<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended June 30, 2000 or
[_] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from __________ to__________
Commission file number: 0-27063
Family Room Entertainment Corporation
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(Name of small business issuer in its charter)
New Mexico 85-0206160
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1041 N. Formosa Ave. Mary Pickford Bldg., Ste. 101, Los Angeles, CA. 90046
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (323) 850-2800
Securities registered pursuant to Section 12(b) of the Act: (NONE)
Securities registered pursuant to Section 12(g) of the Act: Common Stock
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
-
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
Regulation S-B is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
The issuer had revenues of $679,188 for the fiscal year ended June 30, 2000.
The aggregate market value of the voting stock held by non-affiliates on June
30, 2000 was approximately $6,627,730 based on the average of the bid and asked
prices of the issuer's common stock in the over-the-counter market on such date
as reported by the OTC Bulletin Board. As of June 30, 2000, 18,245,487 shares of
the issuer's common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The company's report on Form 8-K dated February 11, 2000: Items 1,2 and 7
The company's report on Form 8-K/A dated May 18, 2000:Items 5 and 7
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PART I
ITEM 1. Description of Business
General Business Development
---------------------------
Family Room Entertainment Corporation (the "Company"), is a New Mexico
corporation originally organized as Cobb Resources and was incorporated in 1969.
Our Company is located in Los Angeles, California, and is a Motion Picture
Entertainment Production, Finance, Distribution, and Internet content company.
Restructuring Transaction
As Cobb Resources Corporation, the Company had been active in the mining
and oil and gas sectors. Effective February 3, 2000, three individuals and
certain entities under their control (collectively referred to as the
"Investors") acquired 88% of our common stock through a series of transactions
as follows:
. The three Investors each acquired 666,666 shares (approximately 7.8%
individually and 23.4% in the aggregate of our common stock from our most
significant stockholder (the "Stockholder").
. We sold substantially all of our existing assets, including mineral
interests, cash, equity securities and other assets, to the Stockholder in
exchange for 2,000,000 shares of our common stock (that were placed in treasury)
and the Stockholder's assumption of all of our known and unknown liabilities,
fixed and contingent, that had accrued up to February 3, 2000. The aggregate
purchase price paid by the Stockholder in connection with this transaction was
approximately $347,000. As a result of this transaction, we discontinued all
current operations in which it was engaged.
. We enacted a ten for one reverse stock split that was effective for
stockholders of record on February 17, 2000.
Asset Purchase
Concurrent with the Restructuring Transaction described above, we acquired
interests in certain film projects (the "Asset Purchase") in exchange for
12,707,000 post-split shares of our common stock. The interest in the film
projects acquired during the Asset Purchase were collectively valued at $
1,837,000 based upon independent appraisal.
Name and Symbol Change
Effective May 22, 2000, COBB Resources Corporation's name was changed to
Family Room Entertainment Corporation, and its corresponding OTC:BB trading
symbol "COBB was changed to "FMLY".
Entertainment Motion Picture Industry Overview
The Company discontinued all activities in Mining, Oil and Gas as a result
of the restructure and is now in the entertainment industry. The Company
develops and produces entertainment projects through the following three wholly-
owned subsidiaries: (1) Emmett/Furla
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Films Productions Corporation. (hereafter, "EFFP"), a California Corporation, is
a Motion Picture Development and Production entity that primarily develops and
produces motion pictures intended for worldwide theatrical release (EFFP's
subsidiary, Good Advice, Inc., is a production company formed for the sole
purpose of producing the film "Good Advice"); (2) Emmett Furla Films
Distribution LLC, is a Delaware Limited Liability Company set up to oversee and
arrange world wide distribution of our Company's entertainment projects, and (3)
Family Room Productions Corporation (hereafter, "FRPC") , a California
corporation, is setup primarily to develop and produce family oriented motion
pictures for television and home video distribution as well as episodic
television and internet programming. FRPC has two wholly owned subsidiaries,
Family Room Entertainment Music Publishing Corporation and Emmett/Furla Films
Music Publishing Company, both California corporations, whose function is to
oversees FRPC's EFFP's and their subsidiaries' music publishing (ancillary
rights associated with the creation of original music for motion pictures).
The motion picture industry may be broadly divided into two major segments:
production, which involves the development, financing and making of motion
pictures; and distribution, which involves the promotion and exploitation of
completed motion pictures in a variety of media.
Historically, the largest companies, the so-called "Majors" and "mini-
Majors," have dominated the motion picture industry by both producing and
distributing a majority of the motion pictures which generate significant
theatrical box office receipts. Over the past 15 years "Independents" or
smaller film production and/or distribution companies, such as our Company, have
played an increasingly significant and sizable role in the production and
distribution of motion pictures needed to fill ever the increasing worldwide
demand for filmed entertainment product.
The Majors (and Mini-Majors) include: Universal Pictures (a division of
Seagram), Warner Bros. Pictures (a division of Time Warner), Metro-Goldwyn-Mayer
Inc., Twentieth Century Fox Film Corporation (a division of News Corporation),
Paramount Pictures Corporation (a division of Viacom), Sony Pictures
Entertainment (including Columbia Pictures, Tri Star Pictures and Triumph
Releasing; altogether divisions of Sony) and The Walt Disney Company (Buena
Vista Pictures, Touchstone Pictures and Hollywood Pictures). Generally, the
Majors own and operate private production studios (including lots, sound stages,
production equipment and post-production facilities), have nationwide and/or
worldwide distribution organizations, release pictures with direct production
costs generally ranging from $25,000,000 to $75,000,000, and collectively
provide a near continual source of motion pictures to film exhibitors.
The Majors also have divisions that are promoted as "independent"
distributors of motion pictures, often referred to as the "Mini-Majors." These
"independent" divisions of the Majors include Miramax Films (a division of The
Walt Disney Company), Sony Classics (a division of Sony Pictures), Fox
Searchlight (a division of News Corporation), and New Line (a division of Time
Warner) and its Fine Line distribution label. Most of these divisions were
formerly private production and/or distribution companies.
In addition to the Mini-Majors, there are private or publicly held
production and/or distribution companies, such as the Company, (hereafter,
collectively the "Independents") which engage primarily in the production and/or
distribution of motion pictures produced by companies other than those held by
the Majors and Mini-Majors. Such Independents include, among others,
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Trimark Holdings and Artisan Entertainment. The Independents typically do not
own production studios nor do they employ as large a development and/or
production staff as the Majors.
Motion Picture Production and Financing
The production of a motion picture requires the financing of the direct
costs and indirect overhead costs of production. Direct production costs include
film studio rental, cinematography, post-production costs and the compensation
of creative and other production personnel. Distribution costs (including costs
of advertising and release prints) are not included in direct production costs.
Majors generally have sufficient cash flow from their motion picture and
related activities, or in some cases, from unrelated businesses (e.g., theme
parks, publishing, electronics, and merchandising) to acquire new creative
properties (e.g., screenplay and novels) and pay for the direct production costs
of their motion pictures. Overhead costs are, in substantial part, the salaries
and related costs of the production staff and physical facilities, which Majors
maintain on a full-time basis. Majors often enter into contracts with writers,
producers and other creative personnel for multiple projects or for fixed
periods of time.
