As filed with the Securities and Exchange Commission on June 12, 1997
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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UNITED FILM DISTRIBUTORS, INC.
(Exact name of registrant as specified in its charter)
Delaware 7812 63-1145439
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
------------------------
1990 Westwood Blvd., Penthouse Brian Shuster
Los Angeles, California 90025 United Film Distributors, Inc.
(310) 441-0900 1990 Westwood Blvd., Penthouse
Los Angeles, California 90025
(310) 441-0900
(Address and telephone number of (Name, address and telephone number of agent for service of
principal executive offices) principal executive offices)
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Copies to:
Gerald M. Chizever, Esq. Michael Beckman, Esq.
Howard J. Kern, Esq. Laurence D. Paredes, Esq.
Madge S. Beletsky, Esq. Beckman & Millman, P.C.
Richman, Lawrence, Mann, Greene, 116 John Street, 13th Floor
Chizever, Friedman & Phillips New York, New York 10038
9601 Wilshire Blvd., Penthouse (212) 227-6777
Beverly Hills, CA 90210
(310) 274-8300
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Approximate date of proposed sale to
the public: As soon as possible after the effective
date of this Registration Statement.
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If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number under the earlier
effective registration statement for the same offering.[ ]
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If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering.[ ]
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If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box.[ ]
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CALCULATION OF REGISTRATION FEE
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Title of each class of Proposed maximum Proposed maximum
securities to be registered Amount to be offering price per unit aggregate offering price Amount of registration
registered(1) fee(2)
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Common Stock 920,000 $5.00 $4,600,000 $1,394
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(1) Consists of (i) 800,000 shares of Common Stock being underwritten by
Millennium Securities Corp. and (iii) 120,000 shares of Common Stock
covered by the underwriters' over-alloment option.
(2) The registration fee is calculated in accordance with Rule 457(o) of
the Securities Act of 1933, as amended.
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The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registation
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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UNITED FILM DISTRIBUTORS, INC.
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CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-B
Item Number and Captions Location in Prospectus
------------------------ ----------------------
1. Front of Registration Statement and Outside
Front Cover Page of Prospectus....................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus........................................ Inside Front and Outside Back Cover
Pages
3. Summary Information and Risk Factors................... Prospectus Summary; Risk Factors
4. Use of Proceeds........................................ Prospectus Summary; Use of Proceeds
5. Determination of Offering Price........................ Outside Front Cover Page; Underwriting
6. Dilution............................................... Dilution
7. Selling Security Holders............................... Not Applicable
8. Plan of Distribution................................... Outside Front Cover Page; Underwriting
9. Legal Proceedings...................................... Business
10. Directors, Executive Officers, Promoters and Control
Persons.............................................. Management
11. Security Ownership of Certain Beneficial Owners and
Management........................................... Security Ownership of Certain Beneficial Owners and
Management
12. Description of Securities.............................. Description of Capital Stock
13. Interest of Named Experts and Counsel.................. Not Applicable
14. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities....................... Not Applicable
15. Organization Within Last Five Years.................... Certain Relationships
16. Description of Business................................ Prospectus Summary; Business
17. Management's Discussion and Analysis or Plan of
Operation............................................ Management's Discussion and Analysis of
Financial Condition and Results of
Operations
18. Description of Property................................ Business
19. Certain Relationships and Related Transactions......... Certain Relationships
20. Market for Common Equity and Related Stockholder
Matters.............................................. Description of Capital Stock
21. Executive Compensation................................. Executive Compensation
22. Financial Statements................................... Financial Statements
23. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................. Not Applicable
SUBJECT TO COMPLETION, DATED JUNE 12, 1997
PROSPECTUS
800,000 Shares of Common Stock
UNITED FILM DISTRIBUTORS, INC.
COMMON STOCK
United Film Distributors, Inc. ("UFD" or the "Company") is offering
800,000 shares of Common Stock, $0.01 par value ("Common Stock") (this
"Offering"). See "Description of Capital Stock."
Prior to this Offering, there has been no public market for the Common
Stock. It is currently anticipated that the initial public offering price of the
Common Stock will be $5.00 per share. The public offering price of the Common
Stock was determined by negotiation between the Company and Millennium
Securities Corp., the representative (the "Representative") of the Underwriters
(the "Underwriters"), and is not necessarily related to the Company's asset
value, net worth, results of operations or other established criteria of value.
See "Underwriting."
Application has been made to have the Common Stock approved for
quotation on the NASD Electronic Bulletin Board System under the symbol "HITS"
upon effectiveness of this Offering. However, there can be no assurance that the
Common Stock will be accepted for quotation, or, if accepted, that an active
trading market will develop, or if developed, will be sustained. See "Risk
Factors."
-----------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" ON PAGE 4 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
COMMON STOCK OFFERED HEREBY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
====================================================================================================================================
Title of Each Class of Security Underwriting Discounts and Proceeds to Issuer
Being Registered Price to Public Commissions(1)(2) or Other Person(3)
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Common Stock(4) ........... $5.00 $ .50 $ 4.50
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Totals ................. $4,000,000 $400,000 $3,600,000
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(1) See "Underwriting" for additional compensation to the Underwriters,
including a non-accountable expense allowance of $120,000 ($138,000 if
the underwriter's over-allotment is exercised in full). The Company has
agreed to indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
(2) Before deducting expenses estimated at $927,000, including the
Underwriters' non-accountable expense allowance of $120,000 ($1,005,000
if the Underwriters' over-allotment option is exercised in full).
(3) The Company has granted the Underwriters a 45-day option to purchase up
to 120,000 shares of Common Stock at the public offering price, less
underwriting discounts and commissions, solely to cover
over-allotments, if any. If the additional 120,000 shares of Common
Stock which the Company is making available are purchased, the total
Purchase Price to the Public, Underwriting Discounts and Commissions
and Proceeds to the Company will be $4,600,000, $460,000 and
$4,140,000, respectively. See "Underwriting."
-----------------
The Common Stock being offered by the Company is being offered on a
"firm commitment" basis by the Representative, when, as and if delivered to and
accepted by the Underwriters, and subject to their right to reject orders in
whole or in part and to certain other conditions.
-----------------
Millennium Securities Corp.
The date of this Prospectus is June 12, 1997
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of securities in any
State in which such offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any such State.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICES OF THE COMMON STOCK OF
THE COMPANY AT LEVELS ABOVE THOSE THAT MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE OVER-THE-COUNTER MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
TABLE OF CONTENTS
ADDITIONAL INFORMATION.........................................................2
PROSPECTUS SUMMARY.............................................................2
RISK FACTORS...................................................................4
USE OF PROCEEDS ...............................................................9
DIVIDEND POLICY...............................................................10
DILUTION .....................................................................10
CAPITALIZATION................................................................11
SELECTED FINANCIAL DATA.......................................................12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................................13
BUSINESS .....................................................................16
MANAGEMENT....................................................................25
EXECUTIVE COMPENSATION........................................................26
CERTAIN RELATIONSHIPS.........................................................27
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.......................................................28
DESCRIPTION OF CAPITAL STOCK..................................................29
UNDERWRITING..................................................................31
CERTAIN PROVISIONS OF THE COMPANY'S
ARTICLES OF INCORPORATION AND BYLAWS.................................32
LEGAL MATTERS.................................................................32
EXPERTS .....................................................................32
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 under the Securities Act, as
amended (the "Securities Act"), with respect to the Common Stock offered hereby.
This Prospectus does not contain all of the information set forth in the
Registration Statement. For further information with respect to the Company and
the Common Stock offered hereby, reference is made to such Registration
Statement. Copies of the Registration Statement may be obtained from the
Commission's principal office at 450 Fifth Street, N.W., Washington, D.C. 20549
and at its regional offices at Northwestern Atrium Center, 500 West Madison
Street, Chicago, Illinois 60661-2511 and at 7 World Trade Center, New York, New
York 10048 upon payment of the fees prescribed by the Commission, or may be
examined without charge at the offices of the Commission or at the Commission's
Web site located at "http://www.sec.gov."
The Company is not currently subject to the informational requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). As a
result of this Offering, the Company will become subject to the informational
requirements of the Exchange Act, and in accordance therewith will file reports
and other information with the Commission in accordance with the Commission's
rules. Such reports and other information concerning the Company may be
inspected at the public reference facilities referred to above as well as
certain regional offices of the Commission, and copies of such materials may be
obtained upon payment of certain prescribed rates.
No person is authorized to give any information or make any
representation not contained in this Prospectus, and, if given or made, such
information or representation should not be relied upon as having been
authorized. This Prospectus does not constitute an offer to sell, or a
solicitation of an offer to purchase, the securities offered by this Prospectus,
in any jurisdiction, to or from any person to whom it is unlawful to make such
offer or solicitation of an offer in such jurisdiction. Neither the delivery of
this Prospectus nor any distribution of securities made hereunder shall, under
any circumstances, create an implication that there has been no change in the
affairs of the Company since the date of this Prospectus.
Certain statements contained in this Prospectus that are not related to
historical results, including, without limitation, statements regarding the
Company's business strategy and objectives, future financial position and
estimated cost savings, are forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act and
involve risks and uncertainties. Although the Company believes that the
assumptions on which these forward-looking statements are based are reasonable,
there can be no assurance that such assumptions will prove to be accurate and
actual results could differ materially from those discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed under "Risk
Factors," "Management's Discussion and Analysis and Results of Operations" and
"Business," as well as those discussed elsewhere in this Prospectus. All
forward-looking statements contained in this Prospectus are qualified in their
entirety by this cautionary statement.
Until [ ], 1997 (90 days after the Effective Date of this Offering),
all dealers effecting transactions in the Common Stock may be required to
deliver a Prospectus. This is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
PROSPECTUS SUMMARY
The following summary does not purport to be complete and is qualified
in its entirety by the more detailed information and financial data appearing
elsewhere in this Prospectus. An investment in the Common Stock offered hereby
is highly speculative in nature, involves a high degree of risk and should only
be made by investors who can bear the economic risk of a potential loss of their
entire investment. Prospective purchasers should carefully consider the
information set forth under "Risk Factors" on page 4 before purchasing such
securities.
THE COMPANY
United Film Distributors, Inc. (together with its subsidiaries, the
"Company") is engaged in the acquisition, development, financing, production,
distribution and licensing of motion pictures for exhibition in domestic and
international theatrical markets and for subsequent worldwide release in
different media, including, but not limited to, home video and pay and free
television. The Company was incorporated in Delaware in May 1995. Harry Shuster,
the Company's Chairman, has produced or co-produced 20 movies during the past 25
years. Brian Shuster, President and Chief Executive Officer of the Company, has
been involved in various aspects of film production for approximately 15 movies
during the past eight years. See "Management."
During the Company's first two years of operations, the Company has
completed production of eight films, consisting of The Secret Agent Club, Prey
of the Jaguar, Blood Money, The Elevator, Firestorm, Chase Morran, Santa with
Muscles, and Skeletons. Santa with Muscles was released in movie theaters in
November 1996; Chase Morran was released in February 1997 on the SCI-Fi channel;
and Skeletons was released on HBO in April 1997. Prey of the Jaguar, Blood
Money, and Firestorm have been licensed to HBO by Cabin Fever Entertainment,
Inc. ('CFE"), a distributor of six of the Company's motion pictures, but release
dates have not yet been determined. See "Business--Financing of Motion Picture
Production." The other movies are expected to be distributed by the end of the
year. In addition, the Company is currently in pre-production of several films,
one of which is Rear View Mirror, which should be completed in August 1997 and
released in the calendar 1998. All of the films produced by the Company to date
have been in a budget range of between $540,000 and $3,200,000 and have
generally taken between three and six weeks to film. The Company intends to
continue production of low-budget feature length motion pictures as its
principal business focus. See "Business--Motion Picture Production" for the
Company's current slate of motion picture projects.
To produce a project, the Company first acquires the rights to a story,
book or script ("property"). The Company then typically secures a financing or
production commitment for the project from third parties, such as private
investors, studios, and distributors, prior to expending substantial funds in
the development process. However, the Company does advance its own funds to meet
the interim costs of development and production which amounts are generally
repaid to the Company pursuant to the production contracts. See
"Business--Financing of Motion Picture Production" for a description of the
Company's financing activities.
The Company's strategy is to (i) develop long-term relationships with
talent who have demonstrated the ability to attract widespread audience
interest, both domestically and in significant international markets, (ii) seek
to limit the financial risk to the Company inherent in any one motion picture
project while preserving potential returns through the strategic use of its
long-term distribution agreements with companies such as HBO covering the United
States and Canada, and their respective territories, possessions, and
protectorates (the "Domestic Territories") as well as such foreign distributors
such as Highlight Communications (Germany), Saehan/Hollyvision/Digital Media
(South Korea), Consorcio Europa Serviano Ribiero (Brazil), Manga Films (Spain)
and Italian International Films (Italy), and (iii) exercise strong management
control of production costs of its motion pictures, as well as of general
overhead.
The Company's principal goal is to produce and arrange for the release
of three to five commercially successful low-budget motion pictures per year.
Although there can be no assurances, the Company believes that over time these
films will become the core of a library of films which management believes have
the capacity of generating revenues from their worldwide exploitation in
existing and future media and markets. The Company, as a small independent film
company, anticipates that many, if not all of its films, will not be released in
theaters but instead, will be released, if at all, on cable television,
television and other similar media.
The Company's principal executive offices are located at 1990 Westwood
Boulevard, Penthouse, Los Angeles, California 90025 and its telephone number is
(310) 441-0900.
2
The Offering
Common Stock offered by the Company.......................................... 800,000 shares
Common Stock outstanding before this Offering................................ 3,000,000 shares(1)
Common Stock outstanding after this Offering................................. 3,800,000 shares(1)
Price per share being underwritten........................................... $5.00
Comparative Stock Ownership upon completion of this Offering
Present Shareholders................................................ 3,000,000(1)
Public Shareholders................................................. 800,000(1)
Estimated Net Proceeds to the Company........................................ $3,073,000
Use of Proceeds.............................................................. The net proceeds of this Offering will be
used for (1) repaying $2,000,000 in
indebtedness which is owed to the founders
of the Company, and (2) working capital,
including but not limited to, (a) motion
picture development and production,
including, but not limited to, (i)
supplying production financing for the
Company's motion picture projects, (ii)
retaining, generally on a
picture-to-picture basis, the services of
writers, directors and other artistic
elements in the development of motion
picture projects, (iii) purchasing or
obtaining options for rights to books,
screenplays and other artistic properties,
and (iv) general administrative expenses.
See "Use of Proceeds" and "Certain
Relationships."
Risk Factors................................................................. An investment in the Common Stock offered
hereby involves a high degree of risk and
immediate and substantial dilution of the
book value of the Common Stock and should
be considered only by persons who can
afford the loss of their entire
investment. See "Risk Factors" and
"Dilution."
Proposed NASD Electronic Bulletin Board Trading Symbol(2).................... "HITS"
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(1) Unless otherwise indicated, all share and per share information in this
Prospectus (i) gives effect to the 5-for-1 stock split of the Company's
Common Stock effected in May 1997 and (ii) does not include Common
Stock to be issued upon exercise of the Underwriter's over-allotment
option or issuable upon exercise of outstanding options or warrants or
360,000 shares of Common Stock reserved for issuance pursuant to the
Company's stock option plan, pursuant to which options to purchase an
aggregate of 20,000 shares of Common Stock are currently outstanding.
See "Management--Stock Option Plan" and "Description of Capital Stock."
(2) Although the Company intends to cause a market maker to apply for
inclusion of the Common Stock on the NASD Electronic Bulletin Board,
there can be no assurance that the Common Stock will be included for
quotation, or if so included, that the Company will be able to continue
to meet the requirements for continued quotation, or that a public
trading market will develop or that if such market develops, it will be
sustained. See "Risk Factors--No Prior Public Market; Possible
Volatility of Stock Price; Negotiated Offering Price" and "--Lack of
Prior Market for Common Stock; No Assurance of Public Trading Market."
3
RISK FACTORS
The factors discussed below and elsewhere in this Prospectus could
adversely affect the value of the Common Stock. In addition, the factors
discussed below and elsewhere in this Prospectus may constitute forward-looking
statements and, as such, may involve known or unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Any
forward-looking statements contained in this Prospectus should not be relied
upon as predictions of future events. Such forward-looking statements can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should," "could," "seeks" or "anticipates" or the
negative thereof or other variations thereon or comparable terminology, or by
discussions of strategy. Such statements are necessarily dependent on
assumptions, data or methods that may be incorrect or imprecise and they may be
incapable of being realized. The following factors may constitute or include
cautionary, forward-looking statements identifying important factors with
respect to such forward-looking statements, including certain risks and
uncertainties, that could cause actual results to vary materially from the
future results covered in such forward-looking statements. Other factors could
also cause actual results to vary materially from the future results covered in
such forward-looking statements. Actual results in the future could differ
materially from those described in the forward-looking statements or as a result
of the factors set forth below (which list does not purport to be exhaustive)
and the matters set forth in this Prospectus generally. See "Management's
Discussion and Analysis and Results of Operations" and "Business" for a
description of certain other factors generally affecting the Company's business.
RECENT OPERATING LOSSES; NO ASSURANCE OF PROFITABILITY; LIMITED OPERATING
HISTORY
The Company was founded in May 1995 and has a limited history of
operations on which an investor could base an evaluation of an investment in the
Company. Notwithstanding the fact that the Company had net income of $67,892 for
the fiscal year ended July 31, 1996, the Company incurred a net loss of $71,098
for the six months ended January 31, 1997. There can be no assurance that the
Company will return to profitability. Furthermore, although Harry Shuster has
substantial experience in the motion picture industry as a result of having
produced or co-produced 20 movies during the past 25 years, the Company itself
has been engaged in the production of motion pictures only since 1995. During
that time, eight motion pictures, consisting of The Secret Agent Club, Prey of
the Jaguar, Blood Money, The Elevator, Firestorm, Chase Morran, Santa with
Muscles, and Skeletons have been completed by the Company. Santa with Muscles
was released in movie theaters in November 1996; Chase Morran was released in
February 1997 on the SCI-Fi channel; and Skeletons was released on HBO in April
1997. Prey of the Jaguar, Blood Money, and Firestorm have been licensed to HBO
by CFE, but release dates have not yet been determined. See "Business--Financing
of Motion Picture Production." The other movies are expected to be distributed
by the end of the year. In addition, the Company is currently in pre-production
of several films, one of which is Rear View Mirror, which should be completed in
August 1997 and released in calendar 1998. All of the films produced by the
Company to date have been in a budget range of between $540,000 and $3,200,000.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and "Management."
