2618.
(7) Consists of 166,667 shares of Common Stock held by The Brian Shuster
Trust of which Mr. Shuster is the sole trustee and 166,667 shares of
Common Stock held by The Bardene Shuster Klein Trust of which Mr.
Shuster is a co-trustee with Brian Shuster. Mr. Shuster disclaims
beneficial ownership of the shares of Common Stock held by these
trusts. Mr. Shuster's address is 1990 Westwood Boulevard, Penthouse,
Los Angeles, California 90025
(8) Held by a trust of which the children of Jordan and Nadine Belfort are
the sole beneficiaries. Ms. Axelrod is the sole trustee as Mr. and Mrs.
Belfort disclaim beneficial ownership of the shares of Common Stock
held by this trust. Ms. Axelrod's address is 500 North Broadway, Suite
240, Jericho, New York 11753. Ms. Axelrod does not have any management
and/or consulting role with the Company.
(9) Ms. Belfort's address is 500 North Broadway, Suite 240, Jericho, New
York 11753. Does not include 128,814 shares of Common Stock issuable
upon conversion of 128,814 shares of Preferred Stock because such
Preferred Stock is not convertible until 90 days following the
Effective Date of this Offering and 500,000 shares of Common Stock held
by a trust of which Ms. Belfort's childern are the sole beneficiaries.
See Note 8. Mr. Jordan Belfort disclaims beneficial ownership of these
shares.
28
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company is authorized to issue up to 20,000,000 shares of Common
Stock, par value $0.01 per share, 2,000,000 shares of which were issued and
outstanding as of November 14, 1997 and were owned by approximately seven
holders of record. In addition, the Company is authorized to issue up to
3,000,000 shares of preferred stock, $0.01 par value (the "Preferred Stock"). As
of November 14, 1997, there were 324,296 shares of Series A Convertible
Preferred Stock authorized.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the shareholders. Subject to the rights of holders
of Preferred Stock (if there are any shares outstanding), the holders of Common
Stock are entitled to receive such dividends as may be declared from time to
time by the Board of Directors out of funds legally available therefor and in
the event of liquidation, dissolution or winding-up of the Company, to share
ratably in all assets remaining after payment of all liabilities. The holders of
Common Stock have no preemptive or conversion rights and are not subject to
further calls or assessments by the Company. There are no redemption or sinking
fund provisions applicable to the Common Stock.
PREFERRED STOCK
The Articles of Incorporation of the Company provide that the Board of
Directors may issue an aggregate of 3,000,000 shares of Preferred Stock from
time to time in one or more series. As of the date of this Prospectus, there
were 324,296 shares of Series A Convertible Preferred Stock outstanding.
The Board of Directors is authorized to determine, among other things,
with respect to each series of Preferred Stock which may be issued: (i) the
dividend rate, conditions and preferences, if any; (ii) whether dividends will
be cumulative and, if so, the date from which dividends will accumulate; (iii)
whether, and to what extent, the holders of a series will enjoy voting rights,
if any, in addition to those prescribed by law; (iv) whether and upon what
terms, a series will be convertible into or exchangeable for shares of any other
class of capital stock or other series of Preferred Stock; (v) whether, and upon
what terms, a series will be redeemable; (vi) whether a sinking fund will be
provided for the redemption of a series and, if so, the terms and conditions of
the sinking fund; and (vii) the preference if any, to which a series will be
entitled on voluntary or involuntary liquidation, dissolution or winding up of
the Company. With regard to dividends, redemption and liquidation preference,
any particular series of Preferred Stock may rank junior to, on a parity with,
or senior to any other series of Preferred Stock and Common Stock. The Board of
Directors, without shareholder approval, can issue Preferred Stock with voting
and conversion rights which could adversely affect the voting power of the
holders of Common Stock. The issuance of Preferred Stock under certain
circumstances could have the effect of delaying or preventing a change of
control of the Company or other corporate action. The Board of Directors could
issue Preferred Stock having terms that could discourage an acquisition attempt
or other transaction that some, or a majority, of the stockholders, might
believe to be in their best interests or in which stockholders might receive a
premium for their stock over the then market price of such stock.
SERIES A CONVERTIBLE PREFERRED STOCK
Each share of Series A Convertible Preferred Stock is entitled to a
liquidation preference of $4.50 per share in preference to any other class or
series of capital stock of the Company. Except as otherwise provided by
applicable law, holders of shares of Series A Convertible Preferred Stock have
no voting rights.
Commencing 90 days following the Effective Date of this Offering, the
Series A Convertible Preferred Stock shall become convertible into shares of
Common Stock on the basis of one share of Common Stock for each share of Series
A Convertible Preferred Stock (the "Conversion Ratio"). The Conversion Ratio is
at all times subject to adjustment for customary anti-dilution events such as
stock splits, stock dividends, reorganizations and certain mergers affecting the
Common Stock. The shares of Convertible Preferred Stock were authorized and
approved by the Directors and the shareholders of the Company as of June 16,
1997 and were issued in November 1997.
The Series A Convertible Preferred Stock may be redeemed in whole or in
part at any time beginning three months following the Effective Date of this
Offering, on at least 30 days' notice, at a redemption price equal to $4.50 per
share.
The holders of the Series A Convertible Preferred Stock have entered
into a lock-up agreement with the Representative and the Company pursuant to
which they have agreed not to sell or otherwise dispose of any of the Series A
Convertible Preferred Stock or the underlying Common Stock for a period of two
years from the date of this Prospectus without the prior written consent of the
Representative and the Company. See "-- See Shares Eligible for Future Sale."
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Oxford
Transfer & Registrar, Portland, Oregon.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering, there has been no public market for the Common
Stock. Sales of substantial amounts of shares of Common Stock in the public
market could adversely affect market prices of the shares and make it more
difficult for the Company to sell equity securities in the future at a time and
price it deems appropriate.
Upon completion of the Offering, there will be 2,500,000 shares of
Common Stock outstanding, excluding an aggregate of 240,000 shares reserved for
issuance pursuant to the Company's 1997 Stock Option Plan. Of these shares, the
500,000 shares sold in this Offering will be freely tradeable without
restriction or further registration under the Securities Act of 1933, as
amended, (the "Securities Act"), except for any such shares purchased by an
"affiliate" of the Company, which will be subject to the resale limitations of
Rule 144 under
29
<PAGE>
the Securities Act. As defined in Rule 144, an affiliate of the issuer is a
person who, directly or indirectly, through one or more intermediaries,
controls, is controlled by, or is under common control with, such issuer, and
generally includes members of the Board of Directors and senior management.
The 2,000,000 shares outstanding as of the date of this Prospectus and
the 240,000 shares issuable upon exercise of stock options that have been or may
be granted under the 1997 Stock Option Plan are "restricted shares" as defined
in Rule 144 under the Securities Act ("Rule 144") (collectively, the "Restricted
Shares") and may not be sold without registration under the Securities Act
unless pursuant to an applicable exemption therefrom. In addition, the Company
expects to register under the Securities Act the shares reserved for issuance
under the 1997 Stock Option Plan.
