SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarter ended January 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________ to ________
Commission File No. 000-49865
TriMedia Entertainment Group, Inc.
- --------------------------------------------------------------------------------
(Name of Small Business Issuer)
Delaware 14-1854107
- ------------------------------------------------------ ----------------------------------------------------
(State or other jurisdiction of Incorporation or (IRS Employer Identification No.)
Organization)
101 Charles Drive
Bryn Mawr, Pennsylvania 19010
- ------------------------------------------------------ ----------------------------------------------------
(Address of principal executive offices) (Zip Code)
(610) 520-3050
---------------------------------------------------------
(Registrant's Telephone Number, including Area Code)
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filings requirements for the
past 90 days. YES [X] NO [ ]
There were 26,792,788 issued and outstanding shares of the registrant's common
stock, par value $.0001 per share, at March 10, 2003.
TRIMEDIA ENTERTAINMENT GROUP, INC.
INDEX
Page
----
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at January 31, 2004 (unaudited) and October 31,
2003 (audited)............................................................... 1
Consolidated Statements of Operations for the Three Months Ended January 31,
2004 and January 31, 2003 (unaudited)....................................... 2
Consolidated Statements of Cash Flows for the Three Months Ended January 31,
2004 and January 31, 2003 (unaudited)....................................... 3
Notes to Consolidated Financial Statements................................... 4
Item 2. Management's Discussion and Analysis......................................... 7
Item 3. Controls and Procedures...................................................... 13
Part II. Other Information
Item 1. Legal Proceedings............................................................ 14
Item 2. Changes in Securities and Use of Proceeds.................................... 14
Item 3. Defaults Upon Senior Securities.............................................. 14
Item 6. Exhibits and Reports on Form 8-K............................................. 14
(i)
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TRIMEDIA ENTERTAINMENT GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 2004 AND OCTOBER 31, 2003
January 31, October 31,
2004 2003
----------- -----------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS
Cash $ 28,395 $ 14,085
Prepaid expenses 7,124 22,287
----------- -----------
35,519 36,372
PROPERTY AND EQUIPMENT - Net 1,269,533 1,318,237
FILM COSTS 27,662 -
OTHER ASSETS 200 200
----------- -----------
TOTAL ASSETS $ 1,332,914 $ 1,354,809
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
CURRENT LIABILITIES
Term loans $ 567,304 $ 741,164
Demand note payable 61,602 61,602
Accounts payable and accrued expenses 2,709,695 2,509,150
Taxes payable 17,501 17,501
Advance from Sony 74,397 135,305
Due to stockholder 21,303 19,234
Deferred revenue 3,500 -
----------- -----------
3,455,302 3,483,956
LOAN PAYABLE - STOCKHOLDER 1,100,000 1,100,000
----------- -----------
TOTAL LIABILITIES 4,555,302 4,583,956
----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $0.0001 par value; 20,000,000 shares
authorized; 1,000,000 issued and outstanding 100 100
Common stock, $0.0001 par value; 100,000,000 shares
authorized; 26,792,787 and 26,124,000 shares
issued and outstanding in 2004 and 2003 2,679 2,612
Additional paid-in capital 5,478,208 4,809,488
Accumulated deficit (8,703,375) (8,041,347)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (3,222,388) (3,229,147)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 1,332,914 $ 1,354,809
=========== ===========
See accompanying notes to consolidated financial statements.
1
TRIMEDIA ENTERTAINMENT GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JANUARY 31, 2004 AND 2003
(UNAUDITED)
2004 2003
----------- -----------
NET REVENUE $ 149,720 $ 28,225
DIRECT COSTS 3,561 26,808
----------- -----------
GROSS PROFIT 146,159 1,417
OPERATING EXPENSES 811,587 877,449
----------- -----------
LOSS FROM OPERATIONS 665,428 876,032
OTHER INCOME 3,400 1,086
----------- -----------
NET LOSS $ 662,028 $ 874,946
=========== ===========
BASIC AND DILUTED LOSS PER SHARE $ 0.03 $ 0.03
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES 26,252,132 25,999,000
=========== ===========
See accompanying notes to consolidated financial statements.
