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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-SB/A-3
Post-Effective Amendment No. 3
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS UNDER SECTION 12(b)
OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
TOTAL FILM GROUP, INC.
(Exact name of Registrant as specified in charter)
DELAWARE 13-3851302
State or other jurisdiction of I.R.S. Employer I.D. No.
incorporation or organization
9107 WILSHIRE BOULEVARD, SUITE 475, BEVERLY HILLS, CA 90210
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (310) 275-8404
Securities to be registered pursuant to Section 12(b) of the Act: None
Securities to be registered pursuant to Section 12(g) of the Act:
Title of each class
COMMON STOCK
PAR VALUE $.001
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I
PAGE
<S> <C>
Item 1. Description of Business...........................................................3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...............................................18
Item 3. Description of Property..........................................................25
Item 4. Security Ownership of Certain Beneficial Owners and Management...................25
Item 5. Directors, Executive Officers, Promoters and Control Persons.....................27
Item 6. Executive Compensation...........................................................29
Item 7. Certain Relationships and Related Transactions...................................33
Item 8. Description of Securities........................................................36
PART II
Item 1. Market Price of and Dividends on the Registrant's Common equity and
Other Shareholder Matters...............................................37
Item 2. Legal Proceedings................................................................40
Item 3. Changes in and Disagreements with Accountants....................................40
Item 4. Recent Sales of Unregistered Securities..........................................41
Item 5. Indemnification of Directors and Officers........................................48
PART F/S..................................................................................48
PART III..................................................................................84
</TABLE>
FORWARD LOOKING STATEMENTS
This registration statement contains statements that plan for or
anticipate the future. Forward-looking statements include statements about the
future of operations involving the film and advertising industry, statements
about our future business plans and strategies, and most other statements that
are not historical in nature. In this registration statement forward-looking
statements are generally identified by the words "anticipate," "plan,"
"believe," "expect," "estimate," and the like. Although we believe that any
forward-looking statements we make in this registration statement are
reasonable, because forward-looking statements involve future risks and
uncertainties, there are factors that could cause actual results to differ
materially from those expressed or implied. For example, a few of the
uncertainties that could affect the accuracy of forward-looking statements,
include the following:
- Films released by the Company may not be critically or
financially successful.
- Funding for producing films may not be available.
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In light of the significant uncertainties inherent in the
forward-looking statements made in this registration statement, particularly in
view of our early stage of operations, the inclusion of this information should
not be regarded as a representation by us or any other person that our
objectives and plans will be achieved.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
HISTORY AND ORGANIZATION
Total Film Group, Inc. (the "Company") was incorporated under the laws
of the State of Delaware on August 1, 1995. The Company was originally
incorporated under the name "Executive Marketing, Inc." On February 5, 1997, the
Company changed its name to "Total Film Group, Inc." The Company is also
qualified to do business in the State of California.
Set forth below is a chart showing the Company and its subsidiaries and
the percentage interest in each:
<TABLE>
<CAPTION>
Percent
Parent Company Subsidiary Owned
-------------- ---------- -----
<S> <C> <C>
Total Film Group, Inc. Alien Sky UK Ltd. 100%
Alma Productions UK Ltd 100%
Sundowning, Inc. 100%
Total China, Inc. 50.004%
Total China II, Inc. 100%
Total Creative, Inc. 100%
Total Films UK Ltd 100%
Total Media, Inc. 100%
Total Pictures, Inc. 100%
1st Mr., Inc. 100%
None of our subsidiaries own any subsidiaries.
</TABLE>
In January 1997 the Company entered into an agreement with Total Media
Corporation, a Nevada corporation, to exchange all of the issued and outstanding
shares of such entity for 3,000,000 shares of common stock of the Company. The
Agreement and Plan of Reorganization was closed by the parties on or about
February 4, 1997. As a result of the closing the Company issued 3,000,000
shares, representing approximately 67% of the outstanding stock at closing, to
the shareholders of the Nevada corporation. Mr. Green and his affiliates
received 1,250,000 of such shares. Also as a result of the closing new directors
of the Company were appointed. Messrs. Green, Boyer, and Pacheco were appointed
as new directors. Prior to closing, on January 27, 1997, the Company declared a
stock dividend of one share of common stock of the Company for each two shares
of common stock of the Company outstanding to the shareholders
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of record as of the close of business on January 27, 1997. The payment and
delivery date for such dividend was January 31, 1997.
In February 1998, the Company incorporated a wholly owned subsidiary,
Total Design, Inc., a California corporation engaged in providing marketing and
advertising services. Total Design, Inc. changed its name to "Dyer
Communications, Inc." on May 26, 1998. Effective January 1999 the Company
acquired all of the outstanding stock of Michel/Russo, Inc., a California
corporation engaged in marketing and advertising for 100,000 shares of common
stock of the Company issued to the two shareholders of Michael/Russo. On March
5, 1999, Dyer Communications, Inc. changed its name to "Total Creative, Inc."
Also effective January 1999 Total Creative, Inc. and the Company acquired all of
the interest in Skyrocket, LLC, a California limited liability company engaged
in web development, e-commerce, and digital advertising for a total of 225,000
shares and $25,000. All of the assets, liabilities, and operations of Skyrocket
were transferred to Total Creative, Inc. immediately subsequent to the
acquisition effective January 1999. All of the operations of Michel/Russo, Inc.
were transferred to Total Creative, Inc. subsequent to the acquisition effective
January 1999 and the ownership of Michel/Russo, Inc. was assigned to Total
Creative, Inc. in March 2000.
In February 1999 the Company borrowed $2,000,000 from The Orbiter Fund,
an entity managed by one of the principal shareholders of the Company. (See
"Certain Relationships and Related Transactions.") As additional consideration
for the loan, the Company issued 250,000 three-year warrants to the fund,
exercisable at $2.00 per share. In August 1999 the Company negotiated an
extension of the initial payment of principal in return for which the Company
issued 250,000 shares to the lender. On February 28, 2000, The Orbiter Fund
assigned the note to Lancer Offshore, Inc. and Lancer Partners, L.P. In
September 1999 the Company borrowed an additional $1,800,000 from Lancer
Offshore, Inc., an entity managed by the same principal shareholder of the
Company, and $200,000 from others. (See "Certain Relationships and Related
Transactions.") As additional consideration for the loan, the Company issued a
total of 250,000 shares pro rata to the lenders. The Company also paid a
consulting fee of $140,000 and issued warrants to purchase 100,000 shares of
common stock to Capital Research Ltd. In February 2000 the parties to the loans
agreed to amend the conversion price to $1.50 per share and to convert the
principal amount of the loans into 2,666,667 shares of common stock and to
convert the $376,100 in past due interest into 270,000 shares at the rate of
$1.39 per share. The Company also agreed to pay a consulting fee of $40,000 and
26,667 shares of common stock to Capital Research Ltd. The consulting fees paid
to Capital Research Ltd. were done so pursuant to a consulting agreement between
the Company and such entity.
In September 1999 the Company entered into a consulting agreement with
Capital Research Ltd. The consulting agreement provides that Capital Research
will assist the Company in the following areas:
- reviewing the financial condition of the Company;
- developing a capital formation plan;
- locating market makers for the Company's stock;
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- 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 December 1, 2000, the
Company had issued a total of 325,000 warrants and 51,657 shares, and had paid
$131,500 to Capital Research as compensation pursuant to the agreement.
On October 20, 1999, the Company incorporated Total China, Inc., a
Delaware corporation, as a subsidiary. This entity was formed to act as a
holding company to acquire 20% of the capital stock of MeetChina.com, Inc.,
formerly known as US Business Network, Inc., a Delaware corporation, which has
intellectual property rights to the business-to-business e-commerce portal, Meet
China.com, and is engaged directly through a subsidiary in promoting imports and
exports to and from China through the Internet and providing ancillary services
related thereto. In November 1999, Total China, Inc. and the Company conducted a
joint private offering to raise funds for the transaction with MeetChina.com,
Inc. Total China, Inc. sold 30 units in the private offering. Each unit
consisted of 1.6666 shares of common stock of Total China, Inc. and was sold for
$66,667 per unit. As a part of the same private offering, the Company sold 30
units, with each unit consisting of three-year warrants to purchase 6,667 shares
of the Company's common stock at an exercise price of $3.75 per share. The units
were sold by the Company for approximately $6,666.67 each, or $1.00 per warrant.
Each warrant holder was granted registration rights, and a right of first
refusal to purchase a pro rata amount of the assets of Total China, Inc.
Investors were required to purchase both the Total China, Inc. and the Company
units in the offering. Total China, Inc. realized gross proceeds of $2,000,000
and the Company realized gross proceeds of $200,000. Also in connection with
this private offering, the Company issued warrants to purchase 200,000 shares of
common stock to JBRG Consultants as a commission for introducing potential
investors to the Company. The proceeds to the Company were allocated to pay the
costs of the offering, and the proceeds to Total China, Inc. were used to
purchase shares of common stock of MeetChina.com, Inc., which shares ultimately
represented 17.58% of the issued and outstanding capital stock of such
corporation at closing. This reduction in percentage ownership was a result of
an increased valuation of MeetChina.com, Inc. As a result of this offering, the
Company now owns slightly in excess of 50% of the outstanding stock of Total
China, Inc.
On or about December 16, 1999, the Company and Total China, Inc.
jointly entered into a stock purchase agreement with MeetChina.com, Inc. On
December 17, 1999, the Company and
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Total China, Inc. finalized the agreement with MeetChina.com, Inc., and the
stock of MeetChina.com, Inc. was issued to Total China, Inc. Because of
subsequent financings by MeetChina.com, Inc., at May 31, 2000, Total China, Inc.
owned approximately 11.9% of the outstanding stock of such entity.
MeetChina.com, Inc. has the option under the agreement to acquire approximately
5% of the shares purchased by Total China, Inc. at a cash price of two-thirds of
the market value of such shares. Such right is only exercisable on the 120th day
after an initial public offering of capital stock by MeetChina.com, Inc. on a
designated exchange. Until the stock of MeetChina.com, Inc. is listed on a
designated exchange, the Company and Total China, Inc. have the right, jointly,
to designate one representative to attend meetings of the board of directors of
MeetChina.com, Inc. Total China, Inc. has the right of first refusal to purchase
any shares to be sold or issued by MeetChina.com, Inc. at less than the price
paid by Total China, Inc. Total China, Inc. also has piggy-back registration
rights to register its shares in any appropriate registration statement filed by
MeetChina.com, Inc. with the U.S. Securities and Exchange Commission after the
initial public offering and which includes shares of the founders of
MeetChina.com, Inc.
On November 2, 1999, the Company incorporated Total Group, Inc., a
Delaware corporation, as a wholly-owned subsidiary. Originally formed as a shell
corporation, this entity was used to acquire an equity interest in
MeetChina.com, Inc. On November 15, 1999 Total Group, Inc. changed its name to
Total China II, Inc. The Company owns all of the outstanding common stock of
Total China II, Inc. and 5% of the outstanding preferred stock.
On May 23, 2000, Total China II, Inc. and the Company conducted a joint
private offering to raise funds for the transaction with MeetChina.com, Inc. The
offering was terminated in July 2000. Total China II, Inc. sold 73.86 units in
the private offering. Each unit consisted of 10,000 shares of preferred stock of
China II and 10,000 shares of the Company's common stock. The units sold for
$50,000 per unit. The total gross proceeds of the joint private offering were
$3,693,000. Total China II, Inc. realized gross proceeds of $2,215,800 and the
Company realized gross proceeds of $1,477,200. The Company's proceeds of the
offering will be used for general working capital and the proceeds to Total
China II, Inc. were used to purchase shares of preferred stock in MeetChina.com,
Inc. An investment of $2,000,000 (106,689 shares) was made in MeetChina.com. In
connection with this private offering, a cash fee of $369,300 was paid to JL
Devore & Associates as a commission to structure and administer the private
offering. Of the total fee, Total China II, Inc. paid $221,580 and the Company
paid $147,720. In addition to the cash fee, JL Devore & Associates was issued
50,000 shares of the Company's common stock as compensation for services.
In August 2000 the Company borrowed $1,000,000 for working capital from
Michael Lauer, and from Lancer Partners and Viator Fund, entities controlled by
Michael Lauer, one of our principal shareholders. The Company has executed a
term sheet outlining the terms of the loan. The term sheet provides that the
loan will bear interest at 12% per annum, payable quarterly, and that the loan
will be due May 15, 2001. The Company will be obligated to repay the loan out of
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proceeds of any financing greater than $3,000,000. The loan will be convertible
at $3.00 per share, provided that the conversion price will be reduced to $1.50
for the ninety day period following the due date, and to $1.00 per share
thereafter, if the loan remains unpaid. The shares will have one demand and
piggyback registration rights. The Company also transferred 30,000 shares of
MeetChina.com pro rata to the lenders as additional consideration for the loan.
The Company has also paid a consulting fee of $70,000, and have issued five-year
warrants to purchase 100,000 shares at $3.50 per share, to Capital Research Ltd.
in connection with the loan.
In November 2000 the Company borrowed $525,000 for working capital from
Lancer Offshore and The Viator Fund, entities controlled by Michael Lauer, one
of our principal shareholders. The Company has executed a term sheet outlining
the terms of the loan. The term sheet provides that the loan will bear interest
at 12% per annum, payable quarterly, and that the loan will be due August 14,
2001. The Company will be obligated to repay the loan out of proceeds of any
financing greater than $3,000,000. The loan will be convertible at $2.00 per
share, provided that the conversion price will be reduced to $1.50 after nine
months from the issuance of the note, and $1.00 per share ninety days
thereafter, if the loan remains unpaid. The shares will have one demand and
piggyback registration rights. The Company has also paid a consulting fee of
$36,750, and have issued five-year warrants to purchase 50,000 shares at $3.00
per share, to Capital Research Ltd. in connection with the loan.
The Company's business is divided into three segments: the film
production business, the advertising and marketing business, and as a holding
company. The film production segment is engaged in the production, marketing,
and distribution of commercial feature films. The advertising and marketing
segment is engaged in the development of advertising and marketing campaigns to
provide Internet services for a variety of clients and the Company. The Company
also holds the stock of two subsidiaries as a holding company, Total China, Inc.
and Total China II, Inc., which in turn own stock of MeetChina.com, Inc., an
Internet related business.
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 domestically in a limited
number of 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 1998 and is scheduled for release
in 2001.
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In November 1999 the Company entered into an oral arrangement with
Paramount Classics, a division of Paramount Picture Corporation, for the
marketing and distribution of four feature films. The Company has produced two
of the films under this arrangement, MY FIRST MISTER and BRIDE OF THE WIND. The
Company anticipates that similar arrangements will be made with Paramount
Classics on the next two films, but there is no binding agreement to enforce
such arrangement.
The following is a list of the Company's wholly owned subsidiaries used
in the film business, the jurisdiction of incorporation, and the film associated
with such subsidiary:
<TABLE>
<CAPTION>
Subsidiary Jurisdiction Film
---------- ------------ ----
<S> <C> <C>
Total Films UK Ltd. United Kingdom THE NEW SWISS FAMILY ROBINSON
Alma Production UK Ltd. United Kingdom BRIDE OF THE WIND (a.k.a. ALMA)
Sundowning, Inc. Nevada DIAMONDS
1st Mister, Inc. California MY FIRST MISTER
</TABLE>
The Company has also incorporated Total Pictures, Inc., a California
corporation, to act as signatory for transactions with the Writers' Guild. All
future screen plays developed by the Company will be assigned to this entity.
The Company has acquired an option to purchase a film library which, if
purchased, will become part of this entity.
THE UNITED STATES MOTION PICTURE INDUSTRY
The current motion picture industry in the United States includes the
production and theatrical or television screening of feature-length motion
pictures and the subsequent distribution of such pictures in home video and
ancillary markets. The industry is dominated by the major studios -- some of
which have divisions which are promoted as "independent" distributors of motion
pictures -- including Universal Pictures, Warner Brothers (including Turner
Pictures, New Line Cinema and Castle Rock Entertainment), Twentieth Century Fox,
Sony Pictures Entertainment (including Columbia Pictures and Tristar Pictures),
Paramount Pictures, The Walt Disney Company (including Buena Vista, Touchstone
and Miramax) and MGM (including Metro Goldwyn Mayer Pictures, United Artists
Pictures, Orion Pictures and Goldwyn Entertainment Company). These "majors" have
traditionally produced and distributed the majority of theatrical motion
pictures, and made-for-TV movies, released annually in the United States. In
recent years, however, independent motion picture production companies have
played an important role in the production of motion pictures for the worldwide
feature film and made-for-TV markets. There are also a large number of smaller
production companies, such as the Company, and other entities that produce
theatrical motion pictures and made-for-TV movies.
