Exhibit 10.27
SUBSCRIPTION AGREEMENT
BY ACCEPTING DELIVERY OF THIS MEMORANDUM, THE RECIPIENT AGREES TO KEEP THE
CONTENTS HEREOF, AND ANY INFORMATION OBTAINED BY SUCH PERSON IN CONNECTION
HEREWITH, IN THE STRICTEST CONFIDENCE.
THE SHARES OFFERED HEREBY WILL BE ISSUED PURSUANT TO A CLAIM OF EXEMPTION
FROM THE REGISTRATION OR QUALIFICATION PROVISIONS OF FEDERAL AND STATE
SECURITIES LAWS AND MAY NOT BE SOLD OR TRANSFERRED WITHOUT COMPLIANCE WITH THE
REGISTRATION OR QUALIFICATION PROVISIONS OF APPLICABLE FEDERAL AND STATE
SECURITIES LAWS OR APPLICABLE EXEMPTIONS THEREFROM.
IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN
EXAMINATION OF THE ISSUER AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS
AND RISKS INVOLVED. THESE SHARES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR
STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING
AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS
DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS OFFERING IS BEING MADE IN RELIANCE UPON THE AVAILABILITY OF AN
EXEMPTION FROM THE REGISTRATION PROVISIONS OF THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT") BY VIRTUE OF THE COMPANY'S INTENDED COMPLIANCE WITH THE
PROVISIONS OF SECTIONS 4(2) AND 4(6) THEREOF AND RULE 506 ADOPTED BY THE
SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION") THEREUNDER. THE SHARES
HAVE NEITHER BEEN REGISTERED WITH, NOR APPROVED OR DISAPPROVED BY, THE
COMMISSION OR BY THE SECURITIES REGULATORY AUTHORITY OF ANY STATE, AND NEITHER
THE COMMISSION NOR ANY SUCH STATE AUTHORITY HAS PASSED UPON OR ENDORSED THE
MERITS OF THIS OFFERING OR THE ACCURACY OR ADEQUACY OF THIS CONFIDENTIAL
MEMORANDUM, AND IT IS NOT INTENDED THAT ANY OF THEM WILL. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
INVESTMENT IN THE COMPANY INVOLVES A HIGH DEGREE OF RISK AND ONLY PERSONS
WHO ARE ABLE TO BEAR THE FINANCIAL RISK OF A COMPLETE LOSS OF THEIR INVESTMENT
SHOULD CONSIDER PURCHASING THE SHARES. RISKS INCLUDE, AMONG OTHERS, THAT THERE
IS A LIMITED MARKET FOR THE SECURITIES OF THE COMPANY, THOUGH NO ASSURANCES CAN
BE GIVEN THAT THERE WILL BE ANY MARKET FOR THE COMPANY'S SECURITIES IN THE
FUTURE OR FOR ANY PERIOD OF TIME.
THE CONTENTS OF THIS SUBSCRIPTION AGREEMENT ARE NOT TO BE CONSTRUED AS TAX,
LEGAL, INVESTMENT, OR OTHER ADVICE. EACH INVESTOR SHOULD CONSULT HIS OWN
COUNSEL, ACCOUNTANT, OR TAX OR BUSINESS ADVISOR AS TO TAX, LEGAL, AND RELATED
MATTERS CONCERNING THIS INVESTMENT.
SALES OF THE SHARES CAN BE CONSUMMATED ONLY BY ACCEPTANCE BY THE COMPANY OF
OFFERS TO PURCHASE SUCH SECURITIES WHICH ARE TENDERED TO THE COMPANY BY
PROSPECTIVE INVESTORS. NO SOLICITATION OF ANY SUCH OFFER (INCLUDING ANY
SOLICITATION WHICH MAY BE CONSTRUED AS AN "OFFER" UNDER FEDERAL AND/OR STATE
SECURITIES LAWS) TO SUCH PROSPECTIVE INVESTORS IS AUTHORIZED WITHOUT THE PRIOR
APPROVAL BY THE COMPANY. THE COMPANY RESERVES THE RIGHT TO REVOKE THE OFFER MADE
HEREBY AND TO REJECT ANY OFFER TO PURCHASE THE SHARES BY ANY PROSPECTIVE
INVESTOR, IN WHOLE OR IN PART.
HOLLYWOOD PRODUCTIONS, INC.
SUBSCRIPTION AGREEMENT
April 23, 1998
Ladies/Gentlemen:
The following sets forth the terms and conditions of an offering (the
"Offering") by the Company to purchase an aggregate of 350,000 shares (the
"Shares") of Common Stock, par value $.001 per share (the "Common Stock") of
Hollywood Productions, Inc., a Delaware corporation (the "Company"), at $1.60
per share, which purchase price is equal to an approximate 45% discount from the
average closing bid prices for a period of 10 days prior to the date of this
agreement ("the Purchase Price"). The Offering is being made by the Company on
its own behalf by its Officers and Directors.
STATEMENTS CONTAINED IN THIS MEMORANDUM AND IN REPORTS FILED BY THE COMPANY
WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH ITS REPORTING
REQUIRMENTS WHICH ARE NOT HISTORICAL FACTS MAY BE CONSIDERED FORWARD LOOKING
INFORMATION WITH RESPECT TO PLANS, PROJECTIONS, OR FUTURE PERFORMANCE OF THE
COMPANY AS DEFINED UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
THESE FORWARD LOOKING STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES WHICH
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED.
1. Subscription: the Offering.
(a) By your signature hereto, you hereby subscribe for and agree to
purchase ________ Share(s) at the Purchase Price per Share for an aggregate
purchase price of $_______, subject to the terms and conditions set forth in
this "Agreement." The list of subscribers to this Offering is listed in
Paragraph 7. -
The Shares purchased hereunder are part of a plan to infuse capital into
the Company to be used for the following ("Use of Proceeds"):
Approximately $300,000 will be used in the production of the Company's most
recent motion picture "Battle Studies," which begin production on April 20,
1998.
