UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-SB/A-1
Post-Effective Amendment No. 1
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
<PAGE>
TABLE OF CONTENTS
PART I
Page
Item 1. Description of Business 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
Item 3. Description of Property 20
Item 4. Security Ownership of Certain Beneficial Owners and Management 21
Item 5. Directors, Executive Officers, Promoters and Control Persons 22
Item 6. Executive Compensation 24
Item 7. Certain Relationships and Related Transactions 27
Item 8. Description of Securities 30
PART II
Item 1. Market Price of and Dividends on the Registrant's Common equity
and Other Shareholder Matters 31
Item 2. Legal Proceedings 33
Item 3. Changes in and Disagreements with Accountants 33
Item 4. Recent Sales of Unregistered Securities 34
Item 5. Indemnification of Directors and Officers 38
<PAGE>
PART F/S 39
PART III 40
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.
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:
Percent
Parent Company Subsidiary Owned
Total Film Group, Inc. 1st Mr., Inc. 100%
Total Films UK Ltd 100%
Alma Productions UK Ltd 100%
Sundowning, Inc. 100%
Total Media, Inc. 100%
Total China II, Inc. 100%
Total China, Inc. 50%
Total Creative, Inc. 100%
None of the Company's subsidiaries have a subsidiary.
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 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 convert the principal amount of the
loans into 2,936,667 shares of common stock and to forgive any interest due.
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
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 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 US Business Network. 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 U.S. Business
Network, 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 U.S. Business
Network, 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 U.S. Business Network,
Inc. On December 17, 1999, the Company and Total China, Inc. finalized the
agreement with U.S. Business Network, Inc., and the stock of U.S. Business
Network, Inc. was issued to Total China, Inc. Because of subsequent
financings by U.S. Business Network, Inc., at May 31, 2000, Total China, Inc.
owned approximately 11.9% of the outstanding stock of such entity. U.S.
Business Network, Inc., doing business as MeetChina.com, is the architect and
operator of an e-commerce portal in China which is officially sponsored and
sanctioned by the Chinese government. U.S. Business Network, 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 U.S. Business Network, Inc. on a
designated exchange. Until the stock of U.S. Business Network, 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 U.S. Business Network, Inc. Total China, Inc. has the right of
first refusal to purchase any shares to be sold or issued by U.S. Business
Network, 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 U.S. Business Network, Inc. with
the U.S. Securities and Exchange Commission after the initial public offering
and which includes shares of the founders of U.S. Business Network, Inc.
The Company's business is divided into two segments: the film production
business and the advertising and marketing business. 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 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 is in
production on 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:
Subsidiary Jurisdiction Film
Total Films UK Ltd. United Kingdom The New Swiss Family Robinson
Alma Production UK Ltd. United Kingdom Bride of the Wind (aka Alma)
Sundowning, Inc. Nevada Diamonds
1st Mister, Inc. California My First Mister
The Company has also incorporated Total Pictures, Inc., a California
corporation, to act as signatory for transactions with the Writers' Guild.
All future screenplays 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.
On October 18, 1999, the Company incorporated Total Media, Inc., a
Delaware corporation. On November 2, 1999, the Company incorporated Total
Group.com, Inc., a Delaware corporation. Also on November 2, 1999, the
Company incorporated Total Group, Inc., a Delaware corporation. Each of these
entities is a wholly owned subsidiary of the Company and was formed for future
unidentified projects.
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 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 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
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 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
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. Most recently the Company has concluded a distribution deal with
Paramount Classics, a division of Paramount Pictures for the domestic
distribution of the Company's next four feature films (the first two being My
First Mister and Bride of the Wind).
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 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 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, is presently being filmed on location in Vienna.
Bride is scheduled to complete production in mid-July 2000 and 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 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.
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.
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 San Francisco and 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 My First Mister and Bride of the Wind (aka Alma).
As of March 31, 2000, one customer, SDN Interactive, accounted for
approximately 18.5% of the total accounts receivable generated by TCI.
Employees
At June 30, 2000, the Company and its subsidiaries employed 28 persons
on a full-time basis. In the film production segment, four are in executive
positions, four 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
Company provides medical and dental insurance coverage, life insurance, a 401K
plan to the employees of the Company and its subsidiaries, which is optional.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company generates revenues from the film 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 business from the sale of media design, advertising, and
Internet business consulting services. As reported in the financial
statements provided for the nine month period ended March 31, 2000, the
portion of total revenues attributed to the film business and the advertising
business are 3.6% and 96.4% respectively. There was only one film in limited
theatrical release during this period.
The Company is involved in the business of producing, marketing, and
distributing commercial feature films. It primarily creates, develops and
produces feature-length, theatrical motion pictures. The Company generally
finances all or a substantial portion of the budgeted production costs of
films it produces through advances obtained from distributors and borrowings
secured by domestic and international licenses, from private investors, and
through co-production agreements.
The consolidated financial statements at June 30, 1999, and March
31, 2000, include the accounts of Total Film Group, Inc. and its wholly owned
subsidiaries: Total Creative, Inc., Total Films UK Limited, Sundowning, Inc.,
and 1st Mister, Inc. (collectively, the "Company"). All significant
intercompany balances and transactions have been eliminated upon
consolidation.
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 Financial Accounting
Standards No. 53 ("SFAS 53"), "Financial Reporting by Producers and
Distributors of Motion Picture 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 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 SFAS 53. The Company is amortizing the film
costs for completed films using the individual-film-forecast-computation
method, whereby the amortization of the budget of a film 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.
Results of Operations
Comparison of Fiscal Years ended June 30, 1999 and 1998
The Company's operating revenues for the fiscal year ended June 30,
1999, were $6,120,094, an increase of $6,037,765 or 7,333.7% from operating
revenues of $82,329 in the prior fiscal year ended June 30, 1998. This
increase is attributed to growth in movie release income, which was $0 at June
30, 1998, as compared with $4,429,388 at June 30, 1999. Movie release income
for the period 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, 1999, were $1,690,706, an increase of $1,608,377 or 1,953.6%
from operating revenues of $82,329 in the prior fiscal year ended June 30,
1998. During this period of comparison, TCI acquired Michel/Russo Inc., a
marketing and advertising firm, and Skyrocket, LLC, a web development and
digital advertising company. The operations of these two companies were
merged into the existing TCI operation and the company began reorganizing its
management structure and business strategy.
Total operating expenses were $7,544,697 during the fiscal year ended
June 30, 1999, as compared to $473,132 during the fiscal year ended June 30,
1998. This increase of $7,071,565 in operating expenses is due to: (i)
amortization of motion picture development costs totaling $3,493,709 for The
New Swiss Family Robinson, and (ii) an increase in TCI's administrative
expenses as a fully operational division of the Company.
