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 April 30, 2005
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.
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(Name of Small Business Issuer)
DELAWARE 14-1854107
- --------------------------------------------- ----------------------
(State or other jurisdiction of Incorporation (IRS Employer
or Organization) Identification No.)
1080 N. DELAWARE AVENUE, 8TH FLOOR
PHILADELPHIA, PENNSYLVANIA 19125
- --------------------------------------------- -----------------------
(Address of principal executive offices) (Zip Code)
(215) 426-5536
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(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 45,560,011 issued and outstanding shares of the registrant's common
stock, par value $.0001 per share, at June 10, 2005.
TRIMEDIA ENTERTAINMENT GROUP, INC.
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INDEX
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Page
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Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at April 30, 2005 (unaudited) and October 31, 2004
(audited)........................................................................... 2
Consolidated Statements of Operations for the Three and Six Months Ended April
30, 2005 and April 30, 2004 (unaudited)............................................. 3
Consolidated Statements of Cash Flows for the Six Months Ended April 30, 2005
and April 30, 2004 (unaudited)...................................................... 4
Notes to Consolidated Financial Statements.......................................... 6
Item 2. Management's Discussion and Analysis................................................ 11
Item 3. Controls and Procedures............................................................. 19
Part II. Other Information
Item 1. Legal Proceedings................................................................... 19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds......................... 19
Item 3. Defaults Upon Senior Securities..................................................... 20
Item 6. Exhibits and Reports on Form 8-K.................................................... 20
(i)
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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TRIMEDIA ENTERTAINMENT GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30, 2005 AND OCTOBER 31, 2004
April 30, October 31,
2005 2004
----------------- ----------------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS
Cash $ 57,456 $ 185,096
Miscellaneous receivables 5,850 -
Prepaid expenses 339,070 29,262
------------ -------------
402,376 214,358
PROPERTY AND EQUIPMENT - Net 349,639 456,135
ADVANCES TO ARTISTS 407,082 -
CAPITALIZED FILM COSTS 95,516 83,140
INVESTMENT IN AFFILIATED COMPANY 1,055,000
OTHER ASSETS 58,273 9,625
------------ -------------
TOTAL ASSETS $ 2,367,886 $ 763,258
============ =============
LIABILITIES AND STOCKHOLDER'S DEFICIT
CURRENT LIABILITIES
Term loans $ 901,619 $ 781,613
Demand note payable 204,102 184,602
Accounts payable and accrued expenses 1,036,138 3,425,599
Taxes payable 17,501 17,501
Advance from Sony 46,544 13,088
Due to stockholder 27,082 7,137
Deferred revenue - 1,167
------------ -------------
2,232,986 4,430,707
LONG-TERM DEBT 3,109,585 -
LOANS PAYABLE - STOCKHOLDER 1,100,000 1,199,040
------------ -------------
TOTAL LIABILITIES 6,442,571 5,629,747
------------ -------------
STOCKHOLDERS' DEFICIT
Preferred stock, $0.0001 par value; 20,000,000 shares authorized;
none and 1,000,000 shares issued and outstanding in 2005 and 2004 - 100
Common stock, $0.0001 par value; 100,000,000 shares authorized;
42,396,316 and 30,396,316 shares issued and outstanding in 2005 and 2004 4,239 2,950
Common stock subscribed 2,632,171
Additional paid-in capital 9,758,147 7,949,420
Accumulated deficit (16,469,242) (12,818,959)
------------ -------------
TOTAL STOCKHOLDERS' DEFICIT (4,074,685) (4,866,489)
------------ -------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 2,367,886 $ 763,258
============ =============
See accompanying notes to consolidated financial statements.
-2-
TRIMEDIA ENTERTAINMENT GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED APRIL 30, 2005 AND 2004
(UNAUDITED)
Three Months Ended Six Months Ended
April 30, April 30,
2005 2004 2005 2004
------ ------ ------ ------
NET REVENUE $ 23,913 $ 6,830 $ 26,175 $ 156,550
DIRECT COSTS 28,420 5,065 143,088 8,626
----------- ----------- ----------- -----------
GROSS PROFIT (LOSS) (4,507) 1,765 (116,913) 147,924
OPERATING EXPENSES 975,483 1,269,737 3,540,675 2,081,322
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (979,990) (1,267,972) (3,657,588) (1,933,398)
OTHER INCOME 4,457 - 7,308 3,400
----------- ----------- ----------- -----------
NET LOSS $ (975,533) $(1,267,972) $(3,650,280) $(1,929,998)
=========== =========== =========== ===========
BASIC AND DILUTED
LOSS PER SHARE $ (0.03) $ (0.05) $ (0.12) $ (0.07)
=========== =========== =========== ===========
WEIGHTED AVERAGE
NUMBER OF SHARES 33,062,983 26,686,959 31,334,687 26,739,873
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
-3-
TRIMEDIA ENTERTAINMENT GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED APRIL 30, 2005 AND 2004
(UNAUDITED)
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(3,650,283) $(1,929,998)
Adjustment to reconcile net loss to net cash
used in operating activities
Common stock issued for services 13,940 -
Warrants issued for expenses - 164,300
Amortization of film costs 12,092 -
Depreciation and amortization 106,496 97,408
Increase in assets
Miscellaneous receivable (5,850) -
Film costs (24,468) -
Prepaid expenses (20,456) (71,340)
Advances to artists (407,082) -
Increase (decrease) in liabilities
Accounts payable and accrued expenses 138,368 262,723
Advance from Sony 33,456 (57,120)
Deferred revenue (1,167) 8,167
----------- -----------
Net cash used in operating activities (3,804,954) (1,525,860)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Due to stockholder 25,246 (19,234)
Purchase of investment in affiliated company (25,000) -
----------- -----------
Net cash provided by (used in) investing activities 246 (19,234)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (payments) on long-term debt 3,109,585 -
Net borrowings on demand notes 19,500 -
Net borrowings (payments) on term loans 120,006 (81,322)
Net proceeds from sale of stock 427,977 1,665,000
----------- -----------
Net cash provided by financing activities 3,677,068 1,583,678
----------- -----------
NET INCREASE (DECREASE) IN CASH (127,640) 38,584
CASH - BEGINNING OF YEAR 185,096 14,085
----------- -----------
CASH - END OF YEAR $ 57,456 $ 52,669
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
CASH PAID DURING THE YEAR FOR:
Interest $ 40,370 $ 47,547
=========== ===========
See accompanying notes to consolidated financial statements.
