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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB
(AMENDMENT NO. 3)
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL
BUSINESS ISSUERS
UNDER SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
REALM PRODUCTION AND ENTERTAINMENT, INC.
(Name of Small Business Issuer in its charter)
FLORIDA 65-0609891
(State of incorporation) (I.R.S. Employer Identification No.)
4950 WEST PROSPECT ROAD, FT. LAUDERDALE, FLORIDA 33309
(Address of principal executive offices) (Zip Code)
Issuer's Telephone Number (954) 745-0077
Securities to be registered pursuant to 12(b) of the Act: NONE
Securities to be registered pursuant to 12(g) of the Act:
COMMON STOCK $.005 PAR VALUE
(Title of Class)
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INFORMATION REQUIRED IN REGISTRATION STATEMENT
PART I
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
Realm Production and Entertainment, Inc. (the "Company"), was
incorporated under the laws of the State of Florida in May 1995. The Company,
through BRT Video, Inc., its majority owned subsidiary ("BRT") and VidKid
Distribution, Inc., its wholly owned subsidiary ("VidKid"), is engaged in (i)
the development and production of live and computer generated children's made
for television movies and series; (ii) the marketing and sale of various
children's programs, including certain "Howdy Doody" episodes; and (iii)
providing video and post-production and distribution services to third
parties.In addition to the foregoing, the Company's business is intended to
include, but not be limited to, obtaining video, broadcast and distribution
rights ("Intellectual Properties") to children's television programs and movies
owned, licensed, or to be acquired or created by the Company.
PROGRAM PRODUCTION
In October 1998, the Company acquired 72.5% of the outstanding stock of
BRT. The remaining 27.5% is owned by James Purpuro and Norman Titcomb. BRT was
organized in November 1983 and provides video, audio and editing post-production
services and facilities to the Company and third parties including local
television stations, independent producers and cable broadcasters. The Company's
production business, as conducted through BRT, involves a three phase process
comprised of pre-production, production and post-production activities.
The pre-production stage begins with the creation of a concept and
story. During pre-production, a script and songs (both music and lyrics) are
written. In addition, Company personnel prepare model sheets for each character,
create story boards and mouth charts for purposes of synchronization. The
Company's pre-production activities are presently conducted principally by the
Company at its offices and at work for hire studios including those of set and
puppet manufacturers.
The production phase includes the actual shooting or computer animation
of the principal photography of each episode and/or movie. During the production
phase, principal photography occurs including but not limited to, sets lighting,
sound recording, blue screen photography and animation.
The post-production phase involves editing the which includes adding
voices, music and special effects to the rough cut magnetic tape, film negative
and/or animation. The tape or negative is then edited and reviewed for quality,
and any corrections or final changes required are made. The result of the
post-production process is a final positive print (for film) or a 1-inch master
take (for television or videocassette) in which the video, music and sound
effects are synchronized.
MARKETING AND DISTRIBUTION
In July 1997, the Company formed Vidkid as a wholly-owned subsidiary.
Vidkid will distribute Intellectual Properties owned by the Company and various
third parties for which Vidkid will receive royalty payments. The Company
expects Vidkid to generate revenues from the programs it distributes through
three principal channels: (i) markets, including network, syndicated and cable
television, both in the United States and abroad, (ii) non-television markets,
including videocassette sales and rentals and (iii) after-market merchandising,
including licensing the use of children's characters in connection with toys,
clothing and other forms of children's products ("Merchandising Rights")
although Vidkid has not acquired and Merchandising Rights to date.
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Vidkid owns both the broadcast and video distribution rights for 130
color episodes of The New Howdy Doody Show produced in the 1970's (the "Howdy
Doody Episodes"). NBC owns the Howdy Doody trademark rights and all
merchandising rights to "Howdy Doody" products. The Company's marketing strategy
is to utilize the "Howdy Doody Episodes" to establish immediate video sales
revenues, television exposure and to enhance the Company's name in the industry.
"HOWDY DOODY". In August 1997, VidKid entered an agreement with Madison
Sports and Entertainment, Inc. ("Madison") to purchase from Madison the
broadcast and video rights (the "Rights") in 130 color episodes of the "Howdy
Doody" Show produced in the 1970's (the "Madison Agreement"). After the Company
paid an initial deposit of $50,000 to Madison pursuant to the terms of the
Madison Agreement, litigation ensued between Madison and John J. Drury ("Drury")
as to which party owned the Rights. After Drury prevailed in the litigation, the
Company entered into an agreement with Drury and Buffalo Bob Enterprises, Inc.
which set forth the terms pursuant to which the Company would purchase the
Rights from Drury (the "Drury Agreement"). Subsequent to the consummation of the
Drury Agreement, Madison appealed the lower court's ruling naming Drury as the
owner of the Rights but the appellate court upheld the lower court's ruling. As
a result of the appellate court's ruling, the Company intends to pay the
remainder of the purchase price for the Howdy Doody Episodes to Drury. The
Company is in possession of Howdy Doody Episodes and is in the process of
cleaning, digitizing and editing them, which is estimated to be completed in the
second quarter of 1999. Negotiations have commenced to establish the extent of
the market for the episodes as both a video sale and as a television series. QVC
has featured the "Howdy Doody Episodes" on two separate programs.
In August 1998, the Company signed video distribution agreements with
National Syndications, Inc. and Fast Forward Marketing, to distribute the "Howdy
Doody" Episodes to the retail markets. The National Syndications agreement was
terminated in accordance with its terms in December 1998. The Fast Forward
Marketing agreement, which terminates in July 2001, sets forth the terms
pursuant to which Fast Forward Marketing will attempt to sell "Howdy Doody"
Episode video box sets.
In December 1998, VidKid licensed Broadcast America Partnership, Ltd.
("BAP") the right to broadcast 65 of the "Howdy Doody" Episodes (the "Broadcast
America Agreement"). On June 2, 1999, the Company and BAP agreed to terminate
the Broadcast America Agreement with neither party having any further
obligations to the other party. The Broadcast America Agreement was terminated
upon the Company's request due to BAP's inability to procure advertising funds
necessary to air the "Howdy Doody" Episodes.
The Company is attempting to enter into additional agreements with
companies to market the Howdy Doody Episodes to foreign markets and for domestic
television broadcast although no agreements or material negotiations have taken
place to date.
In addition to the "Howdy Doody Episodes", the Company has acquired
rights to, and commenced, preliminary pre-production development of additional
children's programs.
In August 1997, the Company entered into a joint venture with The
Animation Factory, Inc. ("TAF"). TAF has established themselves in the video,
TV, CD-ROM and comic book industries, and has animated episodes of "VanPires", a
nationally syndicated children's show. Through the joint venture agreement, the
Company acquired the exclusive distribution rights and a fifty (50%) percent
equity participation in "Atomic Ants" and "Goblins" which are computer animation
concepts to be produced as television series. The Company is entitled to
additional fees of between 10% and 22.8% from gross revenues generated from the
distribution if the Company can arrange for or provide financing necessary to
produce a minimum of thirteen (13) episodes of "Atomic Ants" and "Goblins."
"ATOMIC ANTS is a three dimensional computer animated action series
takes place in the year 3618, when humans have long since become extinct, and
the insect species have evolved to take over the earth. "GOBLINS"
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is a children's live action, puppet and three dimensional computer animated show
whose three (3) minute "trailer" is presently being edited.
In May 1995, the Company entered into an agreement with John Driver,
the creator of "YAHOO BUGABOO", to develop, produce, finance and distribute
Yahoo Bugaboo programming. "YAHOO BUGABOO", is a children's adventure story
concept with a set of newly created puppet characters. The Company completed the
production of the pilot (three half-hour episodes) in August 1996. Subject to
the availability of adequate financial resources, the Company plans to produce
13 episodes of "Yahoo Bugaboo." If the Company decides to expand the Yahoo
Bugaboo concept beyond the pilot, the Company will be obligated to pay Mr.
Driver three and one-half (3.5%) percent of the adjusted gross merchandising
royalty revenues the Company receives from "Yahoo Bugaboo." Mr. Driver is also
entitled to perform various production services on behalf of the Company in
connection with the continued development and production of "Yahoo Bugaboo"
program for which the Company must pay Mr. Driver certain commissions. Mr.
Driver has the right to receive the agreement if certain production quotas are
not achieved.
"SPACE PIRATES" is a 3D computer generated pirate adventure that takes
place in the year 3018. The adventure is premised upon classic pirate characters
tales but also involves new concepts and story lines which includes futuristic
majestic space ships that sail through uncharted regions of the universe. The
Company is producing Space Pirates and Vidkid is currently distributing Space
Pirates. Neither the Company nor Vidkid currently has agreements with third
parties regarding Space Pirates.
Marketing and distribution costs for the "Howdy Doody Episodes" during
1997 and 1998 were approximately $108,500 and $817,500, respectively. During the
current fiscal year, the Company has spent approximately $75,000 on "Howdy
Doody" marketing efforts. Marketing and distribution costs for "Yahoo Bugaboo"
during 1997 and 1998 were approximately $262,500 and $0, respectively. During
the current fiscal year, the Company spent approximately $37,500 on "Yahoo
Bugaboo" marketing efforts. During 1997 and 1998, the Company spent
approximately $0 and $104,000, respectively on "Space Pirates" marketing and
distribution efforts. During the current year, the Company has spent about
$475,000 on Space Pirates marketing efforts.
COMPETITION
The Company competes with many television production and distribution
companies, TV studios and editing facilities, many of which are larger and have
greater human, financial and other resources. In the program creation business,
the Company competes with many other producers of children's television
programs, many of which are larger and have substantially greater human,
financial and other resources than the Company and which have histories of
attracting talent, producing children's programs and hiring key employees for
the production of children's programs, as well as significantly broader access
to production and distribution opportunities and creative talent. The most
critical factor in the program creation business is the commercial acceptance of
the programs by the public. In selecting programs, customers such as television
networks rely heavily on the past history of successful programs by the
producer. Since the Company does not have any history at this time, it is at a
competitive disadvantage.
Year 2000 Impact
The Year 2000 issue is the result of information technology systems and
embedded systems (products which are made with microprocessor (computer) chips)
such as personal computers using a two-digit format, as opposed to four digits,
to indicate the year. Such information technology and embedded systems may be
unable to properly recognize and process date-sensitive information beginning
January 1, 2000. This could result in a system failure or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities.
