Registration of Securities of a Small-Business Issuer — Form 10-SB
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10SB12G Registration of Securities of a Small-Business 61 300K
Issuer
2: EX-2.1 Plan of Acquisition, Reorganization, Arrangement, 3 17K
Liquidation or Succession
3: EX-2.2 Plan of Acquisition, Reorganization, Arrangement, 11 51K
Liquidation or Succession
4: EX-3.1 Articles of Incorporation/Organization or By-Laws 2 15K
5: EX-6.1 Opinion re: Discount on Capital Shares 16 69K
14: EX-6.10 Opinion re: Discount on Capital Shares 1 13K
15: EX-6.11 Opinion re: Discount on Capital Shares 16 69K
16: EX-6.12 Opinion re: Discount on Capital Shares 8 41K
17: EX-6.13 Opinion re: Discount on Capital Shares 4 25K
18: EX-6.14 Opinion re: Discount on Capital Shares 1 13K
19: EX-6.15 Opinion re: Discount on Capital Shares 7 31K
20: EX-6.16 Opinion re: Discount on Capital Shares 18 76K
21: EX-6.17 Opinion re: Discount on Capital Shares 6 30K
22: EX-6.18 Opinion re: Discount on Capital Shares 18 73K
23: EX-6.19 Opinion re: Discount on Capital Shares 20 76K
6: EX-6.2 Opinion re: Discount on Capital Shares 1 13K
24: EX-6.20 Opinion re: Discount on Capital Shares 6 32K
25: EX-6.21 Opinion re: Discount on Capital Shares 20 77K
26: EX-6.22 Opinion re: Discount on Capital Shares 6 32K
27: EX-6.23 Opinion re: Discount on Capital Shares 4 22K
28: EX-6.24 Opinion re: Discount on Capital Shares 6 30K
29: EX-6.25 Opinion re: Discount on Capital Shares 7 35K
30: EX-6.26 Opinion re: Discount on Capital Shares 6 28K
31: EX-6.27 Opinion re: Discount on Capital Shares 5 32K
32: EX-6.28 Opinion re: Discount on Capital Shares 2 19K
33: EX-6.29 Opinion re: Discount on Capital Shares 17 76K
7: EX-6.3 Opinion re: Discount on Capital Shares 5 22K
34: EX-6.30 Opinion re: Discount on Capital Shares 13 59K
35: EX-6.31 Opinion re: Discount on Capital Shares 15 53K
36: EX-6.32 Opinion re: Discount on Capital Shares 13 58K
37: EX-6.33 Opinion re: Discount on Capital Shares 31 124K
38: EX-6.34 Opinion re: Discount on Capital Shares 20 68K
39: EX-6.35 Opinion re: Discount on Capital Shares 20 68K
40: EX-6.36 Opinion re: Discount on Capital Shares 3 22K
8: EX-6.4 Opinion re: Discount on Capital Shares 1 14K
9: EX-6.5 Opinion re: Discount on Capital Shares 6 30K
10: EX-6.6 Opinion re: Discount on Capital Shares 2 19K
11: EX-6.7 Opinion re: Discount on Capital Shares 6 30K
12: EX-6.8 Opinion re: Discount on Capital Shares 2± 14K
13: EX-6.9 Opinion re: Discount on Capital Shares 8 37K
41: EX-10.1 Material Contract 1 13K
10SB12G — Registration of Securities of a Small-Business Issuer
Document Table of Contents
Page 1 of 37
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS UNDER SECTION 12(b)
OR 12(g) OF THE SECURITIES ACT OF 1934
TOTAL FILM GROUP, INC.
(Exact name of Registrant as specified in charter)
DELAWARE 13-3851302
State or other jurisdiction of I.R.S. Employer I.D. No.
incorporation or organization
9107 WILSHIRE BOULEVARD, SUITE 475, BEVERLY HILLS, CA 90210
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (310) 275-8404
Securities to be registered pursuant to Section 12(b) of the Act: None
Securities to be registered pursuant to Section 12(g) of the Act:
Title of each class
COMMON STOCK
PAR VALUE $.001
Page 2 of 37
TABLE OF CONTENTS
PART I
PAGE
----
Item 1. Description of Business.............................................3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................13
Item 3. Description of Property............................................17
Item 4. Security Ownership of Certain Beneficial Owners and Management.....18
Item 5. Directors, Executive Officers, Promoters and Control Persons.......19
Item 6. Executive Compensation.............................................21
Item 7. Certain Relationships and Related Transactions.....................25
Item 8. Description of Securities..........................................27
PART II
Item 1. Market Price of and Dividends on the Registrant's Common equity
and Other Shareholder Matters.............................28
Item 2. Legal Proceedings..................................................31
Item 3. Changes in and Disagreements with Accountants......................31
Item 4. Recent Sales of Unregistered Securities............................31
Item 5. Indemnification of Directors and Officers..........................34
PART F/S....................................................................35
PART III....................................................................36
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.
Page 3 of 37
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.
In January 1997 the Company entered into an agreement with Total Media
Corporation, a Nevada corporation, to exchange all of the issued and outstanding
shares of such entity for 3,000,000 shares of common stock of the Company. The
Agreement and Plan of Reorganization was closed by the parties on or about
February 4, 1997. As a result of the closing the Company issued 3,000,000
shares, representing approximately 67% of the outstanding stock at closing, to
the shareholders of the Nevada corporation. Mr. Green and his affiliates
received 1,250,000 of such shares. Also as a result of the closing new directors
of the Company were appointed. Messrs. Green, Boyer, and Pacheco were appointed
as new directors. Prior to closing, on January 27, 1997, the Company declared a
stock dividend of one share of common stock of the Company for each two shares
of common stock of the Company outstanding to the shareholders of record as of
the close of business on January 27, 1997. The payment and delivery date for
such dividend was January 31, 1997.
In February 1998, the Company incorporated a wholly owned subsidiary,
Total Design, Inc., a California corporation engaged in providing marketing and
advertising services. Total Design, Inc. changed its name to "Dyer
Communications, Inc." on May 26, 1998. Effective January 1999 the Company
acquired all of the outstanding stock of Michel/Russo, Inc., a California
corporation engaged in marketing and advertising. On March 5, 1999, Dyer
Communications, Inc. changed its name to "Total Creative, Inc." In April 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. 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.
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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 and warrants to Lancer Offshore, Inc. 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 agreed
to issue a total of 250,000 shares pro rata to the lenders. The Company also
paid a consulting fee of $140,000 and agreed to issue warrants to purchase
100,000 shares of common stock. In February 2000 the parties to the loans
agreed to convert the principal amount of the loans into 2,936,667 shares of
common stock and to forgive any interest due. The Company also agreed to pay
a consulting fee of $40,000 and 26,667 shares of common stock. The Company is
in the process of issuing the 250,000 shares in connection with the September
1999 loan, 40,000 of the 100,000 warrants payable under the September 1999
loan, and the shares due in the February 2000 conversion transaction and
consulting arrangement. At March 15, 2000, none of these securities had been
issued.
In September 1999 the Company entered into a consulting agreement
with Capital Research Ltd. 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 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.
On October 20, 1999, the Company incorporated Total China, Inc., a
Delaware corporation, as a wholly owned subsidiary. This entity was formed to
act as a holding company to acquire 20% of the capital stock of US Business
Network, Inc., a Delaware corporation, which has intellectual property rights to
the business-to-business e-commerce portal, Meet China.com, and is engaged
directly through a subsidiary in promoting imports and exports to and from China
through the Internet and providing ancillary services related thereto. In
November 1999, Total China, Inc. sold 30 units in a 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. 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
Page 5 of 37
$2,000,000 and the Company realized gross proceeds of $200,000. The proceeds to
the Company were allocated to pay the costs of the offering, and the proceeds to
Total China, Inc. were used to purchase shares of common stock of U.S. Business
Network, Inc., which shares ultimately represented 17.58% of the issued and
outstanding capital stock of such corporation at closing. This reduction in
percentage ownership was a result of an increased valuation of U.S. Business
Network, Inc. As a result of this offering, the Company now owns 50% of the
outstanding stock of Total China, Inc., and, by virtue of irrevocable proxies
from two of the shareholders of Total China, Inc., controls the voting of the
company.
On December 16, 1999, the Company finalized the agreement with U.S.
Business Network, Inc. Because of subsequent financings by U.S. Business
Network, Inc., at February 25, 2000, Total China, Inc. owned approximately 11.9%
of the outstanding stock of such entity. U.S. Business Network, Inc., doing
business as MeetChina.com, is the architect and operator of an e- commerce
portal in China which is officially sponsored and sanctioned by the Chinese
government. U.S. Business Network, Inc. has the option under the agreement to
acquire approximately 5% of the shares purchased by Total China, Inc. at a cash
price of two-thirds of the market value of such shares. Such right is only
exercisable on the 120th day after an initial public offering of capital stock
by U.S. Business Network, Inc. on a designated exchange. Until the stock of U.S.
Business Network, Inc. is listed on a designated exchange, Total China, Inc. has
the right to designate one representative to attend meetings of the board of
directors of U.S. Business Network, Inc.. Total China, Inc. has the right of
first refusal to purchase any shares to be sold or issued by U.S. Business
Network, Inc. at less than the price paid by Total China, Inc. The Company also
has piggy-back registration rights to register its shares in any appropriate
registration statement filed by U.S. Business Network, Inc. with the U.S.
Securities and Exchange Commission after the initial public offering and which
includes shares of the founders of U.S. Business Network, Inc..
The Company's business is divided into two segments: the film
production business and the advertising and marketing business. The film
production segment is engaged in the production, marketing, and distribution of
commercial feature films. The advertising and marketing segment is engaged in
the development of advertising and marketing campaigns to provide Internet
services for a variety of clients and the Company.
THE FILM BUSINESS
The Company's independent film production business is conducted
primarily through the parent, Total Film Group, Inc., and other wholly owned
entities created for specific pictures. Since January 1997 the Company has
produced three films: THE NEW SWISS FAMILY ROBINSON, which aired on January 10,
1999, on ABC's Wonderful World of Disney and was released theatrically abroad;
DIAMONDS, which was released in a limited number movie theaters in December 1999
in order to qualify for Academy Award consideration, and had general domestic
release in February 2000 by Miramax Films; and CHICK FLICK, which was completed
in 1999 and is scheduled for release in late 2000.
Page 6 of 37
In November 1999 the Company entered into an arrangement with Paramount
Classics, a division of Paramount Picture Corporation, for the marketing and
distribution of four feature films. The Company is in production on two of the
films under this arrangement, MY FIRST MISTER and BRIDE OF THE WIND.
The 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:
[Download Table]
Subsidiary Jurisdiction Film
---------- ------------ ----
Total Films UK Ltd. United Kingdom THE NEW SWISS FAMILY ROBINSON
Alma Production UK Ltd. United Kingdom BRIDE OF THE WIND (aka ALMA)
Sundowning, Inc. Nevada DIAMONDS
1st Mister, Inc. California MY FIRST MISTER
The Company has also incorporated Total Pictures, Inc., a California
corporation, to act as signatory for transactions with the Writers' Guild. All
future 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.
On October 18, 1999, the Company incorporated Total Media, Inc., a
Delaware corporation. On November 2, 1999, the Company incorporated Total
Group.com, Inc., a Delaware corporation. Also on November 2, 1999, the Company
incorporated Total Group, Inc., a Delaware corporation. Each of these entities
is a wholly owned subsidiary of the Company and was formed for future
unidentified projects.
THE UNITED STATES MOTION PICTURE INDUSTRY
The current motion picture industry in the United States includes the
production and theatrical or television screening of feature-length motion
pictures and the subsequent distribution of such pictures in home video and
ancillary markets. The industry is dominated by the major studios -- some of
which have divisions which are promoted as "independent" distributors of motion
pictures -- including Universal Pictures, Warner Brothers (including Turner
Pictures, New Line Cinema and Castle Rock Entertainment), Twentieth Century Fox,
Sony Pictures Entertainment (including Columbia Pictures and Tristar Pictures),
Paramount Pictures, The Walt Disney Company (including Buena Vista, Touchstone
and Miramax) and MGM (including Metro Goldwyn Mayer Pictures, United Artists
Pictures, Orion Pictures and Goldwyn Entertainment Company). These "majors" have
traditionally produced and distributed the majority of theatrical motion
pictures, and made-for-TV movies, released annually in the United States. In
recent years, however, independent motion picture production companies have
played an important role in the production of motion pictures for the worldwide
feature film and made-for-TV markets. There are also a large number of smaller
production companies, such as the Company, and other entities that produce
theatrical motion pictures and made-for-TV movies.
Page 7 of 37
The "majors" generally own their production studios and have national
or worldwide distribution organizations. Major studios typically release films
with direct production costs generally ranging from approximately $40 million to
$100 million or more, and provide a continual source of motion pictures to the
nation's theatrical exhibitors. The independents, including the Company, do not
own production studios and, with certain exceptions, have more limited
distribution capabilities than the major studios. Independents typically produce
fewer motion pictures at substantially lower average production costs than major
studios. A low budget independent film (generally one more suitable for
television) may cost as little as $3 million. A few independent production
companies specialize in producing mid-range feature films, those costing between
$10 million to $40 million. Production costs consist of acquiring or developing
the screenplay, film studio rental, cinematography, post-production costs and
the compensation of creative and other production personnel. Distribution
expenses, which consist primarily of the costs of advertising and release
prints, are not included in direct production costs and generally financed by
the distribution company.
MOTION PICTURE PRODUCTION AND FINANCING.
The production of a motion picture begins with the screenplay
adaptation of a popular novel or other literary work acquired by the producer or
the development of an original screenplay having its genesis in a story line or
scenario conceived of or acquired by the production company. In the development
phase, the producer typically seeks production financing and tentative
commitments from a director, the principal cast members, and other creative
personnel. A proposed production schedule and budget also are prepared during
this phase.