DEPENDENCE ON KEY PERSONNEL
Harry Shuster is the founder of the Company and serves as its
Chairman. Mr. Shuster has substantial experience in the motion picture industry
and extensive relationships with the motion picture community, including
creative talent and leading distributors. The Company also relies on the
expertise of Brian Shuster, the Company's President and Chief Executive Officer.
Virtually all decisions concerning the conduct of the business of the Company,
including the properties and rights to be acquired by the Company and the
arrangements to be made for the development, financing, production and
distribution of the Company's motion pictures, are made by or significantly
influenced by Messrs. Harry or Brian Shuster. The loss of their services for any
reason would have a material adverse effect on the Company's business and
operations and its prospects for the future. The Company does not have a "key
man" life insurance on the lives of any of its executive officers. See
"Management." The Company also has recently entered into an employment agreement
with Brian Shuster for an initial term ending March 31, 2000, but which
automatically renews for additional terms of one year each unless 60 days notice
of termination is provided by either party. See "Executive
Compensation--Employment Contracts; Termination of Employment and
Change-In-Control Arrangements." The Company does not have any employment
agreement with Harry Shuster. See "--Conflicts of Interest."
4
CONFLICTS OF INTEREST
The Company relies on the services of Harry Shuster, the Company's
Chairman. However, Mr. Shuster is the Chief Executive Officer of two other
public companies and intends to continue to devote substantial time to the
businesses and affairs of these two other companies. Although Mr. Shuster
intends to devote such time to the business of the Company as he deems necessary
for its operations, there can be no assurance that Mr. Shuster will be available
to handle any crisis situation that may arise, and if Mr. Shuster is
unavailable, it is possible that the resolution of such crises may be less
favorable than the resolution that could have been reached had Mr. Shuster been
available. See "Management."
RISKS OF MOTION PICTURE PRODUCTION
General. The motion picture industry is highly speculative and
inherently risky. There can be no assurance of the economic success of any
motion picture since the revenues derived from the production and distribution
of a motion picture (which do not necessarily bear a direct correlation to the
production or distribution costs incurred) depend primarily upon its acceptance
by the public, which cannot be predicted. The commercial success of a motion
picture also depends upon the quality and acceptance of other competing films
released into the marketplace at or near the same time, the availability of
alternative forms of entertainment and leisure time activities, general economic
conditions and other tangible and intangible factors, all of which can change
and cannot be predicted with certainty. Therefore, there is a substantial risk
that some or all of the Company's motion pictures will not be commercially
successful, resulting in costs not being recouped or anticipated profits not
being realized. Furthermore, the Company, as a small independent film company,
anticipates that many, if not all of its films, will not be released in theaters
but instead, will be released, if at all, on cable television, television and
other similar media.
Completion of a Motion Picture Subject to Uncertainties and Financial
Risks. The production, completion and distribution of motion pictures is subject
to numerous uncertainties, including financing requirements, personnel
availability and the release schedule of competitive films. Although the Company
plans to reduce the risks of its financial involvement in the production costs
of motion pictures through relationships with distributors such as HBO covering
the United States and Canada, and their respective territories, possessions, and
protectorates (the "Domestic Territories") as well as such foreign distributors
such as Highlight Communications (Germany), Saehan/Hollyvision/Digital Media
(South Korea), Consorcio Europa Serviano Ribiero (Brazil), Manga Films (Spain)
and Italian International Films (Italy), the Company may be subject to
substantial financial risks relating to the production, completion and release
of motion pictures. In addition, a significant amount of time may elapse between
the expenditure of funds by the Company and the receipt of revenues from the
motion pictures.
COMPETITION
Motion picture production and distribution are highly competitive. The
competition comes from both companies within the same business and companies in
other entertainment media which create alternative forms of leisure
entertainment. The Company's competition for the acquisition of literary
properties, the services of performing artists, directors, producers and other
creative and technical personnel and production financing includes several
"major" film studios including, but not limited to, The Walt Disney Company,
Paramount Pictures Corporation, MCA, Columbia Pictures, Tri-Star Pictures,
Twentieth Century Fox, Warner Brothers Inc. and MGM/UA, which are dominant in
the motion picture industry, as well as numerous independent motion picture and
television production companies, television networks and pay television systems.
Many of these organizations with which the Company competes have significantly
greater financial and other resources than does the Company. In addition, the
Company's films compete for audience acceptance and exhibition outlets with
motion pictures produced and distributed by other companies, including motion
pictures distributed by CFE, HBO and the Company's foreign distributors. As a
result, the success of any of the Company's films is dependent not only on the
quality and acceptance of that particular film, but also on the quality and
acceptance of other films.
RISKS OF INTERNATIONAL BUSINESS
At January 31, 1997 and July 31, 1996, foreign sales in Asia, South
America and Europe accounted for 41% and 48%, respectively, of total revenues
for these periods. Management of the Company anticipates that a significant
percentage of the Company's revenues and income, if any, will continue to come
from foreign sources. Accordingly, the Company is subject to the risks inherent
in conducting business across national borders, including, but not limited to,
currency exchange rate fluctuations, international incidents, military
outbreaks, economic downturns, government instability, nationalization of
foreign assets, government protectionism and changes in governmental policy, any
of which could have a material adverse effect on the Company's business and
operations and its prospects for the future.
5
FLUCTUATION OF OPERATING RESULTS
Most of the Company's revenues are expected to be derived from the
exploitation of a limited number of motion pictures produced by the Company. As
a result of this factor, as well as uncertainties in the release schedules of
its motion pictures and audience responses thereto, the Company's revenues and
earnings are expected to fluctuate significantly from quarter to quarter.
Accordingly, the Company's revenues and earnings in any particular period may
not be indicative of the results for any future period.
CONTROL BY MANAGEMENT AND EXISTING STOCKHOLDERS
Upon completion of this Offering (assuming no exercise of the
Underwriter's over-allotment option or other outstanding options or warrants),
management and the existing stockholders of the Company will beneficially own
approximately 78.9% of the outstanding Common Stock. As a result, management and
the existing stockholders will continue to be in a position to elect all of the
members of the Board of Directors of the Company, to cause an increase in the
Company's authorized capital stock, to cause the dissolution, merger or sale of
the assets of the Company and, generally, to direct the affairs of the Company.
This concentration of ownership will likely have the effect of discouraging
third parties from acquiring substantial blocks of the Company's Common Stock to
cause a change in the management and control of the Company. Such concentration
of ownership with management could tend to limit the price that investors might
be willing to pay in the future for shares of Common Stock as it may reduce the
possibility of a change in control of the Company. A change in control of an
issuer frequently occurs at a premium over the historical trading prices of the
issuer's publicly traded Common Stock. There are no agreements or other
understandings between the officers and directors of the Company and the other
current stockholders with respect to voting or any other matters pertaining to
the Company. See "Security Ownership of Certain Beneficial Owners and
Management" and "Description of Capital Stock."
LABOR RELATIONS
Many individuals associated with the Company's productions, including
actors, writers and directors, are members of guilds or unions which bargain
collectively with producers on an industry-wide basis from time to time. The
Company's operations are dependent upon its compliance with the provisions of
collective bargaining agreements governing relationships with these guilds and
unions. Strikes or other work stoppages by members of these unions could delay
or disrupt the Company's activities. However, the extent to which the existence
of collective bargaining agreements may affect the Company in the future is not
currently determinable. See "Business--Employees."
NEED FOR ADDITIONAL FINANCING
The Company believes that its existing capital resources, together with
the proceeds of this Offering, will enable the Company to maintain its
operations and working capital requirements for at least twelve (12) months.
However, it is possible that additional financing will be required to fund
further growth in the Company's business beyond the next 12 months whether
through equity financing, debt financing or other sources. There can be no
assurance that such sources of financing will be available, or will be available
on terms acceptable to the Company. Inability to obtain additional financing
could limit the Company's ability to produce motion pictures, retain writers,
directors and other artistic elements, purchase rights to books, screenplays and
other artistic properties, or take other actions that would benefit the Company
and its stockholders and could therefore have a material adverse effect on the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
BROAD DISCRETION IN APPLICATION OF PROCEEDS
A significant portion of the estimated net proceeds of this Offering
has been allocated to working capital and general corporate purposes. Management
will have broad discretion as to the application of such proceeds. Excluding the
proceeds from the exercise of the Underwriters' over allotment option,
$1,073,000 or 34.9% of the net proceeds from this Offering will be used for
general corporate purposes. See "Use of Proceeds."
LIMITATION OF LIABILITY; INDEMNIFICATION
The Company's Articles of Incorporation and Bylaws contain provisions
that limit the liability of directors for monetary damages and provide for
indemnification of officers and directors under certain circumstances. Such
provisions may discourage stockholders from bringing a lawsuit against directors
for breaches of fiduciary duty and may also have the effect of reducing the
likelihood of derivative litigation against directors and officers even though
such action, if successful,
6
might otherwise have benefitted the Company and its stockholders. In addition, a
stockholder's investment in the Company may be adversely affected to the extent
that costs of settlement and damage awards against the Company's officers or
directors are paid by the Company pursuant to the indemnification provisions of
its Articles of Incorporation and Bylaws. See "Certain Provisions of the
Company's Articles of Incorporation and Bylaws."
EFFECTS OF CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Certificate of Incorporation and
Bylaws and of Delaware law may delay, defer or prevent a change in control of
the Company and may adversely affect the voting and other rights of the holders
of Common Stock. In particular, the ability of the Company's Board of Directors
to issue "blank check" preferred stock without further stockholder approval may
have the effect of delaying, deferring or preventing a change in control of the
Company. See "Description of Capital Stock."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE; NEGOTIATED OFFERING
PRICE
Prior to this Offering there has been no public market for the
Company's Common Stock, and there can be no assurance that an active public
trading market will develop after this Offering or be sustained. The initial
public offering price of the Common Stock to be sold in this Offering was
determined by negotiations between the Company and the Representative and may
not be indicative of the market price of the Common Stock after this Offering.
The initial public offering price also does not necessarily bear any
relationship to the Company's assets, book value, net worth or results of
operations of the Company or any other established criteria of value. Factors
not within the control of the Company, including public statements from
securities analysts and others concerning the Company's operations, public
acceptance of the Company's motion pictures, interest rates and changes in
general market conditions could have a significant impact on the future market
prices for shares of the Common Stock, which may be volatile.
LACK OF PRIOR MARKET FOR COMMON STOCK; NO ASSURANCE OF PUBLIC TRADING MARKET
Prior to this Offering, no public trading market existed for the Common
Stock. There can be no assurance that a public trading market for the Common
Stock will develop or that a public trading market, if developed, will be
sustained. Although the Company anticipates that upon completion of this
Offering, the Common Stock will be eligible for inclusion on the NASD Electronic
Bulletin Board System, no assurances can be given that the Common Stock will be
listed on the Bulletin Board. Consequently, there can be no assurance that a
regular trading market for the Common Stock will develop after the completion of
the Offering. If a trading market does in fact develop for the Common Stock
offered hereby, there can be no assurance that it will be maintained.
Furthermore, if for any reason the Common Stock is not listed on the Electronic
Bulletin Board or a public trading market does not otherwise develop, purchasers
of the Common Stock may have difficulty in selling their Common Stock should
they desire to do so. In any event, because certain restrictions may be placed
upon the sale of securities under $5.00, unless such securities qualify for an
exemption from the 'penny stock' rules, such as a listing on The NASDAQ SmallCap
Market, some brokerage firms will not effect transactions in the Company's
Common Stock and it is unlikely that any bank or financial institution will
accept such securities as collateral, which could have an adverse effect in
developing or sustaining any market for the Common Stock. See "--'Penny Stock'
Regulations May Impose Certain Restrictions on Marketability of Securities."
Although they have no legal obligation to do so, the Underwriters from
time to time may act as market makers and may otherwise effect and influence
transactions in the Common Stock. However, there is no assurance that the
Underwriters will continue to effect and influence transactions in the Common
Stock. The prices and liquidity of the Company's Common Stock may be
significantly affected by the degree, if any, of the Underwriters' participation
in the market. The Underwriters may voluntarily discontinue such participation
at any time. Further, the market for, and liquidity of, the Common Stock may be
adversely affected by the fact that a significant amount of the Common Stock may
be sold to customers of the Underwriters.
The Common Stock offered hereby will be traded in the over-the-counter
market in what are commonly referred to as the 'pink sheets' or on the
Electronic Bulletin Board. As a result, an investor may find it more difficult
to dispose of or to obtain accurate quotations as to the price of the Common
Stock offered hereby. The above-described rules may materially adversely affect
the liquidity of the market for the Company's Common Stock. See "Underwriting."
SUBSTANTIAL AND IMMEDIATE DILUTION
7
The initial public offering price is substantially higher than the book
value per share of Common Stock. Investors purchasing shares of Common Stock
pursuant to this Prospectus therefore will incur immediate and substantial
dilution of $3.66 per share (approximately 73.2% of the per share offering
price). Existing stockholders acquired their shares of Common Stock at a nominal
price and, accordingly, new investors will bear virtually all of the risks
inherent in an investment in the Company. See "Dilution."
SHARES AVAILABLE FOR FUTURE SALE
Upon completion of this Offering, there will be 3,800,000 shares of
Common Stock outstanding (3,920,000 shares if the Underwriters' over-allotment
option is exercised in full), excluding shares issuable upon exercise of stock
options and warrants. Of these shares, the 800,000 shares sold in this Offering
(920,000 shares if the Underwriters' over-allotment is exercised in full) will
be freely tradeable under the Securities Act of 1933, as amended (the
"Securities Act"), except for any such shares purchased by an "affiliate" of the
Company. The remaining 3,000,000 shares (the "Restricted Shares") (which were
issued and sold by the Company in private transactions in reliance upon the
non-public offering exemption set forth in Section 4(2) of the Securities Act)
and any other shares hereafter acquired by an "affiliate" of the Company will be
eligible for sale under Rule 144 under the Securities Act, or at any time
pursuant to an effective registration statement relating to such shares. No
prediction can be made as to the effect, if any, that future sales, or the
availability of shares of capital stock for future sale, will have on the market
price of the Common Stock prevailing from time to time. Sales of substantial
amounts of stock (including shares issuable upon the exercise of stock options
and warrants), or the perception that such sales could occur, could adversely
affect prevailing market prices for such shares.
SUBSTANTIAL NUMBER OF AUTHORIZED SHARES AVAILABLE FOR FUTURE ISSUANCE; POSSIBLE
DILUTIVE AND ANTI-TAKEOVER EFFECTS
The Company's Articles of Incorporation authorize the issuance of
20,000,000 shares of Common Stock. Upon completion of this Offering (assuming
the Underwriters' over-allotment option is not exercised), there will be
approximately 16,200,000 authorized but unissued shares of Common Stock
available for future issuance. The Company's Board of Directors has the power to
issue substantial amounts of additional shares without stockholder approval.
Although the Company currently has no commitments to issue any shares of Common
Stock other than as described in this Prospectus, the Company may issue a
substantial number of additional shares in connection with future financings or
acquisitions. To the extent that additional shares of Common Stock are issued,
dilution of the interests of the Company's stockholders will occur.
The Company's Articles of Incorporation also authorize the issuance of
3,000,000 shares of Preferred Stock with such designations, rights, and
preferences as may be determined from time to time by the Board of Directors.
The Board of Directors is empowered, without stockholder approval, to issue
Preferred Stock with dividend, liquidation, conversion, voting, or other rights,
which could adversely affect the voting power or other rights of the holders of
the Company's Common Stock. In addition, the issuance of Preferred Stock and
Common Stock could be utilized, under certain circumstances, as a method of
discouraging, delaying, or preventing a change in control of the Company.
Although the Company currently has no commitments to issue any shares of
Preferred Stock or Common Stock, there can be no assurance that the Company will
not do so in the future. See "Description of Capital Stock."
'PENNY STOCK' REGULATIONS MAY IMPOSE CERTAIN RESTRICTIONS ON MARKETABILITY OF
SECURITIES
The Securities and Exchange Commission (the "Commission"') has adopted
regulations which generally define 'penny stock' to be any security that has a
market price (as defined) less than $5.00 per share or an exercise price of less
than $5.00 per share, subject to certain exceptions. Therefore, if the market
price of the Common Stock is less than $5.00 per security, then such security
would fall within the definition of 'penny stock.' Since it is intended that the
Common Stock offered hereby will be authorized for quotation on the Electronic
Bulletin Board, such securities will not be exempt from the definition of 'penny
stock.' The Company's Common Stock may become subject to rules that impose
additional sales practice requirements on broker-dealers who sell such
securities to persons other than established customers and accredited investors
(generally those with assets in excess of $1,000,000 or annual income exceeding
$200,000, or $300,000 together with their spouse). For transactions covered by
these rules, the broker-dealer must make a special suitability determination for
the purchase of such securities and have received the purchaser's written
consent to the transaction prior to the purchase. Additionally, for any
transaction involving a penny stock, unless exempt, the rules require the
delivery, prior to the transaction, of a risk disclosure document mandated by
the Commission relating to the penny stock market. The broker-dealer must also
disclose the commission payable to both the broker-dealer and the registered
representative, current quotations for the securities and, if the broker-dealer
is the sole market maker, the broker-dealer must disclose this fact and
8
the broker-dealer's presumed control over the market. Finally, monthly
statements must be sent disclosing recent price information for the penny stock
held in the account and information on the limited market in penny stocks.
