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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-SB/A-2
Post-Effective Amendment No. 2
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS UNDER SECTION 12(b)
OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
TOTAL FILM GROUP, INC.
(Exact name of Registrant as specified in charter)
DELAWARE 13-3851302
State or other jurisdiction of I.R.S. Employer I.D. No.
incorporation or organization
9107 WILSHIRE BOULEVARD, SUITE 475, BEVERLY HILLS, CA 90210
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (310) 275-8404
Securities to be registered pursuant to Section 12(b) of the Act: None
Securities to be registered pursuant to Section 12(g) of the Act:
Title of each class
COMMON STOCK
PAR VALUE $.001
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TABLE OF CONTENTS
PART I
<TABLE>
<CAPTION>
Page
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<S> <C>
Item 1. Description of Business................................................ 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................. 18
Item 3. Description of Property............................................... 23
Item 4. Security Ownership of Certain Beneficial Owners and Management........ 24
Item 5. Directors, Executive Officers, Promoters and Control Persons.......... 25
Item 6. Executive Compensation................................................ 27
Item 7. Certain Relationships and Related Transactions........................ 31
Item 8. Description of Securities............................................. 33
PART II
Item 1. Market Price of and Dividends on the Registrant's Common equity and
Other Shareholder Matters.............................. 35
Item 2. Legal Proceedings..................................................... 37
Item 3. Changes in and Disagreements with Accountants......................... 37
Item 4. Recent Sales of Unregistered Securities............................... 38
Item 5. Indemnification of Directors and Officers............................. 44
PART F/S....................................................................... 44
PART III....................................................................... 74
</TABLE>
FORWARD LOOKING STATEMENTS
This registration statement contains statements that plan for or anticipate
the future. Forward-looking statements include statements about the future of
operations involving the film and advertising industry, statements about our
future business plans and strategies, and most other statements that are not
historical in nature. In this registration statement forward-looking statements
are generally identified by the words "anticipate," "plan," "believe," "expect,"
"estimate," and the like. Although we believe that any forward-looking
statements we make in this registration statement are reasonable, because
forward-looking statements involve future risks and uncertainties, there are
factors that could cause actual results to differ materially from those
expressed or implied. For example, a few of the uncertainties that could affect
the accuracy of forward-looking statements, include the following:
- Films released by the Company may not be critically or financially
successful.
- Funding for producing films may not be available.
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In light of the significant uncertainties inherent in the forward-looking
statements made in this registration statement, particularly in view of our
early stage of operations, the inclusion of this information should not be
regarded as a representation by us or any other person that our objectives and
plans will be achieved.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
HISTORY AND ORGANIZATION
Total Film Group, Inc. (the "Company") was incorporated under the laws of
the State of Delaware on August 1, 1995. The Company was originally incorporated
under the name "Executive Marketing, Inc." On February 5, 1997, the Company
changed its name to "Total Film Group, Inc." The Company is also qualified to do
business in the State of California.
Set forth below is a chart showing the Company and its subsidiaries and the
percentage interest in each:
<TABLE>
<CAPTION>
Percent
Parent Company Subsidiary Owned
-------------- ---------- -------
<S> <C> <C>
Total Film Group, Inc. Alien Sky UK Ltd. 100%
Alma Productions UK Ltd 100%
Sundowning, Inc. 100%
Total China, Inc. 50.004%
Total China II, Inc. 100%
Total Creative, Inc. 100%
Total Films UK Ltd 100%
Total Media, Inc. 100%
Total Pictures, Inc. 100%
1st Mr., Inc. 100%
</TABLE>
None of our subsidiaries own any subsidiaries.
In January 1997 the Company entered into an agreement with Total Media
Corporation, a Nevada corporation, to exchange all of the issued and outstanding
shares of such entity for 3,000,000 shares of common stock of the Company. The
Agreement and Plan of Reorganization was closed by the parties on or about
February 4, 1997. As a result of the closing the Company issued 3,000,000
shares, representing approximately 67% of the outstanding stock at closing, to
the shareholders of the Nevada corporation. Mr. Green and his affiliates
received 1,250,000 of such shares. Also as a result of the closing new directors
of the Company were appointed. Messrs. Green, Boyer, and Pacheco were appointed
as new directors. Prior to closing, on January 27, 1997, the Company declared a
stock dividend of one share of common stock of the Company for each two shares
of common stock of the Company outstanding to the shareholders
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of record as of the close of business on January 27, 1997. The payment and
delivery date for such dividend was January 31, 1997.
In February 1998, the Company incorporated a wholly owned subsidiary, Total
Design, Inc., a California corporation engaged in providing marketing and
advertising services. Total Design, Inc. changed its name to "Dyer
Communications, Inc." on May 26, 1998. Effective January 1999 the Company
acquired all of the outstanding stock of Michel/Russo, Inc., a California
corporation engaged in marketing and advertising for 100,000 shares of common
stock of the Company issued to the two shareholders of Michael/Russo. On March
5, 1999, Dyer Communications, Inc. changed its name to "Total Creative, Inc."
Also effective January 1999 Total Creative, Inc. and the Company acquired all of
the interest in Skyrocket, LLC, a California limited liability company engaged
in web development, e-commerce, and digital advertising for a total of 225,000
shares and $25,000. All of the operations of Michel/Russo, Inc. were transferred
to Total Creative, Inc. subsequent to the acquisition effective January 1999 and
the ownership of Michel/Russo, Inc. was assigned to Total Creative, Inc. in
March 2000.
In February 1999 the Company borrowed $2,000,000 from The Orbiter Fund, an
entity managed by one of the principal shareholders of the Company. (See
"Certain Relationships and Related Transactions.") As additional consideration
for the loan, the Company issued 250,000 three-year warrants to the fund,
exercisable at $2.00 per share. In August 1999 the Company negotiated an
extension of the initial payment of principal in return for which the Company
issued 250,000 shares to the lender. On February 28, 2000, The Orbiter Fund
assigned the note to Lancer Offshore, Inc. and Lancer Partners, L.P. In
September 1999 the Company borrowed an additional $1,800,000 from Lancer
Offshore, Inc., an entity managed by the same principal shareholder of the
Company, and $200,000 from others. (See "Certain Relationships and Related
Transactions.") As additional consideration for the loan, the Company issued a
total of 250,000 shares pro rata to the lenders. The Company also paid a
consulting fee of $140,000 and issued warrants to purchase 100,000 shares of
common stock to Capital Research Ltd. In February 2000 the parties to the loans
agreed to amend the conversion price to $1.50 per share and to convert the
principal amount of the loans into 2,666,667 shares of common stock and to
convert the $376,100 in past due interest into 270,000 shares at the rate of
$1.39 per share. The Company also agreed to pay a consulting fee of $40,000 and
26,667 shares of common stock to Capital Research Ltd. The consulting fees paid
to Capital Research Ltd. were done so pursuant to a consulting agreement between
the Company and such entity.
In September 1999 the Company entered into a consulting agreement with
Capital Research Ltd. The consulting agreement provides that Capital Research
will assist the Company in the following areas:
- reviewing the financial condition of the Company;
- developing a capital formation plan;
- locating market makers for the Company's stock;
- building the Company's visibility and credibility with investors and
the media; and
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- locating equity and/or debt funding for the Company and Total
Creative. In part, the agreement provides that the Company shall issue
as of the date of the agreement, five year warrants initially to
purchase 100,000 shares. Thereafter the Company shall issue five year
warrants to purchase 25,000 shares of common stock starting December
1, 1999, and each quarter thereafter, so long as the agreement is in
effect. The exercise price of the warrants is to be set at the closing
price of the common stock on the date of the grant. The agreement has
no initial term but can be terminated by either party upon ninety days
prior notice. The Company is also obligated to pay a monthly fee of
$3,000, plus a 7% fee and a grant of warrants to purchase 50,000
shares of common stock for each $1 million raised by such entity for
the Company. As of June 30, 2000, the Company had issued a total of
275,000 warrants and 293,459 shares, and had paid $26,500 to Capital
Research as compensation pursuant to the agreement.
On October 20, 1999, the Company incorporated Total China, Inc., a Delaware
corporation, as a subsidiary. This entity was formed to act as a holding company
to acquire 20% of the capital stock of MeetChina.com, Inc., formerly known as US
Business Network, Inc., a Delaware corporation, which has intellectual property
rights to the business-to-business e-commerce portal, Meet China.com, and is
engaged directly through a subsidiary in promoting imports and exports to and
from China through the Internet and providing ancillary services related
thereto. In November 1999, Total China, Inc. and the Company conducted a joint
private offering to raise funds for the transaction with MeetChina.com, Inc.
Total China, Inc. sold 30 units in the private offering. Each unit consisted of
1.6666 shares of common stock of Total China, Inc. and was sold for $66,667 per
unit. As a part of the same private offering, the Company sold 30 units, with
each unit consisting of three-year warrants to purchase 6,667 shares of the
Company's common stock at an exercise price of $3.75 per share. The units were
sold by the Company for approximately $6,666.67 each, or $1.00 per warrant. Each
warrant holder was granted registration rights, and a right of first refusal to
purchase a pro rata amount of the assets of Total China, Inc. Investors were
required to purchase both the Total China, Inc. and the Company units in the
offering. Total China, Inc. realized gross proceeds of $2,000,000 and the
Company realized gross proceeds of $200,000. Also in connection with this
private offering, the Company issued warrants to purchase 200,000 shares of
common stock to JBRG Consultants as a commission for introducing potential
investors to the Company. The proceeds to the Company were allocated to pay the
costs of the offering, and the proceeds to Total China, Inc. were used to
purchase shares of common stock of MeetChina.com, Inc., which shares ultimately
represented 17.58% of the issued and outstanding capital stock of such
corporation at closing. This reduction in percentage ownership was a result of
an increased valuation of MeetChina.com, Inc. As a result of this offering, the
Company now owns slightly in excess of 50% of the outstanding stock of Total
China, Inc.
On or about December 16, 1999, the Company and Total China, Inc. jointly
entered into a stock purchase agreement with MeetChina.com, Inc. On December 17,
1999, the Company and Total China, Inc. finalized the agreement with
MeetChina.com, Inc., and the stock of
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MeetChina.com, Inc. was issued to Total China, Inc. Because of subsequent
financings by MeetChina.com, Inc., at May 31, 2000, Total China, Inc. owned
approximately 11.9% of the outstanding stock of such entity. MeetChina.com, Inc.
has the option under the agreement to acquire approximately 5% of the shares
purchased by Total China, Inc. at a cash price of two-thirds of the market value
of such shares. Such right is only exercisable on the 120th day after an initial
public offering of capital stock by MeetChina.com, Inc. on a designated
exchange. Until the stock of MeetChina.com, Inc. is listed on a designated
exchange, the Company and Total China, Inc. have the right, jointly, to
designate one representative to attend meetings of the board of directors of
MeetChina.com, Inc. Total China, Inc. has the right of first refusal to purchase
any shares to be sold or issued by MeetChina.com, Inc. at less than the price
paid by Total China, Inc. Total China, Inc. also has piggy-back registration
rights to register its shares in any appropriate registration statement filed by
MeetChina.com, Inc. with the U.S. Securities and Exchange Commission after
the initial public offering and which includes shares of the founders of
MeetChina.com, Inc.
On November 2, 1999, the Company incorporated Total Group, Inc., a Delaware
corporation, as a wholly-owned subsidiary. Originally formed as a shell
corporation, this entity was used to acquire an equity interest in
MeetChina.com, Inc. On November 15, 1999 Total Group, Inc. changed its name to
Total China II, Inc. The Company owns all of the outstanding common stock of
Total China II, Inc. and 5% of the outstanding preferred stock.
On May 23, 2000, Total China II, Inc. and the Company conducted a joint
private offering to raise funds for the transaction with MeetChina.com, Inc. The
offering was terminated in July 2000. Total China II, Inc. sold 73.86 units in
the private offering. Each unit consisted of 10,000 shares of preferred stock of
China II and 10,000 shares of the Company's common stock. The units sold for
$50,000 per unit. The total gross proceeds of the joint private offering were
$3,693,000. Total China II, Inc. realized gross proceeds of $2,215,800 and the
Company realized gross proceeds of $1,477,200. The Company's proceeds of the
offering will be used for general working capital and the proceeds to Total
China II, Inc. were used to purchase shares of preferred stock in MeetChina.com,
Inc. An investment of $2,000,000 (106,689 shares) was made in MeetChina.com. In
connection with this private offering, a cash fee of $369,300 was paid to JL
Devore & Associates as a commission to structure and administer the private
offering. Of the total fee, Total China II, Inc. paid $221,580 and the Company
paid $147,720. In addition to the cash fee, JL Devore & Associates was issued
50,000 shares of the Company's common stock as compensation for services.
The Company's business is divided into three segments: the film production
business, the advertising and marketing business, and as a holding company. The
film production segment is engaged in the production, marketing, and
distribution of commercial
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feature films. The advertising and marketing segment is engaged in the
development of advertising and marketing campaigns to provide Internet services
for a variety of clients and the Company. The Company also holds the stock of
two subsidiaries, Total China, Inc. and Total China II, Inc., which in turn own
stock of MeetChina.com, Inc., an Internet related business.
In August 2000 the Company borrowed $1,000,000 for working capital from
entities controlled by Michael Lauer, one of our principal shareholders. We have
executed a term sheet outlining the terms of the loan, but we are still in the
process of negotiating the final terms of the definitive agreement. The term
sheet provides that the loan will bear interest at 12% per annum, payable
quarterly, and that the loan will be due May 15, 2001. The Company will be
obligated to repay the loan out of proceeds of any financing greater than
$3,000,000. The loan will be convertible at $3.00 per share, provided that the
conversion price will be reduced to $1.50 for the ninety day period following
the due date, and to $1.00 per share thereafter, if the loan remains unpaid. The
shares will have one demand and piggyback registration rights. We have also paid
a consulting fee of $70,000, and have agreed to issue five-year warrants to
purchase 100,000 shares at $3.50 per share, to Capital Research Ltd. in
connection with the loan.
THE FILM BUSINESS
The Company's independent film production business is conducted primarily
through the parent, Total Film Group, Inc., and other wholly owned entities
created for specific pictures. Because most of the films are financed by
different entities, and in keeping with industry practice, the Company creates a
new subsidiary for each film it produces. Since January 1997 the Company has
produced three films: THE NEW SWISS FAMILY ROBINSON, which aired on January 10,
1999, on ABC's Wonderful World of Disney and was released theatrically abroad;
DIAMONDS, which was released in a limited number movie theaters in December 1999
in order to qualify for Academy Award consideration, and had general domestic
release in February 2000 by Miramax Films; and CHICK FLICK, which was completed
in 1999 and is scheduled for release in late 2000.
In November 1999 the Company entered into an oral arrangement with
Paramount Classics, a division of Paramount Picture Corporation, for the
marketing and distribution of four feature films. The Company has produced two
of the films under this arrangement, MY FIRST MISTER and BRIDE OF THE WIND. The
Company anticipates that similar arrangements will be made with Paramount
Classics on the next two films, but there is no binding agreement to enforce
such arrangement.
The following is a list of the Company's wholly owned subsidiaries used in
the film business, the jurisdiction of incorporation, and the film associated
with such subsidiary:
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<TABLE>
<CAPTION>
Subsidiary Jurisdiction Film
---------- ------------ ----
<S> <C> <C>
Total Films UK Ltd. United Kingdom THE NEW SWISS FAMILY ROBINSON
Alma Production UK Ltd. United Kingdom BRIDE OF THE WIND (a.k.a. ALMA)
Sundowning, Inc. Nevada DIAMONDS
1st Mister, Inc. California MY FIRST MISTER
</TABLE>
The Company has also incorporated Total Pictures, Inc., a California
corporation, to act as signatory for transactions with the Writers' Guild. All
future screen plays developed by the Company will be assigned to this entity.
The Company has acquired an option to purchase a film library which, if
purchased, will become part of this entity.
THE UNITED STATES MOTION PICTURE INDUSTRY
The current motion picture industry in the United States includes the
production and theatrical or television screening of feature-length motion
pictures and the subsequent distribution of such pictures in home video and
ancillary markets. The industry is dominated by the major studios -- some of
which have divisions which are promoted as "independent" distributors of motion
pictures -- including Universal Pictures, Warner Brothers (including Turner
Pictures, New Line Cinema and Castle Rock Entertainment), Twentieth Century Fox,
Sony Pictures Entertainment (including Columbia Pictures and Tristar Pictures),
Paramount Pictures, The Walt Disney Company (including Buena Vista, Touchstone
and Miramax) and MGM (including Metro Goldwyn Mayer Pictures, United Artists
Pictures, Orion Pictures and Goldwyn Entertainment Company). These "majors" have
traditionally produced and distributed the majority of theatrical motion
pictures, and made-for-TV movies, released annually in the United States. In
recent years, however, independent motion picture production companies have
played an important role in the production of motion pictures for the worldwide
feature film and made-for-TV markets. There are also a large number of smaller
production companies, such as the Company, and other entities that produce
theatrical motion pictures and made-for-TV movies.
The "majors" generally own their production studios and have national or
worldwide distribution organizations. Major studios typically release films with
direct production costs generally ranging from approximately $40 million to $100
million or more, and provide a continual source of motion pictures to the
nation's theatrical exhibitors. The independents, including the Company, do not
own production studios and, with certain exceptions, have more limited
distribution capabilities than the major studios. Independents typically produce
fewer motion pictures at substantially lower average production costs than major
studios. A low budget
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independent film (generally one more suitable for television) may cost as little
as $3 million. A few independent production companies specialize in producing
mid-range feature films, those costing between $10 million to $40 million.
Production costs consist of acquiring or developing the screenplay, film studio
rental, cinematography, post-production costs and the compensation of creative
and other production personnel. Distribution expenses, which consist primarily
of the costs of advertising and release prints, are not included in direct
production costs and generally financed by the distribution company.
MOTION PICTURE PRODUCTION AND FINANCING.
The production of a motion picture begins with the screenplay adaptation of
a popular novel or other literary work acquired by the producer or the
development of an original screenplay having its genesis in a story line or
scenario conceived of or acquired by the production company. In the development
phase, the producer typically seeks production financing and tentative
commitments from a director, the principal cast members, and other creative
personnel. A proposed production schedule and budget also are prepared during
this phase.
Upon completing the screenplay and arranging financing commitments,
pre-production of the motion picture begins. In this phase, the producer engages
creative personnel to the extent not previously committed; finalizes the filming
schedule and production budget; obtains insurance and secures completion
guarantees, if necessary or available; establishes filming locations and secures
any necessary studio facilities and stages; and prepares for the start of
principal photography.