-4-
TRIMEDIA ENTERTAINMENT GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SIX MONTHS ENDED APRIL 30, 2005 AND 2004
(UNAUDITED)
2005 2004
----------- -----------
SUPPLEMENTAL DISCLOSURES OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Warrants issued for prepaid consulting services $ 338,000 $ -
=========== ===========
Conversion of term loan to common stock $ - $ 168,787
=========== ===========
Conversion of liabilities to common stock subscribed:
Accounts payable and accrued expenses $ 2,527,830 $ -
Due to stockholder 5,301 -
Loan payable - stockholder 99,040 -
----------- -----------
$ 2,632,171 $ -
=========== ===========
Warrants issued for investment in affiliated company $ 250,000 $ -
Common stock issued for investment in affiliated company
780,000 -
----------- -----------
Investment in affiliated company $ 1,030,000 $ -
=========== ===========
Conversion of preferred stock to common stock:
Preferred stock $ (100) $ -
Additional paid-in capital (900) -
----------- -----------
Common stock
$ 1,000 $ -
=========== ===========
See accompanying notes to consolidated financial statements.
-5-
TRIMEDIA ENTERTAINMENT GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2005
(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 2004 Annual Report on Form 10-KSB which the
Company filed with the Securities and Exchange Commission on January 31, 2005
(the "2004 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 2004 Annual Report should be read in conjunction with the accompanying
interim financial statements. The interim operating results for the three and
six months ended April 30, 2005 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, Ruffnation Films LLC,
Ruffnation Music, TME, Trimedia Film Group, Inc., TM Film Distribution, Inc. and
Four Point Play Productions, LLC. 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, 2005, TME was inactive. In October 2004, the Company formed
Four Point Play Productions, LLC. 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 and six months ended April 30, 2005 and 2004, the basic and
diluted loss per share are the same, since the assumed conversion of the
convertible preferred stock (in 2004), 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
April 30, 2005 had accumulated losses of $16,469,242. For the six months ended
April 30, 2005, the Company's net loss was $3,650,280. In addition, the Company
had negative working capital of $1,830,610 at April 30, 2005 and experienced
negative cash flow from operations of $3,804,954 for the six months ended April
30, 2005. 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.
-6-
TRIMEDIA ENTERTAINMENT GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2005
(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
stockholder 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 $5,315,301 as of April 30, 2005. The Company has granted security
interests in substantially all of its assets to secure its obligations to repay
approximately $873,000 of this indebtedness. Accordingly, the Company will
require a significant amount of cash to fund the present operations and to
continue to grow the business. As the Company's operations grow, the Company's
financing requirements are expected to grow proportionately and the Company
projects the continued use of cash in operating activities for the foreseeable
future. Therefore, the Company is dependent on continued access to external
sources of financing. The current financing strategy is to sell equity
securities to raise a substantial amount of working capital. The Company also
plans to leverage investment in film and music productions through operating
credit facilities, co-ventures and single-purpose production financing. The
Company plans to obtain financing commitments, including, in some cases, foreign
distribution commitments to cover, on average, at 50% of the budgeted
third-party costs of a project before commencing production. The Company plans
to outsource required services and functions whenever possible. The Company also
plans 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. The Company
believes that it will be necessary for the Company to raise at least $10,000,000
in order to meet the anticipated cash requirements through April 30, 2006. There
can be no assurance that the Company will be successful in its efforts to raise
this amount of additional financing. In the event that the Company is unable to
raise these funds, the Company will then be required to delay its plans to grow
its business and the Company will rely on its net revenues to fund its
operations.
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 2005 to meet expected negative operating cash flows.
NOTE 3 - LOAN PAYABLE - STOCKHOLDER
Loans payable - stockholder consist of an unsecured demand notes payable to
Christopher Schwartz, accruing interest at 7% per annum. Interest expense,
associated with these notes for the six months ended April 30, 2005 was $38,500.
Christopher Schwartz does not intend to call these notes during the next fiscal
year and therefore the notes are reflected on the balance sheet as a non-current
liability.
-7-
TRIMEDIA ENTERTAINMENT GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2005
(UNAUDITED)
NOTE 4 - LONG-TERM DEBT
On December 20, 2004, TM Film Distribution, Inc., a wholly-owned subsidiary,
entered into a loan agreement with a foreign bank, Fairbairn Private Bank
Limited, under which the bank provides a line of credit facility for a maximum
of (pound)1,628,055. Interest is payable quarterly at the London Interbank
Offered Rate ("LIBOR") plus 0.375%. The line is secured by funds, advanced by a
third party, held on deposit with the lender. The outstanding principal balance
of the line is due in full twenty-four months after the final draw down of the
line. In December, 2004 and January 2005, TM Film Distribution, Inc. was
advanced an aggregate of (pound)1,628,055 (U.S. $3,109,585, using the conversion
rate on the date of first draw down, which approximates the conversion rate as
of April 30, 2005) under this line of credit. A portion of these funds were used
to satisfy expenses related to this transaction in the amount of approximately
$1,494,000.
In addition, the third-party assigned a cash account in the amount of
approximately $3,006,000, restricted for use in promotion and advertising upon
certain conditional and the third-party's approval which amount is offset as a
loan to the third party.