Upon completing the screenplay and arranging financing commitments,
pre-production of the motion picture begins. In this phase, the producer engages
creative personnel to the extent not previously committed; finalizes the filming
schedule and production budget; obtains insurance and secures completion
guarantees, if necessary or available; establishes filming locations and secures
any necessary studio facilities and stages; and prepares for the start of
principal photography.
Principal photography, the actual filming of the screenplay, may extend
from four to sixteen weeks or longer, depending upon such factors as budget,
location, weather and complications inherent in the screenplay. Following
completion of principal photography, the motion picture is edited. Also,
opticals, dialogue, music and any special effects are added, and voice, effects
and music sound tracks and picture are synchronized during post-production. This
results in the production of the negative from which the release prints of the
motion picture are made.
The major studios generally fund production costs from cash flow from
their motion picture and related activities, licensing fees generated from film
library holdings, and, in some cases, from unrelated businesses. Substantial
overhead costs, consisting largely of salaries and related costs of the
development, production, distribution and marketing staff and physical
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facilities maintained by the major studios, also must be funded.
Independent production companies generally avoid incurring substantial
overhead costs by hiring creative and other production personnel and retaining
the other elements required for pre-production, principal photography and
post-production activities on a project-by-project basis. Unlike the major
studios, the independents also typically finance their production activities
from bank loans, "pre-sales" agreements, equity offerings and joint ventures.
Independents generally attempt to complete their financing of a motion picture
production prior to commencement of principal photography, at which point
substantial production costs begin to be incurred and require payment.
"Pre-sales" are often used by independent film companies to finance all
or a portion of the direct production costs of a motion picture. Pre-sales
consist of license fees paid to the producer by third parties in return for the
right to exhibit the completed motion picture in theaters or to distribute it in
home video, television, international or other ancillary markets. Producers with
distribution capabilities may retain the right to distribute the completed
motion picture either domestically or in one or more foreign markets. Producers
may separately license theatrical, home video, television, foreign and all other
distribution rights among several licensees. The producer may also at times be
able to acquire additional production funds through "gap financing," whereby a
lender loans a portion of the production funds based on a distributor's estimate
of the value of distribution rights. Although "gap financing" is currently
available through a variety of lenders, there can be no assurance such lenders
will continue to make funds available on this basis in the future.
Both major studios and independent film companies often acquire motion
pictures for distribution through a customary industry arrangement known as a
"negative pickup," under which the studio or independent film company agrees to
acquire from an independent production company all rights to a film upon
completion of production. The independent production company normally finances
production of the motion picture pursuant to financing arrangements with banks
or other lenders in which the lender is granted a security interest in the film
and the independent production company's rights under its arrangement with the
studio or independent. When the studio or independent "picks up" the completed
motion picture, it assumes or pays the production financing indebtedness
incurred by the production company in connection with the film. In addition, the
independent production company is paid a production fee and generally is granted
a participation in the net profits of the motion picture.
Both major studios and independent film companies generally incur
various third-party participations or deferrals in connection with the
production and distribution of a motion picture. These participations or
deferrals are contractual rights of actors, directors, screen writers, owners of
rights and other creative and financial contributors entitling them to share in
revenues or net profits (as defined in the respective agreements) from a
particular motion picture. Except for the most sought-after talent,
participation or deferral costs are generally payable after all distribution and
marketing fees and expenses, direct production costs and financing costs are
paid in full.
Page 9 of 37
MOTION PICTURE DISTRIBUTION.
Motion picture distribution encompasses the distribution of motion
pictures in theaters and in ancillary markets such as home video, pay-per-view,
pay television, broadcast television, foreign and other markets. The distributor
typically acquires rights from the producer to distribute a motion picture in
one or more markets. For its distribution rights, the distributor typically
agrees to advance the producer a certain minimum royalty or guarantee, which is
to be recouped by the distributor out of revenues generated from the
distribution of the motion picture and is generally nonrefundable. The producer
also is entitled to receive a royalty equal to an agreed-upon percentage of all
revenues received from distribution of the motion picture over and above the
royalty advance.
THEATRICAL DISTRIBUTION. The theatrical distribution of a motion
picture involves the manufacture and transportation of release prints, the
promotion of the picture through advertising and publicity campaigns and the
licensing of the motion picture to theatrical exhibitors. The size and success
of the promotional advertising campaign can materially affect the revenues
realized from the theatrical release of a motion picture. The major studios can
spend in excess of $50 million to promote motion pictures, and have average
combined print and advertising costs in excess of $19 million. The costs
incurred in connection with the distribution of a motion picture can vary
significantly, depending on the number of screens on which the motion picture is
to be exhibited and the competition among distributors for theaters during
certain seasons. Similarly, the ability to exhibit motion pictures in the most
popular theaters can affect theatrical revenues.
The distributor and theatrical exhibitor generally enter into an
arrangement providing for the exhibitor's payment to the distributor of a
percentage of the box office receipts for the exhibition period, in some cases
after deduction of the theater's overhead, or a flat negotiated weekly amount.
The distributor's percentage of box office receipts varies widely, depending
upon the success of the motion picture at the box office and other factors.
Distributors carefully monitor the theaters which have licensed the picture for
exhibition to ensure that the exhibitor promptly pays all amounts due the
distributor. Substantial delays in collection are not unusual.
Successful motion pictures may continue to play in theaters for up to
four (4) months or longer following their initial release. Concurrently with
their release in the United States, motion pictures generally are released in
Canada and may also be released in one or more other foreign markets.
HOME VIDEO. The home video distribution business involves the promotion
and sale of videocassettes and DVDs to local, regional and national video
retailers (e.g., video specialty stores, convenience stores, record stores and
other outlets), which then rent or sell such videocassettes and DVDs to
consumers primarily for private viewing.
Major feature films are usually scheduled for release in the home video
market within four to six months after theatrical release to capitalize on the
theatrical advertising and publicity for the
Page 10 of 37
film. Promotion of new releases is generally undertaken during the nine to
twelve weeks before the release date. Videocassettes or DVDs of feature films
are generally sold to domestic wholesalers at approximately $50 to $60 per unit
and generally are rented by consumers for fees ranging from $1 to $5 per day.
Wholesalers who meet certain sales and performance objectives may earn rebates,
return credits and cooperative advertising allowances. Selected titles,
including certain made-for-video programs, are priced significantly lower to
encourage direct purchase by consumers. Direct sale to consumers is referred to
as the "priced-for-sale" or "sell-thru" market. Typically, owners of films do
not share in video rental income; however, video distributors are beginning to
enter into revenue sharing arrangements with certain retail stores in some
circumstances. Under such arrangements, videocassettes and DVDs are sold at a
reduced price to video rental stores and a percentage of the video rental
revenue is then shared with the owners (or licensors) of the films. Home video
arrangements in international territories are similar to those in domestic
territories except that the wholesale prices may differ.
Overall growth in the domestic home video market has slowed as growth
in the number of new outlets and new VCR homes has moderated. The growth in
outlets designed to specifically serve the rental market has remained
essentially flat for the past several years, while the number of outlets which
offer videocassettes and videodiscs for sale has increased. The sell-thru market
continues to grow with strong sales in the traditional family entertainment
market and a growing number of hit feature films initially released at prices
generally below $30. Furthermore, technological developments which regional
telephone companies and others are developing could make competing delivery
systems economically viable and could affect the home video marketplace.
PAY-PER-VIEW. Pay-per-view television allows cable and satellite
television subscribers to purchase individual programs, including recently
released motion pictures and live sporting, music or other events, on a "per
use" basis. The subscriber fees are typically divided among the program
distributor, the pay-per-view operator and the cable system operator.
PAY TELEVISION. Pay television allows subscribers to view premium
channels such as HBO/Cinemax, Showtime/The Movie Channel and other pay
television networks offered by cable and satellite system operators for a
monthly subscription fee. The pay television networks acquire a substantial
portion of their programming from motion picture distributors. New markets may
develop with the maturation of newly emerging direct broadcast satellite (DBS)
systems and other digital television systems.
BROADCAST AND BASIC CABLE TELEVISION. Broadcast television allows
viewers to receive, without charge, programming broadcast over the air by
affiliates of the major networks (ABC, CBS, NBC and Fox), recently formed
networks (UPN and WB Network), independent television stations and cable and
satellite networks and stations. In certain areas, viewers may receive the same
programming via cable transmission for which subscribers pay a basic cable
television fee. Broadcasters or cable systems operators pay fees to distributors
for the right to air programming a specified number of times.
Page 11 of 37
FOREIGN MARKETS. In addition to their domestic distribution activities,
some motion picture distributors generate revenues from distribution of motion
pictures in foreign theaters, home video, television and other foreign markets.
There has been a dramatic increase in recent years in the worldwide demand for
filmed entertainment. This growth is largely due to the privatization of
television stations, introduction of direct broadcast satellite services, and
increased home video and cable penetration.
OTHER MARKETS. Revenues also may be derived from the distribution of
motion pictures to airlines, schools, libraries, hospitals and the military,
licensing of rights to perform musical works and sound recordings embodied in a
motion picture, and licensing rights to manufacture and distribute merchandise,
clothing and similar commercial articles derived from characters or other
elements of a motion picture.
NEW TECHNOLOGIES. New means of delivery of entertainment product are
constantly being developed and offered to the consumer. The impact of emerging
technologies such as direct broadcast satellites and the Internet, on the
Company's operations cannot be determined at this time.
CURRENT COMPANY OPERATIONS
Management has attempted to focus the film production operations of the
Company on filling the niche for the production of mid-range independent feature
films. Within this niche the Company has been successful in attracting
recognized movie actors, obtaining distribution agreements with recognized
distribution companies, such as Miramax Films for DIAMONDS, and using production
values similar to the ones used by the "majors" to create feature films
comparable to those produced by the "majors" at substantially less cost. Most
recently the Company has concluded a distribution deal with Paramount Classics,
a division of Paramount Pictures for the domestic distribution of the Company's
next four feature films (the first being MY FIRST MISTER).
THE NEW SWISS FAMILY ROBINSON, staring Jane Seymour, was the first
feature film produced by the Company through its wholly owned subsidiary, Total
Films UK Limited, which was created solely for this project. Total Film UK
Limited was incorporated in England on February 11, 1997, under the name
Daneslide Limited.
The film was financed by CLT-UFA in exchange for distribution rights in
certain foreign territories, by the Company, and through a gap loan from Lewis
Horwitz Organization. This loan has since been repaid and its security interest
released.
The film's executive producer was Gerald Green, the president/CEO, a
director, and a principal shareholder of the Company, pursuant to a producer's
agreement between the Company, Total Films UK Limited, and Mr. Green. (See
"Certain Relationships and Related Transactions.") The film aired on January 10,
1999, on ABC's Wonderful World of Disney and received one of
Page 12 of 37
the highest ratings of any of Disney's shows during the season in that time
slot. Pursuant to the agreement between the American Broadcasting Companies,
Inc. and Total Film UK Limited, ABC has the exclusive rights to one additional
broadcast of the film by January 31, 2002, in the United States, its territories
and possessions, Saipan, and Bermuda, but excluding Spanish language broadcasts
in Puerto Rico. ABC's second and final broadcast of the film will take place in
summer 2000, after which the domestic television rights will revert to the
Company. The film is scheduled to be released on video this year.
During 1998 the Company completed production of CHICK FLICK. The film
was a very low budget picture that was financed entirely by the Company.
The third film is DIAMONDS, staring Kirk Douglas, Dan Aykroyd, and
Lauren Bacall. This film was produced by Sundowning, Inc., a wholly owned
subsidiary of the Company created for this project. Sundowning, Inc. was
incorporated in the State of Nevada on July 16, 1998, and is qualified to do
business in the State of California under the name "Sundowning Entertainment."
The film was financed through a co-production with a German company,
Cinerenta/Cinesun, and Total Film Group, Inc. The executive producers for the
film were Gerald Green and Rainer Bienger, and the producer of the film was
Patricia Green, the wife of Gerald Green. (See "Certain Relationships and
Related Transactions.) "J&M Entertainment" is handling the foreign sales for the
film.
The Company is in production with MY FIRST MISTER. The film stars
LeeLee Sobieski and Albert Brooks, and is directed by Christine Lahti. The film
is being financed through a German co-production, a private investor, and gap
financing from the Lewis Horwitz organization. The film will be released in the
United States and Canada by Paramount Classics. Mario Kassar is handling the
foreign sales for this film.
The Company is also in production with BRIDE OF THE WIND (aka ALMA)
staring Jonathan Price and directed by Bruce Beresford. The film is being
financed through a German co-production, a private investor, and gap financing
from the Lewis Horwitz organization. The film will be released in the United
States and Canada by Paramount Classics. Mario Kassar is handling the foreign
sales for this film.
THE ADVERTISING AND MARKETING BUSINESS
Total Creative, Inc. ("TCI") is engaged in web design and development,
digital advertising and other traditional advertising and marketing related
services in the marketing business. In order to maximize its competitive
potential, TCI operates three business units, each focusing on different segment
of the industry: 1) a graphic design studio, directed at the entertainment
industry; 2) a general advertising agency that creates print and broadcast
advertising for consumer and business-to-business marketers; and 3) an Internet
services company, which develops and creates web sites and e-commerce solutions.
TCI has offices in San Francisco and Los Angeles.
Page 13 of 37
TCI helps clients plan and implement their Internet strategy with a
particular emphasis on brand and creative content. Services include marketing
and brand consulting, information architecture, graphical user interface design,
content development, programming and integration management. TCI's major clients
include KPMG, Eastman Kodak, and MGM Home Entertainment. Since the formation of
TCI in March 1999, the Company's strategy has been to enhance TCI's brand
awareness and market position including aggressive new business development
efforts and negotiation of guaranteed production contracts with key film
clients. TCI also supplies the Company with the marketing and creative
advertising campaign work required for its films produced "in house," including
MY 1ST MISTER and BRIDE OF THE WIND (aka ALMA).