Principal photography, the actual filming of the screenplay, may extend
from four to sixteen weeks or longer, depending upon such factors as budget,
location, weather and complications inherent in the screenplay. Following
completion of principal photography, the motion picture is edited. Also,
opticals, dialogue, music and any special effects are added, and voice, effects
and music sound tracks and picture are synchronized during post-production. This
results in the production of the negative from which the release prints of the
motion picture are made.
The major studios generally fund production costs from cash flow from their
motion picture and related activities, licensing fees generated from film
library holdings, and, in some cases, from unrelated businesses. Substantial
overhead costs, consisting largely of salaries and related costs of the
development, production, distribution and marketing staff and physical
facilities maintained by the major studios, also must be funded.
Independent production companies generally avoid incurring substantial
overhead costs by hiring creative and other production personnel and retaining
the other elements required for pre-production, principal photography and
post-production activities on a project-by-project basis. Unlike the major
studios, the independents also typically finance their production
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activities from bank loans, "pre-sales" agreements, equity offerings and joint
ventures. Independents generally attempt to complete their financing of a motion
picture production prior to commencement of principal photography, at which
point substantial production costs begin to be incurred and require payment.
"Pre-sales" are often used by independent film companies to finance all or
a portion of the direct production costs of a motion picture. Pre-sales consist
of license fees paid to the producer by third parties in return for the right to
exhibit the completed motion picture in theaters or to distribute it in home
video, television, international or other ancillary markets. Producers with
distribution capabilities may retain the right to distribute the completed
motion picture either domestically or in one or more foreign markets. Producers
may separately license theatrical, home video, television, foreign and all other
distribution rights among several licensees. The producer may also at times be
able to acquire additional production funds through "gap financing," whereby a
lender loans a portion of the production funds based on a distributor's estimate
of the value of distribution rights. Although "gap financing" is currently
available through a variety of lenders, there can be no assurance such lenders
will continue to make funds available on this basis in the future.
Both major studios and independent film companies often acquire motion
pictures for distribution through a customary industry arrangement known as a
"negative pickup," under which the studio or independent film company agrees to
acquire from an independent production company all rights to a film upon
completion of production. The independent production company normally finances
production of the motion picture pursuant to financing arrangements with banks
or other lenders in which the lender is granted a security interest in the film
and the independent production company's rights under its arrangement with the
studio or independent. When the studio or independent "picks up" the completed
motion picture, it assumes or pays the production financing indebtedness
incurred by the production company in connection with the film. In addition, the
independent production company is paid a production fee and generally is granted
a participation in the net profits of the motion picture.
Both major studios and independent film companies generally incur various
third-party participations or deferrals in connection with the production and
distribution of a motion picture. These participations or deferrals are
contractual rights of actors, directors, screen writers, owners of rights and
other creative and financial contributors entitling them to share in revenues or
net profits (as defined in the respective agreements) from a particular motion
picture. Except for the most sought-after talent, participation or deferral
costs are generally payable after all distribution and marketing fees and
expenses, direct production costs and financing costs are paid in full.
MOTION PICTURE DISTRIBUTION.
Motion picture distribution encompasses the distribution of motion pictures
in theaters and in ancillary markets such as home video, pay-per-view, pay
television, broadcast television, foreign and other markets. The distributor
typically acquires rights from the producer to
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distribute a motion picture in one or more markets. For its distribution rights,
the distributor typically agrees to advance the producer a certain minimum
royalty or guarantee, which is to be recouped by the distributor out of revenues
generated from the distribution of the motion picture and is generally
nonrefundable. The producer also is entitled to receive a royalty equal to an
agreed-upon percentage of all revenues received from distribution of the motion
picture over and above the royalty advance.
THEATRICAL DISTRIBUTION. The theatrical distribution of a motion picture
involves the manufacture and transportation of release prints, the promotion of
the picture through advertising and publicity campaigns and the licensing of the
motion picture to theatrical exhibitors. The size and success of the promotional
advertising campaign can materially affect the revenues realized from the
theatrical release of a motion picture. The major studios can spend in excess of
$50 million to promote motion pictures, and have average combined print and
advertising costs in excess of $19 million. The costs incurred in connection
with the distribution of a motion picture can vary significantly, depending on
the number of screens on which the motion picture is to be exhibited and the
competition among distributors for theaters during certain seasons. Similarly,
the ability to exhibit motion pictures in the most popular theaters can affect
theatrical revenues.
The distributor and theatrical exhibitor generally enter into an
arrangement providing for the exhibitor's payment to the distributor of a
percentage of the box office receipts for the exhibition period, in some cases
after deduction of the theater's overhead, or a flat negotiated weekly amount.
The distributor's percentage of box office receipts varies widely, depending
upon the success of the motion picture at the box office and other factors.
Distributors carefully monitor the theaters which have licensed the picture for
exhibition to ensure that the exhibitor promptly pays all amounts due the
distributor. Substantial delays in collection are not unusual.
Successful motion pictures may continue to play in theaters for up to four
(4) months or longer following their initial release. Concurrently with their
release in the United States, motion pictures generally are released in Canada
and may also be released in one or more other foreign markets.
HOME VIDEO. The home video distribution business involves the promotion and
sale of videocassettes and DVDs to local, regional and national video retailers
(e.g., video specialty stores, convenience stores, record stores and other
outlets), which then rent or sell such videocassettes and DVDs to consumers
primarily for private viewing.
Major feature films are usually scheduled for release in the home video
market within four to six months after theatrical release to capitalize on the
theatrical advertising and publicity for the film. Promotion of new releases is
generally undertaken during the nine to twelve weeks before the release date.
Videocassettes or DVDs of feature films are generally sold to domestic
wholesalers at approximately $50 to $60 per unit and generally are rented by
consumers for fees ranging from $1 to $5 per day. Wholesalers who meet certain
sales and performance objectives may earn rebates, return credits and
cooperative advertising allowances. Selected titles, including
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certain made-for-video programs, are priced significantly lower to encourage
direct purchase by consumers. Direct sale to consumers is referred to as the
"priced-for-sale" or "sell-thru" market. Typically, owners of films do not share
in video rental income; however, video distributors are beginning to enter into
revenue sharing arrangements with certain retail stores in some circumstances.
Under such arrangements, videocassettes and DVDs are sold at a reduced price to
video rental stores and a percentage of the video rental revenue is then shared
with the owners (or licensors) of the films. Home video arrangements in
international territories are similar to those in domestic territories except
that the wholesale prices may differ.
Overall growth in the domestic home video market has slowed as growth in
the number of new outlets and new VCR homes has moderated. The growth in outlets
designed to specifically serve the rental market has remained essentially flat
for the past several years, while the number of outlets which offer
videocassettes and videodiscs for sale has increased. The sell-thru market
continues to grow with strong sales in the traditional family entertainment
market and a growing number of hit feature films initially released at prices
generally below $30. Furthermore, technological developments which regional
telephone companies and others are developing could make competing delivery
systems economically viable and could affect the home video marketplace.
PAY-PER-VIEW. Pay-per-view television allows cable and satellite television
subscribers to purchase individual programs, including recently released motion
pictures and live sporting, music or other events, on a "per use" basis. The
subscriber fees are typically divided among the program distributor, the
pay-per-view operator and the cable system operator.
PAY TELEVISION. Pay television allows subscribers to view premium channels
such as HBO/Cinemax, Showtime/The Movie Channel and other pay television
networks offered by cable and satellite system operators for a monthly
subscription fee. The pay television networks acquire a substantial portion of
their programming from motion picture distributors. New markets may develop with
the maturation of newly emerging direct broadcast satellite (DBS) systems and
other digital television systems.
BROADCAST AND BASIC CABLE TELEVISION. Broadcast television allows viewers
to receive, without charge, programming broadcast over the air by affiliates of
the major networks (ABC, CBS, NBC and Fox), recently formed networks (UPN and WB
Network), independent television stations and cable and satellite networks and
stations. In certain areas, viewers may receive the same programming via cable
transmission for which subscribers pay a basic cable television fee.
Broadcasters or cable systems operators pay fees to distributors for the right
to air programming a specified number of times.
FOREIGN MARKETS. In addition to their domestic distribution activities,
some motion picture distributors generate revenues from distribution of motion
pictures in foreign theaters, home video, television and other foreign markets.
There has been a dramatic increase in recent years in the worldwide demand for
filmed entertainment. This growth is largely due to the
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privatization of television stations, introduction of direct broadcast satellite
services, and increased home video and cable penetration.
OTHER MARKETS. Revenues also may be derived from the distribution of motion
pictures to airlines, schools, libraries, hospitals and the military, licensing
of rights to perform musical works and sound recordings embodied in a motion
picture, and licensing rights to manufacture and distribute merchandise,
clothing and similar commercial articles derived from characters or other
elements of a motion picture.
NEW TECHNOLOGIES. New means of delivery of entertainment product are
constantly being developed and offered to the consumer. The impact of emerging
technologies such as direct broadcast satellites and the Internet, on the
Company's operations cannot be determined at this time.
CURRENT COMPANY OPERATIONS
Management has attempted to focus the film production operations of the
Company on filling the niche for the production of mid-range independent feature
films. Within this niche the Company has been successful in attracting
recognized movie actors, obtaining distribution agreements with recognized
distribution companies, such as Miramax Films for DIAMONDS, and using production
values similar to the ones used by the "majors" to create feature films
comparable to those produced by the "majors" at substantially less cost.
THE NEW SWISS FAMILY ROBINSON, staring Jane Seymour, was the first feature
film produced by the Company through its wholly owned subsidiary, Total Films UK
Limited, which was created solely for this project. Total Film UK Limited was
incorporated in England on February 11, 1997, under the name Daneslide Limited.
The film was financed by CLT-UFA in exchange for distribution rights in
certain foreign territories, by the Company, and through a gap loan from Lewis
Horwitz Organization. This loan has since been repaid and its security interest
released.
The film's executive producer was Gerald Green, the president/CEO, a
director, and a principal shareholder of the Company, pursuant to a producer's
agreement between the Company, Total Films UK Limited, and Mr. Green. (See
"Certain Relationships and Related Transactions.") The film aired on January 10,
1999, on ABC's Wonderful World of Disney and received one of the highest ratings
of any of Disney's shows during the season in that time slot. Pursuant to the
agreement between the American Broadcasting Companies, Inc. and Total Film UK
Limited, ABC has the exclusive rights to one additional broadcast of the film by
January 31, 2002, in the United States, its territories and possessions, Saipan,
and Bermuda, but excluding
<PAGE>
Page 14
Spanish language broadcasts in Puerto Rico. ABC's second and final broadcast of
the film is scheduled for July 23, 2000, after which the domestic television
rights will revert to the Company. The film is scheduled to be released on video
this year.
During 1998 the Company completed production of CHICK FLICK. The film was a
very low budget picture that was financed entirely by the Company.
The third film is DIAMONDS, staring Kirk Douglas, Dan Aykroyd, and Lauren
Bacall. This film was produced by Sundowning, Inc., a wholly owned subsidiary of
the Company created for this project. Sundowning, Inc. was incorporated in the
State of Nevada on July 16, 1998, and is qualified to do business in the State
of California under the name "Sundowning Entertainment." The film was financed
through a co-production with a German company, Cinerenta/Cinesun, and Total Film
Group, Inc. The executive producers for the film were Gerald Green and Rainer
Bienger, and the producer of the film was Patricia Green, the wife of Gerald
Green. (See "Certain Relationships and Related Transactions.) "J&M
Entertainment" is handling the foreign sales for the film.
MY FIRST MISTER was filmed on location in Los Angeles in early 2000. The
film is now in post-production and stars an ensemble cast led by Albert Brooks,
Lee Lee Sobieski, John Goodman, Carol Kane and Mary Kay Place. The film was
directed by Christine Lahti, who won an Academy Award for her short film
LIEBERMAN IN LOVE. The screenplay is by Jill Franklyn. The film was produced by
Carol Baum and Jane Goldenring. The executive producer was Gerald Green through
the Company's subsidiary, 1st Mr. Inc. The film is scheduled to be released by
late 2000 or early 2001. Domestic distribution will be handled by Paramount
Classics, while foreign territories are being sold by Mario Kassar and his C-2
Productions.
BRIDE OF THE WIND is being produced through the Company's wholly owned
subsidiary, Alma Productions UK Ltd, in the Great Britain and is a UK/German
co-production. Directed by Bruce Beresford, the screenplay is by Marilyn Levy.
The film, produced by Lawrence Levy & Evzen Kolar, and executive produced by
Gerald Green, was filmed on location in Vienna and is now being edited in
London. The film is anticipated to be ready for release in 2001. Domestic
distribution will be handled by Paramount Classics and foreign territories are
being sold by Mario Kassar and his C-2 Productions.
The Company has developed a strategy that capitalizes on market
opportunities emerging from the growing entertainment economy and was created to
realize this opportunity. Mr. Green oversees the development and production of
all feature films produced by the Company. The Company intends to tightly
control production expenditures while maintaining the artistic integrity
required to develop and produce successful feature films. The Company's approach
to the creative development and production of films is to focus selectively on
script driven productions that can be made with recognizable casts and at
mid-sized budgets ($5 million to $25
<PAGE>
Page 15
million). Before a motion picture receives approval to begin pre-production, it
must meet certain requirements. The Company will only produce a film based on
the following criteria:
- The script must be original and of the highest quality.
- The project must be mainstream and have mass appeal. Art films are not
considered.
- Directors must have a proven track record with qualifications
acceptable to the foreign buyers and domestic studios. The Company is
not prepared to hire unproven directors.
- Available actors must be identified and their fee structures must fit
into the budget requirements of the picture.
- The film must fall into the funding capabilities and parameters
established. The Company will not generally participate in films with
budgets in excess of approximately $25 million.
- The film must be acceptable to the completion bond company. The
completion bond company underwrites any and all risk that the picture
will not be completed and delivered to its distributors on schedule
and within budget according to the delivery requirements specified in
the distribution agreements.
- Before approving a picture, conservative sales estimates for the
proposed film must indicate that the film project is viable.
- The Company must be able to secure a favorable distribution deal with
a major U.S. domestic distributor prior to approving the film for
pre-production.
- The Company's production executives work in tandem with the production
personnel to ensure tight fiscal and logistical controls on the film.
The Company hires line producers whose sole responsibility is to keep
the film within its established logistics and budget.
By adding Total Creative, Inc., the Company now has two operational
divisions focusing on two business activities in multimedia: entertainment
production, and advertising/marketing/Internet services. Both divisions provide
great opportunity to capitalize on shared resources and existing synergies. Not
unlike major studios with strong content divisions that drive other business
units forward, the Company proposes to create similar advantages between its
entertainment and advertising divisions. The Company hopes to develop sources of
competitive advantage, additional revenue streams, and higher levels of
profitability.
<PAGE>
Page 16
The Company has entered into a foreign sales agreement with C-2 Pictures,
LLC, a California limited partnership composed of equal interests owned by
Cinergi Pictures Entertainment, Inc., a Delaware corporation, and Mario Kassar
Productions LP, a California limited partnership. The agreement was entered into
on August 2, 1999, with Cinergi and was assigned to C-2 Pictures on January 25,
2000. The agreement appoints C-2 Pictures as the exclusive international sales
agent on three pictures, the first being MY FIRST MISTER, to be sold by C-2
Pictures throughout the world, except in the United States, its dominions,
including Puerto Rico, and English speaking Canada. The term of the agreement
shall be for a period of 30 months from the delivery of each picture. The rights
to the pictures shall include all forms of the theatrical, non-theatrical, home
video, public video, commercial video, pay-television, pay-per-view,
video-on-demand, DVD, free television, airline, hotel and ship-at-sea rights
throughout the allotted territory. The Company is obligated to advance between
$75,000 and $150,000 to C-2 Pictures for the costs and expenses in connection
with the distribution, advertising, and exploitation of the film. In addition,
C-2 Pictures will receive 10% of the gross receipts derived from sales in the
applicable territory until the Company recoups its investment in the picture and
the distribution expenses advanced to C-2 Pictures. Thereafter, C-2 Pictures
will receive 15% of the gross proceeds.
The Company intends to secure domestic distribution from major distributors
on a film by film basis. The Company intends to utilize the availability of
print and advertising funds to negotiate favorable studio "Rent-a-System"
arrangements from major distributors on a film by film basis. Such agreements
require the user to be responsible for all prints and advertising expenses. The
value of a studio Rent-a-System distribution deal can be characterized in the
following way. Under a standard studio distribution agreement, the studio would
advance print and advertising costs. Such costs would be recouped through the
studio's first position to receive funds from the film. In addition, a 10%
overhead fee on the prints and advertising expenses would be charged, as well as
a 25% distribution fee applied to gross sales. Additionally, home video
participations for the Company would be computed on a 20% royalty basis rather
than on a low-fee distribution basis. Conversely, should the Company have
sufficient capital to fund its own prints and advertising expenses requirements,
it could enter into a "Rent-a-System" arrangement with the studio. Such an
arrangement would provide the Company access to a major studio's distribution
apparatus on a preferred basis, providing that the entire cost of production and
distribution would be covered by the Company. In return, a very favorable 17.5%
distribution fee could be negotiated with the studio, allowing the Company to
capture a larger and more profitable piece of a film's economic value. The
Company would assume all distribution risk but at the same time maintain control
of all of the film's profits. In this case, the Studio would take its 17.5% fee
and nothing more.
The Company has come to an oral arrangement with Paramount Classics'
co-presidents Ruth Vitale and David Dinerstein for Paramount to market and
distribute of up to four of the Company's feature films. Under the arrangement,
Paramount will receive North American rights to the films. Letter agreements
have been signed for the first two projects under this arrangement, which are
BRIDE OF THE WIND and MY FIRST MISTER.
<PAGE>
Page 17
The Company has also borrowed $2,500,000 to launch the proposed film
project featuring the 'N Sync singing group. The funds were borrowed in April
2000 and were evidenced by promissory notes to the investors. The notes were
without interest, but carried a premium equal to 30% of the principal. In
addition, the investors will receive 6% of the adjusted gross proceeds from the
picture in any and all media, including ancillary rights. The notes are secured
by the producer's interest in the picture. The notes were originally due August
15, 2000, but were extended until November 13, 2000. For such extension, the
Company agreed to issue 166,667 shares to the investors on August 15, 2000,
September 15, 2000, and October 15, 2000.
THE ADVERTISING AND MARKETING BUSINESS
Total Creative, Inc. ("TCI") is engaged in web design and development,
digital advertising and other traditional advertising and marketing related
services in the marketing business. In order to maximize its competitive
potential, TCI operates three business units, each focusing on different segment
of the industry: 1) a graphic design studio, directed at the entertainment
industry; 2) a general advertising agency that creates print and broadcast
advertising for consumer and business-to-business marketers; and 3) an Internet
services company, which develops and creates web sites and e-commerce solutions.
TCI has offices in Los Angeles.