Independents generally avoid incurring substantial overhead costs by hiring
creative and other production personnel, but retaining only any essential
elements, which will be required for pre-production, principal photography and
post- production activities, only on a project-by-project basis. Independents
also typically finance their production activities from various sources,
including bank loans, "pre-sales," equity offerings and joint ventures.
Independents generally attempt to complete the financing of their 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 Independents to finance all or a portion of
the direct production costs of a motion picture. Pre-sales consist of fees or
advances paid or guaranteed to the producer by third parties in return for the
right to exhibit the completed motion picture in theaters and/or to distribute
it in home video, television, international or other ancillary markets. Payment
commitments for a pre-sale are typically subject to the approval of a number of
pre-negotiated factors, including script, production budget, cast and director
and to the delivery of the completed motion picture in the format(s) previously
agreed upon.
Both Majors and Mini-Majors often acquire motion pictures for distribution
through an arrangement known as a "negative pickup" under which the Major or
Mini-Major agrees to acquire from another production company, often an
Independent, some or all of the rights to a film upon its completion. The
Independent often finances the production of a motion picture pursuant to
financing arrangements it has made with banks or other lenders wherein the
lender obtains a security interest in the film and in the Independent's rights
under its distribution arrangement. When the Major or Mini-Major "picks up" the
completed motion picture, it may assume some or all of the production financing
indebtedness incurred by the production company in connection with the film. In
addition, the Independent is often paid a production fee and is granted a
participation in the profits from the distribution of the motion picture.
Both Majors, Mini-Majors and Independents often grant third-party
participations in connection with the distribution and production of a motion
picture. Participations are the
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contractual rights of actors, directors, screenwriters, producers, owners of
rights and/or other creative and/or financial contributors entitling them to
share in revenues or profits (as defined in their individual respective
agreements) from a particular motion picture. Except for the most sought-after
talent, participations are generally payable only after all distribution and
marketing fees and costs; direct production costs (including overhead) and
financing costs are recouped by the producer in full.
Financing the Major Motion Picture
Majors often produce motion pictures whose direct costs exceed $20,000,000.
In order for an Independent, such as our Company, to produce projects that
exceed their equity capabilities, they turn to various outside sources for
funding. Some of those sources include and may be used in any combination: (1)
foreign equity contributions, where a foreign company will exchange equity or
the guarantee thereof for the rights to distribute a motion picture in its
respective territory(s) and participation in the picture; (2) a guarantee or
advance by a distributor or exhibitor for a particular right(s) in a particular
territory(s); (3) a sales agent to garner contracts with actual exhibitors which
state minimum guarantee(s) for particular or aggregate media; (4) a bank or
lending institution will lend monies based on actual sales contract(s) which
license exhibition rights; (5) and/or a bank or lending institution which will
lend monies based on its calculations of potential earnings revenue for the
motion picture in question; and (6) by having a third party investor fund a
portion, usually from 10%% to 50% of the production costs with a participation
in the net profit of the motion picture. By combining (as necessary) the afore
mentioned outside funding sources, the Independent can create motion pictures
which meet and/or exceed the quality and scope of those created by the Major and
Mini-Major at costs which would normally exceed the Independent's possible
equity contribution.
Motion Picture Distribution
Distribution of a motion picture involves the domestic and international
licensing of the picture for (i) theatrical exhibition, (ii) home video, (iii)
presentation on television, including pay-per-view, video-on-demand, satellites,
pay cable, network, basic cable and syndication, (iv) non-theatrical exhibition,
which includes airlines, hotels, armed forces facilities and schools and (v)
marketing of the other rights in the picture, which may include books, CD-ROMs,
merchandising and soundtrack recordings.
Theatrical Distribution and Exhibition.
Motion pictures are often exhibited first in theaters open to the public
where an admission fee is charged. Theatrical distribution involves the
manufacture of release prints, licensing of motion pictures to theatrical
exhibitors, and promotion of the motion picture through advertising and
promotional campaigns. The size and success of the promotional and advertising
campaign may materially affect the revenues realized from its theatrical
release, generally referred to as "box office gross."
Box office gross represents the total amounts paid by patrons at motion
picture theaters for a particular film, as determined from reports furnished by
exhibitors. The ability to exhibit films during summer and holiday periods,
which are generally considered peak exhibition seasons, may affect the
theatrical success of a film. Competition among distributors to obtain
exhibition dates in theaters during these seasons is significant. In addition,
the costs incurred in
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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 whether the motion picture is exhibited during peak exhibition
season(s). Similarly, the ability to exhibit motion pictures in the most popular
theaters in each area can affect theatrical revenues.
Exhibition arrangements with theater operators for the first run of a film
generally provide for the exhibitor to pay the greater of 90% of ticket sales in
excess of fixed amounts relating to the theater's costs of operation and
overhead, or a minimum percentage of ticket sales which varies from 40% to 70%
for the first week of an engagement at a particular theater, decreasing each
subsequent week to 25% to 30% for the final weeks of the engagement. The length
of an engagement depends principally on exhibitors' evaluation of the audience's
response to the film with respect to the current marketplace (e.g., the success
of other films) as weighed against the opportunity cost of exhibiting a "new"
release.
Films with theatrical releases (which generally may continue for several
months domestically) typically are made available for release in other media as
follows:
<TABLE>
<CAPTION>
Market Months After Theatrical Release Approximate Release Period
--------------------------------- ------------------------------- --------------------------
<S> <C> <C>
Domestic pay-per-view 4 - 6 months 3 months
Domestic pay cable 6 - 12 months 12 - 21 months
Domestic home video 10 - 12 months 12 - 24 months
Domestic network or basic cable 30 - 36 months 18 - 36 months
Domestic syndication 30 - 36 months 3 - 15 years
International theatrical --- 4 - 6 months
International home video 6 - 12 months 6 months
International television 18 - 24 months 18 months - 10 years
</TABLE>
Home Video.
The home video distribution business involves the promotion and sale of
videocassettes, DVDs and videodiscs to video retailers (including video
specialty stores, convenience stores, record stores "on-line" stores (i.e.,
Amazon.com) and other outlets), which then rent or sell the videocassettes and
videodiscs to consumers for private viewing. The home video marketplace now
generates total revenues greater than the domestic theatrical exhibition market.
Videocassettes of feature films are generally sold to domestic wholesalers
on a unit basis. Unit-based sales typically involve the sales of individual
videocassettes to wholesalers or actual retailers (e.g., Blockbuster) at $20.00
to $50.00 per unit and generally are rented by consumers for fees ranging from
$1.00 to $5.00 per day (with all rental fees retained by the retailer).
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. The market for direct sale to consumers is
referred to as the "priced-for-sale" or "sell-through" market.