Consequently, the 'penny stock' rules may restrict the ability of broker-dealers
to sell the Company's Common Stock and may affect the ability of purchasers in
this Offering to sell the Company's Common Stock in the secondary market and the
price at which such purchasers can sell any such securities.
ABSENCE OF DIVIDENDS
The Company has never paid cash dividends on the Common Stock and no
cash dividends are expected to be paid on the Common Stock in the foreseeable
future. The Company anticipates that for the foreseeable future all of its cash
resources and earnings, if any, will be retained for the operation and expansion
of the Company's business. See "Dividend Policy."
IN ADDITION TO THE ABOVE RISKS, BUSINESSES ARE OFTEN SUBJECT TO RISKS NOT
FORESEEN OR FULLY APPRECIATED BY MANAGEMENT. IN REVIEWING THIS MEMORANDUM,
POTENTIAL INVESTORS SHOULD KEEP IN MIND OTHER POSSIBLE RISKS.
USE OF PROCEEDS
The net proceeds from the sale of the 800,000 shares of Common Stock
offered by the Company in this Offering, after deducting the estimated
underwriting discounts and commissions and expenses payable by the Company to
attorneys and accountants in connection with this Offering, are estimated to be
$3,073,000 ($3,583,000 if the Underwriters' over-allotment option is exercised
in full). The net proceeds of this Offering will be used for (1) repaying
$2,000,000 in indebtedness which is owed to the founders of the Company, and (2)
working capital, including but not limited to, (a) motion picture development
and production, including, but not limited to, (i) supplying production
financing for the Company's motion picture projects, (ii) retaining, generally
on a picture-to-picture basis, the services of writers, directors and other
artistic elements in the development of motion picture projects, (iii)
purchasing or obtaining options for rights to books, screenplays and other
artistic properties, and (iv) general administrative expenses. The money
borrowed from the founders of the Company was used to fund film productions and
operations. Interest on this indebtedness accrued at 7% per annum.
See "Certain Relationships."
The Company intends to maintain flexibility in order to adjust its
strategies in response to (i) the financial results of its motion pictures, (ii)
developments in the motion picture and entertainment industries, (iii) changing
needs of the Company, and (iv) new opportunities that may arise in the future.
Accordingly, the specific allocation and expenditure of the proceeds of this
Offering among the foregoing uses will remain within the discretion of
management and cannot be determined as of the date of this Prospectus. Pending
their ultimate application, the net proceeds will be invested in interest or
non-interest bearing accounts or invested in short-term government obligations,
investment-grade securities, money market funds or certificates of deposit.
Management believes that the net proceeds from this Offering, together
with its existing capital, funds from operations, advances from both domestic
and foreign distributors and other available sources of capital, will be
sufficient to enable the Company to fund its planned development, production and
overhead expenditures for the next 12 months.
The following table summarizes the expected use of proceeds described
above:
Dollar Percentage of
Use of Proceeds Amount Net Proceeds
--------------- ------ ------------
Repayment of Indebtedness........................................$2,000,000 65.1%
Working Capital.................................................. 1,073,000 34.9%
Total...................................................$3,073,000 100.0%
9
DIVIDEND POLICY
The Company presently intends to retain future earnings, if any, to
finance the expansion and development of its business and not pay cash dividends
on the Common Stock in the foreseeable future. Any future decision of the
Company's Board of Directors to pay dividends will be made in light of the
Company's earnings, financial position, capital requirements and other relevant
factors then existing.
DILUTION
As of January 31, 1997, the Company has a net tangible book value of $
2.036 million or $0.68 per share. Net tangible book value per share of Common
Stock is defined as the tangible assets of the Company, less all liabilities,
divided by the number of shares of Common Stock outstanding, including the
shares resulting from the assumed exercise of all outstanding warrants and
options. After giving effect as of January 31, 1997 to the sale of 800,000
shares of Common Stock offered hereby and after deducting the estimated offering
expenses, the pro forma net tangible book value of the Common Stock at January
31, 1997 would have been $5.109 million or $1.34 per share. This represents an
immediate increase in net tangible book value of $0.66 per share to existing
stockholders and an immediate dilution of $3.66 per share or 73.1% of the
offering price, to new investors purchasing the shares offered hereby. The
following table illustrates this per share dilution:
Initial public offering price $ 5.00
Net tangible book value per share before offering $0.68
Increase in net tangible book value attributable to new investors 0.66
---------------
Pro forma net tangible book value after giving effect to public offering 1.34
-----------
Dilution per share to new investors (1) $ 3.66
===========
- ------------------------
(1) Dilution to new investors does not take into account the issuance
of shares of Common Stock upon exercise of options or warrants, and
assumes no exercise of the Underwriter's over-allotment option. See
"Underwriting." To the extent any of these options or warrants are
exercised, there may be further dilution to new investors.
The following table, calculated as of January 31, 1997 on the same
basis as above, summarizes with respect to existing holders of Common Stock and
new investors of Common Stock in this Offering, a comparison of the number of
shares acquired from the Company, the percentage ownership of such shares, the
total consideration paid, the percentage total consideration paid and the
average price per share.
Shares Purchased Total Consideration Average
----------------- ------------------- Price
Number Percent Amount Percent Per Share
------ ------- ------ ------- ---------
Existing Stock holders 3,000,000 78.9% $ 2,035,931 33.7% $ 0.68
New Investors 800,000 21.1% 4,000,000 66.3% $ 5.00
-----------------------------------------------------
3,800,000 100.0% $ 6,035,931 100.0%
=====================================================
10
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
January 31, 1997, and as adjusted to give effect to the sale of the Common Stock
offered hereby and the application of the estimated net proceeds therefrom. See
"Use of Proceeds." This table should be read in conjunction with the
consolidated financial statements and related Notes thereto and "Management's
Discussion and Analysis and Results of Operation" appearing elsewhere in this
Prospectus.
January 31, 1997
----------------
Actual As Adjusted
------ -----------
(in thousands)
Minority Interest $ 3,132 $ 3,132
Shareholders' Equity:
Preferred stock, $0.01 par value -- --
3,000,000 shares authorized,
none issued
Common stock, $0.01 par value, 30 38
20,000,000 shares authorized,
3,000,000 shares issued and
outstanding; 3,800,000 shares
issued and outstanding, as
adjusted
Additional paid-in capital 2 ,041 5,106
Retained Earnings (35) (35)
---------- ----------
Total shareholders' equity 2,036 5,109
---------- ----------
Total Capitalization $ 2,036 $ 5,109
========== ----------
-----------------------
(1) In accordance with Statement of Financial Accounting Standards No. 53
"Financial Reporting by Producers and Distributors of Motion Pictures,"
the Company has elected to present an unclassified balance sheet. For
information concerning the Company's debt and lease obligations, see
Notes to Consolidated Financial Statements.
11
SELECTED FINANCIAL DATA
The following selected consolidated financial data are qualified by
reference to, and should be read in conjunction with, the Company's consolidated
financial statements, the Notes thereto, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contained elsewhere
in this Prospectus. The selected financial data for each of the two years ended
July 31, 1996 and 1995 are derived from Company's audited financial statements.
The selected financial data for the six-month periods ended January 31, 1997 and
1996 are derived from the Company's unaudited financial statements. Operating
results for the six months ended January 31, 1997 are not necessarily indicative
of the results that may be expected for the fiscal year ending July 31, 1997.
Years Ended Six Months Ended
July 31, January 31,
--------------------------- ------------------------------
Consolidated Statement of Operations Data: 1996 1995 1997 1996
------------ ------------ ------------ ---------------
(in thousands, except per share data)
Film revenue............................................ $ 2,626 $ - $ 4,030 $ -
Film amortization....................................... 1,609 - 3,185 -
------------- ------------ ------------ ---------------
Gross Profit............................................ 1,017 - 845 -
General, administrative and selling expenses....... 755 32 436 333
Interest expenses.................................. 127 - 77 42
Other income (expenses) net........................ 48 - (1) 9
Income (loss) before income taxes....................... 183 (32) 331 (366)
Provision (benefit) for income taxes.................... 27 - (27) (155)
------------- ------------ ------------ ---------------
Income (loss) before minority interests................. $ 156 $ (32) 358 (211)
============= ============ ============ ===============
Minority interests (1).................................. $ 88 $ - $ 429 -
Net Income (loss)....................................... $ 68 $ (32) (71) (211)
Net income (loss) per share............................. $ 0.03 $ (0.03) $ (0.02) (0.14)
============= ============ ============ ===============
Weighted average shares outstanding..................... 2,364 1,000 3,000 1,527
============= ============ ============ ===============
January 31, 1997
----------------------------
Actual Proforma(2)
------------- ------------
(Unaudited) (Unaudited)
Consolidated Balance Sheet Data:
Film costs, net......................................... $ 6,725 $ 6,725
Total assets............................................ 7,433 8,506
Shareholder advances.................................... 1,809 -
Total stockholders' equity (deficit).................... 2,036 5,109
- ----------
(1) Certain related and third parties own minority interests in two limited
partnerships that financed three of the Company's motion pictures. See
"Business--Financing of Motion Picture Production."
(2) Adjusted to reflect the sale of the 800,000 shares of Common Stock
offered by the Company hereby and the application of the estimated net
proceeds therefrom. See "Use of Proceeds" and "Capitalization."
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Company's consolidated financial statements and the Notes thereto appearing
elsewhere in this Registration Statement on Form SB-2 of which this Prospectus
forms a part. Certain statements contained in this Registration Statement on
Form SB-2 of which this Prospectus forms a part that are not related to
historical results, including, without limitation, statements regarding the
Company's business strategy and objectives, future financial position and
estimated cost savings, are forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act and
involve risks and uncertainties. Although the Company believes that the
assumptions on which these forward-looking statements are based are reasonable,
there can be no assurance that such assumptions will prove to be accurate and
actual results could differ materially from those discussed in the forward-
looking statements. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed under "Risk Factors" and
"Business," as well as those discussed elsewhere in this Registration Statement
on Form SB-2 of which this Prospectus forms a part. All forward-looking
statements contained in this Registration Statement on Form SB-2 of which this
Prospectus forms a part are qualified in their entirety by this cautionary
statement.
The period from May 10, 1995, the Company's inception, to July 31, 1995
is referred to herein as FY 1995 and the fiscal year ended July 31, 1996 is
referred to herein as FY 1996.
OVERVIEW
The Company is primarily engaged in the production and distribution of
motion pictures in domestic and foreign markets. The Company produces low budget
movies striving for stories with wide appeal and high production quality. The
Company has produced eight movies and released seven through January 31, 1997
ranging in production costs from $540,000 to $3,200,000. The Company is in
pre-production for its ninth production and is in the development stage of
several more projects.
The Company plans to produce three to five low budget movies per year.
The Company expects its next several films to have budgets less than $1.0
million. The Company also believes that low budget films require less capital
resources, less general and administrative costs and limit the financial risk to
the Company in any one motion picture. Furthermore, the Company has had more
favorable experiences with film costing less than $1.0 million.
A substantial portion of the Company's film revenue since its inception
on May 10, 1995 has been derived from transactions with Cabin Fever
Entertainment, Inc. ("CFE"). The Company licensed domestic rights to CFE for
seven movies. In November 1996, after the Company already delivered the seven
films licensed, CFE refused to accept delivery of the last of the seven movies.
The relationship between the Company and CFE has subsequently deteriorated,
resulting in a lawsuit wherein the Company claims damages for copyright
infringement, breach of contract and fraud. The case was filed in federal
district court in New York in the first quarter of 1997. CFE did not answer the
complaint but instead moved to dismiss the copyright claim, which is the basis
for federal jurisdiction. If CFE is successful on its motion, the Company
intends to move forward with the remaining contract and fraud claims in state
court. Subsequent to the deterioration of the relationship with CFE, the Company
has licensed two other films domestically through other distributors. See
"Business-- Legal Proceedings."
Management of the Company anticipates that the majority of the total
estimated revenue for the Company will be from licensing to foreign
distributors. The Company attends film markets such as the Cannes Film Festival
to promote and license its films to territories such as Germany, South Korea,
Latin America and Spain. As of January 31, 1997, the Company has not licensed
films in some major territories such as Japan and Scandinavia. Although there
can be no assurances, the Company hopes to have licensing agreements in these
territories by December 1997. As of January 31, 1997, the Company has a backlog
of foreign sales orders of approximately $2,988,000.
The Company generally amortizes film costs using the
individual-film-forecast computation method, under which film costs are
amortized for each film in the proportion that revenue recognized during the
current period for the film bears to management's estimate of the total film
revenue to be realized from all media and markets for that film. Film costs
include acquisition costs, print and advertising costs (including costs for
advertising which is intended to benefit the films in other markets such as home
video or television), and, with respect to home video, the costs of
manufacturing (if applicable) and distributing the motion picture. Management
regularly reviews and revises its revenue estimates for each film, which may
result in a change in the rate of amortization and a write-down of the asset
(thereby affecting stockholders' equity and the Company's gross profit).
13
The Company's unamortized film costs are comprised as of the dates set
forth below of the following:
July 31, 1995 January 31, 1996 July 31, 1996 January 31, 1997
------------- ---------------- ------------- ----------------
(In thousands)
Film costs, net............. $ -- $3,694 $9,200 $6,725
The Company believes gross film revenue with respect to a motion
picture is typically realized in the first few years following the film's
availability. As of January 31, 1997, approximately 70% of film costs have been
amortized for films available for delivery prior to July 31, 1996.
RESULTS OF OPERATIONS
The table sets forth, for the periods indicated, the percentage of
total revenues represented by certain items included in the Statement of
Operations.
Years Ended Six Months Ended
July 31, January 31,
----------------------- ----------------------
1996 1995 1997 1996
--------- ----------- --------- ----------
Film Revenue 100.0% - 100.0% -
Amortization of Film Costs 61.3 - 79.0 -
Gross Margin 38.7 - 21.0 -
Selling, General and Administrative 28.7 - 10.8 -
Expenses
Interest, Net (4.4) - (1.9) -
Income Before Income Taxes 6.9 - 8.2 -
Benefit (Provision) for taxes (1.0) - 0.7 -
Minority Interests (3.3) - (10.7) -
Net Income (Loss) 2.6 - (1.8) -
YEAR ENDED JULY 31, 1996 COMPARED TO INCEPTION (MAY 10, 1995) THROUGH JULY 31,
1995
Film revenue. Film revenue for the year ended July 31, 1996 was $2.626 million.
For the period from inception in May 1995 to July 31, 1995 there was no revenue
recognized. There were four films available for foreign and domestic
distribution in FY 1996. During FY 1995, the Company's efforts were directed to
production of films and start-up of the Company. Approximately 74.6% of the
Company's film revenue for the year ended July 31, 1996 was attributable to one
film released in the period.
Film Amortization. Film amortization primarily represents the amortization of
the Company's film costs. Film amortization was $1.610 million in FY 1996 and
there was no amortization for the period ended July 31, 1995.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to approximately $0.755 million for FY 1996
from approximately $0.032 for FY 1995, which represented only three months.
During FY 1995, which represented only three months, the Company's efforts were
directed to production of films and start-up of the Company.
Interest. Interest expense for the year ended July 31, 1996 increased to
approximately $0.117 million from $0 for the period ended July 31, 1995. The
increase was primarily attributable to the increase in stockholders' advances
used to fund production efforts.
SIX MONTHS ENDED JANUARY 31, 1997 COMPARED TO SIX MONTHS ENDED JANUARY 31, 1996
Film revenue. Film revenue for the six months ended January 31, 1997 increased
to approximately $4.030 million from no revenues for the comparable period in
1996. The film revenue in 1997 was primarily attributable to the availability of
seven movies for both foreign and domestic distribution at some period in the
six months ended January 31, 1997 compared to no movies available for the
comparable period in 1996. Approximately 48.5% of the Company's film revenue
during the six months ended January 31, 1997 was attributable to one of the
films initially released during the period. In addition, the
14
Company expects to increase the backlog of sales to foreign territories and upon
delivery a significant portion of the existing and increased backlog,
recognizing revenue accordingly in the final two quarters of 1997.
Film Amortization. Film amortization primarily represents the amortization of
the Company's film costs. Film amortization increased from $3.185 million during
the six month period ended January 31, 1996 compared to no expense for the six
month period ended January 31, 1996. The increase was due to the increase in the
Company's revenues.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to approximately $0.436 million for the six
months ended January 31, 1997 from approximately $0.333 for the six months ended
January 31, 1996. For each six month period ended January 31, 1996 and 1997, the
total selling, general and administrative costs, in absolute dollars were
approximately $1.0 million. However, in connection with the production and
pre-release marketing efforts during the six months ended January 31, 1996, the
Company capitalized certain selling, personnel and administrative costs
attributable to the production or initial marketing of films. During the six
months ended January 31, 1997, less costs were capitalized as the Company's
selling, personnel and administrative costs were allocated to both production
and selling efforts for previously released films. The Company expects selling,
general and administrative expenses, in absolute dollars, to remain level in the
near future.
Interest. Interest expense for the six months ended January 31, 1997 increased
to approximately $0.077 million from approximately $0.042 million for the
corresponding period in 1996. The 239% percent increase was primarily
attributable to the increase in stockholders' advances used to fund production
efforts. Interest expense, as a percentage of advances due to stockholders, was
consistent for each period.
Provision (Benefit) for Income Taxes. The benefit for income taxes for the six
month period ended January 31, 1997 decreased to $0.027 million from $0.155
million. The 82.8% decrease was attributable to a smaller operating loss for the
six months ended January 31, 1997 as compared to the corresponding period in
1996. The effective rate remained relatively constant, net of usage of net
operating loss carryforwards, of pre-tax income for the six months ended January
31, 1996 and for the six months ended January 31, 1997.
