<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended June 30, 2000.
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from to
------------- --------------
Commission file number: 0-26197
STUDIO CITY HOLDING CORPORATION
--------------------------------------
(Exact name of small business issuer as specified in its charter)
New York 13-322-7032
----------------------------- ----------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
14400 Southwest 46th Court
Ocala, Florida 34473
------------------------------------------
(Address of principal executive office) (Zip Code)
(352) 347-3947
----------------------
(Issuer's telephone number)
Check whether the issuer: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
The number of outstanding shares of the issuer's common stock, $0.002
par value, as of May 1, 2000 was 32,557,001.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS ...................................................................... 3
Independent Accountant's Report ........................................................... 4
Consolidated Balance Sheets as of December 31, 1999
and June 30, 2000 ................................................................ 5
Consolidated Statements of Operations
for the Six Month Periods Ended
June 30, 2000 and 1999 ........................................................... 6
Consolidated Statements of Changes in Stockholders' Equity ................................ 7
Consolidated Statements of Cash Flows
for the Six Month Periods Ended
June 30, 2000 and 1999 ........................................................... 8
Notes to Unaudited Consolidated Financial Statements ...................................... 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS............................................................................
ITEM 2 CHANGES IN SECURITIES........................................................................
ITEM 5 OTHER INFORMATION............................................................................
INDEX TO EXHIBITS...................................................................................
</TABLE>
2
<PAGE> 3
PART I
ITEM 1. FINANCIAL STATEMENTS
As used herein, the term "Company" refers to Studio City Holding
Corporation, a New York corporation, and its subsidiaries and predecessors
unless otherwise indicated. Unaudited, consolidated condensed interim financial
statements including a balance sheet for the Company as of the quarter ended
June 30, 2000 and statements of operations, statements of shareholders equity
and statements of cash flows for the interim period up to the date of such
balance sheet and the comparable period of the preceding year.
3
<PAGE> 4
STUDIO CITY HOLDING CORPORATION
AND SUBSIDIARIES
Independent Accountant's Review Report
and
Financial Statements
October 21, 1991 (Inception) To June 30, 2000
<PAGE> 5
STUDIO CITY HOLDING CORPORATION AND SUBSIDIARIES
October 21, 1991 (Inception) To June 30, 2000
TABLE OF CONTENTS
<TABLE>
<S> <C>
INDEPENDENT ACCOUNTANT'S REVIEW REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS 2
CONSOLIDATED STATEMENTS OF OPERATIONS 3
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY 4
CONSOLIDATED STATEMENTS OF CASH FLOWS 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6
</TABLE>
<PAGE> 6
INDEPENDENT ACCOUNTANT'S REVIEW REPORT
To the Board of Directors and Stockholders
Studio City Holding Corporation
We have reviewed the accompanying consolidated balance sheet of Studio City
Holding Corporation (a New York corporation) (a development stage company) and
subsidiaries (development stage companies) as of June 30, 2000, and the related
consolidated statements of operations for the three and six months then ended,
and the changes in stockholders' equity, and cash flows for the six months then
ended, in accordance with Statements on Standards for Accounting and Review
Services issued by the American Institute of Certified Public Accountants. All
information included in these financial statements is the representation of the
management of Studio City Holding Corporation.
A review consists principally of inquiries of company personnel and analytical
procedures applied to financial data. It is substantially less in scope than an
audit in accordance with generally accepted auditing standards, the objective
of which is the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying June 30, 2000 financial statements in order for
them to be in conformity with generally accepted accounting principles.
The financial statements for the year ended December 31, 1999 (including
cumulative information from inception October 21, 1991 to December 31, 1999),
were audited by us, and we expressed an unqualified opinion on them in our
report dated February 28, 2000, but we have not performed any auditing
procedures since that date.
Peel, Schatzel & Wells, P.A.
St. Petersburg, Florida
August 11, 2000
1
<PAGE> 7
STUDIO CITY HOLDING CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30, June 30,
1999 1999 2000
----------- ----------- -----------
(Unaudited) (Reviewed)
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 55,843 $ 101,480 $ 63,445
Intangible assets (Note 3) 77,315 83,150 77,315
Investment in joint ventures and stock 56,823 56,823 2,560,943
Prepaid services 3,469 3,469 3,469
Office equipment (cost $53,312, $53,009 and $53,312;
accumulated depreciation $40,480, $36,652 and $44,061) 12,832 16,357 9,251
Organization costs (net of accumulated amortization) 190 445 189
Accounts receivable 5,170 1,636
----------- ----------- -----------
TOTAL ASSETS $ 211,642 $ 263,360 $ 2,714,612
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Note payable-majority stockholder $ 1,554,027 $ 1,554,027 $ 1,554,027
Loans from minority stockholders 888,784 650,491 1,133,384
Note payable-Hammer Trust 2,500,000
Accrued interest on majority stockholder note 415,952 415,910 424,971
Accrued interest on minority stockholder loans 74,631 33,980 123,723
Accrued interest on Hammer Trust note 40,068
Accrued expenses 7,417 435 3,840
CONTINGENT LIABILITIES--Collective Bargaining Agreement (Note 3) -- -- --
LEASE COMMITMENTS--(Note 15) -- -- --
----------- ----------- -----------
TOTAL LIABILITIES 2,940,811 2,654,843 5,780,013
EQUITY SECURITIES SUBJECT TO RESCISSION (Note 20) 1,003,100 1,003,100 1,006,220
STOCKHOLDERS' EQUITY
Common stock - par value $.002;
150,000,000 shares authorized; 31,057,001, 31,057,001 and 32,557,001
shares issued and outstanding 61,077 61,077 61,077
Common stock warrants 5,000,000 5,000,000 5,000,000
Preferred stock--A - par value $.0001;
10,000,000 shares authorized, issued and outstanding 1,000 1,000 1,000
Preferred stock--B - par value $.0001; 10,000,000 shares authorized;
3,825,834, 3,825,834 and 5,025,834 issued and outstanding 383 383 383
Additional paid-in capital 1,392,737 1,392,737 1,392,737
Deficit accumulated during development stage (2,959,466) (2,623,780) (3,298,818)
Less treasury stock--cost of 400 shares (2,000) (2,000)
Less special distribution to stockholder (Note 3) (7,226,000) (7,226,000) (7,226,000)
----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY (3,732,269) (3,394,583) (4,071,621)
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 211,642 $ 263,360 $ 2,714,612
=========== =========== ===========
</TABLE>
See Independent Accountant's Review Report and accompanying notes.
2
<PAGE> 8
STUDIO CITY HOLDING CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For The Six Months For The Three Months
Cumulative Ended June 30, Ended June 30,
From Inception 2000 1999 2000 1999
October 21, 1991 to ----------- ----------- ----------- -----------
June 30, 2000 (Reviewed) (Unaudited) (Reviewed) (Unaudited)
------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
INCOME $ 331,809 $ 50 $ -- $ -- $ --
EXPENSES
Accounting fees 149,002 15,793 16,750 3,093 13,600
Advertising 15,972 180
Amortization--organization costs 1,792
Auto expenses 184,077 7,635 4,384 3,887 (1,430)
Bad debts 167,695
Bank charges 1,966 313 325 185 76
Commissions 36,906
Consulting fees 155,794 18,802 15,196 10,587 8,228
Contributions 2,537 835 101 835 101
Depreciation 44,064 3,581 3,331 1,791 1,559
Dues and publications 21,389 1,961 609 1,760 417
Equipment rental 357,557 37,320 43,002 14,483 21,011
Insurance 23,414
Interest 981,588 159,090 93,267 101,091 48,938
Legal fees 331,730 22,131 54,245 13,211 28,342
Licenses 26,880 2,485 2,383 (100)
Meals 32,867 2,071 1,585 1,035 1,058
Medical reimbursement--officer 24,206 1,926 1,722
Miscellaneous expenses 47,980 2,398 1,328
Offering costs 32,051
Office expenses 158,881 17,127 12,321 9,890 6,332
Officer compensation 5,000
Postage 66,599 6,006 3,720 3,540 2,390
Professional fees 87,382 750 321 750 321
Project costs 316,735 22,712 40,034 22,712 28,615
Rent 159,842 9,493 4,546 4,934 3,046
Repairs and maintenance 1,361 249 35
Seminars 604
Telephone expense 84,252 3,428 2,012 1,512 1,440
Travel 72,856 4,569 12,253 4,569 12,253
Utilities 23,731 1,194 933 633 568
Wages 13,917
----------- ----------- ----------- ----------- -----------
TOTAL EXPENSES 3,630,627 339,402 313,965 202,120 178,228
----------- ----------- ----------- ----------- -----------
NET LOSS $(3,298,818) $ (339,352) $ (313,965) $ (202,120) $ (178,228)
=========== =========== =========== =========== ===========
EARNINGS (LOSS) PER
COMMON SHARE
(Basic and Diluted Loss Per Share ----------- ----------- ----------- ----------- -----------
are the same--See Note 2) $ (0.0174) $ (0.0107) $ (0.0102) $ (0.0063) $ (0.0057)
=========== =========== =========== =========== ===========
</TABLE>
See Independent Accountant's Review Report and accompanying notes.