The "majors" generally own their production studios and have national
or worldwide distribution organizations. Major studios typically release films
with direct production costs generally ranging from approximately $40 million to
$100 million or more, and provide a
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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.
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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. The Company
obtained financing through the Lewis W. Horwitz Organization, which is a
division of Southern Pacific Bank, for MY FIRST MISTER. The Organization
committed $2,050,000 as gap financing for the film. At September 30, 2000, the
Company had borrowed $1,804,387 from that arrangement. The funds will be repaid
from the international distribution rights to the motion picture. The funds were
borrowed at the prime rate plus one and a quarter percent. The due date of the
loan is April 30, 2001.
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
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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
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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,
<PAGE>
Page 13
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.
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.
<PAGE>
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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 aired
the film a second time on July 23, 2000, thereby extinguishing its exclusive
domestic television rights to the film. The domestic television rights have
reverted to the Company. The film is scheduled to be released on video during
2001.
During 1998 the Company completed production of CHICK FLICK. The film
was a very low budget picture that was financed entirely by the Company. CHICK
FLICK is scheduled for release in 2001.
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. The film has completed its domestic run and is currently available on
video.
MY FIRST MISTER was filmed on location in Los Angeles in early 2000.
The film is now complete and stars an ensemble cast led by Albert Brooks, Lee
Lee Sobieski, John Goodman, Carol Kane and Mary Kay Place. The film was directed
by Christine Lahti, who won an Academy Award for her short film LIEBERMAN IN
LOVE. The screenplay is by Jill Franklyn. The film was produced by Carol Baum
and Jane Goldenring. The executive producer was Gerald Green through the
Company's subsidiary, 1st Mr. Inc. The film is scheduled to be released by late
2000 or early 2001. Domestic distribution will be handled by Paramount Classics,
while foreign territories are being sold by Mario Kassar and his C-2
Productions.
BRIDE OF THE WIND is being produced through the Company's wholly owned
subsidiary, Alma Productions UK Ltd, in the Great Britain and is a UK/German
co-production. Directed by Bruce Beresford, the screenplay is by Marilyn Levy.
The film, produced by Lawrence Levy & Evzen Kolar, and executive produced by
Gerald Green, was filmed on location in Vienna and is now being edited in
London. The film is anticipated to be ready for release in 2001. Domestic
<PAGE>
Page 15
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
<PAGE>
Page 16
hires line producers whose sole responsibility is to keep the
film within its established logistics and budget.
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
<PAGE>
Page 17
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 Company has also borrowed $2,500,000 to launch the proposed film
project featuring the 'N Sync singing group. The funds were borrowed in April
2000 and were evidenced by promissory notes to the investors. The notes were
without interest, but carried a premium equal to 30% of the principal. In
addition, the investors will receive 6% of the adjusted gross proceeds from the
picture in any and all media, including ancillary rights. The notes are secured
by the producer's interest in the picture. The notes were originally due August
15, 2000, but were extended until November 13, 2000. For such extension, the
Company agreed to issue 166,667 shares to the investors on August 15, 2000,
September 15, 2000, and October 15, 2000. The notes were further extended until
December 31, 2000. For such extension, the Company issued 350,000 shares to the
lenders. The Company also paid a fee to Capital Research of 25,000 shares.
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 ADVERTISING AND MARKETING BUSINESS
Total Creative, Inc. ("TCI") is engaged in web design and development,
digital advertising and other traditional advertising and marketing related
services in the marketing business. In order to maximize its competitive
potential, TCI operates three business units, each focusing on different segment
of the industry: 1) a graphic design studio, directed at the entertainment
industry; 2) a general advertising agency that creates print and broadcast
advertising for consumer and business-to-business marketers; and 3) an Internet
services company, which develops and creates web sites and e-commerce solutions.
TCI has offices in Los Angeles.
<PAGE>
Page 18
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 Tourism Authority of Thailand, KPMG, Eastman Kodak, and MGM Home
Entertainment. Since the formation of TCI in March 1999, the Company's strategy
has been to enhance TCI's brand awareness and market position including
aggressive new business development efforts and negotiation of guaranteed
production contracts with key film clients. TCI also supplies the Company with
the marketing and creative advertising campaign work required for its films
produced "in house," including MY FIRST MISTER and BRIDE OF THE WIND (aka ALMA).
Revenues from three customers of this segment represented approximately
$1,069,852 or 33.3% of the Company's consolidated revenues for the year ended
June 30, 2000.
EMPLOYEES
At December 1, 2000, the Company and its subsidiaries employed 29
persons on a full-time basis. In the film production segment, two are in
executive positions, two are administrative, and one is clerical. In addition,
the Company has several free-lance production personnel working on various film
productions. In the advertising and marketing business, three are in executive
positions, sixteen are employed in operations, and two are clerical. The holding
company segment does not have any employees. The Company provides to its
employees, optionally, medical, dental, and life insurance. In some of its
segments, the Company also provides to its employees a 401K plan.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company's business is divided into three segments: (i) the film
production business; (ii) the advertising and marketing business; and (iii) as a
holding company of the stock of an internet related business. The Company
generates revenues from the film production business through movie release
income. This income is defined as the revenues collected from the exploitation
of motion picture releases in the following domestic and international markets:
domestic theatrical, domestic home video, domestic television and sales to
foreign distributors. The Company generates revenues from the advertising and
marketing business from the sale of media design, advertising, and Internet
business consulting services. The holding company is engaged to hold the stock
of MeetChina.com, an internet related business.
The consolidated financial statements at June 30, 2000, include the
accounts of Total Film Group, Inc. and its subsidiaries: Total Creative, Inc.
("TCI"), Total China,
<PAGE>
Page 19
Inc., Total China II, Inc., Total Films UK Limited, Alien Sky UK Ltd.,
Sundowning, Inc., 1st Mister, Inc., and Alma Productions UK Ltd. (collectively,
the "Company"). All significant intercompany balances and transactions have been
eliminated upon consolidation.
The Company's revenues and results of operations are significantly
affected by accounting policies required for the industries in which it
operates. Among the more significant policies are the following:
REVENUE RECOGNITION: Revenues from distribution or releasing agreements
are recognized when the film is released and certain other conditions are met in
accordance with Statement of Position 00-2 ("SOP 00-2"), "Accounting by
Producers and Distributors of Films." Amounts received in advance of the film
being available for release are recorded on the balance sheet as deferred
revenue. This revenue recognition method may result in significant fluctuations
in revenues and net earnings (losses) from period to period. Revenues from Total
Creative, Inc. (TCI) are generally recognized at the completion of job
production. Revenue for long-term contracts is recognized on the
percentage-of-completion method.
MOTION PICTURE DEVELOPMENT COSTS AND AMORTIZATION: Motion picture
development costs represent those costs incurred in the production, acquisition
and distribution of motion pictures, which include production costs, legal
expenses, interest and overhead costs. These costs have been capitalized in
accordance with SOP 00-2. The Company is amortizing the film costs for completed
films using the individual-film-forecast-computation method, whereby expense is
recognized in the proportion that current year revenues bear to management's
estimate of ultimate revenue from all markets. Motion picture development costs
are valued at lower of unamortized cost or estimated net realizable value.
Revenue and cost forecasts for films are 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.
SEASONALITY
The Company's businesses are subject to the effects of seasonality.
Consequently, the operating results for the quarter ended September 30, 2000,
for each business segment, and for the Company as a whole, are not necessarily
indicative of results to be expected for the full year.
Movie release revenues fluctuate based upon the timing of theatrical
motion picture and home video releases and seasonal consumer purchasing
behavior. Release dates for theatrical and home video products are determined by
several factors, including timing of vacation and holiday periods and
competition in the market.
Design fees are influenced by vendor demand and the seasonal nature of
the marketing and advertising services provided by the Company and generally
peak in the spring and summer.
<PAGE>
Page 20
RESULTS OF OPERATIONS
COMPARISON OF FISCAL YEARS ENDED JUNE 30, 2000 AND 1999
The Company's operating revenues for the fiscal year ended June 30,
2000, were $3,205,892, a decrease of $2,914,202 or 47.6% from operating revenues
of $6,120,094 in the prior fiscal year ended June 30, 1999. This decrease
resulted primarily from a reduction in movie release income, which was $131,656
at June 30, 2000, as compared with $4,429,388 at June 30, 1999. Movie release
income for the fiscal year ended June 30, 1999, reflects the revenue from the
Company's film, THE NEW SWISS FAMILY ROBINSON. This movie was filmed during the
1997/1998 fiscal year and broadcast on ABC Television Network in January 1999.
The Company's operating revenues generated by TCI for the fiscal year
ended June 30, 2000, were $3,074,236, an increase of $1,383,530 or 81.8% from
operating revenues of $1,690,706 in the prior fiscal year ended June 30, 1999.
The year ended June 30, 2000, reflects the first complete fiscal year of
operations for TCI after the company reorganized its management and professional
staffing structure and refocused its business strategy from that of a graphic
design boutique to its current strategy as an Internet services agency.
Operating expenses include amortization of motion picture development
costs. Operating expenses exclusive of amortization of motion picture
development costs were $3,822,169 during the fiscal year ended June 30, 2000, as
compared to $3,487,878 during the fiscal year ended June 30, 1999. This increase
of $334,291 in operating expenses is due principally to an increase in TCI's
administrative expenses as a fully operational division of the Company.
Interest expense for the fiscal year ended June 30, 2000, was
$1,169,115 as compared to $143,353 during the fiscal year ended June 30, 1999.
The increase was due to increased borrowings carried for longer terms. Total
indebtedness for borrowed money increased to $5,817,849 for the fiscal year
ended June 30, 2000, from $2,179,577 during the fiscal year ended June 30, 1999.
Amortization of placement fee during the fiscal year ended June 30,
2000 was $1,054,021 as compared to $257,813 during the fiscal year ended June
30, 1999. This expense is directly related to the Company's borrowings with The
Orbiter Fund and The Lancer Group.
For the fiscal year ended June 30, 2000, the Company's balance sheet
reflected goodwill (net of amortization) equal to $282,186 as compared to
$986,926 during the fiscal year ended June 30, 1999. The goodwill arises from
the net deficit assumed by the Company in the Michel/Russo Inc. acquisition as
well as the value of stock options granted in connection therewith. At June 30,
2000, the goodwill associated with the purchase of Skyrocket, LLC was determined
to be impaired as operations ceased immediately following the balance sheet
date. The unamortized balance of $637,063 was expensed for the year ending June
30, 2000.
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Page 21
The Company reported a net loss of $(10,104,268) for the fiscal year
ended June 30, 2000, as compared to a net loss of $(1,044,483) for the fiscal
year ended June 30, 1999. During this fiscal year, the Company recognized a loss
on the early extinguishment of short-term debt. The extraordinary item
represents $(4,553,982) or 45.1% of the fiscal year's net loss. The weighted
average number of common shares outstanding for the compared periods were
9,061,332 in fiscal year 1999/2000 and 8,414,597 in fiscal year 1998/1999.
COMPARISON OF THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
Table 1
<TABLE>
<CAPTION>
Three Months Ended September 30,
------------------------------------------------------------
(unaudited)
2000 1999 % Change
------------------- ------------------- -----------
<S> <C> <C> <C>
REVENUE
Film Production Income $ 311,511 $ - N/A
Advertising and Marketing Fees 249,056 556,542 (55)%
------------------- -------------------
560,567 556,542 1%
------------------- -------------------
OPERATING EXPENSES
Production and Design Costs 196,608 443,297 (56)%
Selling, General & Administrative Expenses 1,323,775 472,363 180%
Depreciation and Amortization 17,602 49,043 (64)%
------------------- -------------------
1,537,985 964,702 59%
------------------- -------------------
LOSS FROM OPERATIONS (977,418) (408,160) 139%
------------------- -------------------
OTHER INCOME (EXPENSE)
Interest Income 12,160 289 4108%
Interest Expense (362,203) (99,036) 266%
Amortization of Placement Fee (822,866) (210,337) 291%
Miscellaneous Income 1,063 18,344 (94)%
------------------- -------------------
(1,171,846) (290,740) 303%
------------------- -------------------
NET LOSS $ (2,149,263) $ (698,900) 208%
=================== ===================
BASIC LOSS PER SHARE $ (0.17) $ (0.08) (113)%
=================== ===================
</TABLE>
Net loss and basic loss per share for the quarter increased by 208% and
117% to ($2,149,263) and ($.17), respectively. These increases were driven by
the Company's need for additional financing and exploitation costs associated
with marketing the Company's film library. Interest expense increased due to
higher average debt balances in the current year. Amortization of placement fees
increased due to the Company's lenders requiring a supplemental fee in order to
obtain or extend our debt obligations. The Company incurred over $300,000 of
marketing and advertising costs for its motion picture DIAMONDS which was
released on video
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Page 22
during the current quarter. The increase in film production revenue was offset
by a decrease in advertising revenues.
In early July 2000, the Company completed its joint private offering in
Total China II to raise funds for the purchase of shares in MeetChina.com. The
offering which began May 2000, raised $3,693,000 of which Total China II
realized gross proceeds of $2,215,000 and the Company realized gross proceeds of
$1,477,200. Of the total proceeds raised, the Company received $42,107 in the
current quarter with the difference received in the last quarter of the fiscal
year ended June 30, 2000. The Company's proceeds of the offering were used for
general working capital and the proceeds to Total China II were used to purchase
shares in MeetChina.com. In the current quarter Total China II used previously
received funds from the private placement to purchase $253,910 of equity
securities in MeetChina.com. In connection with this private offering, a cash
fee of $369,000 was paid in the previous year as a commission to the
administrator of the placement. In addition to the cash fee the administrator
was issued 50,000 shares of the Company's common stock in June 2000 as
compensation for their services.
BUSINESS SEGMENT RESULTS
Table 2
<TABLE>
<CAPTION>
Three Months Ended September 30,
-------------------------------------------------------------
(unaudited)
2000 1999 % Change
------------------- ------------------- ------------
<S> <C> <C> <C>
REVENUE
Film Production $ 311,511 $ - N/A
Advertising and Marketing 249,056 556,542 (55)%
------------------- -------------------
560,567 556,542 1%
------------------- -------------------
OPERATING EXPENSES
Film Production 883,258 135,549 552%
Advertising and Marketing 654,727 829,153 (21)%
------------------- -------------------
1,537,985 964,702 59%
------------------- -------------------
LOSS FROM OPERATIONS (977,418) (408,160) 139%
------------------- -------------------
OTHER INCOME (EXPENSE)
Film Production (1,167,696) (303,335) 285%
Advertising and Marketing (4,150) 12,595 (133)%
------------------- -------------------
(1,171,846) (290,740) 303%
------------------- -------------------
NET LOSS $ (2,149,263) $ (698,900) 208%
=================== ===================
</TABLE>
<PAGE>
Page 23
FILM PRODUCTION
Revenues increased to $311,511, driven by the domestic home video
release of DIAMONDS. In the previous year the Company did not release any motion
pictures during the corresponding period.
Operating expenses increased by $747,709 or 552% to $883,258,
reflecting an increase of $356,361 for the exploitation of the Company's film
library. Increased spending on professional fees of $136,207, compensation of
$86,802 and travel of $26,827 was incurred as the Company aggressively pursues
new film opportunities contributed to the increase in operating expenses for the
quarter. Overall general and administrative expenses increased as the Company
acquired an additional 1,900 square feet of office space for the corporate
headquarters and the value of warrants granted in non-cash transactions
increased by $93,761.
Other expenses increased by $864,361 or 285% to $1,167,696, reflecting
an increase of $612,259 for the amortization of placement fees. The Company's
lenders have required supplemental fees or common stock as a condition to obtain
or refinance our debt obligations. The supplemental charges will be amortized
over the duration of the refinanced or new debt. Interest expense increased
$263,705 due to the Company maintaining a higher average debt balance at higher
rates of interest in the current year.
ADVERTISING AND MARKETING
Revenues decreased by $307,486 or 55% to $249,056, reflecting the
closure of the advertising and marketing's San Francisco operations effective
July 6, 2000. In the previous year, the San Francisco office generated an
additional $190,435 of revenues. Revenue was further reduced by the Company
deferring an additional $140,669 of revenue due to the incomplete status on
several large projects.
Operating expenses decreased by $174,426 or 21% to $654,727, reflecting
a $246,689 or 56% decrease in production costs associated with the segment's
revenues. The decrease in production costs was offset by an increase in rent of
$56,750 for office space in San Francisco; the lease was entered into late in
the previous fiscal year on the now unoccupied space. The Company is actively
trying to sublet the property.
Other income decreased by $16,745 or 133% to ($4,150), reflecting a
decrease of $17,281 in miscellaneous income recognized from the sale of
non-capitalized equipment in the current period.