TCI helps clients plan and implement their Internet strategy with a
particular emphasis on brand and creative content. Services include marketing
and brand consulting, information architecture, graphical user interface design,
content development, programming and integration management. TCI's major clients
include KPMG, Eastman Kodak, and MGM Home Entertainment. Since the formation of
TCI in March 1999, the Company's strategy has been to enhance TCI's brand
awareness and market position including aggressive new business development
efforts and negotiation of guaranteed production contracts with key film
clients. TCI also supplies the Company with the marketing and creative
advertising campaign work required for its films produced "in house," including
MY FIRST MISTER and BRIDE OF THE WIND (aka ALMA).
Revenues from three customers of this segment represented approximately
$1,069,852 or 33.3% of the Company's consolidated revenues for the year ended
June 30, 2000.
EMPLOYEES
At June 30, 2000, the Company and its subsidiaries employed 24 persons on a
full-time basis. In the film production segment, two are in executive positions,
two are administrative, and one is clerical. In addition, the Company has
several free-lance production personnel working on various film productions. In
the advertising and marketing business, two are in executive positions, sixteen
are employed in operations, and one is clerical. The holding company segment
<PAGE>
Page 18
does not have any employees. The Company provides medical and dental insurance
coverage, life insurance, a 401K plan to the employees of the Company and its
subsidiaries, which is optional.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company's business is divided into three segments: (i) the film
production business; (ii) the advertising and marketing business; and (iii) as a
holding company of the stock of an internet related business. The Company
generates revenues from the film production business through movie release
income. This income is defined as the revenues collected from the exploitation
of motion picture releases in the following domestic and international markets:
domestic theatrical, domestic home video, domestic television and sales to
foreign distributors. The Company generates revenues from the advertising and
marketing business from the sale of media design, advertising, and Internet
business consulting services. The holding company is engaged to hold the stock
of MeetChina.com, an internet related business.
The consolidated financial statements at June 30, 2000, include the
accounts of Total Film Group, Inc. and its wholly owned subsidiaries: Total
Creative, Inc. ("TCI"), Total China, Inc., Total China II, Inc., Total Films UK
Limited, Alien Sky UK Ltd., Sundowning, Inc., 1st Mister, Inc., and Alma
Productions UK Ltd. (collectively, the "Company"). All significant intercompany
balances and transactions have been eliminated upon consolidation.
<PAGE>
Page 19
The Company's revenues and results of operations are significantly affected
by accounting policies required for the industries in which it operates. Among
the more significant policies are the following:
REVENUE RECOGNITION: Revenues from distribution or releasing agreements are
recognized when the film is released and certain other conditions are met in
accordance with Statement of Position 00-2 ("SOP 00-2"), "Accounting by
Producers and Distributors of Films." Amounts received in advance of the film
being available for release are recorded on the balance sheet as deferred
revenue. This revenue recognition method may result in significant fluctuations
in revenues and net earnings (losses) from period to period. Revenues from Total
Creative, Inc. (TCI) are generally recognized at the completion of job
production. Revenue for long-term contracts is recognized on the
percentage-of-completion method.
MOTION PICTURE DEVELOPMENT COSTS AND AMORTIZATION: Motion picture
development costs represent those costs incurred in the production, acquisition
and distribution of motion pictures, which include production costs, legal
expenses, interest and overhead costs. These costs have been capitalized in
accordance with SOP 00-2. The Company is amortizing the film costs for completed
films using the individual-film-forecast-computation method, whereby expense is
recognized in the proportion that current year revenues bear to management's
estimate of ultimate revenue from all markets. Motion picture development costs
are valued at lower of unamortized cost or estimated net realizable value.
Revenue and cost forecasts for films are
<PAGE>
Page 20
regularly reviewed by management and revised when warranted by changing
conditions. When estimates of total revenues and costs indicate that a film will
result in an ultimate loss, additional amortization is provided to fully
recognize such loss.
RESULTS OF OPERATIONS
COMPARISON OF FISCAL YEARS ENDED JUNE 30, 2000 AND 1999
<PAGE>
Page 21
The Company's operating revenues for the fiscal year ended June 30, 2000,
were $3,205,892, a decrease of $2,914,202 or 47.6% from operating revenues of
$6,120,094 in the prior fiscal year ended June 30, 1999. This decrease resulted
primarily from a reduction in movie release income, which was $131,656 at June
30, 2000, as compared with $4,429,388 at June 30, 1999. Movie release income for
the fiscal year ended June 30, 1999, reflects the revenue from the Company's
film, The New Swiss Family Robinson. This movie was filmed during the 1997/1998
fiscal year and broadcast on ABC Television Network in January 1999.
The Company's operating revenues generated by TCI for the fiscal year ended
June 30, 2000, were $3,074,236, an increase of $1,383,530 or 81.8% from
operating revenues of $1,690,706 in the prior fiscal year ended June 30, 1999.
The year ended June 30, 2000, reflects the first complete fiscal year of
operations for TCI after the company reorganized its management and professional
staffing structure and refocused its business strategy from that of a graphic
design boutique to its current strategy as an Internet services agency.
Operating expenses include amortization of motion picture development
costs. Operating expenses exclusive of amortization of motion picture
development costs were $3,822,169 during the fiscal year ended June 30, 2000, as
compared to $3,487,878 during the fiscal year ended June 30, 1999. This increase
of $334,291 in operating expenses is due principally to an increase in TCI's
administrative expenses as a fully operational division of the Company.
Interest expense for the fiscal year ended June 30, 2000, was $1,169,115 as
compared to $143,353 during the fiscal year ended June 30, 1999. The increase
was due to increased borrowings carried for longer terms. Total indebtedness for
borrowed money increased to $5,817,849 for the fiscal year ended June 30, 2000,
from $2,179,577 during the fiscal year ended June 30, 1999.
Amortization of placement fee during the fiscal year ended June 30, 2000
was $1,054,021 as compared to $257,813 during the fiscal year ended June 30,
1999. This expense is directly related to the Company's borrowings with The
Orbiter Fund and The Lancer Group.
For the fiscal year ended June 30, 2000, the Company's balance sheet
reflected goodwill (net of amortization) equal to $282,186 as compared to
$986,926 during the fiscal year ended June 30, 1999. The goodwill arises from
the net deficit assumed by the Company in the Michel/Russo Inc. acquisition as
well as the value of stock options granted in connection therewith. At June 30,
2000, the goodwill associated with the purchase of Skyrocket, LLC was
<PAGE>
Page 22
determined to be impaired as operations ceased immediately following the balance
sheet date. The unamortized balance of $637,063 was expensed for the year ending
June 30, 2000.
The Company reported a net loss of $(10,104,268) for the fiscal year ended
June 30, 2000, as compared to a net loss of $(1,044,483) for the fiscal year
ended June 30, 1999. During this fiscal year, the Company recognized a loss on
the early extinguishment of short-term debt. The extraordinary item represents
$(4,553,982) or 45.1% of the fiscal year's net loss. The weighted average number
of common shares outstanding for the compared periods were 9,061,332 in fiscal
year 1999/2000 and 8,414,597 in fiscal year 1998/1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at June 30, 2000, decreased to $448,102 from
$1,130,179 at June 30, 1999. $782,740 of the cash balance at June 30, 1999,
represents unspent production funding for the film DIAMONDS. The Company expects
to collect revenues from this film during the 2000/2001 fiscal year from home
video, television, and foreign sales markets.
The Company has funded its working capital requirements through operating
revenues and proceeds from debt and equity financings. At times, the Company has
relied upon its transactional production loans to provide bridge production
financing prior to receipt of distribution advances.
In February 1999 the Company obtained a $2,000,000 bridge loan from The
Orbiter Fund, an entity managed by one of the principal shareholders of the
Company, with interest at
<PAGE>
Page 23
13.5% and maturing May 2000. In September 1999, the Company obtained a
$2,000,000 convertible note from the Lancer Group, with interest at 12%, payable
quarterly, and maturing March 2000. As of February 28, 2000 these loans were
converted into common stock of the Company. (See Item 1 Description of
Business--History and Organization.) As of June 30, 2000, $2,500,000 of the
Company's short-term debt obligations represent monies borrowed in connection
with the funding of the untitled N'SYNC production. (See Part I, Item 7. Certain
Relationships and Related Transactions and Part II, Item 4. Recent Sales of
Unregistered Securities.)
SUMMARY
Management believes that existing resources and cash generated from
operating activities, together with the possible conversion of certain
outstanding debt, will be sufficient to meet the Company's working capital
requirements through the end of the fiscal year 2000/2001. The Company may seek
other sources of financing to meet its working capital requirements, including
separate equity or debt financing for TCI. The Company from time to time seeks
additional financing through the issuance of new debt or equity securities,
additional bank financings, or other means available to the Company to increase
its working capital.
ITEM 3. DESCRIPTION OF PROPERTY
The Company leases approximately 3,062 square feet of office space in
Beverly Hills, California. This space is used for the Company's corporate
headquarters and the film business. The lease expires on March 16, 2002. Monthly
lease payments are $5,358.
Total Creative, Inc. occupies approximately 5,000 square feet of office
space in Los Angeles, California, which is used for the advertising and
marketing business. The arrangement to occupy this space is for month to month
pursuant to an oral arrangement with the landlord. Monthly rental payments are
$12,000.
<PAGE>
Page 24
Total Creative, Inc. also holds a lease for an unoccupied office space of
approximately 6,850 square feet of office space in the San Francisco,
California, area. The Company is currently attempting to sublease this space.
The lease expires December 31, 2002. Monthly lease payments are $22,833.
Total Creative, Inc. has two major computer equipment leases used in its
advertising business. The principal amount of the first lease is $90,000, with
monthly payments of $2,062. The sixty month lease was entered into in June 1998.
Total Creative, Inc. has the option to purchase the equipment at the end of the
lease period at its then fair market value. The second lease was a thirty-six
month lease entered into in September 1999. The principal amount of this lease
is approximately $110,000. The monthly payments are $3734. There is an option to
purchase the equipment for fair market value at the end of the lease.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth certain information furnished by the named
shareholders and others concerning the ownership of common stock of the Company
as of September 27, 2000, of (i) each person who is known to the Company to be
the beneficial owner of more than 5 percent of the Common Stock; (ii) all
directors and executive officers; and (iii) directors and executive officers of
the Company as a group:
<TABLE>
<CAPTION>
Amount and Nature
Name and Address of Beneficial
of Beneficial Owner Ownership (1) Percent of Class
------------------- ------------- ----------------
<S> <C> <C>
Michael Lauer 7,270,014(2) 53.36%
475 Steamboat Road
Greenwich, CT 06830
Lancer Offshore, Inc. 4,137,907(3) 30.37%
Kaya Flamboyan 9
Curacao, Netherland Antilles
Lancer Partners LP 1,942,107(4) 14.26%
475 Steamboat Road
Greenwich, CT 06830
Gerald Green 2,220,000(5) 15.18%
9019 Lloyd Place
West Hollywood, CA 90069
</TABLE>
<PAGE>
Page 25
<TABLE>
<S> <C> <C>
Manuel Pacheco 55,000(6) *
Eli Boyer 50,000(7) *
Monique L. Jones -0-
Executive Officers and 2,325,000 15.79%
Directors as a Group
(4 Persons)
</TABLE>
-------------------
* Represents less than 1%.
(1) Unless otherwise indicated, this column reflects amounts as to which
the beneficial owner has sole voting power and sole investment power.
(2) Mr. Lauer owns 310,000 of these shares directly in his name. Of the
remaining shares, 4,137,907 are held directly in the name of Lancer Offshore;
1,942,107 are held directly in the name of Lancer Partners; and 250,000 are held
directly in the name of The Orbiter Fund. Mr. Lauer is the general partner of
Lancer Partners. Mr. Lauer is the investment manager of Lancer Offshore and The
Orbiter Fund. Mr. Lauer controls the voting and disposition of these shares by
virtue of being the investment manager for these entities. The Orbiter Fund has
been granted warrants to purchase 250,000 shares. The warrants are exercisable
within sixty days. The shares underlying the warrants are included in the table
and are considered to be outstanding for purposes of computing the percentage
interest held by Mr. Lauer.
(3) These shares are included in the total shares beneficially owned by
Mr. Lauer, who is deemed to share beneficial ownership of these shares with this
entity.
(4) These shares are included in the total shares beneficially owned by
Mr. Lauer, who is deemed to share beneficial ownership of these shares with this
entity.
(5) Of these shares 407,500 are held directly in the name of Mr. Green;
437,500 are held directly in the name of Mr. Green's wife, Patricia M. Green;
375,000 are held in trust for the children of Mr. and Mrs. Green. Mr. and Mrs.
Green control the voting of the shares held in trust. Mr. Green also holds
options to purchase 1,000,000 shares which are exercisable within sixty days.
The shares underlying these options are included in the table and are considered
to be outstanding for purposes of computing the percentage interest held by Mr.
Green.
(6) Mr. Pacheco holds options to purchase 55,000 which are exercisable
within sixty days. The shares underlying these options are included in the table
and are considered to be outstanding for purposes of computing the percentage
interest held by Mr. Pacheco.
(7) Mr. Boyer holds options to purchase 50,000 which are exercisable
within sixty days. The shares underlying these options are included in the table
and are considered to be outstanding for purposes of computing the percentage
interest held by Mr. Boyer.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS,
PROMOTERS AND CONTROL PERSONS
<PAGE>
Page 26
The following table sets forth as of June 30, 2000, the name, age, and
position of each executive officer and director of the Company and the term of
office of such director:
<TABLE>
<CAPTION>
Name Age Position(s) Director Since
---- --- ----------- --------------
<S> <C> <C> <C>
Gerald Green 68 President, CEO, & Chairman 1997
Manuel Pacheco 43 Director 1997
Eli Boyer 80 Secretary, Treasurer, & Director 1997
Monique L. Jones 34 Chief Financial Officer --
</TABLE>
Directors are elected for a term of one year and until their successors are
elected and qualified. Annual meetings of the stockholders, for the selection of
directors to succeed those whose terms expire, are to be held at such time each
year as designated by the Board of Directors. The Board of Directors has not
selected a date for the next annual meeting of shareholders. Officers of the
Company are chosen by the Board of Directors. Each officer holds his office for
one year and until his successor is chosen and qualified. Officers may also be
removed by the Board of Directors whenever in its judgment the best interests of
the Company will be served by removing the officer.
Set forth below is certain biographical information regarding the Company's
executive officers and directors:
GERALD GREEN has been the president of the Company since January 1997. From
1977 to 1997 he was self employed as a producer of feature length motion
pictures.
MANUEL PACHECO has been a practicing attorney in Mexico since 1982. He
received his bachelor of law degree from the Universidad Panamericana in Mexico
City in 1979, and received a master of law degree from Southern Methodist
University, Dallas, Texas, in 1982.
ELI BOYER is a certified public accountant and was a senior partner in the
national accounting firm of Laventhol and Horwath from 1966 to 1986. He has been
self-employed as a certified public accountant since 1986. He served as chief
financial officer of the Company from January 1997 until November 1999. He is
also a director of Bright Star Holding and Safety Harbor Spa, Inc. Mr. Boyer
received his bachelor of science degree in accounting in 1940 from UCLA. He
became a certified public accountant in 1943.
MONIQUE L. JONES has been the chief financial officer of the Company since
November 1999. From February 1996 until September 1999 she was employed by USA
Films (formerly Polygram Filmed Entertainment) as manager of business planning
and development, director of business planning and development, and director of
film finance and planning. From October 1994 until October 1995 Ms. Jones was
employed by Coopers and Lybrand as an associate in the entertainment/media
practice division. She received her MBA in June 1993 from UCLA.
<PAGE>
Page 27
The following table sets forth as of June 30, 2000, the name, age, and
position of each executive officer and director, and each significant employee,
of Total Creative, Inc.:
<TABLE>
<CAPTION>
Name Age Position(s) Director Since
---- --- ----------- --------------
<S> <C> <C> <C>
Gerald Green 68 Director, President, and Secretary 1998
Rod Dyer 64 Co-creative director --
Howard Russo 62 Co-creative director --
</TABLE>
Set forth below is certain biographical information regarding the executive
officers and directors of Total Creative, Inc.:
ROD DYER has been employed as the co-creative director of Total Creative,
Inc. since June 1998. From 1967 until June 1998 Mr. Dyer was president of Dyer
Mutchnick, a design and advertising firm.
HOWARD RUSSO has been employed as co-creative director of Total Creative,
Inc. since January 1999. From February 1989 until December 1998, he was the
executive vice-president and chief financial officer of Michel/Russo, Inc., a
creative advertising agency. From January 1988 until January 1989, Mr. Russo was
senior vice-president and head of creative advertising for Columbia Pictures,
where he oversaw creative advertising for domestic releases of motion pictures.
ITEM 6. EXECUTIVE COMPENSATION
COMPENSATION
The following table sets forth the aggregate executive compensation awarded
to, earned by, or paid to the sole named executive officer by any person for all
services rendered in all capacities to the Company and its subsidiaries for the
fiscal years ended June 30, 2000, 1999, and
<PAGE>
Page 28
1998. No other executive officer's total annual salary and bonus exceeded
$100,000 during each of the last three fiscal years.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
--------------------------------------- -----------------------------------
Awards Payouts
------------------------ -------
Other Restricted All
Name and Principal Annual Stock Options/ LTIP Other
Positions Year Salary Bonus Compensation Award(s) SARs Payouts Compensation
------------------ ---- ----------- ----- ------------ ---------- -------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gerald Green, CEO 2000 $246,945 -- $ 34,739 -- -- -- --
1999 $ 95,000(1) -- $250,000(2) -- 500,000 -- --
1998 $ 80,000(1) -- $350,000(3) -- -- -- --
</TABLE>
-------------------
(1) Of this amount, $20,000 was paid as salary to Patricia M. Green, wife
of Mr. Green.
(2) Of this amount, $100,000 is deferred compensation to Mr. Green for his
producer's fee for the film DIAMONDS. Of the remaining amount $100,000 was paid
as producer's fees to a company owned by Mrs. Green and $50,000 was deferred.
(3) Of this amount, $300,000 is deferred compensation to Mr. Green for his
producer's fee for the film THE NEW SWISS FAMILY ROBINSON. The remaining amount
is deferred compensation to a company owned by Mr. Green's wife, Patricia M.
Green.
1998 STOCK OPTION PLAN
On June 19, 1998, the Board of Directors adopted a 1998 Non-Qualified Stock
Option Plan (the "Plan"), pursuant to which it was authorized to grant options
to purchase up to 800,000 shares of common stock to the Company's key employees,
officers, directors, consultants, and other agents and advisors. Awards under
the Plan consisted of non-qualified stock options. The Plan will terminate on
June 19, 2008. At June 30, 2000, all of the options under the plan had been
granted, except for 70,000. Of the outstanding options, 45,000 had been
exercised as of March 31, 2000.