3
<PAGE> 9
STUDIO CITY HOLDING CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
------------------------------------------------------------
Additional Common
Common Paid-In Stock Preferred
Shares Amount Capital Warrants Stock A
------------ -------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Issuance of common stock 748,000 $ 11,920 $ 1,138,500 $ -- $ --
Special distribution (Note 3)
Common shareholder loss for period
October 21, 1991 to December 31, 1991
------------ -------- ----------- ----------- -------
Balance at December 31, 1991 748,000 11,920 1,138,500 -- --
Issuance of common stock 610,201 1,662 72,770
Common shareholder loss for year
ended December 31, 1992
------------ -------- ----------- ----------- -------
Balance at December 31, 1992 1,358,201 13,582 1,211,270 -- --
Stock split 1 to 100 134,461,899
Shares for properties (1,151,004)
Special distribution (Note 3)
Issuance of common and preferred
stock and common warrants 16,749,900 1,675 56,976 5,000,000
Common shareholder loss for year
ended December 31, 1993
------------ -------- ----------- ----------- -------
Balance at December 31, 1993 152,570,000 15,257 117,242 5,000,000 --
Issuance of common stock (13,420,000) (1,342) 242,670
Common shareholder loss for year
ended December 31, 1994
------------ -------- ----------- ----------- -------
Balance at December 31, 1994 139,150,000 13,915 359,912 5,000,000 --
Issuance of common stock 4,150,000 415 406,095
Common shareholder loss for year
ended December 31, 1995
------------ -------- ----------- ----------- -------
Balance at December 31, 1995 143,300,000 14,330 766,007 5,000,000 --
Issuance of common stock 6,700,000 670 431,506
Equity securities subject to rescission (Note 20) (670) (431,506)
Common shareholder loss for year
ended December 31, 1996
------------ -------- ----------- ----------- -------
Balance at December 31, 1996 150,000,000 14,330 766,007 5,000,000 --
Issuance of common stock 155,000 310 481,113
Equity securities subject to rescission (Note 20) (310) (481,113)
Common shareholder loss for year
ended December 31, 1997
Shares issued, exchanged or converted (119,126,500) (11,000) 9,000 1,000
Merger adjustments 57,747 617,730
------------ -------- ----------- ----------- -------
Balance at December 31, 1997 31,028,500 61,077 1,392,737 5,000,000 1,000
Issuance of common stock 28,501 57 89,444
Equity securities subject to rescission (Note 20) (57) (89,444)
Common shareholder loss for year
ended December 31, 1998
------------ -------- ----------- ----------- -------
Balance at December 31, 1998 31,057,001 61,077 1,392,737 5,000,000 1,000
Cost of 400 shares of common stock
Common shareholder loss for year
ended December 31, 1999
------------ -------- ----------- ----------- -------
Balance at December 31, 1999 31,057,001 61,077 1,392,737 5,000,000 1,000
Issuance of common and preferred stock 1,500,000 3,000
Equity securities subject to rescission (Note 20) (3,000)
Common shareholder loss for six months
ended June 30, 2000 (Reviewed)
------------ -------- ----------- ----------- -------
Balance at June 30, 2000 $ 32,557,001 $ 61,077 $ 1,392,737 $ 5,000,000 $ 1,000
============ ======== =========== =========== =======
<CAPTION>
Deficit
Accumulated Special
During Distribution Total
Preferred Development Treasury To Stockholders'
Stock B Stage Stock Stockholder Equity
--------- ------------ -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Issuance of common stock $ -- $ -- $ -- $ -- $ 1,150,420
Special distribution (Note 3) (1,150,000) (1,150,000)
Common shareholder loss for period
October 21, 1991 to December 31, 1991 (35,455) (35,455)
--------- ------------ -------- ------------ ------------
Balance at December 31, 1991 -- (35,455) -- (1,150,000) (35,035)
Issuance of common stock 74,432
Common shareholder loss for year
ended December 31, 1992 (57,999) (57,999)
--------- ------------ -------- ------------ ------------
Balance at December 31, 1992 -- (93,454) -- (1,150,000) (18,602)
Stock split 1 to 100
Shares for properties (1,151,004)
Special distribution (Note 3) (6,076,000) (6,076,000)
Issuance of common and preferred
stock and common warrants 671,974 5,730,625
Common shareholder loss for year
ended December 31, 1993 (73,409) (73,409)
--------- ------------ -------- ------------ ------------
Balance at December 31, 1993 671,974 (166,863) -- (7,226,000) (1,588,390)
Issuance of common stock 241,328
Common shareholder loss for year
ended December 31, 1994 (172,174) (172,174)
--------- ------------ -------- ------------ ------------
Balance at December 31, 1994 671,974 (339,037) -- (7,226,000) (1,519,236)
Issuance of common stock 406,510
Common shareholder loss for year
ended December 31, 1995 (316,578) (316,578)
--------- ------------ -------- ------------ ------------
Balance at December 31, 1995 671,974 (655,615) -- (7,226,000) (1,429,304)
Issuance of common stock 432,176
Equity securities subject to rescission (Note 20) (432,176)
Common shareholder loss for year
ended December 31, 1996 (558,211) (558,211)
--------- ------------ -------- ------------ ------------
Balance at December 31, 1996 671,974 (1,213,826) -- (7,226,000) (1,987,515)
Issuance of common stock 481,423
Equity securities subject to rescission (Note 20) (481,423)
Common shareholder loss for year
ended December 31, 1997 (572,506) (572,506)
Shares issued, exchanged or converted 1,182 182
Merger adjustments (672,773) 2,704
--------- ------------ -------- ------------ ------------
Balance at December 31, 1997 383 (1,786,332) -- (7,226,000) (2,557,135)
Issuance of common stock 89,501
Equity securities subject to rescission (Note 20) (89,501)
Common shareholder loss for year
ended December 31, 1998 (523,483) (523,483)
--------- ------------ -------- ------------ ------------
Balance at December 31, 1998 383 (2,309,815) -- (7,226,000) (3,080,618)
Cost of 400 shares of common stock (2,000) (2,000)
Common shareholder loss for year
ended December 31, 1999 (649,651) (649,651)
--------- ------------ -------- ------------ ------------
Balance at December 31, 1999 383 (2,959,466) (2,000) (7,226,000) (3,732,269)
Issuance of common and preferred stock 120 3,120
Equity securities subject to rescission (Note 20) (120) (3,120)
Common shareholder loss for six months
ended June 30, 2000 (Reviewed) (339,352) (339,352)
--------- ------------ -------- ------------ ------------
Balance at June 30, 2000 $ 383 $ (3,298,818) $ (2,000) $ (7,226,000) $ (4,071,621)
========= ============ ======== ============ ============
</TABLE>
See Independent Accountant's Review Report and accompanying notes.
4
<PAGE> 10
STUDIO CITY HOLDING CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For The Six Months Ended
Cumulative June 30,
From Inception 2000 1999
October 21, 1991 to ---------------------------
June 30, 2000 (Reviewed) (Unaudited)
------------------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(3,298,818) $ (339,352) $ (313,965)
Amortization and depreciation 45,856 3,581 3,331
Changes in operating assets and liabilities:
Increase in prepaid services (1,024)
Increase in organizational costs (1,860)
Decrease in accounts receivable 5,170 5,809
Increase (decrease) in accrued expenses 2,837 (4,580) (30,870)
Increase in accrued interest payable 588,762 98,179 40,841
Decrease in intangible assets 19,750
----------- ----------- -----------
Net cash used in operating activities (2,644,497) (237,002) (294,854)
INVESTING ACTIVITIES
Investment in CVT Corporation of America (12,000)
Investment in joint ventures and stocks (56,823)
Acquisition of equipment (53,312) (501)
Acquisition of properties (97,066) (5,834)
----------- ----------- -----------
Net cash used in investing activities (219,201) -- (6,335)
FINANCING ACTIVITIES
Borrowings from stockholders 1,206,124 244,604 322,491
Proceeds for issuance of common stock 1,817,036
Repayment of stockholders loans (72,737)
Loan to affiliated company (21,280)
Purchase of 400 shares of common stock (2,000)
----------- ----------- -----------
Net cash provided by financing activities 2,927,143 244,604 322,491
----------- ----------- -----------
Cash and cash equivalents - increase 63,445 7,602 21,302
Cash and cash equivalents - Beginning -- 55,843 80,178
----------- ----------- -----------
Cash and cash equivalents - Ending $ 63,445 $ 63,445 $ 101,480
=========== =========== ===========
Supplemental Disclosures of Cash Flow Information:
----------- ----------- -----------
Cash paid for interest $ 392,826 $ 60,912 $ 52,426
=========== =========== ===========
Noncash financing transaction:
Value of Studio City shares ----------- ----------- -----------
issued for services $ 3,647 $ -- $ --
=========== =========== ===========
Investment in Hammer Trust in the year 2000 was
financed with a $2,500,000 note, issuance of $3,000
common stock and $120 preferred stock and a $1,000
deposit unpaid as of June 30, 2000
</TABLE>
See Independent Accountant's Review Report and accompanying notes.
5
<PAGE> 11
NOTE 1--ORGANIZATION, BACKGROUND INFORMATION AND BASIS OF PRESENTATION
Organization and Background Information
STUDIO CITY INCORPORATED HOLDING (the Company) was incorporated in the State of
Florida on October 25, 1991 as Studio City Incorporated. Prior to
incorporation, pre-incorporation operations commenced in February of 1991. The
Company is engaged in asset development, business management, production and
post-production studio operation, motion picture studio operation, tourist
attraction operation, the development of motion pictures for theatrical
exhibition, for television (i.e. network, cable, pay-per-view, etc.) and home
video, and in the development, production, and distribution of printed
publications. The Company owns a significant number of intellectual properties
and has a partial interest in other intellectual properties.
FAWNSWORTH INTERNATIONAL PICTURES CORPORATION (FIPC) was incorporated in the
State of Florida on October 21, 1991. Prior to incorporation, pre-incorporation
operations commenced in February of 1991. FIPC is a full service motion picture
and television production and distribution company. As a result of the
stockholders of FIPC receiving 491,150 shares of common stock of Studio City
with a par value of $1.00 in exchange for their ownership in the shares of
FIPC, FIPC became a wholly owned subsidiary of the Company on October 18, 1992.
The Company owns 100% of the voting stock of FIPC.
Prior to the stock exchange and transfer, the stockholders of Studio City
Incorporated voted unanimously to increase the amount of common stock
authorized from 1,000,000 shares to 1,500,000 to accommodate the exchange with
FIPC stockholders. The end result was that Studio City, Incorporated became the
parent company of FIPC (a wholly owned subsidiary) with both companies being
developmental stage companies. In a unanimous vote of the stockholders of the
Company, it was voted to change the name of the Company to Studio City
Incorporated Holding, which also operated under the name SCI Holding.
In a unanimous vote of its stockholders, the Company was instructed to execute
a stock split to fully dilute the stock of the Company. The 100 to 1 stock
split was executed on March 1, 1993. On that date, the total authorized common
stock of 150,000,000 shares includes all of the stock authorized including
500,000 shares reserved under the Company's Employee Incentive Stock Option
Plan. The common stock of the Company originally had a par value of $1.00 per
share and was amended to $.01 per share at the time of the stock split.