(ii) Approximately $200,000 will be used to open a certificate of deposit
to back a letter of credit with Xxxxxx Financial, Inc. ("Xxxxxx"). The letter of
credit is required by Xxxxxx to raise the credit line of the Company's
subsidiary, Breaking Waves, Inc., under its Factoring and Revolving Inventory
Loan and Security Agreement with Xxxxxx. The additional credit is needed to
finance the manufacturing of Breaking Waves, Inc.'s new "Jet Ski" line of swim
and water-sports apparel.
(iii) the balance shall be used for general working capital purposes.
(c) The Shares purchased shall be delivered against the receipt of payment
therefor, in the form of cash, certified check, or electronic wire of funds
delivered to Hollywood Productions, Inc.
(d) This Offering is comprised of up to an aggregate of 350,000 shares of
Common Stock for an aggregate purchase price of $560,000. Prior to this
Offering, there were 2,336,944 shares of Common Stock outstanding after giving
effect to the 1 for 3 reverse split -effected on February 5, 1998. All
references to share and per share information takes into account the 3 for 1
reverse split.
(e) The holders holding a majority of the shares being purchased shall have
a right, one time only, to demand the registration for resale of the shares of
Common Stock issued, whereby, the Company shall prepare and file a registration
statement with the Securities and Exchange Commission on an appropriate form,
and use its best efforts to have same declared effective, as well as comply with
state securities laws and the requirements of the Nasdaq Stock Market or such
other market upon which the Company's securities are traded. In addition, for a
period of 24 months the holders shall be notified in the event that the Company
files a Registration Statement at any time. The Company will give notice of its
intent to file such Registration Statement to the holders, and will upon the
request of the holders, include and register in such Registration Statement all
the shares of Common Stock purchased hereunder. The right to register the shares
may be delayed by the Company in the event it is undertaking a offering of its
securities to raise funding and the agent for the funding requires the delay.
The delay shall not extend more than 90 days from the date said funding is
completed, however, in the event the offering is a minimum/maximum offering, the
90 day period shall start running from the date of the initial closing.
2. Conditions. It is understood and agreed that this subscription is made
subject to the following conditions:
(a) The Company shall have the right to accept or reject this subscription
in whole or in part. Unless this subscription is accepted in whole or in part or
rejected by the Company within 30 days from the receipt hereof by the Company,
the subscription shall be deemed rejected in whole.
(b) In the event a subscription is not accepted in whole or in part by the
Company, the full or ratable amount, as the case may be, of any subscription
payment received will be promptly refunded to the subscriber without deduction
therefrom or interest thereon.
(c) In the event this subscription is accepted, the Company shall deliver
to you, against payment therefor, the number of Shares purchased, along with a
fully executed copy of this Agreement.
(d) In the event there are any breaches of this Agreement or you fail to
comply with any of the representations and warranties stated in Paragraph 4 of
this Agreement, you hereby agree, at the sole request of the Company, to rescind
this subscription and return any and all Shares issued upon the return of the
subscription amount paid.
3. Representations and Warranties of the Company. The Company represents
and warrants to, and agrees with, you as follows:
(a) The Company is duly organized, validly existing, and in good standing
under the laws of the State of Delaware, with all requisite power and authority
to own, lease, license, and use its properties and assets and to carry out the
business in which it is engaged.
(b) The Company has authorized capital stock of 20,000,000 shares of Common
Stock of which 2,336,944 shares are issued and outstanding prior to this
Offering.
(c) The Company has all requisite power and authority to execute, deliver,
and perform its obligations under this Agreement, and to issue, sell, and
deliver the Shares being sold pursuant to this Agreement. This Agreement has
been duly authorized by the Company, and (subject, with respect to
enforceability, to the provisions of bankruptcy and similar laws) when executed
and delivered by the Company, will constitute the legal, valid, and binding
obligation of the Company, enforceable as to the Company in accordance with its
terms. The Shares have been duly authorized by the Company and (subject, with
respect to enforceability, to the provisions of bankruptcy and similar laws)
will be duly and validly issued, fully paid, and non-assessable.
(d) No consent, authorization, approval, order, license, certificate, or
permit of or from, or declaration or filing with any federal, state, local, or
other governmental authority or any court or any other tribunal is required by
the Company for the execution, delivery, or performance by the Company of this
Agreement or the execution, issuance, sale, or delivery of the Shares.
(e) No consent of any party to any contract, agreement, instrument, lease,
license, arrangement, or understanding to which the Company is a party or to
which any of its properties or assets are subject is required for the execution,
delivery, or performance by the Company of this Agreement, or the execution,
issuance, sale, or delivery of the Shares or the Shares underlying same.
(f) The execution, delivery, and performance of this Agreement will not
violate, result in a breach of or conflict with (with or without the giving of
notice or the passage of time or both), or entitle any party to terminate or
cause a default under any contract, agreement, instrument, lease, license,
arrangement, or understanding or violate or result in a breach of any term of
the Certificate of Incorporation or By-Laws of, or conflict with any law, rule,
regulation, order, judgment, or decree binding upon the Company or to which any
of its operations, businesses, properties, or assets are subject.