Technological developments, including video server and compression
technologies which regional telephone companies and others are developing, and
expanding markets for DVD and laser discs, could make competing delivery systems
economically viable and could significantly
<PAGE>
impact the home video market generally and, as a consequence, the Company's home
video revenues.
Pay-Per-View.
Pay-per-view television allows cable and satellite television subscribers
to purchase individual programs, primarily recently released theatrical motion
pictures, sporting events and music concerts, on a "per use" basis. The fee a
subscriber is charged is typically split among the program distributor, the pay-
per-view operator and the cable operator.
Pay Cable.
The domestic pay cable industry (as it pertains to motion pictures)
currently consists primarily of HBO/Cinemax, Showtime/The Movie Channel,
Encore/Starz and a number of regional pay services. Pay cable services are sold
to cable system operators for a monthly license fee based on the number of
subscribers receiving the service. These pay programming services are in turn
offered by cable system operators to subscribers for a monthly subscription fee.
The pay television networks generally acquire their film programming by
purchasing the distribution rights from motion picture distributors.
Broadcast and Basic Cable Television.
Broadcast television allows viewers to receive, without charge, programming
broadcast over the air by affiliates of the major networks ( ABC, CBS, NBC, and
Fox), recently formed networks (UPN<and WB Network), independent television
stations and cable and satellite networks and stations. In certain areas,
viewers may receive the same programming via cable transmission for which
subscribers pay a basic cable television fee. Broadcasters or cable systems
operators pay fees to distributors for the right to air programming a specified
number of times.
Foreign Markets
In addition to their domestic distribution activities, some motion picture
distributors generate revenue from distribution of motion pictures in foreign
theaters, home e video, television and other foreign markets. There has been a
dramatic increase in recent years in the world wide demand for 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 for a motion
picture.
New Technologies
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New means of delivery of entertainment product are constantly being
developed and offered to the consumer including internet. The impact of emerging
technologies such as direct broadcast satellites and the internet, on the
Company's operations cannot be determined at this time. However, as a holder of
entertainment copyrights, the Company monitors these new media possibilities.
Non-Theatrical Exhibition.
In addition to the distribution media described above, a number of sources
of revenue exist for motion picture distribution through the exploitation of
other rights, including the right to distribute films to airlines, schools,
libraries, hotels, armed forces facilities and hospitals.
International Markets.
The worldwide demand for motion pictures has expanded significantly as
evidenced by the development of new international markets and media. This
growth is primarily driven by the overseas privatization of television stations,
introduction of direct broadcast satellite services, growth of home video and
increased cable penetration.
Company Motion Picture Acquisitions
In addition to its own production activities, the Company continually seeks
to acquire rights to films and other programming from Independent film
producers, distribution companies and others in order to increase the number of
films it can distribute in existing and emerging delivery systems. To be
successful, the Company must locate and track the development and production of
numerous independent feature films.
Types of Motion Pictures Acquired.
The Company generally seeks to produce or acquire motion pictures across a
broad range of genres, including drama, thriller, comedy, science fiction,
family, action and fantasy/adventure, which will individually appeal to a
targeted audience. The Company has been very selective in acquiring higher
budget (over $3,000,000) films because of the interest that the Majors have
shown in acquiring such films, and the associated competition and higher
production advances, minimum guarantees and other costs. The Company acquires
projects when it believes it can limit its financial risk on such projects
through, for example, significant presales, and when it believes that a project
has significant marketability. In most cases, the Company attempts to acquire
rights to motion pictures with a recognizable marquis "name" personality with
public recognition, thereby enhancing promotion of the motion pictures in the
home video or international markets. The Company believes that this approach
increases the likelihood of producing a product capable of generating positive
cash flow, ancillary rights income and the possibility of a theatrical release.
Methods of Acquisition.
The Company typically acquires films on either a "pick-up" basis or a "pre-
buy" basis. The "pick-up" basis refers to those films in which the Company
acquires distribution rights following completion of most or all of the
production and post-production process. These films
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are generally acquired after management of the Company has viewed the film to
evaluate its commercial viability.
The "pre-buy" basis refers to films in which the Company acquires
distribution rights prior to completion of a substantial portion of production
and post-production. Management's willingness to acquire films on a pre-buy
basis is based upon factors generally including the track record and reputation
of the picture's producer(s), the quality and commercial value of the
screenplay, the "package" elements of the picture, including the director and
principal cast members, the budget of the picture and the genre of the picture.
Before making an offer to acquire rights in a film on a pre-buy basis, the
Company may work with the producer to modify certain of these elements. Once
the modifications are considered acceptable, the Company's obligation to accept
delivery and make payment is conditioned upon receipt of a finished film
conforming to the script reviewed by the Company and other specifications
considered important by the Company.
Acquisition Process.
If the Company locates a motion picture project which it believes satisfies
its criteria, the Company may pay an advance against a share or participation in
the revenue actually received by the Company from the exploitation of a film in
each licensed media (hereafter an, "Advance") or a guarantee a minimum payment
based on projected revenues actually to be received by the Company from the
exploitation of a film in each licensed media (hereafter, a "Minimum
Guarantee"), all of which are conditioned upon delivery of a completed film
which meets or exceeds certain technical standards which are pre-determined in
the distribution agreement with Company. The minimum guarantee is generally paid
prior to the film's release. Typically, the Company will have the right to
recoup the Advance or Minimum Guarantee and certain other amounts from the
distribution revenues realized by the Company prior to paying any additional
revenue participation to the production company.
Company Feature Film Production
Our Company's feature film division, Emmett/Furla Films Productions
Corporation, develops and produces low to medium budget films. Our Company's low
to medium budget films to date have had production budgets ranging from less
than $1 million to $10 million, although our Company from time to time may
produce and release films having higher or much higher budgets. Our Company's
low-budget films are primarily targeted for direct distribution to the
television and home video markets and its medium-budget films our generally
targeted for initial theatrical release.
Our Company generally retains distribution rights for licensing to third
parties internationally. Our Company's films generally are distributed by third
parties domestically and by third party sales agents for international
distribution. In unique circumstances, our Company undertakes limited domestic
distribution or co-distribution activities.
Our Company's feature film strategy generally is to develop and produce
feature films when the production budgets for the films are expected to be
entirely or substantially covered through a combination of pre-sales, output
arrangements, equity arrangements and production loans with "gap" financing.
To further limit our Company's financing risk or to obtain
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production loans, our Company often purchases completion bonds to guarantee the
completion of production and delivery of pre-determined, technically acceptable
film and/or video elements.