Amortization of additional consideration granted for debt during the
fiscal year ended June 30, 1999, was $257,813 as compared to $0 during the
fiscal year ended June 30, 1998. This expense represents the amortized
portion of the excess of market value over the warrant price for the warrants
granted as reflected in the equity section of the Company's balance sheet at
June 30, 1999.
For the fiscal year ended June 30, 1999, the Company's balance sheet
reflected goodwill (net of amortization) equal to $986,926. The goodwill
arises from the net deficit assumed by the Company in the Michel/Russo Inc.
and Skyrocket, LLC acquisitions as well as the value of stock options granted
in connection therewith.
The Company reported a net loss of $(1,579,433), including $(257,813) for
amortization of additional consideration granted for debt, or $(0.19) per
share, for the fiscal year ended June 30, 1999, as compared to a net loss of
$(391,486) or $(0.05) per share for the fiscal year ended June 30, 1998. The
weighted average number of common shares outstanding for the compared periods
were 8,414,597 in fiscal year 1998/1999 and 7,740,667 in fiscal year
1997/1998.
Comparison of Nine Months Ended March 31, 2000 and 1999
The Company's operating revenues for the period ended March 31, 2000,
were $2,321,729, a decrease of $2,800,401 or 55% from operating revenues of
$5,122,130 in the prior nine month period ended March 31, 1999. This decrease
resulted primarily from a reduction in movie release income, which was
$4,373,744 at March 31, 1999, as compared to $85,331 at March 31, 2000. Movie
release income for the period ended March 31, 1999, reflects the revenue from
the Company's film, The New Swiss Family Robinson, while the Company did not
have a film in wide release for the period ended March 31, 2000. The New Swiss
Family Robinson 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 period ended
March 31, 2000, were $2,236,398, an increase of $1,488,012 or 199% from
operating revenues of $748,386 in the prior nine month period ended March 31,
1999. The nine month period ended March 31, 2000, reflects the first nine
months 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 $3,869,665 during the period ended March 31, 2000, as
comparted to $2,501,285 during the period ended March 31, 1999.
Administrative expenses increased $569,125 or 37% to $2,092,391 for the period
ended March 31, 2000, from $1,523,266 in the period ended March 31, 1999. The
increase in such expenses is due principally to an increase in TCI's
administrative expenses as a fully operational division of the Company.
Interest expense for the period ended March 31, 2000, was $335,063 as
compared to $127,142 during the period ended March 31, 1999. The increase was
due to increased borrowings carried for longer terms. Total indebtedness for
borrowed money increased to $2,061,292 for the period ended March 31, 2000,
from $1,870,042 in the period ended March 31, 1999. See "Liquidity and
Capital Resources" below for additional discussion.
Amortization of additional placement fee for the period ended March
31, 2000, was $506,446 as compared to $0 during the period ended March 31,
1999. This expense is directly related to the Company's borrowings with The
Orbiter Fund and the Lancer Group. See "Liquidity and Capital Resources"
below for additional discussion.
The Company reported a net loss of $(7,234,004) or $(0.80) per share
for the period ended March 31, 2000, as compared to a net loss of $(278,247)
or $(0.02) per share for the period ended March 31, 1999. During this period,
the Company recognized a loss on the early extinguishment of short-term debt.
The extraordinary item represents $(4,543,679) or 63% of the period's net
loss. The weighted average number of common shares outstanding for the
compared periods were 8,872,191 in fiscal 1999/2000 and 8,555,000 in fiscal
1998/1999.
Liquidity and Capital Resources
Cash and cash equivalents at March 31, 2000, decreased to $826,452
from $2,388,140 at March 31, 1999. $1,100,000 of the cash balance at March
31, 1999, represents unspent production funding for the film Diamonds. The
Company expects to collect revenues from this film during the next quarter
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 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 March 31,
2000, $1,700,000 of the Company's short and long-term debt obligations
represent monies borrowed in connection with the funding of My First Mister.
Summary
Management believes that existing resources and cash generated from
operating activities, together with the conversion of the outstanding debt,
will be sufficient to meet the Company's working capital requirements through
the end of the fiscal year 1999/2000. The Company may seek other sources of
financing to meet its working capital requirements, including separate equity
or debt financing. 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. The Company is in the process of completing an equity offering of up
to $3,700,000 and expects to conclude the offering by July 31, 2000. The
Company believes that the net proceeds from this offering, together with
anticipated revenues from operations, will be sufficient to meet its presently
anticipated working capital and capital expenditure requirements through the
period ending March 31, 2001.
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.
Total Creative, Inc. also occupies approximately 6,850 square feet of
office space in the San Francisco, California, area. This space houses the
digital advertising business of the Company. 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 June 30, 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:
Amount and Nature
Name and Address of Beneficial
of Beneficial Owner Ownership (1) Percent of Class
Michael Lauer 6,890,014(2) 54.75%
475 Steamboat Road
Greenwich, CT 06830
Lancer Offshore, Inc. 4,137,907(3) 33.55%
Kaya Flamboyan 9
Curacao, Netherland Antilles
Lancer Partners LP 1,942,107(4) 15.74%
475 Steamboat Road
Greenwich, CT 06830
Gerald Green 2,220,000(5) 16.65%
9019 Lloyd Place
West Hollywood, CA 90069
Manuel Pacheco 55,000(6) *
Eli Boyer 50,000(7) *
Monique L. Jones -0-
Executive Officers and 2,325,000 17.43%
Directors as a Group
(4 Persons)
*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
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:
Name Age Position(s) Director Since
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 --
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
the Anderson School at UCLA.
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.:
Name Age Position(s) Director Since
Gerald Green 68 Director, President, and Secretary 1998
Rod Dyer 64 Co-creative director --
Howard Russo 62 Co-creative director --
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 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 1998:
Name Year Annual Compensation Long-Term Compensation All
and Other Awards Payouts Other
Principal Annual Compensation
Positions Salary Bonus Compensation Restricted
Stock
Award(s) Options LTIP
/SARs Payouts
Gerald
Green, CEO 2000 $246,945 -- $34,739 -- -- -- --
1999 $95,000(1) -- $250,000(2) -- 500,000 -- --
1998 $80,000(1) -- $350,000(3) -- -- -- --
(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.
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:
Number of
Securities Percent of
Underlying Total Exercise Expiration
Name Options Options Price Date
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
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:
Number of
Securities Percent of
Underlying Total Exercise Expiration
Name Options Options Price Date
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
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 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 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.
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
(aka 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 March 31, 2000, was $66,200, 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, Inc. and 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 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 March 31, 2000, the Company had loaned approximately $58,900 to Rod
Dyer, a significant employee of Total Creative, Inc., the Company's wholly
owned subsidiary. The loan was made without interest and is payable upon
demand by the Company. 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 loan is not evidenced by any written documents.
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.
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 June 30, 2000, the Company
had outstanding 12,335,299 shares of Common Stock. All Common Shares are
equal to each other 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.