NOTE 5 - STOCKHOLDERS' EQUITY
During the six months ended April 30, 2005, the Company sold an aggregate of
863,556 shares of its common stock in a series of private offerings and received
net proceeds of $427,977.
During the six months ended April 30, 2005, the Company issued 21,446 shares of
its common stock in exchange for services valued at $13,940.
In December 2004, the Company issued Stock Purchase Warrants to purchase
1,000,000 shares of its common stock at an exercise price of $0.49 per share
pursuant to section 4(2) of the Securities Act as compensation for a twelve
month consulting agreement. The Warrants are exercisable until December 2009. In
accordance with the fair value method as described in accounting requirements of
SFAS No. 123(R), the Company recognized prepaid consulting expense of $338,000,
of which $51,830 was expensed for the six months ended April 30, 2005.
In March 2005, the Company issued 2,000,000 shares of its Common Stock and Stock
Purchase Warrants to purchase 1,000,000 shares of its common stock at an
exercise price of $ $0.45 per share, expiring in 5 years, pursuant to Section
4(2) of the Securities Act as part of the purchase of a 10% investment in an
affiliated company. In accordance with the fair value method as described in
accounting requirements of SFAS No. 123(R), the warrants issued were valued at
$250,000. The 2,000,000 shares of common stock were valued at $780,000, which
represents the fair market value of the common stock at date of issuance. This
investment is accounted for by the cost method since the Company's investment is
less that 20%.
In April 2005, 1,000,000 shares of Preferred Stock were converted into
10,000,000 shares of common stock.
In April 2005, the major stockholder of the Company, certain employees of the
Company and certain related parties converted $2,632,171 of liabilities due to
them into stock subscriptions for 2,632,171 shares of the Company's common
stock. The shares of common stock were issued in May 2005.
In February 2005, the Company replaced 120,000 Stock Purchase Warrants
originally issued during Fiscal 2003 with Stock Purchase Warrants to purchase
274,000 of the Company's common stock, due to an anti-dilative clause in the
original agreement. The originally issued warrants had exercise prices between
$1.13 and $1.50 per share. The revised warrants have an exercise price of $0.45
and expire in October 2007, which was the original expiration date. The issuance
of the replacement warrants were accounted for as a variable stock option plan,
however no additional expense was required to be recognized during the six
months ended April 30, 2005.
-8-
TRIMEDIA ENTERTAINMENT GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2005
(UNAUDITED)
NOTE 6 - SUBSEQUENT EVENTS
In May 2005, certain related party lenders entered into an agreement with the
Company to have debt owed to the lenders repaid with a combination of cash and
conversion of debt to equity. As of April 30, 2005, the lenders were owed a
total of $1,041,524, which consists of term loans of $746,508, accrued interest
of $140,016 and accrued expenses of $155,000. As part of the agreement, during
May 2005, the lenders converted $531,524 of debt into 531,524 share of the
Company's common stock. In addition, the Company is obligated to make a cash
payment of $510,000 to the lenders upon the closing of the next equity financing
that the Company undertakes.
In May 2005, the Company entered into a convertible term note payable with a
third party lender. The note states that the third party lender will lend the
Company $1,590,000. Interest only, at 12% per annum, is due monthly with the
outstanding principal to be paid in a lump sum on May 30, 2006. As part of the
loan agreement the Company issued Stock Purchase Warrants to purchase 2,000,000
shares of its common stock at an exercise price of $0.50 per share pursuant to
Section 4(2) of the Securities Act. The Warrants are exercisable until May 2010.
In accordance with the fair value method as described in accounting requirements
of SFAS No. 123R, the Company will recognize a deferred financing fee of
$195,000. The holder of the note has the right to convert all or part of the
outstanding principal amount of the note into common stock of the Company at a
conversion price of $0.50 per share. The conversion price is subject to
adjustment upon occurrence of certain events as defined in the agreement.
NOTE 7 - 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.
Three Months Ended Recording Film Segment Consolidated
April 30, 2005 Studio Production Total Corporate Total
- --------------------------------- -------------- ------------- -------------- -------------- ----------------
Net sales $ - $ 23,913 $ 23,913 $ - $ 23,913
Loss from operations 55,835 104,374 160,209 819,781 979,990
Total assets 755,801 264,093 1,019,894 1,347,992 2,367,886
Depreciation and amortization 51,625 1,623 53,248 - 53,248
Capital expenditures - - - - -
Three Months Ended
April 30, 2004
- ---------------------------------
Net sales $ 4,497 $ 2,333 $ 6,830 $ - $ 6,830
Loss from operations 49,727 136,025 185,752 1,082,220 1,267,972
Total assets 1,213,519 61,082 1,274,601 92,624 1,367,325
Depreciation and amortization 47,081 1,623 48,704 - 48,704
Capital expenditures - - - - -
-9-
TRIMEDIA ENTERTAINMENT GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2005
(UNAUDITED)
NOTE 7 - BUSINESS SEGMENTS (Continued)
Six Months Ended Recording Film Segment Consolidated
April 30, 2005 Studio Production Total Corporate Total
- --------------------------------- -------------- ------------- -------------- -------------- ---------------
Net sales $ 1,095 $ 25,080 $ 26,175 $ - $ 26,175
Loss from operations 113,339 1,638,713 1,752,052 1,905,536 3,657,588
Total assets 755,801 264,093 1,019,894 1,347,992 2,367,886
Depreciation and amortization 103,250 3,246 106,496 - 106,496
Capital expenditures - - - - -
Six Months Ended
April 30, 2004
- ---------------------------------
Net sales $ 10,597 $ 145,953 $ 156,550 $ - $ 156,550
Loss from operations 97,658 66,153 163,811 1,769,587 1,933,398
Total assets 1,213,519 61,082 1,274,601 92,624 1,367,325
Depreciation and amortization 94,162 3,246 97,408 - 97,408
Capital expenditures - - - - -
Three Months Ended Six Months Ended
April 30, April 30,
------------------------- -------------------------
Reconciliations 2005 2004 2005 2004
- ------------------------------------------- -------- ---------- ---------- ----------
Total segment operating loss $160,209 $ 185,752 $ 175,052 $ 163,811
Corporate overhead expenses 819,781 1,082,220 1,905,536 1,769,587
Other income (4,457) - (7,308) (3,400)
-------- ---------- ---------- ----------
Total consolidated net loss $975,533 $1,267,972 $3,650,280 $1,929,998
======== ========== ========== ==========
-10-
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 for the fiscal
period ended October 31, 2004 filed on January 31, 2005 (which we refer to as
Fiscal 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
- ------
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our consolidated
financial statements and related notes appearing elsewhere in this report. This
discussion and analysis contains forward-looking statements that involve risks,
uncertainties, and assumptions. The actual results may differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including but not limited to the risks discussed in this report.