Minority Interests. Minority interests represents the pro-rata portion (based on
revenues of films financed by minority interests) of amounts due minority
limited partners in excess of their initial investment in the Company's limited
partnerships subsidiaries. Minority interest increased to $0.429 million during
the six month period ended January 31, 1997 compared to no expense for the six
month period ended January 31, 1996 due to the increase in the Company's
revenues for the applicable three films.
INFLATION.
The Company believes that inflation, including periodic increases in
movie admission and video rental prices, has not had a material impact on the
Company's financial condition or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception on May 10, 1995, the Company has satisfied its
liquidity requirements principally through advances and equity financing
provided from its shareholders or investments from the sale of limited
partnership interests in two limited partnerships. The Company's cash flow from
operating, investing, and financing activities for FY 1995 and FY 1996 and for
the six-month periods ended January 31, 1996 and 1997 were as follows:
Fiscal Year Ended Six Months Ended
July 31, January 31,
1995 1996 1996 1997
-------------- --------------- -------------- -------------
(In thousands)
Cash Flow Provided by (Used in):
Operating activities $ (32) $ 2,186 $ 344 $ 3,165
Investing activities - (10,810) (3,674) (710)
Financing activities 500 8,155 6,405 (2,160)
15
As set forth above, cash flows provided by financing (primarily equity
and advances provided by shareholders and investments in limited partnership
interests in its subsidiaries) and cash provided from operating activities
(mostly film revenues in domestic and international markets) have been
sufficient to cover cash flows used for the Company's investing activities
(primarily the Company's film acquisition and production costs). The Company
experienced positive cash flow from operations of $3.165 million for the six
months ending January 31, 1997. As the Company increases the number of films it
acquires or produces, it can be expected that net negative cash flow from
investing will continue to be offset, in part by cash flows provided by cash
flows provided by operating activities.
The Company will continue to be significantly dependent upon its
ability to deliver movies to its customers. As of July 31, 1996, the Company had
licenses with its customers for approximately $7.357 million, of which
approximately $3.134 million was collected. The remaining $4.223 million of
backlog will be collected at various periods depending on license terms between
the Company and its customers and when movies are delivered. As the Company
continues its selling efforts in film markets such as Cannes, America Film
Market and Milan International Film, backlog is expected to increase, offset by
collections upon delivery of movies to its customers.
The Company actively seeks to acquire motion pictures to produce and
distribute. The Company's ability to acquire suitable films has, in the past,
been limited by its ability to raise capital through subsidiaries (see
"Financing of Motion Picture Production - Limited Partnerships") and its
founding stockholders ability to provide adequate capital. The founding
stockholders do not currently intend to make any further advances or investments
to the Company.
The Company has no material commitments for capital expenditures at
July 31, 1996 and January 31, 1997.
The Company believes that its existing capital resources, together with
the proceeds of this Offering, will enable the Company to maintain its
operations and working capital requirements for at least twelve (12) months.
However, it is possible that additional financing will be required to fund
further growth in the Company's business beyond the next 12 months whether
through equity financing, debt financing or other sources. There can be no
assurance that such sources of financing will be available, or will be available
on terms acceptable to the Company. Inability to obtain additional financing
could limit the Company's ability to produce motion pictures, retain writers,
directors and other artistic elements, purchase rights to books, screenplays and
other artistic properties, or take other actions that would benefit the Company
and its stockholders and could therefore have a material adverse effect on the
Company.
BUSINESS
MOTION PICTURE INDUSTRY OVERVIEW
GENERAL
The motion picture industry consists of two principal activities:
production, which involves the development, financing and production of motion
pictures; and distribution, which involves the promotion and exploitation of
feature-length motion pictures in a variety of media, including theatrical
exhibition, home video, television and other ancillary markets, both
domestically and internationally. The United States motion picture industry is
dominated by the "major" studios, including The Walt Disney Company, Paramount
Pictures Corporation, Warner Brothers, Inc., MCA, Twentieth Century Fox,
Columbia Pictures, Tri-Star Pictures and MGM/UA. The major studios are typically
large diversified corporations that have strong relationships with creative
talent, exhibitors and others involved in the entertainment industry and whose
libraries of motion pictures provide a stable source of earnings which offset
the variations in the financial performance of their motion picture releases and
other aspects of their motion picture operations. The major studios have
historically produced and distributed the vast majority of high grossing
theatrical motion pictures released annually in the United States.
In recent years, "independent" films have been successfully marketed
and have received commercial acclaim. Of the five pictures nominated for "best
picture" in 1996, four, Fargo, The English Patient, Shine and Secrets and Lies,
are independent films. In addition, an independent film, The English Patient,
won the Oscar for the Best Picture of 1996. Furthermore, the major recipients of
Oscar nominations were independent films rather than the films produced by the
larger studios. The public's acceptance of these movies not produced by a major
studio indicates that companies such as the Company can be competitive in an
industry that traditionally has been dominated by the larger studios. Harvey
Weinstein, co-Chairman of Miramax, the New York based and Disney-owned company,
commented that the Oscar nominations indicate "that there are actually two movie
businesses now: the big studio event movies and the smaller, more innovative
independent film." He added that all the nominations "have one thing in common:
they were writer-driven with good sound stories." The
16
results of the 1996 Oscars further solidify the importance of independent film
makers. The independent studios earned most of the major Oscars, including, best
picture, best actor, best actress, best supporting actress, and best director.
The Company has also profited from the success of the independent film
companies in 1996. Since the nominations were announced, management of the
Company has been able to speak with well-known actors, actresses, and directors
about working with the Company to develop independent productions. In the past,
these people would not have discussed any possible projects with the Company.
However, management of the Company believes that the success of the independents
in 1996 may be the beginning of a cycle from which the Company will be able to
benefit. Management of the Company believes that over time the Company can
develop a solid reputation for producing quality, market-accepted lower-budget
movies.
MOTION PICTURE PRODUCTION AND FINANCING
The production of a motion picture begins with the screenplay
adaptation of a popular novel or other literary work acquired by the producer or
the development of an original screenplay having its genesis in a story line or
scenario conceived or acquired by the producer. In the development phase, the
producer typically seeks production financing and tentative commitments from a
director, the principal cast members and other creative personnel. A proposed
production schedule and budget are also prepared during this phase. Upon
completing the screenplay and arranging financing commitments, pre-production of
the motion picture begins. In this phase, the producer engages creative
personnel to the extent not previously committed; finalizes the filming schedule
and production budget; obtains insurance and secures completion guaranties, if
necessary; establishes filming locations and secures any necessary studio
facilities and stages; and prepares for the start of actual filming. For the
Company, principal photography (the actual filming of the screenplay) generally
extends from three to six weeks, depending upon such factors as budget,
location, weather and complications inherent to the screenplay. This varies
considerably from the major studios which may be in principal photography for as
long as 30 to 40 weeks. Following completion of principal photography in what is
typically referred to as post-production, the motion picture is edited,
opticals, dialogue, music and any special effects are added, and voice, effects
and music sound tracks and pictures are synchronized. This results in the
production of the negative from which release prints of the motion picture are
made.
Production costs consist of acquiring or developing the screenplay,
film studio rental, principal photography, post-production and the compensation
of creative and other production personnel. Distribution expenses, which consist
primarily of the costs of advertising and preparing release prints, are not
included in direct production costs. The major studios generally fund production
costs from cash flow generated by motion picture and related activities or, in
some cases, from unrelated businesses or through off-balance sheet methods.
Substantial overhead costs, consisting largely of salaries and related costs of
the production staff and physical facilities maintained by the major studios,
also must be funded. Independent production companies generally avoid incurring
overhead costs as substantial as those incurred by the major studios by hiring
creative and other production personnel and retaining the other elements
required for pre-production, principal photography and post-production
activities on a picture-by-picture basis. Sources of funds for independent
production companies may include bank loans, "pre-licensing" of distribution
rights, equity offerings and joint ventures. Independent production companies
generally attempt to obtain all or a substantial portion of their financing of a
motion picture prior to commencement of principal photography, at which point
substantial production costs begin to be incurred and require payment.
"Pre-Licensing" of film rights is often used by independent film
companies to finance all or a portion of the direct production costs of a motion
picture. By "pre-licensing" film rights, a producer obtains amounts from third
parties in return for granting such parties a license to exploit the completed
motion picture in various markets and media. Production companies with
distribution divisions may retain the right to distribute the completed motion
picture either domestically or in one or more international markets. Other
production companies may separately license theatrical, home, video, television
and all other distribution rights among several licensees. See "Business --
Financing of Motion Picture Production."
In connection with the production and distribution of a motion picture,
major studios and independent production companies often grant contractual
rights to actors, directors, screen writers, and other creative and financial
contributors to share in revenues or net profits (as defined in their respective
agreements) from such motion picture. Except for the most sought-after talent,
these third-party participations are generally payable after all distribution
fees, marketing expenses, direct production costs and financing costs are
recouped in full.
17
MOTION PICTURE DISTRIBUTION
General
-------
Distribution of a motion picture involves domestic and international
licensing of the picture for (a) theatrical exhibition, (b) non-theatrical
exhibition, which includes airlines, hotels and armed forces facilities, (c)
video cassettes, (d) presentation on television, including pay-per-view, pay,
network, syndication or basic cable and (e) marketing of the other rights in the
picture and underlying literary property, which may include books, merchandising
and soundtracks. In recent years, revenues from the licensing of rights to
distribute motion pictures in ancillary (i.e., other than domestic theatrical)
markets, particularly home video and international pay and free television, have
increased significantly.
The distributor typically acquires rights from the producer to
distribute a motion picture in one or more markets and/or media. For its
distribution rights, the distributor generally agrees to pay to the producer a
certain minimum advance or guarantee upon the delivery of the completed motion
picture, which amount is to be recouped by the distributor out of revenues
generated from the distribution of the motion picture in particular media or
territories. After the distributor has recouped the amount advanced (if any)
plus its distribution costs, the distributor is then entitled to retain ongoing
distribution fees computed as a percentage of the gross revenues generated from
its distribution of the picture. The producer is thereafter entitled to receive
all remaining revenues in excess of the ongoing distribution fee retained by the
distributor.
A substantial portion of a film's ultimate revenues are generated in a
film's initial distribution cycle (generally the first five years after the
film's initial domestic theatrical release). Commercially successful motion
pictures, however, may continue to generate revenues after the film's initial
distribution cycle from the relicensing of distribution rights in certain media,
including television and home video, and from the licensing of distribution
rights with respect to new media and technologies.
Below is a summary of the potential distribution cycle of a motion
picture. It is important to realize that the distribution cycle of a motion
picture varies from picture to picture and from company to company. The Company,
as a small independent film company, anticipates that many, if not all, of its
films will not be released in theaters and instead, will be released, if at all,
on television or other similar media. The movie industry is highly competitive,
and there is no guarantee that any of the Company's movies will be released in
any media, or if released, will be able to generate enough revenues to recoup
the direct negative costs associated with the movie's production. See
"--Competition" and "Risk Factors--Risks of Motion Picture Production."
Theatrical
----------
The theatrical distribution of a motion picture involves the licensing
and booking of the motion picture to theatrical exhibitors, the promotion of the
picture through advertising and publicity campaigns and the manufacture of
release prints from the film negative. Expenditures on these activities,
particularly on promotion and advertising, are often substantial and may have a
significant impact on the ultimate success of the film's theatrical release.
Moreover, as the vast majority of these costs (primarily advertising costs) are
incurred prior to the first weekend of the film's domestic theatrical release,
there is not necessarily a correlation between these costs and the film's
ultimate box office performance. In addition, the ability to distribute a
picture during peak exhibition seasons, including the summer months and the
Christmas holidays, may affect the theatrical success of the picture.
While arrangements for the exhibition of a film vary greatly, there are
certain fundamental economic relationships applicable to domestic theatrical
distribution. Theater owners (the "exhibitors") retain a portion of the
admission paid at the box office ("gross box office receipts"). The share of the
gross box office receipts retained by an exhibitor generally includes a fixed
amount per week (in part to cover overhead), plus a percentage of receipts that
escalates over time. The balance ("gross film rentals") is remitted to the
distributor. The distributor then retains a distribution fee from the gross film
rentals and recoups the costs incurred in distributing the film which consist
primarily of the cost of advertising and the cost of release prints for
exhibition. The balance of gross film rentals, after deducting distribution fees
and any additional distribution costs recouped by the distributors ("net film
rentals"), is then remitted to the producer of the film.
18
Home Videos
-----------
A motion picture typically becomes available for videocassette
distribution within four to six months after its initial domestic theatrical
release. Home video distribution consists of the promotion and sale of video
cassettes to local, regional and national video retailers which rent or sell
video cassettes to consumers primarily for home viewing.
Television
----------
Television rights are generally licensed first to pay-per-view for an
exhibition period within six to nine months following initial domestic
theatrical release, then to pay television approximately twelve to fifteen
months after initial domestic theatrical release, thereafter in certain cases to
free television for an exhibition period, and then to pay television again.
These films are then syndicated to either independent stations or basic cable
outlets. Pay-per-view allows subscribers to pay for individual programs. Pay
television allows cable television subscribers to view such services as HBO,
Cinemax, Showtime, The Movie Channel or Encore Media Services offered by their
cable system operators for a monthly subscription fee. Since groups of motion
pictures are typically packaged and licensed as a group for exhibition on
television over a period of time, revenues from these television licensing
"packages" may be received over a period that extends beyond five years from the
initial domestic theatrical release of a particular film. Motion pictures are
also "packaged" and licensed for television broadcast in international markets.
Non-Theatrical and Other Rights
-----------------'--------------
Films may be licensed for use by airlines, schools, public libraries,
community groups, the military, correctional facilities, ships at sea and
others. Music contained in a film may be licensed for sound recording, public
performance and sheet music publication. Rights in motion pictures may be
licensed to merchandisers for the manufacture of products such as video games,
toys, T-shirts, posters and other merchandise. Rights may also be licensed to
create novelizations of the screenplay and other related book publications.
International Markets
---------------------
In addition to their domestic distribution activities, motion picture
producers and distributors generate substantial revenues from distribution of
motion pictures in international markets (in the same media in which films are
distributed in the domestic market).
COMPANY HISTORY
The Company was organized under the laws of the State of Delaware in
May 1995. The Company is engaged in the acquisition, development, financing,
production, distribution and licensing of motion pictures for exhibition in
domestic and international theatrical markets and for subsequent worldwide
release in different media, including, but not limited to, home video and pay
and free television. The Company was incorporated in Delaware in May 1995. Harry
Shuster, the Company's Chairman, has produced or co-produced 20 movies during
the past 25 years. Brian Shuster, President and Chief Executive Officer of the
Company, has been involved in various aspects of film production for
approximately 15 movies during the past eight years. See "Management."
During the Company's first two years of operations, the Company has
completed production of eight films, consisting of The Secret Agent Club, Prey
of the Jaguar, Blood Money, The Elevator, Firestorm, Chase Morran, Santa with
Muscles, and Skeletons. Santa with Muscles was released in movie theaters in
November 1996; Chase Morran was released in February 1997 on the SCI-Fi channel;
and Skeletons was released on HBO in April 1997. Prey of the Jaguar, Blood
Money, and Firestorm have been licensed by HBO from CFE, but release dates have
not yet been determined. See "Business--Financing of Motion Picture Production."
The other movies are expected to be distributed by the end of the year. In
addition, the Company is currently in pre-production of several films, one of
which is Rear View Mirror, which should be completed in August 1997 and released
in calendar 1998. All of the films produced by the Company to date have been in
a budget range of between $540,000 and $3,200,000. See "--Motion Picture
Production" for the Company's current slate of motion picture projects.
To produce a project, the Company first acquires the rights to a story,
book or script ("property"). The Company then typically secures a financing or
production commitment for the project from third parties, such as private
investors, studios, and distributors, prior to expending substantial funds in
the development process. However, the Company does advance its own funds to meet
the interim costs of development and production which amounts are generally
repaid to the
19
Company pursuant to the production contracts. See "Business--Financing of Motion
Picture Production" for a description of the Company's financing activities.
STRATEGIC OBJECTIVE
The Company's strategy is to (i) develop long-term relationships with
talent who have demonstrated the ability to attract widespread audience
interest, both domestically and in significant international markets, (ii) seek
to limit the financial risk to the Company inherent in any one motion picture
project while preserving potential returns through the strategic use of
long-term distribution agreement with companies such as HBO covering the United
States and Canada, and their respective territories, possessions, and
protectorates (the "Domestic Territories") as well as such foreign distributors
such as Highlight Communications (Germany), Saehan/Hollyvision/Digital Media
(South Korea), Consorcio Europa Serviano Ribiero (Brazil), Manga Films (Spain)
and Italian International Films (Italy), and (iii) exercise strong management
control of production costs of its motion pictures, as well as of general
overhead.
The Company's principal goal is to produce and arrange for the release
of three to five commercially successful low-budget motion pictures per year.
Although there can be no assurances, the Company believes that over time these
films will become the core of a library of films which management believes have
the capacity of generating revenues from their worldwide exploitation in
existing and future media and markets. The Company, as a small independent film
company, anticipates that many, if not all of its films, will not be released in
theaters but instead, will be released on cable television, television and other
similar media.
The Company attempts to balance the financial risk in its productions
with the potential return from exploitation of the rights in its motion pictures
by entering into selective, strategic financing and distribution arrangements
with certain domestic and international distributors. These distributors provide
advances and minimum guarantees in return for the right to distribute the
Company's motion pictures in the licensed territory or media. Generally, the
Company's goal is to receive licensing advances and guarantees (referred to
herein as "prelicensing") in an amount equal to a substantial percentage of the
aggregate direct negative cost of its motion pictures and, in this way, arrange
for distribution of the Company's motion pictures without incurring the
substantial overhead or financial risk often associated with distribution.
