SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
______________
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) August 29, 2003
IRVINE PACIFIC CORPORATION
_____________________________________________________________________________
(Exact name of Registrant as Specified in Charter)
COLORADO 000-50159 84-1424696
(State of Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
1721 Twenty First Street
Santa Monica, CA 90404
_____________________________________________________________________________
(Address of Principal Executive Offices)
Registrant's telephone number, including area code (310) 453-4499
___________________
381 South Eagle Point Drive
Salt Lake City, Utah, 84109
______________________________________________________________________________
(Former Name or Former Address, if changed since last report)
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Item 1. Changes in Control of Registrant.
Irvine Pacific Corporation (the "Registrant") entered into an Agreement
and Plan of Merger, (the "Merger Agreement"), dated as of August 18, 2003 by
and among the Registrant, IPC Merger Sub, Inc., a California corporation and
wholly owned subsidiary of the Registrant ("Merger Sub"), Kanona Moeai, Jr.
and Hollywood Previews, Inc., a California corporation ("HPI"). Pursuant to
the Merger Agreement, on August 29, 2003 (the "Closing Date"), Merger Sub
merged with and into HPI with HPI as the surviving company (the
"Acquisition"). As consideration for the Acquisition, the shareholders of HPI
were issued 55,494,571 of the Registrant's common stock representing 97% of
the issued and outstanding common stock of the Registrant (after giving effect
to the conversion of all notes of the Registrant outstanding immediately prior
to the Acquisition). Although HPI became a wholly-owned subsidiary following
the Acquisition, because the transaction resulted in a change of control, the
transaction has been recorded as a "reverse merger" whereby HPI is considered
to be the accounting acquirer of the Registrant.
The consideration for the Acquisition was determined through arms length
negotiations between management of the Registrant and the management of HPI.
Election of New Directors and Officers.
On the Closing Date, Kanona Moeai, Jr. resigned as President, Secretary,
Treasurer and a Director of the Registrant. Effective September 2, 2003,
David MacEachern, Scott Kapp and Franklin Unruh began serving their terms as
members of the Board of Directors of the Registrant. The newly elected
directors appointed David MacEachern as the Chief Executive Officer and
Chairman of the Board, Scott Kapp, as President and Franklin H. Unruh as Chief
Financial Officer.
Item 2. Acquisition or Disposition of Assets.
The information set forth above under "Item 1. Changes in Control of
Registrant" is incorporated herein by reference.
Immediately prior to the Acquisition, the Registrant had only nominal
assets and liabilities and no current business operations. As a result of the
Acquisition, the Registrant will continue the business operations of HPI. Set
forth below is a discussion of the business and operations of HPI. Unless
specifically stated otherwise, for the purpose of this filing and to avoid
reader confusion, all references to the business activities of the Registrant
shall be assumed to be a reference to that of HPI, its various divisions and
subsidiaries. Therefore, in many instances in this filing, the terms
"Registrant", "HPI", the "Company" and "Hollywood Previews, Inc." may be
interchangeable.
DESCRIPTION OF BUSINESS.
HPI, with principal offices located at 1721 21st Street, Santa Monica
California, 90404 is in the business of, licenses and distributes proprietary
digital media marketed as Hollywood Previews Entertainment Magazine, an
interactive video magazine distributed on CD-ROM or DVD that includes
theatrical trailers of major motion pictures, celebrity interviews, promotions
and contests along with advertisements. HPI has begun developing an
additional video magazine and interactive digital media that will focus on
promoting Las Vegas. In this connection, HPI has formed Las Vegas Previews,
LLC ("LVP"). In addition, HPI intends upon developing future publications
featuring sports, entertainment and the travel and leisure industries. HPI
employs the term "digital publishing" to describe its new interactive media
products and services.
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HPI also provides digital media solutions to corporate customers who
desire to associate their company, products and services with HPI's various
entertainment, sports, travel and other editorial content.
HPI intends on growing its existing product through the creation of new
products, technologies and marketing and through acquisitions. The principal
objective of HPI is to establish itself as a leader in the creation and
distribution of digital publications. HPI has and intends to do business and
derive revenues from a variety of products, services, fees and royalties in
the Information and Publishing Industry. HPI"s core business has and will
revolve around publishing and advertising using HPI's trademarked and
copyrighted CD-ROM and DVD video magazines. In addition, HPI expects to
produce revenues and royalties from a variety of synergistic industry-related
projects and ancillary sales.
HPI is a California Corporation founded on July 25, 2002, originally
under the name DTV Studios. HPI officially changed its corporate name to
Hollywood Previews, Inc. on January 3, 2003. Prior to forming the Company,
and for over two years, HPI's principal management has had ownership and been
involved with other closely-related companies involved in the production and
distribution of CD video magazines, new media and various other interactive
publishing ventures. (See "Related Party Transactions".) One of the
principal management's predecessor companies, The Modern Company LLC, was
responsible for originally conceptualizing and producing the CD-ROM video
magazine now known as Hollywood Previews Entertainment Magazine, along with
all its source code and other intellectual properties. Registrant intends on
changing its corporate name to Hollywood Previews Media, Inc.
Recently through license from a related party, HPI has obtained the
exclusive rights, licenses, trademarks, copyrights, service marks and source
code to produce and from a related party to distribute the Hollywood Previews
Entertainment Magazine worldwide, and to exploit the unique source code,
templates and other proprietary technology originally developed by The Modern
Company LLC for the production of interactive media. (See "Patents and
Licenses".)
Products and Services.
Hollywood Previews(TM) Entertainment Magazine and Related Products:
The Registrant's initial business will be the production and distribution
of the Hollywood Previews(TM) Entertainment Magazine and the Las Vegas
Previews Magazines still under development. The Registrant intends to
continue acquiring regional and national sponsors that will allow for
escalation in the number of disks the Registrant produces and distributes.
The Registrant intends in the future to produce and make its magazines
available under a variety of private labels to specific distributors or
national sponsors. For example, the Registrant and its predecessor recently
competed several special edition magazines featuring Johnnie Walker(TM)
Scotch, Toyota USA, Crunch Fitness(TM) and the Los Angeles Dodgers(TM) as the
sole sponsors. While using the brand Hollywood Previews(TM), these issues had
distinctive looks and covers designed to appeal to the sponsor's targeted
demographic audience. The following table illustrates some of the special
edition disks, their circulation and viewer results.
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- ------------------------------------------------------------------------------
Sponsor Name Number Convergence Total Numbers Average Total
Distributed In % Of Users Viewing Time
- --------------------- ------------ -------------- -------------- -------------
Johnny Walker Scotch 247,000 83% 204,193 11:39 min
- --------------------- ------------ -------------- -------------- -------------
Toyota USA 73,000 97% 70,471 12:34 min
- --------------------- ------------ -------------- -------------- -------------
Crunch Fitness 125,000 29% 36,439 11:59 min
- --------------------- ------------ -------------- -------------- -------------
Los Angeles Dodgers (projected)
50,000 TBD TBD TBD
- ------------------------------------------------------------------------------
With the vast number of corporate sponsorships available, and with the
variety of interactive content that can be procured for publication, the
Registrant intends to continue offering special edition or private labeled
content to other national advertisers who desire to exploit HPI's interactive
media technology.
Design and Production Services:
HPI will continue to provide design and production services for a variety
of new and existing clients. HPI will use its licensed and proprietary
technology to produce such varied products as interactive advertising,
multi-media marketing disks and interactive corporate reports. In addition,
HPI will make available, for a fee, production services to the public and/or
subsidiary or joint venture partners for the design and production of other
video magazines similar to the Hollywood Previews(TM) Entertainment Magazine.
Information, Publishing and Media as a Global Industry.
The Information Industry is one of the largest single sectors of the U.S.
economy. This sector is comprised of several main industries including
publishing, motion pictures and sound recording, broadcasting,
telecommunications and news & information services. According to recent U.S.
Census data publishing revenues for the above industries exceeded $623 billion
in 1997. Of this figure, $179 billion of revenue was generated by publishers
of traditional media such as newspapers, periodicals, books and directories,
and from the evolving industry of electronic, digital or "new media". In
addition, advertising agencies, media buyers and other direct marketing
companies generated an additional $49 billion making publishing and
advertising a $228 billion annual U.S. business.
Publishing and media is a global industry with the major industrialized
nations producing revenues similar, but slightly less than that of the U.S.
when revenues are factored as a percentage of population.
Publishing and media revenues vary annually depending upon regional,
national and global economic conditions. In times of recession or depression,
revenues may be severely impacted as companies have less capital to invest in
advertising and promotions. Conversely, during times of economic growth,
revenues from publishing and advertising can increase dramatically as
companies vie to retain or increase their customer base, market share and
establish brand recognition.
Over the last few years, traditional publishing and advertising has
experienced change as new forms of digital media and electronic distribution
has become available. "New media" is rapidly being accepted by publishers and
corporate sponsors as a unique and effective way to educate consumers, gain
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brand recognition and increase market share.
Entertainment and Motion Picture Industry.
Although Los Angeles, California is widely accepted to be the motion
picture capital of the world, the production and distribution of motion
pictures is a global industry. According to U.S. Census data, revenue from
the production and sale of motion pictures exceeds $67 billion per year.
While the majority of first-run motion pictures continue to be produced by
U.S. movie studios, more and more international studios are producing
high-quality products in direct competition for the international and U.S.
market. It is estimated that there are over 500 feature films distributed in
the U.S. each year. Of these many films, 100 or more may have advertising and
promotional budgets in excess of $30 million.
Competition for market share has caused motion picture studios to
allocate large portions of their distribution budgets to promotion and
advertising. As motion pictures are a very visual art form, studios
traditionally look to advertising mediums that can visually showcase their
products to their largest demographic audience. Television spots, theatrical
trailers and print (newspaper) advertising has long been the mainstay for
studio marketing executives.
With an ever-escalating pace of life, consumers continue to view
entertainment as a diversion, and, for this reason, entertainment industries
such as movies, music, sports and gaming continue to increase in popularity
and revenues. Consumers have an increasing appetite for new recreation and
leisure activities, and continue to devote more of their discretionary income
to entertainment products.
Digital Publishing and Digital Media.
Digital publishing and digital media are developing technologies that
continue to find new venues, uses and applications. With the advent of
personal computers, the internet, wireless devices, cable television and other
devices used to receive and transmit digital media, the opportunities for
interaction between consumers, broadcasters, publishers and advertisers
continues to expand. Content delivered through interactive media provides
consumers a far more involving experience than passive viewing alone.
Consumers now have more choices as to what they want to see, experience or
purchase than ever before. Interactivity allows consumers to instantly
receive more information about what they are interested in, and bypass
information that they are not. Interactivity also allows for vast data-mining
capabilities, so publishers and advertisers can return accurate information as
to what consumers are actually viewing, time of day, viewer demographic etc.
Digital publishing industries will continue to evolve as additional and new
forms of digital distribution become available and publicly accepted.
Digital publishing consists mainly of digital multi-media. Digital
multi-media can be both interactive or passive depending upon the advertisers
or viewers choice. Digital publishing is limited only by the capability of
the technology and the publisher's method of distribution. Passive digital
media is currently being used extensively in the U.S. to display content and
advertising at ATM machines, grocery lines, airports, fast food restaurants,
convenience stores, hotel lobbies and at variety of other locations and
businesses. However, interactive digital media is becoming more popular as
new technologies, consumer products and services become available.
Digital media and interactive digital publishing have the potential to
rapidly become a significant threat to traditional forms of published media
(such as print). With each new generation of consumer becoming more and more
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accustomed to receiving information from electronic media sources (i.e.
television, Internet, wireless devices) and less from traditional media like
newspapers, books and magazines, interactive digital media and I-publishing is
fast becoming a preferred and adopted method of distributing information to
younger consumers. In addition, growth projections for established
publications and periodicals tend to remain relatively flat as the subscriber
and reader base becomes saturated. Traditional publishers see digital media
like Hollywood Previews(TM) Entertainment Magazine as a welcome enhancement to
their printed newspapers, magazines and periodicals.
Home Computers, Entertainment and Multi-Media.
The advent of the home computer, the internet, video games, digital
photography, CD-ROM's, DVD's, and the developing technologies that allow these
devices to interact, communicate and network, have created consumer demand for
more uses and adaptability from these devices. Each year, millions of new
personal computers are sold, with most being equipped with state-of-the-art
multi-media players. By their use, consumers continue to demonstrate their
positive acceptance of the home computer as a prominent source of information
and entertainment.
Each year, more and more computers are becoming linked either through the
Internet or through wide or local networks, providing consumers with the
opportunity to interact with other computer users. Interactive computer video
games, chat rooms, instant messaging and interactive e-mail demonstrates that
many computer users desire interactive content and capability.
Industry statistics continue to show that computer users devote a large
majority of their computer time to entertainment, playing games and surfing
the Internet. The adoption of CD-ROM and DVD technology has made the home
computer a true multi-media experience. With constantly improving graphics,
speed and quality, along with the availability of rich media content,
multi-media computers provides users with ever-increasing entertainment
choices.
Traditional Publishing vs. Digital publishing.
Traditional publishing has remained virtually unchanged for decades. It
may consist of print media such as newspapers, books and magazines,
directories like the Yellow Pages, wireless audio (radio) and television.
Content such as news, recorded music, television shows and other content is
provided by the publisher and delivered to the consumer either for free (i.e.
radio, television and directories) or at greatly subsidized costs (i.e.
newspapers and magazines). In traditional media, content is provided to
attract viewers or subscribers and the publisher derives revenues through the
sale of ads or sponsorships. Advertisers pay rates based upon the number of
viewers or circulation of the publication. Advertisers pay regardless of
whether or not their ad was viewed, and as traditional publishing is passive,
there is no way for an advertiser to accurately determine how many people
viewed their ads, or how many unique views it received. For example, a
magazine purchased at a newsstand might only be viewed by one person on a lone
occasion. However, the same magazine placed in the lobby of a medical office
may be viewed repeatedly by many different (unique) viewers over a period of a
month or longer.
Digital publishing is substantially different yet still similar to
traditional publishing. Revenue models are very similar. Content is provided
usually in the form of multi-media (video and audio) and like traditional
publishing, is provided at a subsidized cost or no charge to the viewers or
subscribers. Just as with traditional publishing, revenues are derived from
the sale of ad space, promotions and sponsorships, and costs are based upon
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each journal's circulation. However, because the Registrant's publishing is
interactive, both the publisher and sponsors (advertisers) can now identify
the viewer, determine which ads were viewed, for how long and even direct
viewer back to the corporate sponsor additional information. Digital
publishing therefore is much more accurate as to its reporting, and when
compared to traditional publishing can be a more efficient and cost-effective
alternative.
Digital publishing however does not have to be interactive. It can be
completely passive so as to require no user interaction. Watching a movie on
DVD is a good example. Because digital media can be displayed, distributed
and produced in such variety, the Registrant is provided with an almost
unlimited opportunity to design and implement custom digital media solutions
for its various customers, consumers and sponsors.
Hollywood Previews(TM) Entertainment Magazine.
The Registrant's initial core product is the Hollywood Previews(TM)
Entertainment Magazine. Hollywood Previews(TM) Entertainment Magazine is
currently handed out at theater box offices and distributed through insertions
in major newspapers and magazines nationally. This video magazine is
distributed at no cost to the viewer, and produced either on CD-ROM or DVD
disk. To date, the Registrant and its predecessor have produced 14 unique
issues, and have distributed over 950,000 CD-ROMs. Currently, each issue
typically contains up to 15 full-length theatrical movie previews along with
celebrity interviews, special behind-the-scenes footage, stills, promotions
and contests. Completely interactive, each CD contains room for up to 15
regional or national corporate sponsorships. New to DVD and new music
releases are also featured with content providers paying for placement and
promotion. Advertisements in this video magazine are not passive, but use
interactive video and other graphical surprises to 'entertain' the viewer as
they move from page-to-page. Because of its interactivity, the Registrant can
secure information about the viewer, see how long was spent viewing previews
and sponsors ads, which ads were most effective, which ads were viewed
multiple times and how many unique individuals viewed them. The Registrant
can then use this data to demonstrate the efficacy of its media to its
sponsors and obtain additional sponsors. The data may also be sold or
provided to studios in harmony with the Registrant's Privacy Policy.
Hollywood Previews Distribution.
To ensure distribution, HPI has entered into a distribution agreement
with Valassis (NYSE: VLC) a major media placement company, for the
distribution of its Hollywood Previews(TM) Entertainment Magazine in various
major U.S. metropolitan newspapers. HPI either has, or is in the process of
distributing Hollywood Previews(TM) Entertainment Magazine in the New York
Times, New York Daily News(TM), The Chicago Tribune(TM), the Los Angeles
Times(TM) and other major Sunday newspapers. Through its relationship with
Valassis, HPI can reach over 55 million households each Sunday for
distribution of its various publications. HPI is now able to do more than
just insert CD-ROM's into newspapers. Through Valassis, HPI can now poly-bag
the entire Sunday newspaper with its advertising and disk. HPI now can place
its products on the "cover" of major national newspapers. HPI is in
discussions with Valassis for an exclusive distribution agreement. The terms
and conditions of this agreement are still being discussed and may never be
formalized.
In addition to newspaper distribution, Hollywood Previews(TM)
Entertainment Magazine will also be distributed in various other ways. HPI
intends to distribute at various national retail stores, public events and
through national magazines. Recently, Johnnie Walker(TM) scotch was the sole
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sponsor for 217,000 disks inserted in the New Yorker(TM) Magazine and for and
additional 30,000 disks distributed directly in theaters.