OVERVIEW
- --------
We are a multimedia entertainment company that has film and music
operations. 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 BMG. 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. While we continued to recognize revenues from Snipes in
Fiscal 2004, we did not recognize the same level of revenues that we recognized
in Fiscal 2003. We have recently re-released Snipes as a combination DVD/CD
package through Charles Street. We commenced distribution of Train Ride, a film
produced by a third party, in February 2005 and we anticipate commencing
production of our new movie, Four Point Play, in the fourth quarter of Fiscal
2005. We also anticipate assisting Gerry Anderson Productions ("GAP") in the
multimedia exploitation of the New Captain Scarlet series.
We presently do not have sufficient cash to implement our business
plan. We have experienced this lack of liquidity throughout Fiscal 2003 and
Fiscal 2004, and the first six months of Fiscal 2005, causing us to be unable to
produce any additional feature films. We believe that we need to raise or
otherwise obtain at least $10,000,000 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 six to
twelve months in order to complete production of additional feature films and
music productions for commercial release and distribution. Accordingly, in order
to generate revenues in the remainder of Fiscal 2005, 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
complete the projects we have planned for Fiscal 2005 or continue 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 this Form 10-QSB.
-11-
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.
Revenue Recognition
-------------------
We recognize revenue from the sale or licensing of films and
non-refundable 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; and
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 April 30, 2005, film
costs of $95,516, which we have recorded on our balance sheet, were incurred in
connection with the production of four films that are in development and
pre-production. We will commence the amortization of these capitalized film
costs upon the distribution of their respective DVDs. Once revenues from a film
commence, the decision as to what portion of the costs to amortize in a given
period is dependent on the estimate of total gross revenues from that film. A
lower estimate will result in faster amortization, while a higher estimate may
result in a disproportionate amortization in later periods if actual revenues
are lower than initial estimates.
During Fiscal 2005 - Second Quarter we commenced the amortization of
the film cost associated with the movie Train Ride upon distribution of the
Train Ride DVD/Home Video in February, 2005. Since we anticipate that
substantially all revenue from the Train Ride DVD/Home Video was generated in
Fiscal 2005 - Second quarter we fully amortized the $12,093 of capitalized film
costs associated with the Train Ride DVD/Home Video.
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.
-12-
RESULTS OF OPERATIONS
- ---------------------
Three Months Ended April 30, 2005 (Fiscal 2005-Second Quarter) vs. Three Months
Ended April 30, 2004 (Fiscal 2004-Second Quarter)
- ------------------------------- ---------------------------- ----------------------------
Fiscal 2005 - Second Fiscal 2004 - Second
--------------------------- ---------------------------
Quarter Quarter $ Change
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Net Loss 975,533 1,267,977 (292,444)
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Net Loss from Operations 979,990 1,267,977 (287,987)
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Net Revenue 23,913 6,830 17,083
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Direct Costs 28,420 5,065 23,355
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Operating Expenses 975,483 1,269,742 (294,259)
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Other Income 4457 -0- 4457
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
The $287,987 decrease in Net Loss From Operations was primarily due to
a decrease in Operating Expenses and a increase in Net Revenue.
The $17,083 increase in Net Revenues primarily resulted from the Net
Revenue realized from the distribution of the Train Ride DVD in the current
period.
The $23,355 increase in Direct Costs was a result of the amortization
of capitalized film cost associated with the Train Ride DVD. 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 $294,259 decrease in Operating Expenses was primarily due to a
$115,196 decrease in fees related to financing activities, a $200,695 decrease
in consulting fees, a $53,595 decrease in interest expense, a $198,311 decrease
in travel expenses offset by an increase of $143,399 in professional fees
primarily related to European financing activities and an increase of $144,020
in salary related expense. Operating Expenses are generally the costs of
operating our business and include salaries, advertising, professional and
consulting fees, rent and utilities, travel and costs related to financing
activities.
-13-
Six Months Ended April 30, 2005 vs. Six Months Ended April 30, 2004
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Fiscal 2005 - Six Months Fiscal 2004 - Six Months $ Change
------------------------ ------------------------ --------
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Net Loss 3,650,280 1,930,003 1,720,277
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Net Loss from Operations 3,657,588 1,933,403 1,724,185
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Net Revenue 26,175 156,550 (130,375)
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Direct Costs 143,088 8,626 134,462
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Operating Expenses 3,540,675 2,081,327 1,459,348
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Other Income 7,308 3,400 3,908
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
The $1,724,185 increase in Net Loss From Operations was primarily due
to an increase in Operating Expenses and decrease in Net Revenue
The $130,375 decrease in Net Revenues primarily resulted from the fact
that no Net Revenue was realized from the distribution of the Snipes DVD in the
current period offset by revenues realized from the distribution of Train Ride
DVD.