Subsequent to the stock split, the par value has again been amended to reflect
the par value at $.0001 per share, and this is the par value per share for each
of the subsidiaries subsequently formed.
Realizing the necessity for expansion, the Company created another subsidiary,
POC-IT PUBLISHERS, INCORPORATED (Poc-It). Poc-It was incorporated in the State
of Florida on May 3, 1993.The Company owns 100% of the voting stock. This
subsidiary was created to assemble, acquire, produce and publish various
literary properties owned by Studio City Incorporated Holding.
6
<PAGE> 12
NOTE 1--ORGANIZATION, BACKGROUND INFORMATION AND BASIS OF PRESENTATION -
continued
On December 14, 1993, the Company entered into an agreement to acquire 77.5% of
CVT CORPORATION OF AMERICA (CVT), an inactive New York based public company.
The cost of the stock was $12,000 plus the Company assumed certain debts. The
purpose of this acquisition was as follows: (i) to reactivate the operations of
CVT after a subsequent reorganization, (ii) prepare CVT for a merger, (iii)
merge the Company into CVT, thus becoming Studio City Holding Corporation, a
New York public company, (iv) prepare the merged entity for SEC and NASD
registration, and (v) prepare the merged entity for a Secondary Offering.
The Company and its subsidiaries are in the developmental stage and have not
generated significant revenues. In addition, the development of commercial
products using the Company's proprietary technology and inventory of
intellectual properties have not been completed and will require significant
additional financing. There is no assurance that commercially successful
products will be developed and that the Company will achieve a profitable level
of operations.
Realizing the necessity to develop certain intellectual properties and assets
through the expansion of operations, the Company created six subsidiaries in
1994. They are as follows:
The Company formed POC-IT COMICS, INCORPORATED on March 29, 1994 as a Florida
corporation. The Company owns 96.93% of the voting stock. Poc-It Comics has
three comic book franchises for development-- "THE EARTH WARRIORS" created by
Larry Faw; "MAGNET MAN" created by Paul Piterski; and "SHADOW RAVEN" created by
Frank Zanca. Poc-It Comics owns literary properties, as well as character
artwork. The first comic book--SHADOW RAVEN PREMIER EDITION was distributed in
May 1995.
The Company formed ZWEIG KNIGHTS PUBLISHING CORPORATION on March 29, 1994 as a
Florida corporation. The Company owns 64.30% of the voting stock. Zweig Knights
Publishing owns twenty six literary properties for future development and
publication. On November 11, 1997, Zweig Knights published its first in a
series of "Limited First Editions", The Nicholas Stories: The Boy With A Wish.
The second book of The Nicholas Stories series, The First Flight of St.
Nicholas, was released on November 1, 1998, and the third book in the series,
The Maiden Voyage of Kris Kringle, was released on October 1, 1999. An animated
television special of The Nicholas Stories: A Holiday Classic is currently in
pre-production.
The Company formed THE INTERNATIONAL CHILDREN'S TELEVISION NETWORK,
INCORPORATED on April 14, 1994 as a Florida corporation. The Company owns
99.96% of the voting stock. The International Children's Television Network has
fifteen literary properties, which is the equivalent of twelve hours of
children's programming.
The Company formed STUDIO CITY AMUSEMENTS, INC. on November 10, 1994 as a
Florida corporation. The Company owns 100% (99.9% in 2000) of the voting stock.
Studio City Amusements owns two theatrical musical productions entitled
"SLICING UP THE BIG APPLE" and "TINTYPES ON AN INTERGALACTICAL STAGE". Studio
City Amusements purpose is to develop and manage entertainment properties, and
to develop and produce Specialty Entertainment Projects. During 1999, this
entity changed its name to SCA GLOBAL RESOURCES, INC.
7
<PAGE> 13
NOTE 1--ORGANIZATION, BACKGROUND INFORMATION AND BASIS OF PRESENTATION -
continued
The Company formed NON-EXISTENT MAJOR LEAGUE FANTASY SPORTS ASSOCIATION,
INCORPORATED on November 10, 1994 as a Florida corporation. The Company owns
100% of the voting stock. Non-Existent Major League Fantasy Sports Association
owns "The 1994 Fan's Choice Fantasy World Championship of Baseball", the first
in a series of interactive radio and television fantasy sporting events. This
satirical 12 hour long radio play of a "fantasy world series of baseball" was
completed December 1, 1994 and is now ready for radio broadcast and/or
distribution.
The Company formed ZINGRR N-2-AKTIV TELEVISION NETWORK, INC. on November 22,
1994 as a Florida corporation. The Company owns 94.95% of the voting stock.
Zingrr N-2-Aktiv was created to serve as a partner in development, creation,
maintenance and programming of FCC Licensed Wireless Cable Stations and
Systems.
The following seven subsidiaries were formed subsequently for the purposes of
diversification and expansion. They are as follows:
The Company formed QUAGGA ENTERTAINMENT CORPORATION on March 30, 1995 as a
Florida corporation. The Company owns 93.33% of the voting stock. Quagga is in
the development stage and is engaged in the exploitation of motion picture and
television properties including the creation of revenue streams and profits
from captive intellectual and franchiseable properties. These activities would
include creating products for television, theatrical release, spin-off book
products, and ancillary spin-offs.
The Company formed ACCINEMATRON RELEASING CORPORATION on September 13, 1995 as
a Florida corporation. The Company owns 100% of the voting stock. Accinematron
was created to coordinate the distribution of various product lines which
include films, television programming, videocassettes, audio products, and
ancillary merchandise.
The Company formed THE MAGIC SHOP, INC. on October 7, 1995 as a Florida
corporation. The Company owns 100% of the voting stock. The Magic Shop was
created to serve as a production center and business incubator for
entertainment related companies.
The Company formed ZOLLIPE CYBERSPACE CORPORATION on June 14, 1996 as a Florida
corporation. The Company owns 100% of the voting stock. Zollipe was created to
develop computer programming and software for interactive games and information
from both the CD-ROM platform and worldwide web.
The Company formed ZZOONZUIT, INC. on June 14, 1996 as a Florida corporation.
The Company owns 100% of the voting stock. Zzoonzuit was created to design and
manufacture a new line of beachwear, swimwear, and athletic clothing.
8
<PAGE> 14
NOTE 1--ORGANIZATION, BACKGROUND INFORMATION AND BASIS OF PRESENTATION -
continued
The Company formed XENOMORPH DIGITAL POST, INC. on June 14, 1996 as a Florida
corporation. The Company owns 100% of the voting stock. Xenomorph was created
to be a digital broadcast and video post-production center and on-line producer
of television programming.
The Company formed PRO-SPORTS ENTERTAINMENT GROUP, INC. on November 1, 1996 as
a Florida corporation. The Company owns 100% of the voting stock. Pro-sports
was created as a motion picture and television production group to produce
entertainment products focused on minority role models.
Basis of Presentation
The consolidated financial statements include the accounts of Studio City
Holding Corporation, and all subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
These consolidated financial statements have been prepared to comply with
disclosure requirements of Securities and Exchange Commission Regulation S-X
and conform to S-B format.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents: The Company considers all highly liquid investments
with a maturity of three months or less when purchased to be cash equivalents.
Office Furniture and Equipment: Office furniture and equipment is stated on the
basis of cost. Depreciation is computed by the straight-line method over useful
lives of 5-10 years.
Organization Costs: Costs to organize the corporations have been capitalized
and are stated on the basis of cost. Amortization is computed by the
straight-line method over 60 months.
Offering Costs: As discussed in Note 16, Quagga incurred specific incremental
costs in connection with a proposed Securities Act of 1993 Regulation D-504
offering. These offering costs were expensed in 1997 due to the expiration of
the offering on April 12, 1997.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that effect the reported amounts of assets and liabilities and
disclosures 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.
9
<PAGE> 15
STUDIO CITY HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 21, 1991 (Inception) THROUGH JUNE 30, 2000
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES - continued
Earnings (Loss) Per Common Share: Basic Earnings (Loss) Per Share is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding during the year. Diluted Earnings (Loss) Per Share
is computed the same as Basic but also giving effect to all dilutive potential
common shares such as options, warrants and convertible preferred stock.
However, the computation of Diluted Earnings (Loss) Per Share does not assume
conversion of any potential common shares if that has an antidilutive effect on
earnings per share. Since there is a loss from operations, Diluted Earnings
(Loss) Per Share is computed the same as Basic Earnings (Loss) Per Share. This
is computed by dividing the net loss by weighted average number of common shares
outstanding during the year. The Earnings (Loss) Per Share are as follows:
<TABLE>
<CAPTION>
Year Net Loss Weighted Average Shares Loss Per Share
---- -------- ----------------------- --------------
<S> <C> <C> <C>
2000 $339,352 31,595,675 $ (.0107)
1999 $649,651 31,057,001 $ (.0209)
1998 $521,483 31,042,751 $ (.0168)
1997 $572,506 30,950,955 $ (.0185)
1996 $558,211 146,650,000 $ (.0038)
1995 $316,578 141,225,000 $ (.0022)
1994 $172,174 145,703,500 $ (.0012)
1993 $ 73,409 144,038,550 $ (.0005)
1992 $ 57,999 1,071,101 $ (.0541)
1991 $ 35,455 784,000 $ (.0452)
</TABLE>
NOTE 3--INTANGIBLE ASSETS AND RELATED OBLIGATIONS
Intangible assets consists of ownership of and rights to a significant number of
literary properties.
In October 1991, the date of incorporation of the Company and FIPC, stock was
issued for rights to several literary properties. 750,000 shares of Studio City
Incorporated Holding stock and 400,000 shares of Fawnsworth International
Pictures Corporation were issued at $1.00 per share in exchange for property
rights and exploitation. The recorded amount of these intangible assets for the
years 1991 and 1992 was zero based on the predecessor's cost. Larry D. Faw,
majority stockholder, was the predecessor owner. The total price of $1,150,000
has been reflected in the 1991 and 1992 financial statements as a reduction in
equity, specifically as a special distribution to stockholder.