LIQUIDITY AND CAPITAL RESOURCES
FOR THE YEAR ENDED JUNE 30, 2000
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Page 24
Cash and cash equivalents at June 30, 2000, decreased to $448,102 from
$1,130,179 at June 30, 1999. $782,740 of the cash balance at June 30, 1999,
represents unspent production funding for the film DIAMONDS. The Company expects
to collect revenues from this film during the 2000/2001 fiscal year from home
video, television, and foreign sales markets.
The Company has funded its working capital requirements through
operating revenues and proceeds from debt and equity financings. At times, the
Company has relied upon its transactional production loans to provide bridge
production financing prior to receipt of distribution advances.
In February 1999 the Company obtained a $2,000,000 bridge loan from The
Orbiter Fund, an entity managed by one of the principal shareholders of the
Company, with interest at 13.5% and maturing May 2000. In September 1999, the
Company obtained a $2,000,000 convertible note from the Lancer Group, with
interest at 12%, payable quarterly, and maturing March 2000. As of February 28,
2000 these loans were converted into common stock of the Company. (See Item 1
Description of Business--History and Organization.) As of June 30, 2000,
$2,500,000 of the Company's short-term debt obligations represent monies
borrowed in connection with the funding of the untitled N'SYNC production. (See
Part I, Item 7. Certain Relationships and Related Transactions and Part II, Item
4. Recent Sales of Unregistered Securities.)
THREE MONTHS ENDED SEPTEMBER 30, 2000
For the three months ended September 30, 2000, cash used by operations
decreased by $142,232 to ($511,157) as the result of increased collection of
receivables, refunds of prepaid expenses and deposits, increased liabilities and
increased amortization costs offset the increased spending on motion picture
development.
The Company expects its film production segment to continue to enter
into production funding arrangements for developing and releasing feature length
motion pictures.
The Company has a need for additional capital in order to provide
working capital for its current business plan. Management believes it will be
able to secure sufficient financing to carry out its business plan, supported in
part by written assurance from the Company's major lender and majority
stockholder that current debt will be extended, if needed, to June 30, 2001, and
beyond and has given verbal assurance to management that it will provide
additional funding to carry out the Company's business plan.
The Company's continued expansion of its business will depend
substantially upon the availability of cash flow from operations or its ability
to raise additional funds. As a result, the Company may be required to seek
additional financing sooner than anticipated. There is no assurance that the
Company will be able to obtain additional financing when needed, or on terms
acceptable to it. In the event the Company cannot obtain additional funds when
needed on
<PAGE>
Page 25
acceptable terms, it may be forced to limit its future operations, which could
have a materially adverse impact on its business.
SUMMARY
Management believes that existing resources and cash generated from
operating activities, together with the possible conversion of certain
outstanding debt, will be sufficient to meet the Company's working capital
requirements through the end of the fiscal year 2000/2001. The Company may seek
other sources of financing to meet its working capital requirements, including
separate equity or debt financing for TCI. The Company from time to time seeks
additional financing through the issuance of new debt or equity securities,
additional bank financings, or other means available to the Company to increase
its working capital.
ITEM 3. DESCRIPTION OF PROPERTY
The Company leases approximately 4,962 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 May 31, 2005. Monthly
lease payments are $9,468.
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 holds a lease for an unoccupied office space
of approximately 6,850 square feet of office space in the San Francisco,
California, area. The Company is currently attempting to sublease this space.
The lease expires December 31, 2002. Monthly lease payments are $22,833.
Total Creative, Inc. has two major computer equipment leases used in
its advertising business. The principal amount of the first lease is $90,000,
with monthly payments of $2,062. The sixty month lease was entered into in June
1998. Total Creative, Inc. has the option to purchase the equipment at the end
of the lease period at its then fair market value. The second lease was a
thirty-six month lease entered into in September 1999. The principal amount of
this lease is approximately $110,000. The monthly payments are $3,734. 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
<PAGE>
Page 26
December 5, 2000, of (i) each person who is known to the Company to be the
beneficial owner of more than 5 percent of the Common Stock; (ii) all directors
and executive officers; and (iii) directors and executive officers of the
Company as a group:
<TABLE>
<CAPTION>
Amount and Nature
Name and Address of Beneficial
Of Beneficial Owner Ownership (1) Percent of Class
------------------- ------------- ----------------
<S> <C> <C>
Michael Lauer 8,181,847(2) 54.84%
475 Steamboat Road
Greenwich, CT 06830
Lancer Offshore, Inc. 4,376,002(3) 30.66%
Kaya Flamboyan 9
Curacao, Netherland Antilles
Lancer Partners LP 2,108,774(4) 14.81%
475 Steamboat Road
Greenwich, CT 06830
Gerald Green 2,220,000(5) 14.73%
9019 Lloyd Place
West Hollywood, CA 90069
Manuel Pacheco 55,000(6) *
Eli Boyer 50,000(7) *
Peter Dattilo -0-
Executive Officers and 2,325,000 15.42%
Directors as a Group
(4 Persons)
</TABLE>
--------------
*Represents less than 1%.
(1) Unless otherwise indicated, this column reflects amounts as to
which the beneficial owner has sole voting power and sole investment power.
(2) Mr. Lauer owns 956,000 of these shares directly in his name. Of the
remaining shares, 4,176,002 are held directly in the name of Lancer Offshore;
1,942,107 are held directly in the name of Lancer Partners; and 261,905 are held
directly in the name of The Orbiter Fund. Mr. Lauer is the general partner of
Lancer Partners.
<PAGE>
Page 27
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 and holds a promissory note in the amount of
$125,000 convertible at $2.00 per share into 62,500 shares. Mr. Lauer holds a
promissory note in the amount of $250,000 convertible at $3.00 per share into
83,333 shares. Lancer Offshore holds a promissory note in the amount of $400,000
convertible at $2.00 per share into 200,000 shares. Lancer Partners holds a
promissory note in the amount of $500,000 convertible at $3.00 per share into
166,667 shares. Viator Fund, an entity controlled by Mr. Lauer, holds a
promissory note in the amount of $250,000 convertible at $3.00 per share into
83,333 shares. The warrants are exercisable, and the notes are convertible,
within sixty days. The shares underlying the warrants and the convertible notes
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 December 15, 2000, the name,
age, and position of each executive officer and director of the Company and
the term of office of such director:
<TABLE>
<CAPTION>
Name Age Position(s) Director Since
---- --- ----------- --------------
<S> <C> <C> <C>
Gerald Green 68 President, CEO, & Chairman 1997
Manuel Pacheco 43 Director 1997
Eli Boyer 80 Secretary, Treasurer, & Director 1997
Peter Dattilo 28 Chief Financial Officer -
</TABLE>
<PAGE>
Page 28
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.
PETER DATTILO has been chief financial officer of the Company since
November 2000. From January 1997 until November 2000 he was employed by Miller,
Kaplan, Arase & Co., LLP, an accounting firm, as a supervisor and senior
accountant. From January 1995 until December 1996 he was employed by The Casden
Company, a real estate investment trust, as a senior accountant. He received his
bachelor of science degree in accounting in 1994 from San Diego State
University.
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.:
<PAGE>
Page 29
<TABLE>
<CAPTION>
Name Age Position(s) Director Since
---- --- ----------- --------------
<S> <C> <C> <C>
Gerald Green 68 Director, President, and Secretary 1998
Rod Dyer 64 Co-creative director --
Howard Russo 62 Co-creative director -
Mark Armstrong 41 CEO
</TABLE>
Set forth below is certain biographical information regarding the
executive officers and directors of Total Creative, Inc.:
ROD DYER has been employed as the co-creative director of Total
Creative, Inc. since June 1998. From 1967 until June 1998 Mr. Dyer was president
of Dyer Mutchnick, a design and advertising firm.
HOWARD RUSSO has been employed as co-creative director of Total
Creative, Inc. since January 1999. From February 1989 until December 1998, he
was the executive vice-president and chief financial officer of Michel/Russo,
Inc., a creative advertising agency. From January 1988 until January 1989, Mr.
Russo was senior vice-president and head of creative advertising for Columbia
Pictures, where he oversaw creative advertising for domestic releases of motion
pictures.
MARK ARMSTRONG has been employed as chief executive officer of Total
Creative, Inc. since September 2000. From 1992 until 1996 he was vice-president
of Metafor Imaging, a digital graphics imaging company, and from 1996 until 2000
he was president of such company.
ITEM 6. EXECUTIVE COMPENSATION
COMPENSATION
The following table sets forth the aggregate executive compensation
awarded to, earned by, or paid to the sole named executive officer by any person
for all services rendered in all capacities to the Company and its subsidiaries
for the fiscal years ended June 30, 2000, 1999, and
<PAGE>
Page 30
1998. No other executive officer's total annual salary and bonus exceeded
$100,000 during each of the last three fiscal years.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
Awards Payouts
Other All
Annual Restricted Other
Name and Principal Compen- Stock Options/ LTIP Compen-
Positions Year Salary Bonus sation Award(s) SARs Payouts sation
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gerald Green, CEO 2000 $246,945 -- $34,739 -- -- -- --
1999 $95,000(1) -- $250,000(2) -- 500,000 -- --
1998 $80,000(1) -- $350,000(3) -- -- -- --
</TABLE>
-----------------
(1) Of this amount, $20,000 was paid as salary to Patricia M. Green,
wife of Mr. Green.
(2) Of this amount, $100,000 is deferred compensation to Mr. Green for
his producer's fee for the film DIAMONDS. Of the remaining amount $100,000 was
paid as producer's fees to a company owned by Mrs. Green and $50,000 was
deferred.
(3) Of this amount, $300,000 is deferred compensation to Mr. Green for
his producer's fee for the film THE NEW SWISS FAMILY ROBINSON. The remaining
amount is deferred compensation to a company owned by Mr. Green's wife, Patricia
M. Green.
1998 STOCK OPTION PLAN
On June 19, 1998, the Board of Directors adopted a 1998 Non-Qualified
Stock Option Plan (the "Plan"), pursuant to which it was authorized to grant
options to purchase up to 800,000 shares of common stock to the Company's key
employees, officers, directors, consultants, and other agents and advisors.
Awards under the Plan consisted of non-qualified stock options. The Plan will
terminate on June 19, 2008. At June 30, 2000, all of the options under the plan
had been granted, except for 70,000. Of the outstanding options, 45,000 had been
exercised as of March 31, 2000.
The Plan is administered by the Board of Directors which determined the
persons to whom awards were granted, the number of awards granted, and the
specific terms of each grant, including the vesting thereof, subject to the
provisions of the Plan.
The exercise price of each option granted under the Plan was determined
by the Board of Directors. The exercise price is (i) payable in cash; (ii)
payable in whole or in part in shares of stock of the Company, which shares
shall be valued at its then fair market value as determined by the Board of
Directors; or (iii) by the surrender or cancellation of other rights to stock of
the Company.
<PAGE>
Page 31
No option granted under the Plan is transferable other than by will or
the laws of descent and distribution, or pursuant to a qualified domestic
relations order. The options are subject to certain adjustments in the case of
stock splits, stock dividends, combination or consolidation of shares, and in
certain asset transfers. In the event that any holder of an option, except a
consultant, is terminated or resigns from his or her position with the Company
or a subsidiary within six months of the grant of an award, any unexercised
portion of such option immediately becomes null and void. In the case of gross
negligence, criminal misconduct, or willful or gross misconduct by an employee,
the Board of Directors may cancel any options held by such person.
STOCK OPTION GRANTS
During the year ended June 30, 1999, the Company granted a total of
960,000 options to employees. Of the options granted, 730,000 were granted under
the 1998 Stock Option Plan and 230,000 were granted pursuant to individual stock
option agreements. The following table sets forth information concerning grant
of stock options made during the fiscal year to the named executive officer and
the percent the grant represents of total options granted to employees during
the fiscal year:
<TABLE>
<CAPTION>
Number of
Securities Percent of
Underlying Total Exercise Expiration
Name Options Options Price Date
---- ------- ------- ----- ----
<S> <C> <C> <C> <C>
Gerald Green 500,000 52.08% $2.00 7/27/01
Manuel Pacheco 55,000 5.73% $2.00 6/19/01
Eli Boyer 50,000 5.21% $2.00 6/19/01
</TABLE>
During the year ended June 30, 2000, the Company granted a total of
752,500 options to employees of the Company and its subsidiaries pursuant to
individual stock option agreements. The following table sets forth information
concerning these grants of stock options made during this fiscal year to the
named executive officer and the percent the grant represents of total options
granted to employees during the fiscal year:
<TABLE>
<CAPTION>
Number of
Securities Percent of
Underlying Total Exercise Expiration
Name Options Options Price Date
---- ------- ------- ----- ----
<S> <C> <C> <C> <C>
Gerald Green 500,000 66.45% $2.00 5/15/03
</TABLE>
<PAGE>
Page 32
2000 RESTRICTED STOCK BONUS PLAN
In January 2000 the Company adopted a Stock Bonus Plan (the "Stock
Bonus Plan") which allows the Company to issue up to 50,000 restricted shares of
the Company's common stock to directors, officers, employees, and others who
have performed bona fide services for the Company. The purpose of the Stock
Bonus Plan is to assist the Company in maintaining and developing a management
team, attracting qualified directors, officers, and employees capable of
assisting in the future success of the Company, and rewarding those individuals
who have contributed to the success of the Company. It is designed to aid the
Company in retaining the services of executives and employees and in attracting
new personnel when needed for future operations and growth and to provide such
personnel with an incentive to remain employees of the Company, to use their
best efforts to promote the success of the Company's business, and to provide
them with an opportunity to obtain or increase a proprietary interest in the
Company. It is also designed to permit the Company to reward those individuals
who are not employees of the Company but who are perceived by management as
having contributed to the success of the Company or who are important to the
continued business and operations of the Company. The Stock Bonus Plan is
administered by the Board of Directors. It will terminate not later than ten
years from its adoption by the Board of Directors. Pursuant to the terms of the
Stock Bonus Plan, the Company issued 7,500 shares to an employee of the Company
in January 2000.
COMPENSATION OF DIRECTORS
The bylaws provide that directors, as such, are not entitled to receive
any stated salary for their services. However, they may receive a fixed sum and
expenses for attendance at meetings of the Board. The Company has not adopted a
policy with regard to establishing any fixed sum for attendance at special or
regular meetings of the board, but it does intend to reimburse directors for
out-of-pocket expenses related to such meetings.
EMPLOYMENT AGREEMENTS
The Company has a full-time employment contract dated September 15,
1999, with Gerald Green to serve as the chief executive officer of the Company.
The agreement terminates on August 31, 2004. Under the contract Mr. Green
receives an annual base salary of $300,000 and a fixed annual bonus of $29,167.
He is also entitled to a contingent annual bonus equal to 10% of the net profits
of the Company before income taxes. Mr. Green will also receive an executive
producer's fee to be negotiated for each film project of the Company. The
agreement provides for an annual review and permits the Board of Directors to
increase or decrease the compensation based upon the services performed by Mr.
Green and the financial condition of the Company. Mr. Green has the right to
defer any part of the compensation upon prior written notice. He is entitled to
a car allowance of $1,500 per month. He is also entitled to medical
<PAGE>
Page 33
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 November 6,2000,
with Peter Dattilo to act as chief financial officer for the Company and its
affiliates. The agreement may be terminated at any time by either party. Mr.
Dattilo receives an annual salary of $85,000. He is entitled to the same
medical, dental, retirement, and other benefits afforded other similar employees
of the Company. Mr. Dattilo was also granted options to purchase 150,000 shares
of common stock of the Company. These options vest at the rate of 50,000 per
year commencing November 6, 2001, and are exercisable at $2.00 for the first
50,000, $3.00 for the second 50,000, and $4.00 for the final 50,000.
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
<PAGE>
Page 34
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 (a.k.a.
ALMA). These fees were paid during the current year.
Mr. Andrew Somper, a former director of the Company, was a partner in
the law firm of Berwin Leighton which performed legal services for the Company.
He is also a director and officer of Total Film UK Limited. Legal fees paid to
Berwin Leighton total approximately $80,000. In addition, Mr. Somper received
stock options for the purchase of 75,000 shares at $2.00 per share. Mr. Somper
exercised this option in February 2000, by canceling 30,000 options. He received
45,000 shares through such exercise.
In February 1999 the Company assumed the repayment of two loans and one
line of credit with a total principal amount of $150,000, the balance of which
at June 30, 2000, was $12,274, between Red Sky Films, LLC and Skyrocket, LLC as
the borrowers and Westamerica Bank as the lender. Assumption of the loans and
the line of credit were required pursuant to the acquisition agreement between
the Company and Skyrocket, LLC.