In general, Rule 144 allows a stockholder who has beneficially owned
Restricted Shares for at least one year (including persons who may be deemed
"affiliates" of the Company under Rule 144) to sell a number of shares within
any three-month period that does not exceed the greater of (i) one percent of
the then outstanding shares of Common Stock (approximately 25,000 shares after
giving effect to this Offering) or (ii) the average weekly trading volume in the
Common Stock during the four calendar weeks immediately preceding such sale.
Sales under Rule 144 are also subject to certain requirements as to the manner
and notice of sale and the availability of public information about the Company.
A stockholder who is not an "affiliate" of the Company at any time during the 90
days immediately preceding a sale, and who has beneficially owned his shares for
at least two years (as computed under Rule 144), is entitled to sell such shares
under Rule 144 without regard to the volume and manner of sale limitations
described above. Rule 144A under the Securities Act permits the immediate sale
by the current holders of Restricted Shares of all or a portion of their shares
to certain qualified institutional buyers, as defined in Rule 144A.
Notwithstanding the above, the holders of 2,000,000 shares of Common Stock and
324,296 shares of Preferred Stock have agreed with the Representative and the
Company not to sell or otherwise dispose of their shares of Common Stock without
the prior written consent of the Representative and the Company for a period of
two years from the date of this Prospectus. See "Underwriting."
In addition, subject to certain limitations on the aggregate offering
price of a transaction and other conditions, Rule 701 may be relied upon with
respect to the resale of securities originally purchased from the Company by its
employees, directors, officers, consultants, or advisers prior to the date the
issuer becomes subject to the reporting requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), pursuant to written compensatory
benefit plans or written contracts relating to the compensation of such persons.
The Securities and Exchange Commission has also indicated that Rule 701 will
apply to stock options granted by an issuer before it becomes subject to the
reporting requirements of the Exchange Act, along with the shares acquired upon
the exercise of such options (including exercises after the date of this
Prospectus). Securities issued in reliance on Rule 701 are restricted securities
and, subject to the contractual restrictions described above, beginning 90 days
after the date of this Prospectus, may be sold by persons other than affiliates
subject only to the manner of sale provisions of Rule 144 and by affiliates
under Rule 144 without compliance with its one-year minimum holding period
requirement. As of the date of this Prospectus, options to purchase 13,332
shares were issued and outstanding as to which Rule 701 may apply.
DELAWARE ANTI-TAKEOVER LAW
The Company is governed by the provisions of Section 203 of the General
Corporation Law of the State of Delaware (the "GCL"), an anti-takeover law. In
general, the law prohibits a public Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
"Business combinations" includes mergers, asset sales and other transactions
resulting in a financial benefit to the stockholder. An "interested stockholder"
is a person who, together with its affiliates and associates, owns (or within
three years, did own) 15% or more of the corporation's voting stock.
The provisions regarding certain business combinations under the GCL
could have the effect of delaying or preventing a change in control of the
Company or the removal of existing management. A takeover transaction frequently
affords stockholders the opportunity to sell their shares at a premium over
current market prices.
30
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in the underwriting
agreement between the Company and the Underwriters named below, for which
Millennium Securities Corp. is acting as Representative (a copy of which
agreement is filed as an exhibit to the Registration Statement of which this
Prospectus forms a part), the Company has agreed to sell to each of the
Underwriters named below, and each of such Underwriters has severally agreed to
purchase, the number of shares of Common Stock set forth opposite its name. All
500,000 shares of Common Stock offered must be purchased by the several
Underwriters if any are purchased. The shares of Common Stock are being offered
by the Underwriters subject to prior sale, when, as and if delivered to and
accepted by the Underwriters and subject to approval of certain legal matters by
counsel and certain other conditions.
Underwriter No. of Shares
----------- -------------
Millennium Securities Corp.
Total 500,000
The Representative has advised the Company that the Underwriters
propose to offer the shares of Common Stock to the public at the offering prices
set forth on the cover page of this Prospectus. The Representative has further
advised the Company that the Underwriters propose to offer the Common Stock
through members of the National Association of Security Dealers, Inc. (the
"NASD"), and may allow a concession, in their discretion, to certain dealers who
are members of the NASD and who agree to sell the Common Stock in conformity
with the NASD Conduct Rules. Such concessions shall not exceed the amount of
underwriting discount that the Underwriters are to receive.
Officers and directors of the Company may introduce the Representative
to persons to consider this Offering and purchase shares of Common Stock either
through the Representative, other Underwriters, or through participating
dealers. In this connection, officers and directors will not receive any
commissions or any other compensation. The Representative has not reserved any
portion of this Offering to cover sales to referrals from officers and Directors
of the Company.
The Company has agreed to pay to the Underwriters a commission of ten
percent (10%) of the gross proceeds of the Offering, including the gross
proceeds from the sale of the Over-Allotment Option, if exercised. In addition,
the Company has agreed to pay to the Representative a non-accountable expense
allowance of three percent (3%) of the gross proceeds of this Offering. The
Company has paid to the Representative a $50,000 advance in respect of such
non-accountable expense allowance. The Representative's expenses in excess of
its non-accountable expense allowance will be paid by the Representative. To the
extent that the expenses of the Representative are less than the amount of the
non-accountable expense allowance received, such excess shall be deemed to be
additional compensation to the Representative.
Upon consummation of this Offering, the Company has agreed to sell to
the Representative or its designees the Representative's Purchase Option to
purchase 50,000 shares at an exercise price of $7.20 per share or 120% of the
public offering price per share of the common stock offered hereby, for a period
of four-years commencing on the date hereof. The Representative's Warrants
cannot be transferred, sold, assigned or hypothecated during the first 12 months
following the date of this Prospectus, except (i) among the officers and/or
directors of the Representative, and at the discretion of the Representative to
selected dealers participating in this Offering or their principals; (ii) by
will; or (iii) by operation of law. The Representative's Warrants may be
exercised in whole or in part at any time in the four-year period commencing one
year from the date of this Prospectus. Any profit realized upon any resale of
the underlying securities thereof may be deemed to be an additional
underwriter's compensation. The Company has agreed to register (or file a
post-effective amendment with respect to any registration statement registering)
the securities underlying the Representative's Purchase Option under the
Securities Act at its expense on one occasion during the four years following
the date of this Prospectus and at the expense of the holders thereafter. The
Company has also agreed to "piggyback" registration rights for the securities
underlying the Representative's Purchase Option at the Company's expense during
the (5) five years following the date of this Prospectus. As long as the
Representative's Warrants are outstanding, the Company may find it more
difficult to raise additional equity capital. At any time at which the
Representative's Warrants are likely to be exercised, the Company would probably
be able to obtain additional equity capital on more favorable terms.