The $134,462 increase in Direct Costs was a result of the recoupment of
expenses by our joint venture partner relating to the release of the Snipes DVD,
amortization of capitalized film costs associated with the Train Ride DVD and
costs related to the development of new artists. 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 $1,459,348 increase in Operating Expenses was primarily due to
$1,385,518 in fees related to financing activities, $87,247 in overhead related
to the European office and operations, $216,558 increase in salaries resulting
from two new officers, an increase of $163,365 in professional fees and an
increase of $144,371 in salary related expenses offset by, a $223,178 decrease
in consulting fees, a $76,726 decrease in interest expense and a $265,318
decrease in travel expenses. Operating Expenses are generally the costs of
operating our business and include salaries, advertising, professional and
consulting fees, rent and utilities, travel and costs related to financing
activities.
OFF-BALANCE SHEET ARRANGEMENTS
There were no off-balance sheet arrangements during the three months
ended April 30, 2005 that have, or are reasonably likely to have, a current or
future affect on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or
capital resources that is material to our interests.
-14-
CHANGES IN FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Six month period ending - Six month period ending - $ Change
------------------------- -------------------------- --------
April 30,2005 April 30, 2004
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Cash Flow from Operating (3,804,954) (1,525,860) (2,279,094)
Activities
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Cash Flow from Investing 246 (19,234) 19,480
Activities
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Cash Flow from Financing 3,677,068 1,583,678 2,093,390
Activities
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
The use of cash from operations in Fiscal 2005 was due primarily to our
Net Loss along with advances to artists of $407,082, and an increase in accounts
payable and accrued expenses of $138,368, principally offset by non-cash charges
for depreciation and amortization of $118,588.
Our investing activities provided cash of $246 in the Six Months ended
April 30, 2005. This amount reflects a $25,000 investment in an affiliated
company offset by an advance from our principal stockholder of $25,246.
In the Six Months ended April 30, 2005, financing activities provided
$3,677,068 in cash through the sale of 863,556 shares of our common stock,
$3,109,585 in proceeds from long-term debt and a total of $139,506 in net
borrowings.
At April 30, 2005, we had approximately $57,400 in cash. At June 1,
2005, we had approximately $100,000 in cash. We do not believe that the amount
of cash that we had on hand at June 1, 2005 is sufficient to fund our operations
through April 30, 2006. We have principally relied on equity financing and loans
from our principal stockholder, distributions from Charles Street, our
co-venture with Sony BMG, and third party lenders to fund our operations. During
Fiscal 2005, 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 and will consider 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. 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 $10,000,000 in order to meet
our anticipated cash requirements through April 30, 2006. 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, if any, to fund our operations.
On December 27, 2004, TM Film Distribution, Inc., our wholly-owned
subsidiary, entered into a Loan Agreement with Fairbairn Private Bank Limited
(the "Loan Agreement"). The Loan Agreement established a loan facility in the
maximum aggregate principal amount of (pound)1,628,055 (the "Facility") that TM
Film Distribution may draw down from time to time. To date, TM Film Distribution
has drawn down (pound)1,628,055 of this Facility. Interest accrues for each
advance under the Facility at the rate of LIBOR on the date of the advance plus
0.375%. Pursuant to the Loan Agreement, the lender determines LIBOR in its sole
discretion by reference to either (i) the relevant Reuters page at or about
11:00 a.m. (London time) on the date an advance is drawn or (ii) if no such rate
can be ascertained at the relevant time, the rate offered to lender by any
leading bank in the London inter-bank market at or about 11:00 a.m. (London
time) on the date an advance is drawn. Amounts drawn under the Facility are due
for repayment on that date which is 24 months after the date on which the final
draw down of the Facility is made. Interest is payable quarterly during the term
that each advance is outstanding. TM Film Distribution's obligation to repay all
loan amounts under the Facility is secured by a Deed of Charge Over Cash and a
Deed of Charge Over Deposit each created in favor of the lender and covering
funds held on deposit by TM Film Distribution with the lender. These funds are
part of the Printing and Advertising fund established by Keydata Media &
Marketing 1 LLP on behalf of TM Film Distribution, as more fully described in
our Annual Report on Form 10-K for the year ended October 31, 2004. On December
27, 2004, we received a payment of $1,468,035 from TM Film Distribution as
payment of costs and expenses in connection with its formation and its
activities in connection with the structuring of transactions with KeyData Media
& Marketing 1, LLP.
-15-
In August 2004, we engaged Brockington Securities, Inc. as our
financial advisor and investment banker pursuant to which we issued them 250,000
shares of our common stock. In February 2005, we received $270,000 (net of
commissions of $30,000) from a private placing offering for which Brockington
acted as placement agent. This transaction was recorded as a subscription
receivable upon the signing of the subscription agreement in January 2005.
We derive a significant portion of our net revenues from our Charles
Street joint venture relating to the sale of the feature film which are released
on DVD/Home Video by Sony BMG. In the first six months of Fiscal 2005, there was
a significant decrease in net revenues due to the decline in revenues from
Snipes, the limited results from the release of Train Ride and our failure to
release any additional new movies or other entertainment content. Under the
terms of the co-venture agreement with Sony BMG, as amended on October 2, 2003,
Ruffnation Films will fund the creation, production and marketing of ten films
for Charles Street. Snipes and Train Ride were the first and second films we
produced under the agreement. Sony BMG will advance 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 BMG from the sales of products released by Charles
Street. Sony BMG has the right to accept or reject any film in its discretion.
Substantially all of the $149,720 of Net Revenue which we generated in Fiscal
2004-first quarter represented revenues primarily from sales to rental outlets
and limited retail sales of the feature film Snipes.
