<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A)
OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [_]
Filed by a Party other than the Registrant [X]
Check the appropriate box:
[X] Preliminary Proxy Statement [_] Confidential, for use of the
Commission Only (as Per-
[_] Definitive Proxy Statement mitted by Rule 14-a-6(e)(2))
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12
Hollywood Trenz, Inc.
--------------------------------------------------
(Name of Registrant as Specified In Its Charter)
Shareholders Committee of Hollywood Trenz, Inc.
--------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (check the appropriate box):
[_] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
[X] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(i) Title of each class of securities to which transaction applies:
(ii) Aggregate number of securities to which transaction applies:
(iii) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
(iv) Proposed maximum aggregate value of transaction:
(v) Total fee paid:
[X] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and date of its filing.
(1) Amount Previously Paid: $500.00
(2) Form, Schedule or Registration Statement No.: Pre 14A
(3) Filing Party: Shareholders Committee of Hollywood Trenz, Inc.
(4) Date Filed: July 5, 1996 (Filed in hard copy; not filed on Edgar)
Notes:
<PAGE>
THE SHAREHOLDERS COMMITTEE
OF HOLLYWOOD TRENZ, INC.
c/o Victor L. Zimmermann, Jr.
O'Rourke O'Hanlan & Zimmermann
27 Pine Street
New Canaan, CT 06840
(203) 966-6664
SOLICITATION OF PROXIES IN CONNECTION WITH PROPOSED CONSENT TO ACTION
October 22, 1996
Hollywood Trenz, Inc.
3471 North Federal Highway
Ft. Lauderdale, Florida 33306
Copies of this proxy statement and form or proxy
are being mailed on or about November 1, 1996
to shareholders of record as of November 1, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Dear Fellow Hollywood Trenz Shareholders:
The Shareholders Committee of Hollywood Trenz, Inc. (the "Committee")
believes that the time has come to seek new shareholder representation on the
Board of Directors of Hollywood Trenz, Inc. (the "Company"). Through these
changes, the Committee believes that the Company's Board of Directors and
management will be more able to accomplish the corporate purpose of the Company,
including the completion of the Company's entertainment center in Phoenix,
Arizona, and expansion and development of other theme parks, both domestically
and abroad, and resultant maximization of the value of the Company's shares. To
accomplish this goal, the Committee needs your support and your proxy. The proxy
will be used to execute a consent to action by shareholders without a meeting
whereby existing directors will be removed and new directors will be elected to
serve until the next annual meeting. A consent to action by shareholders without
a meeting is a permissible form of shareholder action under Delaware law, the
state where the Company is incorporated and is being utilized due to the failure
of the Company to convene an annual meeting as required by law where directors
can be elected.
Unless otherwise indicated, the person named in the accompanying BLUE
proxy will execute a consent to action without a meeting FOR the following
purposes:
1. FOR the removal of the following directors of the Company:
Edward R. Showalter
Robert E. Burton, Jr.
Gregory D. Smith
2. FOR the election of the Committee's nominees for Director.
If, after reading the Proxy Statement and the accompanying letter, you
want to join us in seeking achievement of the corporate purposes of the Company:
MARK the enclosed BLUE Proxy to indicate how you wish a consent to
action to be executed on your behalf.
SIGN the enclosed BLUE Proxy
DATE the enclosed BLUE Proxy
RETURN the enclosed BLUE Proxy in the postage prepaid envelope.
<PAGE>
YOUR PROXY IS IMPORTANT TO US NO MATTER HOW MANY OR HOW FEW SHARES YOU
OWN. PLEASE MARK THE BLUE PROXY, SIGN, DATE, AND RETURN IT PROMPTLY IN THE
ENCLOSED, SELF-ADDRESSED, STAMPED ENVELOPE. BLUE PROXIES WHICH ARE SIGNED, BUT
UNMARKED, WILL BE COUNTED AND A CONSENT WILL BE EXERCISED IN FAVOR OF THE
ACTIONS DESCRIBED ABOVE.
YOU may be receiving a WHITE PROXY from the Company opposing the efforts
of the Committee. WE URGE YOU NOT TO SIGN ANY WHITE PROXY CARD YOU MAY RECEIVE
FROM THE COMPANY.
Any proxy may be revoked at any time before the proxy is exercised by
either a later dated proxy, written notice of revocation to the Secretary of the
Company at its principal office, or a vote in person at the Meeting of
Shareholders. THE ONLY PROXY THAT COUNTS IS THE LATEST, DATED ONE. IF YOUR
SHARES OF THE COMPANY'S STOCK ARE HELD IN THE NAME OF YOUR BROKER, BANK, OR
THEIR NOMINEE, YOU WILL NEED TO CONTACT YOUR BROKER OR BANK TO GIVE INSTRUCTIONS
AS TO WHETHER YOU WISH A CONSENT TO ACTION To BE EXECUTED ON YOUR BEHALF.
As more fully described elsewhere in the Proxy Statement, the Committee
and its nominees are not members of the Company's current management.
If you have any questions or require any assistance in completing your
BLUE Proxy, please call Michael Novielli at (212) 843-8344.
WHY THE COMMITTEE IS SOLICITING PROXIES
Michael Novielli, Eric Landis, Scott MacCaughern, and Kenneth Callison,
who as of July 30, 1996, owned, of record or beneficially, in the aggregate
1,622,975 shares or approximately 3.1% of the outstanding shares of the Company,
decided to form the Committee and make this proxy solicitation after they came
to believe, as described below, that current management's policies were not
directed towards achieving the corporate purpose of the Company and allowing
shareholders to exercise their legitimate rights as shareholders. Mr. Novielli,
Mr. Landis, Mr. MacCaughern and Mr. Callison have purchased shares of the common
stock of the Company for themselves and their families and on their
recommendation have persuaded other investors to make such purchases after being
convinced by the Company's President, Edward R. Showalter ("Showalter"), of his
vision for the Company and the concrete steps which were allegedly being taken
to realize the corporate purpose. The other investors whom have been persuaded
to purchase shares of the Company include investors who were attracted to an
investment in the Company as a result of possible joint venture relationships
with the Company in the development of family entertainment centers in Asia and
others who have involvement in the motion picture and entertainment industries.
The Committee, which consists of the foregoing persons, has recently
become increasingly dissatisfied with the Board of Directors and management of
the Company. The Committee's primary concerns regarding the Company are:
. Inability to fulfill the corporate purpose of the Company.
. Dilution of shareholder value
. Failure to hold an annual shareholders' meeting the entire period
the Company has been a public company.
<PAGE>
(1) Inability to Fulfill the Corporate Purpose of the Company
---------------------------------------------------------
Since January, 1995, the Company has raised over $1,550,000. in cash
according to the notes to its Statement of Cash Flows for the Six Months Ended
June 30, 1995 and 1996 filed as part of its Form 10-QSB dated August 12, 1996.
("Second Quarter 96 10Q.") That cash has apparently all been spent according to
the Second Quarter 96 10Q which showed zero cash remaining. Nevertheless the
Company has still been unable to open its first entertainment park/restaurant.
According to an article in the Phoenix Business Journal on June 21 1996, which
quoted a Denver based real estate broker who apparently represented the Company
in negotiations for its first site in Denver, the Company executed a lease for a
37,000 square foot entertainment center in December, 1995 but Showalter did not
pay the $12,000 security deposit or come up with construction plans for the
building's retrofit as required by the landlord. According to the article, the
landlord subsequently canceled the lease. The text of the Phoenix Business
Journal article is annexed hereto as Exhibit A.
As late as April 12, 1996, when the Company's annual report on Form 10-
KSB was executed by Showalter, the Company was claiming that their entertainment
center in Phoenix was expected to open in the second quarter of 1996 and that
the Denver facility would be open by the summer. As reported in the Phoenix
Business Journal article in July (see Exhibit A) the Denver facility has been
abandoned and according to Spencer Finseth, the former project manager for the
Phoenix site, the Phoenix facility was nowhere near completion at the time.
As of the date of the Phoenix Business Journal article numerous
contractors were apparently owed money and had walked off the job. The article
quoted Finseth as stating that Showalter had "bounced checks" on him and that
"[a] number of subcontractors also have quit and have filed liens against the
property". (see Exhibit A). A spokeswomen for one of the subcontractors, Coleman
Plumbing, was quoted in the article as having stated that Coleman Plumbing was
owed $68,000. (see Exhibit A). A spokesman for the drywall contractor was quoted
as having stated that he "was never paid from the beginning for work on the
park" and was still "owed more than $50,000." (see Exhibit A).
The Committee does not know the current state with respect to
obligations owed to subcontractors or with respect to the construction. However
it does not have any information suggesting that the situation has improved with
respect to payments owed. The Committee believes that with the continuing
problem relative to payments due contractors in Phoenix the facility may not be
completed unless the Company is recapitalized. The Committee believes it is
unlikely that a successful recapitalization can take place under current
management given the unfavorable publicity regarding Showalter's background and
his current track record as chief executive officer of the Company.
The Committee now believes that so many people have lost confidence in
Showalter that he will never be able to achieve the corporate purpose of opening
an entertainment center in a timely manner in addition to installing needed
confidence in the investment community. Not only has his track record with the
Company evidenced an inability to achieve corporate objectives but there have
been recent unfavorable press reports dealing with Showalter's prior background
which the Committee believes will only make it more difficult for the Company to
achieve its goals with current management. The front page of the Business
Section of the Miami Herald for April 16,1995, featured an article (the "Herald
Article") dealing with Showalter's inability to fulfill the Company's
<PAGE>
corporate objective of opening its first family entertainment center in Denver
in 1994 and included examples of Showalter's past business failures and run-ins
with the law. The Herald Article reported that in the past seven years,
according to court records, Showalter has defaulted on loans, written bad
checks, stiffed landlords, cheated on his taxes and defied court judgments. The
article also noted that Showalter declared personal bankruptcy in 1990 and as a
result of his ownership of a garment company, America's Favorite Clothing, in
the mid-1980s, Showalter ceased business without paying his creditors and was
sued for over $200,000.00 and faced criminal charges for his conduct. The
article stated that Showalter plead no contest to grand theft and was placed on
a fifteen year probationary term in order to make restitution. The text of the
entire article is included as Exhibit B.
In addition to the unfavorable press reports the Securities and Exchange
Commission has been conducting an investigation into the Company's affairs. The
existence of this investigation was reported in the Company's 1995 Annual Report
on Form 10-KSB.