2
TRIMEDIA ENTERTAINMENT GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED JANUARY 31, 2004 AND 2003
(UNAUDITED)
2004 2003
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(662,028) $(874,946)
Adjustment to reconcile net loss to net cash
used in operating activities
Warrants issued for consulting services - 157,600
Amortization of deferred loan costs - 15,800
Depreciation and amortization 48,704 47,223
(Increase) decrease in assets
Accounts receivable - 9,712
Film costs (27,662) (37,125)
Prepaid expenses 15,163 (13,125)
Increase (decrease) in liabilities
Accounts payable and accrued expenses 200,545 377,565
Advance from Sony (60,908) -
Deferred revenue 3,500 -
--------- ---------
Net cash used in operating activities (482,686) (317,296)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Due to stockholder 2,069 -
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings on loan payable, stockholder - 21,820
Net borrowings (payments) on term loans (5,073) 272,085
Net proceeds from sale of stock 500,000 -
--------- ---------
Net cash provided by financing activities 494,927 293,905
--------- ---------
NET INCREASE (DECREASE) IN CASH 14,310 (23,391)
CASH - BEGINNING OF YEAR 14,085 27,769
--------- ---------
CASH - END OF YEAR $ 28,395 $ 4,378
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
CASH PAID DURING THE YEAR FOR:
Interest $ 35,962 $ 9,128
========= =========
SUPPLEMENTAL DISCLOSURES OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Warrants issued for deferred loan costs $ - $ 63,200
========= =========
Conversion of term loan to common stock $ 168,787 $ -
========= =========
See accompanying notes to consolidated financial statements.
3
TRIMEDIA ENTERTAINMENT GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2004
(UNAUDITED)
NOTE 1 - FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements have been
prepared by Trimedia Entertainment Group, Inc. ("Trimedia") and Subsidiaries
(collectively, "the Company"). These statements include all adjustments
(consisting only of normal recurring adjustments) which management believes
necessary for a fair presentation of the statements and have been prepared on a
consistent basis using the accounting policies described in the Summary of
Accounting Policies included in the 2003 Annual Report on Form 10-KSB which the
Company filed with the Securities and Exchange Commission on February 13, 2004
(the "2003 Annual Report".) Certain financial information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States have been
condensed or omitted pursuant to those rules and regulations, although the
Company believes that the accompanying disclosures are adequate to make the
information presented not misleading. The Notes to Financial Statements included
in the 2003 Annual Report should be read in conjunction with the accompanying
interim financial statements. The interim operating results for the three months
ended January 31, 2004 may not necessarily be indicative of the operating
results expected for the full year.
Basis of Presentation
- ---------------------
The consolidated financial statements include the accounts of Metropolitan
Recording Inc., Snipes Production, LLC and Ruffnation Films LLC. These companies
were associated through common ownership during the year ended October 31, 2001
and the period ended April 21, 2002. On April 22, 2002 Metropolitan Recording
Inc. acquired all of the interest of Snipes Productions, LLC and Ruffnation
Films LLC in a reorganization intended to qualify as tax-free exchange under
Section 351 of the Internal Revenue Code of 1986, as amended. On October 2,
2002, Trimedia, a public company, acquired 100% of the outstanding common stock
of Metropolitan Recording, Inc., which was accounted for as a reverse
acquisition. Ruffnation Music is a wholly owned company that operates the record
division of the company. In July 2003, the Company formed TME, a wholly owned
foreign production company. In January 2004 the Company formed two Delaware
corporations, Trimedia Film Group, Inc. and TM Film Distribution, Inc., in
anticipation of potential future financing transactions. As of January 31, 2004,
TME, Trimedia Film Group, Inc. and TM Film Distribution, Inc. were inactive
corporations. All material inter-company transactions have been eliminated in
consolidation.
Loss Per Share
- --------------
The Company follows SFAS 128, "Earnings Per Share," resulting in the
presentation of basic and diluted loss per share. The basic loss per share
calculations include the change in capital structure for all periods presented.
For the three months ended January 31, 2004 and 2003, the basic and diluted loss
per share are the same, since the assumed conversion of the convertible
preferred stock, stock options and warrants would be antidilutive because the
Company experienced a net loss for such periods.
NOTE 2 - GOING CONCERN
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern.
Since its inception, the Company has incurred significant losses and, as of
January 31, 2004 had accumulated losses of $8,703,375. For the three months
ended January 31, 2004, the Company's net loss was $662,028. In addition, the
Company had negative working capital of $3,419,783 at January 31, 2004 and
experienced negative cash flow from operations of $482,685 for the three months
ended January 31, 2004. The Company may incur further operating losses and
experience negative cash flow in the future. Achieving profitability and
positive cash flow depends on the Company's ability to generate sufficient
revenues from its films and recording studio and its ability to raise additional
capital. There can be no assurances that the Company will be able to generate
sufficient revenues or raise additional capital to achieve and sustain
profitability and positive cash flow in the future. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
the outcome of these uncertainties.
4
TRIMEDIA ENTERTAINMENT GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2004
(UNAUDITED)
NOTE 2 - GOING CONCERN (Continued)
The Company has no firm commitments for funding its operations. The Company has
historically relied principally on equity financing and loans from its principal
and third parties to meet its cash requirements. The Company intends to raise
additional capital from the sale of its securities. However, there can be no
assurances that the Company will be successful in raising sufficient capital to
have a material positive effect of the Company's operations and cash flow.