Through March 31, 2005, Sony BMG has reported gross billings for
Charles Street related to the release of the Snipes and Train Ride DVD/Home
Videos of $2,331,062 and $188,054 respectively and net profits of $1,043,081 and
$57,517 respectively, of which our portion is $860,027 and $53,489,
respectively. Under the terms of the Charles Street joint venture, net profits
can be adjusted to reflect additional costs incurred. As of the date of this
report, we have not received additional financial information from Sony BMG
relating to amounts due to Charles Street for Snipes. We anticipate receiving
financial information from Sony BMG relating to Charles Street for the period
ending June 30, 2005, however, we do not anticipate receiving significant
additional revenues related to Snipes or Train Ride. Although we may receive
additional payments from Charles Street in Fiscal 2005 related to sales of
Snipes or Train Ride, there can be no assurance of the amount or timing of such
payments. On August 24, 2004, we entered into an agreement with Gerry Anderson
Productions PLC ("GAP") pursuant to which we will represent GAP as its agent in
the development and multimedia exploitation of GAP's New Captain Scarlet Series
properties in the United States, Canada and such other territories as are
mutually agreed upon. In connection with this agreement, we have introduced GAP
to Sony Wonder, a company from the Sony Group and they have negotiated an
agreement regarding the broadcast and master licensing of the New Captain
Scarlet Series pursuant to which GAP will provide Sony Wonder with at least 13
episodes of the series for the purpose of securing a broadcast arrangement with
a major television network and/or cable television network. In addition, Charles
Street, our co-venture with Sony, will negotiate with artists, develop and
produce a soundtrack CD/DVD for the New Captain Scarlet Series. In February
2005, the New Captain Scarlet series began broadcasting the initial 13 half-
hour episodes in the United Kingdom (which is not one of the territories covered
by our agreement with GAP) and producers are presently in production with
episodes 14 -26.
As consideration for services provided under this agreement, we will
receive a fee equal to five percent of the gross cash receipts realized by GAP
from Sony's exploitation of the New Captain Scarlet Series (excluding revenues
generated by sub-agents or distributors appointed by Sony, if any). In addition,
during the period from September 2004 through January 2005, GAP purchased
1,505,544 of our shares of common stock at an aggregate purchase price of
$978,600. Pursuant to the agreement, we also have a five-year option to purchase
up to $1,000,000 of GAP's capital stock at a 15% discount to the value of the
shares on the date that the option is exercised.
-16-
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 in 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 April 30, 2005 was approximately $126,708. The original
maturity date of the loan was 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 in
October 2002 resulted in a change in ownership of all of the issued and
outstanding common stock of Metropolitan. 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. On May 10,
2004, the bank demanded payment in full of the outstanding principal balance of
the loan plus all accrued interest on the loan in the approximate amount of
$14,500 for the aggregate amount of approximately $147,100 by August 17, 2004.
We are currently negotiating terms for an extension of this payment deadline. As
we presently do not have sufficient cash on hand to repay this loan, 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. The total outstanding
amount of this note is reflected as a current liability on our April 30, 2005
Consolidated Balance Sheet.
In addition, we have accounts payable and accrued expenses in the
aggregate amount of approximately $1,036,138, a substantial portion of which are
presently past due.
We also have other obligations that mature or may mature in the next
twelve months.
In June 2004, we received short-term loans in the aggregate amount of
$90,000 from a third party. These obligations are documented by promissory notes
that accrue interest at the rate of 10% per annum and are payable upon the
earlier of our receipt of $1,500,000 in additional financing or July 1, 2005.
In June 2004 and August 2004, we received short-term loans in the
aggregate amount of $100,000 from a third party. These obligations are
documented by promissory notes that accrue interest at the rate of 10% per annum
and are payable upon demand. As an inducement for the loans we issued the lender
warrants to purchase 125,000 shares of common stock at a price per share of $.80
with a term of three years.
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 accrued 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. On June 2, 2004, the promissory note was further amended to extend the
maturity date from April 30, 2004 until September 30, 2004. As of June 2, 2004,
the outstanding principal and accrued interest on the promissory note was
$654,906. For the period from June 2, 2004 until September 30, 2004, the
interest rate on the promissory note was reduced from 35% to 20% and accrued on
the balance of $654,906. In January 2005, the promissory note was further
amended to extend the maturity date from September 30, 2004 until September 30,
2005. 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.
-17-
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 that 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 that 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 that 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 Chairman, Chief Executive Officer and principal
stockholder. These obligations are documented by a demand note payable that
accrues interest at the rate of 7% per annum. In addition, in Fiscal 2004, Mr.
Schwartz extended short-term loans in an aggregate principal amount of $325,040
to us and our operating subsidiaries. We have repaid of the principal amount of
these loans.
In May 2005, certain related party lenders entered into an agreement
with us to have debt owed to the lenders repaid with a combination of cash and
conversion of debt to equity. As of April 30, 2005, the lenders were owed a
total of $1,041,524, which consists of term loans of $746,508, accrued interest
of $140,016 and accrued expenses of $155,000. As part of the agreement, during
May 2005, the lenders converted $531,524 of debt into 531,524 share of our
common stock. In addition, we are obligated to make a cash payment of $510,000
to the lenders upon the closing of the next equity financing that we undertake.
In May 2005, we entered into a convertible term note payable with a
third party lender. The note states that the third party lender will lend us
$1,590,000. Interest only, at 12% per annum, is due monthly with the outstanding
principal to be paid in a lump sum on May 30, 2006. As part of the loan
agreement, we issued stock purchase warrants to purchase 2,000,000 shares of our
common stock at an exercise price of $0.50 per share pursuant to Section 4(2) of
the Securities Act. The Warrants are exercisable until May 2010. The holder of
the note has the right to convert all or part of the outstanding principal
amount of the note into common stock at a conversion price of $0.50 per share.
The conversion price is subject to adjustment upon occurrence of certain events
as defined in the agreement.