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.
Quarter High Low
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
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; 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.
Shares Eligible for Future Sale under Rule 144
The Company had 12,335,299 shares of its common stock outstanding at
June 30, 2000. Of these shares, 7,767,449 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 agreement provides for priority
registration rights and/or piggyback registration rights as normally attached
as compensation warrants.
Record Holders of Stock; Transfer Agent
At June 30, 2000, the Company had 63 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 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 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.
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 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
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 to purchase 25,000 shares of
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 2000 and
$2,000,000 in September 2000. The Company issued a total of 2,936,667 shares
of common stock to the lenders for cancellation of the notes and forgiveness
of outstanding interest due. 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.
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.
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
Financial Statements. The following financial statements are included in
this registration statement:
Page
Report of Auditor F-1
Consolidated Balance Sheets as of June 30, 1999 and 1998 F-2
Consolidated Statements of Operations for the fiscal years
ended June 30, 1999 and 1998 F-3
Consolidated Statements of Stockholders' Equity for the fiscal
years ended June 30, 1999 and 1998 F-4
Consolidated Statements of Cash Flows for the fiscal years
ended June 30, 1999 and 1998 F-5
Notes to Financial Statements F-7
Consolidated Balance Sheets as of March 31, 2000 F-1
Consolidated Statements of Operations and Accumulated Deficit
for the nine month periods ended March 31, 2000 and 1999 F-3
Consolidated Statements of Cash Flows for the nine months
ended March 31, 2000 and 1999 F-4
PART III
Items 1 and 2. Index to Exhibits and Description of Exhibits. The
following exhibits are included as part of this statement:
Exhibit No. Description Page
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 *
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
10.1 Consent of auditor
* 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>
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: July 21, 2000 By /s/ Gerald Green, President
Date: July 25, 2000 By /s/ Monique L. Jones, Chief Financial Officer
<PAGE>
Independent Auditors' Report
Total Film Group, Inc. and Subsidiaries
Beverly Hills, California
We have audited the accompanying consolidated balance sheets of Total Film
Group, Inc. and Subsidiaries (the "Company"), as of June 30, 1999 and 1998,
and the related consolidated statements of operations, stockholders' equity
and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Total Film
Group, Inc. and Subsidiaries as of June 30, 1999 and 1998, and the results of
its operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
/s/ MILLER, KAPLAN, ARASE & CO., LLP
North Hollywood, California
September 29, 1999, except for Note 4,
which is as of January 14, 2000.
<PAGE>
TOTAL FILM GROUP INC. AND SUBSIDIARIES
BALANCE SHEET
ASSETS
June 30, 1999 June 30, 1998
CURRENT ASSETS
Cash and Cash Equivalents $ 1,130,179 $ 629,336
Time Certificate of Deposit 27,678 -
Accounts Receivable 423,413 91,285
Related Party Receivable 90,165 -
Other Receivable 30,000 139,177
Prepaid Expenses 50,557 2,272
_________ _______
TOTAL CURRENT ASSETS 1,751,992 862,070
_________ _______
MOTION PICTURE DEVELOPMENT COSTS
New Swiss Family Robinson 5,639,610 5,298,437
Less: Accumulated Amortization 3,493,709 -
_________ _________
2,145,901 5,298,437
Diamonds 7,386,627 -
Other 778,161 738,465
_________ _________
10,310,689 6,036,902
Less: Production Funding
Received 7,219,391 -
_________ _________
TOTAL MOTION PICTURE DEVELOPMENT
COSTS, NET OF AMORTIZATION AND
PRODUCTION FUNDING RECEIVED 3,091,298 6,036,902
_________ _________
PROPERTY, PREMISES AND EQUIPMENT
Furniture and Fixtures 37,589 25,679
Office Equipment 325,083 33,404
Leasehold Improvements 9,029 8,035
_________ _________
371,701 67,118
Less: Accumulated Depreciation 256,753 12,851
_________ _________
TOTAL PROPERTY, PREMISES AND
EQUIPMENT 114,948 54,267
_________ _________
OTHER ASSETS
Deposits 116,186 16,076
Organization Costs, Net of
Amortization 126,784 200,137
Goodwill, Net of Amortization 986,926 -
Miscellaneous Investments 266,088 39,597
_________ _______
TOTAL OTHER ASSETS 1,495,984 255,810
_________ _________
TOTAL ASSETS $ 6,454,222 $ 7,209,049
========= =========
(See notes to consolidated financial statements)
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, 1999 June 30, 1998
CURRENT LIABILITIES
Short Term Debt $ 2,000,000 $ -
Less: Unamortized
Debt Discount 429,687 -
_________ _______
1,570,313 -
Current Portion of
Long-Term Debt 126,925 -
Current Portion of
Obligation Under Capital Lease 1,121 1,495
Accounts Payable and Accrued
Expenses 508,816 296,751
Income Taxes Payable 25,507 -
Interest Payable 89,507 -
Producer's Fee Payable,
Related Party 300,000 300,000
Deferred Revenue - 2,593,816
_________ _________
TOTAL CURRENT LIABILITIES 2,622,189 3,192,062
_________ _________
LONG-TERM LIABILITIES
Long-Term Debt, Net of
Current Portion 52,652 645,768
Obligation Under Capital
Lease, Net of Current Portion - 1,122
_________ _________
TOTAL LONG-TERM LIABILITIES 52,652 646,890
_________ _________
TOTAL LIABILITIES 2,674,841 3,838,952
_________ _________
STOCKHOLDERS' EQUITY
Common Stock, $0.001 Par Value;
Authorized 50,000,000 Shares;
Issued and Outstanding 8,630,000
Shares and 8,300,000 Shares,
Respectively 8,630 8,300
Stock Warrants Granted, Value
in Excess of Exercise Price 687,500 -
Stock Options Exercisable,
Fair Value 557,813 -
Additional Paid-in Capital 4,841,667 4,098,593
Accumulated Deficit (2,316,229) (736,796)
_________ ________
TOTAL STOCKHOLDERS' EQUITY 3,779,381 3,370,097
TOTAL LIABILITIES AND STOCKHOLDERS' _________ ________
EQUITY $ 6,454,222 $ 7,209,049
========= =========
(See notes to consolidated financial statements)
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended
June 30, 1999 June 30, 1998
REVENUE
Movie Release Income $ 4,429,388 $ -
Design Fees 1,690,706 82,329
_________ ________
6,120,094 82,329
_________ ________
OPERATING EXPENSES
Administrative Expenses 3,911,239 411,556
Depreciation and Amortization 139,749 61,576
Amortization of Motion Picture
Development Costs 3,493,709 -
_________ ________
7,544,697 473,132
_________ ________
LOSS FROM OPERATIONS (1,424,603) (390,803)