The Company has outstanding debt in the aggregate principal amount of
approximately $1,729,000 as of January 31, 2004. The Company has granted
security interests in substantially all of its assets to secure its obligations
to repay approximately $629,000 of this indebtedness. The Company is required to
pay down the debt with the proceeds received from any sale of its securities or
from revenues generated from the commercial release and sale of the film
"Snipes." During Fiscal 2004, the Company anticipates continuing to pursue all
possible funding scenarios that will finance the Company's business operations,
including but not limited to: the private placement of the Company's securities,
international and domestic joint ventures for the development and production of
entertainment content, licensing of products for distribution and exploitation
in global markets; subsidies for financing of film productions in various
markets, debt financing, merger with a foreign listed company, structured
partnerships on a project basis and tax based financing in jurisdictions that
provide incentives for business development. In February 2004, the Company
received approximately $190,000 from a private placement of the Company's
securities. Each of these possible funding scenarios outlined in this paragraph
are subject to change and cannot be predicted with certainty. There can be no
assurance that our planned business operations will obtain the financing
required or achieve favorable results.
There can be no assurance that such funding will be generated or available on
terms acceptable to the Company, or at all, or that the commercial exploitation
of the Company's products will be economically profitable for the Company. These
uncertainties raise substantial doubt about the ability of the Company to
continue as a going concern. Significant additional funding will be required
during Fiscal 2004 to meet expected negative operating cash flows.
NOTE 3 - LOAN PAYABLE - STOCKHOLDER
Loan payable - stockholder is an unsecured demand note payable to Christopher
Schwartz accruing interest at 7% per annum. Interest expense associated with
this note for the three months ended January 31, 2004 and 2003 was $19,250 and
$-0-. In addition, $-0- and $19,250 of interest was capitalized as part of films
costs for the three months ended January 31, 2004 and 2003. Christopher Schwartz
does not intend to call this note during the next fiscal year and therefore the
note is reflected on the balance sheet as a non-current liability.
NOTE 4 - STOCKHOLDERS' EQUITY
Common Stock
- ------------
During the three months ended January 31, 2004 the Company sold 500,000 shares
of its common stock and received net proceeds of $500,000.
In addition, the holder of a $168,787 convertible note submitted the note for
conversion at $1 per share into 168,787 shares of the Company's common stock.
Accrued interest on this convertible note totaling $11,321 was paid in full on
January 23, 2004.
Options and Warrants
- --------------------
There were no options or warrants issued during the three months ended January
31, 2004.
5
TRIMEDIA ENTERTAINMENT GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2004
(UNAUDITED)
NOTE 5 - BUSINESS SEGMENTS
The Company follows SFAS No. 131, "Disclosures About Segments of and Enterprise
and Related Information" which requires the Company to provide certain
information about their operating segments. The Company has two reportable
segments: recording studio and film production.
Summarized financial information concerning the Company's reportable segments,
which are based in the United States, is reflected in the following table:
Recording Film Segment Consolidated
Studio Production Total Corporate Total
---------- ---------- ---------- --------- ----------
Three Months Ended
January 31, 2004
- -----------------------------------
Net sales $ 6,100 $ 143,620 $ 149,720 $ - $ 149,720
Income (loss) from operations (47,931) 69,872 21,941 (687,369) (665,428)
Total assets 1,210,507 28,574 1,239,081 93,833 1,332,914
Depreciation and amortization 47,081 1,623 48,704 - 48,704
Capital expenditures $ - $ - $ - $ - $ -
Three Months Ended
January 31, 2003
- -----------------------------------
Net sales $ 17,200 $ 11,025 $ 28,225 $ - $ 28,225
Loss from operations 62,518 15,242 77,760 798,272 876,032
Total assets 1,447,784 3,710,810 5,158,594 64,370 5,222,964
Depreciation and amortization 45,601 1,623 47,224 - 47,223
Capital expenditures $ - $ - $ - $ - $ -
January 31,
---------------------
Reconciliations 2004 2003
- -------------------------------------- --------- ---------
Total segment operating income (loss) $ 21,941 $ (77,760)
Corporate overhead expenses (687,369) (798,272)
Other income 3,400 1,086
--------- ---------
Total consolidated net loss $(662,028) $(874,946)
========= =========
NOTE 6 - SUBSEQUENT EVENT
In February 2004, the Company sold 190,000 shares of its common stock for net
proceeds of $190,000.
6
CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-QSB includes forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We
have based these forward-looking statements on our current expectations and
projections about future events. These forward-looking statements are subject to
known and unknown risks, uncertainties and assumptions about us that may cause
our actual results, levels of activity, performance or achievements to be
materially different from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking statements. In some
cases, you can identify forward-looking statements by terminology such as "may,"
"will," "should," "could," "would," "expect," "plan," anticipate," believe,"
estimate," continue," or the negative of such terms or other similar
expressions. Factors that might cause or contribute to such a discrepancy
include, but are not limited to, those in our other Securities and Exchange
Commission filings, including our Annual Report on Form 10-KSB filed on February
13, 2004. The following discussion should be read in conjunction with our
Consolidated Financial Statements and related Notes thereto included elsewhere
in this report.