Management believes, based upon its experience, that it can obtain
advances from pre-licensing pursuant to distribution agreements in an amount
equal to a substantial percentage of the aggregate direct negative cost of each
motion picture. However, there can be no assurance with respect to any
particular motion picture that such advances will equal such film's direct
negative cost.
The Company attempts to strictly control the cost of each motion
picture through active management involvement in all phases of the production
process. Management is actively involved in the budgeting process, including the
development of economic assumptions used in determining whether a particular
project is approved for production.
Management of the Company believes that its extensive experience in the
motion picture industry will enable the Company to control and maintain its
general overhead expenditures at appropriate levels given its production
schedule. For each motion picture that is approved for production, additional
personnel are employed to work on that motion picture only, and the costs of
these personnel are included in the budgeted cost for such motion picture.
Management of the Company believes that there will be adequate qualified
personnel available from time to time to meet the Company's needs for additional
personnel. As a result, when no motion pictures are in production, the Company
maintains a relatively small staff (currently 11 full-time employees), which
management believes is sufficient to conduct the Company's current business
activities. Management intends to keep its permanent, full-time staff members
needed to operate the Company on a day-to-day basis at a small number in order
to keep its fixed overhead expenses low. See "Business--Employees."
MOTION PICTURE PRODUCTION
Much of the Company's first two years of operations was spent acquiring
the rights to and developing motion picture projects, as well as producing eight
motion pictures. The Company has completed production of eight motion pictures
to date, consisting of: The Secret Agent Club, Prey of the Jaguar, Blood Money,
The Elevator, Firestorm, Chase Morran, Santa with Muscles, and Skeletons. In
addition, as indicated below, the Company has several projects in
pre-production, one of which is entitled Rear View Mirror, which has an
anticipated completion date August 1997 and should be released in calendar 1998.
The aggregate direct negative costs of the Company's eight completed films was
approximately $10,000,000.
20
Completed and Pending Motion Picture Productions
Title Major Creative Elements Storyline Release Date
----- ----------------------- --------- ------------
Skeletons Director: David DeCoteau After suffering a heart attack, a Pulitzer Released on HBO in
(Prey of the Jaguar, Puppet Prize winning journalist relocates his family April 1997.
Master 3, Lady Avenger) to a picture perfect town in Maine. When he
becomes involved in a murder investigation he
Cast: Ron Silver discovers the evil truth behind the town.
(Time Cop, Reversal of Since the 19th Century, the residents have
Fortune) kept the outside world away by murdering
anyone who attempts to infiltrate their
James Coburn pristine village.
(Maverick, Eraser)
Christopher Plummer
(12 Monkeys, Wolf)
Santa with Muscles Director: John Murlowski When a small town falls victim to the devious Released domestically
(Automatic, Amityville: A New plans of an arch villain, they must turn to in November 1996.
Generation, The Secret Agent the only person capable of helping
Club) them...Santa Claus. Two weeks before
Christmas, a miracle arrives in the form of a
Cast: Hulk Hogan mysterious stranger -- who is convinced he is
(No Holds Barred, Suburban the real Santa Claus. In no time at all,
Commando, Mr. Nanny, The criminals are quaking in fear and the town
Secret Agent Club) begins to come alive again.
The Elevator Directors: Arthur Borman A desperate young writer traps a movie mogul To be released
(...And God Spoke) in an elevator in order to read him a series domestically by the
of shorts that he had written. end of 1997.
Nigel Dick
(Private Investigations)
Rafal Zielinski
(Fun)
Cast: Martin Landau
(Ed Wood, Crimes and
Misdemeanors)
Martin Sheen
(The American President,
Apocalypse Now)
The Secret Agent Director: John Murlowski Ray (Hulk Hogan) leads a double life. Known To be released
Club (Automatic, Amityville: A New by his community and son as a clumsy toy domestically by the
Generation, Santa with Muscles) store owner, he is really the best secret end of 1997.
agent in 1997. America. After returning from
Tibet and seizing the most powerful weapon
Cast: Hulk Hogan ever invented, Ray is kidnapped by evil-doers
(No Holds Barred, Suburban who want the weapon to control the universe.
Commando, Mr. Nanny, With help from his friend, Ray's son locates
Santa with Muscles) the super-weapon and rescues Ray.
21
Title Major Creative Elements Storyline Release Date
----- ----------------------- --------- ------------
Prey of the Jaguar Director: David DeCoteau Damien Bandera escapes from prison and To be released
(Skeletons, Puppet Master 3, murders the family of Special Operations domestically by the
Lady Avenger) agent Derek Leigh, the man who put him in end of 1997.
prison. Filled with grief, Leigh assumes the
Cast: Stacy Keach identity of JAGUAR, a fantasy super-hero, to
(Escape from L.A., Up in upon seek revenge upon Bandera and his entire
Smoke, The Heart is a Lonely operation.
Hunter)
Blood Money Director: John Shepphird Lester Grisam escapes from prison and holds To be released
(Firestorm, Teenage Bonnie & hostage the girlfriend of the man who domestically by the
Klepto Clyde) testified against him. Grisam demands a end of 1997.
ransom of $100,000. However, as the plot
Cast: James Brolin unfolds it becomes apparent that the man's
(The Amityville Horror, girlfriend was quite different than how she
Westworld) appeared.
Chase Morran Director: Gilbert Po A psychotic criminal escapes from the highest Released on the
(Magnificent Scoundrel) security prison of the 24th Century in a SCI-FI network in
stolen shuttle. He lands on Dome 4, a small February 1997.
Cast: Bruce Campbell and peaceful space colony. Within minutes he
(Army of Darkness, McHale's kills the head of security, enslaves the
Navy) residents and takes control of the Dome. His
plans begin to fall apart, when Chase Morran,
a peacekeeper from Earth, arrives on Dome 4
to surprise his wife.
Firestorm Director: John Shepphird In the early 21st Century, on the planet To be released
(Firestorm, Teenage Bonnie & Markus 4, a group of androids capable of domestically by the
Klepto Clyde, Blood Money) human feelings and emotions are enslaved by a end of 1997.
heartless villain named Brinkman (John
Cast: John Savage Savage). Tarmac, the android leader starts a
(White Squall, The Onion rebellion to free his people aided by an
Field) employee of Brinkman's.
Rear View Mirror Director: David DeCoteau A housewife finds out her husband is cheating Not yet in production.
(Skeletons, Prey of the on her. She kills her husband and becomes a Scheduled to be
Jaguar, Puppet Master 3, fugitive with a man with a secret. completed in August
Lady Avenger) 1997 and released in
the first half of 1998.
Cast: Lorraine Bracco (Someone
to Watch Over Me,
GoodFellas)
John Heard
(Home Alone, Home Alone2:
Lost in New York)
There can be no assurance that the Company will be able to complete any
future pictures or that future pictures will be completed in accordance with the
anticipated schedules or budgets, as the production, completion and distribution
of motion pictures is subject to numerous uncertainties, including financing
requirements, personnel availability and the release schedule of competitive
films. There also is no assurance that the Company's motion pictures will be
profitable and enable the Company to recoup its direct negative costs. See
"--Competition" and "Risk Factors--Risks of Motion Picture Production."
22
FINANCING OF MOTION PICTURE PRODUCTION
General
Prior to the commencement of production of a motion picture, the
Company attempts to enter into license agreements with distributors pursuant to
which distributors acquire the right to distribute such motion picture (or
series of motion pictures pursuant to an output agreement) in a certain
geographic territory and media for a specific term. In consideration for these
distribution rights, the distributor is typically required to pay the producer a
fixed amount upon delivery of the motion picture to the distributor ("Minimum
Guarantee"). Once the distributor has recouped an amount equal to its Minimum
Guarantee and costs of distribution, the distributor is entitled to retain
ongoing distribution fees computed as a percentage of the gross revenues
generated from the distribution of the motion picture. The Company is thereafter
entitled to receive all remaining revenues generated from distribution of the
picture in such territory in excess of the ongoing distribution fee retained by
the distributor. In connection with each license agreement, the Company also
receives an advance generally equal to 20% of the Minimum Guarantee (the
"Advance"). The Company typically utilizes the Advance toward the production
costs of the motion picture.
Distribution Agreements
From 1995 to the present, the Company entered into both domestic and
foreign licensing agreements. The Company has been able to license each of its
motion pictures, including the pictures that are still in pre-production. Among
the licensees of the Company's motion pictures are Cabin Fever Entertainment,
Inc. ("CFE") and HBO (United States), Highlight Communications (Germany),
Saehan/Hollyvision/Digital Media (Korea), Consorcio Europa Serviano Ribiero
(Brazil), Manga Films (Spain), and Italian International Films (Italy). Revenues
received by the Company pursuant to its licensing agreements during the fiscal
years ended July 31, 1995 and 1996 were $0 and $2.626 million, respectively.
However, revenues are only realized at the time the motion pictures are
delivered to the respective licensee. Backlogs, which indicate the revenues that
will be realized upon delivery of the motion pictures, were $0 and $5.448
million, respectively, for the same periods. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Limited Partnerships
In addition to the licensing agreements and the advances thereunder,
the Company also raised approximately $4,105,000 in connection with the sale of
limited partnership interests in two (2) limited partnerships, HEP I, L.P. ("HEP
I") and HEP II, L.P. ("HEP II") (collectively, the "Partnerships") of which the
Company is the sole general partner. The third party limited partners of HEP I
and HEP II invested an aggregate of $1,050,000 and $3,000,000, respectively, in
the Partnerships. The Company also invested $1,200,000 as a limited partner in
HEP I. HEP I partners financed and participate in the exploitation of the movie
The Secret Agent Club. HEP II partners financed and participate in the
exploitation of the movies Santa with Muscles and Skeletons. Pursuant to the
distribution agreement between the Company and the Partnerships, the
Partnerships are entitled to receive revenue collected from sales net of a 20%
distribution fee and selling expenses not to exceed $75,000 per film
(collectively, "Net Partnership Revenue"). Pursuant to terms of the limited
partnership agreements, ninety-nine percent (99%) of Net Partnership Revenue is
to be distributed to the limited partners and one percent (1%) to the Company as
the sole general partner until the limited partners have received 110% of their
original investment. After the limited partners have been disbursed their
original investment plus ten (10%) percent, the distribution of Net Partnership
Revenue is to be distributed equally between the general partner and the limited
partners as a group. Both Partnerships terminate when the limited partners
receive a return equal to 200% of their investment.
United Leisure Corporation ("ULC"), a company in which Harry Shuster is
also Chairman of the Board, is one of two limited partners of HEP II. ULC
originally invested $1,500,000 in May 1996. In October 1996, the Company paid
each of HEP II's limited partners approximately $380,000 pursuant to HEP II's
partnership agreement and the Company's exploitation of Santa with Muscles and
Skeletons. See "Certain Relationships."
MAJOR CUSTOMERS
For the six months ended January 31, 1997, revenue from one customer
accounted for $1,290,000 or 32% of total revenues for the period. For the year
ended July 31, 1996, revenues from two customers accounted for $1,225,000 and
$275,000, or 47% and 10%, respectively, of total revenues for the year.
Management of the Company believes that it can negotiate new distribution
agreements on terms similar to those contained in existing agreements in the
event that any such existing agreement is terminated or expires. Accordingly,
management of the Company believes that the profitability of the Company is not
dependent on any single customer.
23
EMPLOYEES
The Company, like other independent production companies, does not
maintain a substantial staff of creative or technical personnel. Management of
the Company believes that sufficient motion picture properties and creative and
technical personnel (such as screenwriters, directors and performers) are
available in the market at acceptable prices to enable the Company to produce as
many motion pictures as it currently plans or anticipates, at the level of
commercial quality the Company may require.
At June 4, 1997, the Company employed a total of 11 full-time
employees. The Company also hires additional employees on a picture-by-picture
basis in connection with the production of the Company's motion pictures. The
salaries of these additional employees, as well as the salaries of certain
full-time employees of the Company who provide direct production services, are
typically allocated to the capitalized cost of the related pictures. The Company
and certain of its subsidiaries are subject to the terms in effect from time to
time of various industry-wide collective bargaining agreements, including the
Writers Guild of America, the Directors Guild of America, the Screen Actors
Guild and the International Alliance of Theatrical Stage Employees. A strike,
job action or labor disturbance by the members of any of these organizations may
have a material adverse effect on the production of a motion picture within the
United States. None of the Company's full-time employees are represented by a
labor union. The Company believes that its current relationship with its
employees is satisfactory.
COMPETITION
Motion picture production and distribution are highly competitive. The
competition comes from both companies within the same business and companies in
other entertainment media which create alternative forms of leisure
entertainment. The Company's competition for the acquisition of literary
properties, the services of performing artists, directors, producers and other
creative and technical personnel and production financing includes several
"major" film studios including, but not limited to, The Walt Disney Company,
Paramount Pictures Corporation, MCA, Columbia Pictures, Tri-Star Pictures,
Twentieth Century Fox, Warner Brothers Inc. and MGM/UA, which are dominant in
the motion picture industry, as well as numerous independent motion picture and
television production companies, television networks and pay television systems.
Many of these organizations with which the Company competes have significantly
greater financial and other resources than does the Company. In addition, the
Company's films compete for audience acceptance and exhibition outlets with
motion pictures produced and distributed by other companies, including motion
pictures distributed by CFE, HBO and the Company's foreign distributors. As a
result, the success of any of the Company's films is dependent not only on the
quality and acceptance of that particular film, but also on the quality and
acceptance of other films.
PROPERTIES
The Company leases office space in Westwood, California. The total
office space is approximately 3,446 square feet. The leases expire on various
dates through June 30, 2001. Total rental on the office space is $9,477 per
month. The office building is owned by 1990 Westwood Blvd, Inc., which is a
private corporation, of which Harry Shuster, the Company's Chairman, is a
majority shareholder. See "Certain Relationships."
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings that could have a
material adverse affect on the Company's operations or financial condition. It
is anticipated that from time to time it will be subject to claims, suits and
complaints that arise in the ordinary course of business. A substantial portion
of the Company's film revenue since its inception on May 10, 1995 has been
derived from transactions with Cabin Fever Entertainment, Inc. ("CFE"). The
Company licensed domestic rights to CFE for seven movies. In November 1996,
after the Company already delivered the seven films licensed, CFE refused to
accept delivery of the last of the seven movies. The relationship between the
Company and CFE has subsequently deteriorated, resulting in a lawsuit wherein
the Company claims damages for copyright infringement, breach of contract and
fraud. The case was filed in federal district court in New York in the first
quarter of 1997. CFE did not answer the complaint but instead moved to dismiss
the copyright claim, which is the basis for federal jurisdiction. If CFE is
successful on its motion, the Company intends to move forward with the remaining
contract and fraud claims in state court. Subsequent to the deterioration of the
relationship with CFE, the Company has licensed two other films domestically
through other distributors.
24
MANAGEMENT
The directors and executive officers of the Company are as follows:
NAME AGE POSITION
- ---- --- --------
Harry Shuster....................................... 60 Chairman
Brian Shuster....................................... 39 President, Chief Executive Officer, Director
David M. Kane....................................... 34 Chief Financial Officer and Secretary
J. Brooke Johnston, Jr.............................. 57 Director
George Folsey, Jr................................... 52 Director
Harry Shuster has been Chairman of the Company since its inception in
May 1995. Mr. Shuster has been Chairman, President and Chief Executive Officer
of United Leisure Corporation ("United Leisure"), a publicly-traded leisure time
services company, for over 20 years. Mr. Shuster also acts as an independent
consultant and as Chairman, President and Chief Executive Officer of Grand
Havana Enterprises, Inc., a publicly traded company formed in 1993, that
operates private membership cigar rooms. In 1990, Lion Country Safari, Inc.,
California, a subsidiary of United Leisure, in connection with major litigation
with its landlord, was forced to seek protection under the United States
Bankruptcy Code by the filing of a voluntary petition under Chapter 11 of such
Code. By filing the petition, the subsidiary was able to protect its assets from
the claims of the landlord. The bankruptcy petition has been dismissed by
stipulation of the parties, but the litigation still is pending.
Brian Shuster has served as Chief Executive Officer, President and a
director of the Company since its inception in May 1995. Since he has been with
the Company, Mr. Shuster has served as the producer of seven films. Prior to
joining the Company, he served as President of Beverly Hills Producers Group, a
private production company, where he produced one motion picture, served as
executive producer of another motion picture, and oversaw production of three
other motion pictures. From 1990 until 1993, he served as vice president of
Worldwide Entertainment Group, where he produced three motion pictures. Mr.
Shuster also is a director of United Leisure.
David M. Kane has served as Secretary and Chief Financial Officer of
the Company since March 1997. Mr. Kane has also been the Chief Financial Officer
of two other public companies since March 1997, Grand Havana Enterprises, Inc.
and United Leisure. See "Certain Relationships." From July 1995 until March 1997
he was director of finance for Virgin Records America, Inc., a private record
company. From May 1994 until June 1995, he was controller of Hemdale Home Video,
Inc., a public video and foreign programming distributor. From October 1992
until May 1994, Mr. Kane was a senior accountant in the audit division for
Kenneth Leventhal & Company, Los Angeles, California. From June 1991 until
December 1991, he was a financial analyst for Walt Disney Imagineering, Inc.,
Glendale, California. From June 1987 until May 1991, Mr. Kane was a senior
accountant in the audit division for Arthur Andersen & Co., Los Angeles,
California.
J. Brooke Johnston, Jr. has been a director of the Company since April
1997. Since April 1996, Mr. Johnston has served as Senior Vice President and
General Counsel of MedPartners, Inc., a physician practice management company.
Prior to joining MedPartners, Inc., Mr. Johnston was a senior principal in the
law firm of Haskell Slaughter Young & Johnston, Professional Association,
Birmingham, Alabama, where he practiced corporate and securities law for over
seventeen years. Before joining Haskell Slaughter, Mr. Johnston practiced law in
New York, New York and at another firm in Alabama. Mr. Johnston is a member of
the Alabama State Bar and the New York and American Bar Associations. Mr.