The following films were either in production, completed, and/or released
or delivered by our Company to certain distributors in 2000, and/or scheduled
for release in our Company's fiscal 2001
<TABLE>
<CAPTION>
Picture Initial Media Delivery/Release Date Principal Talent
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<S> <C> <C> <C>
Held For Ransom Video/Cable May 2000 Dennis Hopper, Zachery Ty Bryan,
Kam Heskin, Jordan Brower
Randy Spelling, Tsianina
Joelson, Morgan Fairchild
After Sex Video/Cable May 2000 Brooke Shields, Virginia
Madsen, D.B. Sweeney, Dan Cortese,
Maria Pitillo, Johnathon Schaech
I'm Over Here Now Cable/Video March 2000 Andrew "Dice" Clay
Good Advice Theatrical March 2000 Charlie Sheen, Angie Harmon,
Denise Richards, Rosanna Arquette,
Jon Lovitz
Ticker Theatrical March 2001 Tom Sizemore, Steven Seagal
Jamie Pressly, Dennis Hopper
</TABLE>
There is no assurance that any motion picture, which has not yet been
released, will be released, that a change in the scheduled release dates of any
such films will not occur or, if such motion picture is released, it will be
successful. Our Company has various additional potential feature films under
development. There is no assurance that any project under development will be
produced.
Employees
As of June 30, 1999, our Company had 10 full-time employees, 6 of whom were
engaged in development, production and distribution of theatrical based motion
pictures. None of our Company's employees are covered by a collective bargaining
agreement, although some of our Company's subsidiaries are subject to guild
agreements. Management believes that its employee relations are good.
ITEM 2. Properties
Our Company leases approximately 2,500 square feet of office space at
The Lot, 1041 North Formosa Avenue, Mary Pickford Building, Suite 101, Los
Angeles, California. The lease
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is month to month with approximate monthly payment of $10,300. In July 2000 our
rent will increase to $10,500 per month. Our Company began leasing new corporate
office space in February , 2000 under a contracted office usage agreement on a
month to month basis, which included certain phones and office furniture.
ITEM 3. Legal Proceedings
Our Company is no a party to any material pending legal proceedings and, to
the best of our knowledge, no such action by or against the Company has been
threatened
ITEM 4. Submission of Matters to a Vote of Security Holders
There were certain matters that were submitted to a vote by our Company's
security holders during the fiscal year. These were post-reverse split shares
with respect to a ten for one reverse split of our Company's common stock, the
change in Our Company's name form COBB Resources to Family Room Entertainment,
Inc. and a change in Our Company's OTC:BB: trading symbol COBB to FMLY.
ITEM 5. Market for Common Equity and Related Stockholder Matters
Our common stock trades on the Over-the Counter Bulletin Board, also called
the OTCBB, under the trading symbol "FMLY". The following table set forth the
quarterly high and low bid prices per share for our common stock. The bid
prices reflect inter-dealer prices, without retail markup, markdown, or
commission and may not represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
BID BID
------- -------
<S> <C> <C>
Fiscal 1999
--------------------
September 30, 1998 $0.17 $0.06
December 31, 1998 $0.12 $0.10
March 31, 1999 $0.12 $0.08
June 30, 1999 $0.12 $0.08
September 30, 1999 $.017 $0.10
Fiscal 2000
--------------------
December 31, 1999 $0.12 $0.10
March 31, 2000 $0.12 $0.18
June 30, 2000 $1.50 $1.50 (reflects ten to one reverse split)
</TABLE>
To date, the Company has not declared or paid dividends on its common stock.
As of June 30, 2000, there were approximately 1101 shareholders of record
of the company's Common Stock.
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Recent Sales of Unregistered Securities
---------------------------------------
During March through April, 2000, the Company issued 5,160,000 restricted
shares of the Company's common stock to various investors pursuant to the
exemption to registration provided under Rule 505 of Regulation D of the
Securities Act of 1933, as amended. These shares were sold at $.50 per share
(sale price was arbitrarily set by the Company's management). The Company
received gross proceeds of $2,580,000 from the offering.
Transfer Agent and Registrar
----------------------------
The Company's transfer agent is Securities Transfer Corporation, 2591
Dallas Parkway, Suite 102, Frisco, Texas, 75034.
ITEM 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Plan of Operation
-----------------
The short-term objectives of the Company are the following:
To produce four to six movies a year with the budget per movie ranging
between three to fifty million dollars per movie. .
The Company's long-term objectives are as follows
1. To build a film library from which our Company can earn revenue from.
2. Continue producing films with high profile talent.
3. Produce films with commercial studios.
Additionally Family Room Entertainment Corporation through it Emmett Furla
Film Productions new business plan emphasized the expansion of film project
development along with acquisitions and beginning of new productions for the
fiscal year 2001. These include "Good Advice" starring Charlie Sheen Angie
Harmon, Denise Richards, Rosanna Arquette and Jon Lovitz to be release in March
2001, "Going After Cacciato," to be written and directed by Nick Cassavetes.
Our Company has financed current operations through the sale of our common
stock and through financing from financial institutions. In the near term, our
film financing will be entirely through outside sources to sustain our
operations. Since February 2000 we raised approximately $1,374,000 in the third
quarter ending March 31, 2000 and $1,200,000 in the fourth quarter June 30, 2000
from a private placement of our common stock to qualified investors and current
major shareholders.
Our capital requirements will depend on numerous factors, including the
profitability of our film projects and our ability to control costs. We believe
that our current assets will be sufficient to meet our operating expenses and
capital expenditures to the successful commercialization of our existing film
projects. However, we cannot predict when and if any additional capital
contributions may be needed and we may need to seek one or more substantial new
investors. New investors could cause substantial dilution to existing
stockholders.
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Results of Operations
---------------------
Year Ended June 30, 2000 Compared to Year Ended June 30, 1999
-------------------------------------------------------------
The Company realized revenues for the year ended June 30, 2000 of $679,188,
compared to $0 revenue for the fiscal 1999. The revenues were mainly due to
Motion Picture profit participation of 489,532 from domestic theatrical, home
video, cable and foreign markets. The remaining $189,656 represents rechargeable
overhead fees and development costs.
Operating Costs for the year ended June 30, 2000 are $529,749 compared to
$0 for fiscal year 1999. These costs consist of $349,749 of film amortization
and $180,000 of provision for doubtful accounts.
Company's Gross Profit for fiscal year 2000 was $149,439, net of
amortization of film project costs in accordance with SOP - 002 issued by the
AICPA, compared to $0 for June 30,1999. The profit was primarily from the
acquisition of certain film projects and their release during the forth (4/th/)
quarter of 2000.
Selling, general administrative costs for fiscal year 2000 is $150,498
compared to $0 for fiscal year 1999. These costs consist of $46,000 in salaries
and benefits, rent and occupancy cost of $20,000, general advertising of $8,400,
entertainment and travel of $20,000, telecommunications of $20,000, messenger
service of $10,000, with the remaining $18,000 made up of general office and
supplies.
The net loss for fiscal year 2000 was made up of $8,987 earning from
continuing operations offset by a $66,957 loss from Discontinued Operations.
LIQUIDITY AND CAPITAL RESOURCES:
-------------------------------
Net cash used in operating activities in fiscal 2000 amounted to $1,291,718
of which $73,666 was from discontinued operations as compared to $ 84,825, all
from discontinued operations for fiscal year 1999. The use of cash for fiscal
year 2000 is mainly attributable to additions in film costs of $3,410,425 and
increase in accounts receivables of $671,772 offset by and increase in accounts
payables of $2,309,632, with miscellaneous items making up the difference.