_________ ________
OTHER INCOME (EXPENSE)
Rental Income 184,868 3,475
Interest Income 20,107 1,211
Interest Expense (115,193) (5,089)
Amortization of Additional Consideration
Granted for Debt (257,813) -
Loss on Sale of Assets - (449)
Miscellaneous Income 41,529 169
_________ ________
(126,502) (683)
_________ ________
LOSS BEFORE INCOME TAX EXPENSE (1,551,105) (391,486)
_________ ________
INCOME TAX (EXPENSE) BENEFIT
Current (28,328) -
_________ ________
(28,328) -
_________ ________
NET LOSS $ (1,579,433) $ (391,486)
========= ========
BASIC AND DILUTED LOSS PER SHARE $ (0.19) $ (0.05)
========= ========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 8,414,597 7,740,667
========= ========
(See notes to consolidated financial statements)
<PAGE>
Stock Stock Additional
Common Stock Warrants Options Paid-In Accumulated
Shares Amount Granted Exercisable Capital Deficit
Balance,
July 1, 1997 6,500,000 $ 6,500 $ - $ - $2,100,393 $ (345,310)
Issuance of
Common Stock
for Cash at
$1.00 per
Share
Pursuant
to Private
Offering,
July 1997 1,000,000 1,000 - - 999,000 -
Issuance of
Common Stock
for Cash at
$1.25 per
Share
Pursuant
to Private
Offering,
March 1998 600,000 600 - - 749,400 -
Issuance of
Common Stock
for Cash at
$1.25 per
Share
Pursuant to
Limited
Offering,
April to
May 1998 200,000 200 - - 249,800 -
Net Loss
for the
Year Ended
June 30, 1998 - - - - - (391,486)
Balance,
June 30,
1998 8,300,000 8,300 - - 4,098,593 (736,796)
Issuance of
Common Stock
for
Acquisition
of Skyrocket,
LLC.,
January 1999 150,000 150 - - 337,350 -
Issuance of
Common Stock
for Acquisition
of Michel Russo,
Inc.,
January 1999 100,000 100 - - 212,366 -
Issuance of
Common Stock
as
Additional
Consideration
for Debt,
February 1999 5,000 5 - - 24,683 -
Issuance of
Common Stock
for
Acquisition
of Skyrocket,
LLC., June
1999 75,000 75 - - 168,675 -
Warrants
Exercisable for
250,000 Shares
of Common Stock
at $2.00 per
Share, Issued
as Additional
Consideration
of Debt,
February 1999 - - 687,500 - - -
Stock Options
Exercisable for
210,000 Shares
of Common
Stock at $2.00
per Share for
Services
Rendered
July 1998 -
May 1999 - - - 557,813 - -
Net Loss for
the Year Ended
June 30, 1999 - - - - - (1,579,433)
Balance, _________ _____ _______ _______ _________ ___________
June 30, 1999 8,630,000 $ 8,630 $ 687,500 $557,813 $4,841,667 $(2,316,229)
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended
June 30, 1999 June 30, 1998
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,579,433) $ (391,486)
_________ ________
Adjustments to Reconcile Net
Loss to Net Cash Provided By
Operating Activities:
Depreciation and Amortization 3,633,458 61,576
Loss on Sale of Assets - 449
Adjustment for Liabilities
Acquired from Merger (11,100) -
Abandoned Projects - 8,580
Amortization of Loan Discount 284,956 -
Fair Value of Stock Options Granted 557,813 -
Decrease (Increase) in Assets:
Accounts Receivable (245,099) (76,919)
Related Party Receivable (90,165) -
Other Receivable 109,177 (126,119)
Prepaid Expenses (47,335) 12,785
Deposits (100,110) -
Increase (Decrease) in Liabilities:
Accounts Payable and Accrued Expenses 47,329 255,803
Income Taxes Payable 25,507
Producer's Fee Payable, Related Party - 300,000
Interest Payable 89,507 -
Deferred Revenue (2,593,816) 2,593,816
_________ _________
TOTAL ADJUSTMENTS 1,660,122 3,029,971
_________ _________
NET CASH PROVIDED BY OPERATING ACTIVITIES 80,689 2,638,485
_________ _________
CASH FLOWS FROM INVESTING ACTIVITIES
Cash Used to Purchase Certificate of
Deposit (27,678) -
Payment of Organization Costs - (203,975)
Miscellaneous Investments (226,491) (16,723)
Purchase of Property and Equipment (19,083) (15,285)
Purchase of Subsidiaries (20,000) -
Proceeds from Production Funding
Arrangement 7,219,391 -
Cash Used in Motion Picture
Development, Net (7,767,496) (5,579,207)
_________ ________
NET CASH USED IN INVESTING ACTIVITIES (841,357) (5,815,190)
_________ ________
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Issuance of Common Stock - 2,000,000
Proceeds from Loans 3,203,428 3,159,580
Principal Payments Made on Loans (1,940,421)
Principal Payments on Capital Lease
Obligations (1,496) (2,513,812)
_________ ________
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,261,511 2,645,768
_________ ________
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 500,843 (530,937)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF THE YEAR 629,336 1,160,273
_________ ________
CASH AND CASH EQUIVALENTS AT END OF THE
YEAR $ 1,130,179 $ 629,336
========== ========
(See notes to consolidated financial statements)
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended
June 30, 1999 June 30, 1998
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Interest Paid $ 62,768 $ 187,406
========== ========
Income Taxes Paid $ 2,821 $ -
========== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
DURING THE YEAR ENDED JUNE 30, 1999:
The Company issued 325,000 shares of common stock with a value of
$549,966 as consideration for the acquisition of subsidiaries.
The Company issued 5,000 shares of common stock as consideration for debt
issued by the Company.
The Company granted warrants exercisable for 250,000 shares of common
stock at $2.00 per share with a fair value of $687,500 as additional
consideration for debt issued by the Company.
The Company granted stock options exercisable at $2.00 per share for
210,000 shares of common stock with a fair value of $557,813 for past services
rendered.
(See notes to consolidated financial statements)
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Business and Background:
Total Film Group, Inc. ("Total"), formerly known as Executive Marketing, Inc.,
was organized under the laws of the State of Delaware on August 1, 1995. On
January 29, 1997, Executive and Total Media Corporation ('Media") completed a
share for share exchange pursuant to an Agreement and Plan of Reorganization
("Share Exchange'). For accounting purposes, the share exchange was treated
as a reverse acquisition of Executive by Media. Executive was the legal
acquirer and accordingly, the share exchange was effected by the issuance of
3,000,000 shares of common stock in exchange for all the common stock then
outstanding of Media. After the share exchange, the former stockholders of
Media held approximately 67% of the then outstanding common stock of
Executive. The purchase method of accounting was used, with Media being
treated as the acquirer for accounting purposes. The results of operations
reported in these consolidated financial statements reflect the operations of
Media prior to January 29, 1997 and reflect the combined operations of
Executive and Media subsequent to January 29, 1997. As a result of the share
exchange, Media became a wholly owned subsidiary of Executive. Subsequent to
the share exchange, Executive changed its name to Total.