HPI has completed 14 issues of Hollywood Previews(TM) Entertainment
Magazine, and intends upon producing four quarterly issues each year in
addition to several special editions.
HPI has obtained from a related party the exclusive license for the
proprietary source code, trademarks and templates powering the Hollywood
Previews(TM) Entertainment Magazine. Because of the modular nature of this
code, its underlying architecture can be reproduced again and again for each
digital magazine product. As primary source code does not have to be
re-written for each new product or issue, the Registrant can offer one-off's,
special editions or other on-request productions without incurring additional
coding costs.
Additional Publications.
In addition to the Hollywood Previews(TM) Entertainment Magazine, the
Registrant intends to develop a series of other interactive video magazines
catering to the sports, music, television, travel and leisure industries,
and/or to produce special one-off products for national sponsors upon request.
The Registrant may form wholly owned or jointly-owned subsidiary companies for
the ownership and/or distribution of these additional, yet-to-be-developed
products, and/or to participate in joint ventures with other parties that may
provide content, distribution or other consideration in connection with these
products. (see "Subsidiary Operations" and "Risk Factors")
Las Vegas Previews(TM) Magazine.
HPI has completed a demonstration version of its Las Vegas Previews(TM)
Magazine, and intends to begin publication of this bi-monthly journal through
a joint venture with its majority-owned subsidiary, LVP. As of September 1,
2003, HPI owned 80% of the membership units of LVP. Future dilution will
occur as investors and other key management is retained. Las Vegas continues
to be the number one tourist destination in the world. This newly formed
subsidiary will be operated by Michael Mack. Mr. Mack is a long-standing Las
Vegas resident and actively involved in Las Vegas politics and civic affairs.
Mr. Mack has many personal and business affiliations with hotels, casinos and
convention committees and organizers. In addition, Mr. Mack has extensive
advertising, sales and marketing experience through his public relations firm.
In a model replicating Hollywood Previews(TM) Entertainment Magazine,
content will be acquired from major hotel and casinos, the Las Vegas
Historical Society and other not-for-profit organizations benefiting Las
Vegas. Hotels and casinos may initially be promoted at no charge, with
sponsors subsidizing production and distribution costs. Upon launch of the
magazine to a sizable distribution, hotels and casinos will be charged a
placement fee to have their up-and-coming shows and attractions included in
the magazine. The Magazine will also be sponsored by select national
advertisers. Las Vegas Previews(TM) Magazine is targeted to be distributed in
special editions of the Sunday Los Angeles Times and other major newspapers
that service the Las Vegas Market. As with Hollywood Previews(TM)
Entertainment Magazine, Las Vegas Previews Magazine is expected to be
distributed by Valassis via similar poly-bag cover.
Sports Magazines.
The Registrant views the development of various sports magazines as a
natural development to its publishing library. The Registrant intends to
license or partner with various professional sporting associations to produce
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and distribute interactive sports magazines. The Registrant has began a
dialog with the Los Angeles Dodgers, and has contracted for a short-run of
50,000 disks to promote a special Dodgers music concert held at Dodgers
Stadium on August 30, 2003.
The Registrant sees the opportunity to create new interactive,
multi-media magazines featuring baseball, NFL football, NBA basketball, PGA
golf, NASCAR and other sporting content. These magazines may be published
either as joint ventures with or under license from the various associations.
Magazines could be distributed both at sporting events (as an "add value" to
ticket holders), through traditional print magazines catering to the sports
demographic audience, or through major newspapers like Hollywood Previews
Entertainment Magazine.
Real Time Reporting System.
As with Hollywood Previews(TM) Entertainment Magazine, each of HPI's
proposed new publications will incorporate HPI's proprietary, real time
reporting system. This will allow HPI to generate instant reports as to
consumer reaction, time spent viewing, consumer interests and other data
informative to sponsors and content providers. HPI intends on distributing
special opt-in "survey" disks with each issue that will allow consumers the
opportunity to express their views and opinions on specific content or sponsor
related issues. HPI can either provide this data to committed sponsors as an
ad-value, or may elect to charge sponsors and content providers for this
useful data.
Business Competition.
The Registrant is currently unaware of any direct competition with its
Hollywood Previews(TM) or Las Vegas Previews. The Registrant's core product
is unique both in its compilation, production and method of distribution.
However, because the theatrical movie trailers and music videos HPI uses for
its core content are readily available to other competitors, and because the
underlying technologies incorporating CD-ROM and DVD media are not
proprietary, the Registrant foresees future competition as a reality.
Presently, Registrant's competition comes from three sources, (1) Online,
Internet-based entertainment websites; (2) traditional print media magazines
dedicated to entertainment; and (3) large, established publishing companies
looking to amend their traditional print magazines with digital content.
Internet Competition.
With recent advances in video compression technology and the increasing
availability of broadband access to consumers, computer users who wish to view
theatrical trailers or listen to music may now do so online. There are
various websites devoted to the entertainment industry that have the
capability to stream or serve movie previews and other multi-media content.
With each new major motion picture release, a website is usually created by
the Studio to assist in the promotion of the film. These sites provide
viewers the ability to watch and in some cases download movie previews. These
web sites are created and operated usually at a loss by the studios or film
distributors, and have a limited term of operation. Commercial web sites that
stream or serve movie previews face significant challenges involving bandwidth
and connectivity that can be very expensive to overcome. As most consumers
are not willing to pay to view movie previews, Internet subscription models
are not viable. Conversely, because of stringent copyright issues, some
online companies may not be able to charge users for viewing studio owned
trailers without paying them a royalty. Therefore, entertainment-based web
sites must rely upon revenues generated by banner or other advertising,
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merchandising or studio participation in order to subsidize the cost involved
in serving movie previews to a large audience. The exceptions are sites like
AOL and Yahoo that now offer streaming movie previews directly from their home
page. These major ISP's have already developed the infrastructure necessary
to stream video content to a mass audience. Although entertainment content
will continue to be readily available to consumers via the internet,
significant download times and streaming video quality will remain
problematic.
Traditional Print Competition.
Traditional magazines will continue to play a prominent role in
delivering content, news and information. Revenues generated from print media
constitute the majority of publishing revenues derived worldwide. Magazines
that cater to entertainment may be well established and have vast circulation.
These magazines can attract a larger and more diverse group of sponsors than
HPI. These magazines may be very well funded and/or have national brand
recognition.
However, traditional magazines and print media will always be
two-dimensional. Their format can never duplicate the experience of fully
interactive multi-media. HPI views traditional entertainment magazines
(People, Us, In Style, Rolling Stone) not as direct, but as vicarious
competition. Also, whereas consumers must purchase or subscribe to print
magazines, HPI Previews(TM) will be distributed free of charge further
incentivizing consumers to view its contents.
Traditional print media has always lacked the capacity to report back to
sponsors accurate data as to the effectiveness of sponsor's ad campaigns.
Other than though interpolation of circulation and reader poll data, neither
publishers nor sponsors can provide accurate determinations of reader
interest. Traditional publishers can make only best-effort judgments about
consumer response, ad placement etc. Through proprietary data-mining
technology, HPI has the ability to report accurate and real-time data to
sponsors as to the effectiveness of their advertising. This real-time
auditing capability is very unique in the publishing industry and may prove to
be a substantial advantage to HPI in securing sponsors.
The Registrant forsees that, over time, large established publishers
eventually will begin creating their own proprietary digital content to amend
and enhance their printed publications. The Registrant therefore desires to
become pro-active to this competitive threat. As the initial cost to develop
and perfect the coding, templates and functionality of an interactive disk
could exceed several million dollars, the Registrant intends to form new joint
ventures with these publishers, or enter into license agreements that will
allow them to employ the Registrant's proprietary I-Publishing Software Suite.
By doing so, the Registrant may be able to convert potential competition into
revenue producing partnerships.
Sales and Marketing
The initial and primary markets for the Registrant's products and
services will be in the United States, and consist of the sale of sponsorships
(advertisements) for its publications. In addition to securing national
sponsors, the Registrant is also concentrating sales and marketing activity
directly to movie studios and record companies. As distribution increases, it
is anticipated that these studios and record labels will be asked to pay a
placement fee for inclusion of their movie and music previews in Company
publications. As the Registrant expands its operations and secures additional
sponsors, the Registrant intends on marketing other national brands and other
regional sponsors for special "one-off "interactive media products specially
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designed for a specific industry or consumer demographic.
The Registrant has identified and begun discussions with several media
organizations, media brokers and buying services with existing national
advertising accounts. These include existing publishers or magazines and
newspapers with strong sponsor relationships. Wherever possible, the
Registrant intends, through joint or other ventures, to capitalize on the
existing sales force, client base and distribution base of these companies to
obtain market penetration. These potential partners can also provide
"tip-ins", direct mail, point-of-purchase and other distribution opportunities
that can place Registrant's products in the hands of consumers with greater
efficiency and at less cost than through internal sales and distribution
efforts.
After stabilization, the Registrant intends to develop and secure
international distribution and branding of its products either through joint
ventures with established media and/or content companies, or by organic growth
through the development of foreign subsidiaries.
Operating Units
Presently, the Registrant has only one operating unit, Hollywood
Previews, Inc, with one subsidiary, Las Vegas Previews LLC. LVP will own,
publish and control the Las Vegas Previews Entertainment Magazine. Currently,
HPI owns 80% of LVP, which interest will be diluted upon funding, staffing and
build-out.
Intellectual Property
HPI has obtained the exclusive rights and license (the "License) for the
use of proprietary code, templates, service marks, trademarks, and other
patent and un-patentable devices (collectively the "Intellectual Property")
that Registrant will employ to produce its interactive publications. The
License was acquired from its owner, I-Publishing Inc. ("Licensor"), a closely
related corporation controlled by, and whose beneficial owners are also
principal shareholders and Directors of the Registrant. These individuals and
their respective beneficial ownership of I-Publishing, Inc. are: David
MacEachern (33%), Scott Kapp (33%), and Franklin Unruh (33%).
HPI's exclusive License was effective on April 4, 2003 and is valid for a
term of 99 years. The License can be either assigned, sold, hypothecated,
transferred and/or sub-licensed to other third parties at the sole discretion
of HPI, in accordance with the terms of the License Agreement.
In exchange for the License, HPI will pay a royalty of $0.05 for each
disk HPI produces that uses the Licensor's Intellectual Property in any form.
Licensor may not sell, provide or otherwise assign a similar license to any
other company, nor become a competitor of the Registrant or HPI for as long a
period of time as HPI remains in operation. There are no minimum performance
stipulations in the License Agreement. It is the intent of the Registrant to
permanently acquire the intellectual properties upon stabilization and full
capitalization of the Registrant.
Employees
As of September 1, 2003, the Registrant has approximately 18 employees
and/or full-time independent contractors of whom 10 are involved with graphic,
media or other production, three in sales and marketing, three in accounting
and finance and four in administration. There have never been any employment
issues with employees and the Registrant considers it relationship with its
employees to be satisfactory.
11
The Registrant since its inception has relied heavily upon outside
contractors, consultants, attorneys and other professionals to augment its
employee's operations and aid in the performance of duties. The Registrant
intends to continue employing the use of outside contractors, consultants,
attorneys and other professionals until such time as Registrant may elect to
hire employees to fulfill these obligations.
Legal Proceedings
There are presently no material active, pending or threatened litigation
against the Registrant.
Government Regulation and Other Matters
The Registrant is currently unaware nor can foresee any government
intervention or legislative acts pertaining to the Registrant's industry as
having a materially adverse affect on the Companies operation or viability.
The Registrant is dependent upon certain standard industry practices that if
changed may adversely affect the Registrant's business. The largest and
single-most important factor relates to the dissemination, redistribution and
re-publishing of trademarked or other rights-protected materials currently
available to the Registrant for its use. The Registrant does and will
continue to rely upon the availability of certain media, video clips, audio
clips, photographs, graphics and other collateral materials produced by movie
studios and record companies for the promotion of their products. It is an
industry practice that promotional materials are provided free-of-charge to
established credentialed news or media agencies. These promotional materials
are usually distributed through "press kits" or other special dissemination's
to various media organizations, publishers, TV shows and news organizations
for publication or re-broadcast. Media companies, publishers and broadcaster
then incorporate this copyrighted content into various proprietary programs
and distribute them internationally.
Although the Registrant does not expect a change in the way studios and
record companies distribute or license their copyrighted promotional
materials, should for some reason these promotional materials be unavailable
or should the Registrant be required to pay for the use of these materials,
the Registrant's business could be materially and negatively affected.
In addition, the Registrant's use of celebrity names and/or likenesses,
even when believed to originate from the public domain or when provided as a
part of studio's promotional materials, may be subject to certain rights
protections of which the Registrant may not be made aware, or that may not be
clearly established. Hence, although not anticipated, the Registrant could
face claims arising from the use of these real or perceived intellectual
properties from right holders or other entities who may claim damages based
upon Registrant's unauthorized use or other infringement.
Finally, over the past few years, more and more celebrities have entered
promotional agreements, and have become spokespersons for various consumer
products such as soda, athletic equipment, cars and national brands. It is
possible that the Registrant may create a conflict of interest with these
celebrities and/or their sponsors though passive association with sponsors
advertising in Registrant publications. Although these conflicts currently
exist in traditional media and print magazines (these magazines have numerous
and competing sponsors in the same publications), rights issues and case laws
inherent in digital media are not as clearly defined. Therefore, the
Registrant has determined that it will obtain, and hold in place multi-media
insurance in an amount adequate to protect and defend Registrant should a
problem arise. The Registrant does not at present carry this insurance, but
intends to acquire it as soon as it becomes practical.
12
DESCRIPTION OF PROPERTY.
The Registrant's principal management offices are located at 1721 S. 21st
Street, Santa Monica, California. The property is leased and consists of 2500
square feet of mixed-use office, production and warehouse space.
The Registrant's leased properties consist of the following:
Facility and Location Square Footage Annual Lease Expires
- ----------------------------------- --------------- ------------ -------------
1721 21st Street, Santa Monica, CA 2,500 $37,500 Month-to-month
The Registrant acquired in exchange for a $71,196 short-term note to
I-Publishing Inc., office equipment, computers, servers, audio and video
editing equipment, CD duplication equipment, telephones, desks, chairs and
other miscellaneous equipment for Company operations. In the management's
opinion, the Registrant's facilities and equipment are in overall good
operating condition and meet its immediate needs. However, the Registrant
foresees the need to soon acquire additional or larger facilities in order to
attain and service its projected growth. In addition, the Registrant will
need to acquire additional office equipment, computers and other devices. The
Registrant is dependant upon technology to produce and distribute its
products. For this reason, the Registrant has earmarked substantial capital
for technology, software, licenses, computers and other devices. Due to wear
and obsolescence, the Registrant foresees a continual and substantial amount
of capital will be required for investment in intellectual technologies (IT)
including software, and that IT spending will continue to be a large line
expense for the Registrant for the foreseeable future.
MANAGEMENT'S DISCUSSION AND ANALYSIS.
The following discussion should be read in conjunction with the
Registrant's financial statements and the notes thereto appearing elsewhere in
this Form 8-K. Certain statements contained herein that are not related to
historical results, including, without limitation, statements regarding the
Registrant's business strategy and objectives, future financial position,
expectations about pending litigation and estimated cost savings, are
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Securities Exchange Act") and involve risks and uncertainties. Although the
Registrant 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.
Overview
In August 2003, the Registrant entered into an Agreement and Plan of
Merger with Hollywood Previews, Inc. Pursuant to the Merger Agreement, on the
Closing Date, the shareholders of HPI were issued 55,494,571 shares of common
stock which equals 97% of the issued and outstanding common stock of
Registrant (after giving effect to the conversion of all notes of the
Registrant outstanding immediately prior to the Acquisition). Concurrently
with the Acquisition, all of the Registrants existing officers and directors
resigned and the management of HPI was elected and appointed to such
positions; thereby effecting a change of control. Although HPI became a
wholly-owned subsidiary following the transaction, because the transaction
resulted in a change of control, the Acquisition was recorded as a "reverse
merger" whereby HPI was considered to be the accounting acquirer of the
Registrant. The results of the Registrant previously filed in the past years
are not included herein. The related financial statements are the results of
operations for HPI.
13
Corporate Overview
During the last fiscal year, HPI's attention has been focused on four
areas:
Acquisition of Capital: Management has been actively involved in raising
the necessary capital to begin, and ultimately sustain operations through the
planned scale-up period.
Acquisition of Intellectual and other Properties: Management's efforts
were directed towards (1) obtaining the necessary intellectual properties
required to produce and distribute the Company's publications, (2) securing
additional editorial content from studios and other sources, and (3)
acquisition of corporate sponsors for Company publications.
Strategic Relationships: Management has continued to identify and
establish relationships with new distributors, vendors and joint-venture
partners for the public distribution of Company products.
Production: Management has spent considerable time and resources in the
production and distribution of new issues of Hollywood Previews Entertainment
Magazine, various special editions and the development of additional prototype
publications.
Financial Overview
As of September 1, 2003, HPI had raised approximately $2,265,000 through
the sale of common stock in private placements to various accredited
investors. HPI used such funds to pay for the general and administrative cost
of operations, to complete the acquisition of intellectual and physical
assets, to produce and distribute new issues of Hollywood Previews
Entertainment Magazine, for legal and other professional costs relating to the
reverse merger with the Registrant and for the cost and expenses related to
the private placement.