In February 1999 the Company entered into a loan agreement with The
Orbiter Fund, an entity managed by Michael Lauer, a principal shareholder of the
Company. The principal amount of the loan was $2,000,000. The Company also
granted 250,000 warrants to The Orbiter Fund in connection with the loan. In
August 1999 the Company negotiated an extension of the initial payment of
principal in return for which the Company issued 250,000 shares to the fund.
In September 1999 the Company issued convertible notes in the amount of
$2,000,000, which was used for working capital. The notes were convertible at
any time prior to maturity at the rate of one share for each $2.00 of principal
or interest converted. Of such funds, $1,800,000 were loaned by entities
controlled by Michael Lauer, a principal shareholder of the Company. All of the
lenders were granted pro rata 250,000 shares of restricted common stock. A cash
fee of 7% of the gross amount was paid to Capital Research Ltd., plus 100,000
five-year warrants with an exercise price of $2.25 per share. Capital Research
Ltd. and Bruce Cowen also each loaned $50,000 to the Company in this
transaction. The lenders were introduced to the Company by Mr. Cowen and the
fees were paid to his company pursuant to the terms of the consulting agreement
between Capital Research, Ltd. and the Company. Mr. Cowen, through Capital
Research Ltd., is a consultant to the Company and is a shareholder in the
Company.
<PAGE>
Page 35
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 June 30, 2000, the Company had loaned approximately $78,895 to Rod
Dyer, a significant employee of Total Creative, Inc., the Company's wholly owned
subsidiary. The loan accrues interest at the rate of 8% per annum and repayment
is due in the full on or before June 30, 2002. Mr. Dyer has agreed to pledge his
interest in the 50,000 shares of common stock issued to him by the Company as
security for repayment of the loan. The funds were used by Mr. Dyer to satisfy
debts of the business operated by Mr. Dyer and which became Total Creative, Inc.
In October 1999 the Board of Directors authorized the Company to make
loans to Mr. Green up to $50,000 at an annual interest rate of 8%, payable
interest only monthly with the balance due and payable September 15, 2003, or
sooner, at the option of Mr. Green. During the fiscal year ended June 30, 2000,
the Company loaned $37,500 pursuant to this arrangement. In addition, the
Company loaned $58,065, without interest, to Mr. Green during the fiscal year
ended June 30, 1999, and $52,107, without interest, during the fiscal year ended
June 30, 2000. As of June 30, 2000, Mr. Green had made repayments totaling
$20,000.
In April 2000 the Company borrowed $1,900,000 from Michael Lauer, a
shareholder of the Company, as a part of a $2,500,000 loan to the Company by Mr.
Lauer and others for a new film project. The note issued to Mr. Lauer was
without interest, but carried a premium equal to 30% of the principal loaned by
Mr. Lauer to the Company. In addition, Mr. Lauer and the others will receive a
pro rata portion of 6% of the adjusted gross proceeds from the picture in any
and all media, including ancillary rights. The note is secured by the producer's
interest in the picture. The note was originally due August 15, 2000, but was
extended until November 13, 2000. For such extension, the Company issued 380,000
shares to Mr. Lauer. As a part of the extension of the loan, the Company paid a
fee to Capital Research Ltd. of 25,000 shares. Mr. Cowen also loaned $100,000 to
the Company as a part of the foregoing $2,500,000 loan with the same terms as
with Mr. Lauer and received 20,000 shares for the extension. The notes were
further extended until December 31, 2000. For such extension, the Company issued
350,000 shares to the lenders, including 266,000 shares to Mr. Lauer and 14,000
shares to Mr. Cowen. The Company also paid a fee to Capital Research Ltd. of
25,000 shares.
<PAGE>
Page 36
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 December 8, 2000, the Company had
outstanding 14,073,899 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
<PAGE>
Page 37
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.
<TABLE>
<CAPTION>
Quarter High Low
------- ---- ---
<S> <C> <C> <C>
FISCAL YEAR ENDED
JUNE 30, 1998 First $4.50 $2.75
Second $3.875 $1.125
Third $4.00 $2.00
Fourth $4.25 $2.00
FISCAL YEAR ENDED
JUNE 30, 1999 First $3.1875 $1.3125
Second $3.75 $1.75
Third $5.25 $2.625
Fourth $5.875 $3.1875
FISCAL YEAR ENDED
JUNE 30, 2000 First $3.5625 $1.3125
Second $4.625 $2.6875
Third $8.75 $3.8125
Fourth $6.00 $1.50
FISCAL YEAR ENDING
JUNE 30, 2001 First $4.812 $2.75
</TABLE>
OUTSTANDING OPTIONS, WARRANTS, AND CONVERTIBLE INSTRUMENTS
At December 5, 2000, the Company had outstanding options exercisable
into 1,579,000 shares of common stock. Such options were issued pursuant to the
Company's Stock Option Plan and in individual option agreements.
<PAGE>
Page 38
At December 5, 2000, the Company had outstanding warrants to purchase
1,150,000 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;
100,000 were issued to Capital Research Ltd. in connection with the $1,000,000
loan from Michael Lauer and entities controlled by him in August 2000; 50,000
were issued to Capital Research Ltd. in connection with the $525,000 loan from
entities controlled by Michael Lauer in November 2000;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.
The Company has borrowed $1,000,000 from entities controlled by Michael
Lauer, one of our principal shareholders. This loan is convertible into shares
of common stock of the Company. The loan will be convertible at $3.00 per share,
provided that the conversion price will be reduced to $1.50 for the ninety day
period following the due date, and to $1.00 per share thereafter, if the loan
remains unpaid. We have also agreed to issue five-year warrants to purchase
100,000 shares at $3.50 per share, to Capital Research Ltd. in connection with
the loan.
The Company has borrowed $525,000 from Lancer Offshore and The Viator
Fund, entities controlled by Michael Lauer, one of the principal shareholders of
the Company. This loan is convertible into shares of common stock of the
Company. The loan will be convertible at $2.00 per share, provided that the
conversion price will be reduced to $1.50 following six months from the date of
issuance of the promissory note, and $1.00 per share thereafter. We have also
agreed to issue five-year warrants to purchase 50,000 shares at $3.00 per share,
to Capital Research Ltd. in connection with the loan.
SHARES ELIGIBLE FOR FUTURE SALE UNDER RULE 144
The Company had 14,073,899 shares of its common stock outstanding at
December 8, 2000. Of these shares, 9,027,049 are believed to be restricted
securities and 1,350,000 are believed to be control shares (non-restricted
shares held by affiliates of the Company) pursuant to Rule 144 promulgated by
the Securities and Exchange Commission. The control shares are not subject to
any holding requirement under Rule 144 and would be available for resale subject
to all other conditions of the rule. Management believes that 3,882,150 of the
restricted shares may have met the one year holding requirement of Rule 144.
Restricted shares held by affiliates, restricted shares held by non-affiliates
for less than two years,
<PAGE>
Page 39
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 in connection with the combined private
offering with Total China, Inc. 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.
The Company has agreed to register the 738,600 shares of common stock
of the Company issued in connection with the combined private offering with
Total China II, Inc. The agreement to register the shares provides that the
Company shall cause the registration statement for such shares to be filed as
soon as commercially reasonable immediately after the closing of the offering.
The offering closed in August 2000. The Company has not identified the specific
time at which it intends to file such registration statement. The Company has
agreed to maintain the effectiveness of the registration statement for a period
of at least 270 days. The provision for registration rights contains mutual
indemnification provisions. The stockholders have agreed not to offer, sell,
contract to sell, grant any option for sale, or otherwise dispose of the shares
for a period of six months from the effective date of the registration period,
or the initial public offering of the equity securities of MeetChina.com,
whichever is the lesser period.
In connection with the $1,000,000 loan from Michael Lauer and entities
controlled by him, the Company has agreed to make the loan convertible into
333,333 shares of common stock of the Company. If the loan is converted after
May 15, 2001, the principal amount of the loan will be convertible into 666,667
shares, and if the loan is converted after August 14, 2001, the principal
amount of the loan will be convertible into 1,000,000 shares. The shares will
have one demand and piggyback registration rights.
In connection with the $525,000 loan from Lancer Offshore and The
Viator Fund, the Company has agreed to make the loan convertible into 262,500
shares of common stock of the Company. If the loan is converted after May 14,
2001, the principal amount of the loan will be convertible into 350,000 shares,
and if the loan is converted after August 13, 2001, the principal
<PAGE>
Page 40
amount of the loan will be convertible into 525,000 shares. The shares will have
one demand and piggyback registration rights.
RECORD HOLDERS OF STOCK; TRANSFER AGENT
At December 5, 2000, the Company had 117 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.
<PAGE>
Page 41
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.
<PAGE>
Page 42
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.
<PAGE>
Page 43
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, September 1, 2000, and December 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
<PAGE>
Page 44
converted. The notes were issued in reliance upon the exemption provided in
Section 3(a)(3) of the Securities Act. In connection with the loan, the Company
issued 250,000 shares pro rata to the lenders. The Company also paid a
consulting fee of $140,000 to Capital Consulting Inc. and also issued warrants
to purchase 100,000 shares of common stock of the Company to such firm. Such
securities were issued without registration under the Act by reason of the
exemption from registration afforded by the provisions of Section 4(2) thereof
as transactions by an issuer not involving any public offering. Each investor
was believed to be sophisticated. Such investors delivered appropriate
investment representations with respect to such transaction and consented to the
imposition of restrictive legends upon the certificates evidencing such
securities. No general solicitations were made in connection with the
transaction.
In October 1999 the Company sold warrants to purchase 200,000 shares
exercisable at $3.75 per share to forty accredited investors in a private
placement of the warrants. The warrants were sold for an aggregate of $200,000.
This amount was used to pay the cash finder's fee in a concurrent offering of
shares of Total China, Inc., one of the Company's subsidiaries. The Company also
issued warrants to purchase 200,000 shares of common stock to JBRG Consultants
as a consulting fee in connection with the private offering. Such securities
were issued without registration under the Act by reason of the exemption from
registration afforded by the provisions of Section 4(2) thereof, and Rule 506
promulgated thereunder, as transactions by an issuer not involving any public
offering. Such investors delivered appropriate investment representations with
respect to such transaction and consented to the imposition of restrictive
legends upon the certificates evidencing such securities. No general
solicitations were made in connection with the transaction.
In January 2000, in connection with the funding of the Company's film
MY FIRST MISTER, the Company issued warrants exercisable at $3.75 per share to
purchase 25,000 shares of 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.
<PAGE>
Page 45
In February 2000 the Company converted the outstanding promissory notes
issued in connection with the loan of $2,000,000 in February 1999 and $2,000,000
in September 1999. The Company issued a total of 2,936,667 shares of common
stock to the lenders for cancellation of the notes and outstanding interest due
in the amount of $376,100. The parties to the loans agreed to amend the
conversion price to $1.50 per share and to convert the principal amount of the
loans into 2,666,667 shares of common stock and to convert the $376,100 in past
due interest into 270,000 shares at the rate of $1.39 per share. 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
<PAGE>
Page 46
was issued in reliance upon the exemption provided in Section 3(a)(3) of the
Securities Act. No underwriting discounts or commissions were paid in connection
with such issuance.
In April 2000 the Company borrowed $2,500,000 from four accredited
investors and issued a promissory note to such investors representing such loan.
In August 2000 the loan was extended until November 13, 2000. In October 2000
the company issued 500,000 shares to such lenders for the granting of the
extension. In addition, the Company issued 25,000 shares to Capital Research
Ltd. for consulting services in connection with the extension of the loan. The
notes were further extended until December 31, 2000. For such extension, the
Company issued 350,000 shares to the lenders. The Company also paid a fee to
Capital Research Ltd. of 25,000 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. No underwriting discounts or
commissions were paid in connection with such issuance, except for the 50,000
fee paid to Capital Research Ltd.
From May until July 2000 the Company sold 738,600 common shares to 53
accredited investors in a private placement of the shares. The shares were sold
for an aggregate of $3,693,000. The Company also issued 50,000 common shares to
JL Devore & Associates as a consulting fee in connection with the private
offering. Such securities were issued without registration under the Act by
reason of the exemption from registration afforded by the provisions of Section
4(2) thereof, and Rule 506 promulgated thereunder, as transactions by an issuer
not involving any public offering. Such investors delivered appropriate
investment representations with respect to such transaction and consented to the
imposition of restrictive legends upon the certificates evidencing such
securities. No general solicitations were made in connection with the
transaction.
In addition to the options granted to Ms. Ali and Messrs. Somper and
Shapiro discussed above, the Company granted options from July 1998 until
December 2000 to the following employees and directors of the Company:
<TABLE>
<CAPTION>
Number of Shares Date
Optionee Underlying Options Granted
-------- ------------------ -------
<S> <C> <C>
Manuel Pacheco 55,000 7/1/98
Eli Boyer 50,000 7/1/98
Bruce Mandes 50,000 7/1/98
Gerald Green 500,000 7/27/98
500,000 5/15/00
Dan Michel 50,000 1/1/99
Howard Russo 50,000 1/1/99
Monique Jones 45,000 9/27/99
Scott Taylor 37,500 6/22/00
David Katz 20,000 6/22/00
<PAGE>
Page 47
<S> <C> <C>
Stacey Abrams 150,000 6/22/00
Peter Datillo 150,000 11/6/00
Mark Armstrong 150,000 9/1/00
</TABLE>
In each instance the options were granted without cash consideration but were
granted to maintain the continued employment or affiliation with the Company.
The options were granted to these persons without registration under the Act by
reason of the exemption from registration afforded by the provisions of Rule 701
promulgated by the Securities and Exchange Commission. No underwriting discounts
or commissions were paid in connection with the granting of such options.
In August 2000 the Company borrowed $1,000,000 for working capital from
Michael Lauer and from entities controlled by Michael Lauer, one of the
Company's principal shareholders. The loan bears interest at 12% per annum,
payable quarterly, and is due May 15, 2001. The Company will be obligated to
repay the loan out of proceeds of any financing greater than $3,000,000. The
loan is convertible at $3.00 per share, provided that the conversion price will
be reduced to $1.50 for the ninety day period following the due date, and to
$1.00 per share thereafter, if the loan remains unpaid. The shares will have one
demand and piggyback registration rights. The Company also paid a consulting fee
of $70,000, and has agreed to issue five-year warrants to purchase 100,000
shares at $3.50 per share, to Capital Research Ltd. in connection with the loan.
Such securities were issued without registration under the Securities Act by
reason of the exemption from registration afforded by the provisions of Section
4(2) thereof, as transactions by an issuer not involving any public offering. No
general solicitations were used in connection with the transaction. No
underwriting discounts or commissions were paid in connection with such
issuance, except for the $70,000 and 100,000 warrants paid to Capital Research,
Ltd.
On November 14, 2000, the Company borrowed $525,000 from Lancer
Offshore and The Viator Fund, accredited investors, and issued senior
convertible promissory notes to such investors representing such loan. The
notes are due within six months of issuance and bear simple interest of 12%
payable quarterly. They are convertible into common stock at $2.00 per share
if redeemed within six months of issuance, at $1.50 per share if redeemed
following six months of issuance, and at $1.00 per share if redeemed
thereafter. In addition the Company issued 50,000 shares of common stock pro
rata for lending the funds. In addition, the Company paid $36,750 and issued
50,000 five-year warrants exercisable at $3.00 per share to Capital Research,
Ltd. for consulting services in connection with the loan. Such securities
were issued without registration under the Securities Act by reason of the
exemption from registration afforded by the provisions of Section 4(2)
thereof, as transactions by an issuer not involving any public offering. No
general solicitations were used in connection with the transaction. No
underwriting discounts or commissions were paid in connection with such
issuance, except for the fees paid to Capital Research, Ltd.
<PAGE>
Page 48
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:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Auditor F-1
Consolidated Balance Sheets as of June 30, 2000 and 1999 F-2
Consolidated Statements of Operations for the fiscal years
ended June 30, 2000 and 1999 F-3
Consolidated Statements of Stockholders' Equity for the fiscal
years ended June 30, 2000 and 1999 F-4
Consolidated Statements of Cash Flows for the fiscal years
ended June 30, 2000 and 1999 F-5
Notes to Financial Statements F-7
</TABLE>
Also included are the interim unaudited financial statements for the three
month period ending September 30, 2000 and 1999.
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
FOR THE YEARS ENDED JUNE 30, 2000 AND 1999
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report 1
Independent Auditors' Report 2
Financial Statements
Consolidated Balance Sheets 3-4
Consolidated Statements of Operations 5
Consolidated Statements of Stockholders' Equity 6-7
Consolidated Statements of Cash Flows 8-9
Notes to Financial Statements 10-28
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
Total Film Group, Inc. and Subsidiaries
Beverly Hills, California
We have audited the accompanying consolidated balance sheet of Total Film Group,
Inc. and Subsidiaries (the "Company"), as of June 30, 2000, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Total Film Group,
Inc. and Subsidiaries as of June 30, 2000, and the results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.