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The Company's State of Readiness
The Company and its subsidiaries use a limited amount of computers and
computer software primarily in connection with their in-house bookkeeping
systems. Such systems, including hardware and software, were recently purchased
and are believed, by the manufacturers and the Company to be year 2000
compatible.
Notwithstanding the fact that the Company monitors the extent to which
its and its subsidiaries' hardware and other embedded chip equipment may not be
year 2000 compatible, as a precaution, the Company both uses back-up systems to
store electronic or computer stored information, bookkeeping records and other
administrative information and keeps paper records of all material transactions
and correspondence.
The Costs to Address the Company's Year 2000 Issues
Based on the limited use of computer software, hardware and embedded
systems by the Company and its subsidiaries and the progress the Company and its
subsidiaries have made in identifying and addressing their year 2000 issues,
management does not foresee significant risks associated with year 2000
compliance by the Company and its subsidiaries at this time. The Company
believes that the costs directly associated with the year 2000 issue will be
less than $20,000 and that all required upgrades and replacements, if any, will
be completed prior to the end of the third quarter of 1999.
Customer, Supplier and Other Third Party Year 2000 Issues
The Company does not currently have material third party relationships
with suppliers, customers or other third parties with which it conducts
business. Therefore management cannot, at this time, predict the potential costs
to the Company or its subsidiaries of any adverse impact or effect of any year
2000 deficiencies by any third parties.
The Risks of the Company's Year 2000 Issues and Contingency Plans
Although the Company believes that its internal exposure to the year
2000 issue is limited, there can be no assurance its software or any of its
computer systems will be fully year 2000 compatible. At this time, the Company
is unable to accurately predict the consequences of failed remediation efforts
or new systems to effectively address the year 2000 issue, although management
does not believe that any such failures will result in a material, adverse
effect on the Company or its subsidiaries, or the operation of their business.
ITEM 2. DESCRIPTION OF PROPERTY
The Company maintains a 1500 square foot corporate office at 3100
N.29th Court, Hollywood, Florida. These leased offices house the corporate
executives, and are the center point of the Company's operations. The lease
requires the Company to pay approximately $3,000 per month and terminates in May
2000 subject to the Company's option to renew the lease for a period of three
years.
BRT maintains a 15,000 square foot corporate office at 4950 W. Prospect
Road, Ft. Lauderdale, Florida 33309. These leased offices and the site of video
editing and audio facilities, and a 5,000 square foot sound stage, scheduled to
be constructed in the future. The lease for the BRT facility requires the
Company to pay approximately $11,500 per month and terminates in November 2007.
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ITEM 3. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND SIGNIFICANT EMPLOYEES
The following table sets forth the names, positions with the Company
and ages of the executive officers and directors of the Company. Directors will
be elected at the Company's annual meeting of shareholders and serve for one
year or until their successors are elected and qualify. Officers are elected by
the Board and their terms of office are, except to the extent governed by
employment contract, at the discretion of the Board.
EXECUTIVE OFFICERS AND DIRECTORS
NAME AGE POSITION
- ---- --- --------
Steven Adelstein 51 Chairman of the Board,
Director and President
Gus Guilbert, Jr. 37 Executive Vice President,
Treasurer and Secretary
STEVEN ADELSTEIN has been Chairman of the Board, President and Director
of the Company since May 1995. From February 1993 and February 1995, Mr.
Adelstein was the Executive Producer/coordinator/packager of "Jelly Bean
Jungle," a children's television series syndicated in over 85% of the U.S.
markets and in many foreign territories. Between September 1969 and June 1972,
Mr. Adelstein worked as a Certified Public Accountant with the firm of Peat,
Marwick, Mitchell and Company. In 1989, Mr. Adelstein filed for personal
bankruptcy under the Federal Bankruptcy Act, as a primary result of contingent
liability on commercial real estate loans to various lending institutions. Mr.
Adelstein devotes about 95% of his time to the Company and 5% of his time to
providing services to AUW, Inc., a family owned company. See "Interest of
Management and Certain Transactions".
GUS GUILBERT, JR. has been Executive Vice President, Treasurer and
Secretary of the Company since August 1997. Since June 1993, Mr. Guilbert has
served as Director and President of Gilco, Inc. a computer consulting company
which is not currently conducting operations. Mr. Guilbert currently devotes all
of his time to the Company.
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ITEM 4. EXECUTIVE COMPENSATION
The following table sets forth information relating to the compensation
paid by the Company during the past two fiscal years to the Company's officers.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
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Awards
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Securities
Other Under-
Annual Resticted Lying All Other
Compen- Stock Options/ LTIP Compen-
Name and Principal sation Award(s) SARs Payouts sation
Position Year Salary Bonus ($) ($) (#) ($) ($)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Steven Adelstein,
Chairman 1998 $120,000 $18,000
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1997 $ 90,000 $15,000 200,000(1)
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1996 $ 60,000 $15,000 300,000(1)
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Gus Guilbert 1998 $ 36,000 --
Executive
Vice President, 1997 $ 36,000 -- 25,000(2)
Treasurer
and Secretary 1996 N/A N/A N/A
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</TABLE>
(1) Assigned by Mr. Adelstein to family members and their affiliates.
(2) Issuable upon the exercise of warrants exercisable to $2.00 per share
until December 31, 2005.
EMPLOYMENT AGREEMENTS
STEVEN ADELSTEIN, PRESIDENT AND CHAIRMAN. In January 1996, the Company
entered into a five year employment agreement with Steven Adelstein. The
agreement entitles Mr. Adelstein to receive an average annual base salary of
$102,000 and standard fringe benefits. The agreement also entitles Mr. Adelstein
to receive a bonus equal to 2.5% of gross receipts actually collected by the
Company resulting from merchandising royalties of the Company's Intellectual
Properties. Mr. Adelstein, or his affiliates, also received warrants to acquire
300,000 shares of Common Stock of the Company at an average exercisable price of
$1.25 per share and expiring December 31, 2005. Pursuant to the terms of Mr.
Adelstein's employment agreement with the Company, the Company is obligated to
make a three (3) year loan to Mr. Adelstein of up to $375,000, the proceeds
which must be used to pay the exercise price of the 300,000 warrants granted to
Mr. Adelstein pursuant to the employment agreement which were subsequently
assigned by Mr. Adelstein to his children. The loan will accrue interest at 9.6%
per annum with interest only payable semi-annually until maturity. The loan will
be secured by the shares issued upon exercise of the warrants.
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GUS GUILBERT, JR. EXECUTIVE VICE-PRESIDENT, TREASURER AND SECRETARY. In
August 1997, the Company entered into an three year employment agreement with
Mr. Guilbert. The agreement entitles Mr. Guilbert to an annual base salary of
$36,000 which is increased to $42,000 for the third year of the Agreement and
standard fringe benefits. The agreement also entitles Mr. Guilbert to an annual
bonus based upon performance as determined by the Board of Directors.
Additionally, Mr. Guilbert was granted warrants to acquire 25,000 shares of
Common Stock of the Company at an exercisable price of $2.00 per share
exercisable until December 31, 2005.
STOCK OPTIONS
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
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Individual Grants
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Potential Realizable
Value at
Assumed Annual Alternative To
Percent of Rate of Stock (f) and (g):
Number Of Total Price Appreciation For Grant Date
Securities Options/ Option Term Value
Underlying SARs Granted Exercise Of ------------------------------------------
Options/SARs To Employees Base Price Expiration Grant Date
Name Granted (#) In Fiscal Year ($/Sh) Date 5% ($) 10% ($) Present Value
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<S> <C> <C> <C> <C> <C> <C> <C>
Steven Adelstein n/a n/a n/a n/a n/a n/a n/a
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Gus Guilbert n/a n/a n/a n/a n/a n/a n/a
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</TABLE>
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1998 STOCK OPTION PLAN
INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN
In January 1998, the Board of Directors and a majority of the Company's
shareholders ("Majority Shareholders") adopted the Company's 1998 Stock Option
Plan (the "Plan").
The Plan works to increase the employees', consultants' and employee
directors' proprietary interest in the Company and to align more closely their
interests with the interests of the Company's shareholders. The Plan will also
aid the Company in attracting and retaining the services of experienced and
highly qualified professionals. Under the Plan, the Company intends to reserve
an aggregate of 500,000 shares of Common Stock for issuance pursuant to options
granted under the Plan ("Plan Options"). The Board of Directors or a Committee
of the Board of Directors (the "Committee") of the Company will administer the
Plan which includes, without limitation, the selection of the persons who will
be granted Plan Options under the Plan, the type of Plan Options to be granted,
the number of shares subject to each Plan Option and the Plan Option price.
Plan Options granted under the Plan may either be options qualifying as
incentive stock options ("Incentive Options") under Section 422 of the Internal
Revenue Code of 1986, as amended, or options that do not so qualify
("Non-Qualified Options"). In addition, the Plan also allows for the inclusion
of a reload option provision ("Reload Option"), which permits an eligible person
to pay the exercise price of the Plan Option with shares of Common Stock owned
by the eligible person and receive a new Plan Option to purchase shares of
Common Stock equal in number to the tendered shares. Any Incentive Option
granted under the Plan must provide for an exercise price of not less than 100%
of the fair market value of the underlying shares on the date of such grant, but
the exercise price of any Incentive Option granted to an eligible employee
owning more than 10% of the Company's Common Stock must be at least 110% of such
fair market value as determined on the date of the grant. The term of each Plan
Option and the manner in which it may be exercised is determined by the Board of
the Directors or the Committee, provided that no Plan Option may be exercisable
more than 10 years after the date of its grant and, in the case of an Incentive
Option granted to an eligible employee owning more than 10% of the Company's
Common Stock, no more than five years after the date of the grant. The exercise
price of Non-Qualified Options shall be determined by the Board of Directors or
the Committee.
The per share purchase price of shares subject to Plan Options granted
under the Plan may be adjusted in the event of certain changes in the Company's
capitalization, but any such adjustment shall not change the total purchase
price payable upon the exercise in full of Plan Options granted under the
Plan.Officers, directors, key employees and consultants of the Company and its
subsidiaries (if applicable in the future) will be eligible to receive
Non-Qualified Options under the Plan. Only officers, directors and employees of
the Company who are employed by the Company or by any subsidiary thereof are
eligible to receive Incentive Options.