For the period beginning April 5, 2003 and ending September 1, 2003, on
an un-audited, pro-forma basis, HPI has produced minimal revenues of $38,011
from the production and distribution of Hollywood Previews Entertainment
Magazine and other special edition magazines.
The Company is a successor-in-interest to three closely related
companies: MOD Studios, Inc., The Modern Company LLC and I-Publishing Inc (the
"Predecessor Companies"). Until April 4, 2003 the activities related to the
production and distribution of the Hollywood Previews Entertainment Magazines
were reflected on the financial statements of the Predecessor Companies. On
April 4, 2003, I-Publishing Inc. licensed certain intellectual properties to
HPI. Revenues and expenses related to the production and distribution of the
Magazines subsequent to such date are reflected on the stand-alone financial
statements of HPI. Included in this Form 8-K are the stand-alone financial
statements of HPI and the combined financial statements of the Predecessor
Companies.
On a combined basis, the Company and the Predecessor Companies have
incurred operating losses since inception due to the expenses involved with
production, fundraising and for general and administrative expenses. On an
unaudited pro-forma basis as of September 1, 2003, the Company and the
Predecessor Companies have incurred operating losses of $1,706,439.
Significant expenditures at the corporate level continue. These outlays
include production and distribution costs, fundraising expenses, marketing
expenses, growth initiatives, legal, accounting and other professional fees.
14
Liquidity and Capital Resources
A major variable in the Company's viability will be the timing and amount
of further funds received from the sale of HPI's securities, the ability of
Company to secure sponsorships for its publications, the timing and size of
acquisitions and investments, and the transactional costs required to
consummate them.
The Company may incur future losses from: the development of new
products; the acquisition of licenses and rights to other business, products
and services; research and development activities; limited marketing
activities; and the general and administrative expenses associated with the
above activities. The extent of losses and the time required to reach
profitability are uncertain. There can be no assurance that the Company will
be able to sustain profitability on an ongoing basis. Furthermore, as digital
media and digital publishing are continually developing technologies, the
level of profitability, or lack thereof, cannot be accurately predicted.
The Company's Audit Report includes a "Statement of Going Concern" by the
Company's independent auditing firm. The auditor's conclusions were based in
part on the Company's current negative cash flow and capital deficit. The
Company's future is highly dependent upon its ability to raise additional
capital. The Company will be dependent on the proceeds of these offerings to
fund additional sales and marketing efforts, develop new products, make
strategic investments, and otherwise continue to implement its business
objectives. The failure of the Company to raise sufficient funds will
negatively affect the Company's ability to develop or acquire other businesses
or technologies, make strategic investments, conduct research and development,
protect and defend its intellectual properties, rights and trademarks and
manufacture, distribute and market its products. The Company currently
anticipates that it will continue to require additional financing in order to:
acquire additional targeted technologies; develop new markets; and provide
capital for new entertainment magazines. The Company's capital requirements
will depend on numerous factors, including: the progress and magnitude of the
Company's sales; public acceptance of the Company's publications; advertiser
acceptance of digital media; CD-ROM production fulfillment facilities; delays
in third party production of company products; the cost involved with filing,
prosecuting and enforcing infringement and patent claims; technological
advances; competitor and market conditions; the ability of the Company to
establish collaborative arrangements; and the cost and effectiveness of
commercialization activities and arrangements. It is unlikely that the
Company will be able to satisfy its financing requirements from banks or other
traditional lending institutions. There can be no assurance that the
necessary additional financing will be available to the Company on acceptable
terms, or at all. If additional funding is not available to the Company when
needed, the Company may be required to curtail existing, projected or
developing programs if revenues are not sufficient to fund these activities,
the result of which would have a material adverse effect on the Company's
business and financial condition.
RISK FACTORS
Although the Company will pursue a strategy of product and geographic
diversification, it is not presently broadly diversified and this lack of
diversification may not insulate the Company from market fluctuations.
A key aspect of the Company's long-term strategy is to incorporate
diversification across a number of identified entertainment, publishing and
digital media disciplines. However, the Company has yet to achieve broad
product diversification. Initial operations have been limited to the
production and distribution of the Hollywood Previews(TM) Entertainment
15
Magazine.
By broadening operations, the Company is seeking to reduce its dependency
on any one product, industry or geographic region at any one time, and as
such, reducing its susceptibility to adverse economic circumstances. However,
the close association between advertising revenues and national economic
conditions will continue to expose it in the future to additional risks,
including risks associated with currency valuations and sales fluctuations in
key geographic regions.
Management believes that its multi-disciplinary approach, combined with
the industry and geographic diversification will help insulate the Company
from unforeseen economic, political and/or regulatory pressures that may arise
on a regional basis. However, there is no guarantee against recessions,
regional slow-downs or negative economic conditions that may exist now, or may
occur in the future, in some or many of the Company's key geographic regions.
Negative economic conditions could directly impact the Company's ability to
distribute its products, obtain financing for new productions, future
acquisitions, or continue to grow consistent with Management's expectations.
The Company may not be successful in establishing necessary strategic
alliances.
The Company is seeking to build alliances with leading national sponsors,
media and publishing companies, distributors, financial organizations and
technology companies, and plans to continue its strategy of developing key
alliances in order to expand its reach into the national and international
marketplace. However, there can be no assurance that the Company will be
successful in obtaining ongoing strategic alliances or that the Company will
be able to find further suitable business relationships as it develops
strategies and new products. Any failure to continue or expand such
relationships could have a material adverse effect on the Company's business,
results of operations or financial condition.
Major risks associated with strategic alliances and partnerships are (1)
the lack of control Company may have over these operations, and (2) the
possibility that in the future, the Company's strategic alliances will not
develop or market products in competition with the Company, and/or discontinue
their alliances with the Company or form alliances with the Company's
competitors.
Some of the Company's agreements have not been finalized and terms may differ.
Some of the agreements, negotiations and other business activities
referred to in this memorandum are still in discussion stage and have not yet
been consummated. Depending upon circumstances both inside and outside of the
Company's control, some or all of these agreements may never be consummated,
or, if consummated, the terms and conditions may change materially from the
representations contained herein.
Competition and technological uncertainty exists in the market.
The Company operates in a rapidly evolving field. Competition from other
domestic and foreign companies, media, entertainment, and other institutions
in the areas of product development, product and technology acquisition,
manufacturing and marketing is intense. Competitors may succeed in obtaining
content for their products more rapidly or less expensively than the Company.
Competitors may have already developed, or be in the process of developing
technologies that are, or may be, the basis for competitive products to the
Company's current or planned lines of products. Some of these products may
have an entirely different approach or means of accomplishing the same end
16
results as products currently developed, or contemplated for development, by
the Company.
The Company's competitive position may be adversely affected by
competitive product development or the acceptance and/or integration by the
public or sponsors of new or other forms of digital media, formats or devices
not anticipated or supported by the Company.
Many of the Company's competitors have substantially greater financial,
technical and human resources than the Company. There can be no assurance
that the Company's competitors will not succeed in developing technologies and
products that are more effective or affordable than those being developed by
the Company or that would render the Company's technology and products less
competitive or obsolete.
The Company faces technology risks.
The Company's products are subject to the risks of failure inherent in
the development and testing of products based on innovative or developing
technologies. These risks include the possibilities that Company technology or
any or all of the Company's products may be found to be ineffective, or to
have substantial limitations, or otherwise fail. One or more of the Company's
competitors may achieve patent protection that could have a material adverse
effect on the Company. Although the Company does not currently have any
specific plans to do so, it may prosecute or may be required to defend patent
or trademark infringement litigation or patent interference proceedings with
holders of competitive patents or trademarks. The Company may incur
substantial costs in defending or prosecuting such proceedings. In addition,
such proceedings may impact the Company's competitive position and there can
be no assurance that the Company will be successful in any patent or trademark
litigation.
There is no guarantee that the motion picture studios will continue to provide
the Company with content and movie trailers at no cost.
Presently, the Company is being provided copyrighted theatrical movie
trailers and other copyrighted public dissemination's such as press releases,
behind-the-scenes footage, video clips, celebrity interviews and other
promotional media directly from film studios and other sources at no cost.
This same promotional media is also made available to other companies,
broadcasters and production facilities for their use and incorporation into
various other broadcast mediums and products. Traditionally, this media has
been provided free of charge in the form of industry "Press Kits" and made
available for re-broadcast or re-distribution by third parties without license
or fees. The Company will continue to rely upon the availability of this free
media and content as the key component for the Hollywood Previews
Entertainment Magazine. Although it is not anticipated, should in the future
this content become unavailable, or should at any time studios begin charging
a license or other royalties for the use or re-broadcast of its copyrighted
materials, the Company's ability to continue producing the Hollywood Previews
Entertainment Magazine could be jeopardized, and the production and
distribution of this core Company product could prove non-viable. This would
have an immediate and materially adverse effect upon the Company's revenue
projections, and subsequently affect Company viability.
The Company's future depends, in part, on its Key Personnel, Consultants and
Principal Management's continued participation.
The Company's ability to successfully develop its products, manage growth
and maintain its competitive position will depend, in a large part, on its
ability to attract and retain highly qualified management. The Company is
17
dependent upon its Chief Executive Officer, President, Chief Financial
Officer, and other key members of its management and consulting team.
Competition for such personnel is significant, and there can be no assurance
that the Company will be able to continue to attract and retain such
personnel. The Company's consultants may be affiliated or employed by others
and some may have consulting or other advisory arrangements with other
entities that may conflict or compete with their obligations to the Company.
The Company addresses such potential conflicts by requiring that its
consultants, collaborators and sponsored researchers execute confidentiality
agreements upon commencement of relationships with the Company, by closely
monitoring the work of such persons and by requiring material transfer and
patent assignment agreements wherever possible and appropriate. Inventions or
processes discovered by such persons will not necessarily become the property
of the Company and may remain the property of such persons or others.
Loss of relationships with key suppliers may harm the Company.
Whenever possible, the Company will acquire businesses, products or
product lines which do not rely on a single supplier for raw materials or
finished goods, but there can be no assurance that some products or product
lines will be able to utilize materials or parts except those available
through a single supplier.
Control by Management.
The Company's officers, directors, founders, employees and principal
shareholders currently own a controlling position of the Company's outstanding
stock. Management will be able to elect a majority of the Company's Board of
Directors and will have the ability to control the Company and direct its
business and affairs. This concentration of ownership could have the effect
of delaying or preventing a change in control of the Company.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information (after giving effect
to the issuance of the securities at the Closing) with respect to the
beneficial ownership of the outstanding shares of common stock by the
Registrant's directors, executive officers and each person known to the
Registrant who owns in excess of 5% of the outstanding shares of common stock
and the directors and executive officers of the Registrant as a group. Each
person listed below has personal and sole beneficial ownership of the shares
of common stock listed with their name:
Total Number Percentage
Name/Title of Shares Ownership(1)
------------ ------------ ------------
David MacEachern, CEO and Chairman 11,727,510 20.32%
Scott Kapp, President and Director 10,884,000 18.86%
Franklin H. Unruh, CFO and Director 5,442,000 9.43%
All Directors and Executive Officers
(3 persons) 28,053,510 48.61%
Waletta Far East LTD(2) 5,440,000 9.48%
(1) The percentage ownership is based on 57,711,617 shares outstanding.
(2) Waletta Far East Ltd. Is beneficially owned by Carroll Lavenski.
18
DIRECTORS, EXECUTIVE OFFICERS.
David G. MacEachern, Chairman of the Board and Chief Executive Officer.
Mr. MacEachern has been in the entertainment and advertising business for
over 28 years. As an entrepreneur, he has extensive executive level
experience as a founder and CEO of several successful businesses. His
experience includes developing, and managing companies in as diverse fields as
marketing, advertising, graphic arts, cosmetics and business development.
In 1984, Mr. MacEachern co-founded the David-Scott Advertising; a Los
Angeles based ad agency providing advertising and promotion for local,
regional and national accounts.
While continuing to run David-Scott Advertising, Mr. MacEachern
co-founded and was CEO of Professional Make-up, a cosmetic manufacture with
over $30 million in domestic and international sales. Mr. MacEachern was
instrumental in acquiring distribution rights for Wal-Mart, K-Mart and Target
stores. At Professional Make-Up, his primary responsibilities were developing
marketing strategies, new product development and product promotion.
In 1998 Mr. MacEachern co-founded the Modern Company LLC, a digital
multi-media production house specializing in the application of digital
imaging to the consumer products market. The Modern Company's core
competencies include developing interactive websites, graphic arts and CD-ROM
design.
Scott Kapp, Director and President.
Mr. Kapp has had a long, profitable relationship with Mr. MacEachern
extending back to 1984. A graduate of USC, co-founder and President of
David-Scott Advertising, Mr. Kapp was responsible for negotiating and securing
many of the agency's top clients. His advertising campaign for Ogee hair
products won a Starch Award.
Mr. Kapp also co-founded Professional Make-up. In addition to his role
as President, Mr. Kapp was responsible for the development of ancillary
products, new markets and business development. While at Professional Make-Up,
Mr. Kapp built-out and managed a sales force of 250 independent sales reps and
secured 10 major distributors worldwide.
In 1998 Mr. Kapp along with Mr. MacEachern co-founded the Modern Company
LLC, a digital multi-media production company.
Franklin H. Unruh, Director and Chief Financial Officer.
Mr. Unruh has over 37 years of significant experience in both accounting
and financial consulting. His financial experience comprises an array of
conglomerate corporations ranging from entertainment, film and music
production to food processing and automobile distribution in 4 countries,
South Africa, United Kingdom, Israel and the USA.
From 1980-1986 Mr. Unruh served as Director of Participation's at 20th
Century Fox Films. His duties included managing profit participation's on such
award nominated films as the Star Wars Trilogy and other 20th Century Fox
motion pictures and television programming.
Warner Communications Inc. appointed Mr. Unruh as an International
Internal Auditor and later promoting Mr. Unruh to Controller of Warner Bros.
Music Publishing, the second largest music publishing company in the world.
19
In 1978, A&M Music Publishing recruited Mr. Unruh to serve as Controller
of A&M Music Publishing and later promoted him to Managing Director of ALMO
Publications, A&M Publishing's printed music division.
Mr. Unruh acts as a financial consultant specializing in participations,
residuals and international tax advantage investments for motion picture
clients such as Cinergi, Hemdale Distributing and Streamline Pictures. He
also oversees music production and artist management for his company Hanging
Rock Studios.
Key Management and Employees.
Kelly Konzelman, Executive Vice President.
Mr. Konzelman has extensive experience in corporate development. For the
last six years, his business efforts have focused primarily on corporate
finance, security sales, investment banking and private equity placements.
Mr. Konzelman's company Investment Advisory Group, has consulted with numerous
developing and start-up ventures providing management expertise, implementing
corporate development programs and authoring business plans and private
offering memorandums. These companies were in industries as diverse as
medical devices, cosmetic surgery, media, entertainment, technology,
reclamation and real estate.
As an investment-banking consultant, Mr. Konzelman was responsible for
the successful acquisition of capital for a number of developing companies,
both public and private. As a partner in 360 Financial Services, he
successfully engineered a syndicate of over 120 independent broker dealers to
offer clients private securities placements nationwide.
Mr. Konzelman brings over 22 years of general and executive-level
business experience to the Company. He is currently overseeing the Company
operations, where he is responsible for business affairs, corporate
development and strategic acquisitions.
Kevin D. Plate, Senior Vice President of Sales and Business Development.
Possessing extensive experience in advertising and sponsorship sales,
Mr. Plate has held a variety of increasingly responsible sales and marketing
positions over the past 20 years.
Mr. Plate served as the Western Regional Director for The Golf Channel,
whose high-profile ownership group includes Comcast, Cable, Fox and Times
Mirror Corporation. Through his development of creative sales and marketing
packages for national advertisers, Mr. Plate was responsible for delivering
over $35 million revenue to the first cable network dedicated exclusively to a
single sport.
Mr. Plate executive management also contributed to the success of
Advantage International, the world's second largest sports marketing and
management company, where he used his expertise in strategic planning, new
business development and sales for clients including MasterCard International,
Sara Lee, Tuner Broadcasting and Keebler.
For five years Mr. Plate served in various marketing positions at RJR
Nabisco, a Fortune 500 foods and tobacco producer. Mr. Plate's duties
included leveraging the company's many sports sponsorships and developing
national and market-specific advertising and promotional campaigns for both
the food and tobacco business units.
Mr. Plate responsibilities include implementing the Company's sales and
20
business development plan, and the development of new client-specific products
and special projects.
Board of Directors.
Board Composition.
The Board of Directors is currently composed of three directors. The
Registrant intends to establish two standing committees of the Board of
Directors: a Compensation Committee and an Audit Committee. The Compensation
Committee will recommend to the Board the base salaries and incentive bonuses
for the officers of the Company and will be charged with administering the
Company's Stock Compensation Program. The Audit Committee will be composed of
independent directors and will review the functions of management and the
Registrant's independent auditors pertaining to its financial statements and
perform such other related duties and functions as are deemed appropriate by
the Audit Committee or the Board. The Registrant does not intend to establish
a standing nominating committee or other committee performing similar
functions.
EXECUTIVE COMPENSATION.
The following Summary Compensation Table sets forth the compensation
earned by the Company's Chief Executive Officer. There were no other
executive officer(s) who were serving as such as of December 31, 2002, whose
aggregate compensation for the 2002 fiscal year exceeded $100,000 for services
rendered in all capacity for that fiscal year.