HOLLANDER, LUMER & CO. LLP
Los Angeles, California
September 21, 2000
<PAGE>
INDEPENDENT AUDITORS' REPORT
Total Film Group, Inc. and Subsidiaries
Beverly Hills, California
We have audited the accompanying consolidated balance sheet of Total Film Group,
Inc. and Subsidiaries (the "Company"), as of June 30, 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Total Film Group,
Inc. and Subsidiaries as of June 30, 1999, and the results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.
MILLER, KAPLAN, ARASE & CO., LLP
North Hollywood, California
September 29, 1999, except for Note 8,
which is as of January 14, 2000.
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30,
<TABLE>
<CAPTION>
ASSETS
(Restated)
2000 1999
-------------------------- -------------------------
CURRENT ASSETS
<S> <C> <C>
Cash and Cash Equivalents $ 448,102 $ 1,130,179
Time Certificate of Deposit 20,692 27,678
Accounts Receivable 1,181,579 453,413
Related Party Receivable 218,954 90,165
Deferred Costs 103,221 -
Prepaid Expenses 281,347 50,557
Unamortized Loan Discount - 275,686
------------------------ ----------------------
TOTAL CURRENT ASSETS 2,253,895 2,027,678
OTHER ASSETS
Film Costs, Net of Amortization 9,495,808 3,317,789
Property and Equipment, Net of Amortization 200,714 114,948
Investment in US Business Network, Inc 3,745,090 -
Recoverable Insurance Costs 1,000,000 -
Deposits 538,483 116,186
Organization Costs, Net of Amortization - 126,784
Goodwill, Net of Amortization 282,186 986,926
Capitalized Financing Fees 196,053 -
Other Assets - 39,597
------------------------ ----------------------
15,458,334 4,702,230
------------------------ ----------------------
TOTAL ASSETS $ 17,712,229 $ 6,729,908
======================== ======================
LIABILITIES
CURRENT LIABILITIES
Debt Maturing within One Year $ 4,776,918 $ 2,126,925
Current Portion of Capital Lease 45,464 1,121
Accounts Payable and Accrued Expenses 1,815,534 623,830
Deferred Revenue 227,163 -
Producer's Fee Payable, Related Party 600,000 300,000
------------------------ ----------------------
TOTAL CURRENT LIABILITIES 7,465,079 3,051,876
------------------------ ----------------------
LONG-TERM LIABILITIES
Long-Term Debt, Net of Current Portion 1,040,931 52,652
Capital Lease, Net of Current Portion 57,905 -
------------------------ ----------------------
TOTAL LONG-TERM LIABILITIES 1,098,836 52,652
------------------------ ----------------------
TOTAL LIABILITIES 8,563,915 3,104,528
------------------------ ----------------------
MINORITY INTEREST IN EQUITY OF CONSOLIDATED SUBSIDIARY 829,550 -
------------------------ ----------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30,
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
(Restated)
June 30, 2000 June 30, 1999
--------------------------- ------------------------
<S> <C> <C>
Preferred Stock - $3 Par Value; Authorized 1,080,000 Shares;
Issued and Outstanding 738,600 and 0 Shares Respectively 2,215,800 -
Common Stock, $0.001 Par Value; Authorized 50,000,000 Shares;
Issued and Outstanding 12,335,299 and 8,630,000 Shares
Respectively 12,336 8,630
Additional Paid-in Capital 17,976,175 5,398,029
Accumulated Deficit (11,885,547) (1,781,279)
------------------------- ------------------------
TOTAL STOCKHOLDERS' EQUITY 8,318,764 3,625,380
------------------------- ------------------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 17,712,229 $ 6,729,908
========================= ========================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30,
<TABLE>
<CAPTION>
(Restated)
2000 1999
----------------- ---------------
<S> <C> <C>
REVENUE
Movie Release Income $ 131,656 $ 4,429,388
Design Fees 3,074,236 1,690,706
----------------- ---------------
3,205,892 6,120,094
================= ===============
COSTS AND OPERATING EXPENSES
Production and Design Costs 2,122,396 1,366,786
Selling, General & Administrative Expenses 3,560,741 1,981,343
Depreciation and Amortization 1,750,754 3,633,458
----------------- ---------------
TOTAL COSTS AND OPERATING EXPENSES 7,433,891 6,981,587
----------------- ---------------
LOSS BEFORE OTHER INCOME (EXPENSES) (4,227,999) (861,493)
----------------- ---------------
OTHER INCOME (EXPENSE)
Interest Income 15,559 20,107
Interest Expense (1,169,115) (143,353)
Amortization of Placement Fee (1,054,021) (257,813)
Recoverable Insurance Costs 1,000,000 -
Miscellaneous Income 12,074 226,397
----------------- ---------------
TOTAL OTHER INCOME (EXPENSES) (1,195,503) (154,662)
----------------- ---------------
LOSS BEFORE INCOME TAXES (5,423,502) (1,016,155)
Income Tax Provision
- (28,328)
----------------- ---------------
LOSS BEFORE EXTRAORDINARY ITEM AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (5,423,502) (1,044,483)
EXTRAORDINARY ITEM
Loss on Early Extinguishment of Debt (4,553,982) -
----------------- ---------------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (9,977,484) (1,044,483)
Cumulative Effect for Adopting New Pronounceent on the Amortization
of Organization Costs (126,784) -
----------------- ---------------
NET LOSS $ (10,104,268) $ (1,044,483)
================= ===============
PER SHARE AMOUNTS - BASIC
Loss Before Extraordinay Item and Cumulative Effect of Change in
Accounting Principle $ (0.60) $ (0.12)
----------------- ---------------
Loss on Early Extinguishment of Short-Term Debt
(0.50) -
----------------- ---------------
Cumulative Effect on Prior Years of Changing Organization Costs
Amortization Method
(0.01) -
----------------- ---------------
Net Loss $ (1.11) $ (0.12)
================= ===============
PROFORMA AMOUNTS ASSUMING THE NEW AMORTIZATION
METHOD IS APPLIED RETROACTIVELY - LOSS PER SHARE
Net Loss $ (1.10) $ (0.12)
================= ===============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 9,061,332 8,414,597
================= ===============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional
--------------------------- Preffered Paid-In Accumulated
Shares Amount Stock Capital Deficit
------------- ----------- ------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1998 8,300,000 8,300 - 4,098,593 (736,796)
Issuance of Common Stock for Acquisitions 325,000 325 - 718,391 -
Issuance of Common Stock as Additional
Consideration for Debt 5,000 5 - 11,645 -
Warrants Exercisable for 250,000 Shares of
Common Stock at $2.00 per Share,
Issued as Additional Consideration of
Debt - - - 450,000 -
Stock Options Exercisable for 210,000
Shares of Common Stock at $2.00
per Share for Services Rendered - - - 119,400 -
Net Loss for the Year Ended June 30, 1999 - - - - (1,044,483)
------------- ----------- ------------- ---------------- ---------------
Balance, June 30, 1999 8,630,000 8,630 - 5,398,029 (1,781,279)
Issuance of Common Stock as Additional
Consideration for Debt, 250,000 250 - 291,417 -
Issuance of Common Stock as Compensation
for Executive Officers, Directors and
Employees 233,965 234 - 502,832 -
Issuance of Common Stock for the
Extinguishment of Debt 2,936,667 2,937 - 8,807,063 -
Issuance of Common Stock as Transaction Fee
on the Extinguishment of Debt 26,667 27 - 66,640 -
Issuance of Common Stock as Additional
Consideration for Debt 250,000 250 - 546,500 -
Issuance of Common Stock for the Consulting
Services 8,000 8 - 33,367 -
Proceeds from the Sale of 50% Interest
in China I, Nov 1999 - - - 736,549 -
Issuance of 738,600 Shares of Preferred
Stock in China II - - 2,215,800 (324,341) -
738,600 Shares of Common Stock to be Granted
in Private Placement - - - 1,281,469 -
Warrants Exercisable for 200,000 Shares of
Common Stock at $3.75 per Share,
Issued to Investors as Part of the China I
Offering - - - 200,000 -
Warrants Exercisable for 200,000 Shares of
Common Stock at $2.00 per Share,
Issued as Placement Fees for the China I
Offering - - - 140,000 -
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C> <C> <C> <C>
Warrants Exercisable for 275,000 Shares of
Common Stock at $2.25 to $5.44 per Share,
for Professional Services Rendered - - - 268,400 -
Warrants Exercisable for 25,000 Shares of
Common Stock at $3.75 per Share,
Issued as Additional Consideration of
Debt - - - 28,250 -
Net Loss for the Year Ended June 30, 2000 - - - - (10,104,268)
------------- ----------- --------------- ---------------- ----------------
Balance, June 30, 2000 $ 12,335,299 $ 12,336 $ 2,215,800 $ 17,976,175 $ (11,885,547)
============= =========== =============== ================ ================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30,
<TABLE>
<CAPTION>
(Restated)
2000 1999
-------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (10,104,268) $ (1,044,483)
-------------- -------------
Extraordinary Loss on Retirement of Debt 4,553,982 -
Cumlative Effect of Accounting Change 126,784 -
-------------- -------------
Loss from Continuing Operations (5,423,502) (1,044,483)
Adjustments to Reconcile Net Loss to Net Cash
Provided By (Used in) Operating Activities:
Prodeeds from Production Funding Arrangement 5,179,195 7,219,391
Cash Used in Motion Picture Development (11,539,201) (7,993,987)
Fair Value of Equity Granted 773,390 106,362
Depreciation and Amortization 1,750,754 3,633,458
Amortization of Placement Fees 1,054,021 284,956
Decrease (Increase) in Assets:
Accounts Receivable (728,166) (135,922)
Related Party Receivable (128,789) (90,165)
Deferred Costs (103,221) -
Prepaid Expenses (230,790) (47,335)
Recoverable Insurance Costs (1,000,000) -
Deposits (422,297) (100,110)
Increase (Decrease) in Liabilities:
Accounts Payable and Accrued Expenses 1,649,331 67,744
Deferred Revenue 227,163 (2,593,816)
-------------- -------------
TOTAL ADJUSTMENTS (3,518,610) 350,576
-------------- -------------
NET CASH (USED) BY OPERATING
ACTIVITIES (8,942,112) (693,907)
-------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash Proceeds from the Redemption of Certificate of Deposit 6,986 (27,678)
Cash Used to Purchase Investment in MeetChina.com (3,745,090) -
Other Assets (156,456) -
Purchase of Property and Equipment (23,432) (19,083)
Purchase of Subsidiaries (5,000) (20,000)
-------------- -------------
NET CASH (USED) BY INVESTING
ACTIVITIES (3,922,992) (66,761)
-------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Loans 7,307,017 3,203,428
Proceeds from the Issuance of Stock 1,333,000 -
Proceeds from the Issuance of Stock in Subsidiary 3,707,750 -
Principal Payments Made on Loans (126,372) (1,940,421)
Principal Payments on Capital Lease Obligations (38,368) (1,496)
-------------- -------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 12,183,027 1,261,511
-------------- -------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (682,077) 500,843
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR 1,130,179 629,336
-------------- -------------
CASH AND CASH EQUIVALENTS AT END OF THE YEAR $ 448,102 $ 1,130,179
============== =============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30,
<TABLE>
<CAPTION>
(Restated)
2000 1999
-------------- -------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest Paid $ 308,700 $ 62,768
============== =============
Income Taxes Paid $ 18,879 $ 2,821
============== =============
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
DURING THE YEAR ENDED JUNE 30, 2000
The Company issued 500,000 shares of common stock with a value of
$839,250 as additional consideration for debt issued.
The Company issued 2,936,667 shares of common stock with a value of
$8,810,000 as consideration for the extinguishment of $4,000,000 plus
accrued interest of debt.
The Company issued 26,667 shares of common stock with a value of $66,667
as additional consideration for services rendered in connection with the
extinguishment of debt.
The Company granted stock warrants for 500,000 shares of common stock
with exercise prices ranging from $2.00 to $5.54 per share for past
services rendered.
The Company issued 157,500 shares of common stock with a value of
$405,409 to employees of the Company.
The Company issued 8,000 shares of common stock with a value of $33,375
for consulting services.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 1 - GENERAL:
BUSINESS AND BACKGROUND:
Total Film Group, Inc. (the "Company") was incorporated under the
laws of the State of Delaware on August 1, 1995. The Company was
originally incorporated under the name Executive Marketing, Inc.
("Executive"). On January 29, 1997 the Company entered into an
agreement with Total Media Corporation ("Media"), a Nevada
corporation, to exchange all of the issued and outstanding shares
of Media for 3,000,000 shares of common stock of the Company. For
accounting purposes, the share exchange was treated as a reverse
acquisition of Executive Inc. by Media. The Agreement and Plan of
Reorganization was closed by the parties in February 1997. As a
result of the closing the Company issued 3,000,000 shares,
representing approximately 67% of the outstanding stock at closing
to Media. 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 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. On February 5, 1997, the Company
changed its name to "Total Film Group, Inc." The Company is also
qualified to do business in the State of California.
Set forth below is a chart showing the Company and its subsidiaries
and the percentage interest in each:
<TABLE>
<CAPTION>
Percent
Parent Company Subsidiary Owned
-------------- ---------- -----
<S> <C> <C>
Total Film Group, Inc. Alien Sky UK Ltd. 100%
Alma Productions UK Ltd. 100%
Sundowning, Inc. 100%
Total China, Inc. 50.004%
Total China II, Inc. 100%
Total Creative, Inc. 100%
Total Films UK Ltd. 100%
Total Media, Inc. 100%
Total Pictures, Inc. 100%
1st Mr., Inc. 100%
</TABLE>
None of our subsidiaries own any subsidiaries.
In February 1998, the Company incorporated a wholly owned
subsidiary, Total Design, Inc., a California corporation engaged in
providing marketing and advertising services. Total Design, Inc.
changed its name to "Dyer Communications, Inc." on May 26, 1998.
Effective January 1999 the Company acquired all of the outstanding
stock of Michel/Russo, Inc., a California corporation engaged in
marketing and advertising for 100,000 shares of common stock of the
Company issued to the two shareholders of Michel/Russo. On March 5,
1999, Dyer Communications, Inc. changed its name to "Total
Creative, Inc." Also effective January 1999 Total Creative, Inc.
and the Company acquired all of the interest in Skyrocket, LLC, a
California limited liability company engaged in web development,
e-commerce, and digital advertising for a total of 225,000 shares
and $25,000. All of the operations of Michel/Russo, Inc. were
transferred to Total Creative, Inc. subsequent to the acquisition
effective January 1999 and the ownership of Michel/Russo, Inc. was
assigned to Total Creative, Inc. in March 2000.
On October 20, 1999, the Company incorporated Total China, Inc., a
Delaware corporation, as a subsidiary. This entity was formed to
act as a holding company to acquire 20% of the capital stock of
MeetChina.com, Inc., formerly known as US Business Network, Inc., a
Delaware corporation, which has intellectual property rights to the
business-to-business e-commerce portal, Meet China.com, and is
engaged directly through a subsidiary in promoting imports and
exports to and
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
from China through the Internet and providing ancillary services
related thereto. In November 1999, Total China, Inc. and the
Company conducted a joint private offering to raise funds for the
transaction with MeetChina.com, Inc. Total China, Inc. sold 30
units in the private offering. Each unit consisted of 1.6666 shares
of common stock of Total China, Inc. and was sold for $66,667 per
unit. As a part of the same private offering, the Company sold 30
units, with each unit consisting of three-year warrants to purchase
6,667 shares of the Company's common stock at an exercise price of
$3.75 per share. The units were sold by the Company for
approximately $6,666.67 each, or $1.00 per warrant. Each warrant
holder was granted registration rights, and a right of first
refusal to purchase a pro rata amount of the assets of Total China,
Inc. Investors were required to purchase both the Total China, Inc.
and the Company units in the offering. Total China, Inc. realized
gross proceeds of $2,000,000 and the Company realized gross
proceeds of $200,000. Also in connection with this private
offering, the Company issued warrants to purchase 200,000 shares of
common stock to JBRG Consultants as a commission for introducing
potential investors to the Company. The proceeds to the Company
were allocated to pay the costs of the offering, and the proceeds
to Total China, Inc. were used to purchase shares of common stock
of MeetChina.com, Inc., which shares ultimately represented 17.58%
of the issued and outstanding capital stock of such corporation at
closing. This reduction in percentage ownership was a result of an
increased valuation of MeetChina.com, Inc. As a result of this
offering, the Company now owns slightly in excess of 50% of the
outstanding stock of Total China, Inc.