All Plan Options are nonassignable and nontransferable, except by will
or by the laws of descent and distribution, and during the lifetime of the
optionee, may be exercised only by such optionee. If an optionee's employment is
terminated for any reason (other than his death or disability or termination for
cause), or if an optionee is not an employee of the Company but is a member of
the Company's Board of
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Directors and his service as a Director is terminated for any reason (other than
death or disability), the Plan Option granted to him shall lapse to the extent
unexercised on the earlier of the expiration date or 30 days following the date
of termination. If the optionee dies during the term of his employment, the Plan
Option granted to him shall lapse to the extent unexercised on the earlier of
the expiration date of the Plan Option or the date one year following the date
of the optionee's death.If the optionee is permanently and totally disabled
within the meaning of Section 22(e)(3) of the Internal Revenue Code of 1986, the
Plan Option granted to him lapses to the extent unexercised on the earlier of
the expiration date of the option or one year following the date of such
disability.
The Board of Directors or the Committee may amend, suspend or terminate
the Plan at any time, except that no amendment shall be made which (i) increases
the total number of shares subject to the Plan or changes the minimum purchase
price therefor (except in either case in the event of adjustments due to changes
in the Company's capitalization), (ii) affects outstanding Plan Options or any
exercise right thereunder, (iii) extends the term of any Plan Option beyond ten
years, or (iv) extends the termination date of the Plan. Unless the Plan shall
theretofore have been suspended or terminated by the Board of Directors, the
Plan shall terminate on approximately 10 years from the date of the Plan's
adoption. Any such termination of the Plan shall not affect the validity of any
Plan Options previously granted thereunder.
As of May 5, 1999, no Plan Options had been granted. Mr. Adelstein, the
sole director of the Company and administrator of the Plan may not grant himself
Plan Options until additional members are added to the Company's Board.
OPTION EXERCISES AND HOLDINGS
The following table sets forth information with respect to the exercise
of options to purchase shares of Common Stock during the fiscal year ended
December 31, 1998, of each person named in the Summary Compensation Table and
the unexercised options held as of the end of the 1998 fiscal year.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END
OPTION/SAR VALUES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Number of
Securities Value Of
Underlying Unexercised
Unexercised In-The-Money
Options/SARs Options/SARs
At Fiscal Year-End At Fiscal Year-
Shares Value (#) End ($)
Acquired On Realized Exercisable/ Exercisable/
Name Exercise (#) ($) Unexercisable Unexercisable
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Steven Adelstein 0 0 500,000(1) N/A
- -----------------------------------------------------------------------------------------------------------------------------------
Gus Guilbert 0 0 50,000 N/A
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 500,000 warrants held by Mr. Adelstein family members and
affiliates. See "Security Ownership of Certain Beneficial Owners and
Management.
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ITEM 5. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
Company's Common Stock beneficially owned on May 4, 1999, for (i) each
shareholder known by the Company to be the beneficial owner of five (5%) percent
or more of the Company's outstanding Common Stock, (ii) each of the Company's
executive officers and directors, and (iii) all executive officers and directors
as a group. At May 4, 1999, there were 2,962,626 Shares ("Shares") of Company
common stock, par value $.005 (the "Common Stock") outstanding.
No. of Shares Percent of
Name and Address or of Common Stock Beneficial
Identity of Group(1) Beneficially Owned(2) Ownership
- -------------------- --------------------- ---------
Steve Adelstein (3) 906,400 26.2%
Gus Guilbert, Jr. (4) 88,000 2.9%
FAC Enterprises, Inc.(5) 300,000 10.1%
Realm Holding, Inc.(6) 600,000 20.3%
Kaufmann Fund(7) 172,000 5.8%
---------- ------
2,066,400 65.3%
========== ======
All Executive Officers and Directors
as a group (2 persons)
(1) Unless otherwise indicated, the address of each of the persons setforth
below is 4950 West Prospect Road, Fort Lauderdale, Florida 33309.
(2) In general, a person is considered a "beneficial owner" of a security
if that person has or shares the power to vote or direct the voting of
such security, or the power to dispose of such security. A person is
also considered to be a beneficial owner of any securities of which the
person has the right to acquire beneficial ownership within (60) days.
(3) Mr. Adelstein is Chairman, Director and President of the
Company.Includes (i) warrants to purchase up to 300,000 shares of
Common Stock at an exercise price of $1.25 exercisable through December
31, 2005 held by Mr. Adelstein's children; (ii) warrants to purchase up
to 100,000 shares of Common Stock exercisable at $2.30 exercisable
through December 31, 2005 owned by AUW, Inc. ("AUW"), a company of
which Mr. Adelstein is an officer and which is controlled by Mr.
Adelstein's family members; and (iii) warrants to purchase 100,000
shares of Common Stock exercisable at $2.00 per share through December
31, 2005 owned by Mr. Adelstein's parents; and (iv) an aggregate of
406,400 shares of Common Stock of the Company owned by Mr. Adelstein's
family members and AUW.
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(4) Mr. Guilbert is Executive Vice President, Secretary and Treasurer of
the Company. Includes (i) 25,000 shares of Common Stock issuable upon
the exercise of warrants exercisable at $2.00 per share until December
31, 2005; and (ii) 25,000 shares of Common Stock issuable upon the
exercise of warrants exercisable at $2.30 until December 31, 2005.
(5) Address is 4960 South Virginia Avenue, Suite 300, Reno, NV 89502.
(6) Address is 648 Post Road, Wakefield, RI 02879.
(7) Address is 140 E. 45th Street, 43rd Floor, New York, New York 10017.
ITEM 6. INTEREST OF MANAGEMENT AND OTHER CERTAIN TRANSACTIONS
Prior to being employed by the Company, Mr. Adelstein became employed
with AUW, Inc. ("AUW"), a corporation controlled by family members of Mr.
Adelstein. Pursuant to the terms of an agreement between the Company and AUW in
which AUW allowed Mr. Adelstein to work for the Company at the same time Mr.
Adelstein works for AUW, AUW receives a portion of the compensation received by
Mr. Adelstein from the Company. For example, AUW received $75,000, $60,000 and
$60,000 portions of Mr. Adelstein's compensation in 1996, 1997 and 1998,
respectively.
Pursuant to the terms of Mr. Adelstein's employment agreement with the
Company, the Company is obligated to make a three (3) year loan to Mr. Adelstein
of up to $375,000, the proceeds which must be used to pay the exercise price of
the 300,000 warrants granted to Mr. Adelstein pursuant to the employment
agreement which were subsequently assigned to Mr. Adelstein's children. The loan
will accrue interest at 9.6% per annum with interest only payable semi-annually
until maturity. The loan will be secured by the shares issued upon exercise of
the warrants.
ITEM 7. DESCRIPTION OF SECURITIES
The Company is authorized to issue 10,000,000 shares of Common Stock,
par value $.005 per Share, and 2,000,000 shares of Preferred Stock, par value
$.01 per Share. As of May 4, 1998, there were 2,962,626 shares of Common Stock
issued and outstanding and no shares of Preferred Stock outstanding.
COMMON STOCK
The Company is authorized to issue up to 10,000,000 shares ("Shares")
of Common Stock, $.005 par value per share, of which 2,962,626 Shares are issued
and outstanding as of May 4, 1999. Upon liquidation, dissolution or winding up
of the Company, after payment to creditors and holders of any outstanding shares
of Preferred Stock, the assets of the Company will be divided pro rata on a per
Share basis among the holders of the Common Stock.
Each share of Common Stock entitles the holders thereof, to one vote.
Holders of Common Stock do not have cumulative voting rights which means that
the holders of more than 51% of shares voting for the election of Directors can
elect all of the Directors if they choose to do so, and in such event, the
holders of the remaining shares will not be able to elect any Directors. The
ByLaws of the Company require that only a majority of the issued and outstanding
shares of Common Stock of the Company need be represented to constitute a quorum
and to transact business at a shareholders' meeting. The Common Stock has no
preemptive, subscription or conversion rights and is not redeemable by the
Company.
11
<PAGE>
PREFERRED STOCK
Up to 2,000,000 shares of Preferred Stock may be issued by the Board of
Directors of the Company with rights, designations and preferences as determined
or established by the Board of Directors of the Company. There are currently no
shares of Preferred Stock outstanding.
Currently, there are outstanding an aggregate of 651,900 warrants of
which (i) warrants to purchase 300,000 shares of Common Stock exercisable at
$1.25 per share through December 31, 2005; and (ii) warrants to purchase 150,000
shares of Common Stock exercisable at $2.00 per share through December 31, 2005;
(iii) warrants to purchase 150,000 shares of Common Stock at $2.30 per share
through December 31, 2005; and (iv) warrants to purchase 51,900 shares of Common
Stock at $5.00 per share through December 31, 2001.
CERTAIN FLORIDA LEGISLATION
Florida has enacted legislation that may deter or frustrate takeovers
of Florida corporations. The Florida Control Share Act generally provides that
shares acquired in excess of certain specified thresholds will not possess any
voting rights unless such voting rights are approved by a majority of a
corporation's disinterested shareholders. The Florida Affiliated Transactions
Act generally requires super majority approval by disinterested shareholders of
certain specified transactions between a public corporation and holders of more
than 10% of the outstanding voting shares of the corporation (or their
affiliates). Florida law and the Company's Articles and Bylaws also authorize
the Company to indemnify the Company's directors, officers, employees and
agents. In addition, the Company's Articles and Florida law presently limit the
personal liability of corporate directors for monetary damages, except where the
directors (i) breach their fiduciary duties; and (ii) such breach constitutes or
includes certain violations of criminal law, a transaction from which the
directors derived an improper personal benefit, certain unlawful distributions
or certain other reckless, wanton or willful acts or misconduct.
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER STOCKHOLDER MATTERS
As of January 19, 1999, there were approximately 350 shareholders of record of
the Company's Common Stock. The Company's Common Stock is currently listed for
trading on the over-the-counter bulletin board under the symbol "RMPE". The
following table sets forth, for the period since April 1, 1998, the high and low
bid prices for the Common Stock as reported by the OTC Bulletin Board. The
following high and low bid prices reflect interdealer prices without detail
markup, markdown or commission and may not represent actual transactions.