Accordingly, approximately $4,400,000 from the net proceeds of any
additional financing may be used to satisfy our existing loans and obligations
that 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 $10,000,000 in additional financing, we believe that the
net proceeds from that financing together with cash flow from operations,
including our share of income from 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.
-18-
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 $10,000,000, 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. Accordingly, our stockholders
may only receive income from the appreciation in our stock price, if any.
ITEM 3. CONTROLS AND PROCEDURES
- ------
Evaluation of Disclosure Controls and Procedures
------------------------------------------------
As of April 30, 2005, 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.
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 that 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. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
- ------
In March 2005, we issued 2,000,000 shares of our common stock as part
of our investment in an affiliated company which was valued at $780,000.
In April 2005, our principal stockholder converted 1,000,000 shares of
our Preferred Stock into 10,000,000 shares of our common stock.
In April 2005, Christopher Schwartz agreed to cancel the outstanding
balance due to him of $963,178 in exchange for 963,178 shares of our common
stock. At the same time, other creditors agreed to cancel $1,668,995 of
outstanding indebtedness for 1,668,995 shares of our common stock.
In May 2005, a creditor converted debt of $531,524 in to 531,524 shares
of our common stock.
-19-
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 April 30, 2005, the total outstanding balance of this loan was
$126,708. 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 on our January 31, 2003 Consolidated Balance Sheet.
ITEM 6. EXHIBITS
- ------
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).
4.1 Specimen Stock Certificate (incorporated by reference to
Exhibit 4.1 to the Annual Report on Form 10-KSB for the
fiscal year ended October 31, 2002 filed on March 17, 2003).
4.2 Certificate of Designations of Series A Convertible Preferred
Stock of US Patriot, Inc. (incorporated by reference to
Exhibit 4.2 to the Annual Report on Form 10-KSB for the
fiscal year ended October 31, 2002 filed on March 17, 2003).
10.1 Employment Agreement dated as of October 9, 2002 by and
between US Patriot, Inc. and Christopher Schwartz
(incorporated by reference to Exhibit 10.1 to the Annual
Report on Form 10-KSB for the fiscal year ended October 31,
2002 filed on March 17, 2003).
10.2 Co-Venture Agreement between Sony Music, a Group of Sony
Music Entertainment, Inc., Ruffnation Films, LLC and
Christopher Schwartz dated as of September 20, 2002
(incorporated by reference to Exhibit 10.2 to the Annual
Report on Form 10-KSB for the fiscal year ended October 31,
2002 filed on March 17, 2003).
10.3 Copyright and Royalty Security Agreement dated June 27, 2002
by and between Snipes Productions, LLC and International
Travel CD's, Inc. dated June 27, 2002 (incorporated by
reference to Exhibit 10.9 to the Annual Report on Form 10-KSB
for the fiscal year ended October 31, 2002 filed on March 17,
2003).
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10.4 Stock Purchase Warrant to purchase 33,400 shares of common
stock issued to Frank Eiffe dated November 14, 2002
(incorporated by reference to Exhibit 10.12 to the Annual
Report on Form 10-KSB for the fiscal year ended October 31,
2002 filed on March 17, 2003).
10.5 Stock Purchase Warrant to purchase 66,600 shares of common
stock issued to Dr. Wolfgang Moelzer dated November 14, 2002
(incorporated by reference to Exhibit 10.13 to the Annual
Report on Form 10-KSB for the fiscal year ended October 31,
2002 filed on March 17, 2003).
10.6 Stock Purchase Warrant to purchase 50,000 shares of common
stock issued to BKB Boston K Borg Management GmbH dated
December 12, 2002 (incorporated by reference to Exhibit 10.14
to the Annual Report on Form 10-KSB for the fiscal year ended
October 31, 2002 filed on March 17, 2003).
10.7 7% Demand Promissory Note in the principal amount of
$1,100,000 by Ruffnation Films LLC issued to Christopher
Schwartz dated May 1, 2002 (incorporated by reference to
Exhibit 10.15 to the Annual Report on Form 10-KSB for the
fiscal year ended October 31, 2002 filed on March 17, 2003).
10.8 Security Agreement issued by Ruffnation Films LLC, Snipes
Productions LLC and Metropolitan Recording Inc. to
Christopher Schwartz dated May 1, 2002 (incorporated by
reference to Exhibit 10.16 to the Annual Report on Form
10-KSB for the fiscal year ended October 31, 2002 filed on
March 17, 2003).
10.9 8% Promissory Note in the principal amount of $162,000 by
Metropolitan Recording Inc. issued to Founders Bank dated
August 21, 2001 (incorporated by reference to Exhibit 10.17
to the Annual Report on Form 10-KSB for the fiscal year ended
October 31, 2002 filed on March 17, 2003).
10.10 Security Agreement issued by Metropolitan Recording Inc. to
Founders Bank dated August 21, 2001 (incorporated by
reference to Exhibit 10.18 to the Annual Report on Form
10-KSB for the fiscal year ended October 31, 2002 filed on
March 17, 2003).
10.11 Loan Agreement between Metropolitan Recording, Inc. and
Founders Bank dated August 21, 2001 (incorporated by
reference to Exhibit 10.19 to the Annual Report on Form
10-KSB for the fiscal year ended October 31, 2002 filed on
March 17, 2003).
10.12 Warrants to purchase 10,000 shares of common stock issued to
Trident Growth Fund, L.P. dated March 27, 2003 (incorporated
by reference to Exhibit 10.2 of the Quarterly Report on Form
10-QSB filed on June 18, 2003).
10.13 Warrants to purchase 100,000 shares of common stock issued to
Trident Growth Fund, L.P. dated June 13, 2003 (incorporated
by reference to Exhibit 10.1 of the Quarterly Report on Form
10-QSB filed on September 17, 2003).