Johnston is a member of the Board of Directors of United Leisure. See "Certain
Relationships."
George Folsey, Jr. has been a director of the Company since April 1997.
Mr. Folsey is the son of the late Hollywood cinematographer, George Folsey, who
received fourteen Academy Award nominations. After graduating from Pomona
College, Mr. Folsey worked as an editor at KABC-TV in Los Angeles and formed a
company that filmed and edited all the filmed segments of Laugh-In. Mr. Folsey's
work as a film editor includes: Animal House; The Blues Brothers; Coming to
America; Michael Jackson's Thriller; Bulletproof; the American version of
Michelangelo Antonioni's The Passenger; and re-editing The Great Santini and
John Duigan's Romero. Among Mr. Folsey's producing credits are: An American
Werewolf in London; Trading Places; Spies Like Us; Thriller; Clue; Greedy; The
Three Amigos; Into the Night; and Grumpier Old Men. He is currently producing a
TV pilot based on the motion picture Fargo. After fifteen years of
25
partnership with director John Landis, Mr. Folsey was asked, in 1988, to become
Chairman of QSound Labs, a Canadian corporation specializing in sound
enhancement and localization, where he continues to serve as a member of the
Board of Directors. Mr. Folsey also is a member of the Directors Guild of
America and a member of the Board of Directors of Paulist Productions, which
produced Romero.
Harry Shuster is the father of Brian Shuster. There are no other
relationships between the executive officers and the directors.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation for the Chief Executive
Officer of the Company. No other executive officer received remuneration in
excess of $100,000 for the fiscal year ended July 31, 1996 (the "Named
Executive"):
SUMMARY COMPENSATION TABLE
Annual
Compensation
Name and Principal Position Year Salary (1)
--------------------------- ---- ----------
Brian Shuster 1996 $90,000
President and Chief 1995(2) $12,500
Executive Officer
----------
(1) Mr. Shuster was paid as a consultant for the two years stated above.
(2) The amount paid for 1995 was for the period from May 1995 through July
1996.
DIRECTOR COMPENSATION
Each non-employee director of the Company receives options to purchase
10,000 shares of Common Stock upon his election to the Board of Directors plus
reimbursement of reasonable expenses for each meeting they attend. The options
vest in equal quarterly installments on the anniversary date of the grant date
over four years. The exercise price of the options is equal to the fair market
value of the Common Stock as of the grant date.
1997 STOCK OPTION PLAN
The Company has a Stock Option Plan that is designed to provide
incentive to officers, key employees, consultants, and directors of the Company
or the Company's subsidiaries. There are 360,000 shares of Common Stock
authorized for issuance under the plan, and to date options to purchase 20,000
shares have been issued under the plan in May 1997.
Under the plan, such persons may be granted, at the discretion of the
Board or the Compensation Committee, options at an exercise price equal to at
least 100% of the fair market value of the Common Stock covered by the option on
the grant date, as determined by the Board or the Compensation Committee. In
addition, non-employee Directors of the Company are automatically granted
options to purchase 10,000 shares of Common Stock on the date they become
Directors. Options granted under the plan may be incentive stock options or
non-statutory stock options. Options granted under the plan become immediately
exercisable upon a "change of control" of the Company, as defined in the plan.
26
EMPLOYMENT CONTRACTS; TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
On April 1, 1997, the Company entered into a three year employment
agreement with Brian Shuster, the Company's President, Chief Executive Officer
and a director. The agreement is for a term of three years and provides for an
annual salary of Two Hundred Six Thousand Four Hundred Dollars ($206,400),
subject to annual increases at the sole discretion of the Board of Directors.
The agreement is terminable by the Company for good cause including, but not
limited to, dishonesty, improper disclosure of confidential information, or
neglect of duties under certain circumstances. The agreement is also terminable
by Mr. Shuster for any reason upon 60 days written notice. The agreement is
binding upon any successor corporation to the Company and may have the effect of
discouraging, delaying, or preventing a change of control of the Company.
CERTAIN RELATIONSHIPS
The Company leases certain of its executive office space at a rental of
$9,477 per month, from a corporation of which Harry Shuster, the Company's
Chairman of the Board, is the majority shareholder. The Company is advised that
the rental paid by the Company for its Westwood, California executive offices is
no more favorable to Mr. Shuster than could have been obtained in a similar
location from an unrelated third party.
Between June 2, 1995 and June 27, 1996, the founders of the Company
lent the Company approximately $3,184,333, of which $1,809,333 remained
outstanding at January 31, 1997. The loans were made to fund the Company's
operations and bore interest at the rate of 7% per annum. The interest expense
for these loans was $114,038. The balance of the loans will be repaid out of the
proceeds from this Offering. See "Use of Proceeds."
In April 1996, United Leisure Corporation ("ULC") acquired fifty
percent of the limited partnership interests in HEP II, L.P. ("HEP II") for a
capital contribution of $1,500,000. HEP II made an initial capital distribution
to ULC of $379,500 on July 25, 1996. The Company is the general partner of HEP
II. Harry Shuster, the Chairman of the Board of the Company, is the Chairman of
the Board and the Chief Executive Officer of ULC, and Brian Shuster, the
President, Chief Executive Officer and a director of the Company, is a director
of ULC. In addition, J. Brooke Johnston, Jr. is a director of both the Company
and ULC. See "Business--Limited Partnerships."
On July 9, 1996, ULC made a loan to HEP II of $250,000, which loan was
repaid in October 1996. ULC made an additional loan to HEP II of $500,000 on
July 22, 1996, which loan was repaid on July 25, 1996.
As a general rule, all transactions among the Company and its officers,
directors or 5% or greater stockholders have been, and in the future will be,
made on terms no less favorable than terms available form unaffiliated third
parties.
27
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth certain information with respect to (i)
each director of the Company, (ii) the Named Executive, (iii) all directors and
executive officers of the Company as a group at June 4, 1997, including the
number of shares of Common Stock beneficially owned by each of them, and (iv)
each person known by the Company to own beneficially or of record more than 5%
of the outstanding shares of Common Stock. Unless otherwise indicated below, the
business address of each individual is the same as the address of the Company's
principal executive offices.
Prior to the Offering After the Offering
--------------------- ------------------
Number of Number of
Shares Shares
Beneficially Beneficially
Beneficial Owner Owned Percentage(1) Owned Percentage(1)(2)
---------------- ------------ ------------- ------------ ----------------
Harry Shuster(3) 500,000 16.7% 500,000 13.2%
Brian Shuster(4) 750,000 25.0% 750,000 19.7%
J. Brooke Johnston(5) 0 * 0 *
George Folsey, Jr.(6) 0 * 0 *
Executive Officers and Directors as a Group 1,250,000 41.7% 1,250,000 32.9%
(5 people)
5% Shareholders
---------------
Stanley Shuster(7) 500,000 16.7% 500,000 13.2%
Stephen J. Drescher(8) 750,000 25.0% 750,000 19.7%
Nadine Belfort(9) 750,000 25.0% 750,000 19.7%
- ----------
* Less than one percent.
(1) Based on 3,000,000 shares outstanding and shares issuable upon the
exercise of options or warrants that are exercisable within 60 days of
June 4, 1997 which are deemed to be outstanding for the purpose of
computing the percentage of outstanding stock owned by such persons
individually and by each group of which they are a member, but are not
deemed to be outstanding for the purpose of computing the percentage
ownership of any other person.
(2) Includes 800,000 shares to be issued in connection with this Offering,
but does not include any shares issuable upon exercise of the
Underwriter's over-allotment option.
(3) Chairman of the Company.
(4) President, Chief Executive Officer and a director of the Company.
Includes 250,000 shares of Common Stock held by a trust of which Mr.
Shuster is the sole trustee and 250,000 shares of Common Stock held by
a trust of which Mr. Shuster is a co-trustee with Stanley Shuster. Mr.
Shuster disclaims beneficial ownership of the shares of Common Stock
held by this trust.
(5) Director of the Company. Mr. Johnston's address is 3000 Galeria Tower,
Suite 1000, Birmingham, Alabama 35244.
(6) Director of the Company. Mr. Folsey's address is 350 North Cliffwood
Avenue, Los Angeles, California 90049-2618.
(7) Consists of 250,000 shares of Common Stock held by a trust of which Mr.
Shuster is the sole trustee and 250,000 shares of Common Stock held by
a trust of which Mr. Shuster is a co-trustee with Brian Shuster. Mr.
Shuster disclaims beneficial ownership of the shares of Common Stock
held by this trust. Mr. Shuster's address is 1990 Westwood Boulevard,
Penthouse, Los Angeles, California 90025
(8) Held by a trust of which Stephen J. Drescher is the sole trustee. Mr.
Drescher disclaims beneficial ownership of the shares of Common Stock
held by this trust. Mr. Drescher's address is 101 West 67th Street,
Penthouse 2B, New York, New York 10023. Mr. Drescher does not have any
management and/or consulting role with the Company.
(9) Ms. Belfort's address is 3830 Woodside Avenue, Long Island City, New
York 11104.
28
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company is authorized to issue up to 20,000,000 shares of Common
Stock, par value $0.01 per share, 3,000,000 shares of which were issued and
outstanding as of June 4, 1997 and were owned by approximately seven holders of
record. In addition, the Company is authorized to issue up to 3,000,000 shares
of preferred stock, $0.01 par value (the "Preferred Stock"). As of June 4, 1997,
there were no shares of Preferred Stock outstanding.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the shareholders. Subject to the rights of holders
of Preferred Stock (if there are any shares outstanding), the holders of Common
Stock are entitled to receive such dividends as may be declared from time to
time by the Board of Directors out of funds legally available therefor and in
the event of liquidation, dissolution or winding-up of the Company, to share
ratably in all assets remaining after payment of all liabilities. The holders of
Common Stock have no preemptive or conversion rights and are not subject to
further calls or assessments by the Company. There are no redemption or sinking
fund provisions applicable to the Common Stock.
PREFERRED STOCK
The Articles of Incorporation of the Company provide that the Board of
Directors may issue an aggregate of 3,000,000 shares of Preferred Stock from
time to time in one or more series. As of June 4, 1997, there were no shares of
Preferred Stock outstanding.
The Board of Directors is authorized to determine, among other things,
with respect to each series of Preferred Stock which may be issued: (i) the
dividend rate, conditions and preferences, if any; (ii) whether dividends will
be cumulative and, if so, the date from which dividends will accumulate; (iii)
whether, and to what extent, the holders of a series will enjoy voting rights,
if any, in addition to those prescribed by law; (iv) whether and upon what
terms, a series will be convertible into or exchangeable for shares of any other
class of capital stock or other series of Preferred Stock; (v) whether, and upon
what terms, a series will be redeemable; (vi) whether a sinking fund will be
provided for the redemption of a series and, if so, the terms and conditions of
the sinking fund; and (vii) the preference if any, to which a series will be
entitled on voluntary or involuntary liquidation, dissolution or winding up of
the Company. With regard to dividends, redemption and liquidation preference,
any particular series of Preferred Stock may rank junior to, on a parity with,
or senior to any other series of Preferred Stock and Common Stock. The Board of
Directors, without shareholder approval, can issue Preferred Stock with voting
and conversion rights which could adversely affect the voting power of the
holders of Common Stock. The issuance of Preferred Stock under certain
circumstances could have the effect of delaying or preventing a change of
control of the Company or other corporate action. The Board of Directors could
issue Preferred Stock having terms that could discourage an acquisition attempt
or other transaction that some, or a majority, of the stockholders, might
believe to be in their best interests or in which stockholders might receive a
premium for their stock over the then market price of such stock.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Chase Mellon
Shareholder Services, Los Angeles, California.
Shares Eligible for Future Sale
Prior to this Offering, there has been no public market for the Common
Stock. Sales of substantial amounts of shares of Common Stock in the public
market could adversely affect market prices of the shares and make it more
difficult for the Company to sell equity securities in the future at a time and
price it deems appropriate.
Upon completion of the Offering, there will be 3,800,000 shares of
Common Stock outstanding, excluding (a) an aggregate of 120,000 shares issuable
upon exercise of the over-allotment option; and (b) an aggregate of 360,000
shares reserved for issuance pursuant to the Company's 1997 Stock Option Plan.
Of these shares, the 800,000 shares sold in this Offering and the maximum of
120,000 shares issuable upon full exercise of the over-allotment option will be
freely tradeable without restriction or further registration under the
Securities Act of 1933, as amended, (the "Securities Act"), except for any such
shares purchased by an "affiliate" of the Company, which will be subject to the
resale limitations of Rule 144 under
29
the Securities Act. As defined in Rule 144, an affiliate of the issuer is a
person who, directly or indirectly, through one or more intermediaries,
controls, is controlled by, or is under common control with, such issuer, and
generally includes members of the Board of Directors and senior management.
The 3,000,000 shares outstanding as of the date of this Prospectus and
the 360,000 shares issuable upon exercise of stock options that have been or may
be granted under the 1997 Stock Option Plan are "restricted shares" as defined
in Rule 144 under the Securities Act ("Rule 144") (collectively, the "Restricted
Shares") and may not be sold without registration under the Securities Act
unless pursuant to an applicable exemption therefrom. In addition, the Company
expects to register under the Securities Act the shares reserved for issuance
under the 1997 Stock Option Plan.
In general, Rule 144 allows a stockholder who has beneficially owned
Restricted Shares for at least one year (including persons who may be deemed
"affiliates" of the Company under Rule 144) to sell a number of shares within
any three-month period that does not exceed the greater of (i) one percent of
the then outstanding shares of Common Stock (approximately 38,000 shares after
giving effect to this Offering) or (ii) the average weekly trading volume in the
Common Stock during the four calendar weeks immediately preceding such sale.
Sales under Rule 144 are also subject to certain requirements as to the manner
and notice of sale and the availability of public information about the Company.
A stockholder who is not an "affiliate" of the Company at any time during the 90
days immediately preceding a sale, and who has beneficially owned his shares for
at least two years (as computed under Rule 144), is entitled to sell such shares
under Rule 144 without regard to the volume and manner of sale limitations
described above. Rule 144A under the Securities Act permits the immediate sale
by the current holders of Restricted Shares of all or a portion of their shares
to certain qualified institutional buyers, as defined in Rule 144A.
In addition, subject to certain limitations on the aggregate offering
price of a transaction and other conditions, Rule 701 may be relied upon with
respect to the resale of securities originally purchased from the Company by its
employees, directors, officers, consultants, or advisers prior to the date the
issuer becomes subject to the reporting requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), pursuant to written compensatory
benefit plans or written contracts relating to the compensation of such persons.
The Securities and Exchange Commission has also indicated that Rule 701 will
apply to stock options granted by an issuer before it becomes subject to the
reporting requirements of the Exchange Act, along with the shares acquired upon
the exercise of such options (including exercises after the date of this
Prospectus). Securities issued in reliance on Rule 701 are restricted securities
and, subject to the contractual restrictions described above, beginning 90 days
after the date of this Prospectus, may be sold by persons other than affiliates
subject only to the manner of sale provisions of Rule 144 and by affiliates
under Rule 144 without compliance with its one-year minimum holding period
requirement. As of the date of this Prospectus, options to purchase 20,000
shares were issued and outstanding as to which Rule 701 may apply.
DELAWARE ANTI-TAKEOVER LAW
The Company is governed by the provisions of Section 203 of the General
Corporation Law of the State of Delaware (the "GCL"), an anti-takeover law. In
general, the law prohibits a public Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
"Business combinations" includes mergers, asset sales and other transactions
resulting in a financial benefit to the stockholder. An "interested stockholder"
is a person who, together with its affiliates and associates, owns (or within
three years, did own) 15% or more of the corporation's voting stock.
The provisions regarding certain business combinations under the GCL
could have the effect of delaying or preventing a change in control of the
Company or the removal of existing management. A takeover transaction frequently
affords stockholders the opportunity to sell their shares at a premium over
current market prices.
30
UNDERWRITING
Subject to the terms and conditions contained in the underwriting
agreement between the Company and the Underwriters named below, for which
Millennium Securities Corp. is acting as Representative (a copy of which
agreement is filed as an exhibit to the Registration Statement of which this
Prospectus forms a part), the Company has agreed to sell to each of the
Underwriters named below, and each of such Underwriters has severally agreed to
purchase, the number of shares of Common Stock set forth opposite its name. All
800,000 shares of Common Stock offered must be purchased by the several
Underwriters if any are purchased. The shares of Common Stock are being offered
by the Underwriters subject to prior sale, when, as and if delivered to and
accepted by the Underwriters and subject to approval of certain legal matters by
counsel and certain other conditions.
Underwriter No. of Shares
----------- -------------
Millennium Securities Corp.
Total 800,000
The Representative has advised the Company that the Underwriters
propose to offer the shares of Common Stock to the public at the offering prices
set forth on the cover page of this Prospectus. The Representative has further
advised the Company that the Underwriters propose to offer the Common Stock
through members of the National Association of Security Dealers, Inc. (the
"NASD"), and may allow a concession, in their discretion, to certain dealers who
are members of the NASD and who agree to sell the Common Stock in conformity
with the NASD Conduct Rules. Such concessions shall not exceed the amount of
underwriting discount that the Underwriters are to receive.
The Company has granted the Underwriters an option, exercisable for 45
days from the date of this Prospectus, to purchase up to 120,000 shares of
Common Stock at the public offering price less the underwriting discounts set
forth on the cover page of this Prospectus (the "Over-Allotment Option"). The
Underwriters may exercise this option solely to cover over-allotments in the
sale of the shares of Common Stock offered hereby.
Officers and directors of the Company may introduce the Representative
to persons to consider this Offering and purchase shares of Common Stock either
through the Representative, other Underwriters, or through participating
dealers. In this connection, officers and directors will not receive any
commissions or any other compensation.