COMMON STOCK
---------------------------
HIGH LOW
---- ----
1998
January 1, 1998 - March 31, 1998 N/A N/A
April 1, 1998 - June 30, 1998 4.50 3.375
July 1, 1998 - September 30, 1998 6.00 4.00
October 1, 1998 - December 31, 1998 5.00 3.50
January 1, 1999 - March 31, 1999 5.125 3.50
The transfer agent for the Company's Common Stock is Stock Trans, Inc.,
7 East Lancaster, 3rd Floor, Ardmore, PA 19003-2318.
12
<PAGE>
The Company has never paid cash dividends on its Common Stock. The
Company presently intends to retain future earnings, if any, to finance the
expansion of its business and does not anticipate that any cash dividends will
be paid in the foreseeable future. The future dividend policy will depend on the
Company's earnings, capital requirements, expansion plans, financial condition
and other relevant factors.
ITEM 2. LEGAL PROCEEDINGS
Management of the Company believes there are no material legal
proceedings filed, or to the Company's knowledge, threatened against the
Company. On October 14, 1998, BRT filed suit against Asset Security Corp. and
Fred Brandau in the Circuit Court in the Seventeenth Judicial Circuit in Broward
County, Florida, alleging breach of contract and fraud against the Asset
Security Corp. and Brandau relating to the terms of an agreement between the
parties pursuant to which the defendants were obligated to invest money in BRT
which defendants never invested. BRT sought damages in excess of $15,000. On
August 6, 1999 BRT dismissed its complaint against Asset Secuirty Corp. and
Brandau and Asset Security Corp. and Brandau dismissed all causes of action
against BRT. Neither Asset Security Corp. nor Fred Brandau own shares of common
stock or other securities of BRT or the Company.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
The Company's auditors, Millword & Co., will not stand for reelection
as the Company's independent auditors for the 1999 fiscal year. The Company has
been advised that as a matter of internal policy, Millword & Co. is not, at the
present time, undertaking audits of publicly registered companies.
Notwithstanding, there have been no disagreements between the Company and
Millword.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
In January 1996, the Company issued warrants to purchase up to 300,000
shares of Common Stock of the Company to a shareholder and officer of the
Company. These warrants are exercisable at $1.25 per share on or prior to
December 31, 2000. The exercise period of the warrants was subsequently extended
to December 31, 2005.
During August 1997, the Company issued 303,071 shares of Common Stock
at a price of $1.75 per share to 4 investors in accordance with Rule 504 under
Regulation D promulgated under the Securities Act of 1933, as amended (the
"Act") for net proceeds of $530,000 to be used for the operations of the
Company.
Between August 1997 and October 1998, the Company issued an aggregate
of 410,500 shares of Common Stock to 16 individuals (four of whom were
affiliates or family members of affiliates of the Company) in exchange for
professional services rendered to the Company.
During August 1997, the Company converted notes payable and accrued
salaries amounting to $114,375 into 85,262 shares of Common Stock at per share
prices ranging from $1.25 to $1.75 per share.
In January 1997, the Company issued warrants to purchase up to 150,000
shares of Common Stock of the Company to shareholders and employees of the
Company. These warrants are exercisable at $2.00 per share on or prior to
December 31, 1999. The exercise period of the warrants was subsequently extended
to December 31, 2005. The individuals had access to financial and other
information concerning the Company and had the opportunity to ask questions
concerning the Company and its operations. Accordingly, the issuance of the
shares was exempt from the registration requirements of the Act pursuant to
Section 4(2) of the Act.
13
<PAGE>
In December 1997, the Company issued warrants to purchase up to 150,000
shares of Common Stock of the Company to shareholders and employees of the
Company. These warrants are exercisable at $2.30 per share on or prior to
December 31, 2002. The exercise period of the warrants was subsequently extended
to December 31, 2005. The individuals had access to financial and other
information concerning the Company and had the opportunity to ask questions
concerning the Company and its operations. Accordingly, the issuance of the
shares was exempt from the registration requirements of the Act pursuant to
Section 4(2) of the Act.
In August 1998, the Company issued 227,434 shares of Common Stock at an
average price of $2.42 per share to six accredited investors in accordance with
Rule 504 of Regulation D promulgated under the Act.
During October 1998, the Company issued warrants to purchase 37,500
shares of stock of the Company to one employee. The options are exercisable at
$5.00 per share through January 20, 2001. The individuals had access to
financial and other information concerning the Company and had the opportunity
to ask questions concerning the Company and its operations. Accordingly, the
issuance of the shares was exempt from the registration requirements of the Act
pursuant to Section 4(2) of the Act.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Florida Business Corporation Act (the "Corporation Act") permits
the indemnification of directors, employees, officers and agents of Florida
corporations. The Company's Articles of Incorporation (the "Articles") and
Bylaws provide that the Company shall indemnify its directors and officers to
the fullest extent permitted by the Corporation Act. Insofar as indemnification
for liabilities arising under the Act may be permitted to directors, officers or
persons controlling the Company pursuant to the foregoing provisions, the
Company has been informed that, in the opinion of the Commission, such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling the
Company pursuant to the foregoing provisions, the Company has been informed that
in the opinion of the Securities and Exchange Commission, such indemnification
is against public policy as express in the act and is therefore unenforceable.
The Articles of Incorporation and Bylaws of the Company require the
Company to indemnify its Directors and officers to the fullest extent permitted
by the Business Corporation Act of the State of Florida.
The above indemnification provisions notwithstanding, the Company is
aware that insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers or persons
controlling the Company pursuant to the foregoing provisions, the Company has
been informed that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as express in the act and is
therefore unenforceable.
PART F/S
The financial statements and supplementary data are included herein.
FINANCIAL STATEMENTS AND EXHIBITS
The following audited Financial Statements for the Company, include the
audited balance sheet at December 31, 1998 and the related audited statements of
operations, changes in Stockholders Equity and cash flows for each of the years
in the two year period ended December 31, 1998 and 1997.
14
<PAGE>
REALM PRODUCTION AND ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1998 and
1997 and the Three Months Ended March 31,
1999 and 1998
CONTENTS
<TABLE>
<S> <C>
For the Years Ended December 31, 1998 and 1997:
Report of Independent Certified Public Accountants..............................................................2
Consolidated Financial Statements:
Consolidated Balance Sheet......................................................................................3
Consolidated Statements of Operations...........................................................................4
Consolidated Statement of Changes in Stockholders' Equity (Deficiency)..........................................5
Consolidated Statements of Cash Flows...........................................................................6
Notes to Consolidated Financial Statements...................................................................7-17
For the Three Months Ended March 31, 1999 and 1998:
Consolidated Balance Sheet.....................................................................................18
Consolidated Statements of Operations..........................................................................19
Consolidated Statement of Changes in Stockholders' Equity .....................................................20
Consolidated Statements of Cash Flows..........................................................................21
Notes to Consolidated Financial Statements..................................................................22-24
</TABLE>
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders
Realm Production and Entertainment, Inc. and Subsidiaries
Hollywood, Florida
We have audited the accompanying consolidated balance sheet of Realm
Production and Entertainment, Inc. and Subsidiaries as of December 31, 1998 and
the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for the two years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Realm Production and Entertainment, Inc. and Subsidiaries as of December 31,
1998, and the results of their operations and their cash flows for the two years
then ended, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming Realm Production and Entertainment, Inc. and Subsidiaries will continue
as a going concern. As discussed in Note 1 to the consolidated financial
statements, the Company's need to generate cash from operations and obtain
additional financing raises substantial doubt about its ability to continue as a
going concern. Management's plans as to these matters are discussed in Note 1.
The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Millward & Co. CPAs
Fort Lauderdale, Florida
March 15, 1999
2
<PAGE>
REALM PRODUCTION AND ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1998
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash $ 68,261
Accounts Receivable (Net of Allowance for Doubtful Accounts of $41,000) 155,182
Prepaid Expenses and Other 11,165
----------
Total Current Assets 234,608
==========
Property and Equipment, at Cost (Net of Accumulated Depreciation of $73,752) 1,216,629
----------
OTHER ASSETS:
Security Deposits 26,680
Capitalized Production Costs 1,161,605
----------
1,188,285
----------
Total Assets $2,639,522
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current Portion of Loans Payable $ 877,496
Notes Payable - Related Parties 145,431
Current Portion of Capital Lease Obligations 120,931
Film Costs Payable 100,000
Accounts Payable and Accrued Expenses 456,034
Accrued Salaries 50,000
----------
Total Current Liabilities 1,749,892
CAPITAL LEASE OBLIGATIONS 62,556
LOANS PAYABLE 14,801
----------
Total Liabilities 1,827,249
-----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock ($.01 Par Value; 2,000,000 Shares Authorized)
Convertible Preferred Stock - Series A ($.01 Par Value; 375,000 Shares
Authorized; No Shares Issued and Outstanding) --
Convertible Preferred Stock - Series B ($.01 Par Value; 375,000 Shares
Authorized; No Shares Issued and Outstanding) --
Common Stock ($.005 Par Value; 10,000,000 Shares Authorized;
2,936,267 Shares Issued and Outstanding) 14,681
Additional Paid-in Capital 2,190,403
Accumulated Deficit (1,392,811)
----------
Total Stockholders' Equity 812,273
----------
Total Liabilities and Stockholders' Equity $2,639,522
==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
REALM PRODUCTION AND ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Year Ended
December 31,
-------------------------
1998 1997
---------- ----------
<S> <C> <C>
REVENUES $347,997 $ --
COST OF SALES 96,781 --
---------- ----------
GROSS PROFIT 251,216 --
---------- ----------
OPERATING EXPENSES
Amortization of Production Costs 125,938 55,709
Depreciation and Amortization 64,590 2,699
Salaries and Fringe Benefits 351,136 126,375
Legal and Accounting 57,698 30,770
Consulting Fees 97,716 57,250
Phones and Utilities 30,284 11,920
Rent (Not of Sub-Lease Rental Income of $7,800 in 1997) 59,073 14,975
Other Selling, General and Administrative 93,831 45,859
---------- ----------
Total Operating Expenses 880,266 345,557
---------- ----------
LOSS FROM OPERATIONS (629,050) (345,557)
---------- ----------
OTHER INCOME (EXPENSES):
Interest Income 260 1,643
Interest Expense (22,480) (12,562)
---------- ----------
(22,220) (10,919)
---------- ----------
NET INCOME (LOSS) $ (651,270) $ (356,476)
========== ==========