The Committee believes that the timing of the opening of the Company's
first entertainment center is critical. In large part the Committee's decision
to undertake this consent solicitation is tied to its belief that the Company's
relationship with the Sunkyung Securities LTD.("SKG") can be extremely
profitable and is integral to its future growth. Sunkyong Securities is the
brokerage and investment banking division of the Sunkyong Group ("SKG"), the
fifth largest conglomerate in Korea. With revenues of over $24 billion, SKG
ranks among the top 100 of the Fortune Global 500. One of the Committee's
nominees for director, Ronald Olsen, former Managing Director of SKG, was
responsible for introducing SKG to the Company. However Mr. Olsen did not
receive, and will not receive any compensation, in the form of finder,
consulting or other fees for making the introduction. Mr. Olsen, who is 61
years of age, retired from full time employment with SKG but remains a
consultant to SKG at a sum of $50,000 per year. The Committee believes, as a
result of its discussions with Mr. Olsen, that SKG will provide the financing
for construction of the Company's entertainment centers in Korea and possibly
throughout Asia if the Company can finish its first entertainment center here in
the United States in a timely manner. However the Committee has no assurance
that it will be able to successfully negotiate an agreement with SKG since it
also understands from discussions with Ronald Olsen that SKG may already be
negotiating with other developers of similar entertainment centers to joint
venture projects overseas.
(2) Dilution of Shareholder Value
-----------------------------
Over the last two and one-half years, according to the Form S-8
registration statements filed with the Securities and Exchange Commission, a
total of 29,680,000 shares of the Company's common stock have been issued all
for purported services rendered and most, if not all, without bringing needed
capital to the Company. All of these shares were registered with the Securities
and Exchange Commission on Form S-8 which may be used to register shares for
subsequent issuance to consultants who have provided bona fide services to the
Company. The Committee does not have information regarding each and every one of
these issuances but as a result of evidence provided in the course of the
litigation described below the Committee believes the Company has not complied
with the with rules and regulations governing the use of Form S-8. The Committee
believes that the Company registered shares pursuant to Form S-8 where the
intended recipient had not provided bona fide services. The reason for the
Committee's belief are statements contained in an affidavit of Timothy Brannon,
a former employee of the Company submitted in connection with the litigation
described below. According to the affidavit
<PAGE>
Showalter told Brannon within one month of joining the Company that it would be
necessary to register the shares on Form S-8 noting that Brannon was the
intended recipient even though it was intended that the stock would be parceled
out to various individuals and entities after it was registered and even though
some of these individuals would not have performed services for their stock.
According to the affidavit, after the shares were registered on Form S-8 Brannon
was then requested to find individuals who would buy the stock of the Company at
a discount to the market price and the securities of the Company which had been
registered with the stated intention of being issued in Brannon's name would
then be issued to the buyers.
As recently as October 31, 1994, as reported on the Company's quarterly
report on Form 10-Q for the third quarter of 1994, there were 1,486,495 shares
outstanding. The Committee has calculated that since October 31, 1994,
29,680,000 shares were issued of Form S-8, increasing the number of outstanding
shares by at least that amount. The Company has subsequently reported on its 10-
QSB for second quarter of 1996 that it issued 22,200,000 shares of restricted
common stock for services during May, 1996 and that it presently has 51,205,544
shares of common stock outstanding as of August 12, 1996. However with respect
to the 22,200,000 shares issued, there was no disclosure in the 10-QSB for the
second quarter of 1996 as to when the shares were issued or for what
consideration. Meanwhile the price of the Company's common stock has
deteriorated from a value of approximately $4.00 per share on March 31, 1995
(after a one-for-ten reverse stock split in 1994) to the current level of
approximately $.16.
Based on the lack of disclosure of what the Committee believes to be
material facts with respect to the recent issuance of 22,200,000 shares and the
fact that Showalter may have been aware of the Committee's plans at the time of
the issuance, the Committee believes that Showalter and his fellow directors
approved the recent issuance of 22,200,000 shares solely for the purpose of
entrenching themselves in office and thwarting the efforts of the Committee. The
Committee presently has no other evidence of Showalter's purpose other than the
circumstantial evidence set forth above. The Committee intends to contest the
validity of the issuance under both state and federal law and to argue that
these shares may not be considered outstanding for purposes of determining the
number of shares needed by the Committee to remove the existing directors.
(3) Failure to Hold An Annual Meeting of Shareholders
-------------------------------------------------
According to information provided by the Company in its Form 10-KSB for
fiscal year ending December 31, 1995, ("1995 10-K") the Company was incorporated
on August 25, 1987 and first sold units to the public in September, 1989. Also
according to the 1995 10-K the Company's principal business has been the
development of family entertainment centers since April, 1993 when the Company
changed its name to Hollywood Trenz, Inc. The Committee believes that the
Company has never had an annual meeting of shareholders at least since it
changed its name in April, 1993. Under Section 211(b) of the Delaware General
Corporation Law the Company is under an explicit duty to convene an annual
meeting of stockholders to elect directors. If a annual meeting is not held by
the scheduled meeting date as set forth in the by-laws Delaware law directs the
directors to call a meeting "as soon thereafter as convenient". Unless the
meeting has been called within a specified time (30 days after the stated date,
or 13 months after the last meeting) the Court of Chancery in Delaware on
application of any stockholder or director may summarily order a meeting. It is
the Committee's opinion that shareholders should not have to fight incumbent
management for the right to have an annual meeting at which directors would be
elected by the shareholders. In fact the Committee has elected for now not to
have an annual meeting ordered by the Court but rather solicit proxies for the
purpose of thereafter removing existing directors by written consent of the
stockholders acting without a
<PAGE>
meeting. Although the Company's bylaws provide that the directors shall serve
until the next annual meeting of shareholders the accountability envisioned by
this provision has been rendered meaningless since the Company has never called
for an annual meeting. Showalter and the other directors have therefore been
able to continue in office without putting themselves up for an annual vote of
shareholders.
RECENT LITIGATION
-----------------
A legal action was recently filed against the Showalter and other
members of the Board of the Company in the Court of Chancery of the State of
Delaware, on behalf of one of the Committee's members. The Complaint in this
action is annexed hereto as Exhibit C. A primary objective of this action was to
restrain the Board from further issuing shares on Form S-8. A temporary
restraining order was issued and later vacated by the Delaware Court of
Chancery. The material allegations of the Complaint have been denied by the
defendants. The case is pending but there has not been any recent activity. The
plaintiff in the action, Kenneth Callison, has not decided whether to continue
to prosecute the action.
THE COMMITTEE'S PLANS FOR REORGANIZATION
----------------------------------------
The Committee believes that the Company's management and management
policy should be subject to independent and objective review and that new
directors are required, who are untainted by the prior business and legal
troubles reported with respect to Showalter, who will operate the Company in a
manner giving due regard for the legal rights of shareholders to elect directors
and who are able to bring the necessary strategic vision to the Company.
For these reasons, the Committee has resolved to make this solicitation,
in an effort to ensure that all shareholders of the Company have the choice of
electing new, independent directors to the Board who are committed to the
pursuit of corporate purposes and the maximization of shareholder value. If
action by the shareholders of the Company results in the election of a new Board
of Directors nominated by the Committee, the new directors will initiate an
aggressive reorganization and institute a construction plan to complete the
Company's first entertainment center in Phoenix, Arizona, which has been beset
by problems since construction commenced in July, 1995. The following is a broad
outline of the Committee's plan of reorganization:
1. Close headquarters location in Ft Lauderdale, Florida, effective
----------------------------------------------------------------
immediately, and move into space at the Company's entertainment center in
- -------------------------------------------------------------------------
Phoenix. This will result in obvious cost savings to the Company and also
- -------
result in greater management oversight of the Company's initial center,
especially during its embryonic stage.
2. Form Interim Management Committee. The Committee would consist of
----------------------------------
Ronald Olsen , Michael Novielli and Eric Landis. Mr. Novielli and Mr. Landis are
members of the Committee while Mr. Olsen is Mr. Landis's father-in-law and a
nominee for director as proposed by the Committee.
3. Hire a high profile Chief Executive Officer. The Committee has had
--------------------------------------------
talks with an executive with over 20 years of experience in the restaurant
industry. This executive has demonstrated success in managing large country;
clubs, resorts, hotels and developing and managing new restaurant entertainment
concepts. This executive founded a company that developed and consulted on over
twelve theme restaurants. The executive has demonstrated significant interest in
becoming the Chief Executive Officer if there is a
<PAGE>
change in management. However consummation of an agreement is subject to many
variables, including and most importantly the executive's perception of the
financial viability of the Company at the time of any change in management. If
the Committee is not successful in negotiating an agreement with this
individual, someone with like experience will be sought. The Committee believes
that no one in current management has a proven track record in restaurant
management which the Committee believes is critically important if not essential
to the Company's success.
4. Obtain 3-5 million dollar new capital infusion. Since the Company is
-----------------------------------------------
now apparently insolvent the Committee views finding a new source of capital
quickly a critical component of its reorganization plan. The Committee believes
that the Company's present financial difficulties cannot be remedied under
current management because it will be difficult if not impossible to find new
sources of capital given the press reports regarding Showalter's past and
present business and legal difficulties. The Committee believes that given the
fact that Mr. Novielli, Mr. Landis and Mr. MacCaughern are all members of the
securities industry, the prospects for finding new capital once the Company is
under new management will be good. The Committee does believe that it is likely
that there will need to be further dilution to existing shareholders since any
source for the needed capital will demand significant equity participation. To
date there have been no material discussions regarding future financing nor does
the Committee expect such discussions to occur until and unless it is successful
in electing its proposed slate of directors.
5. Negotiate With Creditors and Contractors. Once a source of new
-----------------------------------------
capital has been obtained new management will negotiate with existing creditors
including all of the contractors who are owed money on the Phoenix project to
obtain satisfactory resolutions to their claims.
6. Finish Construction on Phoenix Site.
------------------------------------
7. Hire and Train Staff Phoenix Site.
----------------------------------
8. Grand Opening of Phoenix Location.
----------------------------------
9. Negotiate with SKG for Joint Venture in Korea. In December, 1995,
----------------------------------------------
the Company announced that it had entered into an agreement for the joint
venturing of Hollywood Trenz family entertainment centers in Korea, Singapore,
Japan and Taiwan. SKG was to secure financing and arrange joint ventures for the
construction and operation of the family entertainment centers. The announcement
stated that the Company anticipated opening centers in Asia in 1996. Although
the Committee cannot be positive at this time that SKG will still desire to
joint venture this development with the Company even if the Committee is
successful in replacing existing management, the Committee believes that the
chances will be improved with new management and the presence of SKG's former
employer, Ronald Olsen. As previously discussed Mr. Olsen continues to act as a
consultant with SKG since his retirement.