Item 2. Management's Discussion and Analysis or Plan of Operation
Overview
--------
We are a multimedia entertainment company that operates a film
division, a record division and a studio division. During Fiscal 2003, we
derived substantially all of our revenues from the release of our feature film
Snipes. We completed production of Snipes in Fiscal 2002 and released it in
Fiscal 2003 through Charles Street, our co-venture with Sony. Snipes had a
limited theatrical release followed by release of the DVD/VHS of the film. In
addition, through a distribution agreement with New Line Television, Inc.,
Snipes was aired on VH-1, the music television channel. We do not anticipate
generating any significant revenues from Snipes in Fiscal 2004.
We presently do not have sufficient cash to implement our business
plan. We have experienced a lack of liquidity throughout Fiscal 2003 and in the
first quarter of Fiscal 2004, causing us to be unable to produce any additional
feature films. We believe that we need to raise or otherwise obtain at least
$7,500,000 in additional financing in order to satisfy our existing obligations
and implement our business plan. If we are successful in obtaining such
financing, we may require an additional nine to twelve months in order to
complete production of additional feature films for release and distribution.
Accordingly, in order to generate revenues in Fiscal 2004, we may need to rely
on other sources of revenue such as acquiring the rights to distribute and
exploit feature films and other entertainment content produced by third parties.
If we are not successful in obtaining additional financing, we will not be able
to implement our business plan.
The following discussion and analysis should be read in conjunction
with the consolidated financial statements and the related notes thereto
included in our annual report on Form 10-KSB filed with the Securities and
Exchange Commission on February 13, 2004.
Critical Accounting Policies
----------------------------
In presenting our financial statements in conformity with accounting
principles generally accepted in the United States, we are required to make
estimates and assumptions that affect the amounts reported therein. Several of
the estimates and assumptions we are required to make relate to matters that are
inherently uncertain as they pertain to future events. However, events that are
outside of our control cannot be predicted and, as such, they cannot be
contemplated in evaluating such estimates and assumptions. If there is a
significant unfavorable change to current conditions, it will likely result in a
material adverse impact to our consolidated results of operations, financial
position and in liquidity. We believe that the estimates and assumptions we used
when preparing our financial statements were the most appropriate at that time.
Presented below are those accounting policies that we believe require subjective
and complex judgments that could potentially affect reported results.
7
Revenue Recognition
-------------------
We recognize revenue from the sale or licensing of films and
nonrefundable minimum guarantees from customers upon meeting all recognition
requirements of Statement of Position ("SOP") 00-2, "Accounting by Producers or
Distributors of Films." According to SOP 00-2, an entity should recognize
revenue from a sale or licensing arrangement of a film when all of the following
conditions are met.
o Persuasive evidence of a sale or licensing arrangement with a
customer exists.
o The film is complete and, in accordance with the terms of the
arrangement, has been delivered or is available for immediate and
unconditional delivery.
o The license period of the arrangement has begun and the customer
can begin its exploitation, exhibition, or sale.
o The arrangement fee is fixed or determinable.
o Collection of the arrangement fee is reasonably assured.
If we do not meet any one of the preceding conditions, then we will
defer recognizing revenue until all of the conditions are met.
Capitalized Film Costs
-----------------------
Costs of making motion picture films that are produced for sale to
third parties are stated at the lower of cost, less accumulated amortization, or
fair value. In accordance with SOP 00-2, we expense film costs based on the
ratio of the current period gross revenues to estimated total gross revenues
from all sources on an individual production basis. As of January 31, 2004, the
only film costs which we had recorded on our balance sheet were incurred in
connection with the production of the movie Snipes. During Fiscal 2003-Second
Quarter, we commenced the amortization of the original $3,694,162 in film costs
associated with the movie Snipes upon distribution of the DVD in February 2003.
We anticipated that these film costs would be fully amortized during Fiscal
2003. Accordingly, the amortization expense related to the film costs associated
with the movie Snipes for the fiscal year ended October 31, 2003 was $3,694,162.
If we estimated that Snipes would have generated more Net Revenues, then we
would have amortized less film costs during the fiscal year ended October 31,
2003 which would have reduced our net loss. We believe that full amortization of
these costs in Fiscal 2003 is appropriate as we currently estimate that is the
period in which we will have generated substantially all of the revenues
associated with the distribution of the DVD. The amortization of film costs
represented substantially all of the direct costs incurred during the fiscal
year ended October 31, 2003.