4. Representations and Warranties of the Subscriber. You hereby represent
and warrant to and agree with the Company as follows:
(a) You are an "Accredited Investor" as that term is defined in Section
501(a) of Regulation D promulgated under the Securities Act of 1933, as amended
(the "Securities Act"). Specifically you are (check appropriate items(s)):
____(i) A bank as defined in Section 3(a)(2) of the Securities Act, or a
savings and loan association or other institution as defined in Section
3(a)(5)(A) of the Securities Act, whether acting in its individual or fiduciary
capacity; a broker or dealer registered pursuant to Section 15 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"); an insurance company as
defined in Section 2(13) of the Securities Act; an investment company registered
under the Investment Company Act of 1940 or a business development company as
defined in Section 2(a)(48) of that Act; a small Business Investment Company
licensed by the U.S. Small Business Administration under Section 301(c) or (d)
of the Small Business Investment Act of 1958; a plan established and maintained
by a state, its political subdivisions, or any agency or instrumentality of a
state or its political subdivisions, for the benefit of its employees, if such
plan has total assets in excess of $5,000,000; an employee benefit plan within
the meaning of the Employee Retirement Income Security Act of 1974, if the
investment decision is made by a plan fiduciary, as defined in Section 3(21) of
such Act, which is either a bank, savings and loan association, insurance
company, or registered investment advisor, or if the employee benefit plan has
total assets in excess of $5,000,000 or, if a self-directed plan, with
investment decisions made solely by persons that are accredited investors;
_____(ii) A private business development company as defined in Section
202(a)(22) of the Investment Advisers Act of 1940;
_____(iii) An organization described in Section 501(c)(3) of the Internal
Revenue Code, corporation, Massachusetts, or similar business trust, or
partnership, not formed for the specific purpose of acquiring the securities
offered, with total assets in excess of $5,000,000;
_____(iv) A Director or executive Officer of the Company (circle
appropriate item);
_____(v) A natural person whose individual net worth, or joint net worth
with that person's spouse, at the time of his or her purchase exceeds
$1,000,000;
_____(vi) A natural person who had an individual income in excess of
$200,000 in each of the two most recent years or joint income with that person's
spouse in excess of $300,000 in each of those years and has a reasonable
expectation of reaching the same income level in the current year;
_____(vii) A trust with total assets in excess of $5,000,000, not formed
for the specific purpose of acquiring the securities offered, whose purchase is
directed by a sophisticated person as described in Rule 506(b)(2)(ii); or
_____(viii) An entity in which all of the equity owners are accredited
investors. (If this alternative is checked, you must identify each equity owner
and provide statements signed by each demonstrating how each qualified as an
accredited investor.)
(b) If you are a natural person, you are: a bona fide resident of the
state/country of ___________/____________ contained in your address set forth on
the signature page of this Agreement as your home address; at least 21 years of
age; and legally competent to execute this Agreement. If an entity, you are duly
authorized to execute this Agreement and this Agreement, when executed and
delivered by you, will constitute your legal, valid, and binding obligation
enforceable against you in accordance with its terms.
(c) You have received, read carefully, and are familiar with this
Agreement, and respecting the Company, its business, plans, and financial
condition, the terms of the Offering and any other matters relating to the
Offering. You have reviewed all materials which have been requested by you, and
the Company has answered all inquiries that you or your representatives have put
to it. You have had access to all additional information necessary to verify the
accuracy of the information set forth in this Agreement and any other materials
furnished herewith, and you have taken all the steps necessary to evaluate the
merits and risks of an investment as proposed hereunder.
(d) You or your purchaser representative have such knowledge and experience
in finance, securities, investments, and other business matters so as to be able
to protect your interests in connection with this transaction, and your
investment in the Company hereunder is not material when compared to your total
financial capacity.
(e) You understand the various risks of an investment in the Company as
proposed herein and can afford to bear such risks, including the Common Stock,
though there can be no assurances that a more liquid market will develop or that
any market which may develop will be maintained for any period of time. You may
find it impossible to liquidate your investment at a time when it may be
desirable to do so, or at any other time.
(g) You have been advised by the Company that the Shares have not been
registered under the Securities Act, that the Shares will be issued on the basis
of the statutory exemption provided by Sections 4(2) and 4(6) of the Securities
Act and/or Regulation D promulgated thereunder relating to transactions by an
issuer not involving any public offering and under similar exemptions under
certain state securities laws, that this transaction has not been reviewed by,
passed on, or submitted to any Federal or state agency or self-regulatory
organization where an exemption is being relied upon, and that the Company's
reliance thereon is based in part upon the representations made by you in this
Agreement. You acknowledge that you have been informed by the Company of, or are
otherwise familiar with, the nature of the limitations imposed by the Securities
Act and the rules and regulations thereunder on the transfer of securities. In
particular, you agree that no sale, assignment, or transfer of the Shares shall
be valid or effective, and the Company shall not be required to give any effect
to any such sale, assignment, or transfer, unless (i) the sale, assignment, or
transfer of the Shares is registered under the Securities Act, it being
understood that the Shares are not currently registered for sale and that the
Company has no obligation or intention to so register the Shares except as
contemplated herein; or (ii) the Shares are sold, assigned, or transferred in
accordance with all the requirements and limitations of Rule 144 under the
Securities Act, it being understood that Rule 144 is not available at the
present time for the sale of the Shares; or (iii) such sale, assignment, or
transfer is otherwise exempt from registration under the Securities Act. You
acknowledge that the Shares shall be subject to a stop transfer order and the
certificate or certificates evidencing any Shares shall bear the following or
substantially similar legends and such other legends as may be required by state
blue sky laws:
"These securities have not been registered under the Securities Act of
1933, as amended (the "Act"). Such securities may not be sold or offered for
sale, transferred, hypothecated, or otherwise assigned in the absence of an
effective registration statement with respect thereto under such Act or an
opinion reasonably acceptable to the Company of counsel reasonably acceptable to
the Company that an exemption from registration for such sale, offer, transfer,
hypothecation, or other assignment is available under such Act."
(h) You will acquire the Shares for your own account (or for the joint
account of you and your spouse either in joint tenancy, tenancy by the entirety,
or tenancy in common) for investment and not with a view to the sale or
distribution thereof or the granting of any participation therein, and that you
have no present intention of distribution or selling to others any of such
interest or granting any participation therein, except as provided for herein.