10. Determine Future Sites and Forms of Financing.
----------------------------------------------
The Committee's proposed Board of Directors is well diversified and the
Committee believes represents highly ethical and competent individuals in
industries well suited to guide Hollywood Trenz through this critical stage.
Reference is made to the table under "PRINCIPAL SHAREHOLDERS" below and Appendix
"A" attached for further information about the members of the Committee.
<PAGE>
We believe that corporate democracy depends on the voice of the
shareholders, as reflected in your proxy. We urge you to take an active part in
ensuring shareholder democracy at the Company and in choosing the directors of
your Company.
REMOVAL OF DIRECTORS
For the reasons set forth above, the Committee believes that the
Company's Board of directors has not been acting in a manner which is consistent
with the best interests of the Company and its shareholders. Under Delaware
corporate law, the Company's shareholders are permitted to remove directors of
the Company with or without cause. Under Delaware law, shareholders can act
either at a meeting or by written consent in lieu of a meeting if a majority of
outstanding shares is represented by the consents. The Committee has decided to
seek election of its proposed slate of directors by written consent without a
meeting. Rather than request each shareholder to execute a consent, the
Committee has determined to ask shareholders to execute proxies to one of the
members of the Committee who will then execute a consent to action on behalf of
everyone who has executed a proxy. Under Delaware law, a proxy is valid for up
to three years unless revoked. Once the holder of proxies executes a written
consent, the consent, to be effective, must be delivered to the Company within
sixty days of the date the consent is executed.
The Committee believes that the removal of the following persons from
the Company's Board of Directors is in the best interest of the Company and its
shareholders:
Edward R. Showalter
Robert E. Burton, Jr.
Gregory D. Smith
The persons named in the BLUE Proxy or their substitutes will execute a
consent to action without a meeting on your behalf removing the Company's Board
of Directors and electing those named above unless you withheld authority to so
act with respect to one or more Directors by marking the appropriate space in
the BLUE Proxy.
In order to be able to remove the existing directors the Committee will
need to receive proxies from shareholders holding a majority of the Company's
outstanding shares as of the record date. The record date will be the date on
which the first written consent is executed by a holder of one of the proxies.
After it has received proxies representing a majority of the Company's
outstanding shares, (calculated by the Committee so as to exclude the shares
whose voting rights the Committee intends to contest), the Committee intends to
expeditiously execute written consents on behalf of all shareholders who have
executed proxies and deliver them forthwith to the Company. The Committee then
intends to commence a special proceeding under Section 225 of the Delaware
General Corporation Law to contest the issuance of the 20,200,000 shares. In
order to prevail the Committee must be successful in the Section 225 proceeding
in obtaining a determination excluding holders of the 20,200,000 shares issued
by the Company in May, 1996 from voting their shares for the election of
directors or otherwise having their shares count in calculating a majority of
shares outstanding or else it will not be possible to remove the existing
directors and to elect the Committee's proposed slate of directors. The
Committee believes it will be successful since it believes these shares were
issued without consideration and with the sole purpose of entrenching Showalter
and incumbent management. The Committee estimates that the entire process
through completion of the Section 225 hearing may take between sixty and one
hundred and twenty days.
<PAGE>
ELECTION OF DIRECTORS
According to the Company's bylaws, the number of directors which shall
constitute the whole board shall be not less than two nor more than nine. There
are currently three directors. All directors elected shall hold office
according to the by-laws until his successor is elucidated and qualified.
The Committee has proposed removal of all of the Company's three current
directors. The committee has assembled nominees for directors whom it believes
are highly qualified and have the talent, vision and experience necessary to
maximize shareholder value while overseeing the Company's business. Any person
so elected will serve until his successor is elected and qualified.
The persons named in the BLUE Proxy or their substitutes will execute a
consent to action without a meeting which action will result in the removal of
existing directors and the election of the Committee's nominees listed below
(the "Committee's Nominees") as directors unless you withhold authority by
marking the appropriate space on the BLUE Proxy.
Each of the Committee's Nominees has agreed to serve as a director if
elected. If any of the Committee's Nominees should become unavailable for
election (which contingency is not now expected), the shares represented by the
BLUE Proxy will be voted for such substitute nominees(s) as the Committee may
name.
If elected as directors of the Company, each of the Committee's Nominees
will devote such portion of his time as he deems appropriate to serve as a
director of the Company. If elected, the nominees will suggest that the Board of
Directors initially meet monthly with additional Board meetings held as needed.
Except as set forth in this Proxy Statement, as of the date hereof, none
of the committee's members and nominees, nor any of their respective affiliates
have or intend to have any arrangement or understanding with any person with
respect to any future employment by the Company or with respect to any future
transaction to which the Company or any of its affiliates will or may be a
party. None of the Committee's nominees have had any business relationships with
the Company during its last fiscal year nor are any of the Committee's nominees
employed by the Company or any of its subsidiaries or affiliates.
To the extent practicable, the Committee desires to be able, through the
election of its slate, to direct the policies of the Board of Directors of the
company with the least possible disruption to the Company's business and
employees. There can be no assurance, however, that all key personnel will
remain in the employ of the Company even if requested to do so. None of the
committee members has any current intention of making a proposal with respect to
any merger or similar transaction involving the Company.
<PAGE>
THE COMMITTEE'S NOMINEES
The following table sets forth certain information concerning the
Committee's Nominees:
<TABLE>
<CAPTION>
Name Age Principal Business Occupation
- ---- --- For the Last Five Years
-----------------------
<S> <C> <C>
Joseph B. LaRocco 37 Attorney, Stamford, Connecticut since 1982. Mr.
LaRocco represents securities firms, investment
funds, investment banks, and corporate finance
firms.
Alfred Hahnfeldt 50 Founder and Chief Executive Officer of the NetStar
Company, a company specializing in the design,
development and installation of interactive voice
response systems which enable companies to provide
services for customers on the Internet. Also
founder and Chief Executive Officer of Spinneret
Financial Systems, Ltd., a financial consulting
firm. Formerly Vice President and Chief Financial
Officer for HO Penn Machinery Company, Inc. at
$180 million Caterpillar dealership. B.A. Yale
University 1968.
Ronald D. Olsen 60 President, Human Resources International. Formerly
Managing Director of Sunkyong Group of Korea, a
major multinational conglomerate, from 1987-1996.
Executive with IBM corporation from 1958-1987.
</TABLE>
Except as indicated in the foregoing table, none of the Committee
members own any shares of the Company solely of record but not beneficially.
Appendix "A" hereto lists all purchases and sales of securities of the Company
made within the past two years by members of the Committee, the Nominees and
their associates.
No member of the Committee or Nominee is or has been within the past
year a party to any contracts, arrangements or understandings with any person
with respect to any securities of the Company including, but not limited to,
joint ventures, loan or option arrangements, puts or calls, guarantees against
loss or guaranties of profit, division of losses or profits or the giving or
withholding of proxies except as noted below./1/ None of the members of the
Committee or the Nominees has been convicted in a criminal proceeding (excluding
traffic violations or similar misdemeanors during the last ten years).
- ---------------------
/1/ Michael Noveilli, a member of the Committee, executed a consulting
agreement in April, 1996 whereby he agreed to attempt to find sources of capital
for the Company. Pursuant to this agreement, Mr. Noveilli was to receive
shares of the Company's common stock to be issued immediately, the purpose of
which was to compensate him for his efforts to locate sources of capital as well
as to recognize his assistance in locating market makers for the Company's stock
and negotiating an agreement with Sunkyong Securities Ltd. Mr. Noveilli
thereafter decided to assist in forming the Committee before he was issued his
stock. Mr. Noveilli has agreed to waive any claim pursuant to this agreement,
which he may have against the Company, in the event the Committee's nominees are
elected.
<PAGE>
the members of the Committee or the Nominees has been convicted in a criminal
proceeding (excluding traffic violations or similar misdemeanors during the last
ten years).
Except as indicated in the foregoing table, no associates of members of
the committee or associates of Nominees to the Board of Directors holds any
common stock of the Company.
SOLICITATION OF PROXIES
The Committee expects to solicit proxies by mail, telephone, telegram
and personal interview. The Committee will also request brokers, custodians, and
other nominees to forward solicitation materials to the beneficial owners of the
voting securities of the Company, and they will be reimbursed for their
reasonable out-of-pocket expenses.
All of the expenses of this solicitation will be borne by the Committee.
It is estimated that the total costs incurred to date in connection with this
solicitation have been approximately $15,000 and that it is estimated that a
total of approximately $100,000 (including legal fees) will be expended in
connection therewith. It is the Committee's beliefs that this solicitation will
enhance the value of all shareholder interests is in the Company. Accordingly,
the Committee intends to seek reimbursement from the Company of the costs of
this solicitation in the event that it is successful in removing Edward R.
Showalter as a director and then only to the extent cash flow permits and such
reimbursement does not materially affect the Company's ability to complete
construction on its Phoenix site. The Committee will submit the question of such
reimbursement to a vote of the shareholders.
<PAGE>
[Front of the proxy]
THIS PROXY IS BEING SOLICITED BY THE SHAREHOLDERS COMMITTEE OF
HOLLYWOOD TRENZ, INC.
To Be Used to Act by
Written Consent Without A Meeting
October 1, 1996
The undersigned hereby revokes all prior proxies given by the undersigned and he
hereby appoints Eric T. Landis, Michael Novielli and Scott MacCaughern, or any
one of them, as Proxies, each with the power to appoint his substitute, and
hereby authorizes them and each of them to represent the undersigned to act by
written consent without a meeting for the purposes set forth below with all
powers which the undersigned would possess if personally present, with respect
to all of the shares of Hollywood Trenz, Inc., standing in the name of the
undersigned, upon such business as follows:
1. Amend the Company's Bylaws to remove amendments after April 1, 1996, (if
any), which impose certain requirements upon shareholders who wish to
nominate a person to the Company's Board of Directors or bring any other
business before an annual meeting of the shareholders of the Company. (As
of this date, there have been no such amendments to the Committee's
knowledge).
[_] For [_] Against [_] Abstain
2. Remove the following Directors:
Edward R. Showalter
Robert E. Burton, Jr.