BASIC AND DILUTED:
Net Loss Per Common Share: $ (0.25) $ (.19)
========== ==========
Weighted Common Shares Outstanding 2,599,818 1,869,538
========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
REALM PRODUCTION AND ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK $.005 Par
------------------------- ---------------------------
Shares Amount Shares Amount
--------- ---------- --------- -------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 375,000 $ 375,000 1,700,000 $ 8,500
Shares Issued in Exchange for Services - - 54,000 272
Shares Issued in Connection with Private
Placement - - 303,071 1,515
Issuance of Common Stock for Debt
Forgiveness - - 85,262 427
Interest Expense on Debt Exchange for
Common Stock - - - -
Redemption of Preferred Stock (175,000) (175,000) - -
Net Loss for the Year Ended December 31,
1997 - - - -
--------- ---------- --------- -------
Balance at December 31, 1997 200,000 200,000 2,142,833 10,714
Shares Issued in Exchange for Services - - 16,000 30
Shares Issued for Production Cost - - 340,000 1,700
Shares Issued in Connection with Offering - - - 227,434 1,137
Shares Issued in Connection with Acquisition - - 50,000 250
Conversion of Preferred Stock (200,000) (200,000) 160,000 800
Net Loss for the Three Months Ended March
31, 1999 - - - -
--------- ---------- --------- -------
Balance at March 31, 1998 - - 2,236,267 $14,681
========= ========== ========= =======
</TABLE>
[RESTUBED FOR TABLE ABOVE]
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL STOCKHOLDERS
PAID IN ACCUMULATED EQUITY
CAPITAL DEFICIT (Deficiency)
---------- ----------- ------------
<S> <C> <C> <C>
Balance at December 31, 1996 $ -- $ (385,065) $ (1,565)
Shares Issued in Exchange for Services 95,103 - 95,375
Shares Issued in Connection with Private
Placement 528,485 - 530,000
Issuance of Common Stock for Debt
Forgiveness 113,943 - 114,375
Interest Expense on Debt Exchange for
Common Stock 10,834 - 10,834
Redemption of Preferred Stock - - (175,000)
Net Loss for the Year Ended December 31,
1997 - (356,476) (356,476)
---------- ----------- ---------
Balance at December 31, 1997 748,370 (741,541) 217,543
Shares Issued in Exchange for Services 39,920 - 40,000
Shares Issued for Production Cost 610,3 00 - 612,000
Shares Issued in Connection with Offering - 467,863 - 469,000
Shares Issued in Connection with Acquisition 124,750 - 125,000
Conversion of Preferred Stock 199,200 - -
Net Loss for the Three Months Ended March
31, 1999 - (651,270) (651,270)
---------- ----------- ---------
Balance at March 31, 1998 $2,190,403 $(1,392,811) $ 812,273
========== =========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE>
REALM PRODUCTION AND ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------
1998 1997
---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Loss $ (651,270) $ (356,476)
Adjustments to Reconcile Net Loss to Net Cash Flows
Used in Operating Activities:
Depreciation 64,590 2,699
Amortization of Film Costs 125,938 55,709
Stock Issued for Services 53,500 95,375
Interest Expense on Debt Exchange for Common Stock -- 10,834
Interest Expense 12,600 --
(Increase) Decrease in:
Accounts Receivable (39,281) --
Prepaid Expenses and Other 3,991 (3,009)
Increase (Decrease) in:
Accounts Payable and Accrued Expenses 74,719 (10,195)
Accrued Salaries and Fringe Benefits 30,000 2,375
Due to Officer (1,167) (4,854)
---------- -----------
Net Cash Flows Used In Operating Activities (334,362) (207,542)
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Property and Equipment (52,542) (16,354)
Increase in Capitalized Production Costs (238,461) (145,638)
---------- -----------
Net Cash Flows Used in Investing Activities (291,003) (161,992)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Issuance of Common Stock 363,000 530,000
Redemption of Preferred Stock -- (175,000)
Principal Repayments of Notes Payable - Related Parties -- (51,450)
Principal Repayments of Capital Lease Obligations (3,893) --
Proceeds from Issuance of Notes Payable - Related Parties 142,931 --
Proceeds from Issuance of Notes Payable 203,500 102,500
Principal Repayments of Notes Payable (17,698) (32,000)
---------- -----------
Net Cash Flows Provided by Financing Activities 687,840 374,050
---------- -----------
Net Increase in Cash 62,475 4,516
Cash - Beginning of Year 5,786 1,270
---------- -----------
Cash - End of Year $ 68,261 $ 5,786
========== ===========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Conversion of preferred stock to common $ 200,000 $ --
========== ===========
Issuance of common stock in exchange for reduction in Debt $ 106,000 $ 114,375
========== ===========
Common stock issued in connection with acquisition $ 125,000 $ --
========== ===========
Issuance of common stock related to capitalized film costs $ 598,500 $ --
========== ===========
Details of Acquisition: $1,227,934 $ --
Fair value of assets
Liabilities $1,227,934 $ --
---------- -----------
Cash Paid -- --
Less: cash acquisitions -- --
---------- -----------
Net cash paid for acquisition $ -- $ --
---------- -----------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
6
<PAGE>
REALM PRODUCTION AND ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Realm Production and Entertainment, Inc. (the "Company") was incorporated
under the laws of the State of Florida on May 12, 1995. The Company, through BRT
Video, Inc. ("BRT"), its 72.5% majority owned subsidiary and Vidkid
Distribution, Inc., its wholly owned subsidiary ("Vidkid"), is engaged in (i)
the development and production of children's made for television movies and
series; (ii) the marketing and sale of various children's programming; and (iii)
providing video and post-production and distribution services to third parties.
On October 1, 1998, the Company acquired 72.5% of the outstanding stock of
BRT. BRT was organized in November 1983 and provides video, audio and editing
post-production services and facilities to the Company and to third parties
including local television stations, independent producers and cable
broadcasters. See Note 2 for details.
The Company maintains its principal business operations in Fort
Lauderdale, Florida.
BASIS OF PRESENTATION
The consolidated statements include the accounts or Realm Production and
Entertainment, Inc. and its wholly owned and majority-owned subsidiaries. All
significant inter-company balances and transactions have been eliminated.
GOING CONCERN
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. At December 31, 1998, the
Company had a working capital deficiency of $1,515,284 and losses since
inception of $1,392,811. These conditions raise substantial doubt about the
ability of the Company to continue as a going concern.
Management's plans include developing efficiencies and additional revenue
as a result of the acquisition of BRT, a company that provides video, audio and
editing post-production facilities. The Company owns 130 color episodes of
"Howdy Doody", a popular children's program aired in the 1970's, which the
Company expects to begin marketing to cable outlets. The Company has commenced
production on a computer animated feature film. In addition to distribution
through film, video and television markets, the Company anticipates additional
revenue from character development. The Company also needs financing to complete
its plans and will pursue obtaining funding through private placements of debt
or equity offerings. However, there is no assurance that the aforementioned
events will occur and be successful.
7
<PAGE>
REALM PRODUCTION AND ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING FOR PRODUCTION COSTS AND DISTRIBUTION RIGHTS
For the period ended December 31, 1997, the Company did not have revenues
primarily as a result of being in the development stage of its operations.
During 1998 revenues were primarily attributable to its BRT division and revenue
is recorded when services are performed.
The Company generally capitalizes all costs incurred to produce children's
intellectual properties, excluding any interest expense funded under the
production loans. Such costs also include the actual direct costs of production,
certain exploitation costs and production overhead. Capitalized exploitation or
distribution costs include those costs that clearly benefit future periods such
as video prints and prerelease and early release advertising that is expected to
benefit the program in future markets. These costs, as well as participation and
talent residuals, are amortized each period on an individual video or television
program basis in the ratio that the current period's gross revenues from all
sources for the program bear to management's estimate of anticipated total gross
revenues for such video or program from all sources. Revenue estimates are
reviewed quarterly and adjusted where appropriate and the impact of such
adjustments could be material.
Production costs are stated at the lower of unamortized cost or estimated
net realizable value. Losses, which may arise because costs of individual videos
or television series exceed anticipated revenues, are charged to operations
through additional amortization.
The Company has entered into agreements with outside entities to
exclusively distribute other children's intellectual properties. Under the term
of these Agreements, the Company advances funds for the "pilot" development,
production and marketing costs in accordance with the specific agreements.
It is the Company's policy to write off capitalized investment costs
associated with the intellectual properties if, in management's opinion, the
capitalized costs are in excess of net realizable value. Accordingly, for the
year ended December 31, 1998 and 1997, management amortized film costs of
$125,938 and $55,709, respectively, for the Company's intellectual properties.
PROPERTY AND EQUIPMENT
Property and equipment are stated on the basis of cost less accumulated
depreciation and amortization. The Company provides for depreciation on a
straight-line basis over the following estimated useful lives: equipment,
furniture and fixtures, 5 to 7 years. Leasehold costs are being amortized on a
straight-line basis over a ten-year period, the lease term.
When assets are retired or otherwise disposed of, the costs and
accumulated depreciation are removed from the respective accounts and any
related gain or loss is recognized. Maintenance and repair costs are charged to
expense as incurred, and renewals and improvements that extend the useful lives
of assets are capitalized.
8
<PAGE>
REALM PRODUCTION AND ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
-----------------------------------------
December 31, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS
The carrying amount reported in the consolidated balance sheet for cash,
accounts and other receivables, accounts payable and accrued liabilities,
capital lease obligations, and notes payable approximates fair market value due
to the immediate or short-term maturity of these financial instruments.
INCOME TAXES
The Company utilizes the asset and liability method of accounting for
deferred income taxes. Under this method, deferred tax assets and liabilities
are established based on the differences between financial statement and income
tax bases of assets and liabilities using enacted tax rates in effect for the
year in which the differences are expected to reverse.
The Company provides a valuation allowance against deferred tax assets if,
based on the weight of available evidence, it is more likely than not that some
or all of the deferred tax assets will not be realized.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period to prepare these consolidated financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates and assumptions.
LOSS PER COMMON SHARE
Basic earnings per share is computed by dividing net loss, after adding
back preferred stock dividends accumulated during the period, by weighted
average number of shares of common stock outstanding during each period. Diluted
loss per share is computed by dividing net loss by the weighted average number
of shares of common stock, common stock equivalents and potentially dilutive
securities outstanding during each period. Diluted loss per common share is not
presented because it is anti-dilutive.
STOCK-BASED COMPENSATION
The Company uses SFAS No. 123, "Accounting for Stock-Based Compensation,"
which permits entities to recognize as expense over the vesting period the fair
value of all stock-based awards on the date of grant. Alternatively, SFAS No.