(i) It never has been represented, guaranteed, or warranted by any broker,
the Company, any of the Officers, Directors, shareholders, employees, or agents
of either, or any other persons, whether expressly or by implication, that:
(1)the Company or you will realize any given percentage of profits and/or
amount or type of consideration, profit, or loss as a result of the Company's
activities or your investment in the Company; or
(2) the past performance or experience of the management of the Company, or
of any other person, will in any way indicate the predictable results of the
Company's activities.
(j) You understand that the net proceeds from all subscriptions paid and
accepted pursuant to the Offering, after deduction for expenses of the Offering,
will be used as general working capital for the Company.
(k) You hereby acknowledge receipt of the Company's Form 10-KSB annual
report for the year ended December 31, 1997 and quarterly report of Form 10-QSB
for the three months ended March 31, 1998.
(l) Without limiting any of your other representations and warranties
hereunder, you acknowledge that you have reviewed and are aware of the following
recent developments of the Company:
(i) Effective February 5, 1998, the Company effected a reverse split, 1 for
3, of all of its outstanding shares of Common Stock. As a result of same, prior
to consummation of this Offering, the Company had 2,336,944 shares of Common
Stock outstanding.
(ii) In February 1998, the Company completed a private placement of 300,000
shares of the Company's Common Stock at a price of $.65 per share. American
Telecom Corporation, a company of which Xxxx Xxxxx, the son-in-law of Xxxxxx
Xxxxxxxx, is President, Secretary, and a Director, purchased 100,000 shares in
this offering. The funds were used for general working capital purposes.
In April 1998 the Company entered into a co-production agreement with
Norfolk Films, Inc. ("Norfolk") for the production of a new film entitled Battle
Studies. The Company and Norfolk have agreed to form a limited liability company
to finance, produce and distribute the film, which commenced production on April
20, 1998. The film was written and is being directed and co-produced by Xxxxxx
Xxxxxxxx. The film is a contemporary ghost story about power, greed, love and
Xxxxxxxxx Xx Xxxxx'x lost notebook. The estimated budget is approximately
$440,000 of which the Company has committed to fund 50%. In accordance with the
terms of the co-production agreement the proceeds of the film will be
distributed first to reimburse 135% of the costs of the picture and the
remaining proceeds shall be distributed 50%, 50% to Norfolk and the Company,
respectively. If there is a book or a play on the screenplay then the proceeds
shall be distributed 60%, 40% to the Norfolk and Company, respectively.
5. Risk Factors
An investment in the securities offered hereby are speculative and involve
a high degree of risk. In addition to the other information contained in this
Prospectus, the following factors should be carefully considered before
purchasing the securities offered by this Prospectus. The purchase of the
securities offered hereby should not be considered by anyone who cannot afford
the risk of loss of their entire investment.
Statements contained in this Memorandum and in the Company's reports as
filed with the Securities and Exchange Commission which are not historical facts
may be considered forward looking information with respect to plans,
projections, or future performance of the Company as defined under the Private
Securities Litigation Reform Act of 1995. These forward looking statements are
subject to risks and uncertainties which could cause actual results to differ
materially from those projected.
Risks Associated with the Company's Film Business
(a) No Significant Operating History; Accumulated Deficit; Limited
Experience of Management. Prior to the acquisition and production of Dirty
Laundry and the acquisition of Breaking Waves the Company, had limited
operations, consisting primarily of its formation and the consummation of its
initial public offering. The Company's officers had limited experience, prior to
the production of Dirty Laundry of assessing the potential of a screenplay,
producing a motion picture, or in distributing and marketing a motion picture.
The lack of experience of management may adversely affect the operations of the
Company and ultimately, the value of an investment in the Company. In addition,
the likelihood of success of the Company must be considered in light of the
problems, expenses, difficulties, complications and delays frequently
encountered in connection with a business with a limited operating history and
the competitive environment in which the Company operates. Further, there can be
no assurances that the Company's management will be able to successfully
implement its business plan or that unanticipated result in increased costs,
material delays in its implementation or ability to implement such plan. As of
March 31, 1998 the Company had an accumulated deficit of $78,461, which could
adversely affect the Company's ability to conduct its operations.
(b) No Guarantee of Return of Initial Investment; No Assurances of the
Receipt of Revenues; Need for Additional Capital. The co-production agreements
for Dirty Laundry and Battle Studies provide that the Company and the
co-producer shall have the right to recover 100% and 135%, respectively, of
their investment with respect to the production costs of the films from
revenues, if any, from the release, distribution and exploitation of the film.
The Dirty Laudry agreement requires the first proceeds to be paid $50,000 to
each of Xxx Xxxxxx and Xxxx Xxxxxx pursuant to their participation agreements.
Additional proceeds received shall be distributed pursuant to the terms of the
agreements. To date the Dirty Laundry has generated revenues of $205,000
pursuant to its licensing agreement with Trident Licensing, Inc.
The production release of a motion picture is subject to numerous
uncertainties, and there can be no assurance that the Company's strategy will be
successful, that its release schedule will be met or that it will achieve its
financial goals. There can be no assurance that any revenues will be realized
from the distribution of the Dirty Laundry or Battle Studies, or any motion
picture produced by the Company, therefore, there can be no assurances that an
investment in the production of a motion picture will be repaid. Even in the
event revenues are generated from the distribution of a film, there can be no
assurances that the Company will receive any of such revenues, due to revenue
sharing rights of artists and creative personnel in additional to arrangements
with other investors. In addition, in the event that the Company receives
revenues from the distribution of a film, there can be no assurances that such
revenues will be sufficient to return to the Company the full amount of its
investment in the Dirty Laundry or Battle Studies or that future motion pictures
acquired, produced and released by the Company will earn sufficient revenues to
repay any investment or cost incurred in their production. Though aggregate
revenues in the film industry from all markets are substantial, the costs of
producing films are also substantial. The combination of these and other factors
has caused a large portion of films produced to be unprofitable.