The Plan is administered by the Board of Directors which determined the
persons to whom awards were granted, the number of awards granted, and the
specific terms of each grant, including the vesting thereof, subject to the
provisions of the Plan.
The exercise price of each option granted under the Plan was determined by
the Board of Directors. The exercise price is (i) payable in cash; (ii) payable
in whole or in part in shares of stock of the Company, which shares shall be
valued at its then fair market value as determined by the Board of Directors; or
(iii) by the surrender or cancellation of other rights to stock of the Company.
<PAGE>
Page 29
No option granted under the Plan is transferable other than by will or the
laws of descent and distribution, or pursuant to a qualified domestic relations
order. The options are subject to certain adjustments in the case of stock
splits, stock dividends, combination or consolidation of shares, and in certain
asset transfers. In the event that any holder of an option, except a consultant,
is terminated or resigns from his or her position with the Company or a
subsidiary within six months of the grant of an award, any unexercised portion
of such option immediately becomes null and void. In the case of gross
negligence, criminal misconduct, or willful or gross misconduct by an employee,
the Board of Directors may cancel any options held by such person.
STOCK OPTION GRANTS
During the year ended June 30, 1999, the Company granted a total of 960,000
options to employees. Of the options granted, 730,000 were granted under the
1998 Stock Option Plan and 230,000 were granted pursuant to individual stock
option agreements. The following table sets forth information concerning grant
of stock options made during the fiscal year to the named executive officer and
the percent the grant represents of total options granted to employees during
the fiscal year:
<TABLE>
<CAPTION>
Number of
Securities Percent of
Underlying Total Exercise Expiration
Name Options Options Price Date
---- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Gerald Green 500,000 52.08% $2.00 7/27/01
Manuel Pacheco 55,000 5.73% $2.00 6/19/01
Eli Boyer 50,000 5.21% $2.00 6/19/01
</TABLE>
During the year ended June 30, 2000, the Company granted a total of 752,500
options to employees of the Company and its subsidiaries pursuant to individual
stock option agreements. The following table sets forth information concerning
these grants of stock options made during this fiscal year to the named
executive officers and the percent the grants represent of total options granted
to employees during the fiscal year:
<TABLE>
<CAPTION>
Number of
Securities Percent of
Underlying Total Exercise Expiration
Name Options Options Price Date
---- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Gerald Green 500,000 66.45% $2.00 5/15/03
Monique Jones 10,000 5.98% $3.00 11/8/02
15,000 $4.00 11/8/03
20,000 $5.00 11/8/04
</TABLE>
Of the options granted to Ms. Jones, 10,000 vest after twelve months of
continuous employment; 15,000 will vest after twenty-four months of continuous
employment; and 20,000
<PAGE>
Page 30
will vest after thirty-six months of continuous employment. All of the other
options set forth above have fully vested.
2000 RESTRICTED STOCK BONUS PLAN
In January 2000 the Company adopted a Stock Bonus Plan (the "Stock Bonus
Plan") which allows the Company to issue up to 50,000 restricted shares of the
Company's common stock to directors, officers, employees, and others who have
performed bona fide services for the Company. The purpose of the Stock Bonus
Plan is to assist the Company in maintaining and developing a management team,
attracting qualified directors, officers, and employees capable of assisting in
the future success of the Company, and rewarding those individuals who have
contributed to the success of the Company. It is designed to aid the Company in
retaining the services of executives and employees and in attracting new
personnel when needed for future operations and growth and to provide such
personnel with an incentive to remain employees of the Company, to use their
best efforts to promote the success of the Company's business, and to provide
them with an opportunity to obtain or increase a proprietary interest in the
Company. It is also designed to permit the Company to reward those individuals
who are not employees of the Company but who are perceived by management as
having contributed to the success of the Company or who are important to the
continued business and operations of the Company. The Stock Bonus Plan is
administered by the Board of Directors. It will terminate not later than ten
years from its adoption by the Board of Directors. Pursuant to the terms of the
Stock Bonus Plan, the Company issued 7,500 shares to an employee of the Company
in January 2000.
COMPENSATION OF DIRECTORS
The bylaws provide that directors, as such, are not entitled to receive any
stated salary for their services. However, they may receive a fixed sum and
expenses for attendance at meetings of the Board. The Company has not adopted a
policy with regard to establishing any fixed sum for attendance at special or
regular meetings of the board, but it does intend to reimburse directors for
out-of-pocket expenses related to such meetings.
EMPLOYMENT AGREEMENTS
The Company has a full-time employment contract dated September 15, 1999,
with Gerald Green to serve as the chief executive officer of the Company. The
agreement terminates on August 31, 2004. Under the contract Mr. Green receives
an annual base salary of $300,000 and a fixed annual bonus of $29,167. He is
also entitled to a contingent annual bonus equal to 10% of the net profits of
the Company before income taxes. Mr. Green will also receive an executive
producer's fee to be negotiated for each film project of the Company. The
agreement provides for an annual review and permits the Board of Directors to
increase or decrease the compensation based upon the services performed by Mr.
Green and the financial condition of the Company. Mr. Green has the right to
defer any part of the compensation upon prior written notice. He is entitled to
a car allowance of $1,500 per month. He is also entitled to medical
<PAGE>
Page 31
insurance for himself, his spouse, and children up to age twenty-five, and the
amount of medical and hospital expenses paid or payable for such persons not
covered by insurance. He is to receive three weeks paid vacation each year. If
Mr. Green is unable to perform his duties because of illness or incapacity for
more than twelve months, the Company may suspend its payment obligation or
terminate the agreement. Mr. Green is also to receive screen and advertising
credit in films in which he provides creditable services.
The Company entered into an employment agreement dated September 27,1999,
with Monique L. Jones to act as chief financial officer for the Company and its
affiliates. The agreement may be terminated at any time by either party. Ms.
Jones receives an annual salary of $100,000, which amount may be increased by
the Company's executive committee after annual review of her performance. She is
entitled to the same medical, dental, retirement, and other benefits afforded
other similar employees of the Company. Ms. Jones was also granted options to
purchase 45,000 shares of common stock of the Company.
Mr. Boyer, the Company's treasurer and secretary, has no employment
agreement or other compensatory plan or arrangement with the Company.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Gerald Green, the president, a director and principal shareholder of the
Company, may be deemed a promoter in relation to the organization of the
business of the Company and was the founder of Total Media Corporation. In
connection with the original acquisition of Total Media Corporation by the
Company, Mr. Green exchanged all of his shares of Total Media Corporation for
shares of the Company.
Mr. Green was employed by Total Films UK Limited, a wholly owned subsidiary
of the Company, as the executive producer of THE NEW SWISS FAMILY ROBINSON. For
his services, Mr. Green earned $300,000 and screen credit as producer of the
film. Payment of the cash consideration has been deferred, without interest,
until the film recoups its negative costs. Mr. Green is also an officer and a
director of Total Films UK Limited.
Mr. Green and his wife, Patricia M. Green, were also employed by
Sundowning, Inc. as the executive producer and the producer, respectively, of
the film DIAMONDS. For his services as producer of DIAMONDS, Mr. Green earned a
fee of $100,000, which is deferred, without interest, until the film recoups its
negative costs. Mr. and Mrs. Green are also officers and directors of
Sundowning, Inc. Mrs. Green, through her company, Saso Entertainment, Inc.,
earned $150,000 as producer's fees in connection with the film, $50,000 of which
has been deferred, without interest, until the film recoups its negative costs.
Of the total amount earned, $100,000 was paid during the fiscal year ended June
30, 1999. A bonus of $40,000 was paid to Mrs. Green during the fiscal year ended
June 30, 2000.
<PAGE>
Page 32
Mrs. Green, through her company, Saso Entertainment, Inc., was paid $75,000
as an in- house production executive in connection with the film MY FIRST MISTER
and $100,000 as a producer's fee for the film BRIDE OF THE WIND (a.k.a. ALMA).
These fees were paid during the current year.
Mr. Andrew Somper, a former director of the Company, was a partner in the
law firm of Berwin Leighton which performed legal services for the Company. He
is also a director and officer of Total Film UK Limited. Legal fees paid to
Berwin Leighton total approximately $80,000. In addition, Mr. Somper received
stock options for the purchase of 75,000 shares at $2.00 per share. Mr. Somper
exercised this option in February 2000, by canceling 30,000 options. He received
45,000 shares through such exercise.
In February 1999 the Company assumed the repayment of two loans and one
line of credit with a total principal amount of $150,000, the balance of which
at June 30, 2000, was $12,274, between Red Sky Films, LLC and Skyrocket, LLC as
the borrowers and Westamerica Bank as the lender. Assumption of the loans and
the line of credit were required pursuant to the acquisition agreement between
the Company and Skyrocket, LLC.
In February 1999 the Company entered into a loan agreement with The Orbiter
Fund, an entity managed by Michael Lauer, a principal shareholder of the
Company. The principal amount of the loan was $2,000,000. The Company also
granted 250,000 warrants to The Orbiter Fund in connection with the loan. In
August 1999 the Company negotiated an extension of the initial payment of
principal in return for which the Company issued 250,000 shares to the fund.
In September 1999 the Company issued convertible notes in the amount of
$2,000,000, which was used for working capital. The notes were convertible at
any time prior to maturity at the rate of one share for each $2.00 of principal
or interest converted. Of such funds, $1,800,000 were loaned by entities
controlled by Michael Lauer, a principal shareholder of the Company. All of the
lenders were granted pro rata 250,000 shares of restricted common stock. A cash
fee of 7% of the gross amount was paid to Capital Research Ltd., plus 100,000
five-year warrants with an exercise price of $2.25 per share. Capital Research
Ltd. and Bruce Cowen also each loaned $50,000 to the Company in this
transaction. The lenders were introduced to the Company by Mr. Cowen and the
fees were paid to his company pursuant to the terms of the consulting agreement
between Capital Research, Ltd. and the Company. Mr. Cowen, through Capital
Research Ltd., is a consultant to the Company and is a shareholder in the
Company.
On February 28, 2000 the Company entered into an agreement with the lenders
in the two $2,000,000 loans made in February and September 1999 to convert the
principal amount of such loans into common stock of the Company and to forgive
the unpaid interest. Pursuant to the agreement the Company issued 2,790,014
shares to entities controlled by Mr. Lauer. These shares include the pro rata
amount of shares which were to be issued to such entities in connection with the
September 1999 loan. As of the date of the agreement, the Company owed $376,100
in interest to the entities controlled by Mr. Lauer. The agreement does not
affect the
<PAGE>
Page 33
250,000 warrants granted to The Orbiter Fund in connection with the February
1999 loan, or the 250,000 shares granted for extension of the payments under
such loan. Also in connection with this transaction, the Company issued 26,667
shares and paid $40,000 to Capital Research Ltd. as a transaction fee for
assisting the Company in the negotiation of the conversion of the loans. In
addition, Capital Research Ltd. and an additional lender received 310,079 shares
for loans made by them in connection with the September 1999 loan.
At June 30, 2000, the Company had loaned approximately $78,895 to Rod Dyer,
a significant employee of Total Creative, Inc., the Company's wholly owned
subsidiary. The loan accrues interest at the rate of 8% per annum and repayment
is due in the full on or before June 30, 2002. Mr. Dyer has agreed to pledge his
interest in the 50,000 shares of common stock issued to him by the Company as
security for repayment of the loan. The funds were used by Mr. Dyer to satisfy
debts of the business operated by Mr. Dyer and which became Total Creative, Inc.
In October 1999 the Board of Directors authorized the Company to make loans
to Mr. Green up to $50,000 at an annual interest rate of 8%, payable interest
only monthly with the balance due and payable September 15, 2003, or sooner, at
the option of Mr. Green. During the fiscal year ended June 30, 2000, the Company
loaned $37,500 pursuant to this arrangement. In addition, the Company loaned
$58,065, without interest, to Mr. Green during the fiscal year ended June 30,
1999, and $52,107, without interest, during the fiscal year ended June 30, 2000.
As of June 30, 2000, Mr. Green had made repayments totaling $20,000.
In April 2000 the Company borrowed $1,900,000 from Michael Lauer, a
shareholder of the Company, as a part of a $2,500,000 loan to the Company by Mr.
Lauer and others for a new film project. The note issued to Mr. Lauer was
without interest, but carried a premium equal to 30% of the principal loaned by
Mr. Lauer to the Company. In addition, Mr. Lauer and the others will receive
a pro rata portion of 6% of the adjusted gross proceeds from the picture in
any and all media, including ancillary rights. The note is secured by the
producer's interest in the picture. The note was originally due August 15,
2000, but was extended until November 13, 2000. For such extension, the
Company issued 380,000 shares to Mr. Lauer. As a part of the extension of the
loan, the Company paid a fee to Capital Research Ltd. of 25,000 shares. Mr.
Cowen also loaned $100,000 to the Company as a part of the foregoing
$2,500,000 loan with the same terms as with Mr. Lauer and received 20,000
shares for the extension.
ITEM 8. DESCRIPTION OF SECURITIES
COMMON STOCK
The Company has authorized 50,000,000 shares of common stock, par value
$.001 per share (the "Common Stock"). As of October 12, 2000, the Company had
outstanding 14,148,899 shares of Common Stock. All Common Shares are equal to
each other
<PAGE>
Page 34
with respect to voting, and dividend rights, and, are equal to each other with
respect to liquidation rights. Special meetings of the shareholders may be
called by the Board of Directors, the President, or the holders of not less than
one-fifth of all the shares entitled to vote at the meeting. Holders of shares
of Common Stock are entitled to one vote at any meeting of the shareholders for
each share of Common Stock they own as of the record date fixed by the Board of
Directors. At any meeting of shareholders, a majority of the outstanding shares
of Common Stock entitled to vote, represented in person or by proxy, constitutes
a quorum. A vote of the majority of the shares of Common Stock represented at a
meeting will govern, even if this is substantially less than a majority of the
shares of Common Stock outstanding. Holders of shares are entitled to receive
such dividends as may be declared by the Board of Directors out of funds legally
available therefor, and upon liquidation are entitled to participate pro rata in
a distribution of assets available for such a distribution to shareholders.
There are no conversion, pre-emptive or other subscription rights or privileges
granted by the Company with respect to any shares. Reference is made to the
Articles of Incorporation and Bylaws of the Company as well as to the applicable
statutes of the State of Delaware for a more complete description of the rights
and liabilities of holders of shares. The shares of the Company do not have
cumulative voting rights, which means that the holders of more than fifty
percent of the shares of Common Stock voting for election of directors may elect
all the directors if they choose to do so. In such event, the holders of the
remaining shares aggregating less than fifty percent will not be able to elect
directors.
PREFERRED STOCK
The articles of incorporation of the Company authorize 500,000 shares of
preferred stock, par value $.001 per share. Such shares may be issued in such
series and have such rights, preferences, an designation as determined by the
Board of Directors. No preferred shares are outstanding.
CHANGE OF CONTROL
The creation and issuance of a series of preferred stock or the issuance of
shares of common stock by the Board of Directors could be used to delay, defer,
or prevent a change of control of the Company in certain takeover attempts.
Using such shares, the Board of Directors could create impediments to, or delay
persons seeking to effect, a takeover or transfer of control of the Company by
causing such additional authorized shares to be issued to a holder or holders
who might side with the Board in opposing a takeover bid that the Board of
Directors determines is not in the best interests of the Company and its
shareholders. Such an issuance could diminish the voting power of existing
shareholders who favor a change in control, and the ability to issue the shares
could discourage an attempt to acquire control of the Company.
<PAGE>
Page 35
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANTS'S
COMMON EQUITY AND OTHER SHAREHOLDER MATTERS
MARKET FOR STOCK
The Common Stock of the Company is quoted on the Pink Sheets ("TFGP"). The
table below sets forth for the periods indicated the high and low bid quotations
as reported by Nasdaq Trading & Market Services. These quotations reflect
inter-dealer prices, without retail mark-up, mark-down, or commission and may
not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Quarter High Low
------- ---- ---
<S> <C> <C> <C>
FISCAL YEAR ENDED
JUNE 30, 1998 First $4.50 $2.75
Second $3.875 $1.125
Third $4.00 $2.00
Fourth $4.25 $2.00
FISCAL YEAR ENDED
JUNE 30, 1999 First $3.1875 $1.3125
Second $3.75 $1.75
Third $5.25 $2.625
Fourth $5.875 $3.1875
FISCAL YEAR ENDED
JUNE 30, 2000 First $3.5625 $1.3125
Second $4.625 $2.6875
Third $8.75 $3.8125
Fourth $6.00 $1.50
</TABLE>
OUTSTANDING OPTIONS, WARRANTS, AND CONVERTIBLE INSTRUMENTS
At June 30, 2000, the Company had outstanding options exercisable into
1,532,500 shares of common stock. Such options were issued pursuant to the
Company's Stock Option Plan and in individual option agreements.
At June 30, 2000, the Company had outstanding warrants to purchase 950,000
shares of common stock. Of the outstanding warrants, 200,000 were issued to
investors and 200,000 were issued to JBRG Consultants as a consulting fee in
connection with the private offering by the Company in October 1999; 100,000
were issued to Capital Research Ltd. in connection with the $2,000,000 loan from
entities controlled by Michael Lauer and others in September 1999; 175,000 were
issued to Capital Research Ltd. in connection with its consulting agreement;
<PAGE>
Page 36
250,000 were issued to The Orbiter Fund in connection with the $2,000,000 loan
to the Company in February 1999; and 25,000 were issued to Richard Davimos, Jr.
in connection with a production loan for the film MY FIRST MISTER.
In December 1998 the Company borrowed $50,000 from Merchants T&F and issued
5,000 shares in partial consideration for loaning such funds. The shares were
issued to Murray Wilson, the president of such entity. The Company agreed to
repurchase such shares at $3.00 per share if they could not be sold under Rule
144 after one year from December 1998.
The Company has borrowed $1,000,000 from entities controlled by Michael
Lauer, one of our principal shareholders. This loan is convertible into shares
of common stock of the Company. The loan will be convertible at $3.00 per share,
provided that the conversion price will be reduced to $1.50 for the ninety day
period following the due date, and to $1.00 per share thereafter, if the loan
remains unpaid. We have also agreed to issue five-year warrants to purchase
100,000 shares at $3.50 per share, to Capital Research Ltd. in connection with
the loan.
SHARES ELIGIBLE FOR FUTURE SALE UNDER RULE 144
The Company had 14,148,899 shares of its common stock outstanding at
October 12, 2000. Of these shares, 8,556,049 are believed to be restricted
securities and 1,350,000 are believed to be control shares (non-restricted
shares held by affiliates of the Company) pursuant to Rule 144 promulgated by
the Securities and Exchange Commission. The control shares are not subject to
any holding requirement under Rule 144 and would be available for resale subject
to all other conditions of the rule. Management believes that 3,882,150 of the
restricted shares may have met the one year holding requirement of Rule 144.