123 also allows entities to continue to apply the provisions of APB Opinion No.
25 and provide pro forma net income and pro forma earnings per share disclosures
for employee stock option grants as if the fair-value-based method defined in
SFAS No. 123 has been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions
of SFAS No. 123.
9
<PAGE>
REALM PRODUCTION AND ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
-----------------------------------------
December 31, 1998
NOTE 2 - ACQUISITION
On October 1, 1998, the Company acquired 72.5% of the outstanding stock of
BRT in exchange for 50,000 shares of Company stock with a fair value of
$125,000. BRT provides video, audio and editing post-production services and
facilities to the Company and to third parties including local television
stations, independent producers and cable broadcasters. The Company is
accounting for this acquisition using the purchase method of accounting. The
purchase price exceeded the fair value of net liabilities assumed by
approximately $425,000. The excess has been applied to leasehold improvement and
costs and is being amortized on a straight-line basis over 10 years, the life of
the lease. The results of operations of BRT are included in the accompanying
financial statements from October 1, 1998 (date of acquisition) to December 31,
1998.
The following unaudited pro forma consolidated results of operations have
been prepared as if the acquisition of Realm and BRT had occurred as of the
beginning of fiscal 1998 and 1997:
1998 1997
------------ ----------
Net Sales $ 1,184,172 $ 812,736
Net Loss $(1,006,340) $(453,650)
Net Loss per Share $ (.38) $ (.24)
Pro forma data does not purport to be indicative of the results that would
have been obtained had these events actually occurred at the beginning of the
periods presented and is not intended to be a projection of future results.
NOTE 3 - PROPERTY AND EQUIPMENT
At December 31, 1998, property and equipment and related accumulated
depreciation consisted of the following:
Video and Audio Equipment $ 504,882
Office Furniture and Equipment 85,255
Truck 15,806
Leasehold Improvements and Costs 684,438
----------
1,290,381
Less: Accumulated depreciation (73,752)
----------
Total $1,216,629
==========
For the years ended December 31, 1998 and 1997, depreciation expense
amounted to $64,590 and $2,699, respectively.
10
<PAGE>
REALM PRODUCTION AND ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
-----------------------------------------
December 31, 1998
NOTE 4 - NOTES PAYABLE - RELATED PARTIES
The Company has notes payable to related parties and a stockholder of the
Company. These notes are non-interest bearing, non-collateralized, and are
payable on demand. As of December 31, 1998, notes payable to these related
parties amounted to $145,431. For the year ended December 31, 1998, the Company
imputed interest on these notes at an annual rate of 12%.
During 1997, a note amounting to $5,000 was converted into 3,810 shares of
the Company's $.005 par value common stock at a price of $1.3125 per share.
Beneficial interest was calculated for this transaction and accordingly, $1,667
was charged to interest expense and to additional paid-in capital. See Note 9.
NOTE 5 - LOANS PAYABLE
At December 31, 1998, loans payable consisted of the following:
<TABLE>
<CAPTION>
<S> <C>
Notes payable - BRT investor - See (a) below. $641,840
Note payable - third party. This note bears interest at 9.6% per
annum beginning on July 1, 1998 is non-collateralized and is payable
in full on June 30, 1999. 150,000
Note payable to third party. This note bears interest at 12% per annum and
is payable on demand. 50,000
Revolving credit agreement with a bank aggregating $30,000. The agreement bears
interest at the bank's prime rate plus 3% (10.75% at December 31, 1998) and is
payable on demand. The loan contains certain covenants that require, among other
matters, that the Company obtain the consent of the lender before incurring any
additional debts, except for indebtedness for trade credit in the
ordinary course of the Company's business. 26,150
Notes payable to bank payable in 36 monthly installments of $1,012 including
interest at 12.85% per annum payable on or before April 22, 2001. The loan
contains certain covenants that require, among other matters, that the Company
obtain the consent of the lender before incurring any additional debts,
exceptfor Indebtedness for trade credit in the ordinary course
of the Company's business. 24,307
--------
$892,297
========
</TABLE>
Long-term debt maturing at December 31 for the next five years and
thereafter is as follows:
1999 (included in current liabilities) $877,496
2000 10,861
2001 3,940
--------
$892,297
========
11
<PAGE>
REALM PRODUCTION AND ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
-----------------------------------------
December 31, 1998
NOTE 5 - LOANS PAYABLE (CONTINUED)
(a)In September 1997, BRT and an investor entered into an informal
agreement whereby the investor would advance $1,500,000 for expansion and
renovation of a new facility in exchange for a 49% ownership interest in BRT.
The parties to the agreement intended to engage an independent appraiser to
determine the value of the stock and thus the portion of the $1,500,000 that
would be attributable to equity financing. The balance of the advanced funds
would be evidenced by a note payable bearing interest at prime plus 1%. Between
October 1997 and December 31, 1997, the investor advanced $435,000. In early
1998 the investor advanced an additional $150,000. Thus, by the end of February
1998, the investor had advanced $585,000. In addition to advances totaling
$585,000, the Company has recorded accrued interest amounting to $56,840 as of
December 31, 1998 which has been included in the loan payable to this investor.
In 1998, due to disagreements between management of BRT and the investor,
no formal agreement was ever executed; no independent appraiser was ever engaged
to value BRT's stock and the investor ceased advancing any funds. As of the date
of these financial statements, there has been no resolution of this matter.
Therefore, for purposes of preparing these financial statements, management has
reported the entire amount contributed through the end of December ($585,000) as
a current loan payable. In addition, the reported balance includes accrued
interest at prime plus 1% amounting to $56,840.
On October 14, 1998, BRT filed a lawsuit against the investor based upon
both a breach of agreement and a possible fraud action. At this time it is not
possible to determine what the outcome of this litigation might be, how long it
will take, or what counterclaims the investor may assert. Therefore, while
management would intend to vigorously defend itself in any litigation and
believes it has meritorious defenses against any suit, it is reasonably possible
that this matter will have an effect on the Company's financial position in the
near term (within the next year) and that effect may be material.
NOTE 6 - INCOME TAXES
Current income taxes are computed at statutory rates on pretax income.
Deferred taxes would be recorded based on differences in financial statements
and taxable income. At December 31, 1998, the Company had elected to carry
forward net operating losses for federal and state income tax purposes of
approximately $860,000 that are available to reduce future taxable income
through 2013. As utilization of such operating losses for tax purposes is not
assured, the deferred tax asset has been fully reserved through the recording of
a 100% valuation allowance. These operating losses may be limited to the extent
an "ownership change" occurs.
The components of the deferred tax asset as of December 31, 1998 are as
follows:
1998
---------
Deferred Tax Asset:
Net Operating Loss Carryforward $ 334,000
Amortization of Film Costs 138,000
Deduction for Stock Issued for Services 61,000
---------
533,000
Less: Valuation Allowance (533,000)
---------
Net Deferred Tax $ -0-
=========
12
<PAGE>
REALM PRODUCTION AND ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------------------
December 31, 1998
NOTE 6 - INCOME TAXES (CONTINUED)
Net operating losses expire as follows:
Expiration
Year Amount
---------- --------
2010 $ 39,000
2011 164,000
2012 185,000
2013 472,000
--------
$860,000
========
NOTE 7 - FILM COSTS PAYABLE
During 1997, the Company purchased the rights and master prints of 130
color half-hour episodes of The Howdy Doody Show (Note 1). As of December 31,
1998, the Company owes $100,000 relating to the purchase of these films.
NOTE 8 - CAPITAL LEASE OBLIGATION
BRT has entered into various leases for its video production equipment
that meet the requirements of a capital lease. The total capitalized cost of the
equipment as of December 31, 1998 is $622,634. These amounts represents the
present value of the minimum lease payments during the lease term and was
determined using BRT's estimated borrowing rate at the inception of the lease.
The Company's borrowing rate was used because the lessor's implicit interest
rate was not readily determinable. The following is a schedule of noncancelable
future minimum lease payments required under these leases:
1999 $ 136,045
2000 46,297
2001 21,840
---------
Total minimum lease payments 204,162
Less amount representing interest (20,695)
---------
Present value of net minimum lease
payments 183,487
Less current obligations due under
capital leases (120,931)
---------
Long-term obligations due under
capital leases $ 62,556
=========
13
<PAGE>
REALM PRODUCTION AND ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------------------
December 31, 1998
NOTE 9 - STOCKHOLDERS' EQUITY
INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN
In January 1998, the Company adopted the Company's 1998 Stock Option Plan
(the "Plan). The Plan provides for the granting of either incentive stock
options or nonqualified stock options to purchase shares of the Company's common
stock to officers, directors and key employees responsible for the direction and
management of the Company and to non-employee consultants and independent
contractors. At December 31, 1998, 500,000 shares of common stock were reserved
for issuance under the Plan and no options have been granted.
PREFERRED STOCK
The Company is authorized to issue 375,000 shares of Series A Preferred
Stock, Par value $.01 per share. This preferred stock has a cumulative dividend
of 9.6%. Said dividend is payable in cash or by issuance of Common Shares of the
Company, at the sole discretion of the Company's Board of Directors. Said
preferred stock is convertible into the Company's common stock at a share price
subject to adjustment. The Company may compel the conversion of the Series A
Preferred Stock into common stock of the Company. In January 1996, the Company
exchanged 375,000 shares of its Preferred Stock in exchange for the forgiveness
of payment of a $375,000 debt. During 1997, the Company redeemed 175,000 shares
preferred stock at $1.00 per share or $175,000. During April 1998, the preferred
stock shareholders' converted 200,000 preferred shares into 160,000 shares of
the Company's common stock.
For the year ended December 31, 1997, the Company has accrued a cumulative
preferred stock dividend amounting to $9,600.
The Company is authorized to issue 375,000 shares of Series B Preferred
Stock, Par value $.01 per share. The Series B Preferred Stock for the most part
includes rights and preferences similar to that of the Series A Preferred Stock.
COMMON STOCK
During August 1997, the Company issued 303,071 shares of common stock at a
price of $1.75 per share in accordance with Rule 504 under Regulation D
promulgated under the Securities Act of 1933 for net proceeds of $530,000 to be
used for the operations of the Company.
During August 1997, the Company issued 54,500 shares of common stock in
exchange for professional services rendered to third parties and related
parties. These shares were valued at $1.75 per share, the fair value and charged
to operations.