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
Awards Payouts
------------------------------ --------------------- -----------------
Securities
Other Under- All
Name and Annual Restricted lying- LTIP Other
Principal Salary Bonus Compen- Stock Options/ Payouts Compen-
Position Year ($) ($) sation($) Award(s)($)SAR's(#) ($) sation($)
(a) (b) (c) (d) (e) (f) (g) (h) (i)
- --------------------- ----- ----------- --------- ---------- ---------- ---------- ------- ---------
<s> <c> <c> <c> <c> <c> <c> <c> <c>
David MacEachern, CEO 2002 $ 108,634 - - - - - -
2001 $ 143,000 - $ 38,500 - - - -
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Registrant has engaged in transactions in excess of $60,000 during
the past two years involving our executive officers, directors and more than
5% stockholders. The following is a summary of various related party
transactions that have occurred, are pending, or will occur in the future.
This summary is not, and does not purport to be a complete description of the
details of each and every transaction. It is provided solely for the purpose
of disclosing the existence of certain transactions, their history, potential
conflicts of interest and the associated risks to investors as they pertain to
the Registrant, its operations or viability.
21
Exclusive License and Royalties for Intellectual Properties.
HPI has obtained an exclusive license(s) to exploit certain intellectual
properties from another closely related party, I-Publishing Inc. ("Licensor"
and "I-Publishing"). Licensor obtained the Intellectual Property indirectly
from MOD Studios Inc., which acquired it from The Modern Company LLC.
I-Publishing, Inc, MOD Studios, Inc. and The Modern Company are all
closely related companies. MOD Studios Inc. subsequently became insolvent and
was unable to service its liabilities.
Mr. Franklin Unruh ("Unruh"), the principal secured creditor of MOD
Studios Inc. acquired certain physical and intellectual assets of MOD Studios
Inc. pursuant to foreclosure. Unruh then contributed the Intellectual
Properties to I-Publishing in exchange for preferred shares. I-Publishing
thereafter entered into a license agreement with HPI, granting HPI exclusive
rights to exploit the Intellectual Property in accordance with the License
Agreement. In exchange, HPI agreed to pay I-Publishing a royalty of $0.05 for
each disk produced and distributed by HPI that incorporated any form of the
licensed intellectual properties. The License Agreement is for a term of 99
years, and royalties will be paid to the I-Publishing in perpetuity.
I-Publishing also sold physical business assets to the Registrant in exchange
for a note in the amount of $71,196. This note has since been repaid.
Intent by HPI to Acquire Intellectual Property from I-Publishing Inc.
As per the terms of the License Agreement, HPI has the first right to
purchase the Intellectual Properties for fair market value at any time during
the term of the license. The Registrant intends to exercise this purchase
option at some future time. The proceeds of this sale would directly benefit
and inure to the beneficial owners of the I-Publishing, which members
currently are also principal shareholders in the Company.
Intent to Use Related Companies as Contractors or Consultants.
Compensation (salary) may be paid to the Registrant's primary and
executive management either as an individual, or as an independent contractor.
This includes certain executives of the Registrant who are also the primary
owners and directors of I-Publishing Inc. The majority of all executive
compensation will be paid directly to I-Publishing, for distribution as
directed by executive. To comply with GAAP requirements and to accurately
disclose the total amount of executive compensation, all monies paid to
executive both as an individual (employee) or to a related entity (consultant
or independent contractor) shall be classified and listed on the Registrant's
financial statement as "executive compensation".
In addition to the License Agreement and executive compensation, the
Registrant may engage in ongoing business with I-Publishing, and/or other
entities with whom officers or directors of the Registrant may have a
relationship or a beneficial interest. Should Company elect to do business
with any related party, the Registrant will not pay more than fair, reasonable
and competitive rates for these services. The Registrant intends to use
closely related companies as outside contractors, or to consult with the
Registrant to develop, test, produce or assist in the development of new
company products and services.
Possible Future Acquisition of I-Publishing Inc.
The Registrant intends to eventually acquire the intellectual properties
licensed from I-Publishing. In addition, the Registrant may also consider the
acquisition of I-Publishing, Inc. As the intellectual property and License
22
Agreement will continue to be the primary asset of I-Publishing, this
strategic acquisition may be in the interest of the Registrant and its
shareholders.
Provided an agreement to purchase I-Publishing Inc. could be obtained,
the value of the License Agreement for Intellectual Properties could then be
present-valued, and this appraisal used as the basis for determining the
actual value of the acquisition. The acquisition could then be made either
using Company's common shares or preferred shares, or a combination of shares
and notes.
As beneficial ownership of I-Publishing is similar to the principal
beneficial ownership of the Company, this acquisition, if consummated, would
result in the reverse-dilution for the Registrant's principal shareholders,
and would result in a stronger control position by Company insiders and
management.
DESCRIPTION OF SECURITIES.
The Registrant is authorized to issue 500,000,000 shares of common stock
with a par value of $0.001 per share, of which 57,711,617 shares were issued
and outstanding as of August 29, 2003. All shares of common stock have equal
rights and privileges with respect to voting, liquidation and dividend rights.
Each share of common stock entitles the holder (i) to one non-cumulative vote
for each share held of record on all matters submitted to a vote of the
stockholders, (ii) to participate equally and to receive any and all such
dividends as may be declared by the Board of Directors out of funds legally
available; and (iii) to participate pro rata in any distribution of assets
available for distribution upon liquidation of the Company. The Registrant's
stockholders have no preemptive rights to acquire additional shares of common
stock or any other securities. The Registrant is also authorized to issue up
to 20,000,000 shares of preferred stock, $0.001 par value, in such series and
with such rights and preferences as are determined by the Board of Directors.
The Registrant has not designated any such series of preferred shares and no
preferred shares are issued and outstanding as of the date hereof.
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND OTHER
SHAREHOLDER MATTERS.
There is currently no established trading market for the Registrant's
common stock. Although the Registrant's common stock has been listed on the
"pink sheets" since early 1999, symbol "IRVP", the Registrant's market has
been inactive since mid-1999 with only a few isolated transactions at
approximately $.01 per share. As of December 31, 2002 the Registrant had
approximately 276 shareholders of record holding 11,527,546 common shares.
11,000,000 shares were subsequently cancelled by the Registrant leaving a
total of 527,546 shares outstanding. 55,494,571 additional shares were then
issued to the shareholders of HPI and an additional 1,600,000 shares were
committed to be issued to non-affiliates through the conversion of outstanding
notes over two years old. These 1,600,000 shares are subject to a one-year
lock-up and leakage agreement restricting the sale or transfer thereof. These
shares will not be available for resale until March 1, 2004, whereupon
shareholders may sell up to 12,5000 shares per week, or the total amount upon
the Registrant's common shares being listed on the American Stock Exchange or
NASDAQ.
Of the 55,494,571 restricted shares remaining, 2,823,089 may be available
for resale beginning August 20, 2004, subject to the Registrant completing an
effective registration statement for these shares. The remainder of the
outstanding shares are restricted either under Rule 144 or by a Shareholder's
Agreement for a term of not less than two years or until August 29, 2005.
23
The Registrant has granted warrants to purchase up to 40,000 common
shares to the Registrant's placement agent as commission for prior offerings
of which it must register. A subsidiary of the Registrant has also issued
securities convertible to common stock of the Registrant. Should all of the
Registrant's outstanding derivative and/or convertible securities be exercised
or converted, an additional 2,350,000 restricted common shares would be
outstanding.
The Registrant has never paid cash or stock dividends on our common stock.
The Registrant has no present plan to pay any dividends, but intend to
reinvest its earnings, if any.
LEGAL PROCEEDINGS.
The Registrant is not a party to any legal proceedings or threatened
proceedings as of the date of this filing
RECENT SALES OF UNREGISTERED SECURITIES.
The following securities have been sold by the Restistrant without
registration within the past three years.
In October of 2000, the Resgistrant issued an aggregate of 416,932 shares
of common stock to one individual(s) for cash of $400 ($0.001 per share).
Between December 18, 2000 and October 1, 2002, the Registrant issued six
Convertible Notes which are convertible into an aggregate of 2,885,000 common
shares, as follows:
Conversion
Date Principal Holder Due Date Into Shares
12/18/2000 $6,000 Stephen Cartisano 12/31/2001 600,000
03/08/2001 $2,000 David Cartisano 12/31/2001 100,000
03/28/2001 $3,100 Jennifer Cartisano 12/31/2001 150,000
04/02/2001 $29,988 Sussex Financial 12/31/2001 1,500,000
Group, Ltd.
("Sussex")
09/06/2002 $2,700 North American 12/31/2003 135,000
Marketing Inc.
10/01/2002 $8,000 North American 12/31/2003 400,000
Marketing Inc.
Concurrently with the closing of the Acquisition, all of the noteholders
except Sussex agreed to waive their rights to enforce the notes. Sussex has
agreed to convert its note into 1,600,000 shares of the Registrant's Common
Stock.
On September 5, 2002, the Registrant issued 11,000,0000 shares to the
following individuals for cash totaling $20,000 (or $.002 per share): 200,000
shares each to Howard Abrams, David Abrams, Matthew Foulger, Stephanie
Harnicher, and Ed Johnson; and 10,000,000 shares to Gerald Curtis, the
Registrant's then sole officer and director. Gerald Curtis subsequently sold
his 10,000,000 shares to Kanona Moeai for $0.002 per share when Mr. Moeai took
office on November 1, 2002.
In connection with the Acquisition, the Registrant issued 55,494,571
shares to the shareholders of HPI. The shares were issues pursuant to an
exemption provided by Section 4(2) of the Securities Act of 1933, as amended
(the "Securities Act").
In private placements occurring between February 1 and August 29, 2003,
HPI issued an aggregate of 2,598,333 shares (2,823,089 on a post Acquisition
24
basis) to accredited investors and 7,000,000 shares (7,432,500 on a post
Acquisition basis) to the Placement Agent and its designees. The shares were
issued pursuant to an exemption provided by Section 4(2) of the Securities
Act.
INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our amended and restated articles of incorporation do not provide for any
specific indemnification provisions. Article X of our bylaws provides that we
may indemnify "any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed claim, action, suit or
proceeding, whether civil, criminal, administrative or investigative (other
than an action by or in the right of the Corporation) by reason of the fact
that he is or was a director, officer, employee or agent of the Corporation,
or is or was serving at the request of the Corporation as a director, partner,
officer, employee or agent of another Corporation, partnership, joint venture,
trust or other enterprise, against expenses (including attorneys' fees
inclusive of any appeal), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such claim, action,
suit or proceeding if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Corporation, and
with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct unlawful. The termination of any claim, action, suit or
proceeding by judgment, order, settlement, conviction, or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a presumption that
the person did not act in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of the Corporation,
and, with respect to any criminal action or proceeding, had reasonable cause
to believe that his conduct was unlawful."
Article X also provides that "the Corporation may indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed claim, action or suit by or in the right of the
Corporation to procure a judgment in its favor by reason of the fact that he
is or was a director, officer, employee or agent of the Corporation, or is or
was serving at the request of the Corporation as a director, partner, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against expenses (including attorneys' fees inclusive of any
appeal) actually and reasonably incurred by him in connection with the defense
or settlement of such claim, action or suit if he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the Corporation and except that no indemnification shall be made in respect of
any claim, issue or matter as to which such person shall have been adjudged to
be liable for negligence or misconduct in the performance of his duty to the
Corporation unless and only to the extent that a court of competent
jurisdiction (the "Court") in which such claim, action or suit was brought
shall determine upon application that, despite the adjudication of liability
but in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Court shall deem
proper."
In addition, to the extent that a director, officer, employee or agent of
the Irvine Pacific has been successful on the merits or otherwise in defense
of any claim, action, suit or proceeding , or in defense of any claims, issue
or matter therein, he shall be indemnified against expenses (including
attorneys fees inclusive of any appeal) actually and reasonably incurred by
him in connection therewith, notwithstanding that he has not been successful
(on the merits or otherwise ) on any other claim, issue or matter in any such
claim, action, suit or proceeding.
Section 4 of Article X of our bylaws states that "Any indemnification
25
under Sections 1 and 2 of this Article X (unless ordered by a court) shall be
made by the Corporation only as authorized in the specific case upon a
determination that indemnification of the director, officer, employee or agent
is proper in the circumstances because he has met the applicable standard of
conduct set forth in Sections 1 and 2. Such determination shall be made (a) by
the Board of Directors by a majority vote of a quorum consisting of directors
who were not parties to such action, suit or proceeding, or (b) if such a
quorum is not obtainable, or, even if obtainable, a quorum of disinterested
directors so directs, by independent legal counsel in a written opinion, or
(c) by the shareholders."
We have also made the provision in our bylaws that expenses incurred in
defending a civil or criminal action, suit or proceeding may be paid by Irvine
Pacific in advance of the final disposition of such action, suit or proceeding
as authorized by the Board of Directors in the specific case upon receipt of
an undertaking by or on behalf of the director, officer, employee or agent to
repay such amount unless it shall ultimately be determined that he is entitled
to be indemnified by us.
The indemnification provided by our bylaws, which incorporates the
provisions of Colorado Statutes Article 7-102 through 7-110 is exclusive of
any other rights to which those indemnified may be entitled under any statute,
rule of law, provision of the Certificate of Incorporation, by-law, agreement,
vote of shareholders or disinterested directors, or otherwise, both as to
action in his official capacity and as to action in another capacity, while
holding such office, and shall continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person. Where such other
provision provides broader rights of indemnification than these by-laws, said
other provision shall control.
Irvine Pacific also has power to purchase and maintain insurance on
behalf of any person who is or was our director, officer, employee or agent of
or is or was serving at our request as a director, partner, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise against any liability asserted against him and incurred by him in
any such capacity, or arising out of his status as such, whether or not we
would have the power to indemnify him against such liability under the other
indemnification provisions of our bylaws.
Item 5. Other Events.
In connection with the Acquisition, the Registrant has moved its
principal executive offices from 3871 South Eagle Point Drive, Salt Lake City,
Utah, 84109 to 1721 Twenty First Street, Santa Monica, CA 90404.
Item 7. Financial Statement, Pro Forma Financial Information and Exhibits.
a) Financial Statements of Businesses Acquired.
The Financial Statements of HPI on a stand-alone basis and the
Predecessor Companies on a combined basis are set forth at the end hereof.
b) Pro Forma Financial Information.
Pro Forma Financial Information as of December 31, 2002 and June
30,2003 (as if the Acquisition had occurred as of the earliest date presented)
is set forth at the end hereof.
c) Exhibits.
2.1 Agreement and Plan of Merger, dated as of August 18, 2003
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
IRVINE PACIFIC CORPORATION
Date: September 12, 2003 By: /s/ David MacEarchern
---------------------
Name: David MacEachern
Title: Chief Executive Officer
27
HOLLYWOOD PREVIEWS, INC.
CONTENTS
December 31, 2002 and June 30, 2003 (unaudited)
==============================================================================
Page
INDEPENDENT AUDITOR'S REPORT F-2
FINANCIAL STATEMENTS
Balance Sheets F-3 - F-4
Statements of Operations F-5
Statements of Shareholders' Equity F-6
Statements of Cash Flows F-7 - F-9
Notes to Financial Statements F-10 - F-19
F-1
28
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders of
Hollywood Previews, Inc.
We have audited the accompanying balance sheet of Hollywood Previews, Inc. as
of December 31, 2002, and the related statements of operations, shareholders'
equity, and cash flows for the period from July 22, 2002 (inception) to
December 31, 2002. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hollywood Previews, Inc. as
of December 31, 2002, and the results of its operations and its cash flows for
the period from July 22, 2002 (inception) to December 31, 2002 in conformity
with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. However, during the period from
July 22, 2002 (inception) to December 31, 2002, the Company did not have any
significant operations, had related party debt of $325,000, and was highly
dependent on equity and debt financing. These factors, among others, as
discussed in Note 2 to the financial statements, raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 2. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Singer Lewak Greenbaum & Goldstein LLP
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
August 12, 2003
F-2
29
HOLLYWOOD PREVIEWS, INC.
BALANCE SHEETS
December 31, 2002 and June 30, 2003 (Unaudited)
==============================================================================
ASSETS
June 30, December 31,
2003 2002
------------- -------------
(unaudited)
Current assets
Cash $ 251,328 $ -
Accounts receivable 37,500 -
------------- -------------
Total current assets 288,828 -
Property and equipment, net 62,499 -
Due from affiliate, net of reserve
of $850,173 (unaudited) and $0 75,000 390,000
Other assets 7,500 -
------------- -------------
Total assets $ 433,827 $ 390,000
============= =============
The accompanying notes are an integral part of these financial statements.
F-3
30
HOLLYWOOD PREVIEWS, INC.
BALANCE SHEETS
December 31, 2002 and June 30, 2003 (Unaudited)
==============================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, December 31,
2003 2002
------------- -------------
(unaudited)
Current liabilities
Accounts payable and accrued expenses $ 13,654 $ -
Notes payable - related parties 78,696 325,000
------------- -------------
Total current liabilities 92,350 325,000
------------- -------------
Commitments
Shareholders' equity
Preferred stock, $1,000 par value
5,000,000 shares authorized
0 (unaudited) and 0 shares issued
and outstanding - -
Common stock, no par value
100,000,000 shares authorized
35,703,333 (unaudited) and no shares
issued and outstanding 1,690,751 -
Subscription receivable (130,000) -
Common stock committed, 16,707,761 (unaudited)
and 38,500,000 shares 195,000 65,000
Accumulated deficit (1,414,274) -
------------- -------------
Total shareholders' equity 341,477 65,000
------------- -------------
Total liabilities and shareholders' equity $ 433,827 $ 390,000
============= =============
The accompanying notes are an integral part of these financial statements.