Net cash used in investing activities for fiscal year 2000 amounted to
$1,257,451 as compared to $16,833 in discontinued operations in fiscal year
1999. The increase was mainly due to the purchase of a certificate of deposit of
$1,200,000.
Financing activities generated net cash of $3,924,000 in fiscal 2000
compared with ($7,024) from discontinued operations in fiscal year 1999. The
cash generated in fiscal 2000 was attributable from the issuance of notes and a
revolving line of credit amounting to $1,550,000 plus proceeds from the sale of
common stock net of costs amounting to $2,374,000.
There is no expected or planned sale of significant equipment by the company.
The Company's work force is expected to remain at the same level over the next
twelve months.
<PAGE>
ITEM 7. Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Index To Audited Financial Statements
Independent Auditors' Report F-2
Consolidated Balance Sheets as of June 30, 2000 and 1999 F-3
Consolidated Statements of Loss for the years ended June 30, 2000 and 1999 F-4
Consolidated Statement of Stockholders' Equity (Deficit) and Comprehensive Income
For the years ended June 30, 2000 and 1999 F-5
Consolidated Statements of Cash Flows for the years ended June 30, 2000 and 1999 F-6
Notes to Consolidated financial Statements F-7
</TABLE>
ITEM 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not Applicable
<PAGE>
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
The following table sets forth the names, ages and all positions with our
Company currently held by each person who may be deemed an executive officer of
our Company. Executive officers serve at the discretion of the Board of
directors. Unless otherwise noted, all references to our Company include Family
Room Entertainment Corporation and all its wholly owned subsidiaries:
The following table sets forth the directors and executive officers of the
Company
<TABLE>
<CAPTION>
Name Age Executive Position Held
---- --- ----------------------------
<S> <C> <C>
George Furla 40 Co-Chairman, Chief Executive
Officer and President
Randall Emmett 29 Co-Chairman, Chief Operating
Officer and Secretary
Peter Benz 40 Treasurer
</TABLE>
Randall Emmett - Co-Chairman Mr. Emmett has extensive experience in the
entertainment and film industry. He began his career with Simpson/Bruckheimer
Films as an Assistant to the Producer after graduating from the New York School
of Visual Arts in 1994. While at Simpson/Bruckheimer, Randall worked on film
projects such as "Bad Boys" and "Crimson Tide". Randall later worked for
International Creative Management ("ICM") as an Assistant within the Motion
Picture Talent Division. Mr. Emmett jointly formed the current production
company in 1998 and is principally responsible for talent, agency relationships
and has joint responsibility for concept development.
George Furla - Co-Chairman Mr. Furla has over 18 years of business experience
in entertainment and financial services. He began his business career with
Cantor Fitzgerald where he was a trader in the equity securities area. After
spending several years with Cantor Fitzgerald, George then worked for Jones and
Associates for 3 years in a similar capacity. In 1988, Mr. Furla left Jones and
Associates to run a hedge fund which he established. Mr. Furla entered the film
business in 1995, financing several productions. George formed the current
production company in 1998 and is principally responsible for financing
arrangements, distribution and has joint responsibility for concept development.
Mr. Furla is a 1982 graduate of the University of Southern California with a
degree in business administration.
Peter T. Benz - Treasurer Mr. Benz has over 15 years experience in the areas
of investment banking and advisory services. Mr. Benz is the founding principal
and President of Bi Coastal Consulting, a company founded in 1986 to work with
small growth companies in the areas of financing, mergers/acquisition, funding
strategy and general corporate development. Prior to
<PAGE>
founding Bi Coastal Consulting, Mr. Benz worked at Gilford Securities where he
was responsible for Private Placements and Investment Banking activities. Mr.
Benz has also founded three public companies and has served as a Director of
four other public companies. Mr. Benz is a graduate of Notre Dame University.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than 10% of a
registered class of the Company's equity securities to file with the Securities
and Exchange Commission initial reports of ownership and reports of changes in
ownership of Common Stock and other equity securities of the Company. Officers,
directors and greater than 10% shareholders are required by SEC regulations to
furnish the Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on its review of the copies of
such reports furnished to the company and written representations that no other
reports were required during the fiscal year ended June 30, 2000, all Section
16(a) filing requirements applicable to its officers, directors and greater than
10% beneficial owners were complied with.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth certain summary information regarding
compensation paid by our Company for services rendered during the fiscal years
ended December 31, 1999 and 1998, respectively, to our Company's Chief Executive
Officer, President and Chief Financial Officer during such period.
Executive Compensation
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation Awards
Payouts
------------------------------------------ ------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (3) (h) (I)
Other (2) Securities All
Name and Annual Restricted Underlying Other
Principal Compen Stock Options/ LTIP Compen
Position Year Salary (1) Bonus sation($) Award($) Sar (#) Payouts($) sation ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
President/CEO 2000 $ 0 0 0 0 0 0 0
Secretary 2000 0 0 0 0 0 0 0
Director 2000 0 0 0 0 0 0 0
Key Personnel: 2000 0 0 0 0 0 0 0
Total: $ 0 0 0 0 0 0 0
Directors as a
Group $ 0 0 0 0 0 0 0
</TABLE>
(1) There are no existing employment agreements between the officers and
the Company.
(2) Executive Officers are not collecting any salary at this time.
(3) No options granted
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of our Company's Common Stock as of June 30,2000 based on information
available to our Company by (I) each person who is known by our Company to own
more than 5% of the outstanding Common Stock based upon reports filed by such
persons within the Securities and Exchange Commission; (ii) each of our
Company's directors; (iii) each of the Named Executive Officers; and (iv) all
officers and directors of our Company as a group.
<TABLE>
<CAPTION>
Name and Address of Number of Shares
Beneficial Owner Beneficially Owned (1) Percentage
----------------------------------- ------------------ ----------
<S> <C> <C>
George Furla
The Lot
Mary Pickford Bldg., Suite 101
1041 North Formosa Ave.
Hollywood, CA. 90046 5,902,334 32.35%
Randall Emmett
The Lot
Mary Pickford Bldg., Suite 101
1041 North Formosa Ave.
Hollywood, CA. 90046 3,902,333 21.39%
Peter Benz
543 Virginia Avenue 3,652,333 20.02%
San Mateo, CA. 94402
13,457,001 73.76%
</TABLE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As at June 30, 2000 George Furla has loaned the Company under a Convertible
Note Payable amounting to $350,000 (see Note 8 of Notes to Financial
Statements). Subsequently to June 20, 2000 George Furla has loaned the Company
approximately an additional $ $850,000 under a Convertible Notes Payable.
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
2.1* Asset Purchase Agreement between the Company and George Furla
("Furla"), Randall Emmett ("Emmett"), Emmett/Furla Films, a California
general partnership ("EF Films"), and Randall Emmett Films, Inc. a
California corporation ("RE FILMS") (all of whom are collectively
referred to as the "Seller" or "Sellers").
2.2* Asset Purchase Agreement between the Company and COBB Resources
corporation, a Texas corporation.