The Company has agreed to pay to the Underwriters a commission of ten
percent (10%) of the gross proceeds of the Offering, including the gross
proceeds from the sale of the Over-Allotment Option, if exercised. In addition,
the Company has agreed to pay to the Representative a non-accountable expense
allowance of three percent (3%) of the gross proceeds of this Offering. The
Company has paid to the Representative a $50,000 advance in respect of such
non-accountable expense allowance. The Representative's expenses in excess of
its non-accountable expense allowance will be paid by the Representative. To the
extent that the expenses of the Representative are less than the amount of the
non-accountable expense allowance received, such excess shall be deemed to be
additional compensation to the Representative.
The Company has agreed to engage the Representative as its investment
banker for a period of twelve (12) months on the first day of the month
following the closing of the Offering at an aggregate fee of $5,000 for eight
months for a total of $40,000. The Representative also has agreed, at the
Company's request, to provide advice and consulting services to the Company
concerning potential merger and acquisition and financing proposals, whether by
public financing or otherwise. The Company has agreed, at the closing of the
Offering, to enter into a merger and acquisition agreement with the
Representative. The merger and acquisition agreement will provide that the
Representative will be paid a finder's fee of five (5%) percent of the first
$5,000,000, four (4%) of next $5,000,000 and 3% of the excess, if any, over
$10,000,000 of the consideration received or paid to the other party by the
Company in any such transactions.
Holders of 3,000,000 shares of Common Stock have agreed not to sell any
of such Common Stock for a period of 24 months from the Effective Date, without
the prior written consent of the Representative. See "Description of Capital
Stock--Shares Eligible for Future Sale."
The Company has agreed to indemnify the Underwriters against any costs
or liabilities incurred by the Underwriters by reason of misstatements or
omissions to state material facts in connection with the statements made in the
Registration Statement and the Prospectus. The Underwriters have in turn agreed
to indemnify the Company against any liabilities by reason of misstatements or
omissions to state material facts in connection with the statements made in the
Registration Statement, of which this Prospectus is a part, based on information
relating to the Underwriters and furnished in writing by the Underwriters. To
the extent that these provisions may purport to provide exculpation from
possible liabilities arising under the federal securities laws, in the opinion
of the Securities and Exchange Commission, such indemnification is contrary to
public policy and therefore unenforceable.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to copies
of each such agreement, which are filed as exhibits to the Registration
Statement. See "Additional Information."
PRICING OF THE OFFERING
Prior to this Offering, there has been no public trading market for the
Common Stock. Consequently, the initial offering price of the shares of Common
Stock has been determined by negotiations between the Company and the
Representative. Among the factors considered in determining the offering price
were the financial condition and prospects of the Company, the industry in which
the Company is engaged, certain financial and operating information of companies
engaged in activities similar to those of the Company and the general market
condition of the securities markets. The offering price does not necessarily
bear any relationship to any established standard or criteria of value based
upon assets, earnings, book value or other objective measures.
31
The Company anticipates that the Common Stock will be listed for
quotation on the NASD Electronic Bulletin Board under the symbol "HITS," but
there can be no assurance that an active trading market will develop, even if
the Common Stock is accepted for quotation. The Underwriters intend to make a
market in the Common Stock.
CERTAIN PROVISIONS OF THE COMPANY'S
ARTICLES OF INCORPORATION AND BYLAWS
The Company's Articles of Incorporation provide that the liability of
directors for monetary damages shall be limited to the fullest extent
permissible under Delaware law. The Articles of Incorporation and the Company's
Bylaws provide for indemnification of its officers and Directors to the fullest
extent permitted under Delaware law. See "Risk Factors--Limitation on Director
Liability."
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered
hereby will be passed upon for the Company by the law firm of Richman, Lawrence,
Mann, Greene, Chizever, Friedman & Phillips, Beverly Hills, California. The law
firm of Beckman & Millman, P.C., New York, New York will pass upon certain
aspects of this Offering on behalf of the Underwriters.
EXPERTS
The audited financial statements of the Company as of July 31, 1995 and
1996 and for the fiscal years then ended are included herein and in the
registration statement in reliance upon the report of Moore Stephens, P.C.,
certified public accountants, as indicated in the reports with respect thereto,
and are included herein in reliance upon the authority of said firm as experts
in accounting and auditing.
32
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors of
United Film Distributors, Inc.
Los Angeles, California
We have audited the accompanying consolidated balance sheet of
United Film Distributors, Inc. and its subsidiaries as of July 31, 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year then ended, and for the period from May 10, 1995 [date of
inception] through July 31, 1995. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the consolidated financial
position of United Film Distributors, Inc. and its subsidiaries as of July 31,
1996, and the consolidated results of their operations and their cash flows for
the year then ended, and for the period from May 10, 1995 [date of inception]
through July 31, 1995, in conformity with generally accepted accounting
principles.
MOORE STEPHENS, P.C.
Certified Public Accountants.
Cranford, New Jersey
November 15, 1996
UNITED FILM DISTRIBUTORS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
JANUARY 31, JULY 31,
1 9 9 7 1 9 9 6
[UNAUDITED]
ASSETS:
Cash $ 295,774 $ --
Deposits 318,870 341,501
Deferred Tax Asset 26,658 --
Prepaid and Other Current Assets 7,556 7,556
Film Costs - Net 6,724,776 9,200,319
Equipment - Net 60,198 66,526
--------------- ----------------
TOTAL ASSETS $ 7,433,832 $ 9,615,902
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Cash Overdraft $ -- $ 160,687
Accounts Payable 35,003 187,987
Accrued Interest Payable - Stockholders 190,664 114,038
Income Taxes Payable 26,657 26,657
Deferred Income 204,050 508,050
Due to Affiliates -- 14,325
Advances from Stockholders 1,809,333 2,359,333
--------------- ----------------
TOTAL LIABILITIES 2,265,707 3,371,077
--------------- ----------------
COMMITMENT AND CONTINGENCIES [8] -- --
--------------- ----------------
MINORITY INTEREST 3,132,193 4,137,795
--------------- ----------------
STOCKHOLDERS' EQUITY:
Preferred Stock, Authorized 3,000,000 Shares, Issued
and Outstanding -0- Shares, Par Value $.01 -- --
Common Stock, Authorized 20,000,000 Shares, Issued
and Outstanding 3,000,000 Shares, Par Value $.01 30,000 30,000
Paid-in Capital 2,040,666 2,040,666
Retained Earnings [Deficit] (34,734) 36,364
--------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 2,035,932 2,107,030
--------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,433,832 $ 9,615,902
=============== ================
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
F-2
UNITED FILM DISTRIBUTORS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
FOR THE PERIOD
--------------
MAY 10, 1995
------------
[DATE OF
--------
INCEPTION]
----------
SIX MONTHS ENDED YEAR ENDED THROUGH
---------------- ---------- -------
JANUARY 31, JULY 31, JULY 31,
----------- -------- --------
1 9 9 7 1 9 9 6 1 9 9 6 1 9 9 5
------- ------- ------- -------
[UNAUDITED] [UNAUDITED]
REVENUES:
Revenues - Completed Film Contracts $ 4,029,908 $ -- $ 2,626,000 $ --
---------------- --------------- ---------------- ---------------
EXPENSES:
General and Administrative Expenses 194,016 206,021 439,769 31,528
Film Festivals 117,283 74,914 252,753 --
Rent - Related Party 118,734 45,456 49,380 --
Depreciation on Equipment 6,328 6,326 12,653 --
Amortization - Film Cost 3,185,276 -- 1,609,466 --
---------------- --------------- ---------------- ---------------
TOTAL EXPENSES 3,621,637 332,717 2,364,021 31,528
---------------- --------------- ---------------- ---------------
OPERATING INCOME [LOSS] 408,271 (332,717) 261,979 (31,528)
---------------- --------------- ---------------- ---------------
INCOME AND [EXPENSES]:
Interest Income -- 8,200 11,608 --
Interest Expense -- -- (12,936) --
Interest Expense - Related Party (76,629) (41,589) (114,037) --
Other Income -- -- 35,730 --
---------------- --------------- ---------------- ---------------
OTHER [EXPENSES] - NET (76,629) (33,389) (79,635) --
---------------- --------------- ---------------- ---------------
INCOME [LOSS] BEFORE MINORITY INTEREST 331,642 (366,106) 182,344 (31,528)
MINORITY INTEREST (429,398) -- (87,795) --
---------------- --------------- ---------------- ---------------
[LOSS] INCOME BEFORE INCOME TAXES (97,756) (366,106) 94,549 (31,528)
BENEFIT [PROVISION] FOR INCOME TAXES 26,658 154,868 (26,657) --
---------------- --------------- ---------------- ---------------
NET [LOSS] INCOME $ (71,098) $ (211,238) $ 67,892 $ (31,528)
================ =============== ================ ===============
NET [LOSS] INCOME PER SHARE $ (.02) $ (.14) $ .03 $ (.03)
================ =============== ================ ===============
WEIGHTED AVERAGE NUMBER OF
SHARES 3,000,000 1,526,541 2,363,512 1,000,000
================ =============== ================ ===============
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
F-3
UNITED FILM DISTRIBUTORS, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------------------
PREFERRED STOCK COMMON STOCK RETAINED TOTAL
--------------- ------------ -------- -----
NUMBER OF NUMBER OF PAID-IN EARNINGS STOCKHOLDERS'
--------- --------- ------- -------- -------------
SHARES AMOUNT SHARES AMOUNT CAPITAL [DEFICIT] EQUITY
------ ------ ------ ------ ------- --------- ------
Initial Contribution -- $ -- 1,000,000 $ 10,000 $ 43,333 $ -- $ 53,333
Net [Loss] for the period
May 10, 1995 [Date of
Inception] through
July 31, 1995 -- -- -- -- -- (31,528) (31,528)
----------- ---------- ----------- --------- ------------ ---------- -----------
BALANCE - JULY 31, 1995 -- -- 1,000,000 10,000 43,333 (31,528) 21,805
Issuance of Common Stock
September 1995 -- -- 1,000,000 10,000 43,333 -- 53,333
Issuance of Common Stock
October 1995 -- -- 343,687 3,437 671,563 -- 675,000
Issuance of Common Stock
November 1995 -- -- 138,493 1,385 270,615 -- 272,000
Issuance of Common Stock
February 1996 -- -- 178,207 1,782 348,218 -- 350,000
Issuance of Common Stock
March 1996 -- -- 89,104 891 174,109 -- 175,000
Issuance of Common Stock
June 1996 -- -- 250,509 2,505 489,495 -- 492,000
Net Income for the year ended
July 31, 1996 -- -- -- -- -- 67,892 67,892
----------- ---------- ----------- --------- ------------ ---------- -----------
BALANCE - JULY 31, 1996 -- -- 3,000,000 30,000 2,040,666 36,364 2,107,030
Net Loss for the six
months Ended
January 31, 1997 -- -- -- -- -- (71,098) (71,098)
----------- ---------- ----------- --------- ------------ ---------- -----------
BALANCE - JANUARY 31, 1997
[UNAUDITED] $ -- $ -- 3,000,000 $ 30,000 $ 2,040,666 $ (34,734) $ 2,035,932
=========== ========== =========== ========= ============ ========== ===========
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
F-4
UNITED FILM DISTRIBUTORS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
FOR THE PERIOD
--------------
MAY 10, 1995
------------
[DATE OF
--------
INCEPTION]
----------
SIX MONTHS ENDED YEAR ENDED THROUGH
---------------- ---------- -------
JANUARY 31, JULY 31, JULY 31,
----------- -------- --------
1 9 9 7 1 9 9 6 1 9 9 6 1 9 9 5
------- ------- ------- -------
[UNAUDITED] [UNAUDITED]
OPERATING ACTIVITIES:
Net Income [Loss] $ (71,098) $ (211,238) $ 67,892 $ (31,528)
---------------- --------------- ---------------- ---------------
Adjustments to Reconcile Net Income
[Loss] to Net Cash Provided by
[Used For] Operating Activities:
Amortization of Film Costs 3,185,276 -- 1,609,466 --
Depreciation 6,328 6,326 12,653 --
Deferred Tax Asset (26,658) -- -- --
Minority Interest 429,398 -- 87,795 --
Changes in Assets and Liabilities:
[Increase] Decrease in:
Prepaid Expenses -- (7,998) (7,556) --
Deposits from Film Contracts 22,631 141,409 (341,501) --
Equipment Purchases -- (66,526) (79,179) --
Increase [Decrease] in:
Accounts Payable (152,987) 126,846 187,987 --
Accrued Interest 76,629 41,589 114,037 --
Income Taxes Payable -- (155,942) 26,657 --
Deferred Income (304,000) 469,975 508,050 --
---------------- --------------- ---------------- ---------------
Total Adjustments 3,236,617 555,679 2,118,409 --
---------------- --------------- ---------------- ---------------
NET CASH - OPERATING ACTIVITIES -
FORWARD 3,165,519 344,441 2,186,301 (31,528)
---------------- --------------- ---------------- ---------------
INVESTING ACTIVITIES:
Capitalizable Assets -- -- (897,240) --
Film Advances - Net (709,733) (3,673,582) (9,912,545) --
---------------- --------------- ---------------- ---------------
NET CASH - INVESTING ACTIVITIES -
FORWARD (709,733) (3,673,582) (10,809,785) --
---------------- --------------- ---------------- ---------------
FINANCING ACTIVITIES:
Cash Overdraft (160,687) -- 160,687 --
Finance from Limited Partners (1,435,000) 4,050,000 4,050,000 --
Advances from Related Party (14,325) -- 14,325 --
Advances from Stockholders (550,000) 1,354,667 1,912,666 446,667
Collection on Stock Subscription -- 1,000,333 2,017,334 53,333
---------------- --------------- ---------------- ---------------
NET CASH - FINANCING ACTIVITIES -
FORWARD $ (2,160,012) $ 6,405,000 $ 8,155,012 $ 500,000
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
F-5
UNITED FILM DISTRIBUTORS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
FOR THE PERIOD
--------------
MAY 10, 1995
------------
[DATE OF
--------
INCEPTION]
----------
SIX MONTHS ENDED YEAR ENDED THROUGH
---------------- ---------- -------
JANUARY 31, JULY 31, JULY 31,
----------- -------- --------
1 9 9 7 1 9 9 6 1 9 9 6 1 9 9 5
------- ------- ------- -------
[UNAUDITED] [UNAUDITED]
NET CASH - OPERATING ACTIVITIES -
FORWARDED $ 3,165,519 $ 344,441 $ 2,186,301 $ (31,528)
NET CASH - INVESTING ACTIVITIES -
FORWARDED (709,733) (3,673,582) (10,809,785) --
NET CASH - FINANCING ACTIVITIES -
FORWARDED (2,160,012) 6,405,000 8,155,012 500,000
---------------- --------------- ---------------- ---------------
NET INCREASE [DECREASE] IN CASH 295,774 3,075,859 (468,472) 468,472
CASH - BEGINNING OF PERIODS -- 468,472 468,472 --
---------------- --------------- ---------------- ---------------
CASH - END OF PERIODS $ 295,774 $ 3,544,331 $ -- $ 468,472
================ =============== ================ ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the periods for:
Interest $ -- $ -- $ 12,936 $ --
Income Taxes $ -- $ -- $ -- $ --
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
F-6
UNITED FILM DISTRIBUTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JANUARY 31, 1997 AND 1996 IS
UNAUDITED]
- --------------------------------------------------------------------------------
[1] ORGANIZATION AND OPERATIONS
United Film Distributors, Inc. [formerly Hit Entertainment, Inc.] [the
"Company"] was incorporated under the laws of the State of Delaware on May 10,
1995. The Company is engaged in the development, production, and distribution of
motion pictures on a world-wide basis.
[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial statements
include the accounts of the Company and its subsidiaries Hit Productions, United
Film Distributors, HEP I, L.P. and HEP II, L.P. Amounts invested by and income
attributable to third party limited partners HEP I, L.P. and HEP II, L.P. are
presented as minority interest in the accompanying financial statements. All
other significant intercompany accounts and transactions have been eliminated in
consolidation.
REVENUE RECOGNITION - Amounts received as fees for projects in production are
deferred until the project becomes available for release in accordance with the
terms of the agreement and are recognized as revenues at such time. Revenues
from the sale of completed productions are recognized upon their sale.
CASH EQUIVALENTS - The Company considers all highly liquid debt instruments
purchased with a maturity of three months or less to be cash equivalents. The
Company did not have any cash equivalents at July 31, 1996.
CONCENTRATION OF CREDIT RISK - Financial instruments that potentially subject
the Company to significant concentrations of credit risk consist principally of
cash. The Company places its cash with high credit quality financial
institutions. At times the cash in any one bank may exceed the FDIC $100,000
limit. At July 31, 1996, there was approximately $50,300 in financial
institutions which was subject to such risk. The Company does not require
collateral or other security to support financial instruments.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FILM COSTS AND AMORTIZATION - Film costs include the cost of completed projects,
costs of projects in production and costs expended on projects in development.
Film costs are stated at the lower of amortized cost or estimated net realizable
value. Amortization of completed projects is charged to operations on an
individual project basis in a ratio that the current year's revenue bears to
management's estimate of total revenues [current and future years] from all
sources. This is commonly referred to as the individual-film-forecast method.
Adjustments of amortization resulting from changes in estimates of total
revenues are recognized in the current year's amortization. When a completed
project is fully amortized, its cost and related accumulated amortization are
removed from the accounts. If, in the opinion of management, any property in the
development stage is not planned for use, the net carrying value of such
property is charged to current year's operations.
DEPRECIATION AND AMORTIZATION - Depreciation and amortization of fixed assets
[consisting of furniture, and computer equipment] is provided on the
straight-line method over the estimated useful lives of the related assets which
range from three to seven years.
STOCK OPTIONS ISSUED TO EMPLOYEES - The Company adopted Statement of Financial
Accounting Standards ["SFAS"] No. 123, "Accounting for Stock-Based Compensation"
on January 1, 1996 for financial statement note disclosure purposes and will
continue to apply the intrinsic value method of Accounting Principles Board
["APB"] Opinion No. 25, "Accounting for Stock Issued to Employees" for financial
reporting purposes.