Purchase Agreement: On February 16, 1993, the Company entered into an agreement
to acquire the direct ownership of various intellectual properties in the amount
of $7,226,000, which included 72 motion picture properties, 4 television pilot
properties, 48 books for publication, 4 inventions, 1 franchise program and 1
Specialty Product Design and marketing program. The Company's Purchase Agreement
for these properties included an obligation in the form of a promissory demand
note in the amount of $1,554,027 payable to Larry D. Faw, the majority
stockholder. In addition, the Company granted to Larry D. Faw warrants with the
option to purchase 5,000,000 shares of common stock, which was considered to be
partial payment under
10
<PAGE> 16
STUDIO CITY HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 21, 1991 (Inception) THROUGH JUNE 30, 2000
NOTE 3--INTANGIBLE ASSETS AND RELATED OBLIGATIONS - continued
the Purchase Agreement. These warrants are exercisable at $1.00 per share at a
maximum of 25% per year beginning the first anniversary of the effective date of
the grant and continues until one of the following occurs: (i) to the year 2003,
or, (ii) when all warrants have been exercised, or, (iii) all rights to such
warrants have been terminated in a mutually agreed upon written agreement.
The Purchase Agreement additionally provided for the requirement that 51% of the
Company's preferred stock be issued to Larry D. Faw. The amount of preferred
stock was later decreased to 1,000,000 shares of redeemable convertible and
callable preferred B stock, with each share of preferred stock being entitled to
noncumulative dividends at 6% annual rate upon declaration of the Board of
Directors.
The preferred stock was recorded in the amount of $671,973, which was the
purchase price of the assets less the amount attributed to the promissory demand
note and the common stock warrants.
The Company, as part of the Purchase Agreement issued 1,000,000 shares of its
preferred B stock on February 15, 1995. The preferred stock can be converted to
common stock at market price, or, callable at any time by the Company at a fixed
price of $50 per share for preferred B stock and $105 per share for preferred A
stock, or in parts, on or after February 16, 1996, and will be redeemable and/or
callable until February 16, 2006.
In summary, the Purchase Agreement includes the $1,554,027 promissory demand
note, the $5,000,000 common stock warrants and $671,973 value of preferred stock
for a total price of $7,226,000. Management believes this Purchase Agreement was
at a significant discount which is evidenced by the Independent Valuation as
discussed below in Note 3. As previously stated, the recorded amount of these
intangible assets was zero based on the predecessor's cost. Larry D. Faw, the
majority stockholder, was the predecessor owner. The total price of $7,226,000
has been reflected in the 1993 through 1999 financial statements as a reduction
in equity, specifically as a special distribution to stockholder.
Pre-existing Rights: Ownership of certain literary properties were transferred
from the Company to its subsidiaries in 1993. Properties with a value of
$600,000 were transferred to Fawnsworth International Pictures Corporation,
increasing the intangible asset value from $400,000 to $1,000,000 (note:
properties were purchased in 1993 for $100, increasing intangible assets to
$1,000,100) and increasing its additional paid-in capital from $433,880 to
$1,033,880. Properties with a value of $1,200,000 were transferred to Poc-It
Publishers, Incorporated in exchange for its common stock. After these
transfers, the Company's intangible assets were $5,026,000. Incidental costs
have subsequently been incurred increasing the asset costs.
The purchase price of the intangible assets acquired from the majority
stockholder, Larry D. Faw, was determined by Industry Standards (i.e. Union
Minimums as detailed in the Writers Guild of America 1992 Minimum Basic
Agreement as collectively bargained with the Alliance of Motion Picture and
Television Producers, Producers Guild of America, Directors Guild of
11
<PAGE> 17
STUDIO CITY HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 21, 1991 (Inception) THROUGH JUNE 30, 2000
NOTE 3--INTANGIBLE ASSETS AND RELATED OBLIGATIONS - continued
America, and all other signatory union business franchise valuation methods, and
other similar industry standards for product and merchandise development).
Independent Valuation: In 1995, the Company engaged a major U.S. investment
banking firm to conduct an analysis of the Companies' intellectual properties as
an independent third party consultant. This Independent Valuation was in direct
response as a requirement of the Securities and Exchange Commission's Chief
Accounting Office. This Independent Valuation was prepared as a Preliminary
Valuation prior to a public offering and was created as an internal document,
which due to its sensitive contents, has been made available to the Securities
and Exchange Commission as a confidential sealed document. The Preliminary
Independent Valuation was prepared through the following:
(1) Independent Research: (a) the investment banker's Research Analysts Reports,
(b) Standard & Poor's Industry Surveys, (c) Mergers and Acquisitions from
Securities Data Corporation, and, (d) financial reports from publicly traded
media holding companies and motion picture/television production companies.
(2) Industry Guidelines.
(3) Analysis of the Collective Bargaining Agreements: The 1992 Writers Guild of
America-Alliance of Motion Picture & Television Producers Theatrical and
Television Basic Agreement, Amended and Effective May 2, 1992 through May 1,
1995; and the 1995 Writers Guild of America-Alliance of Motion Picture &
Television Producers Theatrical and Television Basic Agreement, Amended and
Effective May 2, 1995 through May 1, 1998, and ratified and amended on May 2,
1998 through May 1, 2001. All of which are Collective Bargaining Agreements
under the auspices of the National Labor Relations Board.
(4) Management Interviews.
The Preliminary Valuation Summary was prepared utilizing two valuation
methodologies for 22 of the Companies' intellectual properties: (1) Cost
Approach projected as $9,700,000 and, (2) Discounted Cash Flow projected as
$46,000,000. Based on the two methodologies, the preliminary value achieved was
$9,659,980 for 22 intellectual properties having a projected
costs/obligations/value of $439,090 for each of the 22 intellectual properties.
At the time of the Independent Valuation, Studio City Holding Corporation and
its subsidiaries owned 152 intellectual properties, the majority of which were
not utilized in calculations of the Preliminary Valuation.
Contingent Liabilities-Collective Bargaining Agreement: Studio City Holding
Corporation, Fawnsworth International Pictures Corporation, the International
Children's Television Network, Incorporated, and Zingrr N-2-Aktiv Television
Network, Inc. are registered signatory companies to the 1995 Writer's Guild of
America-Alliance of Motion Picture & Television Producers Theatrical and
Television Basis Agreement ("MBA"), Amended and Effective May 2, 1995 through
May 1, 1998. Studio City Holding Corporation and its subsidiaries are
exclusively
12
<PAGE> 18
STUDIO CITY HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 21, 1991 (Inception) THROUGH JUNE 30, 2000
NOTE 3--INTANGIBLE ASSETS AND RELATED OBLIGATIONS - continued
represented by the Alliance of Motion Picture & Television Producers, Inc. The
collective bargaining agreement is under the auspices of the National Labor
Relations Board and is deemed to be a contingent liability for Studio City
Holding Corporation and its subsidiaries in regards to all literary properties
owned by the companies for development and/or sale. All aspects of intellectual
properties represented by the "MBA" have been tabulated and have pre-set
financial obligations that pass through to the Company and/or other type of
ownership, and, directly passes through to any and all purchasers of the
intellectual properties. The contingent liabilities, requisite costs, and
expense calculations as determined under the 1995 "MBA" are restrictive and
compliance is dictated by law.
NOTE 4--INVESTMENT IN JOINT VENTURE AND STOCK
The Companies currently own (in entirety) literary properties whose "replacement
cost/value" and/or "1995 Minimum Basic Agreements" contingent
liabilities/obligation and/or associated direct pass-through costs for
production and distribution are tabulated under the Agreement as of December 31,
1996 as $811,931 per intellectual property. Studio City Holding Corporation and
its subsidiaries current portfolio of intellectual properties are required to
comply with all of the aspects pertaining to the collective bargaining agreement
in its most current form, and, those contingent liabilities pass through to the
owner of record.
This investment represents costs of $6,823 paid by FIPC on behalf of Florida
Screen Gems Partners, a partnership of which the FIPC is a partner. The
Partnership is in the development stage. The Company has also invested in two
Corporations--Environmental Production Systems and Florida Film Investment
Company. These investments are recorded at cost for a total of $50,000. In April
2000, the investment in Hammer Trust in the amount of $2,504,120 increased this
investment total to $2,560,943 (See Note 21).
NOTE 5--PREPAID SERVICES
The Company and FIPC issued common stock to several individuals in exchange for
future services and expertise. The asset values recorded were determined by
management.
NOTE 6--OFFICE FURNITURE AND EQUIPMENT AND NOTE PAYABLE-STOCKHOLDER
At the time of incorporation in October 1991, FIPC acquired office furniture and
equipment from a stockholder, Genevieve Faw in the amount of $13,600. The
Company became indebted for this amount plus $1,520 for supplies that was
expensed in 1991. Therefore, the total liability to the stockholder for this
transaction was $15,120 since 1991. In 1994 the liability was satisfied. In
1995, the Company and Poc-It Comics acquired office furniture and equipment. In
1996, 1997 and 1999, the Company acquired additional office furniture and
equipment. Office furniture and equipment is recorded at cost, less accumulated
depreciation. The provision for depreciation is
13
<PAGE> 19
STUDIO CITY HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 21, 1991 (Inception) THROUGH JUNE 30, 2000
NOTE 6--OFFICE FURNITURE AND EQUIPMENT AND NOTE PAYABLE-STOCKHOLDER - continued
computed on the straight-line method over the estimated useful lives of the
assets which range from 5 to 7 years.
NOTE 7--NOTE PAYABLE-MAJORITY STOCKHOLDER
As discussed in Note 3 above, the Company became obligated under the Purchase
Agreement to its majority stockholder, Larry D. Faw. The promissory demand note
is dated the date of the Purchase Agreement, which is February 16, 1993. The
promissory demand note contains the following provisions: (i) due upon demand,
(ii) payments may be made at any time, and (iii) a balloon payment is due on
February 16, 1995. The note has an initial annual interest rate of 2%. On
February 16, 1995, the note became due and subsequently was extended for six
months at an annual interest rate of 9%. Since August 16, 1995, the note has
been extended nine times through August 16, 2000. No principal payments have
been made on this note, but partial interest payments have been made in 1995
through 2000. Accrued interest on this note was $424,971, as of June 30, 2000,
and $415,952, $375,069, $290,518, $194,456, $108,593, $58,158 and $27,078 as of
December 31, 1999, 1998, 1997, 1996, 1995, 1994 and 1993 respectively.