2.3* Security Purchase Agreement between George Furla, Peter Benz and
Randall Emmett and Charles Cobb.
3.1** Articles of Incorporation as amended
3.2** Bylaws
27.1*** Financial Data Schedule
------------------
* Incorporated by reference to the Company's Annual Report on Form 8-K/A
Amendment Number One filed with the Commission on May 18, 2000.
** Incorporated by reference to the Company's Annual Report on Form 10-K
Amendment Number One for the fiscal year ended June 30, 1997, as filed
with the Commission on July 16, 1998.
*** Filed herewith
<PAGE>
Signatures
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Family Room Entertainment Inc.
By: /s/ George Furla
-------------
George Furla
Director, Chief Executive Officer,
President and Chief Accounting Officer
Date: September 28, 2000
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
<TABLE>
<S> <C> <C>
/s/ George Furla Director, Chief Executive September 28, 2000
-------------------------
George Furla Officer, President and Chief
Accounting Officer
/s/ Randell Emmett Director September 28, 2000
-------------------------
Randell Emmett
/s/ Peter Benz Director September 28, 2000
-------------------------
Peter Benz
</TABLE>
<PAGE>
FAMILY ROOM ENTERTAINMENT CORPORATION
__________
CONSOLIDATED FINANCIAL STATEMENTS
WITH REPORT OF INDEPENDENT ACCOUNTANTS
for the years ended June 30, 2000 and 1999
<PAGE>
FAMILY ROOM ENTERTAINMENT CORPORATION
TABLE OF CONTENTS
--------
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C>
Report of Independent Accountants 2
Audited Financial Statements
Consolidated Balance Sheet as of June 30, 2000 3
Consolidated Statement of Operations for the
years ended June 30, 2000 and 1999 4
Consolidated Statement of Stockholders' Equity
for the years ended June 30, 2000 and 1999 5
Consolidated Statement of Cash Flows for the
years ended June 30, 2000 and 1999 6
Notes to Consolidated Financial Statements 7
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Stockholders and Board of Directors
Family Room Entertainment Corporation:
We have audited the accompanying balance sheet of Family Room Entertainment
Corporation (formerly Cobb Resources Corporation) as of June 30, 2000, and the
related statements of operations, stockholders' equity and cash flows for each
of the two years in the period then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Family Room Entertainment
Corporation as of June 30, 2000, and the results of its operations and its cash
flows for each of the two years in the period then ended in conformity with
generally accepted accounting principles.
/s/ Ham, Langston & Bregena, L.L.P
Houston, Texas
August 25, 2000
-2-
<PAGE>
FAMILY ROOM ENTERTAINMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, 2000
---------
ASSETS
------
Cash and cash equivalents $1,370,737
Accounts receivable, net 491,772
Restricted certificate of deposit 1,200,000
Film costs, net 4,987,388
Property and equipment, net 54,386
Deferred income taxes 54,000
----------
Total assets $8,158,283
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Notes payable and convertible debt $ 1,423,152
Accounts payable and accrued liabilities 2,309,632
Income tax payable 54,000
-----------
Total liabilities 3,786,784
-----------
Commitments and contingencies
Stockholders' equity:
Common stock; $.01 par value; 25,000,000
shares authorized; 18,245,487 shares
issued and outstanding 1,824,549
Additional paid in capital 9,197,770
Accumulated deficit (6,650,820)
-----------
Total stockholders' equity 4,371,499
-----------
Total liabilities and stockholders'
equity $ 8,158,283
===========
The accompanying notes are an integral part
of these consolidated financial statements.
-3-
<PAGE>
FAMILY ROOM ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended June 30, 2000 and 1999
---------
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
Revenues:
Film revenue $ 489,532 $ -
Overhead fees 189,656 -
---------- ----------
Total revenue 679,188 -
---------- ----------
Operating costs:
Amortization of film costs 349,749 -
Provision for doubtful accounts 180,000 -
---------- ----------
Total operating costs 529,749 -
---------- ----------
Gross Profit 149,429 -
Selling, general and administrative 150,498 -
---------- ----------
Loss from operations (1,059) -
---------- ----------
Interest income 10,046 -
---------- ----------
Income from continuing operations 8,987 -
---------- ----------
Discontinued operations:
Loss from operation of discontinued
business segment (66,957) (442,044)
Loss from disposal of discontinued
business segment - -
---------- ----------
Loss from discontinued operations (66,957) (442,044)
---------- ----------
Net loss $ (57,970) $(442,044)
========== ==========
Weighted average number of common shares
outstanding (basic and fully diluted) 7,082,674 853,426
========== ==========
Net loss per common share (basic and
fully diluted)
Continuing operations $ 0.01 $ 0.00
Discontinued operations (0.01) (0.52)
---------- ----------
Net loss $ 0.00 $ (0.52)
========== ==========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-4-
<PAGE>
FAMILY ROOM ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
for the years ended June 30, 2000 and 1999
----------
<TABLE>
<CAPTION>
Additional
Common Stock Paid-In Accumulated Treasury
------------------------
Shares Amount Capital Deficit Stock Total
---------- ----------- ---------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1998 (giving effect
to a 1 for 10 reverse stock split on
February 3, 2000) 853,427 $ 85,343 $6,924,255 $(6,150,806) $ (6,000) $ 852,792
Issuance of treasury stock as compen-
sation - - - - 6,000 6,000
Net loss - - - (442,044) - (442,044)
---------- ----------- ---------- ----------- --------- ----------
Balance at June 30, 1999 853,427 85,343 6,924,255 (6,592,850) - 416,748
Sale of assets in exchange for treasury
stock - - - - (338,839) (338,839)
Cancellation of treasury stock (175,000) (17,500) (321,339) - 338,839 -
Issuance of common stock to purchase
film projects 12,407,060 1,240,706 596,294 - - 1,837,000
Sale of common stock in a private place-
ment for $0.50 per share 5,160,000 516,000 2,064,000 - - 2,580,000
Syndication costs in connection with
private placement - - (206,000) - - (206,000)
Value of conversion feature attached to
$350,000 of convertible debt funded
by an officer/stockholder - - 140,560 - - 140,560
Net loss - - - (57,970) - (57,970)
---------- ----------- ---------- ----------- --------- ----------
Balance at June 30, 2000 18,245,487 $1,824,549 $9,197,770 $(6,650,820) $ - $4,371,499
========== =========== ========== =========== ========= ==========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-5-
<PAGE>
FAMILY ROOM ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------
Year Ended June 30,
------------------------
2000 1999
----------- ---------
Operating activities:
Net loss $ (57,970) $(442,044)
Adjustment to reconcile net loss to net cash
used by operating activities:
Loss from operation of discontinued
business segment 66,957 442,044
Film cost amortization 348,749 -
Depreciation 1,263 -
Software amortization 1,802 -
Provision for doubtful accounts 180,000 -
Amortization of debt costs 13,712 -
Change in operating assets and liabilities:
Increase in accounts receivable (671,772) -
Additions to film costs (3,410,425) -
Increase in accounts payable and accrued
liabilities 2,309,632 -
----------- ---------
Net cash used by continuing operations (1,218,052) -
Net cash used by discontinued operations (73,666) (84,825)
----------- ---------
Net cash used in operating activities (1,291,718) (84,825)
----------- ---------
Investing activities:
Purchase of film projects (75,000) -
Purchase of property and equipment (57,451) (55,551)
Purchase of certificate of deposit (1,200,000) -
Proceeds from sale of oil and gas properties - 28,718
Proceeds from certificate of deposit - 10,000
----------- ---------
Net cash used by investing activities (1,257,451) (16,833)
----------- ---------
Financing activities:
Proceeds from notes payable and revolving
line of credit 1,550,000 -
Proceeds from sale of common stock 2,580,000 -
Syndication costs incurred in connection
with sale of common stock (206,000) -
Principal payment on note payable - (7,024)
----------- ---------
Net cash provided by financing activities 3,924,000 (7,024)
----------- ---------
Increase (decrease) in cash and cash equivalents 1,299,831 (108,682)
Cash and cash equivalents at beginning of period 70,906 179,588
----------- ---------
Cash and cash equivalents at end of period $ 1,370,737 $ 70,906
=========== =========
The accompanying notes are an integral part
of these consolidated financial statements
-6-
<PAGE>
FAMILY ROOM ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company
-----------
Family Room Entertainment Corporation (the "Company"), a New Mexico
corporation, is a motion picture company involved in the creative
development, production, distribution, licensing and financing of motion
pictures and internet content that supports those motion pictures. The
Company's distribution markets include the United States and Canadian
domestic markets and world wide foreign markets. The significant business
activities of the Company constitute one business segment, filmed
entertainment.