The Company estimates that between 36 and 52 weeks will elapse between the
commencement of expenditures by the Company in the acquisition of a screenplay,
the production of a motion picture and the release of such film. Additionally,
it is anticipated that no revenues will be received from the exploitation of
such film for an additional period of between 16 weeks and 36 weeks thereafter,
if at all. Therefore, the Company may not have the capital needed, at times, for
production or distribution costs of additional films due to the delay in the
receipt of revenues from its prior investments.
(c) High Costs of Motion Picture Production; Likelihood of going over
Budget. The Company anticipates that the motion pictures it produces will cost
between $1,000,000 and $3,000,000, depending on the film. The likelihood of the
success of each film and the Company's ability to stay on budget and on schedule
for each film must be considered in light of the problems, expenses,
difficulties, complications and delays frequently encountered in connection with
the production of a motion picture. Dirty Laundry went approximately $250,000
over budget. Due to unforeseen problems and delays including; illness, weather,
technical difficulty and human error, most films go over budget. In addition,
the lack of experience of management in this industry, the limited operating
history and capital of the Company, and the competitive environment in which the
Company operates, may cause increased expenses due to mistakes and delays in the
production of the films.
(d) Inability to Obtain Distribution of the Films; Consumer Preferences.
The success of a film in theatrical distribution, television, home video and
other ancillary markets is dependent upon public taste which is unpredictable
and susceptible to change. The theatrical success of a film may also be
significantly affected by the number and popularity of other films then being
distributed. Accordingly, it is impossible for anyone to predict accurately the
success of any film at the time it enters production. The production of a motion
picture requires the expenditure of funds based largely on a pre-production
evaluation of the commercial potential of the proposed project. The Company has
spent approximately $300,000 for the costs of marketing and distribution of
Dirty Laundry and has only recouped $205,000 in distribution revenues.
There is intense competition within the film industry for exhibition time
at theaters, as well as for distribution in other media, and for the attention
of the movie-going public and other viewing audiences. Competition for
distribution in other media is as intense as the competition for theatrical
distribution and not all films are licensed in other media. There are numerous
production companies and numerous motion pictures produced, all of which are
seeking full distribution and exploitation. Despite the large number of films
produced, only a small number of films receive widespread consumer acceptance,
and thereby account for a large percentage of total box office receipts.
(e) Labor disputes in Film Industry. Most screenwriters, performers,
directors and technical personnel who will be involved in the films are members
of guilds or unions which bargain collectively with producers on an
industry-wide basis from time to time. Any work stoppages or other labor
difficulties could delay the production of the films, resulting in increased
production costs and delayed return of investments.
(f) Competition in Film Industry. The Company will be in competition with
other which produce, distribute and exploit and finance films, some of which
have substantial financial and personnel resources, which are greater and more
extensive than the Company's. These companies include the major film studios,
including Disney, Universal, MGM, and Sony as well as the television networks.
There is substantial competition in the industry for a limited number of
producers, directors, actors and properties, which are able to attract major
distribution in all media and all markets throughout the world.
Risks Associated with the Company's Swimwear Business
(g) Cyclical Apparel Industry; Dependence on Single Product Line. The
apparel industry is a cyclical industry, with consumer purchases of swimwear and
accessory items and related goods tending to decline during recessionary periods
when disposable income is low. Accordingly, a prolonged recession would in all
likelihood have an adverse effect on the operations of the Company. Some of the
Company's customers, including large retail department store chains, have in
recent years experienced financial difficulties and some have filed for
protection under Chapter XI of the federal bankruptcy laws. The Company is
unable to predict what effect, if any, the financial difficulties encountered by
such retailers and other customers will have on the Company's future business.
Additionally, the Company currently operates in only one segment of the apparel
industry, girl's swimwear and is therefore dependent on the demand for such
goods. Decreases in the demand for swimwear products would have a material
adverse affect on the Company's business. The Company it is in the process of
expanding its operations and market segment to include boy's and men's swimwear.
(h) Uncertain Fashion Trends; Inability to Keep Pace with Consumer's
Changing Preferences. The Company believes that its success depends in
substantial part on its ability to anticipate, gauge and respond to changing
consumer demands and fashion trends in a timely manner. The Company designs its
swimwear lines during the months from January to March each year for delivery of
products between November and May of the following year. The Company is
anticipating in advance consumer preferences for the following year. There can
be no assurance, however, that the Company will be successful in this regard. If
the Company misjudges the market for any of its products, it may be faced with
unsold finished goods, inventory and work in process, which could have an
adverse effect on the Company's operations.
(i) Entrance into New Market Segment and New Product Line. The Company
presently operates in only one segment of the apparel industry, specifically
girl's swimwear, in which it has operated for many years. The Company entered
into a licensing agreement with Kawasaki to use the trademark "Jet Ski" for a
line of girl's, boy's, and men's swimwear. The Company's production and
marketing of boy's and men's swimwear is an entrance into a new market segment
for its products. In addition, the Company has not previously marketed any of
its products under the Jet Ski name. There can be no assurance that the Company
will be successful in this market segment or with this new line. If the Company
misjudges the market for this market segment or new line, it may be faced with
unsold finished goods, inventory and work in process, which could have an
adverse effect on the Company's operations.
(j) Dependence on Suppliers. The swimwear designs are principally sent to a
manufacturer, Zone Company, Ltd., in Korea, which Company provides the knitting
and printing for approximately 65% of the fabrics ordered by the Company.
Previously during fiscal 1997 and 1996 this company provided approximately 19%
and 95% knitting and printing. Once the fabrics are produced, they are
principally shipped to P.T. Kizone International, Inc., a company in Indonesia
which company sews the garments into finished products. This company provided
95% and 71% of the Company's sewing needs for the years ended December 31, 1996
and 1997, respectively. Although the management of Breaking Waves is of the
opinion that there are numerous manufacturers of fabrics and companies which
provide sewing on similar terms and prices, there can be no assurances that
management is correct in such belief. The unavailability of fabrics or the
sewing thereof at current price levels could adversely affect the operations of
the Company.