NOTE 8--RELATED PARTY TRANSACTIONS
In February of 1991, both the Company and FIPC started incurring
pre-incorporation expenses that were expensed by the companies and were paid by
its majority stockholder, Larry D. Faw. This practice has continued through the
present and both companies have reimbursed the stockholder for these expenses.
The nature of these expenses were automobile expense, office rent expense,
telephone expense, office supplies expense and other operational expenses. These
expenses were corporate expenses that were paid by the majority stockholder,
Larry D. Faw and charged to the companies. The Company incurred automobile
expenses and reimbursed Larry D. Faw at the mileage rates as prescribed by the
Internal Revenue Service. Additionally, the Company incurred office rent and
utilities and reimbursed Larry D. Faw $500 and $84 per month respectively.
Additional expenses were incurred and reimbursed to Larry D. Faw such as
telephone expenses, office supplies, and other operational expenses.
As discussed in Note 3, the Company acquired various intellectual properties
from the majority stockholder, Larry D. Faw, for $7,226,000 in exchange for a
promissory demand note, preferred stock and warrants to purchase common stock at
a fixed price.
The Company executed a statutory merger with CVT Corporation of America (name
changed to Studio City Holding Corporation) on July 1, 1996 with Studio City
Holding Corporation (a New York Corporation) being the surviving entity.
Subsequently, the operations of Studio City Incorporated Holding (a Florida
Corporation) were wound up and the corporation dissolved. (See Note 17--Merger).
14
<PAGE> 20
STUDIO CITY HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 21, 1991 (Inception) THROUGH JUNE 30, 2000
NOTE 8--RELATED PARTY TRANSACTIONS - continued
Zweig Knights Publishing Corporation, a subsidiary of the Company, has earned
revenue from sale of three books of the Nicholas Stories series. Total revenue
earned was $45,591 and $66,026 for the years ended December 31, 1999 and 1998.
Of these amounts, $41,000 and $54,575 were from sales to Harry K, Inc. Harry K,
Inc. is a corporation 100% owned by Harry Knights, the author of the books, who
is also a stockholder and officer of the Company as well as the subsidiary,
Zweig Knights Publishing Corporation. In 1997, the Company enlisted Harry K,
Inc. to serve as chief marketer and retail sales coordinator. The Company sells
to Harry K, Inc. as a wholesaler at a price of $10 per unit/book. Harry K, Inc.
markets the books within the guidelines of the Board of directors. Harry Knights
coordinates advertising, public relations and sales management at major trade
and specialty products showcases and conventions. Harry Knights receives no
compensation for the duties he performs on behalf of the Company. The Company
does assist in providing reimbursements for some expenses that are incurred
above and beyond the requirements necessary for retail sales.
NOTE 9--STOCKHOLDERS' EQUITY
Common Stock and Preferred Stock
Studio City Holding Corporation immediately after the Merger and as of December
31, 1996 (See Note 17) had 150,000,000 shares authorized, issued and outstanding
with a par value of $.01 per share. Upon the Merger, Larry D. Faw, the principal
stockholder converted 100,000,000 shares of common stock into 10,000,000 shares
of Class A Preferred Stock and 10,000,000 shares of common stock into 1,000,000
shares of Class B Preferred Stock. Additionally, the former stockholders of CVT
exchanged their shares for 9,123,250 shares of common stock. Additionally, some
shareholders elected the option to exchange their common shares for Class B
Preferred Stock (10 shares of common for 1 share of Class B Preferred Stock).
18,258,340 shares of common stock were exchanged for 1,825,834 shares of Class B
Preferred Stock. Additional shares of common were issued during 1997 and 1998.
As of June 30, 2000, 32,557,001 shares were issued and outstanding. As of
December 31, 1999 and 1998, there were 31,057,001 shares issued and outstanding.
The par value was amended to $.002 per share.
As discussed above, Larry D. Faw, the principal stockholder, converted common
stock into 10,000,000 shares of Class A Preferred Stock. This is the amount of
shares issued and outstanding as of June 30, 2000 and December 31, 1999 and
1998. The par value is $.0001 per share.
As discussed above, Larry D. Faw, the principal stockholder, converted common
stock into 1,000,000 shares of Class B Preferred Stock. He previously had
1,000,000 shares prior to this conversion. Additionally, other stockholders
exchanged common stock for 1,825,834 shares of Class B Preferred Stock. As of
June 30, 2000, 5,025,834 shares were issued and outstanding. As of December 31,
1999 and 1998, there were 3,825,834 shares issued and outstanding. The par value
is $.0001 per share.
15
<PAGE> 21
STUDIO CITY HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 21, 1991 (Inception) THROUGH JUNE 30, 2000
NOTE 9--STOCKHOLDERS' EQUITY - continued
Fawnsworth International Pictures Corporation has 500,000 shares authorized. The
par value is $.01 per share. There were 491,150 shares issued and outstanding as
of June 30, 2000 and December 31, 1999 and 1998 with Studio City being the
registered beneficial owner.
Poc-It Publishers, Incorporated has 10,000,000 shares authorized, issued and
outstanding. The par value is $.0001 per share.
Poc-It Comics, Incorporated has one class of common stock and it is voting (one
share, one vote). The par value is $.0001 per share with 10,000,000 authorized.
10,000,000 shares are issued and outstanding. Poc-It Comics has 5,000,000 shares
authorized, issued and outstanding of Class A Preferred Stock at $.0001 par
value per share which is callable, voting and convertible to common. There are
also 5,000,000 shares authorized, issued and outstanding Class B Preferred Stock
at $.0001 par value per share which is non-voting with preferential dividends.
Quagga Entertainment Corporation has one class of common stock and it is voting
(one share, one vote). The par value is $.001 per share with 10,000,000 shares
authorized and 7,000,000 shares issued and outstanding. Quagga has 5,000,000
shares of Class A Preferred Stock authorized, issued, and outstanding. The par
value of the Class A shares is zero. The Class A shares (1) are voting--one
share, one vote (2) receive no dividends (3) are not convertible ( 4) are not
redeemable (5) are callable at $25.00 per share.
Quagga has 5,000,000 shares of Class B Preferred Stock of which 2,500,000 are
issued and outstanding. The par value of the Class B shares is zero. The Class B
shares (1) are non-voting (2) have special dividend rights based on earnings (3)
have the initial price of $6.00 (4) have a fixed dividend of 12% per annum based
on earnings (5) are callable at $7.50 per share after the first year's dividend
(6) are callable after 3 years at $10.00 per share (7) are convertible to common
(8) have preferential liquidation treatment above all other shares.
Additionally, Quagga has 500,000 shares of Class C Preferred Stock, however, no
shares have been issued. The par value of the Class C shares is zero. The Class
C shares (1) are non-voting (2) have special dividend rights based on earnings
(3) have the initial price of $2.00 (4) are callable any time after issuance for
$2.00 for a period up to two years (5) are callable for $2.50 after two years
(6) are convertible to common after three years on a one to one basis (7) have
preferential liquidation treatment over common stock and Class A Preferred
stock.
All other entities presented in these financial statements other than those
referred to above in this note, have one class of common stock and it is voting
(one share, one vote). The par value is $.0001 per share with 10,000,000
authorized, issued and outstanding. There are 5,000,000 shares authorized,
issued and outstanding each of Class A and B Preferred Stock at $.0001 par value
per share. Class A is voting and convertible to common and Class B is non-voting
with preferential dividends.
16
<PAGE> 22
STUDIO CITY HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 21, 1991 (Inception) THROUGH JUNE 30, 2000
NOTE 10--TRADEMARKS, COPYRIGHTS AND LICENSES
The Company uses its own and licensed trademarks from its subsidiaries for
spinoff product development and merchandising from its various intellectual
properties. The Company owns 126 copyrights and will seek patents for 4
products. Additionally, the Company will be purchasing new products and literary
properties for development, and/or, enter into joint ventures for the
development of intellectual properties or consumer products. Each such instance
will be earmarked by distinct contractual requirements and obligations by the
Company.
NOTE 11--EMPLOYEES, EMPLOYMENT AGREEMENTS AND EMPLOYEE BENEFITS
The Company has had no full-time employees from inception to date except for
Quagga Entertainment Corporation during 1995. The Company has had contractual
relationships with independent contractors. Operations are managed by officers,
directors, and stockholders who received no monetary compensation through 1999.
In the year 2000, the Company began paying consulting fees to certain officers
and stockholders. Through June 30, 2000, $8,000 has been paid to the majority
stockholder, Larry D. Faw, and $6,464 has been paid to other minority
stockholders. The Company has had no employment agreements with key officers
from inception to date. However, the Company anticipates entering into
employment agreements with key personnel and intends to obtain key-man insurance
when the Company emerges from the development stage.
The Company does maintain a medical reimbursement plan whereby the majority
stockholder, Larry D. Faw, is reimbursed for his medical costs. This does not
include any other family members.
NOTE 12--ADDITIONAL CONTINGENT PAYMENTS
As of June 30, 2000, the Company was obligated to make future contingent
payments under research and development contracts, which are based upon actual
utilization of certain intellectual properties in pre-publication, published or
cinematic form. These contingent payments will continue for an indeterminable
length of time, and will be payable in all cases at the time of funding for each
respective project. Under certain of these contracts, the Company is obligated
to pay royalties ranging from 1.5% to 5% of the gross net profits which are
distributable from the commercialization and merchandising of these properties.