Artist Compensation Costs
-------------------------
The amount of royalties earned by artists, as adjusted for anticipated
returns, is charged to expense in the period in which the sale of the record
takes place. Advance royalty paid to an artist is reported as an asset only if
the past performance and current popularity of the artist to whom the advance is
made provide a sound basis for estimating that the amount of the advance will be
recoverable from future royalties earned by the artist. Capitalized advances are
charged to expense as subsequent royalties are earned by the artist. Any portion
of capitalized advances that appear not to be fully recoverable from future
royalties to be earned from the artist are charged to expense during the period
in which the loss becomes evident.
8
Results of Operations
Three Months Ended January 31, 2004 (Fiscal 2004-First Quarter) vs. Three Months
Ended January 31, 2003 (Fiscal 2003-First Quarter)
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Fiscal 2004 - First Quarter Fiscal 2003 - First Quarter $ Change
--------------------------- --------------------------- --------
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Net Loss 662,028 874,946 (212,918)
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Net Loss from Operations 665,428 876,032 (210,604)
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Net Revenue 149,720 28,225 121,495
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Direct Costs 3,561 26,808 (23,247)
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Operating Expenses 811,587 877,449 (65,862)
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Other Income 3,400 1,086 2,314
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
The $212,918 decrease in Net Loss was primarily due to an increase in
Net Revenues of $121,495, a decrease in Direct Costs of $23, 247 and a decrease
in Operating Expenses of $65,862.
The $210,604 decrease in Net Loss From Operations was primarily due to
decreased corporate and overhead expenses related to the development, marketing
and production of the film Snipes, the release of Snipes and a decrease in
professional fees and costs related to completion of the redomestication merger
and the negotiation of our co-venture with Sony Music Entertainment, Inc.
("Sony") which is called "Charles Street".
The $121,495 increase in Net Revenues primarily resulted from a $11,100
decrease in Net Revenues from recording studio operations resulting from rentals
of the recording studios for independent music projects and a $132,595 increase
in Net Revenues from film operations resulting from the theatrical release of
the film Snipes.
The $23,247 decrease in Direct Cost was a result of the decreased
production fees and costs and related cost and expenses related to the
theatrical release of the film Snipes. Direct Costs are costs directly related
to the production of film or music projects that we develop and include such
items as production fees and costs, artist costs and expenses, engineering
services, equipment rentals, studio supplies and support services.
The $65,862 decrease in Operating Expenses was primarily due to a
decrease in corporate and overhead related expenses including professional fees
for legal and accounting expenses related to the redomestication merger and
negotiation of the co-venture with Sony. Operating Expenses are generally the
costs of operating our business and include salaries, advertising, professional
and consulting fees, rent and utilities, and travel.
9
Changes in Financial Position, Liquidity and Capital Resources
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Fiscal 2004 - First Quarter Fiscal 2003 - First Quarter $ Change
--------------------------- --------------------------- --------
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Cash Flow from Operating (482,686) (317,296) (165,390)
Activities
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Cash Flow from Investing 2,069 0 2,069
Activities
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Cash Flow from Financing 494,927 293,905 201,022
Activities
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
The use of cash from operations in Fiscal 2004-First Quarter was due
primarily to our net loss, which was principally offset by non-cash charges for
depreciation and amortization, and an increase in accounts payable and accrued
expenses. Net cash used increased in Fiscal 2004-First Quarter due to less
warrants being issued for consulting services, a continued increase in accounts
payable and accrued expenses offset by a decrease in net loss.
Our investing activities provided cash of $2,069 in Fiscal 2004-First
Quarter. This amount was advanced to us by our principal stockholder.
Our financing activities provided cash of $494,927 in Fiscal 2004-First
Quarter and $293,905 in Fiscal 2003-First Quarter. In Fiscal 2004-First Quarter,
financing activities provided $500,000 in cash through the sale of 500,000
shares of our common stock. The increase in our financing activities in Fiscal
2004-First Quarter resulted from the sales of our securities.
At March 15, 2004, we had $10,500 in cash. We do not believe that the
amount of cash which we had on hand at March 15, 2004 is sufficient to fund our
operations through January 31, 2005. We have principally relied on equity
financing and loans from our principal stockholders, distributions from Charles
Street, our co-venture with Sony and third party lenders to fund our operations.
During Fiscal 2004, we anticipate continuing to pursue all possible funding
scenarios that will finance our business operations. We intend to obtain
financing to fund our operations for the next twelve months through sales of our
securities and/or a combination of alternative financing structures including,
but not limited to, joint or co-ventures, licensing of projects, production
subsidies, debt financing, tax structured financing, a merger with or
acquisition of a foreign listed entity and partnerships for individual or
multiple projects. We are presently engaged in negotiations of definitive
agreements with two potential sources of financing. However, we are not certain
that these financing transactions will close or whether we will be able to
obtain additional financing. We believe that it will be necessary for us to
raise at least $7,500,000 in order to meet our anticipated cash requirements
through January 31, 2005. There can be no assurances that we will be successful
in our efforts to raise this amount of additional financing. In the event that
we are unable to raise these funds, we will then be required to delay our plans
to grow our business and we will rely on our net revenues to fund our
operations.