For the period from July 1, 1999, through December 31, 1999, one
customer, SDI Interactive, accounted for approximately 30% of the total revenues
generated by TCI.
EMPLOYEES
At February 25, 2000, the Company and its subsidiaries employed 28
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, five are in executive
positions, seventeen are employed in operations, and one is clerical. The
Company provides medical and dental insurance coverage, life insurance, a 401K
plan to the employees of the Company and its subsidiaries, which is optional.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is involved in the business of producing, marketing, and
distributing commercial feature films. It primarily creates, develops and
produces feature-length, theatrical motion pictures. The Company generally
finances all or a substantial portion of the budgeted production costs of films
it produces through advances obtained from distributors and borrowings secured
by domestic and international licenses, from private investors, and through
co-production agreements.
Total Creative, Inc. ("TCI"), a wholly-owned subsidiary of the Company,
is an Internet services agency providing Internet business consulting, web site
development and media design and advertising services. As an expected result of
increases in revenues trailing increases in expenditures, the Company believes
TCI will continue to adversely affect the Company's consolidated results of
operations through the end of the 1999/2000 fiscal year.
Page 14 of 37
The consolidated financial statements at June 30, 1999, and December
31, 1999, include the accounts of Total Film Group, Inc. and its wholly owned
subsidiaries: Total Creative, Inc., Total Films UK Limited, and Sundowning,
Inc. (collectively, the "Company"). All significant intercompany balances and
transactions have been eliminated upon consolidation.
The Company's revenues and results of operations are significantly
affected by accounting policies required for the industries in which it
operates. Among the more significant policies are the following:
REVENUE RECOGNITION: Revenues from distribution or releasing agreements
are recognized when the film is released and certain other conditions are met in
accordance with Statement of Financial Accounting Standards No. 53 ("SFAS 53"),
"Financial Reporting by Producers and Distributors of Motion Picture Films."
Amounts received in advance of the film being available for release are recorded
as deferred revenue. This revenue recognition method may result in significant
fluctuations in revenues and net earnings (losses) from period to period.
Revenues from TCI are generally recognized at the completion of production.
Revenue for long-term contracts is recognized on the percentage-of-completion
method.
MOTION PICTURE DEVELOPMENT COSTS AND AMORTIZATION: Motion picture
development costs represent those costs incurred in the production,
acquisition and distribution of motion pictures, which include production
costs, legal expenses, interest and overhead costs. These costs have been
capitalized in accordance with SFAS 53. The Company is amortizing the film
costs for completed films using the individual-film-forecast-computation
method, whereby the amortization of the budget of a film is recognized in the
proportion that current year revenues bear to management's estimate of
ultimate revenue from all markets. Motion picture development costs are
valued at lower of unamortized cost or estimated net realizable value.
Revenue and cost forecasts for films are regularly reviewed by management and
revised when warranted by changing conditions. When estimates of total
revenues and costs indicate that a film will result in an ultimate loss,
additional amortization is provided to fully recognize such loss.
RESULTS OF OPERATIONS
COMPARISON OF FISCAL YEARS ENDED JUNE 30, 1999 AND 1998
The Company's operating revenues for the fiscal year ended June 30,
1999, were $6,120,094, an increase of $6,037,765 or 99% from operating
revenues of $82,329 in the prior fiscal year ended June 30, 1998. This
increase is attributed to growth in movie release income, which was $0 at
June 30, 1998, as compared with $4,429,388 at June 30, 1999. Movie release
income for the period ended June 30, 1999, reflects the revenue from the
Company's film, THE NEW SWISS FAMILY ROBINSON. This movie was filmed during
the 1997/1998 fiscal year and broadcast on ABC Television Network in January
1999.
Page 15 of 37
The Company's operating revenues generated by TCI for the fiscal
year ended June 30, 1999, were $1,690,706, an increase of $1,608,377 or 95%
from operating revenues of $82,329 in the prior fiscal year ended June 30,
1998. During this period of comparison, TCI acquired Michel/Russo Inc., a
marketing and advertising firm, and Skyrocket, LLC, a web development and
digital advertising company. The operations of these two companies were
merged into the existing TCI operation and the company began reorganizing its
management structure and business strategy.
Total operating expenses were $7,544,697 during the fiscal year ended
June 30, 1999, as compared to $473,132 during the fiscal year ended June 30,
1998. This increase of $7,071,565 in operating expenses is due to:
(i) amortization of motion picture development costs totaling $3,493,709 for
THE NEW SWISS FAMILY ROBINSON, and (ii) an increase in TCI's administrative
expenses as a fully operational division of the Company.
Amortization of additional consideration granted for debt during the
fiscal year ended June 30, 1999, was $257,813 as compared to $0 during the
fiscal year ended June 30, 1998. This expense represents the amortized
portion of the excess of market value over the warrant price for the warrants
granted as reflected in the equity section of the Company's balance sheet at
June 30, 1999.
For the fiscal year ended June 30, 1999, the Company's balance sheet
reflected goodwill (net of amortization) equal to $986,926. The goodwill
arises from the net deficit assumed by the Company in the Michel/Russo Inc.
and Skyrocket, LLC acquisitions as well as the value of stock options granted
in connection therewith.
The Company reported a net loss of $(1,579,433), including
$(257,813) for amortization of additional consideration granted for debt, or
$(0.19) per share, for the fiscal year ended June 30, 1999, as compared to a
net loss of $(391,486) or $(0.05) per share for the fiscal year ended June
30, 1998. The weighted average number of common shares outstanding for the
compared periods were 8,414,597 in fiscal year 1998/1999 and 7,740,667 in
fiscal year 1997/1998.
COMPARISON OF SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998
The Company's operating revenues for the period ended December 31,
1999, were $1,256,999, a decrease of $3,611,142 or 74% from operating
revenues of $4,868,141 in the prior six month period ended December 31, 1998.
This decrease resulted primarily from a reduction in movie release income,
which was $4,093,815 at December 31, 1998, as compared to $85,331 at December
31, 1999. Movie release income for the period ended December 31, 1998,
reflects the revenue from the Company's film, THE NEW SWISS FAMILY ROBINSON,
while the Company did not have a film in wide release for the period ended
December 31, 1999. THE NEW SWISS FAMILY ROBINSON was filmed during the
1997/1998 fiscal year and broadcast on ABC Television Network in January 1999.
Page 16 of 37
The Company's operating revenues generated by TCI for the period
ended December 31, 1999, were $1,171,667, an increase of $397,341 or 34% from
operating revenues of $774,326 in the prior six month period ended December
31, 1998. The six month period ended December 31, 1999, reflects the first
six months of operations for TCI after the company reorganized its management
and professional staffing structure and refocused its business strategy from
that of a graphic design boutique to its current strategy as an Internet
services agency.
Total operating expenses were $2,254,913 during the period ended
December 31, 1999 as compared to $4,255,755 during the period ended December 31,
1998. Administrative expenses increased $707,537 or 205% to $1,052,983 for the
period ended December 31, 1999 from $345,446 in the period ended December 31,
1998. The increase in such expenses is due principally to an increase in TCI's
administrative expenses as a fully operational division of the Company. TCI's
total headcount was eighteen employees at December 31, 1999, as compared with
twelve employees at December 31, 1998.
Interest expense for the period ended December 31, 1999, was $341,593
as compared to $5,641 during the period ended December 31, 1998. The increase
was due to increased borrowings. Total indebtedness for borrowed money increased
to $3,738,162 for the period ended December 31, 1999, from $296,527 in the
period ended December 31, 1998. See "Liquidity and Capital Resources" below for
additional discussion.
Amortization of additional consideration for the period ended
December 31, 1999, was $674,519 as compared to $0 during the period ended
December 31, 1998. This expense is directly related to the Company's
borrowings with The Orbiter Fund and the Lancer Group. See "Liquidity and
Capital Resources" below for additional discussion.
The Company reported a net loss of $(1,997,344) or $(0.23) per share
for the period ended December 31, 1999, as compared to net income of $670,200
or $0.08 per share for the period ended December 31,1998. The weighted
average number of common shares outstanding for the compared periods were
8,805,272 in fiscal 1999/2000 and 8,300,000 in fiscal 1998/1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at December 31, 1999 decreased to $791,967
from $3,132,062 at December 31, 1998. $3,000,000 of the cash balance at
December 31, 1998 represents unspent production funding for the film
DIAMONDS, which was in production from November 1998 to January 1999. The
Company expects to collect revenues from this film during the next two
quarters 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
Page 17 of 37
Company has relied upon its transactional production loans to provide bridge
production financing prior to receipt of distribution advances.
The Company's borrowings consist principally of two notes: one note
for $2,000,000 to The Orbiter Fund and several notes totaling $2,000,000 to
the Lancer Group and associates. 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. The loan bears interest at 13.5% and
matures May 2000. In September 1999, the Company obtained a $2,000,000
convertible note from the Lancer Group. This note bears interest at 12%,
payable quarterly, and matures March 2000. The Company has negotiated an
early retirement of these notes and is in the process of converting the debt
to a form of equity.
SUMMARY
Management believes that existing resources and cash generated from
operating activities, together with the conversion of the outstanding debt,
will be sufficient to meet the Company's working capital requirements through
the end of the fiscal year 1999/2000. The Company may seek other sources of
financing to meet its working capital requirements, including separate equity
or debt financing. The Company from time to time seeks additional financing
through the issuance of new debt or equity securities, additional bank
financings, or other means available to the Company to increase its working
capital.
ITEM 3. DESCRIPTION OF PROPERTY
The Company leases approximately 3,062 square feet of office space in
Beverly Hills, California. This space is used for the Company's corporate
headquarters and the film business. The lease expires on March 16, 2002. Monthly
lease payments are $5,358.
Total Creative, Inc. occupies approximately 5,000 square feet of
office space in Los Angeles, California, which is used for the advertising
and marketing business. The arrangement to occupy this space is for month to
month pursuant to an oral arrangement with the landlord. Monthly rental
payments are $12,000.
Total Creative, Inc. also occupies approximately 2,000 square feet of
office space in the San Francisco, California, area. This space houses the
digital advertising business of the Company. The arrangement to occupy this
space is for month to month pursuant to an oral arrangement with the landlord.
Monthly rental lease payments are $6,500.
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
Page 18 of 37
purchase the equipment at the end of the lease period at its then fair market
value. The second lease was a thirty-six month lease entered into in September
1999. The principal amount of this lease is approximately $110,000. The monthly
payments are $3734. There is an option to purchase the equipment for fair market
value at the end of the lease.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth certain information furnished by the
named shareholders and others concerning the ownership of common stock of the
Company as of March 10, 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:
[Download Table]
Amount and Nature
Name and Address of Beneficial
of Beneficial Owner Ownership (1) Percent of Class
------------------- ----------------- ----------------
Michael Lauer 6,890,014(2) 43.6%
475 Steamboat Road
Greenwich, CT 06830
Lancer Offshore, Inc. 4,137,907(3) 26.2%
Kaya Flamboyan 9
Curacao, Netherland Antilles
Lancer Partners LP 1,942,107(4) 12.3%
475 Steamboat Road
Greenwich, CT 06830
Gerald Green 1,720,000(5) 18.27%
9019 Lloyd Place
West Hollywood, CA 90069
Manuel Pacheco 55,000(6) *
Eli Boyer 50,000(7) *
Monique L. Jones -0-
Executive Officers and 1,825,000 20.24%
Directors as a Group
(4 Persons)
--------------------------
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*Represents less than 1%.
(1) Unless otherwise indicated, this column reflects amounts as to
which the beneficial owner has sole voting power and sole investment power.
(2) Mr. Lauer owns 310,000 of these shares directly in his name. Of the
remaining shares, 1,715,000 are held directly in the name of Lancer Offshore,
Inc.; 1,575,000 are held directly in the name of Lancer Partners LP; and 250,000
are held directly in the name of The Orbiter Fund, Ltd. Mr. Lauer is the general
partner of Lancer Partners LP. Mr. Lauer is the investment manager of Lancer
Offshore, Inc. and The Orbiter Fund, Ltd. Mr. Lauer controls the voting and
disposition of these shares by virtue of being the investment manager for these
entities. The Orbiter Fund, Ltd. has been granted warrants to purchase 250,000
shares. Also, pursuant to the conversion of the outstanding loans to the Company
, Lancer Partners LP will receive 367,107 shares and Lancer Offshore, Inc. will
receive 2,422,907 shares. The shares are issuable, and the warrants are
exercisable, within sixty days. The shares to be issued, and the shares
underlying the warrants, are included in the table and are considered to be
outstanding for purposes of computing the percentage interest held by Mr. Lauer.
(3) These shares are included in the total shares beneficially owned by
Mr. Lauer, who is deemed to share beneficial ownership of these shares with this
entity.
(4) These shares are included in the total shares beneficially owned by
Mr. Lauer, who is deemed to share beneficial ownership of these shares with this
entity.
(5) Of these shares 407,500 are held directly in the name of Mr. Green;
437,500 are held directly in the name of Mr. Green's wife, Patricia M. Green;
375,000 are held in trust for the children of Mr. and Mrs. Green.
Mr. and Mrs. Green control the voting of the shares held in trust. Mr. Green
also holds options to purchase 500,000 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 March 15, 2000, the name, age, and
position of each executive officer and director of the Company and the term of
office of such director:
[Download Table]
NAME AGE POSITION(S) DIRECTOR SINCE
---- --- ----------- --------------
Gerald Green 68 President, CEO, & Chairman 1997
Manuel Pacheco 43 Director 1997
Eli Boyer 80 Secretary, Treasurer, & Director 1997
Monique L. Jones 34 Chief Financial Officer --
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Directors are elected for a term of one year and until their successors
are elected and qualified. Annual meetings of the stockholders, for the
selection of directors to succeed those whose terms expire, are to be held at
such time each year as designated by the Board of Directors. The Board of
Directors has not selected a date for the next annual meeting of shareholders.