The Company has agreements with various individuals who will receive funds from
the initial distribution proceeds from the exploitation of certain literary
properties. These amounts are uncalculable because they are percentage rights in
individual properties which are identified in the Company's unaudited financial
statements and inventory analysis. These contracts and percentage rights are as
follows:
17
<PAGE> 23
STUDIO CITY HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 21, 1991 (Inception) THROUGH JUNE 30, 2000
NOTE 12--ADDITIONAL CONTINGENT PAYMENTS - continued
For the motion picture property "Bawdyhouse Bandits":
<TABLE>
<S> <C>
Frederick G. Spriggs 1% profit participation
Norman T. Godheim 1% profit participation
Heflar Family Trust 2% profit participation
Darlene C. Barror 1% profit participation
Suzanne Quinonez 1% profit participation
Genevieve H. Faw 2% profit participation
</TABLE>
For each of the following motion picture properties-- "Return To Treasure
Island", "Bad News", "TampaVice or The Comic Misadventures of Nipit and Budd",
"Mistaken Identity", "Love Can Kill", "Billion Dollar Bunnies", "The Love Bugs",
"A Touch of Evil", "Eyes of Terror", "Rail Rider", "Swingtime", "Whooz Choice",
"The War Lords", "Captain J Ride Again", "Midnight Blues", "Belle of Berry
Hill", "Hells Revenge", "Vendetta", "A Miracle In Tibet", "The Junkyard Gang",
"Land of the GaNodds", "So Far From My Heart", "Water Drop Series", "Damon
Runyon Series", "Way Off Broadway", "Paparazzi", "Love Bugs-Television Game
Show", "Fright Night", "Fountain Blue", "The Worlds Greatest Escapes", and
"Seminole"--the following contractual agreements exist: Genevieve H. Faw--2%.
For each of the following motion picture properties under option--"Cut Throat
Ridge", "The Plunderers", "The Last Glider", "Silence Awaits", "Stihlman and the
Firestone", "The Orion Murders", "Battle of Buck Mountain", "A Delicate
Obsession", "Seven Eleven Sorority Street", "Happy Bob", "Ghost Rider", "Teeth
of Lions", "Dali", "The Hillsville Courthouse Murder Massacre", "The Last Great
Adventure", "Otto", "Wheels", "Freefalling", and "Like A Butterfly"-the
following contractual agreements exist: Genevieve H. Faw--1%.
For the following book rights and motion picture rights on "Cain and Abel
Revisited: The True Life Story of Earle Don Fagan, Jr."--the following
contractual agreement exists:
<TABLE>
<S> <C>
The E. Don Fagan, Jr. Trust $50,000 on contract to sale
$25,000 new purchase
1% net profit participation
</TABLE>
The Company has separate contractual royalty agreements with Genevieve H. Faw
for deferred fees and royalties for each of the following inventions-- "Enviro
Tools"(tm), "Boot Valet"(r), "Book Lounge"(r), and "Radius Gauge"(r).
The following contracts exist: Genevieve H. Faw--1% royalty per number sold.
The Company has separate contractual agreements for royalties for books under
the research and development phase of the Company's wholly owned subsidiary,
Poc-It Publishers, Incorporated. All of the following book titles in each series
have royalty fees -- "Reward Series" (13 titles), "The Poc-It Mania Series" (11
titles), "Self Help Manuals" (11 titles), and "Contemporary Career Guide Series"
(10 titles): The following contracts exist: Genevieve H. Faw--1% royalty per
number sold.
18
<PAGE> 24
STUDIO CITY HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 21, 1991 (Inception) THROUGH JUNE 30, 2000
NOTE 12--ADDITIONAL CONTINGENT PAYMENTS - continued
There are separate contractual agreements in connection with the assignment of
Artistic Property Agreement between Fawnsworth International Pictures
Corporation and Michael Fields for ownership rights of original art for 4 comic
books characters created by Larry D. Faw. These 4 characters are "Taren",
"Mercer", "Shrieve", and "Quant", all from the "Earth Warrior" series. Poc-It
Comics, Incorporated issued 10,000 shares of common stock to Michael Fields in
addition to $100 cash per contract--$400 total. Additionally, Fields is to
receive a flat fee of $5,000 for each agreement payable when and if the art
design is utilized in the production of a movie or animation product--$20,000
total if all character art is utilized.
There is a separate Purchase & Profit Participation Agreement between Fawnsworth
International Pictures Corporation and Paul and Brahm Piterski for the ownership
of the literary rights and artwork of the comic book character "Willy the Magnet
Man". Poc-It Comics, Incorporated issued 50,000 shares of common stock to
Piterski in addition to $100 cash. Additionally, Piterski is to receive a
$15,000 consultant/production fee at time of movie production plus 10% of the
net profits generated from the exploitation of the entertainment franchise.
There is a separate Agreement between the Company, Roger H. Hefler, Larry D. Faw
and Frank Zanca/Wingspan Productions for the ownership rights of the literary
property "Shadow Raven", which are assigned to Poc-It Comics, Incorporated.
Poc-It Comics, Incorporated issued 50,000 shares of common stock and 100,000
shares of Class B preferred stock to Zanca.
There is a separate Assignment of Artistic Property Agreement between Fawnsworth
International Pictures Corporation and Calvin B. Clarke for the ownership rights
of original art for the comic book character created by Larry D. Faw. The
character is "Hafro", another character from the "Earth Warrior" series. Clarke
received $100 cash plus he will receive a $5,000 consultant fee if the art is
utilized plus a pro rata percentage from 5% allocated to Talent Pool.
There is a separate Assignment of Artistic Property Agreement between Fawnsworth
International Pictures Corporation and Ricardo Colon for the ownership rights of
original art for the comic book character "Un-named". Colon received $100 cash
plus he will receive a $5,000 consultant fee if the art is utilized plus a pro
rata percentage from 5% allocated to Talent Pool.
There is a separate Assignment of Artistic Property Agreement between Fawnsworth
International Pictures Corporation and Marco Antonio Nazario for the ownership
rights of original art for the comic book character created by Larry D. Faw. The
character is "Sunspot", another character from the "Earth Warrior" series.
Clarke received $100 cash plus he will receive a $5,000 consultant fee if the
art is utilized plus a pro rata percentage from 5% allocated to Talent Pool.
There is a separate Assignment of Artistic Property Agreement between Fawnsworth
International Pictures Corporation and Melissa Polizzi for the ownership rights
of original art for
19
<PAGE> 25
STUDIO CITY HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 21, 1991 (Inception) THROUGH JUNE 30, 2000
NOTE 12--ADDITIONAL CONTINGENT PAYMENTS - continued
3 comic book characters created by Larry D. Faw. The characters are "Marilise",
"Lilian", and "Renata", triplet characters from the "Earth Warrior" series.
Polizzi received $100 cash plus she will receive a $5,000 consultant fee if the
art is utilized plus a pro rata percentage from 5% allocated to Talent Pool.
There is a separate Assignment of Rights and Profit Participation Agreement
between Fawnsworth International Pictures Corporation and Larry D. Faw for the
licensing rights of the literary property "Earth Warriors", which consists of 12
characters. This Agreement is for a 5 year period ending October 9, 1998. Faw
received no cash but did receive 50,000 shares of Poc-It Comics, Incorporated on
March 29, 1994. If the rights are utilized, Faw will receive $15,000 for print
format, $50,000 for motion picture and/or other multi-media plus 5% of the net
profits attributable to this entertainment franchise.
There is a separate Agreement between the Company and Harry B. Knights, the
author of "The Nicholas Stories", who serves as Senior Vice-President of the
Company and Chief Operations Officer of Zweig Knights Publishing Corporation, a
subsidiary of the Company. The contractual obligation to Harry B. Knights was
met by issuing to him 1,250,000 shares of Preferred A and 1,250,000 of shares of
Preferred B stock of Zweig Knights Publishing Corporation plus 100,000 shares of
restricted common stock of the Company in April 1994. Additionally, Harry B.
Knights received a cash consulting fee of $5,000 on the 1997 production of "The
Nicholas Stories".
There is a separate pass-through Agreement between Harry B. Knights which is
contingent upon the publication and/or cinematic adaptation of any of these
intellectual properties. He is to receive a consultant fee and a profit
participation in each of these properties.
On July 1, 1995, the Company entered into a joint venture with Quagga Television
Partners Limited Partnership for the production and distribution of low budget
motion pictures and television programming. Larry D. Faw is the Managing Partner
of Quagga Television Partners and is the largest contributor as a limited
partner. Quagga Television Partners furnished the majority of the funding for
the production of Zoo Toonz. Quagga Television Partners owns a library of video
footage of exotic animals for the creation of animal music videos. As of this
date, Quagga Television Partners has not licensed use of this footage.
The Company has entered into a series of Joint Venture Agreements with Lisa
Moody/Tin Woman Music, Inc. for the creation of music for the first generation
of Zoo Toonz. Larry D. Faw and Quagga Television Partners Limited Partnership
have contributed capital for these joint ventures. To date, 5 contractual
arrangements have been made for the creation of 27 songs for the Zoo Toonz
project. The songwriter has been prepaid for the creation of these songs and
separate funds have been expended for the production of Recording Masters. A
contingent liability passes through to the Company for any profits associated
with the usage of these songs, if the songs are utilized.
20
<PAGE> 26
STUDIO CITY HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 21, 1991 (Inception) THROUGH JUNE 30, 2000
NOTE 12--ADDITIONAL CONTINGENT PAYMENTS - continued
The Company had entered into an Agreement for the use of 2 puppets, Clyde and
Alfred, for the utilization in volume one of Zoo Toonz, with John C. Cummings,
Jr. Additional puppet footage was shot at Disney-MGM Studios, however, the
footage was unacceptable. Due to contractual restrictions placed on the Company
by Disney for Volume one of Zoo Toonz, the release and distribution was
cancelled. The Joint Venture Agreement was terminated by John C. Cummings, Sr.
on October 2, 1996.
A Contingent Production Joint Venture was entered into by the Company with Marc
Rose and Radio Cinema for the creation of various products and merchandise which
could be created from the distribution and cinematic adaptation of a series of
radio shows entitled "Dry Smoke and Whispers". This contingent agreement may be
terminated.
On June 17, 1996, the Company purchased the patents and trademarks for "Uncle
Tuffy's French Security Window". The purchase was made between the Company and
Paul Piterski, the inventor and patent owner for $2,000 in cash plus 5% of the
gross profits attributable to the sale, licensing, or other profits due to the
Company for the exploitation of this patented product.
In July 1996, the Company placed a $10,000 option on the right to purchase
literary properties written by science fiction writer Andre Norton. The
properties which were optioned were "The Wraiths of Time" and "A New Property
Adaptation From The Screenplay of The Wraiths of Time". The option still exists,
however, original funding was to be realized from the public offering of Quagga
Entertainment Corporation's D-504, which expired. Publishing Corporation, has
entered into an Agreement to be a corporate general partner in ZK Partners
Limited Partnership. This Partnership is currently being formed for the
financing of an animation for "The Nicholas Stories", and is currently in the
development stage.