Gregory A. Smith
[_] For [_] Against [_] For the Removal of All Except
INSTRUCTIONS: To withhold authority to act for the removal of any director,
mark the "For All Except" box and write the name(s) of the director(s) as to
whom your action is to be withheld in the space provided below.
- --------------------------------------------------------------------------
3. Elect or appoint the following Directors for a one-year term:
Ronald D. Olsen
Joseph B. LaRocco
Alfred Hahnfeldt
[_] For [_] Against [_] For All Except
INSTRUCTIONS: To withhold authority to act for any nominee, mark the "For All
Except" box and write the name(s) of the nominee(s) for whom your action is to
be withheld in the space provided below.
- --------------------------------------------------------------------------
[This is the back of the proxy]
THIS PROXY IS SOLICITED ON BEHALF OF THE SHAREHOLDERS COMMITTEE OF HOLLYWOOD
TRENZ, INC. THE COMMITTEE RECOMMENDS AFFIRMATIVE VOTES ON PROPOSALS ONE, TWO,
AND THREE. CONSENTS TO ACTION WILL BE EXECUTED AS SPECIFIED. IF NO
SPECIFICATION IS MADE, A CONSENT TO ACTION WILL BE EXECUTED ON BEHALF OF THE
SHARES REPRESENTED IN FAVOR OF PROPOSALS ONE, TWO, AND THREE.
PLEASE COMPLETE, SIGN, DATE AND RETURN THIS PROXY PROMPTLY USING THE ENCLOSED
ENVELOPE.
- --------------------------
RECORD DATE SHARES
(signature) X: Date:
--------------------------------- ----------------
(signature) X: Date:
--------------------------------- ----------------
NOTE: Please sign exactly as name appears hereon. Joint owners should each
sign. When signing as attorney, executor, administrator, trustee or guardian,
please give full title as such. If a corporation, please sign in full corporate
name by President or other authorized officer. If a partnership, please sign in
partnership name by authorized person.
<PAGE>
APPENDIX "A"
------------
INFORMATION ABOUT THE COMMITTEE AND THE NOMINEES
------------------------------------------------
All securities of the Company set forth in this Appendix are owned
beneficially by the persons indicated in the table below, except as described in
the table. No funds were borrowed to acquire such shares. No member of the
Committee or Nominee is or has been within the past year a party to any
contracts, arrangements or understandings with any person with respect to any
securities of the Company including, but not limited to joint ventures, loan or
option arrangement, puts or calls, guarantees against loss or guaranties of
profit, division of losses or profits or the giving or withholding of proxies
except the agreement with Michael Novielli previously set forth above.
Names and Business Addresses of Committee
-----------------------------------------
Michael Novielli Kenneth Callison
Dutchess Capital Partners Allied Health Association
380 Lexington Avenue 7936 East Arapahoe Court
Suite 517 Suite 2300
New York, NY 10168 Englewood, CO 80112
Scott MacCaughern Eric T. Landis
Round Hill Securities Merit Capital Associates, Inc.
5263 Heather Lane 1221 Post Road East
Park City, UT 84060 Westport, CT 06880
Names and Business Addresses of Nominees
----------------------------------------
Ron Olsen
c/o Merit Capital Associates, Inc.
1221 Post Road East
Westport, CT 06880
Alfred Hahnfeldt Joseph B. LaRocco
Spinneret Financial Systems, Ltd. 1055 Washington Boulevard
One Marshall Street Stamford, CT 06901
Suite 206
South Norwalk, CT 06854
Purchases and Sales of Shares of Company Common Stock, No Par Value
-------------------------------------------------------------------
<TABLE>
<CAPTION>
Committee Member Date Buy/Sell Number of Shares
---------------- ---- -------- ----------------
<S> <C> <C> <C>
Eric Landis 7/11/95 B 45,000
7/14/95 B 5,000
7/31/95 B 100
9/28/95 B 15,000
10/2/95 B 6,450
10/3/95 B 5,000
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
10/16/95 B 20,000
11/15/95 B 20,000
12/14/95 B 50,000
12/14/95 B 50,000
12/20/95 B 50,000
2/9/96 B 20,000
2/12/96 B 20,000
2/23/96 B 50,000
2/26/96 B 50,000
3/6/96 B 9,000
3/7/96 B 14,000
3/8/96 B 30,450
3/11/96 B 3,000
3/11/96 B 5,000
3/12/96 B 4,000
3/12/96 B 3,000
3/13/96 B 5,000
3/18/96 B 10,000
3/26/96 B 7,000
3/27/96 B 33,000
3/27/96 B 30,000
3/29/96 B 97,000
4/22/96 B 57,000
4/29/96 B 3,000
5/31/96 B 7,000
7/11/95 S 20,000
2/16/96 S 55,000
3/13/96 S 45,000
3/26/96 S 7,000
3/28/96 S 30,000
5/31/96 S 7,000
6/10/96 S 60,000
William Landis 8/11/95 B 20,000
(father) 11/7/95 B 5,000
11/13/95 B 15,000
12/14/95 B 50,000
12/20/95 B 100,000
1/31/96 B 135,000
3/13/96 B 45,000
3/26/96 B 70,000
3/27/96 B 30,000
3/28/96 B 10,000
3/29/96 B 100,000
4/30/96 B 5,000
4/30/96 B 20,000
5/1/96 B 85,000
5/2/96 B 30,000
5/3/96 B 20,000
5/6/96 B 14,000
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
5/6/96 B 30,000
5/7/96 B 20,000
5/7/96 B 30,000
5/8/96 B 10,000
5/8/96 B 10,000
5/9/96 B 15,000
6/10/96 S 19,000
Ronald D. Olsen/2/ 7/24/95 B 6,550
2/9/96 B 25,000
</TABLE>
Scott MacCaughern (owner of record or beneficially owned)
<TABLE>
<S> <C> <C> <C>
Eileen MacCaughern 4/5/95 B 1,000
(mother) 4/6/95 B 100
4/6/95 B 2,000
8/30/95 B 17,400
Barbara Pires 4/25/85 B 2,000
(sister) 5/2/95 B 1,475
Linda Lee 10/18/96 B 2,450
(sister-in-law)
Michael Novielli 4/6/96/3/ B 79,000
(individually) 5/6/96 S 10,000
5/8/96 S 10,000
Mr./Mrs. Michael 8/22/95 B 10,000
Novielli, Sr. 1/18/96 B 10,000
(father and mother)
Kenneth Callison 9/27/94 B 30,000
9/28/94 B 20,000
11/7/94 B 5,000
12/15/94 B 2,650
12/16/94 B 2,350
6/11/96 B 25,000
6/12/96 B 51,000
</TABLE>
- -----------------------
/2/ Also a Nominee for director
/3/ Shares journaled from Allied Capital on April 6, 1996.
<PAGE>
Nominees for Director
---------------------
<TABLE>
<S> <C> <C> <C>
Alfred Hahnfeldt 1/26/95 B 10,000
2/17/95 S 7,000
2/24/95 S 3,000
3/13/95 B 3,500
3/30/95 S 3,500
Joseph B. LaRocco 8/19/95 B 10,000
1/5/96 B 15,000
2/9/96 B 25,000
</TABLE>
<PAGE>
EXHIBIT A
---------
Article printed in The Phoenix Business Journal, June 21, 1996
Theme-park developer faces
mounting bills, legal action
By ILAN RUBER
The Business Journal
The glitter and stars surrounding the opening of a $3.5 million Hollywood-themed
park in Phoenix are fading, as the company behind the project faces unpaid
contractors and legal action by a group of its shareholders.
Ft. Lauderdale, Fla.-based Hollywood Trenz Inc., is building a 34,000-square-
foot theme park at 2710 W. Bell Road that includes a theme restaurant, laser-tag
arena and virtual-reality arcade games. The project reportedly is near
completion and company president and CEO Ed Showalter said the park will open by
the end of summer.
But the former project coordinator for the site at Interstate 17 and Bell Road,
said there still is about $1 million worth of construction needed for the part
to be 100 percent complete. And he says contractors working on the project
haven't been paid for their work.
"This guy's out of control," Spencer Finseth who acted as project coordinator
for Hollywood Trenz, said of Showalter, "He's bounced checks on me."
Finseth left the project early in May, and said he still is owed between $5,000
and $7,000 from Showalter.
Only between 10 percent and 15 percent of the construction bills have been paid
as of early May and about 50 percent of the construction was completed when he
walked off the job, Finseth said.
A number of subcontractors also have quit and have filed liens against the
property, he said.
Coleman Plumbing in Phoenix received a cashier's check for about $17,000 but
still is owed $68,000, a company spokeswoman said.
Ray Lewis of Adobe Drywall in Phoenix said he never was paid from the beginning
for work on the park. He said he still is owed more than $50,000.
"I really felt concerned that the subs get paid," Finseth said. "When one of
the smaller subs get stiffed for $60,000 to $70,000, it could close them down."
Last week, a Delaware court lifted a temporary restraining order that prohibited
Hollywood Trenz from issuing certain shares of stock to individuals, such as
contractors, electricians and plumbers, in exchange for services.
Vic Zimmermann, an attorney representing the shareholder group, said a complaint
had been filed June 10 against the company and its directors for misuse of funds
and misuse of the company's capital stock. "They (Hollywood Trenz) issued stock
- -- to consultants who we don't think were bona fide consultants," he said.
<PAGE>
The shareholders allege the stock was not being issued for actual consulting
services, but rather for the company's capital-raising actions, according to
Charles Butler, another lawyer representing the stockholders. It wasn't going
to the people that it said it was going to," but to keep the business up and
running, Butler said.
The company issued stock for services because it didn't have the cash up front
to pay for the work, Zimmermann said. "Not only did they not have the cash,
which is not disputed, but some of the stock which allegedly was issued for bona
fide services, the services were never performed."
Proceeds from the stock, registered May 17 with the Securities and Exchange
Commission, were to be used for employees and consultants and employee-benefit
plans, Butler said. He said by law, the stock is not to be used in a capital-
raising transaction.
The ban to issue stock was filed Monday after Hollywood Trenz representative
submitted affidavits that said the restraining order forced the company to halt
its operations in Phoenix.
According to Butler, the Delaware Chancery Court said it had assumed there were
no operations in Phoenix. "Mr. Showalter's representatives responded to the
motion with Showalter's affidavits, which we feel are completely erroneous."
In light of that, the court rescinded the restraining order.
But Butler said the 10-day ban allotted plaintiffs' attorneys time to collect
evidence and prepare to file for a preliminary injunction to stop the stock
issuance. "I haven't filed for a preliminary injunction, yet," he said.