F-4
31
HOLLYWOOD PREVIEWS, INC.
STATEMENTS OF OPERATIONS
For the Period from July 22, 2002 (Inception) to December 31, 2002 and
for the Six Months Ended June 30, 2003 (unaudited)
==============================================================================
For the
Period from
For the July 22,
Six Months 2002
Ended (Inception) to
June 30, December 31,
2003 2002
------------- -------------
(unaudited)
Net sales $ 37,500 $ -
Cost of sales 32,411 -
------------- -------------
Gross profit 5,089 -
Operating expenses 567,879 -
Reserve for collection of receivable
due from affiliate 850,173 -
------------- -------------
Loss from operations (1,412,963) -
------------- -------------
Other expense
Interest expense (511) -
------------- -------------
Loss before provision for income taxes (1,413,474) -
Provision for income taxes 800 -
------------- -------------
Net loss $ (1,414,274) $ -
============= =============
The accompanying notes are an integral part of these financial statements.
F-5
32
HOLLYWOOD PREVIEWS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
For the Period from July 22, 2002 (Inception) to December 31, 2002 and
for the Six Months Ended June 30, 2003 (unaudited)
===========================================================================================================
Common Stock
--------------------------- Subscription Committed Accumulated
Shares Amount Receivable Stock Deficit Total
------------- ------------- ------------- ------------ ------------ -------------
Balance, July 22, 2002
(Inception) - $ - $ - $ - $ - $ -
Common stock committed
for interest payable - - - 50,000 - 50,000
Common stock committed
for consulting - - - 15,000 - 15,000
Net loss - - - - - -
------------- ------------- ------------- ------------ ------------ -------------
Balance, December 31, 2002 - - - 65,000 - 65,000
Issuance of common stock
to founders (unaudited) 33,500,000 - - - - -
Issuance of common stock
for debt conversion
(unaudited) 200,000 150,000 - - - 150,000
Issuance of common stock
for cash (unaudited) 2,003,333 1,570,000 - - - 1,570,000
Subscription receivable
(unaudited) - - (130,000) 130,000 - -
Offering costs (unaudited) - (29,249) - - - (29,249)
Net loss (unaudited) - - - - (1,414,274) (1,414,274)
------------- ------------- ------------- ------------ ------------ -------------
Balance, June 30, 2003
(unaudited) 35,703,333 $ 1,690,751 $ (130,000) $ 195,000 $(1,414,274) $ 341,477
============= ============= ============= ============ ============ =============
The accompanying notes are an integral part of these financial statements.
F-6
33
HOLLYWOOD PREVIEWS, INC.
STATEMENTS OF CASH FLOWS
For the Period from July 22, 2002 (Inception) to December 31, 2002 and
for the Six Months Ended June 30, 2003 (unaudited)
=========================================================================================
For the
Period from
For the July 22,
Six Months 2002
Ended (Inception) to
June 30, December 31,
2003 2002
-------------- --------------
(unaudited)
<s> <c> <c>
Cash flows from operating activities
Net loss $ (1,414,274) $ -
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation 8,697 -
Reserve for collection of receivable
due from affiliate 850,173 -
(Increase) decrease in
Accounts receivable (37,500) -
Other assets (7,500) -
Increase (decrease) in
Accounts payable and accrued expenses 13,654 -
-------------- --------------
Net cash used in operating activities (586,750) -
-------------- --------------
Cash flows from investing activities
Due from affiliate (535,173) -
-------------- --------------
Net cash used in investing activities (535,173) -
-------------- --------------
Cash flows from financing activities
Payments on notes payable - related parties (175,000) -
Proceeds from notes payable - related parties 7,500 -
Offering costs (29,249) -
Proceeds from issuance of common stock 1,570,000 -
-------------- --------------
Net cash provided by financing activities 1,373,251 -
-------------- --------------
The accompanying notes are an integral part of these financial statements.
F-7
34
HOLLYWOOD PREVIEWS, INC.
STATEMENTS OF CASH FLOWS
For the Period from July 22, 2002 (Inception) to December 31, 2002 and
for the Six Months Ended June 30, 2003 (unaudited)
=========================================================================================
For the
Period from
For the July 22,
Six Months 2002
Ended (Inception) to
June 30, December 31,
2003 2002
-------------- --------------
(unaudited)
<s> <c> <c>
Net increase in cash $ 251,328 $ -
Cash, beginning of period - -
-------------- --------------
Cash, end of period $ 251,328 $ -
============== ==============
Supplemental disclosures of cash flow information
Income taxes paid $ 800 $ -
============== ==============
The accompanying notes are an integral part of these financial statements.
F-8
35
HOLLYWOOD PREVIEWS, INC.
STATEMENTS OF CASH FLOWS
For the Period from July 22, 2002 (Inception) to December 31, 2002 and
for the Six Months Ended Jun e 30, 2003 (unaudited)
==============================================================================
Supplemental schedule of disclosures of non-cash investing and financing
activities
During the year ended December 31, 2002, $50,000 of a $225,000 note payable
was converted into 2,500,000 shares of common stock of the Company that the
Company was committed to issue.
During the six months ended June 30, 2003, the Company completed the
following:
.. converted $150,000 (unaudited) of notes payable into 200,000 shares
(unaudited) of common stock, of which $50,000 (unaudited) was for interest
due on the note.
.. purchased equipment valued at $71,196 (unaudited) from a
shareholder/officer in exchange for a note payable.
F-9
36
HOLLYWOOD PREVIEWS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2002 and June 30, 2003 (Unaudited)
==============================================================================
NOTE 1 - ORGANIZATION
General
- -------
Hollywood Previews, Inc. (the "Company") was incorporated on July 22, 2002 in
the state of California and is a publisher of interactive, digital,
multi-media publications on CD-ROM, DVD, the Internet, television, and
interactive television. The Company distributes an entertainment magazine on
CD-ROM and DVD that features movie previews, video games, and television
previews, plus interviews with stars, behind the scenes videos, music
soundtracks and music videos, Hollywood fashion and style, and other
entertainment news. The magazine is also distributed through major Sunday
newspapers. It is also targeted to specific households and handed out at
movie theater box offices on a national basis.
Revenues are generated from the sale of paid advertising sponsorships,
licensing, content placements, and e-commerce fees, plus the sale to
advertisers and content providers of the Company's proprietary Usage Report
that monitors the use of the disk by its audience.
On April 5, 2003, the following occurred:
.. An affiliated company, I-Publishing, Inc. ("I-Publishing") licensed to the
Company the exclusive rights to use I-Publishing's intellectual property.
I-Publishing is to receive annual royalties for each CD distributed.
.. The Company purchased property and equipment from I-Publishing that
I-Publishing had purchased from a shareholder/officer. The transaction
has been accounted for at the carry-over basis of the assets at which they
were obtained by the shareholder/officer of I-Publishing.
Combined Financial Statements
- -----------------------------
The Company is a member of an affiliated group (the "affiliated group"), which
includes I-Publishing, MOD Studios, Inc. ("MOD Studios"), and The Modern
Company, LLC ("The Modern Company"). If the financial statements were
presented on a combined basis with the affiliated group, the pro forma impact
on the financial condition and results of operations of the Company for the
year ended December 31, 2002 would be as follows:
Affiliated Combining Combined
As Reported Group Entries Basis
------------- ------------ ------------ ------------
Balance sheet
Current assets $ - $ 200,811 $ - $ 200,811
Property and equipment - 71,196 - 71,196
Due from affiliate 390,000 - (390,000) -
Other assets - 700 - 700
------------- ------------ ------------ ------------
Total assets $ 390,000 $ 272,707 $ (390,000) $ 272,707
============= ============ ============ ============
F-10
37
HOLLYWOOD PREVIEWS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2002 and June 30, 2003 (Unaudited)
==============================================================================
NOTE 1 - ORGANIZATION (Continued)
Combined Financial Statements (Continued)
- -----------------------------
Affiliated Combining Combined
As Reported Group Entries Basis
------------- ------------ ------------ ------------
Current liabilities
Book overdraft $ - $ 18,711 $ - $ 18,711
Accounts payable - 257,293 - 257,293
Due to affiliate - 390,000 (390,000) -
Notes payable - 57,160 - 57,160
Current portion of
notes payable -
related parties 325,000 366,812 - 691,812
------------- ------------ ------------ ------------
Total current liabilities 325,000 1,089,976 - 1,024,976
Notes payable - related
parties, net of current
portion - 50,000 - 50,000
------------- ------------ ------------ ------------
Total liabilities 325,000 1,139,976 - 1,074,976
Shareholders' and members'
equity (deficit) 65,000 (867,269) - (802,269)
------------- ------------ ------------ ------------
Total liabilities and
shareholders' and
members' equity $ 390,000 $ 272,707 $ (390,000) $ 272,707
============= ============ ============ ============
Results of operations
Revenue $ - $ 1,455,377 $ - $ 1,455,377
Expenses - 1,684,331 - 1,684,331
------------- ------------ ------------ ------------
Loss from operations - (228,954) - (228,954)
Other income (expense) - (212,549) - (212,549)
------------- ------------ ------------ ------------
Loss before provision
for income taxes - (441,503) - (441,503)
Provision for income
taxes - 800 - 800
------------- ------------ ------------ ------------
Net loss $ - $ (442,303) $ - $ (442,303)
============= ============ ============ ============
F-11
38
HOLLYWOOD PREVIEWS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2002 and June 30, 2003 (Unaudited)
==============================================================================
NOTE 1 - ORGANIZATION (Continued)
Combined Financial Statements (Continued)
- -----------------------------
The unaudited, pro forma impact on the financial condition and results of
operations of the Company for the six months ended June 30, 2003 would be as
follows:
Affiliated Combining Combined
As Reported Group Entries Basis
------------- ------------ ------------ ------------
(unaudited) (unaudited) (unaudited) (unaudited)
Balance sheet
Current assets $ 288,828 $ 185,521 $ (71,196) $ 403,153
Property and equipment 62,499 - - 62,499
Due from affiliate 75,000 - (75,000) -
Other assets 7,500 1,000 - 8,500
------------- ------------ ------------ ------------
Total assets $ 433,827 $ 186,521 $ (146,196) $ 474,152
============= ============ ============ ============
Current liabilities
Accounts payable $ 13,654 $ 163,866 $ - $ 177,520
Due to affiliate - 925,173 (925,173) -
Notes payable - 43,094 - 43,094
Current portion of
notes payable -
related parties 78,696 106,677 (71,196) 114,177
------------- ------------ ------------ ------------
Total current liabilities 92,350 1,238,810 (996,369) 334,791
Notes payable - related
parties, net of current
portion - 7,279 - 7,279
------------- ------------ ------------ ------------
Total liabilities 92,350 1,246,089 (996,369) 342,070
Shareholders' and
members' equity
(deficit) 341,477 (1,059,568) 850,173 132,082
------------- ------------ ------------ ------------
Total liabilities and
shareholders' and
members' equity $ 433,827 $ 186,521 $ (146,196) $ 474,152
============= ============ ============ ============
F-12
39
HOLLYWOOD PREVIEWS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2002 and June 30, 2003 (Unaudited)
==============================================================================
NOTE 1 - ORGANIZATION (Continued)
Combined Financial Statements (Continued)
- -----------------------------
Affiliated Combining Combined
As Reported Group Entries Basis
------------- ------------ ------------ ------------
(unaudited) (unaudited) (unaudited) (unaudited)
Results of operations
Revenue $ 37,500 $ 286,125 $ - $ 323,625
Expenses 1,450,463 736,930 850,173 1,337,270
------------- ------------ ------------ ------------
Loss from operations (1,412,963) (450,855) 850,173 (1,013,645)
Other income (expense) (511) (61,979) - (62,490)
------------- ------------ ------------ ------------
Loss before provision
for income taxes (1,413,474) (512,834) 850,173 (1,076,135)
Provision for income
taxes 800 1,600 - 2,400
------------- ------------ ------------ ------------
Net loss $ (1,414,274) $ (514,434) $ 850,173 $(1,078,535)
============= ============ ============ ============
NOTE 2 - GOING CONCERN
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements, during the period from July 22, 2002 (inception) to December 31,
2002, the Company did not have any significant operations, had related party
debt of $325,000, and was highly dependent on equity and debt financing.
These factors raise substantial doubt about its ability to continue as a going
concern.
Additional financing will be required in order for the Company to continue in
existence. Management believes it will be able to obtain such financing from
new investors through sales of equity through a private placement memorandum
as well as the completion of a reverse merger with a public entity, which
would add liquidity to the Company's stock.
The financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.
F-13
40
HOLLYWOOD PREVIEWS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2002 and June 30, 2003 (Unaudited)
==============================================================================
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information
- -----------------------------
The financial information as of June 30, 2003, and for the six months then
ended, is unaudited, but in the opinion of management, includes all
adjustments, consisting only of normal recurring adjustments, that the Company
considers necessary for a fair presentation of the financial position,
operating results, and cash flows for such periods. Results for the six
months ended June 30, 2003 are not necessarily indicative of results for the
year ended December 31, 2003.
Revenue Recognition
- -------------------
Revenue is generated mainly through the sale and licensing of interactive,
digital, multi-media publishing and is recognized when the product, usually
either a CD-ROM or DVD, is shipped to the customer or distributed to the
public, provided that the other conditions of sale as established by the
Securities and Exchange Commission's Staff Accounting Bulleting ("SAB") No.
101, are satisfied:
.. Persuasive evidence of an arrangement exists.
.. Delivery has occurred or services have been rendered.
.. The seller's price to the buyer is fixed or determinable.
.. Collectibility is reasonably assured.
Revenue from advertising contracts and agreements is deferred until the
services and/or products are completed and delivered.
Accounts Receivable
- -------------------
The Company sell their products throughout the United States. The Company
evaluates its accounts receivable on a regular basis for collectibility and
provide for an allowance for potential credit losses as deemed necessary.
Property and Equipment
- ----------------------
Property and equipment are recorded at cost, less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of five years. Maintenance and minor replacements are charged to
expense as incurred. Gains and losses on disposals are included in the
results of operations.
Impairment of Long-Lived Assets
- -------------------------------
The Company reviews its assets for impairment in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Estimated losses are included in the statements of operations as
a component of cost of sales.
Fair Value of Financial Instruments
- -----------------------------------
The Company's financial instruments include cash, accounts receivable, and
accounts payable and accrued expenses. The book values of all financial
instruments are representative of their fair values.
F-14
41
HOLLYWOOD PREVIEWS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2002 and June 30, 2003 (Unaudited)
==============================================================================
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
- ------------
The Company utilize SFAS No. 109, "Accounting for Income Taxes," which
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred income taxes
are recognized for the tax consequences in future years of differences between
the tax bases of assets and liabilities and their financial reporting amounts
at each year-end based on enacted tax laws and statutory tax rates applicable
to the periods in which the differences are expected to affect taxable income.
Valuation allowances are established, when necessary, to reduce deferred tax
assets to the amount expected to be realized. The provision for income taxes
represents the tax payable for the period and the change during the period in
deferred tax assets and liabilities.
Estimates
- ---------
The preparation of financial statements 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 revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Concentrations and Uncertainties
- --------------------------------
Total net sales earned from one customer constituted 100% (unaudited) of total
net sales earned for the six months ended June 30, 2003. Amounts due from one
major customer represented 100% (unaudited) of the net accounts receivable
balance at June 30, 2003.
Recently Issued Accounting Pronouncements
- -----------------------------------------
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting and reporting for derivative instruments and hedging
activities under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 149 is effective for derivative instruments and
hedging activities entered into or modified after June 30, 2003, except for
certain forward purchase and sale securities. For these forward purchase and
sale securities, SFAS No. 149 is effective for both new and existing
securities after June 30, 2003. This statement is not applicable to the
Company.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures in its
statement of financial position certain financial instruments with
characteristics of both liabilities and equity. In accordance with the
standard, financial instruments that embody obligations for the issuer are
required to be classified as liabilities. SFAS No. 150 will be effective for
financial instruments entered into or modified after May 31, 2003 and
otherwise will be effective at the beginning of the first interim period
beginning after June 15, 2003. This statement is not applicable to the
Company.
F-15
42
HOLLYWOOD PREVIEWS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2002 and June 30, 2003 (Unaudited)
==============================================================================
NOTE 4 - CASH
The Company maintains cash deposits at banks located in California. Deposits
at each bank are insured by the Federal Deposit Insurance Corporation up to
$100,000. As of December 31, 2002 and June 30, 2003, the uninsured portions
amounted to $0 and $212,102 (unaudited), respectively. The Company has not
experienced any losses in such accounts and believe they are not exposed to
any significant credit risk on cash.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment at June 30, 2003 consisted of the following:
(unaudited)
-------------
Fixtures $ 9,582
Equipment 164,361
------------
173,943
Less accumulated depreciation 111,444
------------
Total $ 62,499
============
Depreciation expense was $0 and $8,697 (unaudited) for the period from July
22, 2002 (inception) to December 31, 2002 and the six months ended June 30,
2003, respectively.
NOTE 6 - LINE OF CREDIT
The Company maintain a line of credit with a financial institution, which
enables them to borrow up to $30,000. The line of credit is collateralized by
all of the Company's accounts receivable, of which the Company may borrow up
to 75% of the accepted accounts receivable balance. At December 31, 2002 and
June 30, 2003, the line of credit was unused.