We derived a significant portion of our Net Revenues in Fiscal 2003 and
in the first quarter of Fiscal 2004 from the sale of the feature film Snipes,
which was released on DVD/Home Video by Sony on February 25, 2003. Under the
terms of the co-venture agreement with Sony, Sony advanced funds for
manufacturing, marketing, promotion, production, distribution and other related
expenses for film and music projects. These funds are considered a loan to
Charles Street and are recoverable by Sony from the sales of products released
by Charles Street. Substantially all of the $1,149,584 in Net Revenues which we
generated in Fiscal 2003 and the $149,720 of Net Revenues which regenerated in
the first quarter of Fiscal 2004 represented sales of the feature film Snipes.
Through December 31, 2003, Sony has reported gross billings for Charles Street
related to the release of the Snipes DVD/Home Video of $2,386,496 and net
profits of $1,084,640, of which our portion is $881,875. Although we may receive
additional payments from Charles Street in Fiscal 2004 related to sales of
Snipes, there can be no assurance of the amount or timing of such payments.
10
During Fiscal 2003, we negotiated the international licensing rights to
the release of the Snipes DVD and CD soundtrack outside of the United States
with Sony. We may receive net revenues from the television and international
licensing rights during Fiscal 2004. However, there can be no assurance that we
will generate net revenues from any of these arrangements.
In November 2002, we entered into a distribution agreement with New
Line Television, Inc. for the distribution of the film Snipes via television in
the United States, its territories and Canada. Pursuant to the distribution
agreement we received an advance in the amount of $400,000 in December, 2002. We
recognized $253,986 of revenue from New Line Television, Inc. as of October 31,
2003. Pursuant to the terms of the distribution agreement, New Line Television,
Inc. retains all monies received up to $1,000,000 pursuant to its licensing of
Snipes. To the extent New Line Television, Inc.'s receipts from the licensing of
Snipes exceed $1,000,000, we will receive the net profits after New Line
Television, Inc. recoups all of its cost, fees and expenses with interest.
Accordingly, there can be no assurance that we will receive additional payments
from New Line Television, Inc. under the distribution agreement.
We have entered into negotiations of agreements with licensors and
distributors of our film and music products both domestically and
internationally. Pursuant to industry standards, the terms and conditions of
these agreements provide for advances against sales of the respective film or
music product that is licensed or distributed. We use the advances for operating
capital needs. However in most cases these advances are recoverable from future
sales of our products. There is no assurance that the advances that we receive
will be recoverable from the sale of respective music or film products licensed
or distributed domestically or internationally. In addition, there is no
assurance that we will receive sufficient advances to adequately fund our
operations.
We advance funds to artists and, in some cases, to independent
producers pursuant to their respective contracts for acquisition, composition,
marketing, production, development or other related costs. In most cases, these
expenses are recoverable from the artist or independent producer upon the sale
of such party's music or film product. However, there can be no assurance that
the advances or expenses will be recoverable from the artist or producer of a
film or music project. We do not presently have any existing obligations to
advance funds to any artists or independent producers and our ability to do so
in the future is highly dependent on our ability to raise additional financing.
In addition to the financing that we need to implement our business
plan, we are presently in technical default on a loan in the original principal
amount of $162,000 that Metropolitan, our subsidiary, received from a bank. The
current principal balance of the loan at March 15, 2004 was $134,097. The loan
has a maturity date of August 2006. The loan is payable in monthly installments
of $1,965, including accrued interest at a rate of 8% per annum, with a lump sum
payment due at maturity of $99,858. The loan is collateralized by all assets of
Metropolitan and a personal guarantee by Christopher Schwartz. The loan
agreement includes a provision that states that any change of ownership of 25%
or more of the common stock of Metropolitan without the prior written consent of
the bank is an event of default. The share exchange transaction resulted in a
change in ownership of all of the issued and outstanding common stock of
Metropolitan. Accordingly, Metropolitan is in technical default of this loan
agreement. Upon default, the bank, at its option, may increase the interest rate
four basis points, demand payment in full of the outstanding principal balance
of the loan plus all accrued interest thereon, and may hold Metropolitan liable
for all collection costs that it incurs. Although the bank has not notified us
that it intends to exercise any of these options, there is no assurance that it
will not elect to do so at any point in the future. As we presently do not have
sufficient cash on hand to repay this loan, if the bank elects to demand
repayment, then we may be faced with its election to sell a sufficient amount of
the assets of Metropolitan to raise the funds necessary to repay this loan. Any
such action would have a material adverse effect on our operations. Since
Metropolitan did not receive a waiver from the bank, the total outstanding
amount of this note is reflected as a current liability in our January 31, 2004
Consolidated Balance Sheet.