Restricted shares held by affiliates, restricted shares held by non-affiliates
for less than two years, and control shares are not available for resale under
Rule 144 for a period of ninety days following the effective date of this
registration statement.
REGISTRATION RIGHTS
In October 1999 the Company commenced an offering of warrants to purchase
200,000 shares of common stock. The offering closed on November 30, 1999, and
the Company issued 200,000 warrants. In connection with this issuance, the
Company granted to the holders of the warrants the right to include the shares
underlying the warrants on a one-time basis in the next registration statement
filed by the Company under the Securities Act in which the Company proposes to
offer shares for cash or securities. The piggy-back registration rights expire
thirty-six months following the closing of the offering.
The Company has agreed to register warrants to purchase 200,000 shares of
the Company's common stock, exercisable at $4.125 per share, to be issued to
JBRG Consultants in connection with the private offering by the Company and
Total China, Inc. in October 1999. The
<PAGE>
Page 37
agreement provides for priority registration rights and/or piggyback
registration rights as normally attached as compensation warrants.
The Company has agreed to register the 738,600 shares of common stock of
the Company issued in connection with the combined private offering with Total
China II, Inc. The agreement to register the shares provides that the Company
shall cause the registration statement for such shares to be filed as soon as
commercially reasonable immediately after the closing of the offering. The
offering closed in August 2000. The Company has not identified the specific time
at which it intends to file such registration statement. The Company has agreed
to maintain the effectiveness of the registration statement for a period of at
least 270 days. The provision for registration rights contains mutual
indemnification provisions. The stockholders have agreed not to offer, sell,
contract to sell, grant any option for sale, or otherwise dispose of the shares
for a period of six months from the effective date of the registration period,
or the initial public offering of the equity securities of MeetChina.com,
whichever is the lesser period.
In connection with the $1,000,000 loan from entities controlled by Michael
Lauer, we have agreed to make the loan convertible into shares of common stock
of the Company. The shares will have one demand and piggyback registration
rights.
RECORD HOLDERS OF STOCK; TRANSFER AGENT
At September 27, 2000, the Company had 62 shareholders of record as
reported by the Company's transfer agent. The transfer agent for the Company is
Interwest Transfer Company, Inc., 1981 East 4800 South, Suite 100, Salt Lake
City, UT 84117.
DIVIDENDS
Since its inception, the Company has not paid any cash dividends on its
common stock and the Company does not anticipate that it will pay dividends in
the foreseeable future.
ITEM 2. LEGAL PROCEEDINGS
No legal proceedings are reportable pursuant to this item.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
On July 10, 2000, the Company engaged Hollander, Lumer & Co. LLP, Certified
Public Accountants, as independent auditors of the Company for the year ending
June 30, 2000. The decision to retain Hollander, Lumer & Co. LLP, and not to
re-engage Miller, Kaplan, Arase & Co., LLP, the former independent auditor, was
made by the Board of Directors on such date. The decision not to re-engage
Miller, Kaplan, Arase & Co., LLP did not involve a dispute with the Company over
accounting policies or practices. The report of Miller, Kaplan, Arase & Co., LLP
on the financial statements of the Company and subsidiaries for the years ended
June 30, 1999
<PAGE>
Page 38
and 1998, did not contain an adverse opinion or disclaimer of opinion, nor was
it modified as to uncertainty, audit scope, or accounting principals. In
connection with the audit of the financial statements of the Company and
subsidiaries for such years ended June 30, 1999 and 1998, there were no
disagreements with Miller, Kaplan, Arase & Co., LLP for the annual periods, and
for the period up to the date of the change, on any matters of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure which, if not resolved to the satisfaction of Miller, Kaplan, Arase &
Co., LLP, would have caused such firm to make reference to the matter in its
report.
Neither the Company, nor anyone on its behalf, has consulted Hollander,
Lumer & Co. LLP regarding the application of accounting principles to a specific
completed or contemplated transaction, or the type of audit opinion that might
be rendered on the financial statements of the Company and subsidiaries, and
neither written nor oral advice was provided by Hollander, Lumer & Co. LLP that
was an important factor considered by the Company in reaching a decision as to
any accounting, auditing, or financial reporting issue.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
In January 1997, the Company issued 3,000,000 shares of common stock to the
six shareholders of Total Media Corporation, a Nevada corporation. The shares
were issued in a reverse acquisition transaction between the Company and Total
Media Corporation, in which such shareholders exchanged all of their shares for
the shares of the Company. Such securities were issued without registration
under the Securities Act by reason of the exemption from registration afforded
by the provisions of Section 4(2) thereof, as transactions by an issuer not
involving any public offering. No general solicitations were used in connection
with the transaction. Each of the shareholders of Total Media Corporation
delivered appropriate investment representations to the Company with respect to
such transaction and consented to the imposition of restrictive legends upon the
certificates evidencing such securities. Each of the investors was believed to
be a sophisticated investor. No underwriting discounts or commissions were paid
in connection with such issuance.
In April 1997 the Company sold 1,000,000 shares of common stock to two
persons for cash proceeds of $50,000 and to five persons for conversion of notes
payable by the Company in an aggregate of $950,000 without registration in a
limited offering pursuant to Rule 504 promulgated by the Securities and Exchange
Commission under the Securities Act of 1933 and Section 3(b) thereunder. No
underwriting discounts or commissions were paid in connection with such
issuances.
In July 1997 the Company sold 2,000,000 shares to four accredited investors
in a private placement of the shares. The shares were sold for an aggregate of
$2,000,000. Such securities were issued without registration under the Act by
reason of the exemption from registration afforded by the provisions of Section
4(2) thereof, and Rule 506 promulgated thereunder, as transactions by an issuer
not involving any public offering. Such investors delivered appropriate
<PAGE>
Page 39
investment representations with respect to such transaction and consented to the
imposition of restrictive legends upon the certificates evidencing such
securities. No general solicitations were made in connection with the
transaction. No underwriting discounts or commissions were paid in connection
with such issuance.
In April 1998 the Company sold 800,000 shares of common stock for an
aggregate of $1,000,000 to eight persons without registration in a limited
offering pursuant to Rule 504 promulgated by the Securities and Exchange
Commission under the Securities Act of 1933 and Section 3(b) thereunder. No
underwriting discounts or commissions were paid in connection with such
issuances.
In October 1998 the Company borrowed $246,528 for working capital from
Sophia Toledo. The Company issued a ninety-day promissory note dated October 8,
1998, to Ms. Toledo evidencing such loan. The loan was repaid on May 19, 1999.
The note was issued in reliance upon the exemption provided in Section 3(a)(3)
of the Securities Act. No underwriting discounts or commissions were paid in
connection with such issuance.
In December 1998 the Company issued 5,000 shares to Murray Wilson in
connection with a loan of $50,000 by Merchants T&F, a company controlled by such
individual, in a private placement of the shares. The loan was repayable on or
before February 18, 1999, with a thirty day extension if the Company paid an
additional $5,000. The shares were issued as partial consideration for Merchants
T&F loaning the funds to the Company. The note was issued in reliance upon the
exemption provided in Section 3(a)(3) of the Securities Act. The shares were
issued without registration under the Act by reason of the exemption from
registration afforded by the provisions of Section 4(2) thereof, as a
transaction by an issuer not involving any public offering. Mr. Wilson delivered
appropriate investment representations with respect to such transaction and
consented to the imposition of a restrictive legend upon the certificate
evidencing such securities. No general solicitations were made in connection
with the transaction. Mr. Wilson is believed to be a sophisticated investor. No
underwriting discounts or commissions were paid in connection with such
issuance.
In January 1999 the Company issued 50,000 shares to Rod Dyer in connection
with his employment agreement with the Company. As additional compensation under
the employment contract, the Company issued an additional 50,000 shares on
January 1, 2000, and 50,000 shares on June 1, 2000. The shares were issued
without registration under the Act by reason of the exemption from registration
afforded by the provisions of Section 4(2) thereof, as a transaction by an
issuer not involving any public offering. Mr. Dyer delivered appropriate
investment representations with respect to such transaction and consented to the
imposition of a restrictive legend upon the certificate evidencing such
securities. No general solicitations were made in connection with the
transaction. Mr. Dyer is believed to be a sophisticated investor. No
underwriting discounts or commissions were paid in connection with such
issuance.
<PAGE>
Page 40
In connection with the purchase of Michel/Russo in January 1999, the
Company issued 50,000 shares to Dan Michel and Howard Russo, the sole
shareholders of Michel/Russo. The shares were issued without registration under
the Act by reason of the exemption from registration afforded by the provisions
of Section 4(2) thereof, as a transaction by an issuer not involving any public
offering. Mr. Michel and Mr. Russo delivered appropriate investment
representations with respect to such transaction and consented to the imposition
of a restrictive legend upon the certificate evidencing such securities. No
general solicitations were made in connection with the transaction. Mr. Michel
and Mr. Russo were believed to be sophisticated investors. No underwriting
discounts or commissions were paid in connection with such issuance.
In February 1999 the Company borrowed $2,000,000 from The Orbiter Fund
Ltd., a corporation controlled by one of the Company's principal shareholders,
Michael Lauer. In connection with the transaction the Company issued warrants to
purchase 250,000 shares exercisable at $2.00 per share on or before February 9,
2002. The Company also issued 250,000 shares to The Orbiter Fund in August 1999
for an extension on the repayment of the loan.
Effective April 27, 1999, the Company issued a total of 150,000 shares of
common stock to Douglas Humphreys and April Minnich, the two owners of Skyrocket
LLC, a California limited liability company. Effective June 22, 1999, the
Company issued an additional 75,000 shares to such parties. The shares were
issued in an acquisition transaction between the Company and Total Creative,
Inc., and Skyrocket LLC, in which such owners exchanged all of their interest in
the limited liability company for the shares of the Company. Such securities
were issued without registration under the Securities Act by reason of the
exemption from registration afforded by the provisions of Section 4(2) thereof,
as transactions by an issuer not involving any public offering. No general
solicitations were used in connection with the transaction. Each of the
shareholders of Skyrocket LLC delivered appropriate investment representations
to the Company with respect to such transaction and consented to the imposition
of restrictive legends upon the certificates evidencing such securities. Each of
the investors was believed to be a sophisticated investor. No underwriting
discounts or commissions were paid in connection with such issuance.
In January 1999 the Company granted options to Madeleine Ali, an employee
of the Company, to purchase 100,000 shares of the Company's common stock at
$2.00 per share. In April 1999 Ms. Ali exercised her option to purchase 10,000
shares at the exercise price of $2.00 per share. Rather than paying cash, she
canceled 4,445 of the options which equaled the exercise price based upon the
bid price of $4.50 per share on the day of exercise. Thus, she was issued 5,555
shares. In January 2000 Ms. Ali was issued 7,500 shares pursuant to the
Company's Stock Bonus Plan. In February 2000 Ms. Ali also exercised her option
to purchase 15,000 shares at the exercise price of $2.00 per share. Rather than
paying cash, she canceled 6,000 of the options which equaled the exercise price
based upon the bid price of $5.00 per share on the day of exercise. Thus, she
was issued 9,000 shares. The shares were issued pursuant to Rule 701
<PAGE>
Page 41
promulgated by the Securities and Exchange Commission. No underwriting discounts
or commissions were paid in connection with such issuances.
In September 1999 the Company entered into a consulting agreement with
Capital Research Ltd. and issued warrants to purchase 100,000 shares. Pursuant
to the terms of the consulting agreement, the Company also issued warrants to
Capital to purchase 25,000 shares of common stock on December 1, 1999, on March
1, 2000, and on June 1, 2000. Such securities were issued without registration
under the Act by reason of the exemption from registration afforded by the
provisions of Section 4(2) thereof as transactions by an issuer not involving
any public offering. Each investor was believed to be sophisticated. Such
investors delivered appropriate investment representations with respect to such
transaction and consented to the imposition of restrictive legends upon the
certificates evidencing such securities. No general solicitations were made in
connection with the transaction.
In September 1999 the Company borrowed $2,000,000 from five accredited
investors and issued a six month promissory note to such persons. The notes were
convertible at any time through the maturity of the notes at the rate of one
share for each $2.00 of principal or interest converted. The notes were issued
in reliance upon the exemption provided in Section 3(a)(3) of the Securities
Act. In connection with the loan, the Company issued 250,000 shares pro rata to
the lenders. The Company also paid a consulting fee of $140,000 to Capital
Consulting Inc. and also issued warrants to purchase 100,000 shares of common
stock of the Company to such firm. Such securities were issued without
registration under the Act by reason of the exemption from registration afforded
by the provisions of Section 4(2) thereof as transactions by an issuer not
involving any public offering. Each investor was believed to be sophisticated.
Such investors delivered appropriate investment representations with respect to
such transaction and consented to the imposition of restrictive legends upon the
certificates evidencing such securities. No general solicitations were made in
connection with the transaction.
In October 1999 the Company sold warrants to purchase 200,000 shares
exercisable at $3.75 per share to forty accredited investors in a private
placement of the warrants. The warrants were sold for an aggregate of $200,000.
This amount was used to pay the cash finder's fee in a concurrent offering of
shares of Total China, Inc., one of the Company's subsidiaries. The Company also
issued warrants to purchase 200,000 shares of common stock to JBRG Consultants
as a consulting fee in connection with the private offering. Such securities
were issued without registration under the Act by reason of the exemption from
registration afforded by the provisions of Section 4(2) thereof, and Rule 506
promulgated thereunder, as transactions by an issuer not involving any public
offering. Such investors delivered appropriate investment representations with
respect to such transaction and consented to the imposition of restrictive
legends upon the certificates evidencing such securities. No general
solicitations were made in connection with the transaction.
In January 2000, in connection with the funding of the Company's film MY
FIRST MISTER, the Company issued warrants exercisable at $3.75 per share to
purchase 25,000 shares of
<PAGE>
Page 42
common stock of the Company to Richard Davimos, Jr. Such securities were issued
without registration under the Act by reason of the exemption from registration
afforded by the provisions of Section 4(2) thereof as a transaction by an issuer
not involving any public offering. Such investor delivered appropriate
investment representations with respect to such transaction and consented to the
imposition of restrictive legends upon the certificates evidencing such
securities. No general solicitations were made in connection with the
transaction.
In May 2000 the Company issued 8,000 shares of common stock to John Daly as
compensation for production consulting services to the Company. Such securities
were issued without registration under the Securities Act by reason of the
exemption from registration afforded by the provisions of Section 4(2) thereof,
as transactions by an issuer not involving any public offering. No general
solicitations were used in connection with the transaction. Mr. Daly delivered
appropriate investment representations to the Company with respect to such
transaction and consented to the imposition of restrictive legends upon the
certificates evidencing such securities. He was believed to be a sophisticated
investor. No underwriting discounts or commissions were paid in connection with
such issuance.
In February 2000 the Company converted the outstanding promissory notes
issued in connection with the loan of $2,000,000 in February 1999 and $2,000,000
in September 1999. The Company issued a total of 2,936,667 shares of common
stock to the lenders for cancellation of the notes and outstanding interest due
in the amount of $376,100. In addition, the Company issued 26,667 shares of
common stock and paid $40,000 to Capital Research Ltd. as a commission in
connection with the conversion transaction. Such securities were issued without
registration under the Act by reason of the exemption from registration afforded
by the provisions of Section 4(2) thereof as transactions by an issuer not
involving any public offering. Each of the investors was believed to be
sophisticated. Such investors delivered appropriate investment representations
with respect to such transaction and consented to the imposition of restrictive
legends upon the certificates evidencing such securities. No general
solicitations were made in connection with the transaction.
In May 1999 the Company granted options to Leonard Shapiro to purchase
30,000 shares of the Company's common stock at $3.00 per share. In February 2000
Mr. Shapiro exercised his option to purchase 30,000 shares at the exercise price
of $3.00 per share. Rather than paying cash, he canceled 13,090 of the options
which equaled the exercise price based upon the bid price of $6.875 per share on
the day of exercise. Thus, he was issued 16,910 shares. Such securities were
issued without registration under the Securities Act by reason of the exemption
from registration afforded by the provisions of Section 4(2) thereof, as
transactions by an issuer not involving any public offering. No general
solicitations were used in connection with the transaction. Mr. Shapiro
delivered appropriate investment representations to the Company with respect to
such transaction and consented to the imposition of restrictive legends upon the
certificates evidencing such securities. Mr. Shapiro was believed to be a
sophisticated investor. No underwriting discounts or commissions were paid in
connection with such issuance.
<PAGE>
Page 43
In August 1998 the Company granted options to Andrew Somper, a director at
such time, to purchase 75,000 shares of the Company's common stock at $2.00 per
shares. In February 2000 Mr. Somper exercised his option to purchase 75,000
shares at the exercise price of $2.00 per share. Rather than paying cash, he
canceled 30,000 of the options which equaled the exercise price based upon the
bid price of $5.00 per share on the day of exercise. Thus, he was issued 45,000
shares. The shares were issued pursuant to Rule 701 promulgated by the
Securities and Exchange Commission. No underwriting discounts or commissions
were paid in connection with such issuances.
In February 2000 the Company borrowed $100,000 for working capital from
Trinity American Corporation in connection with the purchase of an option to
acquire a film library. The Company issued a three month promissory note dated
February 17, 2000, to such entity evidencing the loan. On May 17, 2000, the loan
was extended to September 30, 2000. The note was issued in reliance upon the
exemption provided in Section 3(a)(3) of the Securities Act. No underwriting
discounts or commissions were paid in connection with such issuance.
In April 2000 the Company borrowed $2,500,000 from four accredited
investors and issued a promissory note to such investors representing such loan.
In August 2000 the loan was extended until November 13, 2000. In October 2000
the company issued 500,000 shares to such lenders for the granting of the
extension. In addition, the Company issued 25,000 shares to Capital Research,
Ltd. for consulting services in connection with the extension of the loan. Such
securities were issued without registration under the Securities Act by reason
of the exemption from registration afforded by the provisions of Section 4(2)
thereof, as transactions by an issuer not involving any public offering. No
general solicitations were used in connection with the transaction. No
underwriting discounts or commissions were paid in connection with such
issuance, except for the 25,000 fee paid to Capital Research, Ltd.
From May until July 2000 the Company sold 738,600 common shares to 53
accredited investors in a private placement of the shares. The shares were sold
for an aggregate of $3,693,000. The Company also issued 50,000 common shares to
JL Devore & Associates as a consulting fee in connection with the private
offering. Such securities were issued without registration under the Act by
reason of the exemption from registration afforded by the provisions of Section
4(2) thereof, and Rule 506 promulgated thereunder, as transactions by an issuer
not involving any public offering. Such investors delivered appropriate
investment representations with respect to such transaction and consented to the
imposition of restrictive legends upon the certificates evidencing such
securities. No general solicitations were made in connection with the
transaction.