Officers of the Company are chosen by the Board of Directors. Each officer holds
his office for one year and until his successor is chosen and qualified.
Officers may also be removed by the Board of Directors whenever in its judgment
the best interests of the Company will be served by removing the officer.
Set forth below is certain biographical information regarding the
Company's executive officers and directors:
GERALD GREEN has been the president of the Company since January 1997.
From 1977 to 1997 he was self employed as a producer of feature length motion
pictures.
MANUEL PACHECO has been a practicing attorney in Mexico since 1982. He
received his bachelor of law degree from the Universidad Panamericana in Mexico
City in 1979, and received a master of law degree from Southern Methodist
University, Dallas, Texas, in 1982.
ELI BOYER is a certified public accountant and was a senior partner in
the national accounting firm of Laventhol and Horwath from 1966 to 1986. He has
been self-employed as a certified public accountant since 1986. He served as
chief financial officer of the Company from January 1997 until November 1999. He
is also a director of Bright Star Holding and Safety Harbor Spa, Inc. Mr. Boyer
received his bachelor of science degree in accounting in 1940 from UCLA. He
became a certified public accountant in 1943.
MONIQUE L. JONES has been the chief financial officer of the Company
since November 1999. From February 1996 until September 1999 she was employed by
USA Films (formerly Polygram Filed Entertainment) as manager of business
planning and development, director of business planning and development, and
director of film finance and planning. From October 1994 until October 1995 Ms.
Jones was employed by Coopers and Lybrand as an associate in the
entertainment/media practice division. She received her MBA in June 1993 from
UCLA, Los Angeles, California.
The following table sets forth as of March 15, 2000, the name, age, and
position of each executive officer and director, and each significant employee,
of Total Creative, Inc. :
[Download Table]
NAME AGE POSITION(S) DIRECTOR SINCE
---- --- ----------- --------------
Gerald Green 68 Director, President, and Secretary 1998
Rod Dyer 64 Co-creative director --
Howard Russo 62 Co-creative director --
D. Daniel Michel 53 Co-creative director --
Douglas Humphreys 38 Significant Employee --
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[Download Table]
April Minnich 42 Significant Employee --
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.
D. DANIEL MICHEL has been employed as co-creative director of Total
Creative, Inc. since January 1999. From February 1989 until December 1998, he
was the president of Michel/Russo, Inc., a creative advertising agency. From
January 1988 until January 1989, Mr. Michel was the president of marketing for
Columbia Pictures, where he directed marketing for domestic distribution of
motion pictures. He received a bachelor of science degree in anthropology in
1968 from Clairemont Men's College, and a master of science degree in journalism
in 1969 from Northwestern University.
DOUGLAS HUMPHREYS has been employed to supervise new media for Total
Creative, Inc. since April 1999. From January 1990 until April 1999, he was the
president and owner of Red Sky Films, a commercial production company, and
Skyrocket Interactive, a digital interactive company.
APRIL MINNICH has been employed to supervise business development for
Total Creative, Inc. since April 1999. From January 1990 until April 1999, she
was the director of marketing for Red Sky Films and Skyrocket Interactive, a
digital interactive company.
ITEM 6. EXECUTIVE COMPENSATION
COMPENSATION
The following table sets forth the aggregate executive compensation
awarded to, earned by, or paid to the named executive officer by any person for
all services rendered in all capacities
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to the Company and its subsidiaries for the fiscal years ended June 30, 1999,
1998, and 1997:
[Enlarge/Download Table]
-----------------------------------------------------------------------------------------------------------------------------------
Annual Compensation Long-Term Compensation
-------------------------------------- --------------------------------------
Awards Payouts
------------------------- ---------
Other
Annual Restricted All Other
Name and Principal Compen- Stock Options/ LTIP Compen-
Positions Year Salary Bonus sation Award(s) SARs Payouts sation
-----------------------------------------------------------------------------------------------------------------------------------
Gerald Green, CEO 1999 $95,000(1) -- $250,000(2) -- 500,000 -- --
-----------------------------------------------------------------------------------------------------------------------------------
1998 $80,000(1) -- $350,000(3) -- -- -- --
-----------------------------------------------------------------------------------------------------------------------------------
1997 $80,000(1) -- -- -- -- -- --
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------
(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 $50,000
was paid as producer's fees to a company owned by Mrs. Green and $100,000 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 700,000 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 March 15, 2000, all of the options under the plan
had been granted. Of the outstanding options, 45,000 had been exercised as of
March 15, 2000.
The Plan is administered by the Board of Directors which determined the
persons to whom awards were granted, the number of awards granted, and the
specific terms of each grant, including the vesting thereof, subject to the
provisions of the Plan.
The exercise price of each option granted under the Plan was determined
by the Board of Directors. The exercise price is (i) payable in cash; (ii)
payable in whole or in part in shares of stock of the Company, which shares
shall be valued at its then fair market value as determined by the Board of
Directors; or (iii) by the surrender or cancellation of other rights to stock of
the Company.
No option granted under the Plan is transferable other than by will or
the laws of descent and distribution, or pursuant to a qualified domestic
relations order. The options are subject to certain adjustments in the case of
stock splits, stock dividends, combination or consolidation of
Page 23 of 37
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, 1998, the Company granted a total of
155,000 options to employees under the 1998 Stock Option Plan. The following
table sets forth information concerning individual grants of stock options made
during that fiscal year to each of the named executive officers and the percent
each grant represents of total options granted to employees and non-employee
directors during the fiscal year:
[Download Table]
Number of
Securities Percent of
Underlying Total Exercise Expiration
Name Options Options Price Date
---- ------- ------- ----- ----
Manuel Pacheco 55,000 35.48% $2.00 6/19/01
Eli Boyer 50,000 32.26% $2.00 6/19/01
During the year ended June 30, 1999, the Company granted a total of
805,000 options to employees. Of the options granted, 545,000 were granted under
the 1998 Stock Option Plan and 260,000 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:
[Download Table]
Number of
Securities Percent of
Underlying Total Exercise Expiration
Name Options Options Price Date
---- ------- ------- ----- ----
Gerald Green 500,000 62.1% $2.00 7/27/01
Since June 30, 1999, and through March 15, 2000, the Company has
granted a total of 45,000 options to an employee pursuant to an individual stock
option agreement. The following table sets forth information concerning this
grant 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:
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[Download Table]
Number of
Securities Percent of
Underlying Total Exercise Expiration
Name Options Options Price Date
---- ------- ------- ----- ----
Monique Jones 10,000 100% $3.00 11/8/02
15,000 $4.00 11/8/03
20,000 $5.00 11/8/04
Of the options granted to Ms. Jones, 10,000 vest after twelve months of
continuous employment; 15,000 will vest after twenty-four months of continuous
employment; and 20,000 will vest after thirty-six months of continuous
employment. All of the other options set forth above have fully vested.
2000 RESTRICTED STOCK BONUS PLAN
In January 2000 the Company adopted a Stock Bonus Plan (the "Stock
Bonus Plan") which allows the Company to issue up to 50,000 restricted shares of
the Company's common stock to directors, officers, employees, and others who
have performed bona fide services for the Company. The purpose of the Stock
Bonus Plan is to assist the Company in maintaining and developing a management
team, attracting qualified directors, officers, and employees capable of
assisting in the future success of the Company, and rewarding those individuals
who have contributed to the success of the Company. It is designed to aid the
Company in retaining the services of executives and employees and in attracting
new personnel when needed for future operations and growth and to provide such
personnel with an incentive to remain employees of the Company, to use their
best efforts to promote the success of the Company's business, and to provide
them with an opportunity to obtain or increase a proprietary interest in the
Company. It is also designed to permit the Company to reward those individuals
who are not employees of the Company but who are perceived by management as
having contributed to the success of the Company or who are important to the
continued business and operations of the Company. The Stock Bonus Plan is
administered by the Board of Directors. It will terminate not later than ten
years from its adoption by the Board of Directors. Pursuant to the terms of the
Stock Bonus Plan, the Company issued 7,500 shares to an employee of the Company
in January 2000.
COMPENSATION OF DIRECTORS
The bylaws provide that directors, as such, are not entitled to receive
any stated salary for their services. However, they may receive a fixed sum and
expenses for attendance at meetings of the Board. The Company has not adopted a
policy with regard to establishing any fixed sum for attendance at special or
regular meetings of the board, but it does intend to reimburse directors for
out-of-pocket expenses related to such meetings.
Page 25 of 37
EMPLOYMENT AGREEMENTS
The Company has a full-time employment contract dated September 15,
1999, with Gerald Green to serve as the chief executive officer of the Company.
The agreement terminates on August 31, 2004. Under the contract Mr. Green
receives an annual base salary of $300,000 and a fixed annual bonus of $29,167.
He is also entitled to a contingent annual bonus equal to 10% of the net profits
of the Company before income taxes. Mr. Green will also receive an executive
producer's fee to be negotiated for each film project of the Company. The
agreement provides for an annual review and permits the Board of Directors to
increase or decrease the compensation based upon the services performed by
Mr. Green and the financial condition of the Company. Mr. Green has the right
to defer any part of the compensation upon prior written notice. He is
entitled to a car allowance of $1,500 per month. He is also entitled to
medical insurance for himself, his spouse, and children up to age
twenty-five, and the amount of medical and hospital expenses paid or payable
for such persons not covered by insurance. He is to receive three weeks paid
vacation each year. If Mr. Green is unable to perform his duties because of
illness or incapacity for more than twelve months, the Company may suspend
its payment obligation or terminate the agreement. Mr. Green is also to
receive screen and advertising credit in films in which he provides
creditable services.
The Company entered into an employment agreement dated
September 27,1999, with Monique L. Jones to act as chief financial officer
for the Company and its affiliates. The agreement may be terminated at any
time by either party. Ms. Jones receives an annual salary of $100,000, which
amount may be increased by the Company's executive committee after annual
review of her performance. She is entitled to the same medical, dental,
retirement, and other benefits afforded other similar employees of the
Company. Ms. Jones was also granted options to purchase 45,000 shares of
common stock of the Company.
Mr. Boyer, the Company's treasurer and secretary, has no employment
agreement or other compensatory plan or arrangement with the Company.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Gerald Green, the president, a director and principal shareholder of
the Company, may be deemed a promoter in relation to the organization of the
business of the Company and was the founder of Total Media Corporation. In
connection with the original acquisition of Total Media Corporation by the
Company, Mr. Green exchanged all of his shares of Total Media Corporation for
shares of the Company.
Mr. Green was employed by Total Films UK Limited, a wholly owned
subsidiary of the Company, as the executive producer of THE NEW SWISS FAMILY
ROBINSON. For his services, Mr. Green earned $300,000 and screen credit as
producer of the film. Payment of the cash consideration has been deferred,
without interest, until the film recoups its negative costs. Mr. Green is also
an officer and a director of Total Films UK Limited.
Page 26 of 37
Mr. Green and his wife, Patricia M. Green, were also employed by
Sundowning, Inc. as the executive producer and the producer, respectively, of
the film DIAMONDS. For his services as producer of DIAMONDS, Mr. Green earned a
fee of $100,000, which is deferred, without interest, until the film recoups its
negative costs. Mr. and Mrs. Green are also officers and directors of
Sundowning, Inc. Mrs. Green, through her company, Saso Entertainment, Inc.,
earned $150,000 as producer's fees in connection with the film, $100,000 of
which has been deferred, without interest, until the film recoups its negative
costs. Of the total amount earned, $50,000 was paid during the fiscal year ended
June 30, 1999. A bonus of $40,000 was paid to Mrs. Green during the current
fiscal year.
Mrs. Green, through her company, Saso Entertainment, Inc., was paid
$75,000 as an in-house production executive in connection with the film 1ST
MISTER and $100,000 as a producer's fee for the film BRIDE OF THE WIND (aka
ALMA). These fees were paid during the current year.
Mr. Andrew Somper, a former director of the Company, was a partner in
the law firm of Berwin Leighton which performed legal services for the Company.
He is also a director and officer of Total Film UK Limited. Legal fees paid to
Berwin Leighton total approximately $80,000. In addition, Mr. Somper received
stock options for the purchase of 75,000 shares at $2.00 per share. Mr. Somper
exercised this option in February 2000, by canceling 30,000 options. He received
45,000 shares through such exercise.
In February 1999 the Company assumed the repayment of two loans and one
line of credit with a total principal amount of $150,000, the balance of which
at March 21, 2000, was $66,200, between Red Sky Films, LLC and Skyrocket, LLC as
the borrowers and Westamerica Bank as the lender.
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. 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.
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
Page 27 of 37
agreement the Company intends to issue 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 agreed to issue 26,667 shares and to pay $40,000 to Capital Research,
Ltd. as a transaction fee. In addition, Capital Research, Ltd. and an
additional lender are to receive 310,079 shares for loans made by them in
connection with the September 1999 loan.
At December 31, 1999, the Company had loaned approximately $51,100 to
Rod Dyer, a significant employee of Total Creative, Inc., the Company's wholly
owned subsidiary. The loan was made without interest and is payable upon demand
by the Company. Mr. Dyer has agreed to pledge his interest in the 50,000 shares
of common stock issued to him by the Company as security for repayment of the
loan. The loan is not evidenced by any written documents.
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 current fiscal year the Company
has loaned $29,167 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 $48,835, without interest, during the current fiscal year through
March 15, 2000. As of March 15, 2000, none of the loans had been repaid.
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 March 10, 2000, the Company had
outstanding 8,913,965 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
Page 28 of 37
subscription rights or privileges granted by the Company with respect to any
shares. Reference is made to the Articles of Incorporation and Bylaws of the
Company as well as to the applicable statutes of the State of Delaware for a
more complete description of the rights and liabilities of holders of shares.