NOTE 7 - NOTES PAYABLE - RELATED PARTIES
Notes payable - related parties at December 31, 2002 and June 30, 2003
consisted of the following:
June 30, December 31,
2003 2002
------------ ------------
(unaudited)
Unsecured note payable to officer, bearing interest
at 10% per annum, due on demand. $ 7,500 $ -
F-16
43
HOLLYWOOD PREVIEWS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2002 and June 30, 2003 (Unaudited)
==============================================================================
NOTE 7 - NOTES PAYABLE - RELATED PARTIES (Continued)
June 30, December 31,
2003 2002
------------ ------------
(unaudited)
Unsecured note payable to shareholder, bearing
interest at a $50,000 flat payment, due on
demand. $ - $ 175,000
Unsecured note payable to officer, bearing interest
at 10.8% per annum, due on demand. 71,196 -
Unsecured note payable to officer, bearing interest
at 10.8% per annum, due in September 2003. - 150,000
------------ ------------
78,696 325,000
Less current portion 78,696 325,000
------------ ------------
Long-term portion $ - $ -
============ ============
NOTE 8 - COMMITMENTS
The Company leases its office facilities on a month-to-month basis. Rent
expense amounted to $0 and $9,375 (unaudited) for the for the period from July
22, 2002 (inception) to December 31, 2002 and the six months ended June 30,
2003, respectively.
NOTE 9 - SHAREHOLDERS' EQUITY
Common Stock
- ------------
During the six months ended June 30, 2003, the Company completed the
following:
.. issued 33,500,000 shares (unaudited) of common stock to certain of its
founders. The shares were committed at the Company's inception.
.. issued 2,033,333 shares (unaudited) of common stock to investors through a
private placement memorandum in exchange for $1,570,000 (unaudited) in
cash and incurred offering costs of $29,249 (unaudited).
Common Stock Subscription
- -------------------------
During the six months ended June 30, 2003, the Company received a subscription
for 130,000 shares (unaudited) of common stock from investors through a
private placement memorandum and recorded a subscription receivable of
$130,000 (unaudited).
F-17
44
HOLLYWOOD PREVIEWS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2002 and June 30, 2003 (Unaudited)
==============================================================================
NOTE 9 - SHAREHOLDERS' EQUITY (Continued)
Common Stock Committed
- ----------------------
During the period from July 22, 2002 (inception) to December 31, 2002, the
Company completed the following:
.. committed to issue 2,500,000 shares of common stock to a debtor in
exchange for non-payment of $50,000 of interest payable.
.. committed to issue 2,500,000 shares of common stock to a consultant in
exchange for $15,000 in cash.
.. committed to issue 33,500,000 shares of common stock to its founders at
its inception as founders' shares.
During the six months ended June 30, 2003, the Company completed the
following:
.. committed to issue 9,374,428 shares (unaudited) of common stock to its
founders.
.. converted $150,000 (unaudited) of notes payable into 200,000 shares
(unaudited) of common stock of which $50,000 (unaudited) was for interest
due on the note.
NOTE 10 - INCOME TAXES
The Company has not incurred any income tax expense since inception other than
the taxes imposed by the state of California. The Company recorded an
allowance of 100% for its net operating loss carry-forward due to the
uncertainty of its realization.
NOTE 11 - RELATED PARTY TRANSACTIONS
Due from Affiliate
- ------------------
During the year ended December 31, 2002, MOD Studios collected $390,000 in
cash intended for the Company for sales of equity and issuances of debt by the
Company.
At June 30, 2003, management determined that $850,173 (unaudited) of the
$925,173 (unaudited) balance outstanding at that date was impaired since the
financial condition of MOD Studios makes collection of the receivable doubtful
and recorded a reserve of $850,173 (unaudited) for the six months ended June
30, 2003.
F-18
45
HOLLYWOOD PREVIEWS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2002 and June 30, 2003 (Unaudited)
==============================================================================
NOTE 11 - RELATED PARTY TRANSACTIONS (Continued)
Licensing Agreement
- -------------------
During the six months ended June 30, 2003, I-Publishing licensed to the
Company the exclusive rights to use its intellectual property. The Company is
to pay I-Publishing royalties of $0.05 (unaudited) per CD-ROM or DVD sold with
the "Hollywood Previews Entertainment Magazine" trademark or name and $0.02
(unaudited) per CD-ROM or DVD sold for any other publication. The royalties
are subject to inflationary increases every two years. The license term is
for 99 years beginning April 4, 2003 (unaudited).
NOTE 12 - SUBSEQUENT EVENTS (UNAUDITED)
Common Stock
- ------------
Subsequent to June 30, 2003, the Company issued 100,000 shares of common stock
to investors through a private placement memorandum in exchange for $100,000
in cash.
Common Stock Subscription
- -------------------------
Subsequent to June 30, 2003, the Company completed the following:
.. received a subscription for 50,000 shares of common stock to investors
through a private placement memorandum and recorded a subscription
receivable of $50,000.
.. collected $85,000 on a common stock subscription receivable and issued
85,000 shares of common stock.
F-19
46
I-PUBLISHING, INC., MOD STUDIOS, INC., AND
THE MODERN COMPANY, LLC
CONTENTS
December 31, 2002 and June 30, 2003 (unaudited)
==============================================================================
Page
INDEPENDENT AUDITOR'S REPORT F-2
COMBINED FINANCIAL STATEMENTS
Combined Balance Sheets F-3 - F-5
Combined Statements of Operations F-6
Combined Statements of Shareholders' and Members' Deficit F-7 - F-8
Combined Statements of Cash Flows F-9 - F-11
Notes to Combined Financial Statements F-12 - F-25
F-1
47
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders of
I-Publishing, Inc.
MOD Studios, Inc.
The Modern Company, LLC
We have audited the accompanying combined balance sheet of I-Publishing, Inc.,
MOD Studios, Inc., and The Modern Company, LLC as of December 31, 2002, and
the related combined statements of operations, shareholders' and members'
deficit, and cash flows for each of the two years in the period ended December
31, 2002. These financial statements are the responsibility of the Companies'
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of I-Publishing,
Inc., MOD Studios, Inc., and The Modern Company, LLC as of December 31, 2002,
and the combined results of their operations and their cash flows for each of
the two years in the period ended December 31, 2002 in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Companies will continue as a going concern. However, during the years ended
December 31, 2002 and 2001, the Companies incurred net losses of $442,303 and
$2,510,849, respectively, and had net cash used in operating activities of
$476,162 and $723,933, respectively. In addition, the Companies' accumulated
deficit was $3,854,769 as of December 31, 2002. These factors, among others,
as discussed in Note 2 to the financial statements, raise substantial doubt
about the Companies' ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 2. The financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
/s/ Singer Lewak Greenbaum & Goldstein LLP
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
August 12, 2003
48
I-PUBLISHING, INC., MOD STUDIOS, INC., AND
THE MODERN COMPANY, LLC
COMBINED BALANCE SHEETS
December 31, 2002 and June 30, 2003 (unaudited)
==============================================================================
ASSETS
June 30, December 31,
2003 2002
------------- ------------
(unaudited)
Current assets
Cash $ 5,248 $ 4,677
Accounts receivable, net of allowance for doubtful
accounts of $8,444 (unaudited) and $8,444 109,077 196,134
Note receivable - related party 71,196 -
------------- ------------
Total current assets 185,521 200,811
Property and equipment, net - 71,196
Other assets 1,000 700
------------- ------------
Total assets $ 186,521 $ 272,707
============= ============
The accompanying note are an integral part of these financial statements.
F-3
49
I-PUBLISHING, INC., MOD STUDIOS, INC., AND
THE MODERN COMPANY, LLC
COMBINED BALANCE SHEETS
December 31, 2002 and June 30, 2003 (unaudited)
==============================================================================
LIABILITIES AND SHAREHOLDERS' AND MEMBERS' DEFICIT
June 30, December 31,
2003 2002
------------- ------------
(unaudited)
Current liabilities
Book overdraft $ - $ 18,711
Accounts payable and accrued expenses 163,866 257,293
Due to affiliate 925,173 390,000
Current portion of notes payable 55,094 57,160
Current portion of notes payable - related parties 94,677 366,812
------------- ------------
Total current liabilities 1,238,810 1,089,976
Notes payable, net of current portion 7,279 -
Notes payable - related parties, net of
current portion - 50,000
------------- ------------
Total liabilities 1,246,089 1,139,976
------------- ------------
Commitments
The accompanying notes are an integral part of these financial statements.
F-4
50
I-PUBLISHING, INC., MOD STUDIOS, INC., AND
THE MODERN COMPANY, LLC
COMBINED BALANCE SHEETS
December 31, 2002 and June 30, 2003 (unaudited)
==============================================================================
LIABILITIES AND SHAREHOLDERS' AND MEMBERS' DEFICIT (Continued)
Shareholders' and members' deficit
Preferred stock - I-Publishing, no par value
5,000 shares authorized
450 (unaudited) and 0 shares issued and
outstanding dividends in arrears of $4,425
(unaudited) $ - $ -
Preferred stock - MOD Studios, $0.01 par value
20,000,000 shares authorized
0 (unaudited) and 0 units issued and outstanding - -
Common stock - I-Publishing, no par value
100,000,000 shares authorized
30,000 (unaudited) and 0 shares
issued and outstanding - -
Common stock - MOD Studios, $0.01 par value
100,000,000 shares authorized
3 (unaudited) and 15,300,000 shares
issued and outstanding - 153,000
Additional paid-in capital - MOD Studios 3,309,635 2,834,500
Series A common units - The Modern Company,
no par value 4,500 units authorized
4,500 (unaudited) and 4,500 units issued and
outstanding - -
Series B common units - The Modern Company,
no par value 600 units authorized
0 (unaudited) and 0 units issued and outstanding - -
Accumulated deficit (4,369,203) (3,854,769)
------------- ------------
Total shareholders' and members' deficit (1,059,568) (867,269)
------------- ------------
Total liabilities and shareholders' and members'
deficit $ 186,521 $ 272,707
============= ============
The accompanying notes are an integral part of these financial statements.
F-5
51
I-PUBLISHING, INC., MOD STUDIOS, INC., AND
THE MODERN COMPANY, LLC
COMBINED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2002 and 2001 and
for the Six Months Ended June 30, 2003 and 2002 (unaudited)
==============================================================================
For the Six Months Ended For the Year Ended
June 30, December 31,
--------------------------- ---------------------------
2003 2002 2002 2001
------------- ------------- ------------- -------------
(unaudited) (unaudited)
Net sales $ 286,125 $ 222,152 $ 1,455,377 $ 499,136
Cost of sales 176,775 705,983 1,003,777 1,099,756
------------- ------------- ------------- -------------
Gross profit (loss) 109,350 (483,831) 451,600 (600,620)
Operating expenses 560,205 233,407 680,554 1,891,504
------------- ------------- ------------- -------------
Loss from operations (450,855) (717,238) (228,954) (2,492,124)
------------- ------------- ------------- -------------
Other income (expense)
Interest income - - - 8,861
Interest expense (11,979) (22,717) (132,549) (26,786)
Loss on investment (50,000) - (80,000) -
------------- ------------- ------------- -------------
Total other income
(expense) (61,979) (22,717) (212,549) (17,925)
------------- ------------- ------------- -------------
Loss before provision
for income taxes (512,834) (739,955) (441,503) (2,510,049)
Provision for income
taxes 1,600 800 800 800
------------- ------------- ------------- -------------
Net loss $ (514,434) $ (740,755) $ (442,303) $ (2,510,849)
============= ============= ============= =============
The accompanying notes are an integral part of these financial statements.
F-6
52
I-PUBLISHING, INC., MOD STUDIOS, INC., AND
THE MODERN COMPANY, LLC
COMBINED STATEMENTS OF SHAREHOLDERS' AND MEMBERS' DEFICIT
For the Years Ended December 31, 2002 and 2001 and
for the Six Months Ended June 30, 2003 (unaudited)
===========================================================================================================================
Common Units
Preferred Stock Common Stock Common Stock - MOD Studios The Modern
-------------- --------------- ---------------------------------- Company
I-Publishing I- Publishing Additional Series A
-------------- --------------- Paid-in -------------- Accumulated
Shares Amount Shares Amount Shares Amount Capital Units Amount Deficit Total
------- ------ -------- ------ ----------- ---------- ----------- ------- ------ ------------ ------------
Balance,
December 31,
2000 - $ - - $ - 14,905,000 $ 149,050 $ 1,063,450 2,400 $ - $ (901,617) $ 310,883
Issuance of
common stock
for cash - - - - 370,000 3,700 146,300 - - - 150,000
Cancellation of
units from
member - - - - - - - (800) - - -
Issuance of
units to new
member - - - - - - - 800 - - -
Net loss - - - - - - - - - (2,510,849) (2,510,849)
------- ------ -------- ------ ----------- ---------- ----------- ------- ------ ------------ ------------
Balance,
December 31,
2001 - - - - 15,275,00 152,750 1,209,750 2,400 - (3,412,466) (2,049,966)
Issuance of
common stock
for cash - - - - 25,000 250 24,750 - - - 25,000
Issuance of
units to
members - - - - - - - 2,100 - - -
Capital
contribution
of deferred
revenue - - - - - - 1,600,000 - - - 1,600,000
Net loss - - - - - - - - - (442,303) (442,303)
------- ------ -------- ------ ----------- ---------- ----------- ------- ------ ------------ -------------
The accompanying notes are an integral part of these financial statements.
F-7
53
I-PUBLISHING, INC., MOD STUDIOS, INC., AND
THE MODERN COMPANY, LLC
COMBINED STATEMENTS OF SHAREHOLDERS' AND MEMBERS' DEFICIT
For the Years Ended December 31, 2002 and 2001 and
for the Six Months Ended June 30, 2003 (unaudited)
===========================================================================================================================
Common Units
Preferred Stock Common Stock Common Stock - MOD Studios The Modern
-------------- --------------- ---------------------------------- Company
I-Publishing I- Publishing Additional Series A
-------------- --------------- Paid-in -------------- Accumulated
Shares Amount Shares Amount Shares Amount Capital Units Amount Deficit Total
------- ------ -------- ------ ----------- ---------- ----------- ------- ------ ------------ ------------
Balance,
December 31,
2002 - $ - - $ - 15,300,000 $ 153,000 $ 2,834,500 4,500 $ - $(3,854,769) $ (867,269)
Issuance of
preferred
stock for
assets
(unaudited) 450 - - - - - - - - - -
Issuance of
common stock
to founders
(unaudited) - - 30,000 - - - - - - - -
Capital
contribution
on foreclosure
of assets
(unaudited) - - - - - - 322,135 - - - 322,135
Cancellation of
common stock
due to
foreclosure
of assets
(unaudited) - - - - (15,299,997) (153,000) 153,000 - - - -
Net loss
(unaudited) - - - - - - - - - (514,434) (514,434)
------- ------ -------- ------ ----------- ---------- ----------- ------- ------ ------------ ------------
Balance,
June 30, 2003
(unaudited) 450 $ - 30,000 $ - 3 $ - $ 3,309,635 4,500 $ - $(4,369,203) $(1,059,568)
======= ====== ======== ====== =========== ========== =========== ======= ====== ============ ===========-
The accompanying notes are an integral part of these financial statements.
F-8
54
I-PUBLISHING, INC., MOD STUDIOS, INC., AND
THE MODERN COMPANY, LLC
COMBINED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2002 and 2001 and
for the Six Months Ended June 30, 2003 and 2002 (unaudited)
For the Six Months Ended For the Year Ended
June 30, December 31,
--------------------------- ---------------------------
2003 2002 2002 2001
------------- ------------- ------------- -------------
(unaudited) (unaudited)
<s> <c> <c> <c> <c>
Cash flows from operating
activities
Net loss $ (514,434) $ (740,755) $ (442,303) $ (2,510,849)
Adjustments to reconcile net
loss to net cash used in
operating activities
Depreciation - 17,395 34,789 28,143
(Increase) decrease in
Accounts receivable 87,057 20,925 (149,775) 19,248
Prepaid expenses and
other current assets - - - 5,800
Other assets (300) - - (700)
Increase (decrease) in
Accounts payable and
accrued expenses (93,427) 560,527 81,127 134,425
Deferred revenue - 30,000 - 1,600,000
------------- ------------- ------------- -------------
Net cash used in operating
activities (521,104) (111,908) (476,162) (723,933)
------------- ------------- ------------- -------------
Cash flows from investing
activities
Due to affiliate 535,173 - 390,000 -
Purchase of property and
equipment - - - (88,689)
------------- ------------- ------------- -------------
Net cash provided by (used in)
investing activities 535,173 - 390,000 (88,689)
------------- ------------- ------------- -------------
The accompanying notes are an integral part of these financial statements.