The Company has agreed to engage the Representative as its investment
banker for a period of twelve (12) months on the first day of the month
following the closing of the Offering at an aggregate fee of $5,000 for eight
months for a total of $40,000. The Representative also has agreed, at the
Company's request, to provide advice and consulting services to the Company
concerning potential merger and acquisition and financing proposals, whether by
public financing or otherwise. The Company has agreed, at the closing of the
Offering, to enter into a merger and acquisition agreement with the
Representative. The merger and acquisition agreement will provide that the
Representative will be paid a finder's fee of five (5%) percent of the first
$5,000,000, four (4%) of next $5,000,000 and 3% of the excess, if any, over
$10,000,000 of the consideration received or paid to the other party by the
Company in any such transactions.
Holders of 2,000,000 shares of Common Stock and 324,296 shares of
Preferred Stock have agreed not to sell any of such stock for a period of 24
months from the Effective Date, without the prior written consent of the
Representative and the Company. The Representative and the Company may, in their
absolute discretion and at any time without notice, release all or any portion
of the securities subject to the lock-up agreements. See "Description of Capital
Stock--Shares Eligible for Future Sale."
The Company has agreed to indemnify the Underwriters against any costs
or liabilities incurred by the Underwriters by reason of misstatements or
omissions to state material facts in connection with the statements made in the
Registration Statement and the Prospectus. The Underwriters have in turn agreed
to indemnify the Company against any liabilities by reason of misstatements or
omissions to state material facts in connection with the statements made in the
Registration Statement, of which this Prospectus is a part, based on information
relating to the Underwriters and furnished in writing by the Underwriters. To
the extent that these provisions may purport to provide exculpation from
possible liabilities arising under the federal securities laws, in the opinion
of the Securities and Exchange Commission, such indemnification is contrary to
public policy and therefore unenforceable.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to copies
of each such agreement, which are filed as exhibits to the Registration
Statement. See "Additional Information."
PRICING OF THE OFFERING
Prior to this Offering, there has been no public trading market for the
Common Stock. Consequently, the initial offering price of the shares of Common
Stock has been determined by negotiations between the Company and the
Representative. Among the factors considered in determining the offering price
were the financial condition and prospects of the Company, the industry in which
the Company is engaged, certain financial and operating information of companies
engaged in activities similar to those of the Company and the general market
condition of the securities markets. The offering price does not necessarily
bear any relationship to any established standard or criteria of value based
upon assets, earnings, book value or other objective measures.
31
<PAGE>
The Company anticipates that the Common Stock will be listed for
quotation on the NASD Electronic Bulletin Board under the symbol "HITS," but
there can be no assurance that an active trading market will develop, even if
the Common Stock is accepted for quotation. The Underwriters intend to make a
market in the Common Stock.
CERTAIN PROVISIONS OF THE COMPANY'S
ARTICLES OF INCORPORATION AND BYLAWS
The Company's Articles of Incorporation provide that the liability of
directors for monetary damages shall be limited to the fullest extent
permissible under Delaware law. The Articles of Incorporation and the Company's
Bylaws provide for indemnification of its officers and Directors to the fullest
extent permitted under Delaware law. See "Risk Factors--Limitation on Director
Liability."
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered
hereby will be passed upon for the Company by the law firm of Richman, Lawrence,
Mann, Greene, Chizever & Phillips, Beverly Hills, California. The law firm of
Beckman & Millman, P.C., New York, New York will pass upon certain aspects of
this Offering on behalf of the Underwriters.
EXPERTS
The audited financial statements of the Company as of July 31, 1996 and
1997 and for the fiscal years then ended are included herein and in the
registration statement in reliance upon the report of Moore Stephens, P.C.,
certified public accountants, as indicated in the reports with respect thereto,
and are included herein in reliance upon the authority of said firm as experts
in accounting and auditing.
32
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors of
United Film Distributors, Inc.
Los Angeles, California
We have audited the accompanying consolidated balance sheet of United Film
Distributors, Inc. and its subsidiaries as of July 31, 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the two fiscal years in the period then ended. 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 audit 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, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
United Film Distributors, Inc. and its subsidiaries as of July 31, 1997, and the
consolidated results of their operations and their cash flows for each of the
two fiscal years in the period then ended in conformity with generally accepted
accounting principles.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
November 7, 1997
F-1
<PAGE>
UNITED FILM DISTRIBUTORS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET AS OF JULY 31, 1997.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Cash $ 800,253
Prepaid and Other Assets 164,624
Due from Affiliates 57,000
Film Costs - Net 5,832,029
Equipment - Net 53,876
----------------
TOTAL ASSETS $ 6,907,782
================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts Payable $ 536,536
Accrued Expenses 271,695
Income Taxes Payable 149,216
Deferred Revenue 264,192
Due to Stockholder 28,200
----------------
TOTAL LIABILITIES 1,249,839
----------------
COMMITMENT AND CONTINGENCIES [8] [5E] --
----------------
MINORITY INTEREST 1,793,704
----------------
STOCKHOLDERS' EQUITY:
Preferred Stock, Authorized 3,000,000 Shares:
Series A Convertible Preferred, Par Value $.01,
which are redeemable at $4.50,
Issued and Outstanding 324,296 Shares [12C] 3,243
Preferred Stock-Paid in Capital redemption value 1,456,090
Common Stock, Authorized 20,000,000 Shares, Issued
and Outstanding 2,000,000 Shares, Par Value $.01 20,000
Common Stock - Paid in Capital 2,225,478
Retained Earnings 159,428
----------------
TOTAL STOCKHOLDERS' EQUITY 3,864,239
----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,907,782
================
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated
Financial Statements.
F-2
<PAGE>
UNITED FILM DISTRIBUTORS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED
JULY 31,
1 9 9 7 1 9 9 6
------- -------
<S> <C> <C>
REVENUES:
Revenues - Completed Film Contracts $ 6,171,237 $ 2,626,000
---------------- ---------------
EXPENSES:
General and Administrative Expenses 712,234 439,769
Film Festivals 34,779 252,753
Rent - Related Party 85,293 49,380
Depreciation on Equipment 12,650 12,653
Amortization - Film Cost 5,401,303 1,609,466
---------------- ---------------
TOTAL EXPENSES 6,246,259 2,364,021
---------------- ---------------
OPERATING [LOSS] INCOME (75,022) 261,979
---------------- ---------------
INCOME AND [EXPENSES]:
Interest Income - Related Party 7,000 --
Interest Income -- 11,608
Interest Expense -- (12,936)
Interest Expense - Related Party (60,774) (114,037)
Other Income -- 35,730
---------------- ---------------
OTHER [EXPENSES] - NET (53,774) (79,635)
---------------- ---------------
[LOSS] INCOME BEFORE MINORITY INTEREST (128,796) 182,344
MINORITY INTEREST 374,420 (87,795)
---------------- ---------------
INCOME BEFORE INCOME TAXES 245,624 94,549
[PROVISION] FOR INCOME TAXES (122,560) (26,657)
---------------- ---------------
NET INCOME $ 123,064 $ 67,892
================ ===============
NET INCOME PER SHARE $ .06 $ .04
================ ===============
WEIGHTED AVERAGE NUMBER OF SHARES 2,056,988 1,563,229
================ ===============
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated
Financial Statements.