The shares of the Company do not have cumulative voting rights, which means that
the holders of more than fifty percent of the shares of Common Stock voting for
election of directors may elect all the directors if they choose to do so. In
such event, the holders of the remaining shares aggregating less than fifty
percent will not be able to elect directors.
PREFERRED STOCK
The articles of incorporation of the Company authorize 500,000 shares
of preferred stock, par value $.001 per share. Such shares may be issued in such
series and have such rights, preferences, an designation as determined by the
Board of Directors. No preferred shares are outstanding.
CHANGE OF CONTROL
The creation and issuance of a series of preferred stock or the
issuance of shares of common stock by the Board of Directors could be used to
delay, defer, or prevent a change of control of the Company in certain takeover
attempts. Using such shares, the Board of Directors could create impediments to,
or delay persons seeking to effect, a takeover or transfer of control of the
Company by causing such additional authorized shares to be issued to a holder or
holders who might side with the Board in opposing a takeover bid that the Board
of Directors determines is not in the best interests of the Company and its
shareholders. Such an issuance could diminish the voting power of existing
shareholders who favor a change in control, and the ability to issue the shares
could discourage an attempt to acquire control of the Company.
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANTS'S
COMMON EQUITY AND OTHER SHAREHOLDER MATTERS
MARKET FOR STOCK
The Common Stock of the Company is quoted on the OTC Electronic
Bulletin Board (OTC BB: "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.
[Download Table]
Quarter High Low
------- ---- ---
FISCAL YEAR ENDED
JUNE 30, 1998 First $4.50 $2.75
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[Download Table]
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 ENDING
JUNE 30, 2000 First $3.5625 $1.3125
Second $4.625 $2.6875
OUTSTANDING OPTIONS, WARRANTS, AND CONVERTIBLE INSTRUMENTS
At March 15, 2000, the Company had outstanding options exercisable into
875,000 shares of common stock. Such options were issued pursuant to the
Company's Stock Option Plan and in individual option agreements.
At March 15, 2000, the Company had outstanding warrants to purchase
260,000 shares of common stock. Of the outstanding warrants, 200,000 were issued
in connection with the private offering by the Company in October 1999 and
60,000 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. As
of March 15, 2000, the Company had also agreed to, but not yet issued, warrants
to purchase 665,000 shares of common stock. Set forth below is a brief
description of the warrants to be issued:
- As part of the February 1999 $2,000,000 loan from The Orbiter
Fund, the Company agreed to issue three-year warrants to the
lender to purchase 250,000 shares at $2.00 per share.
- In connection with the September 1999 consulting agreement
with Capital Research Ltd., the Company is obligated to issue
warrants to purchase an aggregate of 150,000 shares.
- As part of the September 1999 $2,000,000 loan from various
entities controlled by Michael Lauer, one of our principal
shareholders, and others, the Company is obligated to issue
additional warrants to Capital Research Ltd. to purchase
40,000 shares at $2.25 per share.
- In connection with the private offering by the Company and
Total China, Inc. in October 1999, the Company is obligated to
issue warrants to JBRG Consultants to
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purchase 200,000 common shares at $4.125 per share at any time
before November 19, 2002.
- In connection with a loan of $1,000,000 for the film 1st
Mister, the Company is obligated to issue warrants to Richard
Davimos, Jr. to purchase 25,000 common shares at $3.75 per
share, provided that if the note is repaid by June 1, 2000,
one-half of the warrants will be canceled.
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.
Pursuant to the employment agreement with Rod Dyer, one of the
employees of Total Creative, Inc., the Company was obligated to issue 50,000
shares of common stock to him on January 4, 2000. Such shares had not been
issued at March 15, 2000. The Company is also obligated to issue another 50,000
to Mr. Dyer pursuant to his employment agreement on June 30, 2000.
SHARES ELIGIBLE FOR FUTURE SALE UNDER RULE 144
The Company had 8,913,965 shares of its common stock outstanding at
March 10, 2000. Of these shares, 4,363,915 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 3,754,950 of the
restricted shares may have met the one year holding requirement of Rule 144.
Restricted shares held by affiliates, restricted shares held by non-affiliates
for less than two years, and control shares are not available for resale under
Rule 144 for a period of ninety days following the effective date of this
registration statement.
REGISTRATION RIGHTS
In October 1999 the Company commenced an offering of warrants to
purchase 200,000 shares of common stock. The offering closed on November 30,
1999 and the Company issued 200,000 warrants. In connection with this issuance,
the Company granted to the holders of the warrants the right to include the
shares underlying the warrants on a one-time basis in the next registration
statement filed by the Company under the Securities Act in which the Company
proposes to offer shares for cash or securities. The piggy-back registration
rights expire thirty-six months following the closing of the offering.
Page 31 of 37
The Company has agreed to register warrants to purchase 200,000
shares of the Company's common stock exerciseable at $4.125 per share to be
issued to JBRG Consultants in connection with the private offering by the
Company and Total China, Inc. in October 1999. The agreement provides for
priority registration rights and/or piggyback registration rights as normally
attached as compensation warrants.
RECORD HOLDERS OF STOCK; TRANSFER AGENT
At March 10, 2000, the Company had 58 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
No change in accountant is reportable pursuant to this item.
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
Page 32 of 37
promulgated by the Securities and Exchange Commission under the Securities Act
of 1933 and Section 3(b) thereunder. No underwriting discounts or commissions
were paid in connection with such issuances.
In July 1997 the Company sold 2,000,000 shares to four accredited
investors in a private placement of the shares. The shares were sold for an
aggregate of $2,000,000. Such securities were issued without registration under
the Act by reason of the exemption from registration afforded by the provisions
of Section 4(2) thereof, and Rule 506 promulgated thereunder, as transactions by
an issuer not involving any public offering. Such investors delivered
appropriate investment representations with respect to such transaction and
consented to the imposition of restrictive legends upon the certificates
evidencing such securities. No general solicitations were made in connection
with the transaction. No underwriting discounts or commissions were paid in
connection with such issuance.
In April 1998 the Company sold 800,000 shares of common stock for an
aggregate of $1,000,000 to eight persons without registration in a limited
offering pursuant to Rule 504 promulgated by the Securities and Exchange
Commission under the Securities Act of 1933 and Section 3(b) thereunder. No
underwriting discounts or commissions were paid in connection with such
issuances.
In October 1998 the Company borrowed $246,528 for working capital from
Sophia Toledo. The Company issued a ninety-day promissory note dated October 8,
1998, to Ms. Toledo evidencing such loan. The loan was repaid on May 19, 1999.
The note was issued in reliance upon the exemption provided in Section 3(a)(3)
of the Securities Act. No underwriting discounts or commissions were paid in
connection with such issuance.
In December 1998 the Company issued 5,000 shares to Murray Wilson in
connection with a loan of $50,000 by Merchants T&F, a company controlled by such
individual, in a private placement of the shares. The loan was repayable on or
before February 18, 1999, with a thirty day extension if the Company paid an
additional $5,000. The shares were issued as partial consideration for Merchants
T&F loaning the funds to the Company. The note was issued in reliance upon the
exemption provided in Section 3(a)(3) of the Securities Act. The shares were
issued without registration under the Act by reason of the exemption from
registration afforded by the provisions of Section 4(2) thereof, as a
transaction by an issuer not involving any public offering. Mr. Wilson delivered
appropriate investment representations with respect to such transaction and
consented to the imposition of a restrictive legend upon the certificate
evidencing such securities. No general solicitations were made in connection
with the transaction. Mr. Wilson is believed to be a sophisticated investor. No
underwriting discounts or commissions were paid in connection with such
issuance.
In January 1999 the Company issued 50,000 shares to Rod Dyer in
connection with his employment agreement with the Company. The shares were
issued without registration under the Act by reason of the exemption from
registration afforded by the provisions of Section 4(2)
Page 33 of 37
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 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 agreed to issue
warrants to purchase 250,000 shares exercisable at $2.00 per share on or before
February 9, 2002. Of the number of warrants owed, the Company has issued
warrants to purchase 125,000 shares and is in the process of issuing the
remaining warrants. The Company also issued 250,000 shares to The Orbiter Fund
in August 1999 for an extension on the repayment of the loan.
In April 1999, the Company issued a total of 225,000 shares of common
stock to Douglas Humphreys and April Minnich, the two owners of Skyrocket LLC, a
California limited liability company. 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.
Also in April 1999 Madeleine Ali, an employee of the Company, exercised
her option to purchase 10,000 shares at $4.50 per share, the bid price of the
stock on the exercise date. Rather than paying cash, she canceled 4,445 of the
options which equaled the exercise price. 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 $5.00 per share, the bid price of the stock on the date of
exercise. Rather than paying cash, she canceled 6,000 of the options which
equaled the exercise price. 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 borrowed $2,000,000 from five accredited
investors and issued a six month promissory note to such persons. The notes were
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 34 of 37
In October 1999 the Company sold warrants to purchase 200,000 shares to
forty accredited investors in a private placement of the warrants. The warrants
were sold for an aggregate of $200,000. This amount was used to pay the cash
finder's fee in a concurrent offering of shares of Total China, Inc., one of the
Company's subsidiaries. The Company also issued warrants to purchase 200,000
shares of common stock to the finder. 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.
Also in February 2000 Leonard Shapiro exercised his option to purchase
30,000 shares at $6.875 per share, the bid price of the stock on the date of
exercise. Rather than paying cash, he canceled 13,090 of the options which
equaled the exercise price. 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.
Also in February 2000 Andrew Somper, a former director of the Company,
exercised his option to purchase 75,000 shares at $5.00 per share, the bid price
of the stock on the date of exercise. Rather than paying cash, he canceled
30,000 of the options which equaled the exercise price. 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. The note was issued in
reliance upon the exemption provided in Section 3(a)(3) of the Securities Act.
No underwriting discounts or commissions were paid in connection with such
issuance.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware
expressly authorizes a Delaware corporation to indemnify its officers,
directors, employees, and agents against claims or liabilities arising out of
such persons' conduct as officers, directors, employees, or agents for the
corporation if they acted in good faith and in a manner they reasonably believed
Page 35 of 37
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:
[Download Table]
Page
----
Report of Auditor F-1
Consolidated Balance Sheets as of June 30, 1999 and 1998 F-2
Consolidated Statements of Operations for the fiscal years
ended June 30, 1999 and 1998 F-3
Consolidated Statements of Stockholders' Equity for the fiscal
years ended June 30, 1999 and 1998 F-4
Consolidated Statements of Cash Flows for the fiscal years
ended June 30, 1999 and 1998 F-5
Notes to Financial Statements F-7
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-1
Consolidated Statements of Operations and Accumulated Deficit
for the six month periods ended December 31, 1999
and 1998 F-3
Consolidated Statements of Stockholders' Equity for the six
month periods ended December 31, 1999 and 1998 F-4
Consolidated Statements of Cash Flows for the fiscal years
ended December 31, 1999 and 1998 F-5
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PART III
Items 1 and 2. Index to Exhibits and Description of Exhibits. The
following exhibits are included as part of this statement:
[Download Table]
Exhibit No. Description Page
2.1 Articles of Incorporation, as amended
2.2 Current Bylaws
3.1 Form of Common Stock Certificate
6.1 Reorganization Agreement dated January 29, 1997
6.2 Promissory Note to Merchants T&F dated
December 15, 1998
6.3 Loan Agreement with the Orbiter Fund dated
February 9, 1999, as amended August 11, 1999
6.4 Promissory Note to The Orbiter Fund dated
February 10, 1999
6.5 Warrant Certificate to the Orbiter Fund
6.6 Capital Research Ltd Agreement
6.7 Warrant Certificate to Capital Research Ltd.
6.8 $2 Million Convertible Note Term Sheet dated
September 21, 1999
6.9 Form of Convertible Promissory Note
6.10 Promissory Note Conversion Agreement dated
February 28, 2000
6.11 Form of Warrant Certificate in October 1999
Private Offering
6.12 Form of Registration Rights Agreement in October
1999 Private Offering
6.13 Form of Right of First Refusal Agreement in
October 1999 Private Offering
6.14 Promissory Note to Trinity American Corporation
dated February 17, 2000
6.15 Agreement Re Sale of Interest in Skyrocket, LLC
6.16 Michel/Russo, Inc. Stock Purchase Agreement, as
amended
6.17 Employment Agreement of Gerald Green
6.18 Employment Agreement of Rod Dyer
6.19 Employment Agreement of D. Daniel Michel, as
amended
6.20 Stock Option Certificate to D. Daniel Michel
6.21 Employment Agreement of Howard Russo, as amended
6.22 Stock Option Certificate to Howard Russo
6.23 Employment Agreement of Monique L. Jones
6.24 Stock Option Certificate to Monique L. Jones
6.25 1998 Non-Qualified Stock Option Plan
6.26 Form of Non-Qualified Stock Option Certificate
6.27 Stock Option Certificate for Madeleine Ali, as
amended
6.28 Stock Bonus Plan
6.29 Stock Purchase Agreement with U.S. Business
Network, Inc.
6.30 Executive Producer Agreement for DIAMONDS
6.31 Producer's Agreement for NEW SWISS FAMILY ROBINSON
Page 37 of 37
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6.32 Producer Agreement for CHICK FLICK
6.33 Office Lease Agreement
6.34 Paramount Pictures Corporation/Alma U.K.
Production, Limited letter agreement for BRIDE OF
THE WIND
6.35 Paramount Pictures Corporation/1st Mr. Inc. letter
agreement for MY FIRST MISTER
6.36 JBRG Consultants consulting agreement
10.1 Consent of auditor
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: March 28, 2000 By /s/ Gerald Green, President
Date: March 28, 2000 By /s/ Monique L. Jones, Chief Financial
Officer
INDEPENDENT AUDITORS' REPORT
Total Film Group, Inc. and Subsidiaries
Beverly Hills, California
We have audited the accompanying consolidated balance sheets of Total Film
Group, Inc. and Subsidiaries (the "Company"), as of June 30, 1999 and 1998, and
the related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Total Film Group,
Inc. and Subsidiaries as of June 30, 1999 and 1998, and the results of its
operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
/s/ MILLER, KAPLAN, ARASE & CO., LLP
September 29, 1999, except for Note 4,
which is as of January 14, 2000.