Zimmermann said he expected to file a motion for the preliminary injunction on
Wednesday.
The initial order was handed down without notice to Showalter. Zimmermann said
that was because the shareholders believe the stock was in the process of being
issued and once issued, it would be impossible take further action.
Showalter was not present at the hearing and in a telephone interview Wednesday
said he would not comment further on the matter. He did issue a statement
vindicating himself and Hollywood Trenz of the shareholders' allegations.
"The purported shareholders group that brought the suit did not, in fact,
represent the shareholders of Hollywood Trenz, but was comprised of a group of
dissident individuals who were seeking control of the company for their own self
- -serving and personal gain," Showalter said. "This group attempted to use the
court and the media to further their scheme by making erroneous statements about
the company and its directors."
Part of the preliminary injunction suit will ask the court to order a
stockholder list. The shareholders committee was formed after the original suit
was filed by Ken Callison, a Littleton, Colo., stockholder. The group consists
of people who have an interest in the stock and the company, Zimmermann said.
Callison was not available for comment.
Chip Block, a Denver-area real estate agent in a transaction involving Hollywood
Trenz, said he, too, has had trouble with Showalter and the company.
<PAGE>
"It was difficult to get a deal done up here given the financial condition for
the company," said Block, who leased a space for the Hollywood Trenz concept in
Littleton. He said he leased a 37,000-square-foot building in December for an
entertainment center, but Showalter did not pay the $12,000 security deposit or
come up with construction plans for the building's retrofit as required by the
landlord. Block said the landlord since has canceled the lease.
Because of the Denver lease deal going sour, Block lost out on his commission
and said he'd never work with Showalter again. "Once you go around the block
with Ed, you don't do it again," Block said.
In addition to the injunction on issuance of certain shares of stock, the
lawsuit is asking the court to set a date for an annual meeting of shareholders
within the next 60 days. Directors for the company allegedly were appointed by
Showalter, but never elected, Zimmermann said.
Ralph Shattuck, a shareholder who purchased about $100,000 worth of Hollywood
Trenz stock said such a meeting never has been held.
Shattuck said he has a promissory note for $20,000 from Showalter that was to be
paid in November 1994. He has not received his money. "He promised to have it
taken care of before they opened up the doors. Now I questioned why I bought
into this $100,000 fiasco."
Hollywood Trenz stock is trading at about 10 cents a share, down from about $17
a share when the company went public in 1993.
"A lot of investors have lost money," Zimmermann said. "That's really the
bottom line."
<PAGE>
EXHIBIT B
---------
Article printed in The Miami Herald Sunday, April 16, 1995
High-tech fun center is having rocky start
Past difficulties dog owner in new venture
By JAMES McNAIR
Herald Business Writer
On a vacant knoll in suburban Denver, just above the shine of traffic on
Interstate 25, Edward R. Showalter Jr. hopes to lay his greatest golden egg.
Under on big roof, the Fort Lauderdale man would create a $14 million, six-story
shrine of high-tech entertainment for all ages. Among the draws: A massive
laser tag arena, a motion-simulator theater, a virtual-reality center, a two
story video wall, two jungle gyms, two stages, a retail store, private party
rooms and a 400-seat restaurant with four bars.
Denver's would be the first. Then Sunrise, Orlando, Atlanta and Las Vegas. By
2001, Showalter plans to open 51 Hollywood Trenz Family Entertainment Centers.
If people come and spend as he says they will, his company, Hollywood Trenz
Inc., will gross $1.5 billion a year.
That's the plan. Now for the reality.
By its own account, Hollywood Trenz was to have broken ground for the Denver
center on a least four occasions in 1994 -- but didn't. A financing deal
announced last September fell through and hasn't been replaced. Meanwhile,
three company officers have bailed out and the company's publicly traded shares
have plunged in value, from $17 last April 22 to $2.62 on Thursday. (The market
was closed for Good Friday.)
"The investment community has gotten totally had on this deal," said Michael
Pinson, publisher of Investment Digest newsletter in Clearwater.
Pinson's remark would come as no surprise to many people who have had business
dealings with Showalter. In the last seven years, court records show, Showalter
has defaulted on loans, written bad checks, stiffed landlords, cheated on his
taxes and defied court judgments. He declared personal bankruptcy in 1990. He
is serving a 15-year probation term for grand theft from an Orlando lender in
1988.
"He's like the ultimate white collar crook," said Gary Neville a Santa Monica,
Calif., architect who guaranteed a $400,000 loan to a Showalter company in
Hilaleah, then lost it when Showalter defaulted and filed for bankruptcy.
Showalter's launch of Hollywood Trenz raises serious questions about how a
company president can shelter a shady past from the investing public. Unless
they did their own sleuthing shareholders of Hollywood Trenz would have had no
knowledge of Showalter's misdeeds.
In documents filed with the Securities and Exchange Commission, Hollywood Trenz
makes no mention of Showalter's bankruptcy filing, his no-contest plea to grand
theft and most of the lawsuits. The company's annual report for 1993 says
Showalter ran American Movie Retail Inc. in Fort Lauderdale from 1989 to 1992.
It doesn't say the store was
<PAGE>
booted out of shopping centers in Coconut Grove and Oakland Park for falling
behind on the rent.
Charles Senatore, head of the SEC's regional office in Miami, would not talk
about Hollywood Trenz's disclosure requirements. Leslie Croland, a former SEC
attorney now in private practice in Miami, said public companies must disclose
any information from the past five years that is "material" in helping
reasonable investors decide to buy, hold or sell the stock.
"If there was a bankruptcy of any officer or director in the past five years, it
has to be disclosed." Croland said. "The no-contest plea is debatable."
Hollywood Trenz has not yet filed its annual report for 1994. But a filing for
the nine month's ended Sept. 30 reveals a company in desperate shape: Sales --
from the company's only operation, a shirts-and-paraphernalia store in Sarasota
- -- were $63,706. Its net loss was $2 million. Moreover, its current debts --
those due in a year -- were $4.6 million, while its current assets were
$122,299.
The filing also makes this unsurprising disclosure: The SEC is looking at its
financial statements.
Who is Showalter?
Although he has an electrical engineering degree from Penn State, Ed Showalter
is Hollywood all the way.
Showalter, 44 years old and divorced, flies around the country on a Lear jet.
When he's not driving his red Mitsubishi 3000GT, he's often in the back of a
limousine. He lives rent-free in a $810,000 house on the Intracosatal Waterway
in Pompano Beach. Hollywood Trenz owns the house.
With his bushy mustache, pony tail, pointed cowboy boots and outgoing
personality, Showalter is easy to warm up to. Acquaintances call him a born
promoter.
"Ed comes across with a lot of boyish charm, and he's very disarming," said
Scott Frazier, an Orlando attorney who sued Showalter in 1988 on behalf of a
lender, National Factors Ltd.
When conversations turn to business, Showalter draws rapt attention. Neville,
the Santa Monica architect, recalled that Showalter talked big numbers and big
projections. But he said it was Showalter's determination and knowledge of the
Hollywood licensing business that impressed him most of all.
Showalter, who did not respond to repeated requests for interviews, left his
engineering career in 1985, according to the Hollywood Trenz business plan. He
moved from Columbus, Ohio, to Miami. His first venture, America's Favorite
Clothing, was a wholesaler of garments bearing the likeness of such characters
as Batman, Roger Rabbit and Cathy.
<PAGE>
Recession takes toll
America's Favorite Clothing fell victim to recession in the later 1980s, the
business plan states. When Showalter didn't pay his debts, creditors took him
to court. National Factors, which financed his inventory, had him charged with
grand theft in Orlando and sued for the recovery of more than $200,000.
Showalter pleaded no contest to the charge. He stayed out of prison by agreeing
to repay National Factors $149,000 over a 15-year period.
"Unfortunately, it seemed to be the only way to get a penny out of Ed," said
Frazier, National's attorney.
As of last week, Showalter owed $122,095, said Gary Rogatz, a senior
administrator with the Florida Probation and Parole office in Fort Lauderdale.
He has a strong incentive to keep paying.
"If he's not in compliance, then we would send a violation report to Orlando and
let them know, then the judge would issue a warrant for his arrest," Rogat said.
New companies
As America's Favorite Clothing faltered, Showalter started new with American
Movie Retail. It sold Hollywood and cartoon theme shirts and merchandise in at
least two locations, CocoWalk in Coconut Grove and Yates Plaza in Oakland Park.
He was evicted from both. He still hasn't paid off a $97,000 judgment from the
CocoWalk lawsuit.
Things weren't much better in Showalter's personal life. In 1991, he was chased
out of his home in Oakland Park's Oak Tree Country Club for failing to pay his
rent.
"The sheriff actually had to remove his things and put them on the street," said
Salome Zikakis, attorney for Showalter's landlord, Guy Shoemaker.
Not one to brood, Showalter created another company -- Hollywood Trenz -- in
1993. This time, it was a company whose shares were traded in the stock market.
Specifically the NASDAQ Electronic Bulletin board, realm of obscure, low-priced
"penny" stocks.
Hollywood Trenz was formed in one of those backroom mergers that enable a
company to go public without going through an exhaustive SEC review. A publicly
owned shell company called Dimension Capital "bought" Interstate Finance &
Trust, a real estate company, from Showalter. For compensation, he received a
majority share of Dimension's stock. He change the merged company's name to
Hollywood Trenz.
Lavish entertainment centers
The stage was set for Showalter to build his grandiose Hollywood Trenz Family
Entertainment Centers. To raise money, he flew to investment seminars in
Boston, San Francisco and Las Vegas, touting the stock to brokerage houses,
newsletter publishers and investors. Showalter's ebullience worked wonders.
"They were talking about laser tag, virtual reality and a Planet Hollywood type
of environment. I thought it was a very exciting project," said Pinson, the
newsletter publisher.
<PAGE>
From his fifth-floor office in the Roselli Building in Oakland Park, Showalter
hired employees and had the first blueprints for the entertainment center drawn.
A flurry of press releases ensued last spring. One announced an agreement to
buy nine acres near Denver. Another set the groundbreaking for June 1994, the
grand opening by year end.
The announcements set fire to Hollywood Trenz shares last April, but interest
was short-lived. In the real Hollywood entertainment executives smelled a hoax.