(k) Risks Associated with Concentration of Customers. For the years ended
December 31, 1997 and 1996, Breaking Waves has two and two customers which
comprise 36% and 12%, and 16% and 12% of net sales, respectively. For the three
months ended March 31, 1998 and 1997, Breaking Waves had four and two customers
which comprise 16%, 15%, 11%, and 10%; and 23% and 14% of net sales,
respectively. Some of the Company's customers, including large retail department
store chains, have recently experienced financial difficulties and some have
filed for protection under the federal bankruptcy laws. The Company is unable to
predict what effect, if any, the financial difficulties encountered by such
retailers and other customers will have on the Company's future business. The
loss of either customer or any group of customers could have a material adverse
affect on the Company's results of operations.
(l) Seasonality of Business Operations. The Company believes that its
business may be considered seasonal with a large portion of its revenues and
profits being derived between December and June for shipments being made between
November and May. Each year from June to November the Company engages in the
process of designing and manufacturing the following seasons swimwear lines,
during which time the Company incurs the majority of its expenses, with limited
revenues. There can be no assurances that revenues received during December to
June will support the Company's operations for the rest of the year.
(m) Competition in Swimwear Industry. The Company's business is highly
competitive, with relatively insignificant barriers to entry and with numerous
firms competing for the same customers. The Company is in direct competition
with local, regional, national and international swimwear manufacturers, many of
which have greater resources and more extensive distribution and marketing
capabilities than the Company. Competitive factors include quality, price,
style, design, creativity, originality and service at the wholesale level. In
addition, many large retailers have recently commenced sales of "store brand"
products, which compete with those sold by the Company. Management believes that
the Company's market share is insignificant in the markets in which it sells.
(n) Protection of Intellectual Property. The Company relies on common law
trademarks for use of its private label swimwear lines. In addition, the Company
has entered into a licensing agreements with Beach Patrol, Inc. and Kawasaki, to
use the trademarks "Daffy's Waterwear and "Jet Ski", respectively." In the event
the Company, Beach Patrol, Inc. or Kawasaki, breaches their licensing agreement
and the Company is unable to continue to use the trademarks, the loss thereof
may adversely affect the Company's operations. The Company has also filed to
register additional trademarks in the United States, which applications are
currently pending. There can be no assurance that such additional trademarks
will be registered or if registered, that such marks, as well as the Company's
registered xxxx or marks licensed by the Company will be adequately protect
against infringement. In addition, there can be no assurance that the Company
will not be found to be infringing on another company's trademark. In the event
the Company finds another party infringing upon its trademark, if registered, or
is found by another company to be infringing upon such company's trademark,
there can be no assurances that the Company will have the financial means to
litigate such matters.
General Risks
(o) Indemnification of Officers and Directors. As permitted under the
Delaware General Corporation Law, the Company's Certificate of Incorporation
provides for the indemnification and elimination of the personal liability of
the directors to the Company or any of its shareholders for damages for breaches
of their fiduciary duty as directors. As a result of the inclusion of such
provision, shareholders may be unable to recover damages against directors for
actions taken by them which constitute negligence or gross negligence or that
are in violation of their fiduciary duties. The inclusion of this provision in
the Company's Certificate of Incorporation may reduce the likelihood of
derivative litigation against directors and other types of shareholder
litigation.
(p) Limited Public Market for Securities. At present there is a limited
public market for the Company's Securities. There is no assurance that a regular
trading market will develop, or if one does develop, that it will be sustained
for any period of time. Therefore, purchasers of the Company's securities may be
unable to resell such securities at or near their original offering price or at
any price. Furthermore, it is unlikely that a lending institution will accept
the Company's securities as pledged collateral for loans even if a regular
trading market develops. The underwriter of the Company's public offering, was a
dominant influence in the market for the Company's securities until February
1997, at which time it ceased operations. The market for and liquidity of the
Company's securities have been significantly affected and may continue to be
affected by the loss of its underwriter's participation in the market.
(q) Dividends. The Company has not paid any cash dividends nor, because of
its present financial status and its contemplated financial requirements, does
it contemplate or anticipate paying any cash dividends upon its Common Stock in
the foreseeable future. In April 1998, the Board of Directors approved the
issuance of a warrant dividend to its Common Stock holders of record on May 8,
1998. The warrants issued under the dividend distribution shall give the
warrantholder the right to acquire one share of the Company's Common Stock at an
exercise price of $4.00 and shall be exercisable for a period commencing twelve
months from the date of issuance and extending until three years from the date
of issuance.
(r) Increase Public Float Through Shares Available for Resale. A total of
2,336,944 shares of Common Stock have been issued by the Company of which
1,367,294 shares may be deemed "restricted securities" (as such term is defined
in Rule 144 issued under the Act) and, in the future, may be publicly sold only
if registered under the Act or pursuant to an exemption from registration. Of
the restricted shares, 1,280,350 shares have been registered for resale in
accordance with a Registration Statement filed in April 1998 and all but 14,444
of the remaining restricted shares have been held for in excess of one year and
therefore are eligible for resale in accordance with Rule 144. Any sales under
Rule 144 or pursuant to this registration statement would, in all likelihood,
have a depressive effect on the market price for the Company's Common Stock and
Warrants.
(s) Possible Future Dilution. The Company has authorized capital stock of
20,000,000 shares of Common Stock, par value $.001 per share. Inasmuch as the
Company may use authorized but unissued shares of Common Stock without
stockholder approval in order to acquire businesses, to obtain additional
financing or for other corporate purposes, there may be further dilution of the
stockholders' interests.