2. Summary of Significant Accounting Policies
------------------------------------------
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany balances
and transactions have been eliminated.
Unclassified Consolidated Balance Sheet
---------------------------------------
In accordance with the provisions of Statement of Position 00-2 ("SOP
00-2"), the Company has elected to present an unclassified consolidated
balance sheet because the Company has an operating cycle of approximately
three years.
Accounting Estimates
--------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from these
estimates.
Revenue Recognition
-------------------
Revenue from the distribution of motion pictures is recognized as earned
under the criteria established by SOP 00-2. The Company's revenue cycle is
generally one to three years, with the expectation that substantially all
revenue will be recognized in the first two years of most of the company's
released individual motion pictures. In accordance with SOP 00-2 the
Company considers revenue earned when all of the following have occurred:
-7-
<PAGE>
FAMILY ROOM ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
__________
2. Summary of Significant Accounting Policies, continued
-----------------------------------------------------
Revenue Recognition, continued
------------------------------
. The Company has a valid sale or licensing agreement in place.
. The motion picture is complete and in accordance with the agreement
with the customer.
. The motion picture has been delivered or is deliverable.
. The license period has begun.
. The revenue is fixed or determinable and collection is reasonably
assured.
Film Costs
----------
Film costs include costs to acquire, develop and/or produce feature motion
pictures, mainly salaries, equipment, overhead, participations, and
residuals. Production costs in excess of reimbursable amounts are
capitalized. Once a film is released, any film production costs capitalized
is amortized in the proportion that the revenue during the year for each
film bears to the estimated revenue to be received from all sources under
the individual film forecast method. Estimates of anticipated total gross
revenues are reviewed periodically and revised when necessary. Unamortized
film production costs are compared with net realizable value each reporting
period on a film-by-film basis. If estimated gross revenues are not
sufficient to recover the unamortized film production costs, the
unamortized film production costs are written down to net realizable value.
Cash Equivalents
----------------
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
Property and Equipment
----------------------
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using the straight-line method over estimated
useful lives ranging from three to five years. These assets are
periodically reviewed for impairment whenever changes in circumstances
indicate that the carrying amount of the asset may not be recoverable.
Impaired assets and assets to be disposed of are reported at the lower of
carrying values or fair values, less costs of disposal.
-8-
<PAGE>
FAMILY ROOM ENTERTAINMENT CORPORATION
2. Summary of Significant Accounting Policies, continued
-----------------------------------------------------
Interest
--------
Costs associated with the maintenance of debt are charged to expense or
capitalized to the extent debt is used for productions.
Advertising Costs
-----------------
All costs related to general advertising are charged to expense as
incurred. During the years ended June 30, 2000 and 1999, the Company
incurred general advertising costs totaling $8,409 and $-0-, respectively.
Net Loss Per Common Share
-------------------------
Basic loss per common share amounts is based on the weighted average number
of common shares outstanding during the respective periods. Dilutive loss
per common share amounts is based on the weighted average common shares
outstanding during the period and shares assumed issued upon conversion of
stock options when the effect of such conversions would have been dilutive
to net loss. There is no assumed conversion of stock options for 2000 or
1999 as the effect would be anti-dilutive.
Comprehensive Income
--------------------
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income"
("SFAS 130") which establishes standards for the reporting of comprehensive
income and its components in financial statements. Comprehensive income
consists of net income and other gains and losses affecting stockholder's
equity that, under generally accepted accounting principles, are excluded
from net income, such as unrealized gains and losses on investments
available for sale, foreign currency translation gains and losses and
minimum pension liability. For the years ended June 30, 2000 and 1999, the
Company's financial statements include none of the additional elements that
affect comprehensive income. Accordingly, net income and comprehensive
income are identical.
Reclassifications
-----------------
Certain amounts included in the financial statements for 1999 have been
reclassified to conform to 2000 financial statement presentation.
-9-
<PAGE>
FAMILY ROOM ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
2. Summary of Significant Accounting Policies, continued
-----------------------------------------------------
Fair Value of Financial Instruments
-----------------------------------
The Company includes fair value information in the notes to the financial
statements when the fair value of its financial instruments is different
from the book value. When the book value approximates fair value, no
additional disclosure is made.
Concentration of Credit Risk
----------------------------
Cash and accounts receivable are the primary financial instruments that
subject the Company to concentrations of credit risk. The Company maintains
its cash in banks selected based upon management's assessment of the bank's
financial stability. Balances exceed the $100,000 federal depository
insurance limit.
Accounts receivable arise primarily from transactions with customers in
California. The Company performs credit reviews of its customers and
provides a reserve for accounts where collectibility is uncertain.
Collateral is not required for credit granted.
3. Asset Purchase
--------------
Effective February 3, 2000, the Company acquired the rights to certain film
projects (the "Asset Purchase") from three individuals and entities under
their control for 12,407,060 newly issued post-split shares of the
Company's common stock. The individuals from whom the film projects were
acquired, now make up the Company's management team. The aggregate purchase
price for the projects was $1,912,000 based upon an independent valuation
of the projects. (See Note 10)
4. Discontinued Operations
-----------------------
Effective February 3, 2000, the Company discontinued its current operations
and sold all of its operating assets. At the date of the sales transaction
(the "Transaction"), the Company's operating assets consisted primarily of
investments in equity securities and in non-producing oil and gas
properties. Under the terms of the Transaction, the Company sold all of its
existing assets to its largest stockholder in exchange for 175,000 post
split shares of its common stock that were placed in treasury and
subsequently retired, (See Note 11) and the assumption of all liabilities,
commitments and contingencies that existed at the date of the Transaction.