Total is involved in the business of producing, marketing and distributing
commercial feature films. It primarily creates, develops and produces
feature-length, theatrical motion pictures.
Total Creative, Inc. ("TCI") is a wholly-owned subsidiary of Total which
formerly operated as Dyer Communications, Inc. TCI acquired substantially all
the assets of Skyrocket, LLC and Michel Russo, Inc. effective January 1,
1999. TCI is a graphic design boutique specializing in digital advertising,
entertainment marketing, film promotion, trade and consumer advertising and
packaging, including corporate advertising and corporate identity.
Principles of Consolidation:
The consolidated financial statements include the accounts of Total Film
Group, Inc. and its wholly owned subsidiaries: Total Radio, Inc., Total
Pictures, Inc., Total Film (UK) Ltd., Alien Sky (UK) Ltd., Total Creative,
Inc. and Sundowning, Inc. (collectively, the "Company"). All significant
intercompany balances and transactions have been eliminated upon
consolidation.
Basis of Presentation:
On January 1, 1999, the Company acquired Skyrocket, LLC and Michel Russo,
Inc., graphic arts businesses located in San Francisco and Los Angeles,
respectively. Total 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 Total, Skyrocket, LLC and Michel Russo, Inc. had
December 31 fiscal year ends.
The following table presents information about the acquisitions made by Total
in the fiscal years ending June 30, 1999 and 1998. All acquisitions were
accounted for under the purchase method of accounting.
Acquisition Purchase Goodwill Amortization
Date Price Period Goodwill
(in Years)
Skyrocket, LLC 1/99 $ 531,250 $ 701,598 15
Michel Russo, Inc. 1/99 212,467 313,540 15
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
Basis of Presentation: (Continued)
The purchase price was allocated to tangible assets and intangible assets,
including goodwill less liabilities assumed. Management is primarily
responsible for estimating the fair value of the assets and liabilities
acquired, and has conducted due diligence in determining the fair value.
Management has made estimates and assumptions that affect the reported amounts
of assets, liabilities and expenses resulting from such acquisitions. Actual
results could differ from those amounts.
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 Financial Accounting Standards No. 53 ("SFAS
53"), "Financial Reporting by Producers and Distributors of Motion Picture
Films". Amounts received in advance of the film being available are recorded
as deferred revenue.
Revenues from graphic design are generally recognized at the completion of
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 SFAS 53. 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.
Cash Equivalents:
The Company considers all short-term investments with an original maturity of
three months or less to be cash equivalents. Short-term investments included
in cash and cash equivalents for the years ended June 30, 1999 and 1998 were
$0 and $26,375, respectively.
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.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
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 1 to 7 years. Total
depreciation expense relating to property and equipment for the years ended
June 30, 1999 and 1998 were $31,189 and $10,222, respectively.
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.
Organization Costs:
Organization costs, which reflect amounts expended to organize the Company,
are amortized by the straight-line method over five years.
Amortization expense relating to organization costs was $80,348 and $51,354
for the years ended June 30, 1999 and 1998, respectively.
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 amortization for the year ended June 30,
1999 was $28,212.
Accounts Receivable:
Accounts receivable is stated net of allowance for doubtful accounts. The
allowance is based upon management's estimate of the collectibility of
accounts receivable. Management estimated the total allowance to be $12,155
and $14,365 for the years ended June 30, 1999 and 1998, respectively.
Other Assets:
The Company is in the process of acquiring a film library and a special
effects facility. Other assets is comprised of costs incurred by the Company
relating to these acquisitions. These amounts are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable.
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.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
Concentration of Credit Risk:
The Company maintains bank account balances in institutions located in
California and Puerto Rico. 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,
1999 and 1998 by $946,146 and $483,000, respectively.
Financial instruments that potentially subject the Company to credit risk
consist of accounts receivable. The Company grants credit to customers
located in its operating location, primarily California. Concentrations of
credit risk with respect to accounts receivable is somewhat limited due to the
number of customers comprising the Company's customer base and their
dispersion across different industries.
Impairment of Long-Lived Assets:
Periodically, the Company evaluates whether there has been impairment in the
carrying value of the long-lived assets, such as motion picture development
costs and property and equipment, in accordance with generally accepted
accounting principles. Management believes that the long-lived assets in the
accompanying balance sheets are recoverable.
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, 1999
was $160,789.
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 year ended June 30, 1999 since that would have an antidiluted effect
on EPS.
Fair Value of Financial Instruments:
The Company's financial instruments include cash, receivables, payables and
accrued expenses. The carrying amount of such financial instruments
approximates fair value because of the short maturity of these instruments.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
Accounting for Stock Based Compensation
As permitted under Statement of Financial Accounting Standards No. 123
("SFAS 123") "Accounting for Stock-Based Compensation", the Company uses the
intrinsic value based method of accounting as prescribed by APB Opinion No. 25
"Accounting for Stock Issued to Employees" to account for compensation expense
for its stock-based employee compensation plan.
New Accounting Pronouncements:
In April 1998, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position 98-5, Reporting on the Costs of Start-Up
Activities. Costs of start-up activities, including organization costs,
should be expensed as incurred. This SOP is effective for financial
statements for fiscal years beginning after December 15, 1998. Initial
application of this SOP should be reported as the cumulative effect of a
change in accounting principle, as described in Accounting Principles Board
Opinion No. 20, Accounting Changes. The Company is required to adopt the SOP
on its financial statements for the year ended June 30, 2000. Adoption of the
SOP will reduce the Company's total assets and net income by the amount of
unamortized organization costs. At June 30, 1999, organization costs, net of
amortization, in the Company's balance sheet was $126,784.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 101, Revenue Recognition. SAB 101 provides
guidance on revenue recognition. SAB 101 requires the following to occur
before the Company can recognize income: 1) Persuasive evidence of an
arrangement exists. 2) Delivery has occurred or services have been rendered.
3) The price is fixed or determinable. 4) Collectibility is reasonably
assured. The Company will adopt SAB 101 no later than the first quarter of
fiscal year 2001. SAB 101 is not expected to have a material impact on the
Company's consolidated balance sheet, statements of operations or cash
flows.
Reclassifications:
Certain reclassifications have been made to amounts reported in prior periods
to conform with current year presentation.
NOTE 2 - SUPPLEMENTARY FINANCIAL INFORMATION:
The acquisition of Skyrocket, LLC and Michel Russo, Inc. were accounted for by
the purchase method of accounting under Accounting Principles Board Opinion
(APB) No. 16. Accordingly, Total includes the pro forma operations of the
consolidated entity for the years ended June 30, 1999 and 1998, respectively.