F-1
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
[Enlarge/Download Table]
ASSETS
2100393
June 30, 1999 June 30, 1998
------------- -------------
CURRENT ASSETS
Cash and Cash Equivalents $1,130,179 $ 629,336
Time Certificate of Deposit 27,678 --
Accounts Receivable 423,413 91,285
Related Party Receivable 90,165 --
Other Receivable 30,000 139,177
Prepaid Expenses 50,557 2,272
---------- ----------
TOTAL CURRENT ASSETS 1,751,992 862,070
---------- ----------
MOTION PICTURE DEVELOPMENT COSTS
New Swiss Family Robinson 5,639,610 5,298,437
Less: Accumulated Amortization 3,493,709 --
---------- ----------
2,145,901 5,298,437
Diamonds 7,386,627 --
Other 778,161 738,465
---------- ----------
10,310,689 6,036,902
Less: Production Funding Received 7,219,391 --
---------- ----------
TOTAL MOTION PICTURE DEVELOPMENT COSTS, NET OF
AMORTIZATION AND PRODUCTION FUNDING RECEIVED 3,091,298 6,036,902
---------- ----------
PROPERTY, PREMISES AND EQUIPMENT
Furniture and Fixtures 37,589 25,679
Office Equipment 325,083 33,404
Leasehold Improvements 9,029 8,035
---------- ----------
371,701 67,118
Less: Accumulated Depreciation 256,753 12,851
---------- ----------
TOTAL PROPERTY, PREMISES AND EQUIPMENT 114,948 54,267
---------- ----------
OTHER ASSETS
Deposits 116,186 16,076
Organization Costs, Net of Amortization 126,784 200,137
Goodwill, Net of Amortization 986,926 --
Miscellaneous Investments 266,088 39,597
---------- ----------
TOTAL OTHER ASSETS 1,495,984 255,810
---------- ----------
TOTAL ASSETS $6,454,222 $7,209,049
========== ==========
(See notes to consolidated financial statements)
F-2
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (cont.)
[Enlarge/Download Table]
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, 1999 June 30, 1998
------------- -------------
CURRENT LIABILITIES
Short Term Debt $ 2,000,000 $ --
Less: Unamortized Debt Discount 429,687 --
----------- -----------
1,570,313 --
Current Portion of Long-Term Debt 126,925 --
Current Portion of Obligation Under Capital Lease 1,121 1,495
Accounts Payable and Accrued Expenses 508,816 296,751
Income Taxes Payable 25,507 --
Interest Payable 89,507 --
Producer's Fee Payable, Related Party 300,000 300,000
Deferred Revenue -- 2,593,816
----------- -----------
TOTAL CURRENT LIABILITIES 2,622,189 3,192,062
----------- -----------
LONG-TERM LIABILITIES
Long-Term Debt, Net of Current Portion 52,652 645,768
Obligation Under Capital Lease, Net of Current Portion -- 1,122
----------- -----------
TOTAL LONG-TERM LIABILITIES 52,652 646,890
----------- -----------
TOTAL LIABILITIES 2,674,841 3,838,952
----------- -----------
STOCKHOLDERS' EQUITY
Common Stock, $0.001 Par Value; Authorized 50,000,000 Shares;
Issued and Outstanding 8,630,000 Shares and 8,300,000 Shares,
Respectively 8,630 8,300
Stock Warrants Granted, Value in Excess of Exercise Price 687,500 --
Stock Options Exercisable, Fair Value 557,813 --
Additional Paid-in Capital 4,841,667 4,098,593
Accumulated Deficit (2,316,229) (736,796)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 3,779,381 3,370,097
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 6,454,222 $ 7,209,049
=========== ===========
(See notes to consolidated financial statements)
F-3
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
[Download Table]
For the Years Ended
-----------------------------
June 30, 1999 June 30, 1998
------------- -------------
REVENUE
Movie Release Income $ 4,429,388 $ --
Design Fees 1,690,706 82,329
----------- -----------
6,120,094 82,329
----------- -----------
OPERATING EXPENSES
Administrative Expenses 3,911,239 411,556
Depreciation and Amortization 139,749 61,576
Amortization of Motion Picture
Development Costs 3,493,709 --
----------- -----------
7,544,697 473,132
----------- -----------
LOSS FROM OPERATIONS (1,424,603) (390,803)
----------- -----------
OTHER INCOME (EXPENSE)
Rental Income 184,868 3,475
Interest Income 20,107 1,211
Interest Expense (115,193) (5,089)
Amortization of Additional Consideration
Granted for Debt (257,813) --
Loss on Sale of Assets -- (449)
Miscellaneous Income 41,529 169
----------- -----------
(126,502) (683)
----------- -----------
LOSS BEFORE INCOME TAX EXPENSE (1,551,105) (391,486)
----------- -----------
INCOME TAX (EXPENSE) BENEFIT
Current (28,328) --
----------- -----------
(28,328) --
----------- -----------
NET LOSS $(1,579,433) $ (391,486)
=========== ===========
BASIC AND DILUTED LOSS PER SHARE $ (0.19) $ (0.05)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 8,414,597 7,740,667
=========== ===========
(See notes to consolidated financial statements)
F-4
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
[Enlarge/Download Table]
Common Stock Stock Stock Additional
------------------ Warrants Options Paid-In Accumulated
Shares Amount Granted Exercisable Capital Deficit
--------- ------ -------- ----------- ---------- -----------
Balance, July 1, 1997 6,500,000 $6,500 $ -- $ -- $2,100,393 $ (345,310)
Issuance of Common Stock for Cash at $1.00
per Share Pursuant to Private Offering,
July 1997 1,000,000 1,000 -- -- 999,000 --
Issuance of Common Stock for Cash at $1.25
per Share Pursuant to Private Offering,
March 1998 600,000 600 -- -- 749,400 --
Issuance of Common Stock for Cash at $1.25
per Share Pursuant to Limited Offering,
April to May 1998 200,000 200 -- -- 249,800 --
Net Loss for the Year Ended June 30, 1998 -- -- -- -- -- (391,486)
--------- ------ -------- -------- ---------- -----------
Balance, June 30, 1998 8,300,000 8,300 -- -- 4,098,593 (736,796)
Issuance of Common Stock for Acquisition
of Skyrocket, LLC., January 1999 150,000 150 -- -- 337,350 --
Issuance of Common Stock for Acquisition of
Michel Russo, Inc., January 1999 100,000 100 -- -- 212,366 --
Issuance of Common Stock as Additional
Consideration for Debt, February 1999 15,000 5 -- -- 24,683 --
Issuance of Common Stock for Acquisition
of Skyrocket, LLC., June 1999 75,000 75 -- -- 168,675 --
Warrants Exercisable for 250,000 Shares of
Common Stock at $2.00 per Share,
Issued as Additional Consideration of
Debt, February 1999 -- -- 687,500 -- -- --
Stock Options Exercisable for 210,000
Shares of Common Stock at $2.00
per Share for Services Rendered
July 1998 - May 1999 -- -- -- 557,813 -- --
Net Loss for the Year Ended June 30, 1999 -- -- -- -- -- (1,579,433)
--------- ------ -------- -------- ---------- -----------
Balance, June 30, 1999 8,630,000 $8,630 $687,500 $557,813 $4,841,667 $(2,316,229)
========= ====== ======== ======== ========== ===========
(See notes to consolidated financial statements)
F-5
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
[Enlarge/Download Table]
For the Years Ended
-----------------------------
June 30, 1999 June 30, 1998
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,579,433) $ (391,486)
----------- -----------
Adjustments to Reconcile Net Loss to Net Cash
Provided By Operating Activities:
Depreciation and Amortization 3,633,458 61,576
Loss on Sale of Assets -- 449
Adjustment for Liabilities Acquired from Merger (11,100) --
Abandoned Projects -- 8,580
Amortization of Loan Discount 284,956 --
Fair Value of Stock Options Granted 557,813 --
Decrease (Increase) in Assets:
Accounts Receivable (245,099) (76,919)
Related Party Receivable (90,165) --
Other Receivable 109,177 (126,119)
Prepaid Expenses (47,335) 12,785
Deposits (100,110) --
Increase (Decrease) in Liabilities:
Accounts Payable and Accrued Expenses 47,329 255,803
Income Taxes Payable 25,507
Producer's Fee Payable, Related Party -- 300,000
Interest Payable 89,507 --
Deferred Revenue (2,593,816) 2,593,816
----------- -----------
TOTAL ADJUSTMENTS 1,660,122 3,029,971
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 80,689 2,638,485
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash Used to Purchase Certificate of Deposit (27,678) --
Payment of Organization Costs -- (203,975)
Miscellaneous Investments (226,491) (16,723)
Purchase of Property and Equipment (19,083) (15,285)
Purchase of Subsidiaries (20,000) --
Proceeds from Production Funding Arrangement 7,219,391 --
Cash Used in Motion Picture Development , Net (7,767,496) (5,579,207)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (841,357) (5,815,190)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Issuance of Common Stock -- 2,000,000
Proceeds from Loans 3,203,428 3,159,580
Principal Payments Made on Loans (1,940,421)
Principal Payments on Capital Lease Obligations (1,496) (2,513,812)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,261,511 2,645,768
----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 500,843 (530,937)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR 629,336 1,160,273
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF THE YEAR $ 1,130,179 $ 629,336
=========== ===========
(See notes to consolidated financial statements)
F-6
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
[Download Table]
For the Years Ended
-----------------------------
June 30, 1999 June 30, 1998
------------- - ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest Paid $ 62,768 $187,406
======== ========
Income Taxes Paid $ 2,821 $ --
======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
DURING THE YEAR ENDED JUNE 30, 1999:
The Company issued 325,000 shares of common stock with a value of $549,966
as consideration for the acquisition of subsidiaries.
The Company issued 5,000 shares of common stock as consideration for debt
issued by the Company.
The Company granted warrants exercisable for 250,000 shares of common stock
at $2.00 per share with a fair value of $687,500 as additional
consideration for debt issued by the Company.
The Company granted stock options exercisable at $2.00 per share for
210,000 shares of common stock with a fair value of $557,813 for past
services rendered.
(See notes to consolidated financial statements)
F-7
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS AND BACKGROUND:
Total Film Group, Inc. ("Total"), formerly known as Executive Marketing,
Inc., was organized under the laws of the State of Delaware on August 1,
1995.
Total is involved in the business of producing, marketing and distributing
commercial feature films. It primarily creates, develops and produces
feature-length, theatrical motion pictures.
Total Creative, Inc. ("TCI") is a wholly-owned subsidiary of Total which
formerly operated as Dyer Communications, Inc. TCI acquired substantially
all the assets of Skyrocket, LLC and Michel Russo, Inc. effective January
1, 1999. TCI is a graphic design boutique specializing in digital
advertising, entertainment marketing, film promotion, trade and consumer
advertising and packaging, including corporate advertising and corporate
identity.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of Total Film
Group, Inc. and its wholly owned subsidiaries: Total Radio, Inc., Total
Pictures, Inc., Total Film (UK) Ltd., Alien Sky (UK) Ltd., Total Creative,
Inc. and Sundowning, Inc. (collectively, the "Company"). All significant
intercompany balances and transactions have been eliminated upon
consolidation.
REVENUE RECOGNITION:
Revenues from distribution or releasing agreements are recognized when the
film becomes available for release and certain other conditions are met in
accordance with Statement of Financial Accounting Standards No. 53 ("SFAS
53"), "Financial Reporting by Producers and Distributors of Motion Picture
Films". Amounts received in advance of the film being available are
recorded as deferred revenue.
Revenues from graphic design are generally recognized at the completion of
production. Revenue for long-term contracts is recognized on the
percentage-of-completion method.
MOTION PICTURE DEVELOPMENT COSTS AND AMORTIZATION:
Motion picture development costs represent those costs incurred in the
production, acquisition and distribution of motion pictures, which include
production costs, legal expenses, interest and overhead costs. These costs
have been capitalized in accordance with SFAS 53. The Company is amortizing
the film costs for completed films using the individual-film-forecast-
computation method, whereby expense is recognized in the proportion that
current year revenues bear to management's estimate of ultimate revenue
from all markets.
Motion picture development costs are valued at lower of unamortized cost or
estimated net realizable value. Revenue and cost forecasts for films are
regularly reviewed by management and revised when warranted by changing
conditions. When estimates of total revenues and costs indicate that a film
will result in an ultimate loss additional amortization is provided to
fully recognize such loss.
F-8
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
CASH EQUIVALENTS:
The Company considers all short-term investments with an original maturity
of three months or less to be cash equivalents. Short-term investments
included in cash and cash equivalents for the years ended June 30, 1999 and
1998 were $0 and $26,375, respectively.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS:
The preparation of financial statements in accordance with generally
accepted accounting principles requires that management use estimates and
assumptions in preparing financial statements. Those estimates and
assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported revenues
and expenses. Actual results could differ from those estimates.
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost. Depreciation of the cost of
property and equipment is computed using the straight-line method over the
estimated useful lives of the related assets ranging from 1 to 7 years.
Total depreciation expense relating to property and equipment for the years
ended June 30, 1999 and 1998 were $31,189 and $10,222, respectively.
Expenditures for maintenance and repairs are charged to expense as
incurred. Additions and betterments are capitalized. The cost and related
accumulated depreciation of property and equipment sold or otherwise
disposed are removed from the accounts and any gain or loss is reflected in
the current year's earnings.
ORGANIZATION COSTS:
Organization costs, which reflect amounts expended to organize the Company,
are amortized by the straight-line method over five years.