No gain or loss was recognized as a result of the Transaction. Following is
an analysis of the assets sold and liabilities assumed in connection with
the Transaction:
-10-
<PAGE>
FAMILY ROOM ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
4. Discontinued Operations
-----------------------
Cash and cash equivalents $ 15,782
Marketable equity securities 126,878
Non-producing oil and gas properties 133,503
Other assets 87,948
--------
Total assets sold 364,111
Less liabilities assumed 25,272
--------
Net assets sold $338,839
========
Following is an analysis of the Company's loss from operation of its
discontinued oil and gas properties and equity securities investment
operations:
Period from
July 1, 1999 Year Ended
to February 3, June 30,
2000 1999
-------------- -----------
Revenue $ - $ 57,757
Loss from operations (66,958) (442,044)
Net loss (66,958) (442,044)
5. Accounts Receivable
-------------------
Accounts receivable at June 30, 2000 consisted of the following:
Accounts receivable for reimbursement of
Operating and reimbursement of development costs $ 235,792
Accrued receivables from film distribution 435,980
----------
671,772
Less allowance for doubtful accounts (180,000)
----------
$ 491,772
==========
During the year ended June 30, 2000, the Company received all film
distribution revenue from distribution rights agreements covering three
feature films from three customers. The cost reimbursement receivable is
due from a single participant in a film participation agreement.
-11-
<PAGE>
6. Film Costs
----------
Film costs and related amounts capitalized at June 30, 2000 consisted of
the following:
In Pre-
Released Production Production Total
---------- ----------- ---------- -----------
Cost of acquiring film
rights $ 374,055 $ - $1,537,945 $ 1,912,000
Interest cost capital-
ized during 2000 - 21,501 - 21,501
Production costs in-
curred during 2000 15,555 4,666,488 18,993 4,701,036
---------- ----------- ---------- -----------
389,610 4,687,989 1,556,938 6,634,537
Less costs paid or
payable by other
participants - (1,298,400) - (1,298,400)
---------- ----------- ---------- -----------
389,610 3,389,589 1,556,938 5,336,137
Less accumulated amor-
tization (348,749) - - (348,749)
---------- ----------- ---------- -----------
$ 40,861 $ 3,389,589 $1,556,938 $4,987,388
========== =========== ========== ==========
The Company expects that all costs associated with released films will be
fully amortized during the year ending June 30, 2001.
7. Property and Equipment
----------------------
Property and equipment at June 30, 2000 consisted of the following:
Life
-------
Computer equipment 5 years $ 24,659
Software 3 years 32,792
----------
57,451
Less accumulated depreciation
and amortization (3,065)
----------
$ 54,386
==========
During the years ended June 30, 2000 and 1999, depreciation expense was
$1,263 and $8,724, respectively. Depreciation expense in 1999 is included
in discontinued operations in the accompanying statements of operations and
cash flows.
-12-
<PAGE>
FAMILY ROOM ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
8. Notes Payable and Convertible Debt
----------------------------------
Notes payable and convertible debt at June 30, 2000 consisted of the
following:
Note payable to a bank under a
$1,200,000 revolving line of
credit, bearing interest at 7.5%
per year and due September 3, 2000.
This note is collateralized by a
$1,200,000 certificate of deposit
that is restricted by the terms of
this line of credit. $1,200,000
Convertible notes payable to a major
stockholder/officer of the Company.
These notes bear interest at 10.0%
per year and are due in quarterly
installments of $87,500, plus inter-
est through June 2001. These notes
are collateralized by substantially
all assets of the Company; however,
the rights of the note holder are
secondary to the rights granted the
bank under the Company's revolving
credit line. The face amounts of
these notes are convertible to
shares of the Company's common stock
at a conversion price of $0.50 per
share. The value of the conversion
feature on these notes payable was
approximately $140,560 and, accor-
dingly, the notes have an effective
rate of interest of approximately 110%. 350,000
----------
1,550,000
Less unamortized value of conversion
feature (126,848)
----------
$1,423,152
==========
-13-
<PAGE>
FAMILY ROOM ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
9. Accounts Payable and Accrued Liabilities
----------------------------------------
Accounts payable and accrued liabilities at June 30, 2000 consisted of the
following:
Accounts payable for production costs $ 431,883
Accrued production costs 1,875,249
Accrued professional fees 2,500
----------
$2,309,632
==========
10. Income Taxes
------------
The Company has incurred significant operating losses since its inception
and, therefore, has not generally been subject to federal income taxes. As
of June 30, 2000, the Company had net operating loss ("NOL") carry forwards
for income tax purposes of approximately $2,846,000, which expire in 2000
through 2020. Under the provisions of Section 382 of the Internal Revenue
Code the greater than 50% ownership changes that occurred in the Company in
connection with the Transaction, subsequent Asset Purchase and private
placement of the Company's common stock severely limited the Company's
ability to utilize its NOL carry forward to reduce future taxable income
and related tax liabilities. Additionally, because United States tax laws
limit the time during which NOL carry forwards may be applied against
future taxable income, the Company will be able to use only approximately
$500,000 of its NOL for federal income tax purposes should the Company
generate sufficient taxable income.
The composition of deferred tax assets and the related tax effects at June
30, 2000 are as follows:
Deferred tax assets:
Net operating losses $ 967,600
Allowance for doubtful accounts and
notes receivable 61,200
Valuation allowance (971,900)
----------
Total deferred tax assets 56,900
Deferred tax liabilities:
Basis of property and equipment 2,900
----------
Net deferred tax asset $ 54,000
==========
-14-
<PAGE>
FAMILY ROOM ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
10. Income Taxes, continued
-----------------------
The difference between the income tax benefit in the accompanying statement
of operations and the amount that would result if the U.S. Federal
statutory rate of 34% were applied to pre-tax loss for the years ended June
30, 2000 and 1999 is as follows:
2000 1999
------------------- ------------------
Amount % Amount %
--------- ------- --------- ------
Benefit for income tax at
federal statutory rate $ (19,709) (34.0) $(150,294) (34.0)
Effect of graduated rates (11,750) (20.0) - -
State income taxes 10,583 18.0 - -
Loss of net operating losses (337,041) (581.0) (635,535) (144.0)
Change in valuation allowance 357,917 617.0 785,829 178.0
--------- ------- --------- ------
$ - - $ - -
========= ======= ========= ======
The provision for income taxes for the years ended June 30, 2000 and 1999
consist of the following:
2000 1999
-------- ------
Current portion:
State $ 16,000 $ -
Federal 38,000 -
-------- ------
54,000 -
-------- ------
Deferred benefit:
State (16,000) -
Federal (38,000) -
-------- ------
Total provision for income taxes $ - $ -
======== ------
-15-