Intercompany transactions for fiscal 1999 and 1998 were immaterial.
June
1999 1998
Total Revenues $ 6,586,061 $ 1,649,109
Total Operating Expenses 8,111,217 2,129,797
_________ _________
Loss From Operations (1,525,156) (480,688)
Other Income (Expense) (197,900) 48,705
Loss Before Income Tax Expense (1,723,056) (431,983)
Income Tax (Expense) (28,328) -
_________ _________
Net Loss $(1,751,384) $ (431,983)
========= =========
Basis and Diluted Loss Per Share $ (.20) $ (0.05)
NOTE 3 - REPORTABLE OPERATING SEGMENTS:
Management's Policy in Identifying Reportable Segments:
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different technology, marketing and distribution strategies.
General Information:
The Company has two reportable operating segments: motion picture films and
graphic arts. The motion picture segment engages in the production, marketing
and distribution of commercial feature films; the graphic arts segment is
involved in the development of advertising and marketing campaigns for a
variety of clients.
Segment Profit or Loss:
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.
For the Year Ended June 30, 1999
Segments
Totals Motion Pictures Graphic Arts
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 373,006 358,847 14,159
Depreciation and amortization 3,633,458 3,584,700 48,758
Segment profit (loss) (1,522,105) (890,419) (631,686)
Segment assets 9,387,462 7,934,141 1,453,321
For the Year Ended June 30, 1998
Totals Motion Pictures Graphic Arts
Revenues from external customers $ 82,329 $ - $ 82,329
Interest income 226,211 226,211 -
Interest expense 5,089 5,089 -
Depreciation and amortization 61,576 61,329 247
Segment profit (loss) (166,486) (107,224) (59,262)
Segment assets 8,933,586 8,439,263 494,323
NOTE 3 - REPORTABLE OPERATING SEGMENTS: (Continued)
Reconciliation of Segment Information to Consolidated Amounts:
Information for the Company's reportable segments relates to its consolidated
totals as follows:
For the Years Ended June 30,
1999 1998
Revenues
Total revenues for reportable segments $ 6,208,855 $ 82,329
Elimination of intersegment revenues (88,761) -
_________ _________
Total consolidated revenues $ 6,120,094 $ 82,329
========= =========
Income or Loss
Total loss for reportable segmnts $(1,522,105) $ (166,486)
Elimination of intersegment income (29,000) $ (225,000)
_________ _________
Loss before income tax $(1,551,105) $ (391,486)
========= =========
Assets
Total assets for reportable segments $ 9,387,462 $ 8,933,586
Elimination of intersegment transactions (2,933,240) (1,724,537)
_________ _________
Consolidated total $ 6,454,222 $ 7,209,049
========= =========
Major Customer Information:
Revenues from two customers of the Company's graphic arts segment represent
approximately $410,330 of the Company's consolidated revenues, for the year
ended June 30, 1999.
NOTE 4 - LOANS PAYABLE:
June 30,1999 June 30, 1998
Mercantile National Bank credit line, entered
into March 23, 1999 with monthly principal
payments of $8,333, plus interest at 8.75% per
annum. The credit line matures March 15, 2000. $ 75,000 $ -
Note payable, assumed October 1997 with
principal secured by the cash proceeds related
to the distribution of the New Swiss Family
Robinson. The interest accrues at 1% above
the bank's prime rate of interest. The
note matured July 28, 1998. - 645,768
WestAmerica Bank note payable, assumed February
1999 with monthly principal payments of $2,500
plus a variable rate of interest currently
10.25% per annum. The debt matures September
2000. 35,000 -
WestAmerica Bank note payable, assumed February
1999 with monthly principa payments of $1,637
plus a variable rate of interest currently 10.5%
per annum. The debt matures November 2000. 22,917 -
WestAmerica Bank credit line, assumed January 1999.
The interest rate is 10.75% per annum. (See Note 6.) 46,660 -
_______ _______
179,577 645,768
Less Current Portion 126,925 -
______ _______
$ 52,652 $ 645,768
======= =======
Future aggregate debt maturities are as follows:
Year Ending
June 30 Amount
2000 $ 126,925
2001 10,444
2002 2,064
2003 1,963
2004 and Therafter 38,181
_______
$ 179,577
=======
On February 11, 1999, the Company borrowed $2,000,000 with principal payable
quarterly at the rate of $375,000 beginning three months following the date of
the first advance and continuing on the same date of each quarter thereafter
until one year following the date of the first advance, at which time the
unpaid principal balance and accrued interest shall be due and payable.
Interest will accrue at a rate of 13.5% per year, payable quarterly under the
same terms as with principal.
The debt holder received as additional consideration 250,000 warrants to
purchase the Company's common stock. The fair value in excess of the exercise
price of the warrants of $687,500 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, 1999 was $429,687.
Total interest expense for these obligations for the years ended June 30, 1999
and 1998 was $95,880 and $5,089.
NOTE 5 - OBLIGATION UNDER CAPITAL LEASE:
The Company leases office equipment with lease term expiring March 2000.
This capital lease obligation has been recorded in the accompanying financial
statements at the present value of future minimum lease payments. The
capitalized cost of $5,939 is included in office equipment in the accompanying
balance sheet. Accumulated depreciation at June 30, 1999 and 1998 includes
$2,673 and $1,405, respectively, related to the capitalized cost of the office
equipment, which was acquired under lease in March 1997.
NOTE 6 - LINE OF CREDIT:
The Company has available a line of credit from WestAmerica Bank for $50,000.
The credit line bears interest annually at 10.75% with monthly payments equal
to 0.417% of the outstanding balance, but not less than $100. The line was
assumed in January 1999 and expires in April 2007. The balance outstanding on
the line at June 30, 1999 was $46,660. (See Note 4).
NOTE 7 - RELATED PARTY TRANSACTIONS:
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 has receivables totaling $90,165 from its officers. The
receivables are short term in nature, do not carry a stated rate of interest
and are callable at the Company's discretation.
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, until the film recoups its
negative costs. The agreement becomes effective as of the release date of the
film. Producer fees of $100,000 were paid by June 30, 1999.
The Company entered into a loan agreement for $2,000,000 with the Orbiter
Fund, an entity managed by a principal shareholder of Total Film Group, Inc.
The terms of the note and other information are included in Note 4 - Loans
Payable.
The Company retained for legal council the law firm of a former
director. Total remittance to this law firm from the Company was $18,800 for
the year ended June 30, 1999.
NOTE 8 - COMMITMENTS AND CONTINGENCIES:
The Company has entered into lease agreements for its office facilities,
office equipment and automobiles with terms ranging from two to five years and
monthly payments from $250 to $5,512. Future minimum lease payments are as
follows:
Year Ending
June 30, Lease Payments
2000 $104,262
2001 94,499
2002 77,213
2003 25,352
________
Total future minimum
lease payments $301,326
========
The lease agreement for the corporate office facilities calls for lease
payments to increase from $5,358 to $5,512 per month starting in March 1999.