In addition to the options granted to Ms. Ali and Messrs. Somper and
Shapiro discussed above, the Company granted options from July 1998 until June
2000 to the following employees and directors of the Company:
<PAGE>
Page 44
<TABLE>
<CAPTION>
Number of Shares Date
Optionee Underlying Options Granted
-------- ------------------ -------
<S> <C> <C>
Manuel Pacheco 55,000 7/1/98
Eli Boyer 50,000 7/1/98
Bruce Mandes 50,000 7/1/98
Gerald Green 500,000 7/27/98
500,000 5/15/00
Dan Michel 50,000 1/1/99
Howard Russo 50,000 1/1/99
Monique Jones 45,000 9/27/99
Scott Taylor 37,500 6/22/00
David Katz 20,000 6/22/00
Stacey Abrams 150,000 6/22/00
</TABLE>
In each instance the options were granted without cash consideration but were
granted to maintain the continued employment or affiliation with the Company.
The options were granted to these persons without registration under the Act by
reason of the exemption from registration afforded by the provisions of Rule 701
promulgated by the Securities and Exchange Commission. No underwriting discounts
or commissions were paid in connection with the granting of such options.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware
expressly authorizes a Delaware corporation to indemnify its officers,
directors, employees, and agents against claims or liabilities arising out of
such persons' conduct as officers, directors, employees, or agents for the
corporation if they acted in good faith and in a manner they reasonably believed
to be in or not opposed to the best interests of the Company. Article XI of the
Bylaws of the Company require the Company to indemnify and hold harmless such
persons to the fullest extent authorized by Delaware law.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers, controlling persons
of the Company pursuant to the foregoing provisions, or otherwise, the Company
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
The Seventh article of the Articles of Incorporation of the Company,
subject to certain exceptions, limits the monetary liability of the directors to
the Company or its shareholders for any breach of fiduciary duty by the director
as a director.
PART F/S
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
FOR THE YEARS ENDED JUNE 30, 2000 AND 1999
<PAGE>
Financial Statements. The following financial statements are included in
this registration statement:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Auditor F-1
Report of Auditor F-2
Consolidated Balance Sheets as of June 30, 2000 and 1999 F-3 -- F-4
Consolidated Statements of Operations for the fiscal years
ended June 30, 2000 and 1999 F-5 -- F-6
Consolidated Statements of Stockholders' Equity for the fiscal
years ended June 30, 2000 and 1999 F-7 -- F-8
Consolidated Statements of Cash Flows for the fiscal years
ended June 30, 2000 and 1999 F-9 -- F-10
Notes to Financial Statements F-11 -- F-27
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
Total Film Group, Inc. and Subsidiaries
Beverly Hills, California
We have audited the accompanying consolidated balance sheet of Total Film Group,
Inc. and Subsidiaries (the "Company"), as of June 30, 2000, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Total Film Group,
Inc. and Subsidiaries as of June 30, 2000, and the results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ HOLLANDER, LUMER & CO. LLP
Los Angeles, California
September 21, 2000
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Total Film Group, Inc. and Subsidiaries
Beverly Hills, California
We have audited the accompanying consolidated balance sheet of Total Film Group,
Inc. and Subsidiaries (the "Company"), as of June 30, 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Total Film Group,
Inc. and Subsidiaries as of June 30, 1999, and the results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ MILLER, KAPLAN, ARASE & CO., LLP
North Hollywood, California
September 29, 1999, except for Note 8,
which is as of January 14, 2000.
F-2
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2000 AND 1999
ASSETS
<TABLE>
<CAPTION>
(Restated)
2000 1999
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents $ 448,102 $ 1,130,179
Time Certificate of Deposit 20,692 27,678
Accounts Receivable 1,181,579 453,413
Related Party Receivable 218,954 90,165
Deferred Costs 103,221
Prepaid Expenses 281,347 50,557
----------- -----------
TOTAL CURRENT ASSETS 2,253,895 1,751,992
OTHER ASSETS
Film Costs, Net of Amortization 9,495,808 3,317,789
Property and Equipment, Net of Amortization 200,714 114,948
Investment in MeetChina.com, Inc. 3,745,090 --
Recoverable Insurance Costs 1,000,000 --
Deposits 538,483 116,186
Organization Costs, Net of Amortization -- 126,784
Goodwill, Net of Amortization 282,186 986,926
Unamortized Loan Discount -- 275,686
Capitalized Financing Fees 196,053 --
Other Assets -- 39,597
----------- -----------
15,458,334 4,977,916
----------- -----------
TOTAL ASSETS $17,712,229 $ 6,729,908
=========== ===========
LIABILITIES
CURRENT LIABILITIES
Debt Maturing within One Year $ 4,776,918 $ 2,126,925
Current Portion of Capital Lease 45,464 1,121
Accounts Payable and Accrued Expenses 1,815,534 623,830
Deferred Revenue 227,163 --
Producer's Fee Payable, Related Party 600,000 300,000
----------- -----------
TOTAL CURRENT LIABILITIES 7,465,079 3,051,876
----------- -----------
LONG-TERM LIABILITIES
Long-Term Debt, Net of Current Portion 1,040,931 52,652
Capital Lease, Net of Current Portion 57,905 --
----------- -----------
TOTAL LONG-TERM LIABILITIES 1,098,836 52,652
----------- -----------
TOTAL LIABILITIES 8,563,915 3,104,528
----------- -----------
MINORITY INTEREST IN EQUITY OF CONSOLIDATED SUBSIDIARY 829,550 --
----------- -----------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-3
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2000 AND 1999
STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(Restated)
June 30, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
Preferred Stock - $2 Par Value; Authorized 1,080,000 Shares;
Issued and Outstanding 738,600 in 2000 and 0 Shares in 1999 1,477,200 --
Common Stock, $0.001 Par Value; Authorized 50,000,000 Shares;
Issued and Outstanding 12,335,299 and 8,630,000 Shares
Respectively 12,336 8,630
Additional Paid-in Capital 18,714,775 5,398,029
Accumulated Deficit (11,885,547) (1,781,279)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 8,318,764 3,625,380
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 17,712,229 $ 6,729,908
============ ============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-4
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
(Restated)
2000 1999
------------ ------------
<S> <C> <C>
REVENUE
Movie Release Income $ 131,656 $ 4,429,388
Design Fees 3,074,236 1,690,706
------------ ------------
3,205,892 6,120,094
------------ ------------
OPERATING EXPENSES
Selling, General & Administrative Expenses 3,560,741 1,981,343
Depreciation and Amortization 1,750,754 3,633,458
Production and Design Costs 2,122,396 1,366,786
------------ ------------
7,433,891 6,981,587
------------ ------------
LOSS FROM OPERATIONS (4,227,999) (861,493)
------------ ------------
OTHER INCOME (EXPENSE)
Interest Income 15,559 20,107
Interest Expense (1,169,115) (143,353)
Amortization of Placement Fee (1,054,021) (257,813)
Recoverable Insurance Costs 1,000,000 --
Miscellaneous Income 12,074 226,397
------------ ------------
(1,195,503) (154,662)
------------ ------------
LOSS BEFORE INCOME TAXES (5,423,502) (1,016,155)
Income Tax Provision -- (28,328)
------------ ------------
LOSS BEFORE EXTRAORDINARY ITEM AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (5,423,502) (1,044,483)
EXTRAORDINARY ITEM
Loss on Early Extinguishment of Debt (4,553,982) --
------------ ------------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (9,977,484) (1,044,483)
Cumulative Effect for Adopting New Pronouncement on the Amortization
of Organization Costs (126,784) --
------------ ------------
NET LOSS $(10,104,268) $ (1,044,483)
============ ============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-5
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
(Restated)
2000 1999
--------- ---------
<S> <C> <C>
PER SHARE AMOUNTS - BASIC
Loss Before Extraordinary Item and Cumulative Effect of Change in
Accounting Principle $ (0.60) $ (0.12)
--------- ---------
Loss on Early Extinguishment of Short-Term Debt (0.50) --
--------- ---------
Cumulative Effect on Prior Years of Changing Organization Costs
Amortization Method (0.01) --
--------- ---------
Net Loss $ (1.11) $ (0.12)
========= =========
PROFORMA AMOUNTS ASSUMING THE NEW AMORTIZATION
METHOD IS APPLIED RETROACTIVELY - LOSS PER SHARE
Net Loss $ (1.10) $ (0.12)
========= =========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 9,061,332 8,414,597
========= =========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-6
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional
--------------------------- Preferred Paid-In Accumulated
Shares Amount Stock Capital Deficit
--------- ------ --------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1998 8,300,000 8,300 -- 4,098,593 (736,796)
Issuance of Common Stock for Acquisitions 325,000 325 -- 718,391 --
Issuance of Common Stock as Additional
Consideration for Debt 5,000 5 -- 11,645 --
Warrants Exercisable for 250,000 Shares of
Common Stock at $2.00 per Share,
Issued as Additional Consideration of
Debt -- -- -- 450,000 --
Stock Options Exercisable for 210,000
Shares of Common Stock at $2.00
per Share for Services Rendered -- -- -- 119,400
Net Loss for the Year Ended June 30, 1999 -- -- -- -- (1,044,483)
--------- ------ --------- ---------- -----------
Balance, June 30, 1999 8,630,000 8,630 -- 5,398,029 (1,781,279)
Issuance of Common Stock as Additional
Consideration for Debt, 250,000 250 -- 291,417
Issuance of Common Stock as Compensation
for Executive Officers, Directors and
Employees 233,965 234 -- 405,332
Issuance of Common Stock for the
Extinguishment of Debt 2,936,667 2,937 -- 8,807,063
Issuance of Common Stock as Transaction
Fee on the Extinguishment of Debt 26,667 27 -- 66,640
Issuance of Common Stock as Additional
Consideration for Debt 250,000 250 -- 546,500
Issuance of Common Stock for Consulting
Services 8,000 8 -- 33,367
Proceeds from the Sale of 50% Interest
in China I, Nov 1999 -- -- -- 736,549
Issuance of 738,600 Shares of Preferred
Stock in China II -- -- 1,477,200 511,759
Granting of 738,600 Shares of Common Stock
in Private Placement -- -- -- 1,281,469
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-7
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional
--------------------------- Preferred Paid-In Accumulated
Shares Amount Stock Capital Deficit
--------- ------ --------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Warrants Exercisable for 200,000 Shares of
Common Stock at $3.75 per Share, Issued
to Investors as Part of the China I Offering -- -- -- 200,000
Warrants Exercisable for 200,000 Shares of
Common Stock at $2.00 per Share, Issued
as Placement Fees for the China I Offering -- -- -- 140,000
Warrants Exercisable for 275,000 Shares of
Common Stock at $2.25 to $5.44 per Share,
for Professional Services Rendered -- -- -- 268,400
Warrants Exercisable for 25,000 Shares of
Common Stock at $3.75 per Share, Issued
as Additional Consideration of Debt -- -- -- 28,250
Net Loss for the Year Ended June 30, 2000 -- -- -- -- (10,104,268)
------------ ------------ ------------ ------------ ------------
Balance, June 30, 2000 12,335,299 $ 12,336 $ 1,477,200 $ 18,714,775 $(11,885,547)
============ ============ ============ ============ ============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-8
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
(Restated)
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(10,104,268) $ (1,044,483)
------------ ------------
Extraordinary Loss on Retirement of Debt 4,553,982 --
Cumulative Effect of Accounting Change 126,784 --
------------ ------------
Loss from Continuing Operations (5,423,502) (1,044,483)
Adjustments to Reconcile Net Loss to Net Cash
Provided By (Used in) Operating Activities:
Proceeds from Production Funding Arrangement 5,179,195 7,219,391
Cash Used in Motion Picture Development (11,539,201) (7,993,987)
Fair Value of Equity Granted 773,390 106,362
Depreciation and Amortization 1,750,754 3,633,458
Amortization of Placement Fees 1,054,021 284,956
Decrease (Increase) in Assets:
Accounts Receivable (728,166) (135,922)
Related Party Receivable (128,789) (90,165)
Deferred Costs (103,221) --
Prepaid Expenses (230,790) (47,335)
Recoverable Insurance Costs (1,000,000) --
Deposits (422,297) (100,110)
Increase (Decrease) in Liabilities:
Accounts Payable and Accrued Expenses 1,649,331 67,744
Deferred Revenue 227,163 (2,593,816)
------------ ------------
TOTAL ADJUSTMENTS (3,518,610) 350,576
------------ ------------
NET CASH (USED) BY OPERATING
ACTIVITIES (8,942,112) (693,907)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash Proceeds from the Redemption of Certificate of Deposit 6,986 (27,678)
Cash Proceeds from the Sale of Interest in Subsidiary 2,000,000 --
Cash Used to Purchase Investment in MeetChina.com, Inc. (3,745,090) --
Other Assets (156,456) --
Purchase of Property and Equipment (23,432) (19,083)
Purchase of Subsidiaries (5,000) (20,000)
------------ ------------
NET CASH (USED) BY INVESTING
ACTIVITIES (1,922,992) (66,761)
------------ ------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-9
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
(Restated)
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Loans 7,307,017 3,203,428
Proceeds from the Issuance of Stock 3,040,750 --
Principal Payments Made on Loans (126,372) (1,940,421)
Principal Payments on Capital Lease Obligations (38,368) (1,496)
------------ ------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 10,183,027 1,261,511
------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (682,077) 500,843
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 1,130,179 629,336
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 448,102 $ 1,130,179
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest Paid $ 308,700 $ 62,768
============ ============
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
DURING THE YEAR ENDED JUNE 30, 2000
The Company issued 500,000 shares of common stock with a value of $839,250
as additional consideration for debt issued.
The Company issued 2,936,667 shares of common stock with a value of
$8,810,000 as consideration for the extinguishment of $4,000,000 plus
accrued interest of debt.
The Company issued 26,667 shares of common stock with a value of $66,667 as
additional consideration for services rendered in connection with the
extinguishment of debt.
The Company granted stock warrants for 500,000 shares of common stock with
exercise prices ranging from $2.00 to $5.54 per share for past services
rendered.
The Company issued 157,500 shares of common stock with a value of $405,409
to employees of the Company.
The Company issued 8,000 shares of common stock with a value of $33,375 for
consulting services.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-10
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 1 - GENERAL:
BUSINESS AND BACKGROUND:
Total Film Group, Inc. (the "Company") was incorporated under the laws of
the State of Delaware on August 1, 1995. The Company was originally
incorporated under the name "Executive Marketing, Inc." On February 5,
1997, the Company changed its name to "Total Film Group, Inc." The Company
is also qualified to do business in the State of California.
Set forth below is a chart showing the Company and its subsidiaries and the
percentage interest in each:
<TABLE>
<CAPTION>
Percent
Parent Company Subsidiary Owned
-------------- ---------- -------
<S> <C> <C>
Total Film Group, Inc. Alien Sky UK Ltd. 100%
Alma Productions UK Ltd. 100%
Sundowning, Inc. 100%
Total China, Inc. 50.004%
Total China II, Inc. 100%
Total Creative, Inc. 100%
Total Films UK Ltd. 100%
Total Media, Inc. 100%
Total Pictures, Inc. 100%
1st Mr., Inc. 100%
</TABLE>
None of our subsidiaries own any subsidiaries.
In January 1997 the Company entered into an agreement with Total Media
Corporation, a Nevada corporation, to exchange all of the issued and
outstanding shares of such entity for 3,000,000 shares of common stock of
the Company. The Agreement and Plan of Reorganization was closed by the
parties on or about February 4, 1997. As a result of the closing the
Company issued 3,000,000 shares, representing approximately 67% of the
outstanding stock at closing, to the shareholders of the Nevada
corporation. Mr. Green and his affiliates received 1,250,000 of such
shares. Also as a result of the closing new directors of the Company were
appointed. Messrs. Green, Boyer, and Pacheco were appointed as new
directors. Prior to closing, on January 27, 1997, the Company declared a
stock dividend of one share of common stock of the Company for each two
shares of common stock of the Company outstanding to the shareholders of
record as of the close of business on January 27, 1997. The payment and
delivery date for such dividend was January 31, 1997.
In February 1998, the Company incorporated a wholly owned subsidiary, Total
Design, Inc., a California corporation engaged in providing marketing and
advertising services. Total Design, Inc. changed its name to "Dyer
Communications, Inc." on May 26, 1998. Effective January 1999 the Company
acquired all of the outstanding stock of Michel/Russo, Inc., a California
corporation engaged in marketing and advertising for 100,000 shares of
common stock of the Company issued to the two shareholders of
Michel/Russo. On March 5, 1999, Dyer Communications, Inc. changed its name
to "Total Creative, Inc." Also effective January 1999 Total Creative, Inc.
and the Company acquired all of the interest in Skyrocket, LLC, a
California limited liability company engaged in web development,
e-commerce, and digital advertising for a total of 225,000 shares and
$25,000. All of the operations of Michel/Russo, Inc. were transferred to
Total Creative, Inc. subsequent to the acquisition effective January 1999
and the ownership of Michel/Russo, Inc. was assigned to Total Creative,
Inc. in March 2000.
On October 20, 1999, the Company incorporated Total China, Inc., a Delaware
corporation, as a subsidiary. This entity was formed to act as a holding
company to acquire 20% of the capital stock of MeetChina.com, Inc.,
formerly known as US Business Network, Inc., a Delaware corporation, which
has intellectual property rights to the business-to-business e-commerce
portal, Meet
F-11
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
China.com, and is engaged directly through a subsidiary in promoting
imports and exports to and from China through the Internet and providing
ancillary services related thereto. In November 1999, Total China, Inc. and
the Company conducted a joint private offering to raise funds for the
transaction with MeetChina.com, Inc. Total China, Inc. sold 30 units in the
private offering. Each unit consisted of 1.6666 shares of common stock of
Total China, Inc. and was sold for $66,667 per unit. As a part of the same
private offering, the Company sold 30 units, with each unit consisting of
three-year warrants to purchase 6,667 shares of the Company's common stock
at an exercise price of $3.75 per share. The units were sold by the Company
for approximately $6,666.67 each, or $1.00 per warrant. Each warrant holder
was granted registration rights, and a right of first refusal to purchase a
pro rata amount of the assets of Total China, Inc. Investors were required
to purchase both the Total China, Inc. and the Company units in the
offering. Total China, Inc. realized gross proceeds of $2,000,000 and the
Company realized gross proceeds of $200,000. Also in connection with this
private offering, the Company issued warrants to purchase 200,000 shares of
common stock to JBRG Consultants as a commission for introducing potential
investors to the Company. The proceeds to the Company were allocated to pay
the costs of the offering, and the proceeds to Total China, Inc. were used
to purchase shares of common stock of MeetChina.com, Inc., which shares
ultimately represented 17.58% of the issued and outstanding capital
stock of such corporation at closing. This reduction in percentage
ownership was a result of an increased valuation of MeetChina.com, Inc.