F-3
<PAGE>
UNITED FILM DISTRIBUTORS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SERIES A CONVERTIBLE
PREFERRED STOCK COMMON STOCK
--------------- ------------ TOTAL
NUMBER OF PAID IN NUMBER OF PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- ------ ------- --------- ------ ------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE - JULY 31, 1995 -- $ -- -- 666,667 $ 6,667 $ 46,666 $ (31,528) $ 21,805
Issuance of Common Stock
September 1995 -- -- -- 666,667 6,667 46,666 -- 53,333
Issuance of Common Stock
October 1995 -- -- -- 229,125 2,291 672,709 -- 675,000
Issuance of Common Stock
November 1995 -- -- -- 92,329 923 271,077 -- 272,000
Issuance of Common Stock
February 1996 -- -- -- 118,804 1,188 348,812 -- 350,000
Issuance of Common Stock
March 1996 -- -- -- 59,402 594 174,406 -- 175,000
Issuance of Common Stock
June 1996 -- -- -- 167,006 1,670 490,330 -- 492,000
Net Income for the year ended
July 31, 1996 -- -- -- -- -- -- 67,892 67,892
----------- ----------- ---------- --------- --------- ------------ ---------- -----------
BALANCE - JULY 31, 1996 -- -- -- 2,000,000 20,000 2,050,666 36,364 2,107,030
Conversion of Debt into
Equity - June 16, 1997 324,296 3,243 1,456,090 -- -- -- -- 1,459,333
Forgiveness of Interest -
Shareholders - June 1997 -- -- -- -- -- 174,812 -- 174,812
Net Income for the year
ended July 31, 1997 -- -- -- -- -- -- 123,064 123,064
----------- ----------- ---------- --------- --------- ------------ ---------- -----------
BALANCE - JULY 31, 1997 324,296 $ 3,243 1,456,090 2,000,000 $ 20,000 $ 2,225,478 $ 159,428 $ 3,864,239
=========== =========== ========== ========= ========= ============ ========== ===========
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated
Financial Statements.
F-4
<PAGE>
UNITED FILM DISTRIBUTORS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED
JULY 31,
1 9 9 7 1 9 9 6
------- -------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 123,064 $ 67,892
---------------- ---------------
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Amortization of Film Costs 5,401,303 1,609,466
Depreciation 12,650 12,653
Minority Interest (374,420) 87,795
Forgiveness of Interest - Shareholders 174,811 --
Changes in Assets and Liabilities:
[Increase] Decrease in:
Prepaid Expenses (161,196) (7,556)
Deposits from Film Contracts 341,501 (341,501)
Equipment Purchases -- (79,179)
Due from Related Party (67,200) --
Increase [Decrease] in:
Accounts Payable/Accrued Expenses 83,708 187,987
Accrued Interest (114,037) 114,037
Income Taxes Payable 122,560 26,657
Deferred Income (243,856) 508,050
Due to Stockholder 28,200 --
---------------- ---------------
Total Adjustments 5,204,024 2,118,409
---------------- ---------------
NET CASH - OPERATING ACTIVITIES 5,327,088 2,186,301
---------------- ---------------
INVESTING ACTIVITIES:
Film Costs (2,033,013) (10,809,785)
---------------- ---------------
FINANCING ACTIVITIES:
Cash Overdraft (160,687) 160,687
Investments by Limited Partners 49,542 4,050,000
Payments made to Limited Partners (1,482,677) --
Advances to/from Related Party -- 14,325
Advances from Stockholders 100,000 1,912,666
Collection on Stock Subscription -- 2,017,334
Repayment of Advances from Stockholders (1,000,000) --
---------------- ---------------
NET CASH - FINANCING ACTIVITIES (2,493,822) 8,155,012
---------------- ---------------
NET INCREASE [DECREASE] IN CASH - FORWARD $ 800,253 $ (468,472)
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated
Financial Statements.
F-5
<PAGE>
UNITED FILM DISTRIBUTORS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED
JULY 31,
1 9 9 7 1 9 9 6
------- -------
<S> <C> <C>
NET INCREASE [DECREASE] IN CASH - FORWARDED $ 800,253 $ (468,472)
CASH - BEGINNING OF YEARS -- 468,472
---------------- ---------------
CASH - END OF YEARS $ 800,253 $ --
================ ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the years for:
Interest $ -- $ 12,936
Income Taxes $ -- $ --
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
In June of 1997, two entities agreed to convert an aggregate of $1,459,333 of
debt to 324,296 shares of preferred stock. In addition, these entities agreed to
forgive accumulated interest owed to them of approximately $175,000, which the
Company has classified as paid-in capital.
The Accompanying Notes are an Integral Part of These Consolidated
Financial Statements.
F-6
<PAGE>
UNITED FILM DISTRIBUTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
[1] ORGANIZATION AND OPERATIONS
United Film Distributors, Inc. [formerly Hit Entertainment, Inc.] [the
"Company"] was incorporated under the laws of the State of Delaware on May 10,
1995. The Company is engaged in the development, production, and distribution of
motion pictures on a world-wide basis.
[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial statements
include the accounts of the Company and its subsidiaries Hit Productions, United
Film Distributors, HEP I, L.P. and HEP II, L.P. Amounts invested by and income
attributable to third party limited partners HEP I, L.P. and HEP II, L.P. are
presented as minority interest in the accompanying financial statements. All
other significant intercompany accounts and transactions have been eliminated in
consolidation.
REVENUE RECOGNITION - Amounts received as fees for projects in production are
deferred until the project becomes available for release in accordance with the
terms of the agreement and are recognized as revenues at such time. Revenues
from the sale of completed productions are recognized upon their sale. Funds
received in advance of release dates or delivery of film elements are recorded
as deferred revenue.
CASH EQUIVALENTS - The Company considers all highly liquid debt instruments
purchased with a maturity of three months or less to be cash equivalents. The
Company did not have any cash equivalents at July 31, 1997.
CONCENTRATION OF CREDIT RISK - Financial instruments that potentially subject
the Company to significant concentrations of credit risk consist principally of
cash. The Company places its cash with high credit quality financial
institutions. At times the cash in any one bank may exceed the FDIC $100,000
limit. At July 31, 1997, there was approximately $742,600 in financial
institutions which was subject to such risk. The Company does not require
collateral or other security to support financial instruments subject to credit
risk.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FILM COSTS AND AMORTIZATION - Film costs include the cost of completed projects,
costs of projects in production and costs expended on projects in development.