None of the other lease agreements call for annual rental increases. Total
rental expense included in the financial statements for the years ending June
30, 1999 and 1998 was $243,011 and $73,643, respectively.
The Company entered into an Employee Loan Out Agreement with Viridian
Holdings (a Company related to the Company's chief executive officer and a
shareholder of the Company) wherein Viridian would loan the Company the
services of its President and Chairman of the Board. The Company is obligated
to pay $4,000 per month in "pass-through" salary through October 1, 1999. In
addition, the Company agreed to cover all medical expenses not covered by
insurance incurred by the President and his family. This compensation
arrangement for the Chairman is exclusive of producer fees associated with the
release of the Company's motion pictures. The agreement can be extended on a
year to year basis after the initial term has expired.
The Company is involved in various legal proceedings, which represent routine
litigation incident to the business, some of which are covered in whole or in
part by insurance. In management's opinion, none of the pending litigation
will have a material adverse effect on the Company's financial position.
On January 21, 1999, the Company entered into an agreement with legal counsel
for assistance in the formation of a new subsidiary. The subsidiary's primary
function will be the production and distribution of motion picture films. In
addition to a $30,000 retainer paid to the attorneys during the year, the
Company agreed to compensate legal counsel $300,000 plus time and expense
charges upon completion of the securities transaction. According to the
agreement, the retainer will be applied to the $300,000 liability once the
transaction is completed. At June 30, 1999, the formation of the new
subsidiary was not yet complete.
NOTE 9 - INCOME TAXES:
The Company has available at June 30, 1999 and 1998, unused operating loss
carryforwards of approximately $2,325,000 and $750,000, 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:
June 30, 1999 June 30, 1998
Deferred Tax Assets $ 790,500 $ 255,000
Deferred Tax Asset Valuation (790,500) (255,000)
_______ _______
Net Deferred Tax Assets $ - $ -
========== ========
NOTE 10 - STOCKHOLDERS' EQUITY:
Stock Option Plan:
In July 1998, the Company adopted a Non-Qualified Stock Option Plan (the
"Plan"). As of June 1999, 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.
During fiscal 1999, the Company granted non-employee directors and consultants
the option to purchase 210,000 shares of unissued Common Stock. These options
were granted for past services rendered with a fair value of $557,813. The
professional fees were charged against earnings in the current year.
Information relative to stock option activity is as follows (in thousands):
Weighted
Options Average
Available Number Aggregate Exercise
for Grant of Shares Price Price
Balance, July 1, 1998 - - $ - $ -
Share Authorized for
issuance 800 - - -
Options Granted (730) 730 1,460 2.00
Options Exercised - - - -
Options Cancelled - - - -
________ ________ ______ ________
Balance, June 30, 1999 70 730 $ 1,460 $ 2.00
________ ________ ______ ________
As of June 30, 1999, approximately 70,000 shares of Common Stock were reserved
for issuance under the Plan.
The following table summarizes information concerning currently outstanding
and exercisable options:
Options Outstanding Options Exercisable
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Outstanding Life Price Exercisable Price
Prices
$ 2.00 730,000 1.31 $ 2.00 623,332 $ 2.00
______ _________ ________ _______ _________ _________
NOTE 10 - STOCKHOLDERS' EQUITY: (Continued)
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 Company's net loss and net loss
per share would have been increased to the pro forma amounts indicated below:
Net Loss as Reported $ (1,579,433)
Proforma Net Loss (2,468,027)
Basic Net Loss per
Share as Reported (0.19)
Proforma Basic Net
Loss per Share (0.27)
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.
Expected Stock Price Volatility 66%
Risk-Free Interest Rate 6%
Expected Lives (In Years) 1.4
Using Black-Scholes option valuation model, the weighted average estimated
fair value of employee stock options granted in the year ended June 30, 1999
was $1.94.
NOTE 11 - PRODUCTION FUNDING PAYABLE:
The Company entered into an agreement with Cinerenta Gesellshaft Fur
Internationale Filmproduktion mbH & Co Zweite Medienbeteiligungs kg (the
"limited partner") and Cinesun Internationale Filmproduktions Gesellshaft mbH
& Co kg (the "producer") whereby the limited partner has agreed to contribute
up to $8,263,340 to the producer for the purposes of financing the production
and delivery of "Diamonds". Under terms of the arrangement the limited
partner willve the rights to distribute the film in Germany, Austria,
German-speaking Switzerland, Alto Adige, Liechtenstein, and German-speaking
Luxembourg. A separate distribution arrangement has been made with Miramax
whereby Miramax will have the exclusive rights to distribute the film in the
United States and English-speaking Canada. The film's collection agent will
distribute gross receipts based upon the agreement reached between the
Company, the limited partner and all profit participants. The agreement calls
for gross receipts from anywhere outside of English-speaking North America to
be allocated to the limited partner until the limited partner has recouped its
initial contribution. The agreement also specifies that all money from
English-speaking North America to be allocated to the Company until the
Company has recouped its initial contribution. Additional receipts over and
above initial contributions will be allocated towards recoupment of any monies
advanced by the completion guarantor towards completion and delivery of the
film and to the sales agents' deferred sales agency fees. Any further
receipts are to be allocated pro rata until the Company has received $100,000
and the limited partner 10% of its total contributions. The balance accruing
in the collection account shall be allocated in perpetuity as follows: 50% to
the limited partner, 33% to the Company, 15% to profit participants and 2% to
insurers. When the limited partner has recouped 130% of its contribution, the
limited partners share of gross receipts shall be reduced to 43% with the
Company's increased to 40%. At June 30, 1999, the Company owed $7,219,391
under this agreement.
NOTE 12 - SUBSEQUENT EVENTS:
Subsequent to June 30, 1999, the Company entered into three capital lease
agreements for computer and office equipment. Each capital lease obligation
will be recorded in the financial statements at the present value of future
minimum lease payments as of the lease date. Each lease term is three years
and payments are due monthly. The fair market value of the equipment will be
capitalized as property, premises and equipment and depreciated over its
estimated useful life.