As a result of this offering, the Company now owns slightly in excess
of 50% of the outstanding stock of Total China, Inc.
On or about December 16, 1999, the Company and Total China, Inc. jointly
entered into a stock purchase agreement with MeetChina.com, Inc. On
December 17, 1999, the Company and Total China, Inc. finalized the
agreement with MeetChina.com, Inc., and the stock of MeetChina.com, Inc.
was issued to Total China, Inc. Because of subsequent financing by
MeetChina.com, Inc., at May 31, 2000, Total China, Inc. owned
approximately 11.9% of the outstanding stock of such entity.
MeetChina.com, Inc. has the option under the agreement to acquire
approximately 5% of the shares purchased by Total China, Inc. at a cash
price of two-thirds of the market value of such shares. Such right is
only exercisable on the 120th day after an initial public offering of
capital stock by MeetChina.com, Inc. on a designated exchange. Until the
stock of MeetChina.com, Inc. is listed on a designated exchange, the
Company and Total China, Inc. have the right, jointly, to designate one
representative to attend meetings of the board of directors of
MeetChina.com, Inc. Total China, Inc. has the right of first refusal to
purchase any shares to be sold or issued by MeetChina.com, Inc. at less
than the price paid by Total China, Inc. Total China, Inc. also has
piggy-back registration rights to register its shares in any appropriate
registration statement filed by MeetChina.com, Inc. with the U.S.
Securities and Exchange Commission after the initial public offering and
which includes shares of the founders of MeetChina.com, Inc.
On November 2, 1999, the Company incorporated Total Group, Inc., a Delaware
corporation, as a wholly-owned subsidiary. Originally formed as a shell
corporation, this entity was used to acquire an equity interest in
MeetChina.com, Inc. In August 2000 Total Group, Inc. changed its name to
Total China II, Inc. The Company owns all of the outstanding common stock
of Total China II, Inc. and 5% of the outstanding preferred stock.
On May 23, 2000, Total China II, Inc. and the Company conducted a joint
private offering to raise funds for the transaction with MeetChina.com,
Inc. The offering was closed in July 2000. Total China II, Inc. sold
73.86 units in the private offering. Each unit consisted of 10,000 shares
of preferred stock of China II and 10,000 shares of the Company's common
stock. The units sold for $50,000 per unit. The total gross proceeds of the
joint private offering were $3,693,000. Total China II, Inc. realized gross
proceeds of $2,215,800 and the Company realized gross proceeds of
$1,477,200. The Company's proceeds of the offering will be used for general
working capital and the proceeds to Total China II, Inc. were used to
purchase shares of preferred stock in
F-12
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
MeetChina.com, Inc. An investment of $2,000,000 (106,689 shares) was made
in MeetChina.com. In connection with this private offering, a cash fee of
$369,300 was paid to JL Devore & Associates as a commission to structure
and administer the private offering. Of the total fee, Total China II, Inc.
paid $221,580 and the Company paid $147,720. In addition to the cash fee,
JL Devore & Associates was issued 50,000 shares of the Company's common
stock as compensation for services.
The Company's business is divided into three segments: the film
production business, the advertising and marketing business, and as a
holding company. The film production segment is engaged in the
production, marketing, and distribution of commercial feature films. The
advertising and marketing segment is engaged in the development of
advertising and marketing campaigns to provide Internet services for a
variety of clients and the Company. The Company also holds the stock of
two subsidiaries, Total China, Inc. and Total China II, Inc., which in
turn own stock of MeetChina.com, Inc., an Internet related business.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION:
The consolidated financial statements include all majority-owned
subsidiaries in which Total Film Group, Inc. exercises control. All
material intercompany balances and transactions have been eliminated upon
consolidation.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS:
The preparation of financial statements in accordance with generally
accepted accounting principles requires that management use estimates and
assumptions in preparing financial statements. Those estimates and
assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported revenues
and expenses. Actual results could differ from those estimates.
REVENUE RECOGNITION:
Revenues from distribution or releasing agreements are recognized when the
film becomes available for release and certain other conditions are met in
accordance with Statement of Position 00-2 ("SOP 00-2"), "Accounting by
Producers and Distributors of Films".
Revenues from advertising and marketing are generally recognized at the
completion of production.
FOREIGN CURRENCY TRANSLATION
For operations outside the United States that prepare financial statements
in currencies other than the U.S. dollar, results of operations and cash
flows are translated at average exchange rates during the period, and
assets and liabilities are translated at end-of-period exchange rates.
Translation adjustments are included as a separate component of accumulated
other comprehensive income (loss) in shareholders' equity.
CASH EQUIVALENTS:
F-13
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
The Company considers all short-term investments with an original maturity
of three months or less to be cash equivalents. There were no short-term
investments included in cash and cash equivalents for the years ended June
30, 2000 and 1999.
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Accounts receivable is stated net of allowance for doubtful accounts. The
allowance is based upon management's estimate of the collectibility of
accounts receivable at the end of the fiscal year. Management estimated the
total allowance to be $12,154 and $12,155 for the years ended June 30, 2000
and 1999, respectively. During fiscal year end 2000 and 1999, the Company
has written off $26,301 and $50,600 of accounts receivable, respectively.
MOTION PICTURE DEVELOPMENT COSTS AND AMORTIZATION:
Motion picture development costs represent those costs incurred in the
production, acquisition and distribution of motion pictures, which include
production costs, legal expenses, interest and overhead costs. The Company
is amortizing the film costs for completed films using the
individual-film-forecast-computation method, whereby expense is recognized
in the proportion that current year revenues bear to management's estimate
of ultimate revenue from all markets.
Motion picture development costs are valued at lower of unamortized cost or
estimated net realizable value. Revenue and cost forecasts for films are
regularly reviewed by management and revised when warranted by changing
conditions. When estimates of total revenues and costs indicate that a film
will result in an ultimate loss additional amortization is provided to
fully recognize such loss.
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost. Depreciation of the cost of
property and equipment is computed using the straight-line method over the
estimated useful lives of the related assets ranging from three to seven
years.
Expenditures for maintenance and repairs are charged to expense as
incurred. Additions and betterments are capitalized. The cost and related
accumulated depreciation of property and equipment sold or otherwise
disposed are removed from the accounts and any gain or loss is reflected in
the current year's earnings.
DEPOSITS:
Deposits consist of refundable payments made in conjunction with the
Company's motion pictures projects and office rental space.
ORGANIZATION COSTS:
Effective July 1, 1999, the Company adopted Statement of Position 98-5
("SOP 98-5) "Reporting on the Costs of Start-Up Activities". SOP 98-5
provides guidance on the financial reporting of start-up and organization
costs and required such costs to be expensed as incurred. The total amount
of deferred start-up costs reported as a cumulative effect of a change in
accounting principle is $126,784 or $.02 per share
GOODWILL:
Goodwill is the excess of the purchase price over the fair value of
identifiable net assets acquired in business combinations accounted for as
purchases. Goodwill is amortized on a straight-line basis over the periods
benefited, fifteen years. Goodwill is reviewed for impairment whenever
events or
F-14
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
changes in circumstances indicate that the carrying amount may not be
recoverable the amount is expensed.
At June 30, 2000 the goodwill associated with the purchase of Skyrocket LLC
was determined to be impaired as operations ceased immediately following
the balance sheet date. The unamortized balance of $637,063 was expensed
for the year ending June 30, 2000.
CAPITALIZED FINANCING FEES:
The Company is in the process of acquiring additional financing for feature
length motion pictures. When funding has been secured the capitalized costs
will be allocated to the films.
INCOME TAXES:
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred
taxes. Deferred taxes are recognized for differences between the basis of
assets and liabilities for financial statement and income tax purposes. The
differences relate primarily to different depreciation methods, net
operating loss carryforwards and state franchise tax. The deferred taxes
represent the future tax return consequences of those differences, which
will either be taxable or deductible when the assets and liabilities are
recovered or settled. A valuation allowance is recognized, if based on
weight of available evidence, it is more likely than not that some portion
or all of the deferred tax asset will not be realized
ACCOUNTING FOR STOCK BASED COMPENSATION
The Company has elected to follow the accounting provisions of Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees"
to account for compensation expense for its stock-based employee
compensation plan and to furnish the pro forma disclosure required under
Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation").
EARNINGS (LOSS) PER SHARE:
Net income (loss) per share is computed using the weighted average number
of shares of common stock outstanding. Common equivalent shares from stock
options and warrants have been included in the computation when dilutive.
Basic EPS is calculated by dividing earnings available to common
stockholders (the "numerator") by the weighted-average number of common
shares outstanding (the "denominator") during the period. The computation
of diluted EPS is similar to the computation of basic EPS except that the
denominator is increased to include the number of additional common shares
that would have been outstanding if the dilutive potential common shares
(that is, securities such as options, warrants, convertible securities, or
contingent stock agreements) had been issued. In addition, in computing the
dilutive effect of convertible securities, the numerator is adjusted to add
back (a) any convertible preferred dividends and (b) the after-tax amount
of interest recognized in the period associated with any convertible debt.
Options and warrants representing common shares were excluded from the
average number of common equivalent shares outstanding in the diluted EPS
calculation for the years ended June 30, 2000 and 1999 since that would
have an antidiluted effect on EPS.
NON-DIRECT RESPONSE ADVERTISING:
Non-direct response advertising costs are expensed the first time the
advertising takes place. Advertising expense for the year ended June 30,
200 and 999 were $175,705 and $160,789 respectively.
F-15
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
RECLASSIFICATIONS:
Certain reclassifications have been made to amounts reported in prior
periods to conform with current year presentation
NOTE 3 - SIGNIFICANT RISKS AND UNCERTAINTIES
NEED FOR ADDITIONAL FINANCING
The Company has a need for additional capital in order to provide
working capital for its current business plans. While the management of
the Company believes it will be able to secure sufficient financing to
carry out its current business plan, there can be no assurance that it
will be able to secure such additional financing or, if so, on terms
acceptable to it. If the Company is unable to secure sufficient funding,
it may be unable to carry out its current business plans.
The Company's continued expansion of its business will depend substantially
upon the availability of cash flow from operations or its ability to raise
additional funds. As a result, Total Film Group may be required to seek
additional financing sooner than anticipated. There is no assurance that
the Company will be able to obtain additional financing when needed, or on
terms acceptable to it. In the event the Company cannot obtain additional
funds when needed on acceptable terms, it may be forced to limit its future
operations, which could have a materially adverse impact on its business.
RELIANCE ON OFFICERS, DIRECTORS AND KEY EMPLOYEES
The ability of the Company to conduct its business affairs successfully
will be subject to the capabilities, business acumen and continuing
services of the Chairman of the Board of Directors and its President,
Gerald Green, and other current officers and directors, and any key
employees to be hired in the future. The Company has no employment
agreements with any of its officers or key employees except for Gerald
Green. While the Company expects to retain the services of Mr. Green,
there can be no assurance of such result. The loss of Mr. Green or any
other key employees could have a material adverse impact on the continued
operation of the Company.
CONCENTRATION OF CREDIT RISK:
The Company maintains bank account balances in institutions located in
California, Puerto Rico and Europe. The balances in California are insured
by the Federal Deposit Insurance Corporation up to $100,000. The Company's
cash balances exceeded the level of insurance coverage for the years ended
June 30, 2000 and 1999 by $318,830 and $946,146, respectively.
NOTE 4 - RECENT PRONOUNCEMENTS
In July 2000, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position 00-2 (SOP 00-02), "Accounting by Producers or
Distributors of Films". SOP 00-2 supercedes Financial Accounting Standards
Board (FASB) Statement of Financial Accounting Standards No. 53 "Financial
Reporting by Producers and Distributors of Motion Picture Films". SOP 00-2
establishes new accounting and reporting standards for the Motion Picture
Industry. SOP 00-2 requires the Company to review its film capitalization
costs and write off any production which three years from its first
capitalized transaction has not been set for production. The Company will
fully implement SOP 00-2 by the first quarter of fiscal year 2001. SOP 00-2
is not expected to have a material impact on the Company's consolidated
balance sheet, statements of operations or cash flows.
F-16
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 5 - SUPPLEMENTARY FINANCIAL INFORMATION:
On January 1, 1999, the Company acquired Skyrocket, LLC and Michel Russo,
Inc., marketing and advertising businesses located in San Francisco and Los
Angeles, respectively. The Company issued 325,000 shares of common stock
and cash in exchange for all the outstanding shares of Skyrocket and Russo.
These transactions were accounted for under the purchase method. Prior to
the acquisition by the Company, Skyrocket, LLC and Michel Russo, Inc. had
December 31 fiscal year ends.
The following table presents information about the acquisitions made by the
Company in the fiscal years ending June 30, 1999. All acquisitions were
accounted for under the purchase method of accounting.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
Amortization
Acquisition Purchase Period Goodwill
Date Price Goodwill (in Years)
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Skyrocket, LLC 1/99 $531,250 $701,598 15
---------------------------------------------------------------------------------------------------
Michel Russo, Inc. 1/99 212,467 313,540 15
---------------------------------------------------------------------------------------------------
</TABLE>
The purchase price was allocated to tangible assets and intangible assets,
including goodwill less liabilities assumed.
The acquisition of Skyrocket, LLC and Michel Russo, Inc. were accounted for
by the purchase method of accounting. Pro Forma results of operations as if
the acquisition took place as of July 1, 1998 are as follows. Intercompany
transactions for fiscal 1999 were immaterial
<TABLE>
<CAPTION>
June 30, 1999
-------------
<S> <C>
Total Revenues $ 6,586,061
Total Operating Expenses 8,111,214
-----------
Loss From Operations (1,525,153)
Other Income (Expense) (197,900)
Loss Before Income Tax Expense (1,723,053)
Income Tax (Expense) (28,328)
-----------
Net Loss $(1,751,381)
===========
Basic and Diluted Loss Per Share $ (0.20)
===========
</TABLE>
NOTE 6 - PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
June 30
-------------------------
2000 1999
-------- --------
<S> <C> <C>
Furniture and Fixtures $ 46,785 $ 37,589
Office Equipment 479,935 325,083
Leasehold Improvements 9,029 9,029
-------- --------
Total Cost 535,749 371,701
Less: Accumulated Depreciation 335,035 256,753
-------- --------
Net Book Value $200,714 $114,948
-------- --------
</TABLE>
F-17
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
Depreciation expense for 2000 and 1999 was $78,282 and $38,184,
respectively.
NOTE 7 - REPORTABLE OPERATING SEGMENTS:
SEGMENT PROFIT OR LOSS:
For the Year Ended June 30, 2000
--------------------------------
<TABLE>
<CAPTION>
SEGMENTS
---------------------------------------------------------
TOTALS MOTION PICTURES MARKETING HOLDING CO.
----------- --------------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues from external customers $ 3,205,892 $ 131,656.00 $ 3,074,236 $ -
Intersegment revenues 1,367 - 1,367 -
Interest income 15,559 11,524 - 4,035
Interest expense 1,169,115 1,138,251 30,864 -
Depreciation and amortization 1,750,754 973,991 776,763 -
Operating profit (loss) (5,452,502) (4,523,165) (933,372) 4,035
Segment assets 20,987,165 15,787,691 1,405,154 3,794,320
For the Year Ended June 30, 1999
--------------------------------
TOTALS MOTION PICTURES MARKETING HOLDING CO.
----------- --------------- ----------- -----------
Revenues from external customers $ 6,120,094 $ 4,429,388 $ 1,690,706 $ -
Intersegment revenues 88,761 - 88,761 -
Interest income 20,107 20,086 21 -
Interest expense 143,353 129,194 14,159 -
Depreciation and amortization 3,633,458 3,584,700 48,758 -
Operating profit (loss) (958,455) (326,769) (631,686) -
Segment assets 9,663,148 8,209,827 1,453,321 -
</TABLE>
F-18
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. Management evaluates
segment performance based on profit or loss from operations before income
taxes and nonrecurring gains and losses. Transfers between segments are
accounted for at market value.
RECONCILIATION OF SEGMENT INFORMATION TO CONSOLIDATED AMOUNTS:
Information for the Company's reportable segments relates to its
consolidated totals as follows:
<TABLE>
<CAPTION>
For the Years Ended June 30,
------------------------------------------
2000 1999
------------------- -----------------
<S> <C> <C>
Revenues
--------
Total revenues for reportable segments $ 3,207,259 $ 6,208,855
Elimination of intersegment revenues (1,367) (88,761)
------------------- -----------------
Total consolidated revenues $ 3,205,892 $ 6,120,094
=================== =================
Income or Loss
--------------
Total loss for reportable segments $(5,452,502) $ (900,455)
Elimination of intersegment income 29,000 (29,000)
------------------- -----------------
Loss before income tax $(5,423,502) $ (929,455)
=================== =================
Assets
------
Total assets for reportable segments $ 20,987,165 $ 9,663,148
Eliminations of intersegment transactions (3,274,936) (2,933,240)
------------------- -----------------
Consolidated total $ 17,712,229 $ 6,729,908
=================== =================
</TABLE>
MAJOR CUSTOMER INFORMATION:
Revenues from three customers of the Company's marketing and advertising
segment represent approximately $1,069,852 or 33.3% of the Company's
consolidated revenues, for the year ended June 30, 2000.
F-19
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 8 - DEBT OBLIGATIONS
<TABLE>
<CAPTION>
June 30,
--------------------------------------
2000 1999
---------------- -------------
<S> <C> <C>
Mercantile National Bank credit line, entered
into March 1999 with monthly principal
payments of $8,333, plus interest at 8.75%
per annum. The credit line matures
March 2000. $ - $ 75,000
WestAmerica Bank note assumed February
1999 with monthly principal payments of $2,500
plus a variable rate of interest currently 12.00%
per annum. The debt matures September 2000. 5,000 35,000
WestAmerica Bank note assumed February
1999 with monthly principal payments of $1,637
plus a variable rate of interest currently 12.00%
per annum. The debt matures September 2000. 3,274 22,917
WestAmerica Bank credit line, assumed January 1999.