In addition, we have accounts payable and accrued expenses in the
aggregate amount of approximately $2,900,000 which are presently past due.
11
We also have other obligations which mature or may mature in the next
twelve months.
On April 11, 2003, Snipes cancelled a $400,000 promissory note, a
$25,000 promissory note and $10,000 promissory note and issued an amended
promissory note in the principal amount of $435,000 to third party lenders. The
amended promissory note accrues interest at the rate of 35% per annum and was
due to mature on October 31, 2003. However, on October 30, 2003 the promissory
note was amended to extend the maturity date from October 31, 2003 until April
30, 2004. The promissory note is secured by a Copyright Royalty and Security
Agreement between the parties and a second lien security interest in all of
Snipes' ownership interest in the motion picture Snipes.
On March 24, 2003, we received a $12,500 loan and issued a promissory
note to 1025 Investments, Inc. This obligation is documented by a promissory
note payable on demand which accrues interest at the rate of 10% per annum. In
June 2003, we received a short term loan in the aggregate principal amount of
$67,102 from 1025 Investments, Inc. This obligation is documented by a
promissory note payable on demand which bears interest at 12% per annum. In July
2003, we received a short term loan in the aggregate principal amount of $17,000
from 1025 Investments, Inc. The obligation is documented by a promissory note
payable on demand which bears interest at 12% per annum. In August 2003, we
repaid $35,000 of these loans and $61,602 presently remains outstanding.
We have received loans in the aggregate principal amount of $1,100,000
from Christopher Schwartz, our Chief Executive Officer, sole director and
principal stockholder. These obligations are documented by a demand note payable
which accrues interest at the rate of 7% per annum. In addition, in Fiscal 2003,
Mr. Schwartz, extended short-term loans in an aggregate principal amount of
$520,009 to us and our operating subsidiaries. These obligations have not been
documented and are due on demand. We have repaid $498,706 of these loans and
loans in the principal amount of $21,303 remain outstanding.
Accordingly, approximately $4,535,000 from the net proceeds of any
additional financing will be used to satisfy our existing loans and obligations
which have matured or will mature in the next twelve months.
The nature of our business is such that significant cash outlays are
required to produce and acquire films, television programs, music soundtracks
and albums. However, Net Revenues from these projects are earned over an
extended period of time after their completion or acquisition. Accordingly, we
will require a significant amount of cash to fund our present operations and to
continue to grow our business. As our operations grow, our financing
requirements are expected to grow proportionately and we project the continued
use of cash in operating activities for the foreseeable future. Therefore we are
dependent on continued access to external sources of financing. Our current
financing strategy is to sell our equity securities to raise a substantial
amount of our working capital. We also plan to leverage investment in film and
music productions through operating credit facilities, co-ventures and
single-purpose production financing. We plan to obtain financing commitments,
including, in some cases, foreign distribution commitments, to cover, on
average, at least 50% of the budgeted third-party costs of a project before
commencing production. We plan to outsource required services and functions
whenever possible. We plan to use independent contractors and producers,
consultants and professionals to provide those services necessary to operate the
corporate and business operations in an effort to avoid build up of overhead
infrastructures, to maintain a flexible organization and financial structure for
productions and ventures and to be responsive to business opportunities
worldwide. Accordingly, once we raise at least $7,500,000 in additional
financing, we believe that the net proceeds from that financing together with
cash flow from operations, including our share of future film production under
the Charles Street co-venture with Sony, will be available to meet known
operational cash requirements. In addition, we believe that our improved
liquidity position will enable us to qualify for new lines of credit on an
as-needed basis.
These matters raise substantial doubt about our ability to continue as
a going concern. We will need to raise significant additional funding in order
to satisfy our existing obligations and to fully implement our business plan.
There can be no assurances that such funding will be available on terms
acceptable to us or at all. If we are unable to generate sufficient funds,
particularly at least $7,500,000, then we may be forced to cease or
substantially curtail operations.
We do not pay and do not intend to pay dividends on our common stock.
We believe it to be in the best interest of our stockholders to invest all
available cash in the expansion of our business.
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Item 3. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
------------------------------------------------
As of January 31, 2004, we carried out an evaluation of the
effectiveness of the design and operation of our "disclosure controls and
procedures" (as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e)) under
the supervision and with the participation of our management, including
Christopher Schwartz, our Chief Executive Officer and Chief Financial Officer.
Based upon that evaluation, Mr. Schwartz concluded that our disclosure controls
and procedures are effective.
Disclosure controls and procedures are controls and other procedures
that are designed to ensure that information required to be disclosed in our
reports filed or submitted under the Exchange Act are recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed in our reports filed under the Exchange Act
is accumulated and communicated to management to allow timely decisions
regarding required disclosure.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We know of no pending legal proceedings to which we or any of our
subsidiaries are a party which are material or potentially material, either
individually or in the aggregate. We are from time to time, during the normal
course of our business operations, subject to various litigation claims and
legal disputes. We do not believe that the ultimate disposition of any of these
matters will have a material adverse effect on our consolidated financial
position, results of operations or liquidity.