Last spring, Showalter talked with actress Shelley Duvall about a deal in which
Duvall would lend her name, image and talent to a children's fantasy theater in
Hollywood Trenz's Denver center. Duvall's business partner at the time,
Christian Eddleman, said no contract was ever signed. But he said Showalter
dropped Duvall's name everywhere he went.
"He's essentially using that false pretense to open doors in Hollywood,"
Eddleman said angrily. "Anybody other than Shelley would have had him for
dinner."
Real estate purchases
Another indication of trouble was Showalter's struggle to pay for real estate he
had bought through Interstate Finance & Trust -- now carried on Hollywood
Trenz's books.
Interstate had borrowed $3.5 million to buy three Florida properties. One was
the $810,000, four-bedroom pool house where Showalter lives rent-free in Pompano
Beach. The others were in Brevard County: a 34-acre site in Melbourne and two
acres of waterfront property in Cocoa.
According to filings with the SEC, Hollywood Trenz planned to build homes on the
Brevard County parcels. It never happened. The U.S. Fish & Wildlife Service
told the company endangered gopher tortoises and scruljays lived on part of the
34-acre tract. The properties in Pompano Beach and Cocoa went into foreclosure.
They still are.
"Bottom line is he just didn't pay," said Jack Korthals, who sued on behalf of
the seller, W. Burke Allen of Fairfax, Va.
The real estate problems had no apparent effect on Showalter's enthusiasm to
become the H. Wayne Huizenga -- his personal hero -- of the family entertainment
industry.
In his business plan, Showalter forecast opening five centers by the end of
1995, 51 by the end of 2000. Each center, he predicted, would have an average
daily attendance of 2,657 people, each spending an average of $31. With the
completion of the 51st center, Hollywood Trenz would general $1.5 billion a year
in sales and $306 million a year in net income, or $1 of profit for every $5
sale.
But in mid-1994, Hollywood Trenz barely had the money to build a chain of hot
dog stands, let alone a chain of family entertainment centers at $14 million a
pop.
In October, the company announced a $14 million financing deal from First
Financial of Boston, but it was never finalized. It raised $1.8 million for the
liberal issuance of new shares in the first nine months of 1994., but the money
went right back out in expenses. As of Sept. 30 Hollywood Trenz had $17,028 in
cash.
Meanwhile, its stock price had fallen to the 40-cent range, prompting the
company to declare a 1-for-10 reverse stock split that elevated the price to a
more respectable $4.
<PAGE>
It was all a house of cards to Showalter's employees. Three former vice
presidents - two of whom are suing Hollywood Trenz for back pay -- said
Showalter spent much of his time traveling to raise money that never seemed to
add up.
"I thought we had a good thing going," said Robert Tansill, who quit as vice
president of construction last summer and filed suit after receiving seven
bounced paychecks. "I didn't think it was a scam, but they haven't done
anything and they keep promising they're going to build this thing in Colorado."
"Showalter's all talk," Tansill said. "he's great at putting out press
releases, but it's nothing but a way to raise money. He doesn't have the savvy
or backing to (build the Hollywood Trenz centers)."
Darrell Wilde left as vice president of operations in January and sued for
nearly $20,000 in back pay. He said ground-breaking for the Denver center was
perpetually "two weeks away."
"I don't know if it's ever happen." Wilde said. "I'm pretty sure it won't
happen, but I don't think (Showalter) is willing to give it up."
Las November, the Arapaho County Commission in Colorado gave final approval to
the Hollywood Trenz project. The company has yet to obtain a building permit,
though. County Planner Ed Clark wonders if that will ever happen.
"I don't know whether to believe them or not," Clark said. "It could be all
smoke and mirrors."
Expecting progress
Bill Howard, a consultant hired to represent Hollywood Trenz in Colorado, said
the project is still on as far as he is concerned.
"To the best of my knowledge, they're solidifying their financing and, when they
do, they'll move forward," Howard said. I'm not particularly alarmed."
Pinson, the newsletter publisher, is alarmed. He issued a sell recommendation
on April 3. He wrote that Showalter refused to return telephone calls or answer
written questions about the status of the project.
"They're promoting their stock, which is perfectly legitimate and common,"
Pinson said in an interview, "but it's another thing to haul out investor
packages that they're going to break ground in 30 days and they've got $14
million in financing -- and it never happens."
Ted Sobo, a Fort Lauderdale lawyer, won a court case against Showalter and
America's Favorite Clothing in 1989 over an unpaid $10,000 business loan from
Stephen I. Levy. He said Showalter still didn't pay up.
"I don't know anybody in his right mind who'd want to invest in a company run by
Mr. Showalter," Sobo said.
A HISTORY OF DIFFICULTIES
Here are some of the bigger legal problems involving Edward R. Showalter Jr.,
president of Hollywood Trenz Inc. since 1988.
<PAGE>
. 1988: National Factors Ltd., an Orlando-based inventory lender, wins a civil
judgment against Showalter and his Hialeah-based garment company
Jazzle's for more than $200,000. The same year, the state attorney's
office in Orlando uses the case to file a grand theft charge against
Showalter. Showalter pleads no contest, is ordered to pay $149,000 in
restitution and is put on probation for 15 years. More than $122,000
remains to be paid.
. 1989: The Internal Revenue Service files a lien against Showalter for
failing to remit $8,835 in withholding taxes due from an unidentified
company of his in 1987. The taxes remain unpaid.
. 1990: Gary Neville, a Santa Monica, Calif. developer sues Showalter for
$381,115. Neville said he had guaranteed a loan for Jazzle's and, when
Showalter defaulted, was held accountable for the note.
. 1990: Showalter files bankruptcy in Florida. He lists $938,415 in debts, $50
in cash on hand and a "watch, jeans, shoes and socks" worth $100. The
filing wiped out his debt to Neville.
. 1990: David Margolis, general manager of O&M Financial in Miami, sues
Showalter and his America's Favorite Clothing company for allegedly
defaulting on a $112,500 loan. Margolis dropped the suit and has never
been repaid.
. 1990: A Broward Judge orders Showalter to repay $10,000 to businessman
Stephen I. Levy to satisfy a loan to America's Favorite Clothing.
Levy's lawyer said Showalter never paid.
. 1991: Showalter is evicted from his home in Oakland Park.
. 1991: Another Showalter company, American Movie Retail, is evicted from
CocoWalk in Coconut Grove and ordered to pay $97,000 to the landlord.
CocoWalk's lawyer said the debt remains unpaid.
. 1993: Robert Tansill, a former vice president of Showalter's Hollywood Trenz
Inc., files a civil fraud suit against Showalter for unpaid wages. One
year later, another Hollywood Trenz vice president, Darrell Wilde,
files a similar suit. The suits are pending.
. 1995: A Virginia Judge returns a default judgment against Showalter for
failing to live up to an agreement to provide businessman W. Burke
Allen with bailout financing for a distressed shopping center in
Maryland. The amount of the judgment has yet to be set. In a related
case, Allen and Florida Realty Mortgage Trust of Miami file
foreclosure suits against Hollywood Trenz for allegedly defaulting on
payments for a waterfront house in Pompano Beach and a waterfront lot
in Melbourne that Allen had sold to Hollywood Trenz. The suits are
pending.
. 1995: Certified Manufacturing Co. of Pleasantville, N.Y. wins a lawsuit
against Hollywood Trenz, in small claims court for failing to pay for
items such as Daffy Duck magnets and Bugs Bunny cookie jars. Certified
said Hollywood Trenz hasn't paid.
<PAGE>
EXHIBIT C
---------
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN AND FOR NEW CASTLE COUNTY
KENNETH CALLISON, )
)
Plaintiff, )
)
v. )
)
EDWARD R. SHOWALTER, )
ROBERT E. BURTON, JR., )
GREGORY D. SMITH, ) C.A. No. 15036
)
Defendants, )
)
and )
)
HOLLYWOOD TRENZ, INC., )
a Delaware corporation, )
)
Nominal Defendant. )
FIRST AMENDED INDIVIDUAL AND
DERIVATIVE COMPLAINT FOR INJUNCTIVE RELIEF
------------------------------------------
Plaintiff Kenneth Callison, by his undersigned attorneys, brings this
action individually and derivatively on behalf of Hollywood Trenz, Inc., a
Delaware corporation ("Hollywood Trenz," "HTNZ ," or the "Company") to enjoin
the continued fraud, mismanagement and improper dilution of stock ownership by
the current directors of the Company. Plaintiff alleges as follows:
Introduction
------------
1. Edward Showalter ("Showalter"), for all intents and purposes, is
Hollywood Trenz. The Board of Directors of Hollywood Trenz exists in name and on
paper only. There is no managerial entity available to rein in Showalter's
massive, sustained, and debilitating fraud on the public, the corporation or its
shareholders. This Court's unequivocal intervention is needed to salvage the
dire circumstance this company faces and to stop a fraud upon the investing
public.
2. Showalter, the Chairman of the Board of Directors and President of
Hollywood Trenz, a sophisticated con artist who has concealed his past and
current misdeeds from the investing public. Among the more glaring deficiencies
in the management and operation of Hollywood Trenz is the fact that it has never
held an annual meeting of shareholders -- a circumstance that plaintiff seeks to
remedy through a separate action pursuant to 8 Del. C. (S) 211 filed on June 6,
1996. But until the stockholders can hold an honest election of directors,
plaintiff needs this Court's
<PAGE>
intervention to stop the unlawful conduct by Showalter -- conduct undertaken
with the apparent knowledge and acquiescence of the remaining two directors.
THE PARTIES
-----------
3. Plaintiff Kenneth Callison is and, since June of 1994, has been a
shareholder of Hollywood Trenz, currently holding approximately 24,000 shares.
4. Defendant Hollywood Trenz is a Delaware corporation. It was
initially known as Dimension Capital, Inc. ("Dimension"), and existed as a
publicly traded shell corporation. In 1993, Dimension acquired all of the stock
of Interstate Finance and Trust Co. ("Interstate"), a private company owned and
operated by Edward Showalter. In the acquisition by Dimension, Showalter
obtained control of a publicly traded entity through a transaction that did not
have to withstand scrutiny by the SEC or underwriters' counsel, a process he
would not likely have withstood given his background. Showalter then changed the
name of Dimension to Hollywood Trenz.
5. Defendant Showalter is the Chairman of the Board of Directors,
President and CEO of Hollywood Trenz. He is also a convicted felon (grand
theft), a tax cheat, and a check kiter who declared personal bankruptcy in 1990
to avoid paying legal judgments against him.