Amortization expense relating to organization costs was $80,348 and $51,354
for the years ended June 30, 1999 and 1998, respectively.
GOODWILL:
The purchase price for the net assets of companies acquired in excess of
their fair market values are amortized using the straight line method over
twenty years. Amortization expense for the year ended June 30, 1999 was
$28,213.
ACCOUNTS RECEIVABLE:
Accounts receivable is stated net of allowance for doubtful accounts. The
allowance is based upon management's estimate of the collectibility of
accounts receivable. Management estimated the total allowance to be $12,155
and $14,365 for the years ended June 30, 1999 and 1998, respectively.
F-9
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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.
CONCENTRATION OF CREDIT RISK:
The Company maintains bank account balances in institutions located in
California and Puerto Rico. The balances in California are insured by the
Federal Deposit Insurance Corporation up to $100,000. The Company's cash
balances exceeded the level of insurance coverage for the years ended June
30, 1999 and 1998 by $946,146 and $483,000, respectively.
Financial instruments that potentially subject the Company to credit risk
consist of accounts receivable. The Company grants credit to customers
located in its operating location, primarily California. Concentrations of
credit risk with respect to accounts receivable is somewhat limited due to
the number of customers comprising the Company's customer base and their
dispersion across different industries.
IMPAIRMENT OF LONG-LIVED ASSETS:
Periodically, the Company evaluates whether there has been impairment in
the carrying value of the long-lived assets, such as motion picture
development costs and property and equipment, in accordance with generally
accepted accounting principles. Management believes that the long-lived
assets in the accompanying balance sheets are recoverable.
NON-DIRECT RESPONSE ADVERTISING:
Non-direct response advertising costs are expensed the first time the
advertising takes place. Advertising expense for the year ended June 30,
1999 was $160,789.
EARNINGS (LOSS) PER SHARE:
Net income (loss) per share is computed using the weighted average number
of shares of common stock outstanding. Common equivalent shares from stock
options and warrants have been included in the computation when dilutive.
Basic EPS is calculated by dividing earnings available to common
stockholders (the "numerator") by the weighted-average number of common
shares outstanding (the "denominator") during the period. The computation
of diluted EPS is similar to the computation of basic EPS except that the
denominator is increased to include the number of additional common shares
that would have been outstanding if the dilutive potential common shares
(that is, securities such as options, warrants, convertible securities, or
contingent stock agreements) had been issued. In addition, in computing the
dilutive effect of convertible securities, the numerator is adjusted to add
back (a) any convertible preferred dividends and (b) the after-tax amount
of interest recognized in the period associated with any convertible debt.
F-10
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
EARNINGS (LOSS) PER SHARE: (CONTINUED)
Options and warrants representing common shares were excluded from the
average number of common equivalent shares outstanding in the diluted EPS
calculation for the year ended June 30, 1999 since that would have an
antidiluted effect on EPS.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The Company's financial instruments include cash, receivables, payables and
accrued expenses. The carrying amount of such financial instruments
approximates fair value because of the short maturity of these instruments.
ACCOUNTING FOR STOCK BASED COMPENSATION
As permitted under Statement of Financial Accounting Standards No. 123
("SFAS 123") "Accounting for Stock-Based Compensation", the Company uses
the intrinsic value based method of accounting as prescribed by APB Opinion
No. 25 "Accounting for Stock Issued to Employees" to account for
compensation expense for its stock-based employee compensation plan.
NEW ACCOUNTING PRONOUNCEMENTS:
In April 1998, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position 98-5, Reporting on the Costs of Start-Up
Activities. Costs of start-up activities, including organization costs,
should be expensed as incurred. This SOP is effective for financial
statements for fiscal years beginning after December 15, 1998. Initial
application of this SOP should be reported as the cumulative effect of a
change in accounting principle, as described in Accounting Principles Board
Opinion No. 20, Accounting Changes. The Company is required to adopt the
SOP on its financial statements for the year ended June 30, 2000. Adoption
of the SOP will reduce the Company's total assets and net income by the
amount of unamortized organization costs. At June 30, 1999, organization
costs, net of amortization, in the Company's balance sheet was $126,784.
RECLASSIFICATIONS:
Certain reclassifications have been made to amounts reported in prior
periods to conform with current year presentation.
NOTE 2 - ACQUISITIONS:
Effective January 1, 1999, the Company acquired the net assets of
Skyrocket, LLC. The shareholders of Skyrocket, LLC received 150,000 shares
of common stock and $25,000 in cash. An additional 75,000 shares of common
stock were granted June 26, 1999.
Effective January 1, 1999, the Company acquired the net assets of Michel
Russo, Inc. The shareholders of Michel Russo, Inc. received 100,000 shares
of common stock.
NOTE 3 - REPORTABLE OPERATING SEGMENTS:
MANAGEMENT'S POLICY IN IDENTIFYING REPORTABLE SEGMENTS:
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different technology, marketing and distribution
strategies.
F-11
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE 3 - REPORTABLE OPERATING SEGMENTS: (CONTINUED)
GENERAL INFORMATION:
The Company's has two reportable operating segments: motion picture films
and graphic arts. The motion picture segment engages in the production,
marketing and distribution of commercial feature films; the graphic arts
segment is involved in the development of advertising and marketing
campaigns for a variety of clients.
SEGMENT PROFIT OR LOSS:
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. Management evaluates
segment performance based on profit or loss from operations before income
taxes and nonrecurring gains and losses. Transfers between segments are
accounted for at market value.
FOR THE YEAR ENDED JUNE 30, 1999
[Download Table]
Segments
--------------------------------
Totals Motion Pictures Graphic Arts
----------- --------------- ------------
Revenues from external customers $ 6,120,094 $ 4,429,388 $ 1,690,706
Intersegment revenues 88,761 -- 88,761
Interest income 20,107 20,086 21
Interest expense 373,006 358,847 14,159
Depreciation and amortization 3,633,458 3,584,700 48,758
Segment profit (loss) (1,522,105) (890,419) (631,686)
Segment assets 9,387,462 7,934,141 1,453,321
FOR THE YEAR ENDED JUNE 30, 1998
[Download Table]
Totals Motion Pictures Graphic Arts
----------- --------------- ------------
Revenues from external customers $ 82,329 $ -- $ 82,329
Interest income 226,211 226,211 --
Interest expense 5,089 5,089 --
Depreciation and amortization 61,576 61,329 247
Segment profit (loss) (166,466) (107,224) (59,262)
Segment assets 8,933,586 8,439,263 494,323
F-12
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE 3 - REPORTABLE OPERATING SEGMENTS: (CONTINUED)
RECONCILIATION OF SEGMENT INFORMATION TO CONSOLIDATED AMOUNTS:
[Download Table]
For the Years Ended June 30,
----------------------------
1999 1998
------------ ------------
REVENUES
Total revenues for reportable segments $ 6,208,855 $ 82,329
Elimination of intersegment revenues (88,761) --
------------ ------------
Total consolidated revenues $ 6,120,094 $ 82,329
============ ============
INCOME OR LOSS
Total loss for reportable segments $ (1,522,105) $ (166,486)
Elimination of intersegment income (29,000) (225,000)
------------ ------------
Loss before income tax $ (1,551,105) $ (391,486)
============ ============
ASSETS
Total assets for reportable segments $ 9,387,462 $ 8,833,586
Eliminations of intersegment transactions (2,933,240) (1,724,537)
------------ ------------
Consolidated total $ 6,454,222 $ 7,209,049
============ ============
Information for the Company's reportable segments relates to its
consolidated totals as follows:
MAJOR CUSTOMER INFORMATION:
Revenues from two customers of the Company's graphic arts segment represent
approximately $410,330 of the Company's consolidated revenues, for the year
ended June 30, 1999.
F-13
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE 4 - LOANS PAYABLE:
[Download Table]
June 30, 1999 June 30, 1998
------------- -------------
Mercantile National Bank credit line, entered into
March 23, 1999 with monthly principal payments of
$8,333, plus interest at 8.75% per annum. The
credit line matures March 15, 2000 $ 75,000 $ --
Note payable, assumed October 1997 with principal
secured by the cash proceeds related to the
distribution of the New Swiss Family Robinson.
The interest accrues at 1% above the bank's prime
rate of interest. The note matured July 28, 1998. -- 645,768
WestAmerica Bank note payable, assumed February 1999
with monthly principal payments of $2,500 plus a
variable rate of interest currently 10.25% per
annum. The debt matures September 2000. 35,000 --
WestAmerica Bank note payable, assumed February 1999
with monthly principal payments of $1,637 plus a
variable rate of interest currently 10.5% per
annum. The debt matures November 2000. 22,917 --
WestAmerica Bank credit line, assumed February 1999.
The interest rate is 10.75% per annum. (See Note 6.) 46,660 --
--------- ----------
179,577 645,768
126,925 --
--------- ----------
Less Current Portion $ 52,652 $ 645,768
========= ==========
Future aggregate debt maturities are as follows:
[Download Table]
Year Ending
June 30 Amount
----------- ------
2000 $ 126,925
2001 10,444
2002 2,064
2003 2,963
2004 and Thereafter 38,181
---------
$ 179,577
=========
On February 11, 1999, the Company borrowed $2,000,000 with principal
payable quarterly at the rate of $375,000 beginning three months following
the date of the first advance and continuing on the same date of each
quarter thereafter until one year following the date of the first advance,
at which time the unpaid principal balance and accrued interest shall be
due and payable. Interest will accrue at a rate of 13.5% per year, payable
quarterly under the same terms as with principal.
The debt holder received as additional consideration 250,000 warrants to
purchase the Company's common stock. The fair value in excess of the
exercise price of the warrants of $687,500 has been recorded as an
unamortized debt discount to be amortized as interest over one year, the
term of the debt. The unamortized loan discount at June 30, 1999 was
$429,687.
Total interest expense for these obligations for the years ended June 30,
1999 and 1998 was $95,880 and $5,089.
F-14
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE 5 - OBLIGATION UNDER CAPITAL LEASE:
The Company leases office equipment with lease term expiring March 2000.
This capital lease obligation has been recorded in the accompanying
financial statements at the present value of future minimum lease payments.
The capitalized cost of $5,939 is included in office equipment in the
accompanying balance sheet. Accumulated depreciation at June 30, 1999 and
1998 includes $2,673 and $1,405, respectively, related to the capitalized
cost of the office equipment, which was acquired under lease in March 1997.
NOTE 6 - LINE OF CREDIT:
The Company has available a line of credit from WestAmerica Bank for
$50,000. The credit line bears interest annually at 10.75% with monthly
payments equal to 0.417% of the outstanding balance, but not less than
$100. The line was assumed in January 1999 and expires in April 2007. The
balance outstanding on the line at June 30, 1999 was $46,660. (See Note 4).
NOTE 7 - RELATED PARTY TRANSACTIONS:
Producer's fee payable of $300,000 is owed to the Company's chief executive
officer. By agreement between the chief executive officer and the Company,
the full amount is being deferred without interest until there are
sufficient funds out of proceeds from the distribution of the "New Swiss
Family Robinson" production to pay off the outstanding amount.
The Company has receivables totaling $90,165 from its officers. The
receivables are short term in nature, do not carry a stated rate of
interest and are callable at the Company's discretation.
NOTE 8 - COMMITMENTS AND CONTINGENCIES:
The Company has entered into lease agreements for its office facilities,
office equipment and automobiles with terms ranging from two to five years
and monthly payments from $250 to $5,512. Future minimum lease payments are
as follows:
[Download Table]
Year Ending
June 30, Lease Payments
----------- --------------
2000 $104,262
2001 94,499
2002 77,213
2003 25,352
----------
Total future minimum
lease payments $301,326
The lease agreement for the corporate office facilities calls for lease
payments to increase from $5,358 to $5,512 per month starting in March
1999. None of the other lease agreements call for annual rental increases.
Total rental expense included in the financial statements for the years
ending June 30, 1999 and 1998 was $243,011 and $73,643, respectively.
The Company entered into an Employee Loan Out Agreement with Viridian
Holdings (a Company related to the Company's chief executive officer and a
shareholder of the Company) wherein Viridian would loan the Company the
services of its President and Chairman of the Board. The Company is
obligated to pay $4,000 per month in "pass-through" salary through October
1, 1999. In addition, the Company agreed to cover all medical expenses not
covered by insurance incurred by the President and his family. This
compensation arrangement for the Chairman is exclusive of producer fees
associated with the release of the Company's motion pictures. The agreement
can be extended on a year to year basis after the initial term has expired.
F-15
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE 8 - COMMITMENTS AND CONTINGENCIES: (CONTINUED)
The Company is involved in various legal proceedings, which represent
routine litigation incident to the business, some of which are covered in
whole or in part by insurance. In management's opinion, none of the pending
litigation will have a material adverse effect on the Company's financial
position.
On January 21, 1999, the Company entered into an agreement with legal
counsel for assistance in the formation of a new subsidiary. The
subsidiary's primary function will be the production and distribution of
motion picture films. In addition to a $30,000 retainer paid to the
attorneys during the year, the Company agreed to compensate legal counsel
$300,000 plus time and expense charges upon completion of the securities
transaction. According to the agreement, the retainer will be applied to
the $300,000 liability once the transaction is completed. At June 30, 1999,
the formation of the new subsidiary was not yet complete.
NOTE 9 - INCOME TAXES:
The Company has available at June 30, 1999 and 1998, unused operating loss
carryforwards of approximately $2,325,000 and $750,000, respectively, which
may be applied against future taxable income and which expire in various
years through 2019. The amount of and ultimate realization of the benefits
from operating loss carryforwards for income tax purposes is dependent, in
part, upon the tax laws in effect, the future earnings of the Company, and
other future events, the effects of which cannot be determined. Because of
the uncertainty surrounding the realization of the loss carryforwards the
Company has established a valuation allowance equal to the amount of the
tax effect of loss carryforwards and, therefore, no deferred tax asset has
been recognized for the loss carryforwards.