F-9
55
I-PUBLISHING, INC., MOD STUDIOS, INC., AND
THE MODERN COMPANY, LLC
COMBINED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2002 and 2001 and
for the Six Months Ended June 30, 2003 and 2002 (unaudited)
For the Six Months Ended For the Year Ended
June 30, December 31,
--------------------------- ---------------------------
2003 2002 2002 2001
------------- ------------- ------------- -------------
(unaudited) (unaudited)
<s> <c> <c> <c> <c>
Cash flows from financing
activities
Increase (decrease) in
book overdraft $ (18,711) $ 5,264 $ 18,711 $ -
Increase (decrease) in
line of credit - 19,892 - (21,517)
Proceeds from notes payable 21,279 57,000 57,160 100,000
Payments on notes payable (16,066) - (100,000) (3,250)
Proceeds from notes payable -
related parties - 6,737 84,323 82,489
Proceeds from issuance of
common stock - 25,000 25,000 150,000
------------- ------------- ------------- -------------
Net cash provided by (used in)
financing activities (13,498) 113,893 85,194 307,722
------------- ------------- ------------- -------------
Net increase (decrease) in cash 571 1,985 (968) (504,900)
Cash, beginning of period 4,677 5,645 5,645 510,545
------------- ------------- ------------- -------------
Cash, end of period $ 5,248 $ 7,630 $ 4,677 $ 5,645
============= ============= ============= =============
Supplemental disclosures
of cash flow information
Interest paid $ 12,490 $ 22,717 $ 132,549 $ 26,786
============= ============= ============= =============
Income taxes paid $ 1,600 $ 800 $ 800 $ 800
============= ============= ============= =============
The accompanying notes are an integral part of these financial statements.
F-10
56
I-PUBLISHING, INC., MOD STUDIOS, INC., AND
THE MODERN COMPANY, LLC
COMBINED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2002 and 2001 and
for the Six Months Ended Jun e 30, 2003 and 2002 (unaudited)
==============================================================================
Supplemental schedule of disclosures of non-cash investing and financing
activities
During the year ended December 31, 2002, MOD Studios contributed $1,600,000 of
deferred revenue to additional paid-in capital.
During the six months ended June 30, 2003, a shareholder/secured creditor
foreclosed on the physical assets with a book value of $71,196 (unaudited) and
intellectual property with a book value of $0 (unaudited) of MOD Studios due
to non-payment of certain notes payable. The shareholder had notes payable
totaling $393,331 (unaudited) at the time of the foreclosure. I-Publishing
then issued 450 shares (unaudited) of preferred stock to the
shareholder/secured creditor/founder in exchange for the intellectual property
with a value of $0 (unaudited) and issued a note payable for $71,196
(unaudited) in exchange for the physical assets. I-Publishing then sold the
physical assets to an affiliate, Hollywood Previews, Inc., in exchange for a
note receivable with a value of $71,196 (unaudited). MOD Studios recorded the
difference between the value of the notes payable and the value of the
physical assets as a contribution to capital.
F-11
57
I-PUBLISHING, INC., MOD STUDIOS, INC., AND
THE MODERN COMPANY, LLC
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 2002 and June 30, 2003 (unaudited)
==============================================================================
NOTE 1 - ORGANIZATION
General
- -------
I-Publishing, Inc. ("I-Publishing") was incorporated on May 6, 2003 in the
state of California and is licensor of intellectual, property primarily
multi-media publishing technology for publishing magazines in CD-ROM and DVD
format.
MOD Studios, Inc. ("MOD Studios") was incorporated on January 8, 2001 in the
state of Delaware and was a publisher of interactive, digital, multi-media
publications on CD-ROM, DVD, the Internet, television, and interactive
television. The company distributed an entertainment magazine on CD-ROM and
DVD that featured movie previews, video games, and television previews, plus
interviews with stars, behind the scenes videos, music soundtracks and music
videos, Hollywood fashion and style, and other entertainment news. The
magazine was distributed through major Sunday newspapers. It also targeted
specific households and was handed out at movie theater box offices on a
national basis.
Revenues are generated from the sale of paid advertising sponsorships,
licensing, content placements, and e-commerce fees, plus the sale to
advertisers and content providers of the proprietary Usage Report that
monitors the use of the disk by its audience.
The Modern Company, LLC ("The Modern Company") is a Nevada limited liability
company organized on February 25, 1999. The Modern Company provides marketing
and advertising consulting services to a variety of industries, including
entertainment and publishing.
The management and beneficial ownership of I-Publishing, MOD Studios, and The
Modern Company are similar.
Quasi Reorganization (unaudited)
- --------------------------------
On January 9, 2001, the members of CD Video Magazine, LLC, a California
limited liability company, unanimously ratified a plan of reorganization
pursuant to the Internal Revenue Code Section 351. Under the plan of
reorganization, each member exchanged his/her membership interests into common
stock of MOD Studios.
MOD Studios produces CD media magazines for which it primarily generates
advertising revenue. The main product is Hollywood Previews Magazine, a
highly interactive magazine, which contains movie trailers and other upcoming
movie information. The CDs are distributed at major movie houses across the
United States at no cost to the reader.
F-12
58
I-PUBLISHING, INC., MOD STUDIOS, INC., AND
THE MODERN COMPANY, LLC
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 2002 and June 30, 2003 (unaudited)
==============================================================================
NOTE 1 - ORGANIZATION (Continued)
Quasi Reorganization (unaudited) (Continued)
- --------------------------------------------
On April 5, 2003, the following occurred:
.. A shareholder/secured creditor/officer of the Companies foreclosed on the
physical assets with a book value of $71,196 (unaudited) and intellectual
property with a book value of $0 (unaudited) of MOD Studios due to the
non-payment of certain notes payable. The shareholder was due notes
payable totaling $393,331 (unaudited) at the time of the foreclosure.
The assets, consisting of property and equipment and intellectual
property, were used as collateral for the notes payable. In addition to
the forbearance of the notes payable, MOD Studios is to receive 5%
(unaudited) of all revenues paid to the shareholder directly for the use
of the "Hollywood Previews" name or trademark from any third party to
whom the shareholder sells, licenses, assigns, or transfers the
"Hollywood Previews" name. MOD Studios did not have any operations after
April 5, 2003 other than the collection of the license fee from the
shareholder/secured creditor.
.. The shareholder contributed the repossessed property and equipment and
intellectual property to I-Publishing in exchange for 450 shares of
convertible preferred stock. The transaction has been accounted for at
the carry-over basis of the related assets and canceled debt. As such,
I-Publishing has recorded the assets transferred at their cost.
.. I-Publishing licensed to an affiliated company, Hollywood Previews, Inc.
("Hollywood Previews"), the exclusive rights to use I-Publishing's
intellectual property. I-Publishing is to receive annual royalties for
each CD distributed. In addition, I-Publishing sold the physical assets
to Hollywood Previews in exchange for a note receivable with a value of
$71,196 (unaudited).
Combined Financial Statements
- -----------------------------
The Companies are a member of an affiliated group which includes Hollywood
Previews, Inc. If the financial statements were presented on a combined basis
with Hollywood Previews, Inc., the pro forma impact on the financial condition
and results of operations of the Companies for the year ended December 31,
2002 would be as follows:
Hollywood Combining Combined
As Reported Previews Entries Basis
------------- ------------ ------------ ------------
Balance sheet
Current assets $ 200,811 $ - $ - $ 200,811
Property and equipment 71,196 - - 71,196
Due from affiliate - 390,000 (390,000) -
Other assets 700 - - 700
------------- ------------ ------------ ------------
Total assets $ 272,707 $ 390,000 $ (390,000) $ 272,707
============= ============ ============ ============
F-13
59
I-PUBLISHING, INC., MOD STUDIOS, INC., AND
THE MODERN COMPANY, LLC
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 2002 and June 30, 2003 (unaudited)
==============================================================================
NOTE 1 - ORGANIZATION (Continued)
Combined Financial Statements (Continued)
- -----------------------------
Hollywood Combining Combined
As Reported Previews Entries Basis
------------- ------------ ------------ ------------
Current liabilities
Book overdraft $ 18,711 $ - $ - $ 18,711
Accounts payable 257,293 - - 257,293
Due to affiliate 390,000 - (390,000) -
Notes payable 57,160 - - 57,160
Current portion of
notes payable -
related parties 366,812 325,000 - 691,812
------------- ------------ ------------ ------------
Total current liabilities 1,089,976 325,000 - 1,024,976
Notes payable - related
parties, net of
current portion 50,000 - - 50,000
------------- ------------ ------------ ------------
Total liabilities 1,139,976 325,000 - 1,097,976
Shareholders' and
members' equity
(deficit) (867,269) 65,000 - (802,269)
------------- ------------ ------------ ------------
Total liabilities and
shareholders' and
members' equity $ 272,707 $ 390,000 $ (390,000) $ 272,707
============= ============ ============ ============
Results of operations
Revenue $ 1,455,377 $ - $ - $ 1,455,377
Expenses 1,684,331 - - 1,684,331
------------- ------------ ------------ ------------
Loss from operations (228,954) - - (228,954)
Other income (expense) (212,549) - - (212,549)
------------- ------------ ------------ ------------
Loss before provision
for income taxes (441,503) - - (441,503)
Provision for income
taxes 800 - - 800
------------- ------------ ------------ ------------
Net loss $ (442,303) $ - $ - $ (442,303)
============= ============ ============ ============
F-14
60
I-PUBLISHING, INC., MOD STUDIOS, INC., AND
THE MODERN COMPANY, LLC
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 2002 and June 30, 2003 (unaudited)
==============================================================================
NOTE 1 - ORGANIZATION (Continued)
Combined Financial Statements (Continued)
- -----------------------------
The unaudited, pro forma impact on the financial condition and results of
operations of the Companies for the six months ended June 30, 2003 would be as
follows:
Hollywood Combining Combined
As Reported Previews Entries Basis
------------- ------------ ------------ ------------
(unaudited) (unaudited) (unaudited) (unaudited)
Balance sheet
Current assets $ 185,521 $ 288,828 $ (71,196) $ 403,153
Property and equipment - 62,499 - 62,499
Due from affiliate - 75,000 (75,000) -
Other assets 1,000 7,500 - 8,500
------------- ------------ ------------ ------------
Total assets $ 186,521 $ 433,827 $ (146,196) $ 474,152
============= ============ ============ ============
Current liabilities
Accounts payable $ 163,866 $ 13,654 $ - $ 177,520
Due to affiliate 925,173 - (925,173) -
Notes payable 43,094 - - 43,094
Current portion of
notes payable -
related parties 106,677 78,696 (71,196) 114,177
------------- ------------ ------------ ------------
Total current liabilities 1,238,810 92,350 (996,369) 334,791
Notes payable - related
parties, net of current
portion 7,279 - - 7,279
------------- ------------ ------------ ------------
Total liabilities 1,246,089 92,350 (996,369) 342,070
Shareholders' and members'
equity (deficit) (1,059,568) 341,477 850,173 132,082
------------- ------------ ------------ ------------
Total liabilities and
shareholders' and
members' equity $ 186,521 $ 433,827 $ (146,196) $ 474,152
============= ============ ============ ============
F-15
61
I-PUBLISHING, INC., MOD STUDIOS, INC., AND
THE MODERN COMPANY, LLC
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 2002 and June 30, 2003 (unaudited)
==============================================================================
NOTE 1 - ORGANIZATION (Continued)
Combined Financial Statements (Continued)
- -----------------------------
Hollywood Combining Combined
As Reported Previews Entries Basis
------------- ------------ ------------ ------------
(unaudited) (unaudited) (unaudited) (unaudited)
Results of operations
Revenue $ 286,125 $ 37,500 $ - $ 323,625
Expenses 736,930 1,450,463 850,173 1,337,270
------------- ------------ ------------ ------------
Loss from operations (450,855) (1,412,963) 850,173 (1,013,645)
Other income (expense) (61,979) (511) - (62,490)
------------- ------------ ------------ ------------
Loss before provision
for income taxes (512,834) (1,413,474) 850,173 (1,076,135)
Provision for income
taxes 1,600 800 - 2,400
------------- ------------ ------------ ------------
Net loss $ (514,434) $(1,414,274) $ 850,173 $(1,078,535)
============= ============ ============ ============
NOTE 2 - GOING CONCERN
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements, during the years ended December 31, 2002 and 2001, the Companies
(as defined in Note 3) had net losses of $442,303 and $2,510,849,
respectively, and had net cash used in operating activities of $476,162 and
$723,933, respectively. In addition, the Companies' accumulated deficit was
$3,854,769 as of December 31, 2002. The Companies' negative cash flow from
operations, recurring net losses, and capital deficit raise substantial doubt
about its ability to continue as a going concern.
Additional financing will be required in order for the Companies to continue
in existence. Management believes it will be able to obtain such financing
from new investors through sales of equity through a private placement
memorandum as well as the completion of a reverse merger with a public entity,
which would add liquidity to the Companies' stock.
The financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be necessary
should the Companies be unable to continue as a going concern.
F-16
62
I-PUBLISHING, INC., MOD STUDIOS, INC., AND
THE MODERN COMPANY, LLC
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 2002 and June 30, 2003 (unaudited)
==============================================================================
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Combination
- -------------------------
The combined financial statements include the accounts of I-Publishing, MOD
Studios, and The Modern Company (the "Companies"). All significant
inter-company accounts and transactions are eliminated in combination.
Interim Financial Information
- -----------------------------
The financial information as of June 30, 2003 and 2002, and for the six months
then ended, is unaudited, but in the opinion of management, includes all
adjustments, consisting only of normal recurring adjustments, that the Company
considers necessary for a fair presentation of the financial position,
operating results, and cash flows for such periods. Results for the six
months ended June 30, 2003 are not necessarily indicative of results for the
year ended December 31, 2003.
Revenue Recognition
- -------------------
Revenue is generated mainly through the sale and licensing of interactive,
digital, multi-media publishing and is recognized when the product, usually
either a CD-ROM or DVD, is shipped to the customer or distributed to the
public, provided that the other conditions of sale as established by the
Securities and Exchange Commission's Staff Accounting Bulleting ("SAB") No.
101, are satisfied:
.. Persuasive evidence of an arrangement exists.
.. Delivery has occurred or services have been rendered.
.. The seller's price to the buyer is fixed or determinable.
.. Collectibility is reasonably assured.
Revenue from advertising contracts and agreements is deferred until the
services and/or products are completed and delivered.
Accounts Receivable
- -------------------
The Companies sell their products throughout the United States. The Companies
evaluate their accounts receivable on a regular basis for collectibility and
provide for an allowance for potential credit losses as deemed necessary.
Property and Equipment
- ----------------------
Property and equipment are recorded at cost, less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of five years. Maintenance and minor replacements are charged to
expense as incurred. Gains and losses on disposals are included in the
results of operations.
F-17
63
I-PUBLISHING, INC., MOD STUDIOS, INC., AND
THE MODERN COMPANY, LLC
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 2002 and June 30, 2003 (unaudited)
==============================================================================
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Impairment of Long-Lived Assets
- -------------------------------
The Company reviews its assets for impairment in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Estimated losses are included in the statements of operations as
a component of cost of sales.
Fair Value of Financial Instruments
- -----------------------------------
The Companies' financial instruments include cash, accounts receivable, and
accounts payable and accrued expenses. The book values of all financial
instruments are representative of their fair values.
Advertising and Marketing Expense
- ---------------------------------
The Companies expense advertising and marketing costs as incurred.
Advertising and marketing expense for the years ended December 31, 2002 and
2001 and the six months ended June 30, 2003 and 2002 was $32,849, $0, $0
(unaudited), and $0 (unaudited), respectively.
Income Taxes
- ------------
The Companies utilize Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes," which requires the recognition of deferred
tax assets and liabilities for the expected future tax consequences of events
that have been included in the financial statements or tax returns. Under
this method, deferred income taxes are recognized for the tax consequences in
future years of differences between the tax bases of assets and liabilities
and their financial reporting amounts at each year-end based on enacted tax
laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized. The provision for income taxes represents the tax
payable for the period and the change during the period in deferred tax assets
and liabilities.
Estimates
- ---------
The preparation of financial statements 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 revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Concentrations and Uncertainties
- --------------------------------
Total net sales earned from two customers constituted 47% and 20% of total net
sales earned for the year ended December 31, 2002. Total net sales earned
from three customers constituted 50%, 17% and 11% of total net sales earned
for the year ended December 31, 2001. Amounts due from one major customer
represented 93% of the net accounts receivable balance at December 31, 2002.
F-18
64
I-PUBLISHING, INC., MOD STUDIOS, INC., AND
THE MODERN COMPANY, LLC
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 2002 and June 30, 2003 (unaudited)
==============================================================================
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Concentrations and Uncertainties (Continued)
- --------------------------------
Total net sales earned from three customers constituted 25% (unaudited), 18%
(unaudited) and 14% (unaudited) of total net sales earned for the six months
ended June 30, 2003. Total net sales earned from three customers constituted
55% (unaudited), 26% (unaudited), and 12% (unaudited) of total net sales
earned for the six months ended June 30, 2002. Amounts due from three major
customers represented 60% (unaudited), 12% (unaudited), and 10% (unaudited) of
the net accounts receivable balance at June 30, 2003.
Recently Issued Accounting Pronouncements
- -----------------------------------------
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting and reporting for derivative instruments and hedging
activities under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 149 is effective for derivative instruments and
hedging activities entered into or modified after June 30, 2003, except for
certain forward purchase and sale securities. For these forward purchase and
sale securities, SFAS No. 149 is effective for both new and existing
securities after June 30, 2003. This statement is not applicable to the
Companies.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures in its
statement of financial position certain financial instruments with
characteristics of both liabilities and equity. In accordance with the
standard, financial instruments that embody obligations for the issuer are
required to be classified as liabilities. SFAS No. 150 will be effective for
financial instruments entered into or modified after May 31, 2003 and
otherwise will be effective at the beginning of the first interim period
beginning after June 15, 2003. This statement is not applicable to the
Companies.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2002 consisted of the following:
Fixtures $ 9,582
Equipment 164,361
---------------
173,943
Less accumulated depreciation 102,747
---------------
Total $ 71,196
===============
F-19
65
I-PUBLISHING, INC., MOD STUDIOS, INC., AND
THE MODERN COMPANY, LLC
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 2002 and June 30, 2003 (unaudited)
==============================================================================
NOTE 4 - PROPERTY AND EQUIPMENT (Continued)
Depreciation expense was $34,789, $28,143, and $17,395 (unaudited) for the
years ended December 31, 2002 and 2001 and the six months ended June 30, 2002,
respectively.