Film costs are stated at the lower of amortized cost or estimated net realizable
value. Amortization of completed projects is charged to operations on an
individual project basis in a ratio that the current year's revenue bears to
management's estimate of total revenues [current and future years] from all
sources. This is commonly referred to as the individual-film-forecast method.
Adjustments of amortization resulting from changes in estimates of total
revenues are recognized in the current year's amortization. When a completed
project is fully amortized, its cost and related accumulated amortization are
removed from the accounts. If, in the opinion of management, any property in the
development stage is not planned for use, the net carrying value of such
property is charged to current year's operations.
DEPRECIATION AND AMORTIZATION - Depreciation and amortization of fixed assets
[consisting of furniture, and computer equipment] is provided on the
straight-line method over the estimated useful lives of the related assets which
range from three to seven years.
F-7
<PAGE>
UNITED FILM DISTRIBUTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #2
- --------------------------------------------------------------------------------
[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED]
STOCK OPTIONS ISSUED TO EMPLOYEES - The Company adopted Statement of Financial
Accounting Standards ["SFAS"] No. 123, "Accounting for Stock-Based Compensation"
on January 1, 1996 for financial statement note disclosure purposes and will
continue to apply the intrinsic value method of Accounting Principles Board
["APB"] Opinion No. 25, "Accounting for Stock Issued to Employees" for financial
reporting purposes.
OPERATIONS IN FOREIGN COUNTRIES - The Company is subject to numerous factors
relating to conducting business in a foreign country [including, without
limitation, economic, political and currency risks] any of which could have a
significant impact on the Company's operations.
MINORITY INTEREST - Minority interest represents the amount invested by outside
parties for the financing of certain films through the Company's two limited
partnership subsidiaries. Minority interests consists of the following:
Investments by Limited Partners $ 4,050,000
Minority Interest Share of Operations 87,795
----------------
MINORITY INTEREST AT JULY 31, 1996 4,137,795
----------------------------------
Investment by Limited Partners 49,542
Minority Interest Share of Operations (374,420)
Disbursements made Limited Partners (1,482,677)
Disbursement Payable to Limited Partners (536,536)
----------------
MINORITY INTEREST AT JULY 31, 1997 $ 1,793,704
---------------------------------- ================
EARNINGS PER SHARE - Earnings per share are computed based on the weighted
average number of shares outstanding during each period presented. Common stock
equivalents are included in the computation when there effect is considered
dilutive.
[3] EQUIPMENT
Equipment at July 31, 1997 consists of the following:
Computer Equipment $ 23,432
Office Equipment 55,746
--------------
Totals 79,178
Less: Accumulated Depreciation (25,302)
--------------
TOTAL - NET $ 53,876
----------- ==============
Depreciation expense for the years ended July 31, 1997 and 1996 was $12,650 and
$12,653, respectively.
F-8
<PAGE>
UNITED FILM DISTRIBUTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #3
- --------------------------------------------------------------------------------
[4] FILM COSTS
Film costs at July 31, 1997 consist of the following:
Completed Projects $ 12,266,522
Less: Accumulated Amortization 7,010,771
--------------
Net of Amortization 5,255,751
Productions in Progress 576,278
--------------
TOTAL $ 5,832,029
----- ==============
Based on management's present estimate of future revenues at July 31, 1997,
substantially all of the unamortized costs of completed projects will be
amortized by July 31, 1998.
[5] RELATED PARTY TRANSACTIONS
[A] LEASES - The Company leases office space from a related party, an entity
whose major stockholder is also a major stockholder of the Company. The rent
expense for the related party lease for the years ended July 31, 1997 and 1996
was $125,700 and $103,000, respectively [See Note 8].
[B] ADVANCES AND EQUITY TRANSACTIONS - For the years ended June 30, 1995, the
Company received $446,667 in advances from two stockholders to fund its
operations and $53,333 from one stockholder for 666,667 shares of common stock
as a founder of the Company.
For the year ended June 30, 1996, the Company received an additional $1,912,666
in advances from two stockholders and received an additional $2,017,333 for an
additional 1,333,333 shares of common stock, which includes 666,667 shares of
common stock to the second shareholder as a founder of the Company.
For the year ended July 30, 1997, the Company received an additional $100,000 in
advances from one stockholder and repaid $1,000,000 in advances to the two
founders and stockholders of the Company through January 10, 1997. Therefore,
cumulative net advances through January 10, 1997 were $1,459,333. On June 16,
1997, this liability was converted to 324,296 shares of preferred stock.
In addition, the Company incurred interest expense for the years ending July 31,
1997 and 1996 of $114,038 and $60,774, respectively. The total interest of
$174,812 due to the two stockholders was forgiven in June of 1997 and classified
as paid-in capital. Interest was calculated at approximately 7%.
[C] MINORITY INTEREST - A related party, an entity whose major stockholder is
also a major stockholder of the Company, is an investor in one of the Company's
consolidated limited partnerships. This entity invested $1,500,000 and received
disbursements of approximately $379,000, pursuant to the terms of the limited
partnership agreement through July 31, 1997. There was an additional $143,048 of
disbursements made or to be made at July 31, 1997. The net investment is
presented as minority interest in the accompanying balance sheet.
[D] COSTS - The Company paid approximately $2,000 a month in fiscal 1997 and
1996 to an affiliated entity of one major stockholder, who is Chairman and Chief
Financial Officer of the Company, for accounting services performed for the
Company.
F-9
<PAGE>
UNITED FILM DISTRIBUTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #4
- --------------------------------------------------------------------------------
[5] RELATED PARTY TRANSACTIONS [CONTINUED]
[E] DUE FROM AFFILIATE - On May 1, 1997, the Company agreed to make periodic
loans of up to $1,000,000 to an affiliated entity which is owned by a major
stockholder of the Company who is also the Company's Chairman and Chief
Financial Officer. The loan will bear interest at prime plus 3%. The full
principal amount advanced, and all accrued but unpaid interest thereon, shall be
payable in one lump sum payment on demand, which demand shall not be made prior
to November 1, 1998. In May of 1997, the Company advanced $500,000 to this
entity. As of July 30, 1997, the loan balance including interest was $507,000.
The Company received $450,000 on July 31, 1997 leaving balance due from the
affiliated entity of $57,000 at July 31, 1997 [See Note 16C].
[6] FAIR VALUE OF FINANCIAL INSTRUMENTS
At its inception, the Company adopted SFAS No. 107, fair value of financial
instruments which requires disclosing fair value to the extent practicable for
financial instruments which are recognized or unrecognized in the balance sheet.
The fair value of the financial instruments disclosed therein is not necessarily
representative of the amount that could be realized or settled, nor does the
fair value amount consider the tax consequences of realization or settlement.
For certain financial instruments, including cash, due from affiliates and
accounts payables and accrued expenses, the carrying amount approximates fair
value because of the near term maturities of such obligations.