<PAGE>
ASSETS
March 31, 2000
CURRENT ASSETS
Cash and Cash Equivalents $ 826,452
Time Certificate of Deposit 20,550
Accounts Receivable 813,925
Related Party Receivable 208,229
Other Receivable 46,761
Prepaid Expenses 37,751
_________
TOTAL CURRENT ASSET 1,953,668
_________
MOTION PICTURE DEVELOPMENT COSTS
New Swiss Family Robinson 5,623,933
Less: Accum Amortization New Swiss Family
Robinson 3,561,015
_________
2,062,918
Diamonds 844,261
My 1st Mister 1,634,552
Other 1,198,386
_________
TOTAL MOTION PICTURE DEVELOPMENT COSTS 5,740,117
_________
PROPERTY AND EQUIPMENT
Furniture and Fixtures 37,589
Office Equipment 472,830
Leasehold Improvements 9,029
_________
519,448
Less: Accumulated Depreciation 307,563
_________
TOTAL PROPERTY AND EQUIPMENT 211,885
_________
OTHER ASSETS
Investment in US Business Network, Inc 2,200,000
Deposits 201,516
Organization Costs, Net of Amortization -
Goodwill, Net of Amortization 936,169
Other Assets 32,714
__________
TOTAL OTHER ASSETS 3,370,399
__________
TOTAL ASSETS $ 11,276,069
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, 2000
CURRENT LIABILITIES
Short-Term Debt $ 1,000,000
Current Portion of Capital Lease 32,934
Current Portion of Long-Term Debt 20,287
Accounts Payable and Accrued Expenses 465,262
Deferred Revenue 131,000
Interest Payable 26,337
Producer's Fee Payable, Related Party 450,000
_________
TOTAL CURRENT LIABILITIES 2,125,820
_________
LONG-TERM LIABILITIES
Long-Term Debt, Net of Current Portion 1,041,005
Capital Lease, Net of Current Portion 73,982
_________
TOTAL LONG-TERM LIABILITIES 1,114,987
_________
TOTAL LIABILITIES 3,240,807
_________
MINORITY INTEREST IN EQUITY OF CONSOLIDATED
SUBSIDIARY 1,000,000
_________
STOCKHOLDERS' EQUITY
Common Stock, $0.001 Par Value; Authorized 50,000,000
Shares; Issued and Outstanding 11,977,299 and 8,555,000
Shares Respectively 11,977
Additional Paid-in Capital 16,573,518
Accumulated Deficit (9,550,233)
_________
TOTAL STOCKHOLDERS' EQUITY 7,035,262
__________
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 11,276,069
==========
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
2000 1999
REVENUE
Movie Release Income $ 85,331 4,373,744
Design Fees 2,236,398 748,386
_________ _________
2,321,729 5,122,130
_________ _________
OPERATING EXPENSES
Administrative Expenses 2,092,391 1,523,266
Depreciation and Amortization 97,845 102,299
Amortization of Motion Picture Costs 67,306 3,454,755
Production and Design Costs 1,679,429 875,720
_________ _________
3,936,971 5,956,040
_________ _______
LOSS FROM OPERATIONS (1,615,242) (833,910)
_________ _________
OTHER INCOME (EXPENSE)
Interest Income 4,758 13,081
Interest Expense (335,063) (127,142)
Amortization of Placement Fee (506,446) -
Loan Fees (184,860) -
Miscellaneous Income 73,312 11,234
_________ _________
(948,299) (102,827)
_________ _________
LOSS BEFORE EXTRAORDINARY ITEM AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (2,563,541) (278,247)
EXTRAORDINARY ITEM
Loss on Early Extinguishment of Debt (4,543,679) -
_________ _________
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (7,107,220) (278,247)
Cumulative Effect for Adopting New
Pronounceent on the Amortization
of Organization Costs (126,784) -
_________ _________
NET LOSS $ (7,234,004) (278,247)
========= =========
PER SHARE AMOUNTS - BASIC
Loss Before Extraordinay Item and
Cumulative Effect of Change in
Accounting Principle $ (0.29) (0.03)
_________ _________
Loss on Early Extinguishment of
Short-Term Debt (.51) -
_________ _________
Cumulative Effect on Prior Years of
Changing Organization Costs
Amortization Method (.02) -
_________ _________
Net Loss $ (.82) (0.03)
========= =========
PROFORMA AMOUNTS ASSUMING THE NEW AMORTIZATION
METHOD IS APPLIED RETROACTIVELY - LOSS PER
SHARE
Net Loss $ (.80) (0.02)
========= =========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 8,872,191 8,555,000
========= =========
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIOD ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (7,234,004) (278,247)
_________ _________
Extraordinary Loss on Retirement of
Debt 4,543,679 -
Cumlative Effect of Accounting Change 126,784 -
_________ _________
Loss from Continuing Operations (2,563,541) (278,247)
Adjustments to Reconcile Net Loss
to Net Cash Provided By (Used in)
Operating Activities:
Fair Value of Equity Granted 479,784 -
Depreciation and Amortization 165,151 3,557,054
Amortization of Additional
Consideration 506,446 83,253
Decrease (Increase) in Assets:
Accounts Receivable (390,512) (63,363)
Related Party Receivable (118,064) -
Other Receivable (16,761) 72,772
Prepaid Expenses 12,806 (20,702)
Deposits (85,330) (191,460)
Increase (Decrease) in Liabilities:
Accounts Payable and Accrued Expenses (69,061) (241,472)
Interest Payable (63,170) 22,995
Deferred Revenue 131,000 (2,593,816)
_________ _________
TOTAL ADJUSTMENTS 552,289 625,261
_________ _________
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES (2,011,252) 347,014
_________ _________
CASH FLOWS FROM INVESTING ACTIVITIES
Cash Proceeds from the Redemption of
Certificate of Deposit 7,128 -
Cash Proceeds from the Sale of Interest
in Subsidiary 2,000,000 -
Cash Used to Purchase Investment in US
Business Network, Inc. (2,200,000) -
Other Assets 6,883 (148,871)
Purchase of Property and Equipment (15,536) (13,675)
Purchase of Subsidiaries (5,000) (20,000)
Prodeeds from Production Funding
Arrangement 2,881,004 7,219,391
Cash Used in Motion Picture Development (5,020,638) (7,178,729)
_________ _________
NET CASH (USED) BY INVESTING ACTIVITIES (2,346,159) (141,884)
_________ _________
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Loans 4,000,000 3,203,428
Proceeds from the Issuance of Stock
Warrants 200,000 -
Principal Payments Made on Loans (118,285) (1,648,394)
Principal Payments on Capital Lease
Obligations (28,031) (1,360)
_________ _________
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,053,684 1,553,674
_________ _________
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (303,727) 1,758,804
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE
PERIOD 1,130,179 629,336
_________ _________
CASH AND CASH EQUIVALENTS AT END OF THE
PERIOD $ 826,452 2,388,140
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Interest Paid $ 222,061 5,641
========= =========
Income Taxes Paid $ 18,879 800
========= =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES
DURING THE NINE MONTH PERIOD ENDED
MARCH 31, 2000
The Company issued 250,000 shares of common stock with a value of
$291,417 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 Company debt.
The Company issued 26,667 shares of common stock with a value of
$66,640 as additional consideration for services rendered in connection with
the extinguishment of Company debt.
The Company granted stock warrants for 450,000 shares of common
stock with exercise prices ranging from $2.00 to $5.54 per share for past
services rendered.
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