6. Defendant Robert Burton ("Burton") is Vice Chairman of the Board,
Chief Operating Officer and Secretary of the Company. Formerly a partner in the
Ohio law firm of Squire, Sanders & Dempsey, Burton was induced by Showalter to
participate both as an investor and as part of the management of Hollywood
Trenz. Burton has lost over $400,000, including his retirement savings, as a
result of his relationship with Showalter, and he has apparently determined that
he is now in too deep and his only hope of recouping his money is to aid and
abet Showalter. He has actively and knowingly assisted Showalter in his illegal
schemes to issue stock.
7. Defendant Gregory Smith (Smith") is a director of the company and
also owns a separate company involved in aircraft charters. Smith has actively
participated with Showalter and Burton to authorize corporate waste, gross
mismanagement, and fraud.
SHOWALTER'S BACKGROUND
----------------------
8. Showalter's entrepreneurial career began with his formation of
America's Favorite Clothing, a garment company. It failed in the mid 1980's and
would be unremarkable except for one fact: Showalter ceased business without
paying his creditors. One of them sued him for over $200,000. Facing criminal
charges for his conduct, Showalter pled no contest to grand theft and was placed
on a 15-year probationary term and ordered to make restitution. Showalter has
never disclosed his conviction for grand theft in any public filings with the
SEC relating to Hollywood Trenz, despite having a legal obligation under
applicable SEC rules and regulations to make such disclosure.
9. Also not disclosed to the SEC -- or the investing public -- was the
fact that as a consequence of numerous bad business deals, Showalter was so
deeply in debt that in 1990 he declared personal bankruptcy. As a director of a
publicly traded company, Showalter is required to disclose in appropriate SEC
filings the fact of his personal bankruptcy.
<PAGE>
10. Each of the above factors -- all certainly relevant to any investor
considering whether to entrust his money to a business controlled by Showalter -
- - were concealed from the SEC, which is presumably one reason the SEC has
launched an investigation into Showalter's activities at Hollywood Trenz.
HOLLYWOOD TRENZ -- BUSINESS BACKGROUND
--------------------------------------
11. Hollywood Trenz began as a T-shirt and memorabilia store in
Sarasota, Florida. This effort has since closed down completely with,
predictably, a judgment by creditors against Showalter for $81,682. Nonetheless,
Showalter has been successful in actively promoting Hollywood Trenz as a company
that will establish family theme parks to include arcades, laser tag, a
toddler's play area, a retail store and theme restaurant. To date, despite
issuing millions of shares of stock and raising millions of dollars from
investors, development of this idea consists of little more than one shell in a
strip shopping center in Phoenix, Arizona.
12. As Showalter began to raise capital for his scheme, he announced
that he would open theme parks in Denver and Phoenix. After spending $1.2
million on the Denver effort, Showalter has abandoned it while failing to pay
the landlord even the security deposit on the land. At the Phoenix site, there
have been some site improvements which have also been abandoned with, again,
lawsuits and mechanic's liens in their wake. The company is functionally
bankrupt and is being propped up financially only by Showalter's continued
fraudulent stock sales to the public.
SHOWALTER'S SCHEME
------------------
13. As described above, the method by which Showalter came to control a
publicly traded corporation enabled him to avoid an initial public offering with
the attendant review by the SEC and due diligence investigations by
underwriters' counsel. By simply merging with an existing publicly traded
company, Showalter was able to begin marketing his scheme to the public through
the public entity, renamed Hollywood Trenz.
14. Whether the concept marketed by Showalter would have succeeded
under different managers remains unresolved. It is clear enough, however, that
under Showalter's tutelage, Hollywood Trenz has been an unmitigated disaster for
all but Showalter. Shareholders have seen the value of their investment drop
like a stone from $17.00 per share in April of 1994 to $.14 currently due to
mismanagement and fraudulent dilution of the stock. Creditors, contractors,
vendors and former employees all are in some form of litigation with the
company. Showalter, meanwhile, routinely rides in limousines, rented Lear jets
charged to the Company by Director Greg Smith and resides in an $800,000 house
in Florida, all financed for his benefit by the Company with funds derived from
the fraudulent registration and sales of stock.
15. Publicly traded companies such as Hollywood Trenz are permitted to
register securities that are offered to employees on SEC Form S-8. Under SEC
rules applicable to Form S-8 registrations, the term "employee" includes
independent contractors working under a written contract. Unlike other
registrations, a Form S-8 registration statement is not reviewed by the SEC and
is effective immediately upon filing. The issuer -- which must be a publicly
trading entity already subject to SEC filing requirements -- benefits from the
streamlined registration process while the recipient of the stock benefits from
the fact that the stock is freely tradable and thus can be reduced to cash by a
sale on the open market. The use of Form S-8 is
<PAGE>
restricted by law in one respect explicitly: it may not be used by an issuer to
----------------------------------
raise capital.
- -------------
16. Unfortunately, the Form S-8 procedure affords an opening for the
unscrupulous. Shares can be registered using Form S-8 and issued to a willing
independent contractor/employee/co-conspirator who never performs the services
that were to be rendered, keeps only a fraction of the shares for him/herself
and "kicks back" the remainder to the issuer or his nominee. The nominee then
sells the shares in the public market and turns the proceeds over to the issuer
or to insiders for their personal benefit.
17. This is precisely the scheme that Showalter has hit upon. Since
October of 1993, Showalter has been to the well of Form S-8 no less than 12
times, causing Hollywood Trenz to issue over 17 million shares of stock to
purported "consultants," many of whom never performed services.
18. The scheme has been outlined in some detail by Timothy Brannon
("Brannon"), a former Hollywood Trenz insider who has come forward to explain
the fraudulent activity to the SEC and others in his affidavit filed on June 6,
1996 in this case.
19. Brannon was initially hired by Showalter to be a manager. Shortly
after his hiring, however, and on four subsequent occasions, Brannon was asked
directly by Showalter to sign overlapping consulting agreements with Hollywood
Trenz for millions of shares of Hollywood Trenz stock. Brannon was told by
Showalter and Burton that he was signing for large blocks of stock to be
registered on Form S-8 but that only a tiny fraction of the stock would actually
go to him for his personal benefit. Showalter would cause the rest to be issued
in the name of various other individuals and entities. Thereafter, with the
assistance of Brannon, Showalter would find persons to buy the stock at a
discount from the current market price. In other instances, Showalter simply had
stock issued to his personal creditors, who could then sell the stock on the
open market to satisfy Showalter's obligations to them.
20. For example, based on his personal experience and conversations
with Showalter, Brannon has testified under oath that:
shares are being issued as a result of the S-8 offerings to individuals
and/or entities who have not been the bona fide provider of services to
the Company. I believe that Mr. Showalter has continued to use the Form
S-8 to register shares of Hollywood Trenz which are then transferred to
individuals or entities with whom he has a close personal relationship
and who have an arrangement with him to let him participate in the
proceeds received by the subsequent sale of the stock. I know that
shares registered to Euro International Designs [Showalter's wife's
company] have then been issued to companies who have helped Showalter
with personal services such as secure financing for his personal
residence. I am specifically aware that 300,000 shares registered in the
name of his wife's company were then transferred to Stevco Inc. in
December, 1995 in exchange for personal services rendered to Showalter.
21. Although the stock registered on Form S-8 was ostensibly for
issuance over a period of time as services were rendered under consulting
agreements,
<PAGE>
the fact is that in each instance all of the stock was issued almost immediately
upon the filing of the applicable Form S-8.
22. Brannon has personal knowledge that at least one so-called
"consultant" in fact performed minimal services for Hollywood Trenz, but
nonetheless received several large blocks of stock. That consultant was
Showalter's wife, Tracey Braime, doing business as Euro-International Designs.
During Brannon's employment with Hollywood Trenz, Showalter's wife admitted to
Brannon that she had performed minimal services for Hollywood Trenz.
23. Support for Tracey Braime's comment to Brannon can be found in the
fact that the contracts she signed with the company are almost patently a sham.
She has signed three separate overlapping consulting agreements with the company
to design some of the interior decor of the Phoenix entertainment center,
consisting of movie memorabilia. The market price of the stock she was to
receive under the contracts had a combined value of some $1.4 million. Braime is
a full time college student, majoring in drama.
24. Braime had already contracted to perform interior decorating under
contract with the company for three years for a fee/stock equivalent of $960,000
when, without any additional consideration, the company fortuitously signed
another three-year contract with Braime to perform exactly the same service,
this time for a fee/stock equivalent of $190,000. Braime received yet a third
three-year contract only one month later, again agreeing to perform exactly the
same services, this time for a fee/stock equivalent of $216,000.
25. Whatever else can be said about Tracey Braime, it is simply not
possible that a responsible Board, acting within the scope of its fiduciary
responsibilities, could have hired a 24-year-old drama student, who is the wife
of the CEO, to be paid well over a million dollars to do decorating.
SHOWALTER FRAUDULENTLY LAUNDERS
HIS FRAUDULENTLY REGISTERED STOCK
---------------------------------
26. Once Showalter has slipped past the SEC by impermissibly
registering stock pursuant to a Form S-8 that he actually plans to use to
finance ongoing operations, he still has to bring the stock to market. Since no
underwriter would even consider underwriting a Showalter stock offering, he has
no legal means to move the stock to an unsuspecting public. Undaunted, Showalter
has yet another scheme to move the stock into the market.
27. Showalter directs his "consultants," the recipients of the stock,
to direct, in turn, transfers to various nominees of Showalter who own brokerage
accounts. In the case of Euro-International Designs, for example, his wife owns
an account at D.E. Frey in Denver, Colorado. This account has by far been the
one used most often.
28. The "consultant" is instructed by Showalter to direct the transfer
agent to transfer the shares. The transfer could be directed anywhere -- to a
creditor, a potential investor, a promoter, a personal creditor of Showalter,
Showalter's personal accounts or the brokerage of account of Showalter's wife.
In many such cases, the recipient of the transferred shares then places the
shares in the transferee's brokerage account and lodges "sell" orders on the
stock, resulting in cash proceeds to the
<PAGE>
transferee. Once the proceeds are reduced to cash, Showalter is free to make
whatever use of the money he wishes without accountability to the corporation.