[7] INCOME TAXES
Temporary differences between financial reporting and tax bases of assets and
liabilities related to depreciation, vacation and sick pay accruals for the
periods presented are considered to be immaterial.
Provision for income taxes has been made as follows:
Year ended
July 31,
1 9 9 7 1 9 9 6
------- -------
Income Before Income Taxes $ 245,623 $ 94,548
Net Operating [Loss] Carryforward -- (31,528)
------------ ------------
TAXABLE INCOME $ 245,623 $ 63,020
-------------- ============ ============
Federal Income Tax $ (104,175) $ (20,840)
State Income Tax (18,385) (5,817)
------------ ------------
TOTAL INCOME TAX [EXPENSE] $ (122,560) $ (26,657)
-------------------------- ============ ============
A reconciliation between the statutory federal income tax rate and the effective
income tax rates is as follows:
Years ended
July 31,
1 9 9 7 1 9 9 6
------- -------
Statutory Federal Income Tax Rate 33.0% 34.0%
State and Local Taxes, Net of Federal Tax Benefits 9.2% 9.2%
Net Operating [Loss] Carryforward --% (15.0)%
Permanent Differences 7.7% --
--------- ---------
EFFECTIVE INCOME TAX RATE 49.9% 28.2%
------------------------- ========= =========
F-10
<PAGE>
UNITED FILM DISTRIBUTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #5
- --------------------------------------------------------------------------------
[8] COMMITMENTS AND CONTINGENCIES
The Company leases offices from a related party at a monthly rental of $9,477
per month. The various lease terms expire between June 30, 1998 and June 30,
2001 [See Note 5].
Future minimum lease payments are as follows:
1998 $ 119,075
1999 46,200
2000 46,200
2001 46,200
2002 42,350
Thereafter --
------------
TOTAL $ 300,025
----- ============
Total rent expense for the year ended July 31, 1997 and 1996 amounted to
$148,541 and $147,747 of which $63,248 and $98,123, respectively, was
capitalized into film costs.
[9] SIGNIFICANT CUSTOMERS
For the years ended July 31, 1997, revenue from three customer amounted to
$2,515,000, $645,000 and $825,000 or 41%, 10% and 13% of total revenues.
Revenues from two customers accounted for $1,225,000 and $275,000, or 47% and
10%, respectively, of total revenues for the year ended July 31, 1996.
[10] FOREIGN SALES
Export sales for the years ended July 31, 1997 and 1996, are principally
concentrated in the following areas:
Years ended
July 31,
1 9 9 7 1 9 9 6
------- -------
Asia $ 773,290 $ 486,000
South America $ 148,500 $ 275,000
Europe $ 1,650,815 $ 495,500
These amounts collectively account for 42% and 48%, respectively, of total
revenues for the years ended July 31, 1997 and 1996.
[11] STOCK OPTION PLANS
In May of 1997, the Board of Directors adopted the 1997 Stock Option Plan,
whereby, the aggregate number of shares which may be issued upon exercise of
options shall not exceed 240,000 shares. Any nonemployee director, employee or
consultant of the Company shall be eligible to be granted options. The Plan is
administered by the Board of Directors or a committee which has the power to
determine eligibility to receive options and the terms of any options granted,
including the exercise or purchase price, the number of shares subject to the
options, the vesting schedule, and the exercise period. On May 28, 1997, the
Board of Directors granted two outside directors 6,666 options each at an
exercise price of $7.50 per share.
F-11
<PAGE>
UNITED FILM DISTRIBUTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #6
- --------------------------------------------------------------------------------
[11] STOCK OPTION PLANS [CONTINUED]
The following is a summary of the status of the fixed plan [nonperformance
based]:
Number of Exercise
Shares Price
Outstanding at August 1, 1996 -- $ --
Granted 13,332 7.50
Exercised -- --
Forfeited -- --
--------------- --------------
OUTSTANDING AT JULY 31, 1997 13,332 $ 7.50
---------------------------- =============== ==============
OPTIONS EXERCISABLE AT JULY 31, 1997 3,333 7.50
------------------------------------ =============== ==============
The exercise prices for the options outstanding at July 31, 1997 is $7.50 with a
vesting period of four years and a contractual life of ten years. The Company
estimates that approximately 100% of such options will eventually vest.
Had compensation cost for the stock option granted been determined based on the
fair value at the grant dates for awards under the plans, consistent with the
alternative method set forth under Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation," the Company's net
income and net income per share would have been decreased by $36,886, and $.02
per share. The pro forma amounts for the year ended July 31, 1997 are indicated
below (in thousands, except per share amounts):
Net Income:
As Reported $ 123,064
Pro Forma $ 86,178
Net Income Per Share:
As Reported $ .06
Pro Forma $ .04
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option- pricing model with the following weighted-average
assumptions used for grants in 1997, dividend yields of $-0- for each year,
expected volatility of approximately 28% for each year; risk-free interest rates
of 5.97 percent; and expected life of 5 years. The weighted-average fair value
of options granted was $2.77 for the year ended July 31, 1997.
[12] STOCKHOLDERS' EQUITY
[A] STOCK SPLIT - In May of 1997, the Company declared a five-for-one stock
split. All share data has been retroactively restated for the split [See Note
16A].
[B] CONVERSION OF DEBT TO EQUITY AND FORGIVENESS OF INTEREST - In June 16 1997,
two stockholders and the Company agreed to convert an aggregate of $1,459,333 of
debt to 324,296 shares of preferred stock. In addition, these entities agreed to
forgive accumulated interest owed to them of approximately $175,000, which the
Company has classified as paid-in capital [See Note 5].
F-12
<PAGE>
UNITED FILM DISTRIBUTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #7
- --------------------------------------------------------------------------------
[12] STOCKHOLDERS' EQUITY [CONTINUED]
[C] PREFERRED STOCK - The Articles of Incorporation of the Company provide that
the Board of Directors may issue an aggregate of 3,000,000 shares of preferred
stock from time to time in one or more series. At July 31, 1997, there were
324,296 shares of Series A convertible preferred stock outstanding subject to
issuance. Such shares were issued in December of 1997 following filing the of
Certificate of Designation with the State of Delaware.
Each share of Series A convertible preferred stock is entitled to a liquidation
preference of $4.50 per share in preference to any other class or series of
capital stock of the Company. Except as otherwise provided by applicable law,
holders of shares of Series A convertible preferred stock have no voting rights
and are not entitled to receive dividends.
Commencing 90 days following the effective date of a proposed public offering,
the Series A convertible preferred stock shall become convertible into shares of
common stock on the basis of one share of common stock for each share of Series
A convertible preferred stock [the "Conversion Ratio"]. The Conversion Ratio is
at all times subject to adjustment for customary anti-dilution events such as
stock splits, stock dividends, reorganizations and certain mergers affecting the
common stock. The shares of convertible preferred stock were authorized and
approved by the Directors and the shareholders of the Company as of June 16,
1997.