The interest rate is 12.50% per annum. 44,931 46,660
Note entered into February 11, 1999 with
principal payable quarterly at $375,000 beginning
three months following the date of the first
advance plus interest at 13.50% per annum.
the note matures February 2000. - 2,000,000
Note entered into January 2000, with interest payable
quarterly at a variable rate of interest currently
10.50%. The note matures December 2001. 1,000,000 -
Note entered into February 2000, with interest payable
quarterly at a 8% rate of interest. The note matures
September 2000. 100,000 -
Note entered into March 2000, with interest payable
quarterly at a 9% rate of interest. The note matures
December 2000. 100,000 -
Note entered into March 2000, with interest accruing
at a rate of 7.5%. The note is secured by the foreign
rights to My First Mister. The note matures April 2001. 1,607,017 -
Note entered into April 20, 2000 with a 30% premium
which is being accrued as interest due on maturity. The
principal balance is $2,500,000 with $457,627 of interest. The
note matures August 2000 (from a majority shareholder) 2,957,627 -
---------------- -------------
$ 5,817,849 $ 2,179,577
Less: Current Portion 4,776,918 2,126,925
---------------- -------------
$ 1,040,931 $ 52,652
================ =============
Future aggregate debt maturities are as follows:
Year Ending
June 30 Amount
----------- -----------
2001 $ 4,319,291
2002 1,002,210
2003 2,675
2004 2,993
2005 and Thereafter 33,053
-----------
$ 5,360,222
-----------
</TABLE>
F-20
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
The holder of the February 1999, $2,000,000 note received as additional
consideration, 250,000 warrants to purchase the Company's common stock. The
fair value of the warrants was determined using the Black-Scholes valuation
model to be $450,000 and has been recorded as an unamortized debt discount
to be amortized as interest over one year, the term of the debt. The
unamortized loan discount at June 30, 2000 and 1999 was $0 and $275,687
respectively.
Total interest expense for these obligations for the years ended June 30,
2000 and 1999 was $1,116,915 and $143,353 respectively.
NOTE 9 - RELATED PARTY TRANSACTIONS:
The Company has receivables totaling $210,734 from its officers. The
receivables are due between July 2002 to September 2003. The receivables at
June 30, 2000 carry a stated rate of interest of 8%. Prior to January 2000
the Company loaned funds to its officers without interest.
Producer's fee payable of $300,000 is owed to the Company's chief executive
officer. By agreement between the chief executive officer and the Company,
the full amount is being deferred without interest until there are
sufficient funds out of proceeds from the distribution of the "New Swiss
Family Robinson" production to pay off the outstanding amount.
The Company's chief executive and his wife are employed by Sundowning, Inc.
as the executive producer and the producer of the motion picture
"Diamonds". For their services, they are to receive fees totaling $250,000,
of which $150,000 is deferred, without interest. The agreement becomes
effective as of the release date of the film. Producer fees of $100,000
were paid by June 30, 1999. A bonus of $40,000 was paid to the Company's
chief executive's wife during the fiscal year ended June 30, 2000.
The Company's chief executive and his wife are employed by My First Mister
and Bride of the Wind as the executive producer and producer of those
respective motion pictures. For their services they were paid $375,000
during the fiscal year ended June 30, 2000.
The Company entered into several loan agreements with its principal
shareholder. The total amount financed for the years ended June 30, 2000
and 1999 were $4,500,000 and $2,000,000 respectively. Additionally, the
Company granted 250,000 warrants and 250,000 shares of restricted common
stock as additional consideration for those loans. The Company later
negotiated extensions of the initial payment of principal in return for
which the Company issued 250,000 shares of Company common stock to the
fund. On February 28, 2000 the Company entered into an agreement to
extinguish $4,000,000 by converting the principal amount of the loans into
common stock of the Company and to forgive the unpaid interest. Pursuant to
the agreement the Company issued 2,936,667 shares to the entities
controlled by the majority shareholder. As of the date of the agreement the
Company owed $376,100 in interest to the entities controlled by the
majority shareholder. As a result of this transaction the Company recorded
an extraordinary loss of $4,553,982 after taxes or $.51 per share. The
agreement does not effect any of the previous additional consideration
granted by the Company.
Mr. Green was employed by Total Films UK Limited, a wholly owned subsidiary
of the Company, as the executive producer of THE NEW SWISS FAMILY ROBINSON.
For his services, Mr. Green earned $300,000 and screen credit as producer
of the film. Payment of the cash consideration has been deferred, without
interest, until the film recoups its negative costs. Mr. Green is also an
officer and a director of Total Films UK Limited.
A director received stock options for the purchase of 75,000 shares at
$2.00 per share in August 1998. He exercised this option in February 2000,
by canceling 30,000 options. He received 45,000 shares through such
exercise.
In February 1999 the Company assumed the repayment of two loans and one
line of credit with a total principal amount of $150,000, the balance of
which at June 30, 2000, was $12,274, between Red Sky Films, LLC and
Skyrocket, LLC as the borrowers and Westamerica Bank as the lender.
F-21
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
Assumption of the loans and the line of credit were required pursuant to
the acquisition agreement between the Company and Skyrocket, LLC.
NOTE 10 - COMMITMENTS AND CONTINGENCIES:
LEGAL MATTERS
The Company was named in a dispute with the Screen Actors Guild Pension
Plan (the "Plan"). The Plan was awarded a judgement of $56,525 for back
pension contributions owed pertaining to the motion picture New Swiss
Family Robinson. The amount rendered in the judgement has been accrued by
the Company as of June 30, 2000.
LINE OF CREDIT
The Company has a line of credit from Mercantile National Bank for
$140,000. This irrevocable letter of credit is secured by TCI's accounts
receivable. This line of credit was granted in April 2000 and expires
February 2001. The Company uses this letter of credit to secure office
space in San Francisco.
EMPLOYMENT AGREEMENTS
The Company has an employment contract with key executive officers that
expire from December 31, 2000 to August 31, 2004. In addition to a base
salary, the agreements provide for a cash bonus and a supplemental bonus
based on pre-tax earnings. The Company is obligated for $1,662,501 under
the terms of the various employment agreements.
CAPITAL LEASE
The Company currently leases certain office equipment with lease terms
expiring February 2002 through May 2003. These capital lease obligations
have been recorded in the accompanying financial statements at the present
value of future minimum lease payments. The capitalized cost of $104,116 is
included in office equipment in the accompanying balance sheet. Accumulated
depreciation at June 30, 2000 and 1999 includes $18,621 and $2,673,
respectively, related to the capitalized cost of the office equipment.
Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
Year Ending
June 30, Lease Payments
--------------------- --------------
<S> <C>
2001 $ 60,546
2002 57,327
2003 9,248
--------
Total future minimum
lease payments $127,121
========
</TABLE>
OPERATING LEASE
The Company has entered into lease agreements for its office facilities and
other office equipment under noncapitalized leases with terms ranging from
two to five years and monthly payments from $222 to $22,838. Future minimum
lease payments are as follows:
<TABLE>
<CAPTION>
Year Ending
June 30, Lease Payments
--------------------- --------------
<S> <C>
2001 $ 518,728
2002 518,728
2003 381,698
2004 240,534
2005 196,883
----------
Total future minimum
lease payments $1,856,573
==========
</TABLE>
F-22
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
Total rental expense included in the financial statements for the years
ending June 30, 2000 and 1999 was $311,025 and $243,011, respectively.
NOTE 11 - INCOME TAXES:
The Company has available at June 30, 2000 and 1999, unused operating loss
carryforwards of approximately $11,800,000 and $1,700,000, respectively,
which may be applied against future taxable income and which expire in
various years through 2019. The amount of and ultimate realization of the
benefits from operating loss carryforwards for income tax purposes is
dependent, in part, upon the tax laws in effect, the future earnings of the
Company, and other future events, the effects of which cannot be
determined. Because of the uncertainty surrounding the realization of the
loss carryforwards the Company has established a valuation allowance equal
to the amount of the tax effect of loss carryforwards and, therefore, no
deferred tax asset has been recognized for the loss carryforwards.
The Company's net deferred tax assets (using a federal rate of 34%)
consisted of the following at:
<TABLE>
<CAPTION>
June 30, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
Deferred Tax Assets $ 4,012,000 $ 578,000
Deferred Tax Asset Valuation (4,012,000) (578,000)
----------- -----------
Net Deferred Tax Assets $ -- $ --
=========== ===========
</TABLE>
NOTE 12 - STOCKHOLDERS' EQUITY:
STOCK OPTION PLAN:
In July 1998, the Company adopted a Non-Qualified Stock Option Plan (the
"Plan"). As of June 2000, approximately 800,000 shares of Common Stock are
reserved for future issuance under this plan. The Plan allows for the
Company to grant stock options to purchase shares of the Company's
authorized but unissued Common Stock to officers, key employees,
non-employee directors and consultants. Options are generally priced at the
fair market value of the stock on the date of grant. Options are generally
exercisable immediately but unvested shares are held in escrow. Options
currently expire no later than five years from the date of grant. The Plan
will terminate on June 19, 2008. As of June 30, 2000 and 1999,
approximately 730,000 shares of Common Stock were issued by the Plan.
INDIVIDUAL STOCK OPTION AGREEMENTS:
The Company grants stock pursuant to individual stock option agreements.
The Company granted 752,500 and 230,000 options to employees under such
agreements for the years ended 2000 and 1999, respectively.
Information relative to stock option activity is as follows (in thousands):
F-23
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
The following table summarizes information concerning currently outstanding
and exercisable options:
<TABLE>
<CAPTION>
Weighted
Options Average
Available Exercise
Shares Price
<S> <C> <C>
Options Outstanding at July 1, 1998 - $ -
Granted 960 2.00
Exercised - -
Cancelled - -
------------- -------------
Options Outstanding at June 30, 1999 960 $ 2.00
Granted 752 $ 2.44
Exercised (45) 1.63
Cancelled - -
------------- -------------
Options Outstanding at June 30, 2000 1,667 $ 2.28
</TABLE>
Using Black-Scholes option valuation model, the weighted average estimated
fair value of employee stock options granted in the year ended June 30,
2000 was $1.10.
<TABLE>
<CAPTION>
Option Outstanding Option Exercisable
---------------------------------------- ------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$2.00 - $5.00 1,667,500 2.04 $2.23 1,432,500 $2.05
</TABLE>
STOCK BONUS PLAN:
In January 2000 the Company adopted a Stock Bonus Plan ("Stock Bonus Plan")
which allows the Company to issue up to 50,000 restricted shares of the
Company's common stock to directors, officers, employees, and others who
have performed bona fide services for the Company. Pursuant to the terms of
the Stock Bonus Plan, the Company issued 7,500 shares with a fair value of
$31,875 to an employee of the Company during the year ended June 2000.
STOCK - BASED COMPENSATION:
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees", and related interpretations in accounting
for its plan. Accordingly, no compensation expense has been recognized for
its stock-based compensation plan other than for the stock options granted
to non-employee directors and consultants. Had compensation cost for the
Company's other options granted been determined based upon the fair value
at the grant date for awards under this plan been consistent with the
methodology prescribed under Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation", the
F-24
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
Company's net loss and net loss per share would have been increased to the
pro forma amounts indicated below:
<TABLE>
<S> <C>
Net Loss as Reported $ (10,104,268)
Proforma Net Loss (10,200,003)
Basic Net Loss per
Share as Reported (1.10)
Proforma Basic Net
Loss per Share (1.12)
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including the
expected stock price volatility. Because the Company's options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect
the fair value estimate, in the opinion of management, the existing models
do not necessarily provide a reliable single measure of the fair value of
its options.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model using a dividend yield of 0% and the
following additional weighted average assumptions used for grants.
<TABLE>
<S> <C>
Expected Stock Price Volatility 0.672%
Risk-Free Interest Rate 6%
Expected Lives (In Years) 3
</TABLE>
NOTE 13 - MOTION PICTURE COSTS
The Company's film production business has completed three motion pictures
since its inception: The New Swiss Family Robinson, Diamonds and Chick
Flick. The Company currently has two other films that are in production: My
First Mister and Bride of the Wind. The Company is also developing other
full length feature films. As of June 30, 2000 the components of motion
picture costs are as following:
F-25
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
<TABLE>
<S> <C>
Released $ 5,624,823
Completed But Not Released 364,051
In Production 5,817,317
Preproduction 1,301,339
------------------
Total Motion Picture Costs $ 13,107,530
Less: Accumulated Amortization (3,611,722)
------------------
Net Motion Picture Costs $ 9,495,808
==================
</TABLE>
The Company capitalizes all film costs which include all direct negative
costs incurred in the physical production of a film, as well as allocations
of production overhead and capitalized interest. Participation costs are
accrued based on the individual-film-forecast-computation method.
Exploitation costs are expensed as incurred.
The Company recorded amortization costs for the years ended June 30, 2000
and 1999, of $118,013 and $3,493,709, respectively. The Company expects to
amortize approximately 22% of its completed films cost for the fiscal year
ending June 30, 2001. The Company does not have any accrued participation
costs that will be paid in the upcoming fiscal year.
In addition the Company determined that one of its completed films Diamonds
had been impaired as a result of the films actual performance subsequent to
release failing to generate sufficient exploitation proceeds to
substantiate its capitalized costs. For the years ended June 30, 2000 and
1999, the company expensed $1,091,047 and $51,959 of previously capitalized
motion picture costs.
NOTE 14 - PRODUCTION FUNDING ARRANGEMENTS:
The Company has entered into various production funding arrangements for
the motion pictures which it produces. These contracts specify that the
Company and a third party will co-produce and exploit the feature films. In
exchange for the co-production rights the third party will make a financial
contribution for the costs incurred in the exploitation of the film. All
incoming exploitation proceeds are allocated between the Company and the
third parties as specified by the production funding arrangements.
Generally the third parties insure their production funding contributions,
with the Company assuming no liability for the third parties recoupement of
their investment. As of June 30, 200 and 1999 third parties had contributed
$5,179,195 and $7,219,391, respectively under these agreements. These
contributions have been netted against the total cost of the motion
pictures.
The Company has insured itself for $1,000,000 for its investment in the
motion picture Diamonds which was recognized in the year ended June 30,
2000. This policy commenced November 1998, effective for 36 months at which
time the net revenue for the film less than the insured amount will be
remitted to the Company.
NOTE 15 - RESTATEMENTS OF FINANCIAL STATEMENTS
The accompanying financial statements for the period ended June 30, 1999
have been restated to correct an error in the calculation of the value of
options granted to directors. The effect of the restatement is a decrease
of the net loss for the year ended June 30, 1999 by $534,950.
F-26
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 15 - SUBSEQUENT EVENTS:
In July 2000, the Company received an extension on the $2,500,000 loan
entered into April 2000 with its majority shareholder. In exchange for the
extension the Company issued 500,000 shares of common stock.
In August 2000, the Company completed its offering in China II. The Company
received the balance owed from the joint private offering in the Company
and China II. The common stock of the Company has not been issued to its
investors or as a placement fee as of the date of the auditors' report.
Also in August, the Company received a $1,000,000 working capital loan from
its principal shareholder. The loan bears interest at 12% per annum
payable quarterly. The loan will be convertible at $3.00 per share,
provided that the conversion price will be reduced to $1.50 for the ninety
day period following the due date, and to $1.00 per share thereafter, if
the loan remains unpaid. The Company also paid a consulting fee of $70,000
and have agreed to issue five year warrants to purchase 100,000 shares at
$3.50 per share to Capital Research, Ltd. in connection with the loan.
F-27
<PAGE>
Page 74
PART III
Items 1 and 2. Index to Exhibits and Description of Exhibits. The following
exhibits are included as part of this statement:
<TABLE>
<CAPTION>
Exhibit No. Description Location
----------- ----------- --------
<S> <C> <C>
2.1 Articles of Incorporation, as amended *
2.2 Current Bylaws *
3.1 Form of Common Stock Certificate *
6.1 Reorganization Agreement dated January 29, 1997 *
6.2 Promissory Note to Merchants T&F dated December 15, 1998 *
6.3 Loan Agreement with the Orbiter Fund dated February 9, 1999, as
amended August 11, 1999 *
6.4 Promissory Note to The Orbiter Fund dated February 10, 1999 *
6.5 A-Warrant Certificate Form, with schedule, to the Orbiter Fund
6.6 Capital Research, Ltd Agreement *
6.7 B-Warrant Certificate Form, with schedule, to Capital Research Ltd.
6.8 $2 Million Convertible Note Term Sheet dated September 21, 1999 *
6.9 Form of Convertible Promissory Note *
6.10 Promissory Note Conversion Agreement dated February 28, 2000 *
6.11 Form of Warrant Certificate in October 1999 Private Offering *
</TABLE>
<PAGE>
Page 75
<TABLE>
<S> <C> <C>
6.12 Form of Registration Rights Agreement in October 1999 Private
Offering *
6.13 Form of Right of First Refusal Agreement in October 1999 Private
Offering *
6.14 Promissory Note to Trinity American Corporation dated February
17, 2000 *
6.15 Agreement Re Sale of Interest in Skyrocket, LLC *
6.16 Michel/Russo, Inc. Stock Purchase Agreement, as amended *
6.17 Employment Agreement of Gerald Green *
6.18 Employment Agreement of Rod Dyer *
6.19 Employment Agreement of D. Daniel Michel, as amended *
6.20 Stock Option Certificate to D. Daniel Michel *
6.21 Employment Agreement of Howard Russo, as amended *
6.22 Stock Option Certificate to Howard Russo *
6.23 Employment Agreement of Monique L. Jones *
6.24 Stock Option Certificate to Monique L. Jones *
6.25 1998 Non-Qualified Stock Option Plan *
6.26 Form of Non-Qualified Stock Option Certificate *
6.27 Stock Option Certificate for Madeleine Ali, as amended *
6.28 Stock Bonus Plan *
6.29 Stock Purchase Agreement with U.S. Business Network, Inc. *
6.30 Executive Producer Agreement for DIAMONDS *
6.31 Producer's Agreement for NEW SWISS FAMILY ROBINSON *
6.32 Producer Agreement for CHICK FLICK *
6.33 Office Lease Agreement *
6.34 Paramount Pictures Corporation/Alma U.K. Production, Limited letter
agreement for BRIDE OF THE WIND *
6.35 Paramount Pictures Corporation/First Mr. Inc. letter agreement for
MY FIRST MISTER *
6.36 JBRG Consultants consulting agreement *
6.37 C-Warrant Certificate for JBRG Consultants **
6.38 D-Warrant Certificate for Davimos **
6.39 Option Agreement for Gerald Green **
6.40 Foreign Sales Agreement, with assignment **
6.41 Dyer Loan Agreement dated August 18, 2000 Attached
6.42 Memorandum of Agreement dated April 20, 2000, with Lauer, Garvey,
Hauser, and Cowen for $2,500,000 loan; promissory note dated April 20,
2000, and extension dated August 1, 2000 Attached
10.1 Consent of auditor Attached
</TABLE>
--------------------
*Filed with the original Form 10-SB registration statement of the Company
filed with the Securities and Exchange Commission on April 5, 2000 (SEC File no.
0-30027).
<PAGE>
Page 76
**Filed with the first post-effective amended Form 10-SB registration
statement of the Company filed with the Securities and Exchange Commission on
July 25, 2000 (SEC File no. 0- 30027).
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this amended registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized.
Total Film Group, Inc.
Date: October 13, 2000 By /s/ Gerald Green, President
Date: October 13, 2000 By /s/ Monique L. Jones, Chief Financial
Officer