14
<PAGE>
REALM PRODUCTION AND ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------------------
December 31, 1998
NOTE 9 - STOCKHOLDERS' EQUITY (CONTINUED)
COMMON STOCK
During August 1997, the Company converted notes payable and accrued
salaries amounting to $114,375 into 85,262 shares on common stock at per share
prices ranging from $1.25 to $1.75 per share.
During 1998, the Company issued 340,000 shares of common stock at a price
of $1.80 for production and video costs.
Also in 1998, the Company issued 227,434 shares of common stock at an
average price of $2.42 per share in accordance with Rule 504 under Regulation D
promulgated under the Securities Act of 1933 for net proceeds of $469,000 to be
used for the operations of the Company.
During October 1998, the Company issued 16,000 shares of common stock in
exchange for professional services rendered to third parties and related
parties. These shares were valued at $2.50 per share, the fair value and charged
to operations.
On October 1, 1998, the Company entered into a stock purchase agreement
with BRT Video Inc. The Company agreed to exchange 50,000 shares of its common
stock for 72.5% of BRT Video, Inc.
WARRANTS
In January 1996, the Company issued warrants to purchase up to 300,000
shares of Common Stock of the Company to a shareholder and officer of the
Company as part of an employment agreement. These warrants are exercisable at
$1.25 per share on or prior to December 31, 2005.
In January 1997, the Company issued warrants to purchase up to 150,000
shares of Common Stock of the Company to shareholders and employees of the
Company. These warrants are exercisable at $2.00 per share on or prior to
December 31, 2005.
In December 1997, the Company issued warrants to purchase up to 150,000
shares of Common Stock of the Company to shareholders and employees of the
Company. These warrants are exercisable at $2.30 per share on or prior to
December 31, 2005.
All of the above warrant exercise prices were at the estimated market
price at the date of grant. The fair value of warrants granted was minimal.
On October 1, 1998, an employee was granted warrants to acquire 37,500
shares of the Company's common stock at an exercise price of $5.00 per share.
The warrants are exercisable commencing one year from agreement date at one
third each year until January 30, 2001. The fair value of the option grant was
estimated on the date of grant using the Black-Scholes option- pricing model
with the following assumptions: dividend yield of 0%; expected volatility of
64%; risk-free interest rate of 5.5%, and an expected life of 28 months.
15
<PAGE>
REALM PRODUCTION AND ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------------------
December 31, 1998
NOTE 9 - STOCKHOLDERS' EQUITY (CONTINUED)
WARRANTS
As permitted by SFAS No. 123, the Company has elected to continue to apply
the provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS No. 123. Had the Company determined compensation cost based
of the fair value at the grant date for its stock options under SFAS No. 123,
the Company's net loss would have been increased to the pro forma amounts
indicated below:
1998 1997
--------- ---------
Net Loss
As reported $(651,270) $(356,476)
Pro forma $(738,270) $(356,476)
Net Loss per Share
As reported $ (.25) $ (.19)
Pro forma $ (.28) $ (.19)
NOTE 10 - COMMITMENTS
OPERATING LEASE
The Company leases office and production space in Hollywood and Fort
Lauderdale, Florida, pursuant to operating leases. The leases generally provide
for fixed monthly rental payments of approximately $2,650 through May 2000. For
the years ended December 31, 1998 and 1997, rent expense, net of sublease rental
income of $7,800 in 1997, amounted to $59,073 and $14,975, respectively.
At December 31, 1998, the future minimum annual rental payments under the
non-cancelable operating leases are as follows:
YEAR
----
1999 $ 140,301
2000 124,308
2001 116,728
2002 122,562
2003 128,694
Thereafter 555,250
----------
$1,187,843
==========
16
<PAGE>
REALM PRODUCTION AND ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------------------
December 31, 1998
NOTE 10 - COMMITMENTS (CONTINUED)
EMPLOYMENT AGREEMENTS
In January 1996, the Company entered into a five (5) year employment
agreement with its President for an annual base salary of $60,000 for 1996,
$90,000 for 1997, and $120,000 for 1998, 1999 and 2000, plus normal benefits,
plus 2.5% of gross receipts actually collected by the Company specifically
pertaining to merchandising of its intellectual properties. Additionally, in
January 1996, the President was granted warrants to acquire 300,000 shares of
common stock of the Company at an exercise price of $1.25 per share, expiring
December 31, 2005. Pursuant to the terms of this agreement, the Company is
obligated to make a three (3) year loan to the President of up to $375,000, the
proceeds which must be used to pay the exercise price of the 300,000 warrants
granted.
In August 1997, the Company entered into a three- (3) year employment
agreement with an employee for an annual base salary averaging $30,000 for 1997,
$36,000 for 1998, and $42,000 for 1998. The agreement entitles the employee to
an annual bonus based on performance as determined by the Board of Directors.
Additionally, the employee was granted warrants to acquire 25,000 shares of
common stock of the Company at an exercise price of $2.00 per share exercisable
until December 31, 2005.
In October 1, 1998, the Company entered into a five (5) year employment
agreement with a shareholder for an annual base salary of $75,000 plus a bonus
of fifteen (15%) percent of annual pre-tax profits up to $250,000 and five (5%)
percent of annual pre-tax profits of over $250,000. The Company also has an
unfunded deferred compensation agreement with this employee providing for
payments upon retirement. The payments will to seven and one half (7.5%) percent
of the annual pre-tax profit of BRT for a period of five years. Additionally,
the employee was granted warrants to acquire 37,500 shares of the Company's
common stock at an exercise price of $5.00 per share (See Note 9). The warrants
are exercisable commencing one year from agreement date at one third each year
until January 30, 2001.
17
<PAGE>
REALM PRODUCTION AND ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
ASSETS 1999 1998
------------ ----------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 8,067 $ 1,067
Accounts Receivable (Net of Allowance for Doubtful Accounts of $48,500) 234,322 -
Prepaid Expenses and Other 10,378 -
------------ ----------
Total Current Assets 252,767 1,067
------------ ----------
Property and Equipment, at Cost (Net of Accumulated Depreciation of $138,251) 1,160,083 21,739
------------ ----------
OTHER ASSETS:
Security Deposits 26,680 -
Goodwill 21,971 -
Capitalized Production Costs 1,171,665 1,069,390
------------ ----------
1,220,316 1,069,390
------------ ----------
Total Assets $ 2,633,166 $1,092,196
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current Portion of Loans Payable $ 982,990 $ 106,000
Notes Payable - Related Parties 186,157 53,396
Current Portion of Capital Lease Obligations 126,737 -
Film Costs Payable 100,000 100,000
Accounts Payable and Accrued Expenses 429,423 36,191
Accrued Salaries 92,574 43,000
------------ ----------
Total Current Liabilities 1,917,881 338,587
CAPITAL LEASE OBLIGATIONS 42,265 -
LOANS PAYABLE 22,031 -
------------ ----------
Total Liabilities 1,982,177 338,587
------------ ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock ($.01 Par Value; 2,000,000 Shares Authorized)
Convertible Preferred Stock - Series A ($.01 Par Value; 375,000 Shares
Authorized; No Shares Issued and Outstanding) - -
Convertible Preferred Stock - Series B ($.01 Par Value; 375,000 Shares
Authorized; 0 and 200,000 Shares Issued and Outstanding in 1999 and 1998, - 200,000
respectively)
Common Stock ($.005 Par Value; 10,000,000 Shares Authorized;
2,947,126 and 2,482,833 Shares Issued and Outstanding in 1999 and 1998, 14,735 12,414
respectively)
Additional Paid-in Capital 2,229,195 1,358,670
Accumulated Deficit (1,592,941) (817,475)
------------ ----------
Total Stockholders' Equity 650,989 753,609
------------ ----------
Total Liabilities and Stockholders' Equity $ 2,633,166 $1,092,196
============ ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
18
<PAGE>
REALM PRODUCTION AND ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 1999 and 1998
(Unaudited)
1999 1998
---------- ----------
REVENUES $ 380,898 $ -
COST OF SALES 24,124 -
---------- ----------
GROSS PROFIT 356,774 -
---------- ----------
OPERATING EXPENSES
Amortization of Production Costs - -
Depreciation and Amortization 64,500 -
Salaries and Fringe Benefits 185,180 43,417
Legal and Accounting 51,437 5,592
Consulting Fees 54,517 13,750
Phones and Utilities 10,474 2,407
Rent 40,577 1,850
Other Selling, General and Administrative 119,415 8,919
---------- ----------
Total Operating Expenses 526,100 75,935
---------- ----------
LOSS FROM OPERATIONS (169,326) (75,935)
---------- ----------
OTHER INCOME (EXPENSES):
Interest Income 61 1
Interest Expense (30,865) -
---------- ----------
(30,804) 1
---------- ----------
NET LOSS $ (200,130) $ (75,934)
========== ==========
BASIC AND DILUTED:
Net Loss Per Common Share $ (0.07) $ (0.03)
========== ==========
Weighted Common Shares Outstanding 2,937,429 2,427,874
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
19
<PAGE>
REALM PRODUCTION AND ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Three Months Ended March 31, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
COMMON STOCK $.005 Par
-------------------------
ADDITIONAL
PAID IN
Shares Amount Shares Amount CAPITAL
------- --------- --------- ------- ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 200,000 $ 200,000 2,142,833 $10,714 $ 748,370
Shares Issued in Exchange for Services - - 16,000 80 39,920
Shares Issued for Production Cost - - 340,000 1,700 610,300
Shares Issued in Connection with Offering - - 227,434 1,137 467,863
Shares Issued in Connection with Acquisition - - 50,000 250 124,750
Conversion of Preferred Stock (200,000) (200,000) 160,000 800 199,200
Net Loss for the Year Ended December 31,
1998 - - - - -
-------- --------- --------- ------- ----------
Balance at December 31, 1998 - - 2,936,267 14,681 2,190,403
Shares Issued in Connection with Acquisition - - 5,859 29 21,942
Shares Issued in Exchange for Services - - 5,000 25 16,850
Net Loss for the Three Months Ended March
31, 1999 - - - - -
-------- --------- --------- ------- ----------
Balance at March 31, 1999 - - 2,947,126 $14,735 $2,229,195
======== ========= ========= ======= ==========
</TABLE>
[RESTUBED TABLE FOR ABOVE]
<TABLE>
<CAPTION>
TOTAL
ACCUMULATED STOCKHOLDERS
DEFICIT EQUITY
------------- -------------
<S> <C> <C>
Balance at December 31, 1997 $ (741,541) $ 217,543
Shares Issued in Exchange for Services - 40,000
Shares Issued for Production Cost - 612,000
Shares Issued in Connection with Offering - 469,000
Shares Issued in Connection with Acquisition - 125,000
Conversion of Preferred Stock - -