On or about December 16, 1999, the Company and Total China, Inc.
jointly entered into a stock purchase agreement with MeetChina.com,
Inc. On December 17, 1999, the Company and Total China, Inc.
finalized the agreement with MeetChina.com, Inc., and the stock of
MeetChina.com, Inc. was issued to Total China, Inc. Because of
subsequent financing by MeetChina.com, Inc., at May 31, 2000, Total
China, Inc. owned approximately 11.9% of the outstanding stock of
such entity. MeetChina.com, Inc. has the option under the agreement
to acquire approximately 5% of the shares purchased by Total China,
Inc. at a cash price of two-thirds of the market value of such
shares. Such right is only exercisable on the 120th day after an
initial public offering of capital stock by MeetChina.com, Inc. on
a designated exchange. Until the stock of MeetChina.com, Inc. is
listed on a designated exchange, the Company and Total China, Inc.
have the right, jointly, to designate one representative to attend
meetings of the board of directors of MeetChina.com, Inc. Total
China, Inc. has the right of first refusal to purchase any shares
to be sold or issued by MeetChina.com, Inc. at less than the price
paid by Total China, Inc. Total China, Inc. also has piggy-back
registration rights to register its shares in any appropriate
registration statement filed by MeetChina.com, Inc. with the U.S.
Securities and Exchange Commission after the initial public
offering and which includes shares of the founders of
MeetChina.com, Inc.
On November 2, 1999, the Company incorporated Total Group, Inc., a
Delaware corporation, as a wholly-owned subsidiary. Originally
formed as a shell corporation, this entity was used to acquire an
equity interest in MeetChina.com, Inc. In August 2000 Total Group,
Inc. changed its name to Total China II, Inc. The Company owns all
of the outstanding common stock of Total China II, Inc. and 5% of
the outstanding preferred stock.
On May 23, 2000, Total China II, Inc. and the Company conducted a
joint private offering to raise funds for the transaction with
MeetChina.com, Inc. The offering was closed in July 2000. Total
China II, Inc. sold 73.86 units in the private offering. Each unit
consisted of 10,000 shares of preferred stock of China II and
10,000 shares of the Company's common stock. The units sold for
$50,000 per unit. The total gross proceeds of the joint private
offering were $3,693,000. Total China II, Inc. realized gross
proceeds of $2,215,800 and the Company realized gross proceeds of
$1,477,200. The Company's proceeds of the offering will be used for
general working capital and the proceeds to Total China II, Inc.
were used to purchase shares of preferred stock in MeetChina.com,
Inc. An investment of $2,000,000 (106,689 shares) was made in
MeetChina.com. In connection with this private offering, a cash fee
of $369,300 was paid to JL Devore & Associates as a commission to
structure and administer the private offering. Of the total fee,
Total China II, Inc.
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
paid $221,580 and the Company paid $147,720. In addition to the
cash fee, JL Devore & Associates was issued 50,000 shares of the
Company's common stock as compensation for services.
The Company's business is divided into three segments: the film
production business, the advertising and marketing business, and as
a holding company. The film production segment is engaged in the
production, marketing, and distribution of commercial feature
films. The advertising and marketing segment is engaged in the
development of advertising and marketing campaigns to provide
Internet services for a variety of clients and the Company. The
Company also holds the stock of two subsidiaries, Total China, Inc.
and Total China II, Inc., which in turn own stock of MeetChina.com,
Inc., an Internet related business.
ACQUISITIONS
The following table presents information about acquisitions made by
the Company for the fiscal years ended June 30, 2000, and 1999. All
of the acquisitions were accounted for under the purchase method of
accounting. All charges were recorded in the quarter in which the
transaction was completed.
<TABLE>
<CAPTION>
Amortization
Acquisition Purchase Period Goodwill
Date Price Goodwill (in Years)
--------------- ---------------- ---------------- ------------------
<S> <C> <C> <C> <C>
Skyrocket, LLC 1/99 $ 531,250 $ 701,598 15
Michel Russo, Inc. 1/99 212,467 313,540 15
</TABLE>
The purchase price was allocated to tangible 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 effect the reported amounts of
assets, liabilities and expenses resulting from such acquisitions.
Actual results could differ from those amounts.
Pursuant to the purchase method of accounting, the accompanying
consolidated statements of operations reflect the results of the
aforementioned entities only subsequent to the date of acquisition.
The following unaudited supplemental pro forma information has been
prepared to give effect to the acquisitions as of the beginning of
the fiscal year preceding the fiscal year in which the acquisition
occurred.
<TABLE>
<CAPTION>
June 30, 1999
-------------
<S> <C>
Total Revenue $ 6,586,061
Total Operating Expenses 8,111,214
-----------
Loss From Operations (1,525,153)
Other Income (Expense) (197,900)
Loss Before Income Tax Expense (1,723,053)
Income Tax (Expense) (28,328)
===========
Net Loss $(1,751,381)
===========
Basic and Diluted Loss Per Share $ (0.20)
-----------
</TABLE>
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION:
The consolidated financial statements include all majority-owned
subsidiaries in which Total Film Group, Inc. exercises control. All
material intercompany balances and transactions have been
eliminated upon consolidation.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS:
The preparation of financial statements in accordance with
generally accepted accounting principles requires that management
use estimates and assumptions in preparing financial statements.
Those estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and
liabilities, and the reported revenues and expenses. Actual results
could differ from those estimates.
REVENUE RECOGNITION:
Revenues from distribution or releasing agreements are recognized
when the film becomes available for release and certain other
conditions are met in accordance with Statement of Position 00-2
("SOP 00-2"), "Accounting by Producers and Distributors of Films".
Revenues from advertising and marketing are generally recognized at
the completion of production.
FOREIGN CURRENCY TRANSLATION
For operations outside the United States that prepare financial
statements in currencies other than the U.S. dollar, results of
operations and cash flows are translated at average exchange rates
during the period, and assets and liabilities are translated at
end-of-period exchange rates. Translation adjustments are included
as a separate component of accumulated other comprehensive income
(loss) in shareholders' equity.
CASH EQUIVALENTS:
The Company considers all short-term investments with an original
maturity of three months or less to be cash equivalents. There were
no short-term investments included in cash and cash equivalents for
the years ended June 30, 2000 and 1999.
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Accounts receivable are stated net of allowance for doubtful
accounts. The allowance is based upon management's estimate of the
collectibility of accounts receivable at the end of the fiscal
year. Management estimated the total allowance to be $12,154 and
$12,155 for the years ended June 30, 2000 and 1999, respectively.
During fiscal year end 2000 and 1999, the Company has written off
$26,301 and $50,600 of accounts receivable, respectively.
MOTION PICTURE DEVELOPMENT COSTS AND AMORTIZATION:
Motion picture development costs represent those costs incurred in
the production, acquisition and distribution of motion pictures,
which include production costs, legal expenses, interest and
overhead costs. The Company is amortizing the film costs for
completed films using the individual-film-forecast-computation
method, whereby expense is recognized in the proportion that
current year revenues bear to management's estimate of ultimate
revenue from all markets.
Motion picture development costs are valued at lower of unamortized
cost or estimated net realizable value. Revenue and cost forecasts
for films are regularly reviewed by management and revised
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
when warranted by changing conditions. When estimates of total
revenues and costs indicate that a film will result in an ultimate
loss additional amortization is provided to fully recognize such
loss.
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost. Depreciation of the cost
of property and equipment is computed using the straight-line
method over the estimated useful lives of the related assets
ranging from three to seven years.
Expenditures for maintenance and repairs are charged to expense as
incurred. Additions and betterments are capitalized. The cost and
related accumulated depreciation of property and equipment sold or
otherwise disposed are removed from the accounts and any gain or
loss is reflected in the current year's earnings.
RECOVERABLE INSURANCE COSTS:
The Company holds an insurance policy of $1,000,000 on the motion
picture Diamonds. The policy which commenced November 1998, will
reimburse the Company for the insured amount less the net revenue
of the film for the 36 months after the film's issuance.
The Company determined that Diamonds which was released during the
fiscal year ended June 30, 2000 became impaired (see note 13) as
its revenues failed to substantiate its capitalized costs. The
revenues received from the motion picture during the year were
immaterial.
DEPOSITS:
Deposits consist of refundable payments made in conjunction with
the Company's motion pictures projects and office rental space.
ORGANIZATION COSTS:
Effective July 1, 1999, the Company adopted Statement of Position
98-5 ("SOP 98-5) "Reporting on the Costs of Start-Up Activities".
SOP 98-5 provides guidance on the financial reporting of start-up
and organization costs and required such costs to be expensed as
incurred. The total amount of deferred start-up costs reported as a
cumulative effect of a change in accounting principle is $126,784
or $.01 per share
GOODWILL:
Goodwill is the excess of the purchase price over the fair value of
identifiable net assets acquired in business combinations accounted
for as purchases. Goodwill is amortized on a straight-line basis
over the periods benefited, fifteen years. Goodwill is reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable the amount is
expensed.
At June 30, 2000 the goodwill associated with the purchase of
Skyrocket LLC was determined to be impaired as operations ceased
immediately following the balance sheet date. The unamortized
balance of $637,063 was expensed for the year ending June 30, 2000.
CAPITALIZED FINANCING FEES:
The Company is in the process of acquiring additional financing for
feature length motion pictures. When funding has been secured the
capitalized costs will be allocated to the films.
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
OTHER ASSETS:
The Company was in the process of acquiring an advertising and
marketing business in Europe as of June 30, 1999. The costs
associated with this acquisition were expensed by the Company for
the year ending June 30, 2000, when negotiations for the business
ceased.
AMORTIZATION OF PLACEMENT FEE:
The Company granted additional consideration, both common stock and
stock warrants for various debt instruments. The consideration was
amortized over the term of the loans, anywhere from six months to
one year. The stock was priced at the fair value at the date of
grant. The warrants were priced using the Black-Scholes valuation
method.
INCOME TAXES:
Income taxes are provided for the tax effects of transactions
reported in the financial statements and consist of taxes currently
due plus deferred taxes. Deferred taxes are recognized for
differences between the basis of assets and liabilities for
financial statement and income tax purposes. The differences relate
primarily to different depreciation methods, net operating loss
carryforwards and state franchise tax. The deferred taxes represent
the future tax return consequences of those differences, which will
either be taxable or deductible when the assets and liabilities are
recovered or settled. A valuation allowance is recognized, if based
on weight of available evidence, it is more likely than not that
some portion or all of the deferred tax asset will not be realized
ACCOUNTING FOR STOCK BASED COMPENSATION
The Company has elected to follow the accounting provisions of
Accounting Principles Board Opinion No. 25 "Accounting for Stock
Issued to Employees" to account for compensation expense for its
stock-based employee compensation plan and to furnish the pro forma
disclosure required under Statement of Financial Accounting
Standards No. 123 "Accounting for Stock-Based Compensation").
EARNINGS (LOSS) PER SHARE:
Net income (loss) per share is computed using the weighted average
number of shares of common stock outstanding. Common equivalent
shares from stock options and warrants have been included in the
computation when dilutive.
Basic EPS is calculated by dividing earnings available to common
stockholders (the "numerator") by the weighted-average number of
common shares outstanding (the "denominator") during the period.
The computation of diluted EPS is similar to the computation of
basic EPS except that the denominator is increased to include the
number of additional common shares that would have been outstanding
if the dilutive potential common shares (that is, securities such
as options, warrants, convertible securities, or contingent stock
agreements) had been issued. In addition, in computing the dilutive
effect of convertible securities, the numerator is adjusted to add
back (a) any convertible preferred dividends and (b) the after-tax
amount of interest recognized in the period associated with any
convertible debt.
Options and warrants representing common shares were excluded from
the average number of common equivalent shares outstanding in the
diluted EPS calculation for the years ended June 30, 2000 and 1999
since that would have an antidiluted effect on EPS.
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
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, 2000 and 1999 were $175,705 and $160,789 respectively.
RECLASSIFICATIONS:
Certain reclassifications have been made to amounts reported in
prior periods to conform with current year presentation.
NOTE 3 - SIGNIFICANT RISKS AND UNCERTANTIES
NEED FOR ADDITIONAL FINANCING
The Company has a need for additional capital in order to provide
working capital for its current business plans. Management believes
it will be able to secure sufficient financing to carry out its
business plan, supported, in part, by written assurance from the
major lender and majority stockholder, that the current debt will
be extended if needed to June 30, 2001 and beyond and has given
verbal assurance to management that it will enable or provide
additional funding to carry out the business plan.
The Company's continued expansion of its business will depend
substantially upon the availability of cash flow from operations or
its ability to raise additional funds. As a result, Total Film
Group may be required to seek additional financing sooner than
anticipated. There is no assurance that the Company will be able to
obtain additional financing when needed, or on terms acceptable to
it. In the event the Company cannot obtain additional funds when
needed on acceptable terms, it may be forced to limit its future
operations, which could have a materially adverse impact on its
business.
RELIANCE ON OFFICERS, DIRECTORS AND KEY EMPLOYEES
The ability of the Company to conduct its business affairs
successfully will be subject to the capabilities, business acumen
and continuing services of the Chairman of the Board of Directors
and its President, Gerald Green, and other current officers and
directors, and any key employees to be hired in the future. The
Company has no employment agreements with any of its officers or
key employees except for Gerald Green and Howard Russo. While the
Company expects to retain the services of both individuals, there
can be no assurance of such result. The loss of either or any
other key employees could have a material adverse impact on the
continued operation of the Company.
CONCENTRATION OF CREDIT RISK:
The Company maintains bank account balances in institutions located
in California, Puerto Rico and Europe. The balances in California
are insured by the Federal Deposit Insurance Corporation up to
$100,000. The Company's cash balances exceeded the level of
insurance coverage for the years ended June 30, 2000 and 1999 by
$318,830 and $946,146, respectively.
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 4 - RECENT PRONOUNCEMENTS
In July 2000, the Accounting Standards Executive Committee of the
AICPA issued Statement of Position 00-2 (SOP 00-02), "Accounting by
Producers or Distributors of Films". SOP 00-2 supercedes Financial
Accounting Standards Board (FASB) Statement of Financial Accounting
Standards No. 53 "Financial Reporting by Producers and Distributors
of Motion Picture Films". SOP 00-2 establishes new accounting and
reporting standards for the Motion Picture Industry. SOP 00-2
requires the Company to review its film capitalization costs and
write off any production which three years from its first
capitalized transaction has not been set for production. The
Company will fully implement SOP 00-2 by the first quarter of
fiscal year 2001. SOP 00-2 is not expected to have a material
impact on the Company's consolidated balance sheet, statements of
operations or cash flows.
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.
NOTE 5 - INVESTMENT IN MEETCHINA.COM
The Company holds equity securities in MeetChina.com, a
non-publicly traded entity at a cost and fair value of $3,745,090.
The investment is classified as available for sale within the other
asset section of the Consolidated Balance Sheet. The Company
investments are reviewed for impairment by senior management. If
the decline in fair value is judged to be other than temporary, the
cost basis will be written down to the fair value and the
write-down will be included in the current period's earnings.
NOTE 6 - PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
2000 1999
--------------------- ---------------------
<S> <C> <C>
Furniture and Fixtures $ 46,785 $ 37,589
Office Equipment 479,935 325,083
Leasehold Improvements 9,029 9,029
--------------------- ---------------------
Total Cost 535,749 371,701
Less: Accumulated Depreciation 335,035 256,753
--------------------- ---------------------
$ 200,714 $ 114,948
--------------------- ---------------------
</TABLE>
Depreciation expense for 2000 and 1999 was $78,282 and $38,184,
respectively.
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 7 - REPORTABLE OPERATING SEGMENTS:
SEGMENT PROFIT OR LOSS:
<TABLE>
<CAPTION>
For the Year Ended June 30, 2000
-------------------------------- Segments
-------------------------------------------------------
Totals Motion Pictures Marketing Holding Co.
----------------- ------------------- --------------- ----------------
<S> <C> <C> <C> <C>
Revenues from external customers $ 3,205,892 $ 131,656 $ 3,074,236 $ -
Intersegment revenues 1,367 - 1,367 -
Interest income 15,559 11,524 - 4,035
Interest expense 1,169,115 1,138,251 30,864 -
Depreciation and amortization 1,750,754 973,991 776,763 -
Operating profit (loss) (5,452,502) (4,523,165) (933,372) 4,035
Segment assets 20,987,165 15,787,691 1,405,154 3,794,320
<CAPTION>
For the Year Ended June 30, 1999
--------------------------------
Totals Motion Pictures Marketing Holding Co.