The Series A convertible preferred stock may be redeemed in whole or in part at
the option of the Company at any time beginning three months following the
effective date of an initial public offering, on at least 30 days' notice, at a
redemption price equal to $4.50 per share.
The holders of the Series A convertible preferred stock have entered into a
lock-up agreement with the Company and the underwriter of a proposed initial
public offering pursuant to which they have agreed not to sell or otherwise
dispose of any of the Series A convertible preferred stock or the underlying
common stock for a period of two years from November 1997 without the prior
written consent of the Company and the Underwriter of the proposed initial
public offering [See Note 16A].
[13] EMPLOYMENT AGREEMENTS
On April 1, 1997, the Company entered into a three year employment agreement
with the Company's president and chief executive officer and a director. The
agreement is for a term of three years and provides for an annual salary of
$206,400 subject to annual increases at the sole discretion of the Board of
Directors. As of July 31, 1997, the Company has deferred approximately $28,200
of salary to this officer and has classified this liability as Due to
Stockholder.
[14] NEW AUTHORITATIVE PRONOUNCEMENT
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings Per Share," and SFAS No. 129,
"Disclosure of Information about Capital Structure" in February 1997. SFAS No.
128 simplifies the earnings per share ["EPS"] calculations required by
Accounting Principles Board ["APB"] Opinion No. 15, and related interpretations,
by replacing the presentation of primary EPS with a presentation of basic EPS.
SFAS No. 128 requires dual presentation of basic and diluted EPS by entities
with complex capital structures. Basic EPS includes no dilution and is computed
by dividing income available to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution of securities that could share in the earnings of an entity,
similar to the fully diluted EPS of APB Opinion No. 15. SFAS No. 128 is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods; earlier application is not permitted. When
adopted, SFAS No. 128 will require restatement of all prior-period EPS data
presented; however, the Company has not sufficiently analyzed SFAS No. 128 to
determine what effect SFAS No. 128 will have on its historically reported EPS
amounts.
F-13
<PAGE>
UNITED FILM DISTRIBUTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #8
- --------------------------------------------------------------------------------
[14] NEW AUTHORITATIVE PRONOUNCEMENT [CONTINUED]
SFAS No. 129 does not change any previous disclosure requirements, but rather
consolidates existing disclosure requirements for ease of retrieval.
The FASB has issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130
is effective for fiscal years beginning after December 15, 1997. Earlier
application is permitted. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. SFAS No. 130 is not
expected to have a material impact on the Company.
The FASB has issued SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information." SFAS No. 131 changes how operating segments are
reported in annual financial statements and requires the reporting of selected
information about operating segments in interim financial reports issued to
shareholders. SFAS No. 131 is effective for periods beginning after December 15,
1997, and comparative information for earlier years is to be restated. SFAS No.
131 need not be applied to interim financial statements in the initial year of
its application. SFAS No. 131 is not expected to have a material impact on the
Company.
[15] LITIGATION
[A] In fiscal year 1997, the Company filed a lawsuit against one of its
customers for not accepting delivery of a film, as per contract. The lawsuit
claimed fraud, breach of contract, unfair competition and copyright infringement
against the customer. The case was filed in Federal Court where it was
voluntarily dismissed and the copyright infringement claims dropped so that the
case could be re-filed and tried in New York State Supreme Court. The State
Court complaint was filed and served. The customer then filed a motion to
dismiss the fraud and unfair competition claims in the State Court complaint.
The motion does not seek dismissal of the breach of contract claim. Under New
York law, the filing of a motion to dismiss stays discovery until the motion is
decided. A hearing on the customer's motion to dismiss is scheduled to commence
on November 19, 1997 but was adjourned until December 5, 1997. The Company
intends to move forward with the remaining contract claims in state court. The
Company believes it will prevail in the lawsuit. No revenue has been recorded
for this film for this customer.
[B] In fiscal 1997, a producer hired for one of the Company's films was
terminated. The producer claims breach of contact, amounts for services
rendered, unjust enrichment and trademark infringement in violation of the
Lanham Act. The producer claims the Company failed to pay $67,500 pursuant to an
agreement between the Company and the producer. The Company asserts that the
agreement was terminated before production commenced and said termination was
mutual and documented in writing. The parties have made cross-motions for
summary judgment. The trial has been set for January 12, 1998. The Company
intends to vigorously defend this action. While the outcome cannot be
determined, management does not expect that it will have a material adverse
effect on the Company's results of operations or financial position.
F-14
<PAGE>
UNITED FILM DISTRIBUTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #9
- --------------------------------------------------------------------------------
[16] SUBSEQUENT EVENTS
[A] PROPOSED INITIAL PUBLIC OFFERING - The Company is offering for public sale
500,000 common shares at $6.00 per share. Although no assurance can be given
that the offering will be successful, the Company intends to utilize the net
proceeds from the proposed offering of approximately $2,283,000 to develop,
produce and distribute movies, to pay certain indebtedness, and for general
working capital needs.
[B] REVERSE STOCK SPLIT -In November 1997, the Company declared a two-for-three
reverse stock split. All share data has been retroactively restated for the
split.
[C] LOAN TO AFFILIATED ENTITY - In August of 1997, the Company made additional
loans in the amount of $650,000 to an affiliated entity of a major stockholder
who is also Chairman and Chief Financial Officer of the Company. The loan bears
interest at prime plus 3% and is due on demand but not before November of 1998
[See Note 5E].
[D] ADVANCES TO AFFILIATED ENTITY - In August and September of 1997, the Company
advanced a total of $275,000 to another affiliated entity. These advances will
be used to offset distributions due as of July 31, 1997 of $143,038 and amounts
due subsequent to July 31, 1997 to this entity as a limited partner in one of
two of the Company's consolidated limited partnerships.
. . . . . . . . . .
F-15
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
United Film Distributors, Inc.
Los Angeles, California
We hereby consent to the use in the Prospectus constituting a part of
this Registration Statement on Form SB-2 of our report dated November 7, 1997,
relating to the consolidated financial statements of United Film Distributors,
Inc. which is contained in the Prospectus.
We also consent to the reference to us under the caption "Experts" in
the Prospectus.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
- --------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Articles of Incorporation provide that the liability of
Directors for monetary damages shall be limited to the fullest extent
permissible under Delaware law. The Articles and the Company's Bylaws provide
for indemnification of its officers and Directors to the fullest extent
permitted under Delaware law.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses payable in connection with
the registration of the Common Stock that is the subject of this Registration
Statement, all of which shall be borne by the Company. All the amounts shown are
estimates except for the Securities and Exchange Commission registration fee and
the National Association of Securities Dealers listing and filing fees.