NOTE 13--EMPLOYEE INCENTIVE STOCK OPTION PLAN
On March 1, 1993, the Board of Directors adopted in Outline Form an Employee
Incentive Stock Option Plan for future full time employees and officers. Under
the Proposed Outline, the Company may issue options exercisable at the current
market value (110% of current market value only to 10% or greater stockholders)
up to $100,000 annually. The Proposed Plan was extended from March 1, 1998, to
terminate on March 1, 2002.
Under the Proposed Plan, any person owning 10% of the voting power of the
Company is restricted from exercising his/her options to three years after the
receipt of such grant. Additional stipulations are as follows: (1) options
terminated or expired revert back into the Plan, (2) unpurchased option shares
remain in the Plan, (3) options are only exercisable by the optionee or his/her
estate, (4) options are not transferable, (5) carryover amounts from one year to
the next year can not exceed 50% of the option, and (6) option shares are
restricted until SEC registration.
The Company has reserved 500,000 shares of common stock for issuance under the
Proposed Plan. No options have been granted under the Proposed Plan from
inception to date.
21
<PAGE> 27
STUDIO CITY HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 21, 1991 (Inception) THROUGH JUNE 30, 2000
NOTE 14--INCOME TAXES
The Company and its subsidiaries have filed separate corporate income tax
returns since each corporation's inception through December 31, 1999. As of June
30, 2000, there have been no timing differences in the recognition of revenue
and expense for financial reporting and income tax purposes. As of December 31,
1999, the Company and its subsidiaries each have available net operating loss
carryforwards for federal and state income tax purposes (which are the same
amount) that will be available to offset future taxable income of the Company.
If unused, net operating loss carryforwards expire after 15 years (20 years
after 1997). The loss carryforwards are summarized as follows:
<TABLE>
<CAPTION>
Year Year Studio City All
Incurred Expires Holding Corp. Subsidiaries Combined
-------- ------- ------------- ------------ --------
<S> <C> <C> <C> <C>
1991 2006 $ 15,596 $ 19,859 $ 35,455
1992 2007 24,000 33,999 57,999
1993 2008 63,543 9,866 73,409
1994 2009 158,468 13,706 172,174
1995 2010 309,995 6,583 316,578
1996 2011 496,761 61,450 558,211
1997 2012 451,666 120,840 572,506
1998 2018 489,105 34,378 523,483
1999 2019 556,889 92,762 649,651
</TABLE>
NOTE 15--RENTALS UNDER OPERATING LEASES
The Company's leasing operations consist principally of the leasing of broadcast
television equipment, various computer, video and sound equipment under
operating leases that expire over the next three to five years. Due to a cross
default by a joint venture partner, a portion of the equipment under two of the
leases was repossessed by the lessor for late payment (see note 18 regarding
"Zoo Toonz"). The Company has continued making monthly payments on all lease
obligations and expects to satisfy all obligations and obtain full use of all
equipment under lease.
The following is a schedule by years of future minimum rental payments required
under operating leases that have initial or remaining noncancelable lease terms
in excess of one year as of December 31, 1999:
<TABLE>
<CAPTION>
Year Ending December 31, Amount
------------------------ --------
<S> <C>
2000 $ 53,084
2001 44,199
2002 2,177
Later Years -0-
--------
$ 99,460
========
</TABLE>
22
<PAGE> 28
STUDIO CITY HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 21, 1991 (Inception) THROUGH JUNE 30, 2000
NOTE 16--CHANGING ECONOMIC CONDITIONS AND SUBSEQUENT EVENTS
From September 1995 to September 1996 Studio City Incorporated Holding entered
into a "First Right of Refusal/Space Lease Agreement" with The Walt Disney
Company on product produced on the Disney-MGM Studios by Studio City. The
Company entered into a one year space lease/first right of refusal/production
agreement to expend a minimum of $1,200,000 at the studio for its projects. The
Company entered into this agreement with Disney based on an agreement with a New
York investment banker taking a contractual (dated August 28, 1995) equity
position of $1,200,000 in Quagga Entertainment Corporation, the production arm
which was located with the Company at Disney/MGM Studios. Quagga Entertainment
Corporation was to achieve total capitalization in 1996 of $8,500,000 based on a
registered public offering in Connecticut. The Company was also qualified to
sell the offering in the state of New York as a registered broker/dealer. The
Company was represented by an investment banker/consultant in Connecticut, who
contractually committed to raising Quagga's capital needs through a registered
D-504 offering. Also, the Company had the option to create and market a "red
herring" D-506 private placement. The Company chose "Shadow Raven", a low-budget
feature motion picture, to be the first project. However, due to expanded costs
associated with the contingent joint venture production partners, the project
was postponed until sufficient capitalization was realized. Quagga's D-504
offering was registered in Connecticut on April 12, 1996. The investment banker
was to commence the financial marketing of the offering, but failed to do so.
The New York equity investor could not meet the contractual commitment. As a
result, the D-504 offering expired on April 12, 1997 and the "red herring" D-506
was withdrawn as a viable funding plan. Accordingly, the offering costs of
$32,051 have been expensed during 1997. With the lack of alternative financing
available to the Company, the contract with Walt Disney Company expired on
September 15, 1996 along with the contingent joint venture production
partnerships.
In April 1997, the Company expanded its operations by relocating to Tampa,
Florida into a facility that provides a small soundstage, office operations, and
edit suite. This new organization of its operations in Tampa is anticipated to
increase revenue production, while providing low costs to the Company for its
own projects.
NOTE 17--MERGER
On June 29, 1996, CVT Corporation of America restated and amended its articles
of incorporation to allow for a name change, the creation of Class A and B
Preferred Stock, the reorganization of operations, and limiting the liability of
its Directors and Officers. CVT Corporation changed its name to Studio City
Holding Corporation (a New York Corporation). 10,000,000 shares of Class A
Preferred Stock with special voting powers were created and 25,000,000 shares of
Class B Preferred Stock with preferential dividends and various rights were
created. The Company adopted a new set of By-Laws which streamlined its
operations as a public company and adopted a set of procedures which limited the
liability of its Directors and Officers.
On July 1, 1996, Studio City Incorporated Holding (a Florida Corporation) and
its subsidiaries merged with and into Studio City Holding Corporation (a New
York Corporation) in a statutory
23
<PAGE> 29
STUDIO CITY HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 21, 1991 (Inception) THROUGH JUNE 30, 2000
NOTE 17--MERGER - continued
merger. The merger transaction was executed in a "like kind" stock exchange,
share for share of common stock of Studio City Incorporated Holding for common
stock of Studio City Holding Corporation. On October 24, 1996, Studio City
Incorporated Holding was dissolved, with the surviving entity being Studio City
Holding Corporation. All of the assets and liabilities of Studio City
Incorporated Holding and its subsidiaries were merged with and into Studio City
Holding Corporation.
As per the Merger Agreement, Larry D. Faw, principal stockholder of Studio City
Incorporated Holding, was required to convert 100,000,000 shares of voting
common stock of Studio City Incorporated Holding into 10,000,000 shares of
Studio City Holding Corporation Class A Preferred Stock and was also required to
convert 10,000,000 shares of common stock into 1,000,000 shares of Class B
Preferred Stock.
On October 29, 1997, the Company called for a name change and exchange of shares
from both former CVT stockholders and Studio City Incorporated Holding
stockholders. This exchange was executed in a "like-kind" share for share
exchange. Additionally, all of the stockholders in the Merged Entity had the
option to convert any, all, or none of their shares of common stock into Class B
Preferred Stock at a ratio of 10 shares of common for 1 share of Class B
Preferred Stock.
NOTE 18--PENDING LITIGATION
When the merger occurred, there were no significant changes in the operations of
the Company and its subsidiaries. Studio City Holding Corporation and its
subsidiaries continued its operations as the merged entity. When the merger
occurred, there were no significant changes in the operations of the Company and
its subsidiaries. Studio City Holding Corporation and its subsidiaries continued
its operations as the merged entity.
The Company being an entertainment company is often required to defend its
rights and licenses for intellectual properties that the Company either owns or
serves as a joint venture partner. This type of litigation is common in the
entertainment industry, and considering that the Company owns numerous
intellectual properties and owns various types of licenses and joint
participations in intellectual properties, it can safely be assumed that the
Company will be required to defend its rights, presently and in the future.
Currently, the Company and its subsidiary, Poc-It Comics, Incorporated, are
defending their rights in the production and distribution of an entertainment
franchise based on a comic book story entitled "Shadow Raven". The principals
are currently attempting to resolve their issues in negotiation.
Secondly, the Company and its subsidiary, Quagga Entertainment Corporation, are
defending a challenge to the Companies' rights associated with a joint venture
to create, produce, distribute
24
<PAGE> 30
STUDIO CITY HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 21, 1991 (Inception) THROUGH JUNE 30, 2000
NOTE 18--PENDING LITIGATION - continued
and exploit an intellectual property entitled "Zoo Toonz", a joint venture where
the timeliness of the creation of finished products are in question. Litigation
is pending in this matter, and, it has been determined that the products will be
completed without the assistance of the joint venture partner. The Company and
its financial partners will seek to recoup all of its investment.
In March 2000, the Company agreed to a mediated settlement. The Settlement
Agreement With Prejudice became effective April 11, 2000. In the settlement
agreement, the Company would have complete ownership of all video footage
associated with the "Zoo Toonz" video series with music. The project included
some original music created by other members of the joint venture. The Company
has the right and direct ownership of all compiled music videos, and the right
to exploit 28 musical compositions for a period which would end April 2030. The
Company and its joint venture partner will receive 100% of the revenues produced
from the sales associated with the musical products as originally produced for a
period ending in 2030, and 100% of the revenues from and for perpetuity all Zoo
Toonz products, including new music produced from various new master recordings
of Zoo Toonz recordings.
NOTE 19--LOANS FROM MINORITY STOCKHOLDERS
During 1998, 1999 and 2000, various minority stockholders loaned the Company
money. These unsecured, short-term (less than one year) loans accrue interest at
10% per annum. The total amounts outstanding are $1,133,384, $888,784 and
$328,000 as of June 30, 2000 and December 31, 1999 and 1998 respectively.