F-7
UNITED FILM DISTRIBUTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #2
[INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JANUARY 31, 1997 AND 1996 IS
UNAUDITED]
- --------------------------------------------------------------------------------
[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED]
OPERATIONS IN FOREIGN COUNTRIES - The Company is subject to numerous factors
relating to conducting business in a foreign country [including, without
limitation, economic, political and currency risks] any of which could have a
significant impact on the Company's operations.
MINORITY INTEREST - Minority interest represents the amount due to outside
parties for their investment in the financing of the films through the Company's
two limited partnership subsidiaries. For the six months ended January 31, 1997
and the year ended July 31, 1996, the amount due to the minority interest
shareholders was $3,132,193 and $4,137,795, respectively.
EARNINGS PER SHARE - Earnings per share are computed based on the weighted
average number of shares outstanding during each period presented. Common stock
equivalents are included in the computation when there effect is considered
dilutive.
[3] EQUIPMENT
Equipment consists of the following:
January 31, July 31,
----------- --------
1 9 9 7 1 9 9 6
------- -------
Computer Equipment $ 23,433 $ 23,433
Office Equipment 55,746 55,746
-------------- ---------------
Totals 79,179 79,179
Less: Accumulated Depreciation 18,981 12,653
-------------- ---------------
TOTAL - NET $ 60,198 $ 66,526
----------- ============== ===============
Depreciation expense for the six months ended January 31, 1997 and the year
ending July 31, 1996 was $6,328 and $12,653, respectively.
[4] FILM COSTS
Film costs consist of the following:
January 31, July 31,
----------- --------
1 9 9 7 1 9 9 6
------- -------
Completed Projects $ 8,671,897 $ 4,221,003
Less: Accumulated Amortization 4,794,742 1,609,466
-------------- ---------------
Net of Amortization 3,877,155 2,611,537
Productions in Progress 2,847,621 6,588,782
-------------- ---------------
TOTALS $ 6,724,776 $ 9,200,319
------ ============== ===============
Based on management's present estimate of future revenues at July 31, 1996,
substantially all of the unamortized costs of completed projects will be
amortized by July 31, 1998.
F-8
UNITED FILM DISTRIBUTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #3
[INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JANUARY 31, 1997 AND 1996 IS
UNAUDITED]
- --------------------------------------------------------------------------------
[5] RELATED PARTY TRANSACTIONS
LEASES - The Company leases office space from a related party, an entity whose
major stockholder is also a major stockholder of the Company [See Note 8]. The
rent expense for the year ended July 31, 1996 and the six months ended January
31, 1997 was $147,747 and $63,750, respectively.
ADVANCES - The Company received advances from two stockholders and or entities
affiliated with the stockholders to fund its operations. Interest payable at
July 31, 1996 and interest expense on these advances for the year then ended
amounted to $114,038. Interest was calculated at 7% interest during the period.
It is anticipated that these advances will be repaid from an initial public
offering [See Note 12].
[6] FAIR VALUE OF FINANCIAL INSTRUMENTS
At its inception, the Company adopted SFAS No. 107, fair value of financial
instruments which requires disclosing fair value to the extent practicable for
financial instruments which are recognized or unrecognized in the balance sheet.
The fair value of the financial instruments disclosed therein is not necessarily
representative of the amount that could be realized or settled, nor does the
fair value amount consider the tax consequences of realization or settlement.
January 31, 1997 July 31, 1996
----------------------------- ---------------------
Carrying Carrying
-------- --------
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
Advances from Stockholders $ 1,809,333 $ 1,809,333 $ 2,359,333 $ 2,359,333
Accrued Interest Payable - Stockholders 190,664 212,381 114,038 145,430
-------------- --------------- -------------- ---------------
$ 1,999,997 $ 2,021,714 $ 2,473,371 $ 2,504,763
============== =============== ============== ===============
For certain financial instruments, including cash, trade receivables and
payables and short-term debt, the carrying amount approximates fair value
because of the near term maturities of such obligations. Interest was calculated
on all debt at 7% per annum. The prime rate at July 31, 1996 was 8-1/4%.
[7] INCOME TAXES
Temporary differences between financial reporting and tax bases of assets and
liabilities related to depreciation, vacation and sick pay accruals are
immaterial.
Provision for income taxes has been made as follows:
FOR THE PERIOD
--------------
MAY 10, 1995
------------
[DATE OF
--------
SIX MONTHS INCEPTION]
---------- ----------
ENDED YEAR ENDED THROUGH
----- ---------- -------
JANUARY 31, JULY 31, JULY 31,
----------- -------- --------
1 9 9 7 1 9 9 6 1 9 9 5
------- ------- -------
Income [Loss] Before Income Taxes $ (97,756) $ 94,548 $ (31,528)
Net Operating [Loss] Carryforward -- (31,528) --
------------ ------------ ------------
TAXABLE [LOSS] INCOME $ (97,756) $ 63,020 $ (31,528)
--------------------- ============ ============ ============
Federal Income Tax $ 33,237 $ (20,840) $ --
State Income Tax 9,023 (5,817) --
Tax Benefit Reserve (15,602) -- --
------------ ------------ ------------
TOTAL INCOME TAX BENEFIT [EXPENSE] $ 26,658 $ (26,657) $ --
---------------------------------- ============ ============ ============
F-9
UNITED FILM DISTRIBUTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #4
[INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JANUARY 31, 1997 AND 1996 IS
UNAUDITED]
- --------------------------------------------------------------------------------
[7] INCOME TAXES [CONTINUED]
A reconciliation between the statutory federal income tax rate and the effective
income tax rates is as follows:
SIX MONTHS
----------
ENDED YEAR ENDED
----- ----------
JANUARY 31, JULY 31,
----------- --------
1 9 9 7 1 9 9 6
------- -------
Statutory Federal Income Tax Rate (34.0)% 34.0 %
State and Local Taxes, Net of Federal Tax Benefits (9.2)% 9.2 %
Net Operating [Loss] Carryforward -- (15.0)%
Tax Benefit Reserve 16.0 % -- %
EFFECTIVE INCOME TAX RATE (27.2)% 28.2 %
------------------------- ========= =========
[8] COMMITMENTS AND CONTINGENCIES
The Company's leases office from a related party at a monthly rental of $9,477
per month. The lease term expires June 30, 2001 [See Note 5].
Future minimum lease payments are as follows:
1997 $ 127,500
1998 119,075
1999 46,200
2000 46,200
2001 46,200
Thereafter 42,350
------------
Total $ 427,525
----- ============
[9] SIGNIFICANT CUSTOMERS
For the six months ended January 31, 1997, revenue from one customer amounted to
$1,290,000 or 32% of total revenues. Revenues from two customers accounted for
$1,225,000 and $275,000, or 47% and 10%, respectively, of total revenues for the
year ended July 31, 1996.
[10] FOREIGN SALES
Export sales for the six months ended January 31, 1997 and the year ended July
31, 1996, are principally concentrated in the following areas:
SIX MONTHS
----------
ENDED YEAR ENDED
----- ----------
JANUARY 31, JULY 31,
----------- --------
1 9 9 7 1 9 9 6
------- -------
Asia $ 543,850 $ 486,000
South America $ 32,970 $ 275,000
Europe $ 1,071,238 $ 495,500
These amounts collectively account for 41% and 48%, respectively, of total
revenues for the six months ended January 31, 1997 and the year ended July 31,
1996.
F-10
UNITED FILM DISTRIBUTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #5
[INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JANUARY 31, 1997 AND 1996 IS
UNAUDITED]
- --------------------------------------------------------------------------------
[11] NEW AUTHORITATIVE PRONOUNCEMENT
The Financial Accounting Standards Board ["FASB"] has issued Statement of
Financial Accounting Standards ["SFAS"] No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." SFAS No. 125
is effective for transfers and servicing of financial assets and extinguishment
of liabilities occurring after December 31, 1996. Earlier application is not
allowed. The provisions of SFAS No. 125 must be applied prospectively;
retroactive application is prohibited. Adoption on January 1, 1997 is not
expected to have a material impact on the Company. The FASB deferred some
provisions of SFAS No. 125, which are not expected to be relevant to the
Company.
The FASB issued SFAS No. 128, "Earnings Per Share," and SFAS No. 129,
"Disclosure of Information about Capital Structure" in February 1997. SFAS No.
128 simplifies the earnings per share ["EPS"] calculations required by
Accounting Principles Board ["APB"] Opinion No. 15, and related interpretations,
by replacing the presentation of primary EPS with a presentation of basic EPS.
SFAS No. 128 requires dual presentation of basic and diluted EPS by entities
with complex capital structures. Basic EPS includes no dilution and is computed
by dividing income available to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution of securities that could share in the earnings of an entity,
similar to the fully diluted EPS of APB Opinion No. 15. SFAS No. 128 is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods; earlier application is not permitted. When
adopted, SFAS No. 128 will require restatement of all prior-period EPS data
presented; however, the Company has not sufficiently analyzed SFAS No. 128 to
determine what effect SFAS No. 128 will have on its historically reported EPS
amounts.
SFAS No. 129 does not change any previous disclosure requirements, but rather
consolidates existing disclosure requirements for ease of retrieval.
[12] SUBSEQUENT EVENTS [UNAUDITED]
[A] PROPOSED INITIAL PUBLIC OFFERING - The Company is offering for public sale
800,000 common shares at $5.00 per share. Although no assurance can be given
that the offering will be successful, the Company intends to utilize the net
proceeds from the proposed offering of approximately $3,073,000 to develop,
produce and distribute movies, to repay certain indebtedness, and for general
working capital needs.
The following supplementary earnings per share reflects on a pro forma basis the
repayment of indebtedness of $2,000,000 and the resulting reduction of interest
expense and increase in net income as if it had taken place at the beginning of
the respective periods.
Six months ended Year ended
---------------- ----------
January 31, July 31,
----------- --------
1 9 9 7 1 9 9 6
------- -------
[Loss] Income $ (27,572) $ 132,665
=============== ==============
[Loss] Income Per Share $ (.01) $ 0.05
=============== ==============
Number of Shares 3,000,000 2,313,512
=============== ==============
[B] STOCK SPLIT - In May of 1997, the Company declared a five-for-one stock
split. All share data has been retroactively restated for the split.
F-11
UNITED FILM DISTRIBUTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #6
[INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JANUARY 31, 1997 AND 1996 IS
UNAUDITED]
- --------------------------------------------------------------------------------
[12] SUBSEQUENT EVENTS [UNAUDITED] [CONTINUED]
[C] EMPLOYMENT AGREEMENT - On April 1, 1997, the Company entered into a three
year employment agreement with the Company's president and chief executive
officer and a director. The agreement is for a term of three years and provides
for an annual salary of two hundred six thousand four hundred dollars
[$206,400]. Subject to annual increases at the sole discretion of the Board of
Directors.
[D] STOCK OPTION PLAN - In May of 1997, the Board of Directors adopted the 1997
Stock Option Plan, whereby, the aggregate number of shares which may be issued
upon exercise of options shall not exceed 360,000 shares. Any nonemployee
director, employee or consultant of the Company shall be eligible to be granted
options. On May 28, 1997, the Board of Directors granted two directors 10,000
options each at an option price of $5.00 per share and expire May 28, 2007.
[13] UNAUDITED INTERIM STATEMENTS
The financial statements as of January 31, 1997 and for the six months ended
January 31, 1997 and 1996 are unaudited; however, in the opinion of management
all adjustments [consisting solely of normal recurring adjustments] necessary in
order to make the interim financial statements not misleading have been made.
The results of the interim periods are not necessarily indicative of the results
to be obtained for a full fiscal year.
. . . . . . . . . .
F-12
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Articles of Incorporation provide that the liability of
Directors for monetary damages shall be limited to the fullest extent
permissible under Delaware law. The Articles and the Company's Bylaws provide
for indemnification of its officers and Directors to the fullest extent
permitted under Delaware law.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses payable in connection with
the registration of the Common Stock that is the subject of this Registration
Statement, all of which shall be borne by the Company. All the amounts shown are
estimates except for the Securities and Exchange Commission registration fee and
the National Association of Securities Dealers listing and filing fees.
To Be Paid By
-------------
Registrant
----------
Securities and Exchange Commission registration fee............... $1,394
National Association of Securities Dealers filing fee............. 960
Blue sky fees and expenses........................................ *
Printing and engraving expenses................................... *
Legal fees and expenses........................................... *
Accounting fees and expenses...................................... 90,000
Miscellaneous..................................................... *
-------------
Total......................................................... $ *
=============
----------
*To be filed by Amendment
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The registrant has sold the following unregistered securities:
1. In connection with the Company's organization in June 1995, the
registrant sold 1,000,000 shares of Common Stock to one of its
founders, Ms. Nadine Belfort, for approximately $.05 per share. The
transaction was exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act").
2. In September 1995, the registrant sold 1,000,000 shares of Common Stock
to its other founder, Mr. Harry Shuster, for approximately $.05 per
share. The transaction was exempt from registration under Section 4(2)
of the Securities Act.
3. In October 1995, the registrant sold 132,382 and 211,303 shares of
Common Stock to Mr. Harry Shuster and Ms. Nadine Belfort, respectively,
for approximately $1.96 per share. The transactions were exempt from
registration under Section 4(2) of the Securities Act.
4. In November 1995, the registrant sold 138,493 shares of Common Stock to
Mr. Harry Shuster for approximately $1.96 per share. The transaction
was exempt from registration under Section 4(2) of the Securities Act.
5. In February 1996, the registrant sold 50,916 and 127,291 shares of
Common Stock to Mr. Harry Shuster and Ms. Nadine Belfort, respectively,
for approximately $1.96 per share. The transactions were exempt from
registration under Section 4(2) of the Securities Act.
II-1
6. In March 1996, the registrant sold 89,104 shares of Common Stock to Ms.
Nadine Belfort for approximately $1.96 per share. The transaction was
exempt from registration under Section 4(2) of the Securities Act.
7. In June 1996, the registrant sold 178,208 and 72,301 shares of Common
Stock to Mr. Harry Shuster and Ms. Nadine Belfort, respectively, for
approximately $1.96 per share. The transactions were exempt from
registration under Section 4(2) of the Securities Act.
The numbers of shares and exercise prices set forth above reflect a
5-for-1 stock split effective in May 1997.
ITEM 27. EXHIBITS.
(a) The following is a list of exhibits furnished:
Exhibit Page
------- ----
Number Exhibit Number
------ ------- ------
1.1 Form of Underwriting Agreement**
1.2 Letter of Intent between the Company and Millennium Securities Corp.*
3.1 Restated Articles of Incorporation*
3.2 Certificate of Amendment of Certificate of Incorporation**
3.3 Bylaws*
4.1 Specimen Stock Certificate**
5 Opinion of Counsel as to legality of the securities being
registered**
10.1 Employment Agreement between the Company and Brian Shuster dated
April 1, 1997*
10.2 Revolving Demand Note between the Company and Harry Shuster**
10.3 Revolving Demand Note between the Company and Nadine Belfort**
10.4 Lease agreement between the Company and 1990 Westwood Blvd., Inc.
dated July 1, 1995 and Addendum to Lease dated November 1, 1996*
10.5 Lease Agreement between the Company and 1990 Westwood Blvd., Inc.
dated July 1, 1996 and Addendum to Lease dated November 1, 1996*
10.6 1997 Stock Option Plan*
10.7 Distribution Agreement between the Company and HEP I, L.P. dated July
17, 1995*
10.8 Distribution Agreement between the Company and HEP II, L.P. dated
March 4, 1996*
10.9 Agreement of Limited Partnership of HEP I, L.P. dated as of July 17,
1995*
10.10 Agreement of Limited Partnership of HEP II, L.P. dated as of March 4,
1996*
10.11 Amendment No. 1 to Agreement of Limited Partnership of HEP II, L.P.
dated as of April 23, 1996*
21.1 List of Subsidiaries*
23.1 Consent of independent accountants*
23.2 Consent of counsel (included as part of Exhibit 5)**
24.1 Power of attorney (included as part of signature page)
27.1 Financial Data Schedule*
- ---------------
* Filed herewith.
** To be filed by amendment.
II-2
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To provide to the Underwriter at the closing specified in the
underwriting agreement certificates in such denominations and registered in such
names as required by the Underwriter to permit prompt delivery to each
purchaser.
(2) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer, or controlling
person of the registrant in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
(3) For purposes of determining any liability under the Securities Act
of 1933, as amended (the "Securities Act"), the information omitted from the
form of prospectus filed as part of a registration statement in reliance upon
Rule 430A and contained in the form of prospectus filed by the registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of the registration statement as of the time it was declared
effective.
II-3
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Los Angeles, State of California on June 12, 1997.
UNITED FILM DISTRIBUTORS, INC.
By: /s/ Brian Shuster
-----------------------------
Brian Shuster
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Brian Shuster and David M. Kane, and each
of them, his attorney-in-fact with power of substitution for him in any and all
capacities, to sign any amendments, supplements, subsequent registration
statements relating to the offering to which this Registration Statement
relates, or other instructions he deems necessary or appropriate, and to file
the same, with exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming all
that said attorney-in-fact or his substitute may do or cause to be done by
virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates stated.
Signature Title Date
--------- ----- ----
/s/ Brian Shuster President, Director and Chief June 12, 1997
--------------------------- Executive Officer (Principal
Brian Shuster Executive Officer)
/s/ Harry Shuster Chairman and Director June 12, 1997
---------------------------
Harry Shuster
/s/ David M. Kane Chief Financial Officer and June 12, 1997
--------------------------- Secretary (Principal Financial
David M. Kane Officer)
/s/ J. Brooke Johnston, Jr. Director June 12, 1997
------------------------------
J. Brooke Johnston, Jr.
/s/ George Folsey, Jr. Director June 12, 1997
---------------------------
George Folsey, Jr.
II-4