(t) Possible delisting of Securities from NASDAQ System; Risks of Low
Priced Stocks. In August 1997 Nasdaq increased its maintenance whereby in order
to continue to be listed on Nasdaq, the Company is required to maintain (i) net
tangible assets of at least $2,000,000, (ii) a minimum bid price of $1.00, (iii)
two market makers, (iv) 300 stockholders, (v) at least 500,000 shares in the
public float and (vi) a minimum market value for the public float of $200,000.
In the event the Company's Securities are delisted from Nasdaq, trading, if any,
in the Securities would thereafter be conducted in the over-the-counter market
on the OTC Bulletin Board. Consequently, an investor may find it more difficult
to dispose of, or to obtain accurate quotations as to the price of the Company's
Securities. Quotation on Nasdaq does not imply that a meaningful, sustained
market for the Company's Securities will develop or if developed, that it will
be sustained for any period of time.
(u) Xxxxx Stock Regulation. Broker-dealer practices in connection with
transactions in "xxxxx stocks" are regulated by certain xxxxx stock rules
adopted by the Securities and Exchange Commission. Xxxxx stocks generally are
equity securities with a price of less than $5.00 (other than securities
registered on certain national securities exchanges or quoted on Nasdaq provided
that current price and volume information with respect to transactions in such
securities is provided by the exchange or system). The xxxxx stock rules require
a broker-dealer, prior to a transaction in a xxxxx stock not otherwise exempt
from the rules, to deliver a standardized risk disclosure document that provides
information about xxxxx stocks and the risks in the xxxxx stock market. The
broker-dealer also must provide the customer with current bid and offer
quotations for the xxxxx stock, the compensation of the broker-dealer and its
salesperson in connection with the transaction, and monthly account statements
showing the market value of each xxxxx stock held in the customer's account. In
addition, the xxxxx stock rules generally require that prior to a transaction in
a xxxxx stock, the broker-dealer must make a special written determination that
the xxxxx stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction. These disclosure requirements
may have the effect of reducing the level of trading activity in the secondary
market for a stock that becomes subject to the xxxxx stock rules. If the
Company's securities become subject to the xxxxx stock rules, investors in this
Offering may find it more difficult to sell their securities.
6. Management.
The following table sets forth, as of April 30, 1998, the management of the
Company:
Position with Corporation;
Name Principal Occupation
Xxxxxx Xxxxxxxx President, CEO, and Director
Xxxxxx XxXxxxx Vice President, Secretary and Director
Xxxxx X. Xx Xxxxxxx, M.D. Director
Xxxxx X. Xxxxxx Director
The Directors of the Corporation are elected annually by the stockholders,
and the Officers of the Corporation are appointed annually by the Board of
Directors. Vacancies on the Board of Directors may be filled by the remaining
Directors. Each current Director and Officer will hold office until the next
Annual Meeting of stockholders or until his successor is elected and qualified.
Xxxxxx Xxxxxxxx has been the President, Chief Executive Officer, and a
Director of the Corporation since January 1997. From May 1996 to January 1997,
Xx. Xxxxxxxx served as Secretary and Treasurer of the Corporation. From May 1996
until its dissolution in November 1997, Xx. Xxxxxxxx has served as the
Secretary, Treasurer, and a Director of D.L. Productions, Inc., the production
company for the Dirty Laundry movie. Since February 1996, Xx. Xxxxxxxx has also
been the President and a Director of H.B.R. Consultant Sales Corp. ("HBR"), of
which his wife is the sole stockholder. Xx. Xxxxxxxx was a consultant to Play
Co. Toys & Entertainment Corp. ("Playco"), a wholesaler and retailer of
children's toys, since July 1995. He became Chairman of the Board of Playco in
September 1996. Prior thereto, from February 1992 to June 1995, Xx. Xxxxxxxx was
a consultant to 00xx Xxxxxx Photo, Inc., an electronics retailer. Xx. Xxxxxxxx
held this position at the request of the bankruptcy court during the time 00xx
Xxxxxx Photo, Inc. was in Chapter 11.
Xxxxxx XxXxxxx has been a Director, Vice President, and Secretary of the
Corporation since January 10, 1997. Prior thereto, he was a consultant to the
Corporation with respect to the production of Dirty Laundry, the Corporation's
first motion picture. From March 1995 to May 1996, Xx. XxXxxxx was a media and
marketing consultant in the film industry working on a variety of projects. From
1991 to 1994, Xx. XxXxxxx was a Vice President for the Bon Bon Group, a national
payroll/accounting entertainment service Corporation.
Xxxxx X. Xx Xxxxxxx, M.D. has been a Director of the Corporation since May
1996. Since July 1995, Xx. Xxxxxxx has been a doctor of pediatrics at Montefiore
Medical Group. From July 1992 to June 1995, Xx. Xxxxxxx was a pediatric resident
at the University of Minnesota, Xxxxxxxx Hospital, St. Xxxx, Minnesota. From
July 1991 to June 1992, Xx. Xxxxxxx was an intern at Montefiore Medical Center,
Bronx, New York. Xx. Xxxxxxx is the son-in-law of Xxxxxx Xxxxxxxx.
Xxxxx X. Xxxxxx was elected as a Director of the Corporation in January
1998. Xx. Xxxxxx was elected Chief Financial Officer of Playco in June 1997 and
was appointed as a Director of Playco in August 1997. Prior thereto, from June
1990 to March 1997, Xx. Xxxxxx was Chief Financial Officer of Urethane
Technologies, Inc. ("UTI") and two of its subsidiaries: Polymer Development
Laboratories, Inc. ("PDL") and BMC Acquisition, Inc. These were specialty
chemical companies which focused on the polyurethane segment of the plastics
industry. Xx. Xxxxxx was also Vice President and a Director of UTI during this
period. In March 1997, three unsecured creditors of PDL filed a petition for the
involuntary bankruptcy of PDL. This matter is pending before the United States
Bankruptcy Court, Central District of California. In 1980, Xx. Xxxxxx obtained a
Masters in Business Administration from University of Southern California. He
obtained his Bachelor of Arts degree in history from Stanford University from
which he graduated with honors in 1978.