The Company's net deferred tax assets (using a federal rate of 34%)
consisted of the following at:
[Download Table]
June 30, 1999 June 30, 1998
------------- -------------
Deferred Tax Assets $ 790,500 $ 255,000
Deferred Tax Asset Valuation (790,500) (255,000)
--------- ---------
Net Deferred Tax Assets $ - $ -
========= =========
NOTE 10 - STOCKHOLDERS' EQUITY:
STOCK OPTION PLAN:
In July 1998, the Company adopted a Non-Qualified Stock Option Plan (the
"Plan"). As of June 1999, approximately 948,000 shares of Common Stock are
reserved for future issuance under this plan. The Plan allows for the
Company to grant stock options to purchase shares of the Company's
authorized but unissued Common Stock to officers, key employees,
non-employee directors and consultants. Options are generally priced at the
fair market value of the stock on the date of grant. Options are generally
exercisable immediately but unvested shares are held in escrow. Options
currently expire no later than five years from the date of grant.
During fiscal 1999, the Company granted non-employee directors and
consultants the option to purchase 210,000 shares of unissued Common Stock.
These options were granted for past services rendered with a fair value of
$557,813. The professional fees were charged against earnings in the
current year.
F-16
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE 10 - STOCKHOLDERS' EQUITY: (CONTINUED)
STOCK OPTION PLAN: (CONTINUED)
Information relative to stock option activity is as follows (in thousands):
[Download Table]
Weighted
Options Average
Available Number Aggregate Exercise
for Grant of Shares Price Price
--------- --------- --------- ---------
Balance, July 1, 1998 $ -- -- $ -- $ --
Share Authorized for Issuance 948 -- -- --
Options Granted (850) 850 1,700 2.00
Options Exercised -- -- -- --
Options Cancelled -- -- -- --
------ ---- ------- -------
Balance, June 30, 1999 $ 98 850 $ 1,700 $ 2.00
====== ==== ======= =======
As of June 30, 1999, approximately 98,000 shares of Common Stock were
reserved for issuance under the Plan.
The following table summarizes information concerning currently outstanding
and exercisable options:
[Enlarge/Download Table]
Options Outstanding Options Exercisable
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------- ----------- ----------- -------- ----------- --------
$2.00 850,000 1.31 $ 2.00 743,332 $ 2.00
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:
F-17
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE 10 - STOCKHOLDERS' EQUITY: (CONTINUED)
STOCK - BASED COMPENSATION: (CONTINUED)
[Download Table]
Net Loss as Reported $(1,579,433)
Proforma Net Loss (2,614,097)
Basic Net Loss per
Share as Reported (0.19)
Proforma Basic Net
Loss per Share (0.29)
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.
[Download Table]
Expected Stock Price Volatility 66%
Risk-Free Interest Rate 6%
Expected Lives (In Years) 1.4
Using Black-Scholes option valuation model, the weighted average estimated
fair value of employee stock options granted in the year ended June 30,
1999 was $1.94.
F-18
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE 11 - PRODUCTION FUNDING PAYABLE:
The Company entered into an agreement with Cinerenta Gesellshaft Fur
Internationale Filmproduktion mbH & Co Zweite Medienbeteiligungs kg (the
"limited partner") and Cinesun Internationale Filmproduktions Gesellshaft
mbH & Co kg (the "producer") whereby the limited partner has agreed to
contribute up to $8,263,340 to the producer for the purposes of financing
the production and delivery of "Diamonds". Under terms of the arrangement
the limited partner will have the rights to distribute the film in Germany,
Austria, German-speaking Switzerland, Alto Adige, Liechtenstein, and
German-speaking Luxembourg. A separate distribution arrangement has been
made with Miramax whereby Miramax will have the exclusive rights to
distribute the film in the United States and English-speaking Canada. The
film's collection agent will distribute gross receipts based upon the
agreement reached between the Company, the limited partner and all profit
participants. The agreement calls for gross receipts from anywhere outside
of English-speaking North America to be allocated to the limited partner
until the limited partner has recouped its initial contribution. The
agreement also specifies that all money from English-speaking North America
to be allocated to the Company until the Company has recouped its initial
contribution. Additional receipts over and above initial contributions will
be allocated towards recoupment of any monies advanced by the completion
guarantor towards completion and delivery of the film and to the sales
agents' deferred sales agency fees. Any further receipts are to be
allocated pro rata until the Company has received $100,000 and the limited
partner 10% of its total contributions. The balance accruing in the
collection account shall be allocated in perpetuity as follows: 50% to the
limited partner, 33% to the Company, 15% to profit participants and 2% to
insurers. When the limited partner has recouped 130% of its contribution,
the limited partners share of gross receipts shall be reduced to 43% with
the Company's increased to 40%. At June 30, 1999, the Company owed
$7,219,391 under this agreement.
NOTE 12 - SUBSEQUENT EVENTS:
Subsequent to June 30, 1999, the Company entered into three capital lease
agreements for computer and office equipment. Each capital lease obligation
will be recorded in the financial statements at the present value of future
minimum lease payments as of the lease date. Each lease term is three years
and payments are due monthly. The fair market value of the equipment will
be capitalized as property, premises and equipment and depreciated over its
estimated useful life.
F-19
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
[Enlarge/Download Table]
ASSETS
------
December 31, 1999 December 31, 1998
----------------------- -------------------------
CURRENT ASSETS
Cash and Cash Equivalents $ 791,967 $ 3,132,062
Time Certificate of Deposit 20,342 -
Accounts Receivable 455,243 242,547
Related Party Receivable 174,058 -
Other Receivable 33,250 15,970
Prepaid Expenses 25,897 25,648
--------------------- --------------------
TOTAL CURRENT ASSETS 1,500,756 3,416,227
--------------------- --------------------
MOTION PICTURE DEVELOPMENT COSTS
New Swiss Family Robinson 5,618,933 5,240,684
Less: Accum Amortization New Swiss Family Robinson 3,561,015 3,196,410
--------------------- --------------------
2,057,918 2,044,274
Diamonds 7,912,125 5,302,568
Less: Production Funding (7,219,391) (7,219,391)
Other 1,339,064 774,481
--------------------- --------------------
TOTAL MOTION PICTURE DEVELOPMENT COSTS, NET 4,089,716 901,932
--------------------- --------------------
PROPERTY, PREMISES AND EQUIPMENT
Furniture and Fixtures 37,589 27,747
Office Equipment 434,439 38,474
Leasehold Improvements 9,028 9,024
--------------------- --------------------
481,056 75,245
Less: Accumulated Depreciation 300,371 20,138
--------------------- --------------------
TOTAL PROPERTY AND EQUIPMENT 180,685 55,107
--------------------- --------------------
OTHER ASSETS
Investment in Meet China.com/Total China, Inc. 66,738 -
Deposits 25,076 145,092
Organization Costs, Net of Amortization 98,808 184,828
Goodwill, Net of Amortization 953,088 -
Miscellaneous Investments 225,861 101,753
--------------------- --------------------
TOTAL OTHER ASSETS 1,369,570 431,673
--------------------- --------------------
TOTAL ASSETS $ 7,140,726 $ 4,804,938
===================== ====================
UNAUDITED FINANCIAL STATEMENTS; FOR INTERNAL INFORMATIONAL PURPOSES ONLY
F-1
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
[Enlarge/Download Table]
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
December 31, 1999 December 31, 1998
--------------------- -------------------------
CURRENT LIABILITIES
Short-Term Debt $ 4,000,000 $ -
Less: Unamortized Debt Discount 455,168 -
--------------------- --------------------
3,544,832 -
Current Portion of Long-Term Debt 135,395 -
Accounts Payable and Accrued Expenses 329,427 168,114
Interest Payable 291,100 -
Producer's Fee Payable, Related Party 300,000 300,000
--------------------- --------------------
TOTAL CURRENT LIABILITIES 4,600,754 468,114
--------------------- --------------------
LONG-TERM LIABILITIES
Long-Term Debt, Net of Current Portion 57,935 296,527
--------------------- --------------------
TOTAL LONG-TERM LIABILITIES 57,935 296,527
--------------------- --------------------
TOTAL LIABILITIES 4,658,688 764,641
--------------------- --------------------
STOCKHOLDERS' EQUITY
Common Stock, $0.001 Par Value; Authorized 50,000,000 Shares;
Issued and Outstanding 8,880,000 and 8,300,000 Shares
Respectively 8,880 8,300
Stock Warrants Granted 200,000 -
Stock Options Exercisable 1,057,813 -
Additional Paid-in Capital 5,528,917 4,098,593
Accumulated Deficit - Beginning of Period (2,316,229) (736,796)
Net Income (Loss) - Current Period (1,997,344) 670,200
--------------------- --------------------
TOTAL STOCKHOLDERS' EQUITY 2,482,037 4,040,297
--------------------- --------------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 7,140,726 $ 4,804,938
===================== ====================
UNAUDITED FINANCIAL STATEMENTS; FOR INTERNAL INFORMATIONAL PURPOSES ONLY
F-2
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
DECEMBER 31, 1999
[Enlarge/Download Table]
December 31, 1999 December 31, 1998
-------------------- --------------------
REVENUE
Movie Release Income $ 85,331 $ 4,093,815
Design Fees 1,171,667 774,326
-------------------- --------------------
1,256,999 4,868,141
-------------------- --------------------
OPERATING EXPENSES
Administrative Expenses 1,052,983 345,446
Depreciation and Amortization 94,979 26,822
Amortization of Motion Picture Development Costs 67,306 3,196,410
Production and Design Costs 1,039,646 687,077
-------------------- --------------------
2,254,913 4,255,755
-------------------- --------------------
INCOME (LOSS) FROM OPERATIONS (997,915) 612,386
-------------------- --------------------
OTHER INCOME (EXPENSE)
Interest Income 514 1,689
Interest Expense (341,593) (5,641)
Amortization of Additional Consideration (Short Term Debt Discount) (674,519) -
Loan Fees (19,192) -
Miscellaneous Income 35,361 61,766
-------------------- --------------------
(999,429) 57,814
-------------------- --------------------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (1,997,344) 670,200
-------------------- --------------------
NET INCOME (LOSS) $ (1,997,344) $ 670,200
==================== ====================
LOSS PER SHARE $ (0.23) $ 0.08
==================== ====================
WEIGHTED AVERAGE NUMBER OF COMMON 8,805,272 8,300,000
SHARES OUTSTANDING ==================== ====================
UNAUDITED FINANCIAL STATEMENTS; FOR INTERNAL INFORMATIONAL PURPOSES ONLY
F-3
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIOD ENDED
[Enlarge/Download Table]
December 31
---------------------------------------------
1999 1998
------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (1,997,344) $ 670,200
---------------------- -----------------------
Adjustments to Reconcile Net Loss to Net Cash
Provided By (Used in) Operating Activities:
Depreciation and Amortization 162,285 3,223,232
Amortization of Additional Consideration 674,519 -
Decrease (Increase) in Assets:
Accounts Receivable (31,830) (151,262)
Related Party Receivable (83,893) -
Other Receivable (3,250) 123,207
Prepaid Expenses 24,660 (23,376)
Deposits 91,110 (129,016)
Increase (Decrease) in Liabilities:
Accounts Payable and Accrued Expenses (179,389) (128,637)
Income Taxes Payable (25,507) -
Interest Payable 201,593 -
Deferred Revenue - (2,593,816)
---------------------- -----------------------
TOTAL ADJUSTMENTS 830,298 320,332
---------------------- -----------------------
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES (1,167,046) 990,532
---------------------- -----------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash Proceeds from the Redemption of Certificate of Deposit 7,336 -
Cash Proceeds from Investors in Total China, Inc./MeetChina.com 2,146,950 -
Cash Used to Purchase Investment in Total China, Inc./MeetChina.com (2,213,688) -
Miscellaneous Investments, Net 40,227 (62,156)
Purchase of Property and Equipment (14,081) (8,127)
Prodeeds from Production Funding Arrangement - 7,219,391
Cash Used in Motion Picture Development , Net (1,041,513) (5,285,056)
---------------------- -----------------------
NET CASH PROVIDED (USED) BY INVESTING
ACTIVITIES (1,074,769) 1,864,052
---------------------- -----------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Loans 2,000,000 745,768
Principal Payments Made on Loans (95,276) (1,095,009)
Principal Payments on Capital Lease Obligations (1,121) (2,617)
---------------------- -----------------------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES 1,903,603 (351,858)
---------------------- -----------------------
F-4
TOTAL FILM GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIOD ENDED
[Enlarge/Download Table]
December 31
---------------------------------------------
1999 1998
------------------- -------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (338,212) 2,502,726
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 1,130,179 629,336
---------------------- -----------------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 791,967 $ 3,132,062
====================== =======================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest Paid $ 146,732 $ 5,641
====================== =======================
Income Taxes Paid $ 3,210 $ 800
====================== =======================
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
DURING THE PERIOD ENDED DECEMBER 31, 1999:
The Company granted stock options exercisable at $2 per share for 250,000
shares of common stock as additional consideration for debt issued by the
Company.
The Company granted warrants exercisable for 165,000 shares of common stock
with an exercise prices ranging from $2.50 to $2.94 per share as
consideration for obtaining debt financing.
The Company granted warrants exercisable for 200,000 shares of common stock
at $3.75 per share to investors in Total China, Inc.
The Company ganted warrants exercisable for 200,000 shares of common stock
at $4.13 per share as consideration for obtaining financing in Total China,
Inc.
The Company converted 250,000 warrents to common stock as specified by the
terms of a debt renogiation.
UNAUDITED FINANCIAL STATEMENTS; FOR INTERNAL INFORMATIONAL PURPOSES ONLY
F-5
Dates Referenced Herein and Documents Incorporated by Reference
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