USING FRAUDULENTLY REGISTERED STOCK TO
FINANCE PERSONAL AND CORPORATE BUSINESS
---------------------------------------
29. Showalter has no source of income beyond what he makes in
connection with his activities with HTNZ yet his lifestyle would make a Fortune
500 corporate president jealous. He owns an $800,000 home in Florida, sleeps in
only the best hotels when he travels, uses private jets, rides in limousines and
routinely dines in four star restaurants. Spencer Finseth, a construction
project manager lured to work for Showalter, reports that even as a single man
he could not keep up with Showalter's pace of late night partying and estimates
that it was routine for Showalter to go through at least $1,000 per day in
spending money alone. All of that money came from investors who thought they
were capitalizing an up-and-coming business. Not only that: approximately three
quarters of all issued and outstanding shares of stock of HTNZ was registered
using the Form S-8 scheme.
30. Each of the Form S-8 registration statements was signed by all
three directors of the Company. Each director was obligated to exercise due
diligence in connection with the execution and filing of the Form S-8
registration statements to assure that such registration statements were
truthful and contained no materially false or misleading information. Each
director had knowledge of the fraudulent scheme for the which the registration
statements were filed, knowledge that each purported consulting agreement was a
sham, and knowledge that the stock being registered would be issued to persons
other than the purported consultants with no valid consideration being paid to
the Company.
THE THREAT OF IMMEDIATE AND IRREPARABLE HARM
--------------------------------------------
A. Showalter's violation of securities laws.
31. It is difficult to assess just how deep a hole Showalter has dug
for the company. The fraudulent registrations and fraudulent sales of stock are
only part of the total picture of liabilities likely to emerge from a full
understanding of Showalter's manipulation of this company. It thus makes little
sense to leave the corporation -- on whose behalf this suit is brought -- to
successive damage suits against the directors when their stated intent is to
continue to break the law.
32. Showalter has exposed the corporation to liability from the SEC for
fraudulent registration of the stock. His practice of floating shares into the
market through secret brokerage accounts of accomplices also subjects the
corporation to potentially enormous liabilities under Section 10(b) and
Regulation 10b-5 and various other provisions of both the Securities Act of 1933
and the Securities Exchange Act of 1934. Such exposure constitutes irreparable
harm to the company.
B. The availability of money damages is doubtful.
33. Defendant Showalter has limited, if any, resources to pay the kind
of monetary damages he has caused in this case. Defendant Burton, a prestigious
attorney at one time, has been broken on the wheel of Showalter's connivance's
and has lost his entire financial nest egg. Each of them is liable for breaches
of their duties
<PAGE>
of loyalty to the shareholders under Delaware law and for violation of the
federal securities laws, yet is without means to pay a substantial money damages
award.
34. Defendant Greg Smith, while a man of more substantial means than
the others, has also often been absent from important decisions that breach
fiduciary duties. Plaintiff is comfortable with his allegations of liability
against this defendant but is realistic that the probability of a holding of
liability on his part so as to give rise to substantial money damages is less
than for the other defendants.
C. Without an injunction, the Court
will be unable to fashion a remedy
on behalf of the corporation.
35. There can be no serious doubt about defendants' current plans for
raising capital if they are not enjoined: they will continue to register shares
fraudulently and sell them to the public fraudulently.
36. If defendants are not enjoined, the shares offered to the public
will, most assuredly, enter the market and become indistinguishable from
legitimately issued shares. Once this occurs, it will be quite impossible for
this Court to rescind the issuances or "unscramble the eggs." In addition, bona
fide purchasers for value will have no notice that Showalter is selling stock
fraudulently.
D. Apart from the securities laws, defendants
have violated the Delaware General
Corporation Law and intend to do so again.
37. Defendants stated intent to continue to capitalize the company by
the use of the consulting agreements registered with the SEC requires that the
Court consider the consulting agreements themselves. These agreements, dubious
on their face and by their frequency, are deeply suspect in light of the
description of Showalter's scheme supplied by Tim Brannon.
38. To the extent these consulting agreements authorize the receipt of
stock prior to the rendition of services, they violate both the Delaware General
Corporation Law and the Delaware Constitution.
39. To the extent that these agreements grant to the consultant shares
of stock that bear no relationship to the services actually rendered, they also
violate the Delaware General Corporation Law.
E. Issuance of large blocks of stock for
little or no consideration violates
the rights of existing shareholders.
40. The Company and all bona fide stockholders of the Company,
including plaintiff, have been and will continue to be injured by the
impermissible issuance of massive amounts of stock for no consideration, the
effect of which is the material dilution of the value of the Company's stock.
41. Stockholders of Hollywood Trenz, including plaintiff, have been and
will be further injured by the immediate and substantial dilution in the voting
<PAGE>
power of their stock each time that Showalter succeeds in issuing stock for no
or completely inadequate consideration.
42. Plaintiff has no adequate remedy at law.
DERIVATIVE ALLEGATIONS
----------------------
43. Plaintiff brings Counts I, III, IV, V and VI derivatively on behalf
of Hollywood Trenz pursuant to Chancery Court Rule 23.1 and 8 Del. C. (S)327.
44. Plaintiff is and at all times relevant to the matters complained of
herein has been a stockholder of the Company.
45. With respect to causes of action that may be derivative in nature,
plaintiff has made no demand on the board of directors.
46. Demand on the board of directors would be futile and therefore is
excused because all members of the board of directors are active participants in
and have personally benefited from the acts alleged in this First Amended
Complaint.
47. The acts complained of herein constitute waste of corporate assets
and were not the product of an exercise of good faith business judgment by the
board of directors of Hollywood Trenz.
Count I. Breach of Fiduciary Duties
------------------------------------
48. Paragraphs 1 through 47 are incorporated herein by reference.
49. As directors, each defendant owed to plaintiff a duty of care with
respect his position as manager of the affairs of the company. Defendants have
breached their duty of care by:
(a) failing to investigate the appropriateness of naming Showalter
CEO and president of the company in light of his criminal history, bankruptcy,
and gross mismanagement;
(b) failing to investigate the legality of registering stock for
resale by using SEC Form S-8;
(c) causing the company to violate the federal securities laws by:
(1) filing incomplete disclosure information with respect to
Showalter and the company's financial condition,
(2) filing Form S-8 registration statements containing false
and misleading consulting agreements, and
(3) permitting Showalter to sell stock through the secret use
of brokerage accounts in the names of others;
<PAGE>
(d) failing to ensure that the accounting practices of the
corporation would prevent conduct such as Showalter's writing checks on
insufficient funds;
(e) failing to hold board of directors meetings or annual meetings
of stockholders;
(f) failing to review the consulting agreements to ensure that the
corporation in fact received the services provided therein prior to the issuance
of the stock consideration;
(g) failing to ensure that the corporation received fair
consideration for the stock that it was issuing in return for the consulting
agreements; and
(h) failing to demand an accounting of the proceeds of the sale of
the stock registered by Form S-8.
50. The directors owed to the shareholders a duty of loyalty.
Defendants have breached their duty of loyalty by:
(a) offering company stock for sale to the public and retaining
for themselves and not for the company some or, occasionally, all, of the
proceeds from such sale;
(b) causing the corporation to enter into written consulting
agreements with Showalter's wife's company under circumstances in which she was
neither qualified to render the services nor able to render them even if
qualified,
(c) causing the corporation to pay, impermissibly, Showalter's
personal living and entertainment expenses; and
(d) converting assets of the corporation to their personal use.
51. The directors owed to the shareholders a duty of oversight of the
officers and management of the company. Defendants failed to oversee the books
and records of the company or the behavior of its officers, including bouncing
checks, breaking promises and ignoring legal obligations of the company. To the
extent that defendants ignored or remained unaware of these facts, defendants
have breached their duty of oversight.
Count II. Unlawful Dilution of Voting Power
--------------------------------------------
52. Paragraphs 1 through 51 are incorporated herein by reference.
53. The conduct described above has unlawfully diluted the individual
voting rights of plaintiff in that shares of stock of the Company have been
fraudulently issued for no consideration to the Company.
Count III. Issuance of Stock Without Consideration
---------------------------------------------------
54. Paragraphs 1 through 53 are incorporated herein by reference.
<PAGE>
55. The issuance of stock to the "consultants" as set forth above is
without consideration, or with consideration so far below its real value to the
corporation as to constitute fraud, in violation of both the Constitution of the
State of Delaware and Section 152 of the General Corporation Law, 8 Del. C. 152.
---- --
56. Such illegal issuance of stock inflicts direct harm on the
plaintiff by fraudulently diluting plaintiff's voting power and direct harm on
the company and its stockholders by diluting the value of the company's stock
and artificially depressing the market for the stock.
Count IV. Violation of Federal Securities Laws
----------------------------------------------
57. Paragraphs 1 through 56 are incorporated herein by reference.
58. The abusive and fraudulent manipulation of SEC Form S-8 and the
open market manipulation by secretly offering newly issued stock through the
brokerage accounts of confederates violates multiple provisions of the
Securities Act of 1933 and The Securities Exchange Act of 1934 and rules and
regulations promulgated thereunder. Such conduct jeopardizes the company's
ability to raise capital and materially threatens its continued corporate
existence.
Count V. Unlawful Conversion
-----------------------------
59. Paragraphs 1 through 58 are incorporated herein by reference.
60. Upon information and belief, Showalter has used substantial sums of
the money raised through the illegal sale of stock to finance directly or
indirectly his personal style of living and otherwise to benefit personally
members of the board of directors and not for any proper corporate purposes.
Such conversion has been accomplished, upon information and belief, with the
knowledge and assent of all of the individual defendants.
Count VI. Waste of Corporate Assets
-----------------------------------
61. Paragraphs 1 through 60 are incorporated herein by reference.
62. The stock of the company is one of the few assets it has,
Defendants have wasted that asset by offering stock to others for substantially
less than its fair value.
<PAGE>
WHEREFORE, plaintiff prays that this Court:
a. exercise its powers to temporarily, preliminarily, and
permanently enjoin Hollywood Trenz, the individual defendants, and their
respective employees, agents, attorneys and all other persons acting in concert
with them from issuing any stock pending the convening of an annual meeting for
the purpose of electing directors, and
b. grant such other relief as the Court may deem appropriate
under the circumstances.
Respectfully submitted,
SMITH, KATZENSTEIN & FURLOW
---------------------------------------
Craig B. Smith I.D. # 472
Charles E. Butler I.D. #2349
Anne E. Bookout I.D. #2273
The Corporate Plaza, 7th Floor
800 Delaware Avenue
P.O. Box 410
Wilmington, DE 19899
(302) 652-8400
OF COUNSEL:
- ----------
Victor L. Zimmermann, Jr.
O'Rourke O'Hanlan & Zimmermann
27 Pine Street
New Canaan, CT 06840
(203) 966-6664
Dated: June 26, 1996