Accrued interest payable on these loans are $123,723, $74,631 and $10,653 as of
June 30, 2000 and December 31, 1999 and 1998 respectively.
NOTE 20--EQUITY SECURITIES SUBJECT TO RESCISSION
Common stock was issued during 1996, 1997, 1998 and 2000 without compliance with
registration requirements of the federal and state securities laws. As a result,
these securities may have rescission rights. Accordingly, the potential
rescission liability has been classified outside of permanent stockholders'
equity, under the caption "Equity Securities Subject To Rescission". This amount
is $432,176 as of December 31, 1996, $913,599 as of December 31, 1997,
$1,003,100 as of December 31, 1998, and 1999 and $1,006,220 as of June 30, 2000.
The likelihood of the exercising of these rescission rights is considered to be
remote, and therefore, interest has not been accrued and included as an
additional liability amount. But the interest is considered to be a contingent
liability of the Company and based on a 10% annual interest rate, amounts to
approximately $36,000 as of December 31, 1996, $98,000 as of December 31, 1997,
$198,000 as of December 31, 1998, $298,000 as of December 31, 1999 and $348,000
as of June 30, 2000. When the rescission rights expire, the respective amounts
will be reclassified as permanent equity.
NOTE 21--INVESTMENT IN HAMMER TRUST
In April 2000, Studio City Holding Corporation and Problem Solvers, Incorporated
established an irrevocable business royalty trust named "The Hammer Trust-An
Irrevocable Business Royalty Trust". Studio City and Problem Solvers are the two
principals, each receiving a 50% profit participation and each having the
authority to appoint a trustee. Studio City has appointed
25
<PAGE> 31
STUDIO CITY HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 21, 1991 (Inception) THROUGH JUNE 30, 2000
Larry D. Faw, the majority stockholder of Studio City, as its trustee. The
purpose of this transaction is to expand the Company's business activities into
the management and operation in the production and distribution of crude oil,
natural gas, and petroleum products.
Studio City's initial contribution to the trust is the following: $1,000 cash,
$2,500,000 promissory demand note payable to the trust accruing interest at 9%
per annum, 1,500,000 shares of Studio City's common stock, and 1,200,000 shares
of Studio City's Class B Preferred Stock. This investment in trust asset is
recorded initially at its cost of $2,504,120 and is included in these financial
statements under investments in joint ventures and stock. The cost includes
$1,000 cash, $2,500,000 note payable, $3,000 par value of common stock and $120
par value of preferred stock.
Problem Solvers initial contribution to the trust is $1,000 cash plus 2,333,340
shares of Class B Preferred Stock of SCA Global Resources, Inc. Problem Solvers
was issued these preferred shares for its efforts in obtaining an agreement for
a swap of common stock between SCA Global Resources, Inc. and M & C Oil, Inc.
and the transfer of oil and gas reserves to SCA Global. In a related
transaction, SCA Global Resources, Inc. completed an acquisition of M & C Oil,
Inc. in a share-for-share stock exchange with Wellsprings Investments, Inc.,
owner of M & C Oil, Inc. The result of this transaction is SCA Global Resources,
Inc. received 10,000 shares (100%) of M & C Oil, Inc. and Wellsprings
Investments, Inc. received 10,000 shares (.10%) of SCA Global Resources, Inc.
26
<PAGE> 32
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
The following information should be read in conjunction with the unaudited
consolidated condensed financial statements included herein. The Company filed
its first Quarterly Report on August 15, 1999. The Company filed its first
Annual Report on April 20, 2000. The attached financial statements represent
quarterly reports from inception to June 30, 2000. The Company has broadened its
operations to include the development of non-entertainment businesses.
Management is currently reviewing and preparing updated business plans to
complement new business opportunities. The purpose of this effort is to add
value to the Company and its subsidiaries and to create core activities that
will increase and maintain revenues for an extended period of time. See Item 1.
RESULTS OF OPERATIONS
Revenues. The Company's cash flow derived from providing debt, equity, or
debt/equity financing to its subsidiaries. The operating results have fluctuated
in the past and may fluctuate significantly in the future as well as a result of
a variety of factors, some of which are outside the Company's control. In
response to the demand for entertainment products, the Company has recently
introduced a plan to create new product lines and to fully develop various
intellectual properties. The Company expects that it will continue to have net
losses at least through December 31, 2000. There is no guarantee that the
Company can fully capitalize it operations.
Six months ended June 30, 2000, compared to six months ended June 30, 1999
Total revenues decreased from $101,480 to $63,445 for the six months ended June
30, 2000. The decrease is primary attributable to decreases in short-term
financing and book sales offset by an increase in the cost of operations as the
Company prepares for its primary stock offering.
The increase in expenses is due to the associated administrative costs and
pre-public offering costs.
A decrease of earnings ($39,930) is due to the reduction of wholesale Book Sales
prior to the year end from Zweig Knights Publishing's entertainment franchise,
based on "The Nicholas Stories". The last of the first trilogy ("The Maiden
Voyage of Kris Kringle") was published on November 1, 1999, and the second
printing of "The Boy With A Wish" was published on October 15, 1999.
Book sales were prepaid in the fourth quarter of 1999 and not anticipated until
the third quarter of 2000.
Total expenses increased $25,437 to $339,402 for the six months ended June 30,
2000. The increase is primarily attributable to an increase in Other expenses
selling, general and administrative.
LIQUIDITY AND CAPITAL RESOURCES
The Company experienced cash flow deficiencies from operations and from
financing activities, (offset by cash flow from short-term borrowings from
stockholders and affiliates) during the six months ended June 30, 2000.
There was no income during the quarter ended June 30, 2000, which was primarily
due to a decrease in revenue from book sales. The Company has continued to incur
debt through short-term financing activities through officers, stockholders and
affiliates. The Company anticipates the continuance of short-term financing
until capital is created through a primary stock offering, mezzanine financing
and/or equity capitalization. There is no assurance that the Company will
achieve the level of capitalization needed to sustain its operations, however,
new business opportunities may allow the Company to re-capitalize through joint
venture associations.
27
<PAGE> 33
RECENT BUSINESS ALLIANCE AND ACQUISITION. In April 2000, the Company completed
the formation of a business alliance with Problem Solvers, Incorporated (a
Kansas corporation that provides consultation to petroleum companies) to form
"The Hammer Trust - An Irrevocable Business Royalty Trust". The Hammer Trust was
created to coordinate the acquisition of various types of business operations
and disperse revenues generated by acquisitions to Studio City Holding
Corporation and Problem Solvers, Incorporated. Upon the creation of The Hammer
Trust, the Company issued 1,500,000 shares of Common Stock to the Trust,
1,200,000 shares of Class B Preferred Stock to the Trust, and a promissory
demand note of $2,500,000. Problem Solvers, Incorporated provide 2,333,340
shares of Class B Preferred stock of SCA Global Resources, Incorporated (a
majority owned subsidiary of Studio City Holding) to The Hammer Trust. Both
parties contributed $1,000 in cash, goodwill and business expertise to the
alliance. The Hammer Trust is operated on a fifty-fifty (50%-50%) basis, with
Larry D. Faw and Hurschel Buscher, Esquire serving as Managing Trustee and
Trustee, respectfully.
The first acquisition generated by The Hammer Trust was the acquisition of M & C
Oil, Incorporated, an owner and operator of gas and oil fields, gas and oil
leases, and petroleum product transports.
In April 2000, SCA Global Resources, Incorporated (a majority owned subsidiary
of the Company) completed the acquisition of M & C Oil, Incorporated (a Nebraska
corporation operating as a foreign corporation in Kansas). SCA Global Resources
received all of M & C Oil's stock and assets for 10,000 shares of common stock
of SCA Global Resources.
M & C Oil owns certain oil and gas leases in Kansas with 22 existing oil wells
and 812 existing gas wells with proven reserves based on preliminary engineering
summaries to be a minimum of 2,100,000 million barrels of crude oil to a maximum
(if fully produced) 8,000,000 barrels of crude oil. Preliminary projections of
both shale and weir gas reserves exceed 23,439,000,000 cubic feet of gas. SCA
Global Resources is currently preparing an inventory of each well and well field
(which includes pump jacks, drilled and piped footage, electric plants, oil
reservoirs, drilling apparatus, gas lines, and assorted materials needed for the
operation of each well). Upon the completion of the inventory concerning the
properties, a more complete report will be filed by amendment.
SCA Global Resources' current business plan for the remainder of the year will
be to prepare a status report for each well and each well field. It is
anticipated that SCA Global Resources will utilize advanced production formulas
which will encompass the operation of a minimum of five wells per acre plat. It
is projected that ten plats will be reviewed, re-worked (if necessary) and
operational by the end of 2001 with the remainder well fields to become
operational in units of fifty plats per year. The gas fields leases encompass
approximately 3,500 acres and the oil field leases encompass approximately 650
acres. The Company's current business plan revolves around the reactivation of
existing wells, and there are no current plans for drilling new wells.
28
<PAGE> 34
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In March 2000, the Company agreed to a mediated settlement with Lisa Moody/Tin
Woman Music, which became effective on April 11, 2000. In the settlement
agreement, the Company would have complete ownership of all video footage
associated with the "Zoo Toonz" a video series with music. The project included
some original music created by Moody. The Company has the right and direct
ownership of all compiled music videos, the right to exploit 28 musical
compositions for a period ending in April 2030. The Company, Quagga Television
Partners, L.P., and its associated joint venture partners will receive 100% of
the revenues produced from the sales associated with the musical products as
originally produced for a period ending in 2030, and, 100% of the revenues from
and for perpetuity of all Zoo Toonz products, including new music produced from
various new master recordings which are produced by new producers of Zoo Toonz
recordings.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 27. Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K.
None.
29
<PAGE> 35
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STUDIO CITY HOLDING CORPORATION
[Registrant]
August 14, 2000 /s/: LARRY D. FAW
--------------------------------------------
Larry D. Faw
Chairman and President
(Principal Financial/Accounting Officer)
30
<PAGE> 36
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Page No. Description
<S> <C> <C>
27 Financial Data Schedule (For SEC use only)
</TABLE>
31