----------------- ------------------- --------------- ----------------
<S> <C> <C> <C> <C>
Revenues from external customers $ 6,120,094 $ 4,429,388 $ 1,690,706 $ -
Intersegment revenues 88,761 - 88,761 -
Interest income 20,107 20,086 21 -
Interest expense 143,353 129,194 14,159 -
Depreciation and amortization 3,633,458 3,584,700 48,758 -
Operating profit (loss) (987,155) (355,469) (631,686) -
Segment assets 9,663,148 8,209,827 1,453,321 -
</TABLE>
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.
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
RECONCILIATION OF SEGMENT INFORMATION TO CONSOLIDATED AMOUNTS:
Information for the Company's reportable segments relates to its
consolidated totals as follows:
<TABLE>
<CAPTION>
For the Years Ended June 30,
--------------------------------------------
2000 1999
------------------ -----------------
<S> <C> <C>
Revenues
Total revenues for reportable segments $ 3,207,259 $ 6,208,855
Elimination of intersegment revenues (1,367) (88,761)
------------------ -----------------
Total consolidated revenues $ 3,205,892 $ 6,120,094
================== =================
Income or Loss
Total loss for reportable segments $ (5,452,502) $ (987,155)
Elimination of intersegment income 29,000 (29,000)
------------------ -----------------
Loss before income tax $ (5,423,502) $(1,016,155)
================== =================
Assets
Total assets for reportable segments $ 20,987,165 $ 9,663,148
Eliminations of intersegment transactions (3,274,936) (2,933,240)
------------------ -----------------
Consolidated total $ 17,712,229 $ 6,729,908
================== =================
</TABLE>
MAJOR CUSTOMER INFORMATION:
Revenues from three customers of the Company's marketing and
advertising segment represent approximately $1,069,852 or 33.3%
(13.6%, 12.9%, 6.8%) of the Company's consolidated revenues, for
the year ended June 30, 2000.
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 8 - DEBT OBLIGATIONS
<TABLE>
<S> <C> <C>
Mercantile National Bank credit line, entered into March 1999 with monthly
principal payments of $8,333, plus interest at 8.75% per annum. The
credit line matures
March 2000. $ - $ 75,000
WestAmerica Bank note assumed February 1999 with monthly principal payments
of $2,500 plus a variable rate of interest currently 12.00%
per annum. The debt matures September 2000. 5,000 35,000
WestAmerica Bank note assumed February 1999 with monthly principal payments
of $1,637 plus a variable rate of interest currently 12.00%
per annum. The debt matures September 2000. 3,274 22,917
WestAmerica Bank credit line, assumed January 1999.
The interest rate is 12.50% per annum. 44,931 46,660
Note entered into February 11, 1999 with principal payable quarterly at
$375,000 beginning three months following the date of the first advance
plus interest at 13.50% per annum.
The note matures February 2000. - 2,000,000
Note entered into January 2000, with interest payable quarterly at a
variable rate of interest currently
10.50%. The note matures December 2001. 1,000,000 -
Note entered into February 2000, with interest payable
quarterly at a 8% rate of interest. The note matures
September 2000. 100,000 -
Note entered into March 2000, with interest payable
quarterly at a 9% rate of interest. The note matures
December 2000. 100,000 -
Note entered into March 2000, with interest accruing
at a rate of 7.5%. The note is secured by the foreign
rights to My First Mister. The note matures April 2001. 1,607,017 -
Note entered into April 20, 2000 with a 30% premium
which is being accrued as interest due on maturity. The
principal balance is $2,500,000 with $457,627 of interest. The
note matures August 2000 (from a majority shareholder). 2,957,627 -
---------------- -----------------
$5,817,849 $ 2,179,577
Less: Current Portion 4,776,918 2,126,925
---------------- -----------------
$1,040,931 $ 52,652
================ =================
</TABLE>
Future aggregate debt maturities are as follows:
<TABLE>
<CAPTION>
Years Ending
June 30 Amount
------------------------ ------------------
<S> <C>
2001 $ 4,776,918
2002 1,002,210
2003 2,675
2004 2,993
2005 and Thereafter 33,053
------------------
$ 5,817,849
==================
</TABLE>
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
The holder of the February 1999, $2,000,000 note received as
additional consideration, 250,000 warrants to purchase the
Company's common stock. The fair value of the warrants was
determined using the Black-Scholes valuation model to be $450,000
and has been recorded as an unamortized debt discount to be
amortized as interest over one year, the term of the debt. The
unamortized loan discount at June 30, 2000 and 1999 was $0 and
$275,686 respectively.
Total interest expense for these obligations for the years ended
June 30, 2000 and 1999 was $1,116,915 and $143,353 respectively.
NOTE 9 - RELATED PARTY TRANSACTIONS:
The Company has receivables totaling $210,734 from its officers.
The receivables are due between July 2002 to September 2003. The
receivables at June 30, 2000 carry a stated rate of interest of 8%.
Prior to January 2000 the Company loaned funds to its officers
without interest.
The Company's chief executive and his wife are employed by
Sundowning, Inc. as the executive producer and the producer of the
motion picture "Diamonds". For their services, they are to receive
fees totaling $250,000, of which $150,000 is deferred, without
interest. The agreement becomes effective as of the release date of
the film. Producer fees of $100,000 were paid by June 30, 1999. A
bonus of $40,000 was paid to the Company's chief executive's wife
during the fiscal year ended June 30, 2000.
The Company's chief executive and his wife are employed by My First
Mister and Bride of the Wind as the executive producer and producer
of those respective motion pictures. For their services they were
paid $375,000 during the fiscal year ended June 30, 2000.
The Company entered into several loan agreements with its principal
shareholder. The total amount financed for the years ended June 30,
2000 and 1999 were $4,500,000 and $2,000,000 respectively.
Additionally, the Company granted 250,000 warrants and 250,000
shares of restricted common stock as additional consideration for
those loans. The Company later negotiated extensions of the initial
payment of principal in return for which the Company issued 250,000
shares of Company common stock to the fund. On February 28, 2000
the Company entered into an agreement to extinguish $4,000,000 by
converting the principal amount of the loans into common stock of
the Company and to forgive the $376,100 of unpaid interest. The
conversion ratio stipulated that for each $1.50 of principal and
$1.39 of past due interest one share of Company common stock would
be issued. Pursuant to the agreement the Company issued 2,936,667
shares to the entities controlled by the majority shareholder. As a
result of this transaction the Company recorded an extraordinary
loss of $4,553,982 after taxes or $.50 per share. The reported loss
was the difference between the fair value of the stock received by
the principal shareholder and the total obligations retired. The
agreement does not effect any of the previous additional
consideration granted by the Company.
Mr. Green was employed by Total Films UK Limited, a wholly owned
subsidiary of the Company, as the executive producer of THE NEW
SWISS FAMILY ROBINSON. For his services, Mr. Green earned $300,000
and screen credit as producer of the film. Payment of the cash
consideration has been deferred, without interest, until the film
recoups its negative costs. Mr. Green is also an officer and a
director of Total Films UK Limited.
A director received stock options for the purchase of 75,000 shares
at $2.00 per share in August 1998. He exercised this option in
February 2000, by canceling 30,000 options. He received 45,000
shares through such exercise.
In February 1999 the Company assumed the repayment of two loans and
one line of credit with a total principal amount of $150,000, the
balance of which at June 30, 2000, was $12,274, between Red Sky
Films, LLC and Skyrocket, LLC as the borrowers and Westamerica Bank
as the lender. Assumption of the loans and the line of credit were
required pursuant to the acquisition agreement between the Company
and Skyrocket, LLC.
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 10 - COMMITMENTS AND CONTINGENCIES:
LEGAL MATTERS
The Company was named in a dispute with the Screen Actors Guild
Pension Plan (the "Plan"). The Plan was awarded a judgement of
$56,525 for back pension contributions owed pertaining to the
motion picture New Swiss Family Robinson. The amount rendered in
the judgement has been accrued by the Company as of June 30, 2000.
LINE OF CREDIT
The Company has a line of credit from Mercantile National Bank for
$140,000. This irrevocable letter of credit is secured by TCI's
accounts receivable. This line of credit was granted in April 2000
and expires February 2001. The Company uses this letter of credit
to secure office space in San Francisco.
EMPLOYMENT AGREEMENTS
The Company has an employment contract with key executive officers
that expire from December 31, 2000 to August 31, 2004. In addition
to a base salary, the agreements provide for a cash bonus and a
supplemental bonus based on pre-tax earnings. The Company is
obligated for $1,662,501 under the terms of the various employment
agreements.
CAPITAL LEASE
The Company currently leases certain office equipment with lease
terms expiring February 2002 through May 2003. These capital lease
obligations have been recorded in the accompanying financial
statements at the present value of future minimum lease payments.
The capitalized cost of $104,116 is included in office equipment in
the accompanying balance sheet. Accumulated depreciation at June
30, 2000 and 1999 includes $18,621 and $2,673, respectively,
related to the capitalized cost of the office equipment. Future
minimum lease payments are as follows:
<TABLE>
<CAPTION>
Year Ending
June 30, Lease Payments
-------- --------------
<S> <C>
2001 $60,546
2002 57,327
2003 9,248
---------
Total future minimum
lease payments $127,121
========
</TABLE>
OPERATING LEASE
The Company has entered into lease agreements for its office
facilities and other office equipment under noncapitalized leases
with terms ranging from two to five years and monthly payments from
$222 to $22,838. Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
Year Ending
June 30, Lease Payments
-------- --------------
<S> <C>
2001 $518,728
2002 518,728
2003 381,698
2004 240,534
2005 196,883
----------
Total future minimum
lease payments $1,856,573
==========
</TABLE>
Total rental expense included in the financial statements for the
years ending June 30, 2000 and 1999 was $311,025 and $243,011,
respectively.
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 11 - INCOME TAXES:
The Company has available at June 30, 2000 and 1999, unused
operating loss carryforwards of approximately $11,800,000 and
$1,700,000, respectively, which may be applied against future
taxable income and which expire in various years through 2019.
The amount of and ultimate realization of the benefits from
operating loss carryforwards for income tax purposes is
dependent, in part, upon the tax laws in effect, the future
earnings of the Company, and other future events, the effects of
which cannot be determined. Because of the uncertainty
surrounding the realization of the loss carryforwards the Company
has established a valuation allowance equal to the amount of the
tax effect of loss carryforwards and, therefore, no deferred tax
asset has been recognized for the loss carryforwards.
The Company's net deferred tax assets (using a federal rate of
34%) consisted of the following at:
<TABLE>
<CAPTION>
June 30, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
Deferred Tax Assets $4,012,000 $578,000
Deferred Tax Asset Valuation ( 4,012,000) ( 578,000)
----------- ---------
Net Deferred Tax Assets $ - $ -
=========== =========
</TABLE>
NOTE 12 - STOCKHOLDERS' EQUITY:
STOCK OPTION PLAN:
In July 1998, the Company adopted a Non-Qualified Stock Option
Plan (the "Plan"). As of June 2000, approximately 800,000 shares
of Common Stock are reserved for future issuance under this plan.
The Plan allows for the Company to grant stock options to
purchase shares of the Company's authorized but unissued Common
Stock to officers, key employees, non-employee directors and
consultants. Options are generally priced at the fair market
value of the stock on the date of grant. Options are generally
exercisable immediately but unvested shares are held in escrow.
Options currently expire no later than five years from the date
of grant. The Plan will terminate on June 19, 2008. As of June
30, 2000 and 1999, approximately 730,000 shares of Common Stock
were issued by the Plan.
INDIVIDUAL STOCK OPTION AGREEMENTS:
The Company grants stock pursuant to individual stock option
agreements. The Company granted 752,500 and 230,000 options to
employees under such agreements for the years ended 2000 and
1999, respectively.
Information relative to stock option activity is as follows (in
thousands):
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
The following table summarizes information concerning currently
outstanding and exercisable options:
<TABLE>
<CAPTION>
Weighted
Options Average
Available Exercise
Shares Price
<S> <C> <C>
Options Outstanding at July 1, 1998 - $ -
Granted 960 2.00
Exercised - -
Cancelled - -
---------------- ---------------
Options Outstanding at June 30, 1999 960 $ 2.00
Granted 752 $ 2.44
Exercised (45) 1.63
Cancelled - -
---------------- ---------------
Options Outstanding at June 30, 2000 1,667 $ 2.28
</TABLE>
Using Black-Scholes option valuation model, the weighted average
estimated fair value of employee stock options granted in the
year ended June 30, 2000 was $1.10.
<TABLE>
<CAPTION>
Option Outstanding Option Exercisable
----------------------------------------- -----------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
---------------- ------------- ------------ ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
$2.00 - $5.00 1,667,500 2.04 $2.23 1,432,500 $2.05
</TABLE>
STOCK BONUS PLAN:
In January 2000 the Company adopted a Stock Bonus Plan ("Stock
Bonus Plan") which allows the Company to issue up to 50,000
restricted shares of the Company's common stock to directors,
officers, employees, and others who have performed bona fide
services for the Company. Pursuant to the terms of the Stock
Bonus Plan, the Company issued 7,500 shares with a fair value of
$31,875 to an employee of the Company during the year ended June
2000.
STOCK - BASED COMPENSATION:
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related
interpretations in accounting for its plan. Accordingly, no
compensation expense has been recognized for its stock-based
compensation plan other than for the stock options granted to
non-employee directors and consultants. Had compensation cost for
the Company's other options granted been determined based upon
the fair value at the grant date for awards under this plan been
consistent with the methodology prescribed under Statement of
Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation", the Company's net loss and net loss
per share would have been increased to the pro forma amounts
indicated below:
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
<TABLE>
<S> <C>
Net Loss as Reported $ (10,104,268)
Proforma Net Loss (10,200,003)
Basic Net Loss per
Share as Reported (1.10)
Proforma Basic Net
Loss per Share (1.12)
</TABLE>
For purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the options' vesting
period.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective
assumptions, including the expected stock price volatility.
Because the Company's options have characteristics significantly
different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair
value estimate, in the opinion of management, the existing models
do not necessarily provide a reliable single measure of the fair
value of its options.
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model using a
dividend yield of 0% and the following additional weighted
average assumptions used for grants.
<TABLE>
<S> <C>
Expected Stock Price Volatility 0.672%
Risk-Free Interest Rate 6%
Expected Lives (In Years) 3
</TABLE>
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NON-CASH EQUITY TRANSACTIONS:
The Company issued shares of its common stock and stock warrants
in non-cash transactions. The issued shares of common stock were
reported at its fair value on the date of grant. The fair value
of stock warrants were determined using the Black-Scholes
valuation model.
Included in the current Statement of Stockholders' Equity are the
following non-cash transactions:
<TABLE>
<CAPTION>
Number
Date of Shares Transaction or Service Provided Fair Value
-------------- ---------------- -------------------------------------------------- ----------------
<S> <C> <C> <C>
Jan-99 150,000 Purchase of Skyrocket, LLC $ 337,500
Jan-99 100,000 Purchase of Michel Russo, Inc. 212,466
Jan-99 5,000 Arranged financing for Company 11,650
Jun-99 75,000 Purchase of Skyrocket, LLC 168,750
Jul-99 50,000 Compensation for TCI Director 168,464
Aug-99 250,000 Extension of $2,000,000 loan and accrued interest 291,667
Sep-99 250,000 Granted to lender for $2,000,000 loan 546,750
Jan-00 7,500 Bonus to Company employee 32,066
Mar-00 2,666,667 Conversion of $4,000,000 debt to equity - Note 15 8,000,000
Mar-00 270,000 Extinguishment of $376,100 of interest on debt 810,000
Mar-00 26,667 Consulting fee for brokering debt conversion 66,667
May-00 2,000 Motion picture consulting fee 7,500
May-00 6,000 Motion picture consulting fee 25,875
Jun-00 50,000 Compensation for TCI Director 139,500
Jun-00 50,000 Compensation for TCI Director 159,000
----------------
$ 10,977,855
<CAPTION>
Number
Date of Warrants Transaction or Service Provided Fair Value
-------------- ---------------- -------------------------------------------------- ----------------
<S> <C> <C> <C>
Feb-99 250,000 Additional consideration on $2,000,000 loan $ 450,000
Sep-99 100,000 Financial consultants placement fees 87,000
Sep-99 60,000 Financial consultants placement fees 32,400
Sep-99 40,000 Financial consultants placement fees 34,000
Nov-99 200,000 Placement fees for MeetChina.com 140,000
Dec-99 25,000 Financial consultants placement fees 25,500
Jan-00 25,000 Additional consideration on $1,000,000 loan 28,250
Mar-00 25,000 Financial consultants placement fees 48,250
Jun-00 25,000 Financial consultants placement fees 41,250
----------------
$ 886,650
</TABLE>
NOTE 13 - MOTION PICTURE COSTS
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
The Company's film production business has completed three motion
pictures since its inception: The New Swiss Family Robinson,
Diamonds and Chick Flick. The Company currently has two other
films that are in production: My First Mister and Bride of the
Wind. The Company is also developing other full length feature
films. As of June 30, 2000 the components of motion picture costs
net of production funding arrangement (See Note 14) are as
follow:
<TABLE>
<S> <C>
Released $ 5,624,823
Completed But Not Released 364,051
In Production 5,817,317
Preproduction 1,301,339
------------------
Total Motion Picture Costs 13,107,530
Less: Accumulated Amortization (3,611,722)
------------------
Net Motion Picture Costs $ 9,495,808
==================
</TABLE>
The Company capitalizes all film costs which include all direct
negative costs incurred in the physical production of a film, as
well as allocations of production overhead and capitalized
interest. Participation costs are accrued based on the
individual-film-forecast-computation method. Exploitation costs
are expensed as incurred.