Item 2. Changes in Securities and Use of Proceeds
In January and February 2004 we issued and sold an aggregate of 500,000
shares of our common stock at an offering price of $1.00 per share to three
accredited investors pursuant to Rule 506 promulgated under the Securities Act.
Item 3. Defaults Upon Senior Securities
We are presently in technical default on a loan in the principal amount
of $162,000 which Metropolitan, our subsidiary, received from a bank. The loan
has a maturity date of August 2006. The loan is payable in monthly installments
of $1,965, including accrued interest at a rate of 8% per annum, with a lump sum
payment due at maturity of $99,858. The loan is collateralized by all assets of
Metropolitan and a personal guarantee by Christopher Schwartz. The loan
agreement includes a provision that states that any change of ownership of 25%
or more of the common stock of Metropolitan is an event of default. The share
exchange transaction resulted in a change in ownership of all of the issued and
outstanding common stock of Metropolitan. Accordingly, Metropolitan is in
technical default of this loan agreement. Upon default, the bank, at its option,
may increase the interest rate four basis points, demand payment in full of the
outstanding principal balance of the loan plus all accrued interest thereon, and
may hold Metropolitan liable for all collection costs that it incurs. Although
the bank has not notified us that it intends to exercise any of these options,
there is no assurance that it will not elect to do so at any point in the
future. As of March 15, 2004, the total outstanding balance of this loan was
$134,097. As we presently do not have sufficient cash on hand to repay this
loan, if the bank elects to demand repayment, then we may be faced with the
bank's election to sell a sufficient amount of the assets of Metropolitan to
raise the funds necessary to repay this loan. Any such action would have a
material adverse effect on our operations. Since Metropolitan did not receive a
waiver from the bank, the total outstanding amount of this note is reflected as
a current liability in our January 31, 2003 Consolidated Balance Sheet.
Item 6. Exhibits and Reports on Form 8-K
2.1 Share Exchange Agreement and Plan of Reorganization dated as
of October 2, 2002 by and among US Patriot, Inc. and
Christopher Schwartz (incorporated by reference to Exhibit 1.1
of Current Report on Form 8-K filed on October 18, 2002).
2.2 Agreement and Plan of Merger between US Patriot, Inc. and
TriMedia Entertainment Group, Inc. (incorporated by reference
to Exhibit 3.4 of Current Report on Form 8-K filed on December
2, 2002).
2.3 Articles of Merger as filed in the State of South Carolina
(incorporated by reference to Exhibit 2.1 of Current Report on
Form 8-K filed on December 2, 2002).
2.4 Certificate of Merger as filed in the State of Delaware
(incorporated by reference to Exhibit 3.5 of Current Report on
Form 8-K filed on December 2, 2002).
3.1 Certificate of Incorporation of TriMedia Entertainment Group,
Inc. (incorporated by reference to Exhibit 3.1 of Current
Report on Form 8-K filed on December 2, 2002).
3.2 Certificate of Amendment of Certificate of Incorporation
Before Payment of Capital of TriMedia Entertainment Group,
Inc. (incorporated by reference to Exhibit 3.2 of Current
Report on Form 8-K filed on December 2, 2002).
3.3 By-laws of TriMedia Entertainment Group, Inc. (incorporated by
reference to Exhibit 3.3 of Current Report on Form 8-K filed
on December 2, 2002).
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4 Certificate of Designations of Series A Convertible Preferred
Stock of US Patriot, Inc. (incorporated by reference to
Exhibit 4.2 of the Annual Report on Form 10-KSB filed on March
17, 2003).
31.1 Certificate dated March 16, 2004 pursuant to Exchange Act Rule
13a-14(a) or 15d-14(a) of the Principal Executive Officer and
the Principal Financial Officer as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 by Christopher Schwartz,
Chief Executive Officer and Chief Financial Officer.
32.1 Certification dated March 16, 2003 pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 made by Christopher Schwartz, Chief
Executive Officer and Chief Financial Officer.
(b) On November 7, 2003 we filed a Current Report on Form 8-K
announcing that we entered into a letter agreement with third party lenders to
amend that certain 35% secured promissory note dated June 27, 2002 as amended
through August 11, 2003. The amendment to the secured promissory note extends
the maturity date for an additional six months from October 31, 2003 to April
30, 2004.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRIMEDIA ENTERTAINMENT GROUP, INC.
Date: March 16, 2004 /s/ Christopher Schwartz
---------------------------------------------------
Christopher Schwartz
Chief Executive Officer and Chief Financial Officer
(principal financial officer and
principal accounting officer)