Significant Employees
Xxxxxxx Xxxxxx, 61, has been the Vice President of design, merchandising,
and production of Breaking Waves, Inc. since its inception in 1991.
Xxxxxxx Xxxxxxxxx, 59, has been the Vice President of marketing and sales
of Breaking Waves, Inc. since its inception in 1991.
The Corporation has agreed to indemnify its Officers and Directors with
respect to certain liabilities including liabilities which may arise under the
Securities Act of 1933. Insofar as indemnification for liabilities arising under
the Securities Act may be permitted to Directors, Officers, and controlling
persons of the Corporation pursuant to any charter, provision, by-law, contract,
arrangement, statute or otherwise, the Corporation has been advised that in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Corporation of expenses incurred or
paid by a Director, Officer, or controlling person of the Corporation in the
successful defense of any such action, suit, or proceeding) is asserted by such
Director, Officer, or controlling person of the Corporation in connection with
the Securities being registered, the Corporation will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act. The Corporation will be
governed by the final adjudication of such issue.
7. Capitalization; Principal Stockholders. The following shall provide a
list of the principal stockholders of the Company prior to this Offering. It
does not include the exercise of any options. There are 2,336,944 shares
outstanding, and assuming the Offering is consummated, there will be 2,686,944
shares outstanding.
Name And Address of Amount and Nature Percent of
Beneficial Owner Of Beneficial Owner Class (1)
---------------------- ------------------- ---------
European Ventures Corp. (2) 980,350 41.9%
X.X. Xxx 00
Xxxx Xxxx, Xxxxxxx, Xxxxxxx
Xxxxxx Xxxxxxx
Xxxxxx Xxxxxxxx (2) 52,500 (3) 2.2%
c/o Hollywood Productions, Inc.
00 Xxxx 00xx Xxxxxx, Xxxxx 000
Xxx Xxxx, Xxx Xxxx 00000
Xxxxx X. Xx Xxxxxxx, M.D. (2) -- --
c/o Hollywood Productions, Inc.
00 Xxxx 00xx Xxxxxx, Xxxxx 000
Xxx Xxxx, Xxx Xxxx 00000
Xxxxxx XxXxxxx 16,667 (4) *
c/o Hollywood Productions, Inc.
00 Xxxx 00xx Xxxxxx, Xxxxx 000
Xxx Xxxx, Xxx Xxxx 00000
All Officers and Directors 69,167 (4) 3.0%
(3 as a Group) (2)-(5)
* Less than 1%
(1) Does not give effect to the issuance of (i) 1,466,667 shares of Common
Stock reserved for issuance upon the exercise of the Warrants; (ii) 80,000
shares of Common Stock reserved for issuance upon the exercise of the
underwriter's warrants and the Warrants underlying the underwriter's warrants;
and (iii) 83,333 shares of Common Stock reserved for issuance under the
Company's 1995 Senior Management Incentive Plan, except for the 25,000 shares
issued thereunder and the 50,000 shares underlying options granted pursuant
thereto.
(2) Xxxxxx Xxxxxxxx is the father-in-law of Xxxx Xxxxx, the sole officer
and director of EVC. The shares owned by EVC have been included in a
registration statement filed by the Company in April 1998 registering the shares
for resale and upon effectiveness of the registration statement will be eligible
for resale from time to time. See "Risk Factors- Increase Public Float Through
Shares Available for Resale."
(3) Includes (i) 16,667 shares of Common Stock under the Senior Management
Incentive Plan, pursuant to a vesting schedule, of which 8,333 shares have
vested; (ii) 33,333 shares of Common Stock underlying an option granted under
the Company's Senior Management Incentive Plan; and (iii) 2,500 shares issued to
H.B.R. Consultants Sales Corp. in September 1996.
(4) Includes 16,667 shares of Common Stock issuable upon the exercise of an
option granted to Xxxxxx XxXxxxx under the Company's Senior Management Incentive
Plan.
(5) Represents all shares purchased in this Offering.
8. Indemnification. You acknowledge that you understand the meaning and
legal consequences of the representations and warranties contained herein, and
you hereby agree to indemnify and hold harmless the Company and each
incorporator, Officer, Director, employee, agent, and controlling person
thereof, past, present, or future, from and against any and all loss, damage, or
disability due to or arising out of a breach of any such representation or
warranty.
9. Transferability. Neither this Agreement, nor any of your interests
herein, shall be assignable or transferable by you in whole or in part except by
operation of law.
10. Commissions. There will be no commissions paid with respect to the sale
of the Shares.
11. Miscellaneous.
(a) All notices or other communications given or made hereunder shall be in
writing and shall be delivered or mailed to you at your address set forth on the
signature page of this Agreement and to the Corporation at the address set forth
below. Notices hand delivered shall be deemed given upon receipt, and notices
sent by mail shall be deemed given on the second business day following deposit
in the Shared States mail.
(b) This Agreement shall be construed in accordance with and governed by
the laws of the State of New York without reference to that State's conflicts of
laws provisions.
(c) This Agreement constitutes the entire agreement between the parties
hereto with respect to the subject matter hereof and may be amended only by a
writing executed by all parties hereto.
(d) This Agreement may be executed in one or more counterparts
representing, however, one and the same agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year this subscription has been accepted by the Company.
Very truly yours, HOLLYWOOD PRODUCTIONS,
INC.
By:
Xxxxxx Xxxxxxxx
President
AGREED TO AND ACCEPTED THIS ____ DAY OF 1998.
==========================
(Print name and address)
(Print social security
number of Employer Id No.)
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