NOTE 5 - NOTES PAYABLE
Notes payable at December 31, 2002 and June 30, 2003 consisted of the
following:
June 30, December 31,
2003 2002
------------- ------------
(unaudited)
Unsecured note payable, bearing, interest at 10%
per annum, due on demand. $ 41,094 $ 57,160
Unsecured note payable, issued for legal
settlement, bearing interest at 9% per annum,
requiring monthly payments of $500, due in
October 2003. 2,000 -
Unsecured note payable, issued for legal
settlement, bearing interest at 9% per annum,
requiring monthly payments of $1,000, due in
December 2004. 19,279 -
------------- ------------
62,373 57,160
Less current portion 55,094 57,160
------------- ------------
Long-term portion $ 7,279 $ -
============= ============
Future maturities of notes payable at June 30, 2003 were as follows:
12 Months
Ending
June 30,
----------
2004 $ 55,094
2005 7,279
-------------
Total $ 62,373
=============
F-20
66
I-PUBLISHING, INC., MOD STUDIOS, INC., AND
THE MODERN COMPANY, LLC
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 2002 and June 30, 2003 (unaudited)
==============================================================================
NOTE 6 - NOTES PAYABLE - RELATED PARTIES
Notes payable - related parties at December 31, 2002 and June 30, 2003
consisted of the following:
June 30, December 31,
2003 2002
------------- ------------
(unaudited)
Unsecured note payable to officer, bearing interest
at 10% per annum, due on demand. $ - $ 93,331
Unsecured note payable to officer, bearing interest
at 10.8% per annum, due in September 2003. - 250,000
Unsecured note payable to officer, bearing interest
at 10.8% per annum, due in September 2004. - 50,000
Unsecured note payable to officer, non-interest-
bearing, due on demand. 86,177 14,981
Unsecured note payable to officer, non-interest-
bearing, due on demand. 8,500 8,500
------------ ------------
94,677 416,812
Less current portion 94,677 366,812
------------ ------------
Long-term portion $ - $ 50,000
============ ============
NOTE 7 - COMMITMENTS
The Companies lease their office facilities on a month-to-month basis. Rent
expense amounted to $37,500, $37,500, $9,375 (unaudited), and $18,750
(unaudited) for the years ended December 31, 2002 and 2001 and the six months
ended June 30, 2003 and 2002, respectively.
F-21
67
I-PUBLISHING, INC., MOD STUDIOS, INC., AND
THE MODERN COMPANY, LLC
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 2002 and June 30, 2003 (unaudited)
==============================================================================
NOTE 8 - SHAREHOLDERS' AND MEMBERS' DEFICIT
Convertible Preferred Stock
- ---------------------------
During the six months ended June 30, 2003, I-Publishing issued 450 shares
(unaudited) of convertible preferred stock to an investor in exchange for
intellectual property, which was valued at $0 (unaudited). These assets
originally belonged to MOD Studios prior to a shareholder perfecting a UCC
claim and foreclosing on substantially all of the assets (see Note 1). The
preferred stock may be converted into common stock at the option of the holder
and is entitled to receive annual cumulative preferred dividends of 4.5%. At
June 30, 2003, there were accumulated dividends in arrears of $4,425
(unaudited), or $9.83 (unaudited) per share.
The transaction has been accounted for at the carry-over basis of the related
assets. As such, I-Publishing has recorded the intellectual property
transferred at its cost.
Common Stock
- ------------
During the year ended December 31, 2002, MOD Studios issued 25,000 shares of
common stock to investors through a private placement memorandum in exchange
for $25,000 in cash.
During the year ended December 31, 2001, MOD Studios issued 370,000 shares of
common stock to investors through a private placement memorandum in exchange
for $150,000 in cash.
During the six months ended June 30, 2003, the Companies completed the
following:
.. I-Publishing issued 30,000 shares (unaudited) of common stock to its
founders for past services.
.. MOD Studios cancelled 15,999,997 shares (unaudited) of its outstanding
common stock after a shareholder/secured creditor foreclosed on
substantially all of the assets of MOD Studios.
Member Units
- ------------
During the year ended December 31, 2002, The Modern Company amended its
articles of organization, whereby the number of authorized units was increased
to 4,500. Thereafter, The Modern Company issued 2,100 units to its existing
members in a cash-free transaction.
During the year ended December 31, 2001, The Modern Company cancelled 800
units from a member and issued 800 units to another member in a cash-free
transaction. Under accounting principles generally accepted in the United
States of America, transfers between members give rise to compensation
expense. Management determined the value of the units transferred was not
material.
F-22
68
I-PUBLISHING, INC., MOD STUDIOS, INC., AND
THE MODERN COMPANY, LLC
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 2002 and June 30, 2003 (unaudited)
==============================================================================
NOTE 9 - WARRANT AND MARKETING CONSULTING AGREEMENT
Warrant
- --------
On January 11, 2001, MOD Studios issued a warrant agreement to Claire's Stores
("Claire's") to purchase 5,000,000 shares of common stock that expires on
January 11, 2011 and has an exercise price of $0.40 per share. The warrant
contains an anti-dilution clause that increased the number of shares available
for purchase under the warrant, on a one to one ratio, if MOD Studios sells
shares of common stock for less than $0.40 per share or without receiving
consideration. Upon exercise, MOD Studios will grant a credit of $400,000
toward the exercise of the warrant.
Marketing Consulting Agreement
- ------------------------------
On February 5, 2001, MOD Studios entered into a marketing agreement with
Claire's in exchange for $1,600,000 in cash for the development and production
of an interactive CD-ROM video magazine. The services and products were never
delivered.
On November 25, 2002, MOD Studios notified its shareholders and Claire's that
it would cease operations due to reoccurring operating losses, a significant
accumulated deficit, and that secured creditors had intentions of foreclosing
on its assets. Pursuant to the warrant agreement, MOD Studios gave Claire's a
30-day notice of intended disposition of the remaining assets of MOD Studios
to its secured creditors as permitted by the UCC. Claire's did not respond to
the 30-day notification, and thereafter, the warrant was canceled. The cash
was contributed to additional paid-in capital on that same date.
NOTE 10 - INCOME TAXES
The Companies have not incurred any income tax expense since inception other
than the taxes imposed by the state of California. The actual tax benefit
differs from the expected tax benefit computed by applying the United States
federal corporate tax rate of 34% to loss before income taxes as follows for
the years ended December 31, 2002 and 2001:
2002 2001
-------------- --------------
Expected tax benefit $ (151,000) $ (854,000)
State income taxes, net of federal benefit (25,000) (145,000)
Changes in valuation allowance 173,800 991,800
Other 3,000 8,000
-------------- --------------
Total $ 800 $ 800
============== ==============
F-23
69
I-PUBLISHING, INC., MOD STUDIOS, INC., AND
THE MODERN COMPANY, LLC
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 2002 and June 30, 2003 (unaudited)
==============================================================================
NOTE 10 - INCOME TAXES (Continued)
The following table summarizes the significant components of the Companies'
deferred tax assets (liabilities) at December 31, 2002:
Deferred tax assets (liabilities)
Bad debt $ 4,000
State taxes (67,000)
Capital loss carry-forward 34,000
Net operating loss carry-forward 915,000
Valuation allowance (886,000)
-----------
Net deferred tax assets (liabilities) $ -
===========
The Companies recorded an allowance of 100% for its net operating loss
carry-forward due to the uncertainty of its realization.
At December 31, 2002, the Companies had federal and state operating loss
carry-forwards of approximately $2,136,000, which begin expiring in 2011 and
2021, respectively.
NOTE 11 - RELATED PARTY TRANSACTIONS
Due to Affiliate
- ----------------
During the year ended December 31, 2002, MOD Studios collected $390,000 in
cash intended for Hollywood Previews for sales of equity and issuances of debt
by Hollywood Previews.
Asset Foreclosure and Licensing Agreement
- -----------------------------------------
During the six months ended June 30, 2003, a shareholder/secured creditor of
MOD Studios filed a UCC claim and foreclosed on the physical assets with a
book value of $71,196 (unaudited) and intellectual property with a book value
of $0 (unaudited) of MOD Studios. The shareholder had notes payable totaling
$393,331 (unaudited) at the time of the foreclosure. The shareholder is also
a majority shareholder and officer of the Companies. In addition to the
forbearance of the notes payable, MOD Studios is to receive 5% (unaudited) of
all revenues paid to the shareholder directly for the use of the "Hollywood
Previews" name or trademark from any third party to whom the shareholder
sells, licenses, assigns, or transfers the "Hollywood Previews" name. The
difference between the value of the notes payable and the physical assets was
recorded as a contribution to capital.
F-24
70
I-PUBLISHING, INC., MOD STUDIOS, INC., AND
THE MODERN COMPANY, LLC
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 2002 and June 30, 2003 (unaudited)
==============================================================================
NOTE 11 - RELATED PARTY TRANSACTIONS (Continued)
Acquisition of Assets
- ---------------------
During the six months ended June 30, 2003, I-Publishing acquired the
intellectual property from a shareholder and officer for 450 shares
(unaudited) of convertible preferred stock, with cumulative dividends of 4.5%,
valued at $0 (unaudited) and acquired the physical assets valued at $71,196
(unaudited) in exchange for a note payable. I-Publishing then sold the
physical assets to Hollywood Previews in exchange for a note receivable with a
value of $71,196 (unaudited). In addition, I-Publishing will pay the
shareholder 5% (unaudited) from the gross proceeds from any sales and license
use of the "Hollywood Previews Entertainment Magazine" trademark or name for a
period of five years.
The transactions have been accounted for at the carry-over basis of the
related assets.
Licensing Agreement
- -------------------
During the six months ended June 30, 2003, I-Publishing licensed to Hollywood
Previews the exclusive rights to use its intellectual property. Hollywood
Previews is to pay I-Publishing royalties of $0.05 (unaudited) per CD-ROM or
DVD sold with the "Hollywood Previews Entertainment Magazine" trademark or
name and $0.02 (unaudited) per CD-ROM or DVD sold for any other publication.
The royalties are subject to inflationary increases every two years. The
license term is for 99 years beginning April 4, 2003 (unaudited).
F-25
71
Hollywood Previews, Inc. and Subsidiaries
Pro Forma Financial Statements - Balance Sheet
December 31, 2002
Irvine Hollywood
Assets Pacific Previews ADJUSTMENTS TOTAL
------------- ------------- --------------- ------------
<s> <c> <c> <c> <c>
Current Assets
Cash 230 0 (230) 1 0
Accounts Receivable 0 0 0 0
------------- ------------- --------------- ------------
Total Current Assets 230 0 (230) 0
Fixed Assets, Net 3,464 0 (3,464) 1 0
Due from Affiliate 0 390,000 0 390,000
Other Assets 0 0 0 0
------------- ------------- --------------- ------------
Total Assets 3,694 390,000 (3,694) 390,000
============= ============= =============== ============
Liabilities & Shareholders' Equity (Deficit)
Current Liabilities
Accounts Payable and Accrueds 1,800 0 (1,800) 1 0
Notes Payable 51,788 0 (51,788) 1 0
Notes Payable - Related Parties 0 325,000 0 325,000
------------- ------------- --------------- ------------
Total Current Liabilities 53,588 325,000 (53,588) 325,000
Shareholders' Equity (Deficit)
Common Stock 11,528 0 46,184 1,2 57,712
Subscription Receivable 0 0 0 0
Common Stock Committed 0 65,000 0 65,000
Paid in Capital 987,971 0 (1,045,683) 1,2 (57,712)
Retained Earnings (1,049,393) 0 1,049,393 1 0
------------- ------------- --------------- ------------
Total Shareholders' Equity (Deficit) (49,894) 65,000 49,894 65,000
------------- ------------- --------------- ------------
Total Liabilities & Shareholders'
Equity (Deficit) 3,694 390,000 (3,694) 390,000
============= ============= =============== ============
December 31, 2002 balances
1 To remove balance sheet and statement of operations for Irvine Pacific from consolidation
2 To restate equity of operating company (Hollywood Previews) to that of shell (Irvine Pacific)
72
Hollywood Previews, Inc. and Subsidiaries
Pro Forma Financial Statements - Statement of Operations
December 31, 2002
Irvine Hollywood
Pacific Previews ADJUSTMENTS TOTAL
------------- ------------- --------------- ------------
<s> <c> <c> <c> <c>
REVENUES 0 0 0 0
COST OF SALES 0 0 0 0
------------- ------------- --------------- ------------
GROSS PROFIT 0 0 0 0
OPERATING EXPENSES:
Impairment of Asset 0 0 0 0
Selling, General & Admin 23,270 0 (23,270) 1 0
------------- ------------- --------------- ------------
TOTAL OPERATING EXPENSES 23,270 0 (23,270) 0
------------- ------------- --------------- ------------
INCOME (LOSS) FROM OPERATIONS (23,270) 0 23,270 0
------------- ------------- --------------- ------------
OTHER INCOME (EXPENSE):
Interest Expense 0 0 0 0
------------- ------------- --------------- ------------
TOTAL OTHER INCOME (EXPENSE) 0 0 0 0
------------- ------------- --------------- ------------
INCOME (LOSS) BEFORE TAXES (23,270) 0 23,270 0
INCOME TAX PROVISION 0 0 0 0
------------- ------------- --------------- ------------
NET INCOME (LOSS) (23,270) 0 23,270 0
============= ============= =============== ============
73
Hollywood Previews, Inc. and Subsidiaries
Pro Forma Financial Statements - Balance Sheet
June 30, 2003
Irvine Hollywood
Assets Pacific Previews ADJUSTMENTS TOTAL
------------- ------------- --------------- ------------
<s> <c> <c> <c> <c>
Current Assets
Cash 230 251,328 (230) 1 251,328
Accounts Receivable 0 37,500 0 37,500
------------- ------------- --------------- ------------
Total Current Assets 230 288,828 (230) 288,828
Fixed Assets, Net 2,964 62,499 (2,964) 1 62,499
Due from Affiliate 0 75,000 0 75,000
Other Assets 0 7,500 0 7,500
------------- ------------- --------------- ------------
Total Assets 3,194 433,827 (3,194) 433,827
============= ============= =============== ============
Liabilities & Shareholders' Equity (Deficit)
Current Liabilities
Accounts Payable and Accrueds 3,764 13,654 (3,764) 1 13,654
Notes Payable 51,788 0 (51,788) 1 0
Notes Payable - Related Parties 0 78,696 0 78,696
------------- ------------- --------------- ------------
Total Current Liabilities 55,552 92,350 (55,552) 92,350
Shareholders' Equity (Deficit)
Common Stock 11,528 1,690,751 (1,644,567)1,2 57,712
Subscription Receivable 0 (130,000) 0 (130,000)
Common Stock Committed 0 195,000 0 195,000
Paid in Capital 987,971 0 645,068 1,2 1,633,039
Retained Earnings (1,051,857) (1,414,274) 1,051,857 1 (1,414,274)
------------- ------------- --------------- ------------
Total Shareholders' Equity (Deficit) (52,358) 341,477 52,358 341,477
------------- ------------- --------------- ------------
Total Liabilities & Shareholders'
Equity (Deficit) 3,194 433,827 (3,194) 433,827
============= ============= =============== ===========
June 30, 2003 balances
1 To remove balance sheet and statement of operations for Irvine Pacific from consolidation
2 To restate equity of operating company (Hollywood Previews) to that of shell (Irvine Pacific)
74
Hollywood Previews, Inc. and Subsidiaries
Pro Forma Financial Statements - Statement of Operations
June 30, 2003
Irvine Hollywood
Pacific Previews ADJUSTMENTS TOTAL
------------- ------------- --------------- ------------
<s> <c> <c> <c> <c>
REVENUES 0 37,500 0 37,500
COST OF SALES 0 32,411 0 32,411
------------- ------------- --------------- ------------
GROSS PROFIT 0 5,089 0 5,089
OPERATING EXPENSES:
Impairment of Asset 0 850,173 0 850,173
Selling, General & Admin 2,464 567,879 (2,464) 1 567,879
------------- ------------- --------------- ------------
TOTAL OPERATING EXPENSES 2,464 1,418,052 (2,464) 1,418,052
------------- ------------- --------------- ------------
INCOME (LOSS) FROM OPERATIONS (2,464) (1,412,963) 2,464 (1,412,963)
------------- ------------- --------------- ------------
OTHER INCOME (EXPENSE):
Interest Expense 0 (511) 0 (511)
------------- ------------- --------------- ------------
TOTAL OTHER INCOME (EXPENSE) 0 (511) 0 (511)
------------- ------------- --------------- ------------
INCOME (LOSS) BEFORE TAXES (2,464) (1,413,474) 2,464 (1,413,474)
INCOME TAX PROVISION 0 800 0 800
------------- ------------- --------------- ------------
NET INCOME (LOSS) (2,464) (1,414,274) 2,464 (1,414,274)
============= ============= =============== ============