<TABLE>
<CAPTION>
To Be Paid By
-------------
Registrant
----------
<S> <C>
Securities and Exchange Commission registration fee............... $1,394
National Association of Securities Dealers filing fee............. 960
Blue sky fees and expenses........................................ 50,000
Printing and engraving expenses................................... 50,000
Legal fees and expenses........................................... 125,000
Accounting fees and expenses...................................... 85,000
Miscellaneous..................................................... 15,000
-------------
Total......................................................... $ 327,354
=============
</TABLE>
----------
*To be filed by Amendment
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The registrant has sold the following unregistered securities:
1. In connection with the Company's organization in June 1995, the
registrant sold 666,667 shares of Common Stock to one of its
founders, Ms. Nadine Belfort, for approximately $.08 per share. The
transaction was exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act").
2. In September 1995, the registrant sold 666,667 shares of Common Stock
to its other founder, Mr. Harry Shuster, for approximately $.08 per
share. The transaction was exempt from registration under Section 4(2)
of the Securities Act.
3. In October 1995, the registrant sold 88,255 and 140,868 shares of
Common Stock to Mr. Harry Shuster and Ms. Nadine Belfort, respectively,
for approximately $2.95 per share. The transactions were exempt from
registration under Section 4(2) of the Securities Act.
4. In November 1995, the registrant sold 92,328 shares of Common Stock to
Mr. Harry Shuster for approximately $2.95 per share. The transaction
was exempt from registration under Section 4(2) of the Securities Act.
5. In February 1996, the registrant sold 33,944 and 84,861 shares of
Common Stock to Mr. Harry Shuster and Ms. Nadine Belfort, respectively,
for approximately $2.95 per share. The transactions were exempt from
registration under Section 4(2) of the Securities Act.
II-1
<PAGE>
6. In March 1996, the registrant sold 59,403 shares of Common Stock to Ms.
Nadine Belfort for approximately $2.95 per share. The transaction was
exempt from registration under Section 4(2) of the Securities Act.
7. In June 1996, the registrant sold 118,805 and 48,201 shares of Common
Stock to Mr. Harry Shuster and Ms. Nadine Belfort, respectively, for
approximately $2.95 per share. The transactions were exempt from
registration under Section 4(2) of the Securities Act.
8. In June 1997, Mr. Harry Shuster and Ms. Nadine Belfort converted an
aggregate of $1,459,333 of debt into 324,296 shares of Convertible
Preferred Stock. Mr. Shuster received 195,482 shares of Preferred Stock
and Ms. Belfort received 128,814 shares of Preferred Stock.
The numbers of shares and exercise prices set forth above reflect a
5-for-1 stock split effective in May 1997 and an addition 2-for-3
reverse stock split effective November 1997.
ITEM 27. EXHIBITS.
(a) The following is a list of exhibits furnished:
<TABLE>
<CAPTION>
Exhibit Page
------- ----
Number Exhibit Number
------ ------- ------
<S> <C>
1.1 Form of Underwriting Agreement**
1.2 Letter of Intent between the Company and Millennium Securities
Corp.***
3.1 Restated Articles of Incorporation***
3.2 Certificate of Amendment of Certificate of Incorporation**
3.3 Bylaws***
3.4 Certificate of Designation re Series A Convertible Preferred Stock**
3.5 Certificate of Amendment of Restated Certificate of Incorporation**
4.1 Specimen Stock Certificate**
5 Opinion of Counsel as to legality of the securities being
registered**
10.1 Employment Agreement between the Company and Brian Shuster dated
April 1, 1997***
10.2 Revolving Demand Note between the Company and Harry Shuster**
10.3 Revolving Demand Note between the Company and Nadine Belfort**
10.4 Lease agreement between the Company and 1990 Westwood Blvd., Inc.
dated July 1, 1995 and Addendum to Lease dated November 1, 1996***
10.5 Lease Agreement between the Company and 1990 Westwood Blvd., Inc.
dated July 1, 1996 and Addendum to Lease dated November 1, 1996***
10.6 1997 Stock Option Plan***
10.7 Distribution Agreement between the Company and HEP I, L.P. dated July
17, 1995***
10.8 Distribution Agreement between the Company and HEP II, L.P. dated
March 4, 1996***
10.9 Agreement of Limited Partnership of HEP I, L.P. dated as of July 17,
1995***
10.10 Agreement of Limited Partnership of HEP II, L.P. dated as of March 4,
1996***
10.11 Amendment No. 1 to Agreement of Limited Partnership of HEP II, L.P.
dated as of April 23, 1996***
21.1 List of Subsidiaries***
23.1 Consent of independent accountants*
23.2 Consent of counsel (included as part of Exhibit 5)**
24.1 Power of attorney***
27.1 Financial Data Schedule*
- ---------------
* Filed herewith.
** To be filed by amendment.
*** Previously filed.
</TABLE>
II-2
<PAGE>
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To provide to the Underwriter at the closing specified in the
underwriting agreement certificates in such denominations and registered in such
names as required by the Underwriter to permit prompt delivery to each
purchaser.
(2) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer, or controlling
person of the registrant in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant 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 Securities
Act and will be governed by the final adjudication of such issue.
(3) For purposes of determining any liability under the Securities Act
of 1933, as amended (the "Securities Act"), the information omitted from the
form of prospectus filed as part of a registration statement in reliance upon
Rule 430A and contained in the form of prospectus filed by the registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of the registration statement as of the time it was declared
effective.
II-3
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Los Angeles, State of California on December 1, 1997.
UNITED FILM DISTRIBUTORS, INC.
By: /s/ Brian Shuster
-----------------------------
Brian Shuster
Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C>
/s/ Brian Shuster President, Director and Chief December 1, 1997
--------------------------- Executive Officer (Principal
Brian Shuster Executive Officer)
/s/ Harry Shuster Chairman, Director, and December 1, 1997
--------------------------- Chief Financial Officer
Harry Shuster (Principal Financial Officer)
By: * Director December 1, 1997
--------------------------
J. Brooke Johnston, Jr.
By: * Director December 1, 1997
--------------------------
George Folsey, Jr.
* By:/s/ Brian Shuster
--------------------------
Brian Shuster
Attorney in fact
</TABLE>
II-4
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0001038385
<NAME> UNITED FILM DISTRIBUTORS, INC.
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> JUL-31-1997
<EXCHANGE-RATE> 1
<CASH> 800,253
<SECURITIES> 0
<RECEIVABLES> 57,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,907,782
<PP&E> 79,178
<DEPRECIATION> 25,302
<TOTAL-ASSETS> 6,907,782
<CURRENT-LIABILITIES> 1,249,839
<BONDS> 0
3,243
0
<COMMON> 20,000
<OTHER-SE> 3,840,996
<TOTAL-LIABILITY-AND-EQUITY> 6,907,782
<SALES> 6,171,237
<TOTAL-REVENUES> 6,171,237
<CGS> 0
<TOTAL-COSTS> 6,246,259
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 60,774
<INCOME-PRETAX> 245,624
<INCOME-TAX> 122,560
<INCOME-CONTINUING> 123,064
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 123,064
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.06
</TABLE>