Net Loss for the Year Ended December 31,
1998 (651,270) (651,270)
------------ -----------
Balance at December 31, 1998 (1,392,811) 812,273
Shares Issued in Connection with Acquisition - 21,971
Shares Issued in Exchange for Services - 16,875
Net Loss for the Three Months Ended March
31, 1999 (200,130) (200,130)
------------ ----------
Balance at March 31, 1999 $ (1,592,941) $ 650,989
============ ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
20
<PAGE>
REALM PRODUCTION AND ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
---------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(200,130) $(75,934)
Adjustments to Reconcile Net Loss to Net Cash Flows
Used in Operating Activities:
Depreciation 64,500 750
Stock Issued for Services 16,875 -
(Increase) Decrease in:
Accounts Receivable (79,140) 3,009
Prepaid Expenses and Other 787 -
Increase (Decrease) in:
Accounts Payable and Accrued Expenses (26,611) 13,535
Accrued Salaries and Fringe Benefits 42,574 23,000
Due to Officer - (1,167)
--------- --------
Net Cash Flows Used in Operating Activities (181,145) (36,807)
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Property and Equipment (7,954) -
Increase in Capitalized Production Costs (10,060) (6,808)
--------- --------
Net Cash Flows Used in Investing Activities (18,014) (6,808)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Notes Payable - Related Parties 40,726 35,396
Principal Repayments of Capital Lease Obligations (14,485) -
Proceeds from Issuance of Notes Payable 112,724 3,500
--------- --------
Net Cash Flows Provided by Financing Activities 138,965 38,896
--------- --------
Net Decrease in Cash (60,194) (4,719)
Cash - Beginning of Period 68,261 5,786
--------- --------
Cash - End of Period $ 8,067 $ 1,067
========= ========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Cash Paid During Year for:
Interest $ - $ -
--------- --------
Income Taxes $ - $ -
--------- --------
Common stock issued in connection with acquisition $ 21,971 $ -
--------- --------
Common stock issued for capitalized production costs $ - $612,000
========= ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
21
<PAGE>
REALM PRODUCTION AND ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared assuming
Realm Production and Entertainment, Inc. and Subsidiaries (collectively, the
"Company") will continue as a going concern. The Company's need to generate cash
from operations and obtain additional financing raises substantial doubt about
its ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty. While the Company is continuing to monitor and reduce its
operating expenses, including payroll, it is also considering the sale of
certain assets or operations as well as exploring other alternatives.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. For further information, refer to
the Company's annual consolidated financial statements and footnotes. The
accompanying consolidated financial statements for the interim periods are
unaudited and reflect all adjustments (consisting only of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of the financial position and operating results for the periods
presented. These financial statements should be read in conjunction with the
financial statements for the year ended December 31, 1998 and notes thereto
contained in the Report on Form 10-SB, as amended, of Realm Production and
Entertainment, Inc. (the "Company") as filed with the Securities and Exchange
Commission. The results of operations for the three months ended March 31, 1999
are not necessarily indicative of the results for the full fiscal year ending
December 31, 1999.
NOTE 2 - LOSS PER SHARE
Basic earnings per share is computed by dividing net loss, after adding back
preferred stock dividends accumulated during the period, by weighted average
number of shares of common stock outstanding during each period. Diluted loss
per share is computed by dividing net loss by the weighted average number of
shares of common stock, common stock equivalents and potentially dilutive
securities outstanding during each period. Diluted loss per common share is not
presented because it is anti-dilutive.
NOTE 3 - SHAREHOLDERS' EQUITY
Common Stock
During March 1999, the Company issued 5,000 shares of common stock in exchange
for professional services rendered. These shares were valued at $3.375 per
share, the fair value, and charged to operations.
During March 1999, the Company exchanged 5,859 shares of its common stock for
7.5% of BRT Video, Inc. See Note 6.
NOTE 4 - COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income." This pronouncement sets forth requirements for
disclosure of the Company's comprehensive income and accumulated other
comprehensive items. In general, comprehensive income combines net income and
"other comprehensive items," which represent certain amounts that are reported
as components of stockholders' equity in the accompanying balance sheet,
including foreign currency translation adjustments. For the three months ending
March 31, 1999, the Company had no comprehensive income.
NOTE 5 - FUTURE EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information" was issued in June 1997. This statement changes the way public
companies report information about segments of their business in their annual
financial statements. This statement is effective for the Company's fiscal year
ending December 31, 1999. However, information is not to be presented for
interim financial statements in the first year of implementation. Adoption of
SFAS No. 131 is not expected to have a material effect on the Company's
financial statement disclosure.
22
<PAGE>
REALM PRODUCTION AND ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(UNAUDITED)
NOTE 6 - ACQUISITION
The Company entered into a stock purchase agreement with BRT Video Inc. On
October 1, 1998, the Company exchanged 50,000 shares of its common stock for
3,760 shares (72.5%) of BRT Video, Inc. During March 1999, the Company exchanged
5,859 shares of its common stock for an additional 7.5% of BRT Video, Inc. The
Company is accounting for this additional acquisition of 7.5% using the purchase
method of accounting. The purchase price exceeded the fair value of net
liabilities assumed by approximately $21,942. The excess has been applied to
goodwill and is being amortized on a straight-line basis over five years.
23
<PAGE>
REALM PRODUCTION AND ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(UNAUDITED)
NOTE 6 - ACQUISITION (Continued)
The following unaudited pro forma consolidated results of operations of the
Company assumes the acquisition had occurred January 1, 1998.
Three Months
Ended March 31,
1998
--------------
Net Sales ............................... $ 144,050
Net Loss ................................ $(283,000)
Net Loss Per Common Share ............... $ (.13)
Pro forma data does not purport to be indicative of the results that would have
been obtained had these events actually occurred at the beginning of the periods
presented and is not intended to be a projection of future results.
24
<PAGE>
PART III
ITEM 1.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION OF DOCUMENT
- -------- -----------------------
<S> <C>
3.1 Articles of Incorporation of Realm Production and Entertainment, Inc.*
3.2 Bylaws of Realm Production and Entertainment, Inc.*
4.1 1998 Stock Option Plan*
10.1 Employment Agreement between Realm Production and Entertainment, Inc. and Steven Adelstein dated January 15,
1996.*
10.2 Employment Agreement between Realm Production and Entertainment, Inc. and Gus Guilbert dated August 1, 1997.*
10.3 Agreement between Realm Production and Entertainment, Inc. and The Animation Factory dated August 4, 1997.*
10.4 Agreement between Realm Production and Entertainment, Inc. and John Driver dated May 15, 1995.*
10.5 Stock Purchase Agreement between Realm Production and Entertainment, Inc. and Norman Titcomb and BRT Video,
Inc. dated October 1, 1998.*
10.6 Asset Purchase Agreement between VidKid Distribution, Inc. and Madison Sports and Entertainment, Inc. dated
August 14, 1997.*
10.7 Settlement Agreement between Realm Production and Entertainment, Inc. and VidKid Distribution, Inc., John J.
Drury, National Media Enterprises, Inc. and Buffalo Bob Enterprises, Inc. dated September 10, 1998.*
10.8 Lease Agreement between Realm Production and Entertainment, Inc. and Reyno International, Inc. dated May 15,
1997.*
10.9 Program License Agreement between Vidkid Distributions, Inc.and Broadcast America Partnership, Ltd.*
10.10 Loan Out Agreement between Realm Production and Entertainment, Inc., Steven Adelstein and A.U.W., Inc. dated
January 15, 1996.*
10.11 Agreement between Realm Production and Entertainment, Inc. and National Syndications, Inc. dated August 7,
1998.*
10.12 License Agreement between Realm Production and Entertainment and Fast Forward Marketing, Inc. dated August
4, 1998.*
10.13 Termination Agreement between Realm Production and Entertainment, Inc. and Broadcast America Partnership, Ltd.*
21 Subsidiaries of the Registrant.*
27.1 Financial Data Schedule extracted from Realm Production and Entertainment, Inc. and Subsidiaries Financial
Statements for the Year Ended December 31, 1998. *
27.2 Financial Data Schedule extracted from Realm Production and Entertainment, Inc. and Subsidiaries Financial
Statements for the Three Months Ended March 31, 1999.**
</TABLE>
* Previously Filed
** Filed Herewith
25
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the Registrant caused this Amendment to its Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<CAPTION>
<S> <C>
EMAILTHATPAYS.COM, INC.
(FORMERLY REALM PRODUCTION & ENTERTAINMENT, INC.)
----------------------------------------------------------
Date: March 24, 2000 By: /s/ DANIEL HUNTER
----------------------------------------------------------
Daniel Hunter, Chief Executive Officer and Director
Date: March 24, 2000 By: /s/ DONALD JAMES MACKENZIE
----------------------------------------------------------
Donald James MacKenzie, President, Secretary and Director
Date: March 24, 2000 By: /s/ WARREN OLSON
----------------------------------------------------------
Warren Olson, Chief Financial Officer
</TABLE>
26
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM REALM
PRODUCTION AND ENTERTAINMENT, INC. AND SUBSIDIARIES FINANCIAL STATEMENTS FOR THE
THREE MONTHS ENDED MARCH 31, 1999
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 8,067
<SECURITIES> 0
<RECEIVABLES> 282,822
<ALLOWANCES> (48,500)
<INVENTORY> 0
<CURRENT-ASSETS> 252,767
<PP&E> 1,298,334
<DEPRECIATION> (138,251)
<TOTAL-ASSETS> 2,633,166
<CURRENT-LIABILITIES> 1,917,881
<BONDS> 0
0
0
<COMMON> 14,735
<OTHER-SE> 636,254
<TOTAL-LIABILITY-AND-EQUITY> 2,633,166
<SALES> 380,898
<TOTAL-REVENUES> 380,898
<CGS> 24,124
<TOTAL-COSTS> 24,124
<OTHER-EXPENSES> 526,100
<LOSS-PROVISION> (169,326)
<INTEREST-EXPENSE> 30,865
<INCOME-PRETAX> (200,130)
<INCOME-TAX> 0
<INCOME-CONTINUING> (200,130)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (200,130)
<EPS-BASIC> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