The Company recorded amortization costs for the years ended June
30, 2000 and 1999, of $118,013 and $3,493,709, respectively. The
Company expects to amortize approximately 22% of its completed
films cost for the fiscal year ending June 30, 2001. The Company
does not have any accrued participation costs that will be paid
in the upcoming fiscal year.
In addition the Company determined that one of its completed
films Diamonds had been impaired as a result of the films actual
performance subsequent to release failing to generate sufficient
exploitation proceeds to substantiate its capitalized costs. The
capitalized cost associated with that picture was written-off
during the current fiscal year and no longer reported in the
Released Film. For the years ended June 30, 2000 and 1999, the
Company expensed $1,091,047 and $51,959 of previously capitalized
motion picture costs.
NOTE 14 - PRODUCTION FUNDING ARRANGEMENTS:
The Company has entered into various production funding
arrangements for the motion pictures which it produces. These
contracts specify that the Company and a third party will
co-produce and exploit the feature films. In exchange for the
co-production rights the third party will make a financial
contribution for the costs incurred in the exploitation of the
film. All incoming exploitation proceeds are allocated between
the Company and the third parties as specified by the production
funding arrangements. Generally the third parties insure their
production funding contributions, with the Company assuming no
liability for the third parties recoupement of their investment.
As of June 30, 2000 and 1999 third parties had contributed
$5,179,195 and $7,219,391, respectively under these agreements.
These contributions have been netted against the total cost of
the motion pictures.
NOTE 15 - DEBT EXTINGUISHMENT
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
APB Opinion No. 30 defines extraordinary items as "events and
transactions that are distinguished by their unusual nature and
by the infrequency of their occurrence". Statement of Financial
Accounting Standards No. 4 further specifies that all material
gains and losses from extinguishment shall be aggregated and, if
material, classified as an extraordinary item, net of related tax
expense.
During the fiscal year ended June 30, 2000 the Company entered
into an agreement to extinguish $4,000,000 by converting the
principal amount of the loans into common stock of the Company
and to forgive the $376,100 of unpaid interest. The conversion
ratio stipulated that for each $1.50 of principal and $1.39 of
past due interest one share of Company common stock would be
issued. Pursuant to the agreement the Company issued 2,936,667
shares to the entities controlled by the majority shareholder
(see Note 9). As a result of this transaction the Company
recorded an extraordinary loss of $4,553,982 net of taxes or $.50
per share. The reported loss was the difference between the fair
value of the stock received by the principal shareholder and the
total obligations retired.
NOTE 16 - RESTATEMENTS OF FINANCIAL STATEMENTS
The accompanying financial statements for the period ended June
30, 1999 have been restated to correct an error in the
calculation of the value of options granted to directors. The
effect of the restatement is a decrease of the net loss for the
year ended June 30, 1999 by $534,950.
NOTE 17 - SUBSEQUENT EVENTS:
In July 2000, the Company received an extension on the $2,500,000
loan entered into April 2000 due August 2000, with its majority
shareholder. In exchange for the extension the Company issued
500,000 shares of common stock payable 166,667 shares per month
that the obligation was extended.
In August 2000, the Company completed its offering in China II.
The Company received the balance owed from the joint private
offering made by the Company and China II. The common stock of
the Company has not been issued to its investors or as a
placement fee as of the date of the auditors' report. Also in
August, the Company received a $1,000,000 working capital loan
from its principal shareholder. The loan bears interest at 12%
per annum payable quarterly. The loan will be convertible at
$3.00 per share, provided that the conversion price will be
reduced to $1.50 for the ninety day period following the due
date, and to $1.00 per share thereafter, if the loan remains
unpaid. The Company also paid a consulting fee of $70,000 and has
agreed to issue five year warrants to purchase 100,000 shares at
$3.50 per share to Capital Research Ltd. in connection with the
loan.
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
------
September 30, 2000 June 30, 2000
--------------------- ---------------------
CURRENT ASSETS (Unaudited) (Audited)
<S> <C> <C>
Cash and Cash Equivalents $ 887,126 $ 448,102
Time Certificate of Deposit 20,692 20,692
Accounts Receivable 622,137 1,181,579
Related Party Receivable 243,043 218,954
Deferred Production Costs 145,198 103,221
Prepaid Expenses 25,450 281,347
Unamortized Placement Fee 600,861 -
--------------------- --------------------
TOTAL CURRENT ASSETS 2,544,507 2,253,895
OTHER ASSETS
Film Costs, Net of Amortization 10,086,624 9,495,808
Property and Equipment, Net of Amortization 172,984 200,714
Investment in MeetChina.com 3,868,956 3,745,090
Recoverable Insurance Costs 1,000,000 1,000,000
Deposits 261,640 538,483
Goodwill, Net of Amortization 276,961 282,186
Capitalized Financing Fees 196,053 196,053
--------------------- --------------------
15,863,218 15,458,334
--------------------- --------------------
TOTAL ASSETS $ 18,407,725 $ 17,712,229
===================== ====================
LIABILITIES
-----------
CURRENT LIABILITIES
Debt Maturing within One Year $ 5,509,188 $ 4,319,291
Current Portion of Capital Lease 44,018 45,464
Accounts Payable and Accrued Expenses 2,443,407 2,273,161
Deferred Revenue 367,832 227,163
Producer's Fee Payable, Related Party 600,000 600,000
--------------------- --------------------
TOTAL CURRENT LIABILITIES 8,964,445 7,465,079
--------------------- --------------------
LONG-TERM LIABILITIES
Long-Term Debt, Net of Current Portion 1,022,282 1,040,931
Capital Lease, Net of Current Portion 50,087 57,905
--------------------- --------------------
TOTAL LONG-TERM LIABILITIES 1,072,369 1,098,836
--------------------- --------------------
TOTAL LIABILITIES 10,036,814 8,563,915
--------------------- --------------------
MINORITY INTEREST IN EQUITY OF CONSOLIDATED SUBSIDIARY 829,550 829,550
--------------------- --------------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
--------------------
September 30, 2000 June 30, 2000
----------------------- --------------------
(Unaudited) (Audited)
<S> <C> <C>
Preferred Stock - Par Value $3 per Share; Authorized 1,080,000
Shares; Issued and Outstanding 738,600 2,215,800 2,215,800
Common Stock, $0.001 Par Value; Authorized 50,000,000
Shares; Issued and Outstanding 12,693,633 and 12,335,299
Shares Respectively 12,694 12,336
Additional Paid-in Capital 19,347,677 17,976,175
Accumulated Deficit (14,034,810) (11,885,547)
--------------------- --------------------
TOTAL STOCKHOLDERS' EQUITY 7,541,361 8,318,764
--------------------- --------------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 18,407,725 $ 17,712,229
===================== ====================
</TABLE>
See Notes to Condensed Consolidated Financial Statements
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended September 30,
------------------------------------------------
2000 1999
-------------------- --------------------
<S> <C> <C>
REVENUE
Film Production Income $ 311,511 $ -
Advertising and Marketing Fees 249,056 556,542
-------------------- --------------------
560,567 556,542
==================== ====================
COSTS AND OPERATING EXPENSES
Production and Design Costs 196,608 443,297
Selling, General & Administrative Expenses 1,323,775 472,363
Depreciation and Amortization 17,602 49,043
-------------------- --------------------
TOTAL COSTS AND OPERATING EXPENSES 1,537,985 964,702
-------------------- --------------------
LOSS BEFORE OTHER INCOME (EXPENSES) (977,418) (408,160)
-------------------- --------------------
OTHER INCOME (EXPENSE)
Interest Income 12,160 289
Interest Expense (362,203) (99,036)
Amortization of Placement Fee (822,866) (210,337)
Miscellaneous Income 1,063 18,344
-------------------- --------------------
TOTAL OTHER INCOME (EXPENSE) (1,171,846) (290,740)
-------------------- --------------------
NET LOSS $ (2,149,263) $ (698,900)
==================== ====================
BASIC LOSS PER SHARE $ (0.17) $ (0.08)
==================== ====================
WEIGHTED AVERAGE NUMBER OF BASIC
COMMON SHARES OUTSTANDING 12,464,285 8,780,000
==================== ====================
</TABLE>
See Notes to Condensed Consolidated Financial Statements
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended September 30,
---------------------------------------------
2000 1999
------------------- -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (2,149,263) $ (698,900)
---------------------- -----------------------
Adjustments to Reconcile Net Loss to Net Cash
Provided By (Used in) Operating Activities:
Prodeeds from Production Funding Arrangements (14,051) -
Cash Used in Motion Picture Development (590,816) (153,456)
Fair Value of Equity Granted and Other Non-Cash Transactions 65,474 -
Depreciation and Amortization 17,602 49,042
Amortization of Placement Fees 822,866 210,337
Decrease (Increase) in Assets:
Accounts Receivable 559,442 (31,488)
Related Party Receivable (24,089) (76,313)
Deferred Costs (41,977) -
Prepaid Expenses 255,897 24,105
Deposits 276,843 (9,000)
Increase (Decrease) in Liabilities:
Accounts Payable and Accrued Expenses 170,246 32,284
Deferred Revenue 140,669 -
---------------------- -----------------------
TOTAL ADJUSTMENTS 1,638,106 45,511
---------------------- -----------------------
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES (511,157) (653,389)
---------------------- -----------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash Proceeds from the Redemption of Certificate of Deposit - 7,561
Cash Used to Purchase Investment in MeetChina.com (253,910) -
Other Assets - 37,472
Purchase of Property and Equipment - (106,856)
---------------------- -----------------------
NET CASH (USED) BY INVESTING
ACTIVITIES (253,910) (61,823)
---------------------- -----------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Loans 1,197,371 1,200,000
Proceeds from the Issuance of Stock 42,107 -
Principal Payments Made on Loans (26,123) (74,436)
Principal Payments on Capital Lease Obligations (9,264) (1,121)
---------------------- -----------------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 1,204,091 1,124,443
---------------------- -----------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 439,024 409,231
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 448,102 1,130,179
---------------------- -----------------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 887,126 $ 1,539,410
====================== =======================
</TABLE>
See Notes to Condensed Consolidated Financial Statements
<PAGE>
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying consolidated financial statements of Total Film Group,
Inc. and Subsidiaries (the "Company") have been prepared in accordance
with generally accepted accounting principles for interim financial
information without audit. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting only of normal recurring
adjustments) considered necessary for a fair presentation have been
reflected in these consolidated financial statements. Operating results
for the three months ended September 30, 2000 are not necessarily
indicative of the results that may be expected for the year ending June
30, 2001. Certain reclassifications have been made in the June 30, 2000
consolidated financial statements to conform to the September 30, 2000
presentation. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's
Annual Report on Form 10-KSB for the year ended June 30, 2000.
2. The Company has a need for additional capital in order to provide
working capital for its current business plans. Management believes it
will be able to secure sufficient financing to carry out its business
plan, supported in part by written assurance from the Company's major
lender and majority stockholder that current debt will be extended if
needed to June 30, 2001 and beyond and has given verbal assurance to
management that it will enable or provide additional funding to carry
out the business plan.
The Company's continued expansion of its business will depend
substantially upon the availability of cash flow from operations or its
ability to raise additional funds. As a result, Total Film Group may be
required to seek additional financing sooner than anticipated. There is
no assurance that the Company will be able to obtain additional
financing when needed, or on terms acceptable to it. In the event the
Company cannot obtain additional funds when needed on acceptable terms,
it may be forced to limit its future operations, which could have a
materially adverse impact on its business.
3. The Company obtained a convertible promissory note of $1,000,000 from
its majority shareholder. The note, convertible into Company common
stock at $3 per share has a stated rate of interest of 12%, is dated
August 14, 2000 and is redeemable nine months from the date of
issuance. Under the terms of the note, the Company transferred
ownership of 30,000 shares of MeetChina.com to the lender. The
financial consultant who arranged the financing received a fee of 7% of
the convertible promissory note and 100,000 stock warrants exercisable
at $3.50 per share.
4. The Company extended a debt obligation for $2,500,000 dated April 20,
2000 originally due August 15, 2000. The note from the majority
shareholder was extended until November 13, 2000. Under the extension
granted by the lender, the Company can roll over the loan on a monthly
basis. For this right the Company agreed to issue 166,667 shares of
common stock for each monthly extension.
<PAGE>
Page 49
PART III
Items 1 and 2. Index to Exhibits and Description of Exhibits. The
following exhibits are included as part of this statement:
<TABLE>
<CAPTION>
Exhibit No. Description Location
<S> <C> <C>
2.1 Articles of Incorporation, as amended *
2.2 Current Bylaws *
3.1 Form of Common Stock Certificate *
6.1 Reorganization Agreement dated January 29, 1997 *
6.2 Promissory Note to Merchants T&F dated December 15, 1998 *
6.3 Loan Agreement with the Orbiter Fund dated February 9, 1999, as
amended August 11, 1999 *
6.4 Promissory Note to The Orbiter Fund dated February 10, 1999 *
6.5 A-Warrant Certificate Form, with schedule, to the Orbiter Fund
6.6 Capital Research, Ltd Agreement *
6.7 B-Warrant Certificate Form, with schedule, to Capital
Research Ltd. Attached
6.8 $2 Million Convertible Note Term Sheet dated September 21, 1999 *
6.9 Form of Convertible Promissory Note with schedule of note holders *
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 *
6.21 Employment Agreement of Howard Russo, as amended *
6.22 Stock Option Certificate to Howard Russo *
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 *
<PAGE>
Page 50
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 Attached
6.34 Paramount Pictures Corporation/Alma U.K. Production, Limited letter agreement for
BRIDE OF THE WIND *
6.35 Paramount Pictures Corporation/First Mr. Inc. letter agreement for
MY FIRST MISTER *
6.36 JBRG Consultants consulting agreement *
6.37 C-Warrant Certificate for JBRG Consultants **
6.38 D-Warrant Certificate for Davimos **
6.39 Option Agreement for Gerald Green **
6.40 Foreign Sales Agreement, with assignment **
6.41 Dyer Loan Agreement dated August 18, 2000 ***
6.42 Memorandum of Agreement dated April 20, 2000, with Lauer,
Garvey, Hauser, and Cowen for $2,500,000 loan;
promissory note dated April 20, 2000, and extensions
dated August 1, 2000, and November 10, 2000 Attached
6.43 Employment Agreement of Peter Dattilo Attached
6.44 Stock Option Certificate to Peter Dattilo Attached
6.45 Term Sheet for $525,000 senior convertible promissory notes Attached
6.46 Form of senior convertible note for $525,000 and schedule
of note holders Attached
6.47 Registration rights agreements for $525,000 loan Attached
6.48 Term Sheet for $1 Million senior convertible promissory notes Attached
6.49 Form of senior convertible note for $1 Million and schedule
of note holders Attached
6.50 Form of Registration rights agreement for $1 Million loan
with schedule Attached
10.1 Consent of auditor Attached
</TABLE>
----------------
*Filed with the original Form 10-SB registration statement of the
Company filed with the Securities and Exchange Commission on April 5, 2000 (SEC
File no. 0-30227).
**Filed with the first post-effective amended Form 10-SB registration
statement of the Company filed with the Securities and Exchange Commission on
July 25, 2000 (SEC File no. 0-30227).
***Filed with the second post-effective amended Form 10-SB registration
statement of the Company filed with the Securities and Exchange Commission on
October 13, 2000 (SEC File no. 0-30227).
<PAGE>
Page 51
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: December 14, 2000 By /s/ Gerald Green
----------------------------------------
Gerald Green, President
Date: December 14, 2000 By /s/ Peter Dattilo
----------------------------------------
Peter Dattilo, Chief Financial Officer