10.14 12% Demand Promissory Note in the principal amount of $67,102
issued to 1025 Investments, Inc. dated June 19, 2003
(incorporated by reference to Exhibit 10.2 of the Quarterly
Report on Form 10-QSB filed on September 17, 2003).
10.15 Warrants to purchase 50,000 shares of common stock issued to
Aaron Lehmann dated June 20, 2003 (incorporated by reference
to Exhibit 10.3 of the Quarterly Report on Form 10-QSB filed
on September 17, 2003).
10.16 Warrants to purchase 100,000 shares of common stock issued to
Founders Equity Securities, Inc. dated June 20, 2003
(incorporated by reference to Exhibit 10.4 of the Quarterly
Report on Form 10-QSB filed on September 17, 2003).
10.17 Warrants to purchase 25,000 shares of common stock issued to
Daryl Strickling dated July 2, 2003 (incorporated by
reference to Exhibit 10.5 of the Quarterly Report on Form
10-QSB filed on September 17, 2003).
10.18 12% Demand Promissory Note in the principal amount of $17,000
issued to 1025 Investments, Inc. dated July 25, 2003
(incorporated by reference to Exhibit 10.6 of the Quarterly
Report on Form 10-QSB filed on September 17, 2003).
10.19 Distribution Agreement between New Line Television, Inc. and
Ruffnation Films LLC dated November 26, 2002 (incorporated by
reference to Exhibit 10.7 of the Quarterly Report on Form
10-QSB filed on September 17, 2003).
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10.20 Amendment to Co-Venture Agreement between Sony Music, a Group
of Sony Music Entertainment, Inc., Ruffnation Films, LLC and
Christopher Schwartz dated as of October 2, 2003
(incorporated by reference to Exhibit 10.30 to the Annual
Report on Form 10-KSB for the fiscal year ended October 31,
2003 filed on February 13, 2004).
10.21 35% Secured Promissory Note in the principal amount of
$435,000 issued by Snipes Productions, LLC to SPH
Investments, Inc., Capital Growth Trust, HMA Investment
Profit Sharing Plan and Continental Southern Resources, Inc.
dated June 27, 2002 as amended through April 11, 2003 and
October 30, 2003 (incorporated by reference to Exhibit 10.31
to the Annual Report on Form 10-KSB for the fiscal year ended
October 31, 2003 filed on February 13, 2004).
10.22 Warrants to purchase 10,000 shares of common stock issued to
Trident Growth Fund, L.P. dated September 11, 2003
(incorporated by reference to Exhibit 10.32 to the Annual
Report on Form 10-KSB for the fiscal year ended October 31,
2003 filed on February 13, 2004).
10.23 Employment Agreement by and between TriMedia Entertainment
Group, Inc. and Daniel J.B. Taylor dated March 23, 2004
(incorporated by reference to Exhibit 10.1 of the Quarterly
Report on Form 10-QSB filed on June 15, 2004).
10.24 Stock Purchase Warrant to purchase 2,500 shares of common
stock issued to Middle Fork Investments Ltd. dated April 5,
2004 (incorporated by reference to Exhibit 10.2 of the
Quarterly Report on Form 10-QSB filed on June 15, 2004).
10.25 Stock Purchase Warrant to purchase 121,875 shares of common
stock issued to Middle Fork Investments Ltd. dated April 5,
2004 (incorporated by reference to Exhibit 10.3 of the
Quarterly Report on Form 10-QSB filed on June 15, 2004).
10.26 Agreement dated as of August 12, 2004 by and between Gerry
Anderson Productions PLC and TriMedia Entertainment Group,
Inc. (incorporated by reference to Exhibit 10.1 of Current
Report on Form 8-K filed on September 10, 2004).
10.27 Stock Purchase Warrant to purchase 50,000 shares of common
stock issued to Larry Feinstein dated June 1, 2004
(incorporated by reference to Exhibit 10.1 of the Quarterly
Report on Form 10-QSB filed on September 14, 2004).
10.28 10% Demand Promissory Note in the principal amount of $50,000
issued to 1025 Investments, Inc. dated June 1, 2004
(incorporated by reference to Exhibit 10.2 of the Quarterly
Report on Form 10-QSB filed on September 14, 2004).
10.29 10% Demand Promissory Note in the principal amount of $40,000
issued to 1025 Investments, Inc. dated June 14, 2004
(incorporated by reference to Exhibit 10.3 of the Quarterly
Report on Form 10-QSB filed on September 14, 2004).
10.30 Stock Purchase Warrant to purchase 62,500 shares of common
stock issued to K. David Stevenson dated June 25, 2004
(incorporated by reference to Exhibit 10.4 of the Quarterly
Report on Form 10-QSB filed on September 14, 2004).
10.31 10% Demand Promissory Note in the principal amount of $50,000
issued to K. David Stevenson dated June 25, 2004
(incorporated by reference to Exhibit 10.5 of the Quarterly
Report on Form 10-QSB filed on September 14, 2004).
10.32 Stock Purchase Warrant to purchase 62,500 shares of common
stock issued to K. David Stevenson dated August 13, 2004
(incorporated by reference to Exhibit 10.6 of the Quarterly
Report on Form 10-QSB filed on September 14, 2004).
10.33 10% Demand Promissory Note in the principal amount of $50,000
issued to K. David Stevenson dated August 13, 2004
(incorporated by reference to Exhibit 10.7 of the Quarterly
Report on Form 10-QSB filed on September 14, 2004).
10.34 Consulting Agreement dated December 21, 2004 by and between
TriMedia Entertainment Group, Inc. and Joseph Safina
(incorporated by reference to Exhibit 10.1 of Current Report
on Form 8-K filed on December 23, 2004).
10.35 Loan Agreement Between Fairbairn Private Bank Limited and TM
Film Distribution, Inc. (incorporated by reference to Exhibit
10.1 of Current Report on Form 8-K filed on January 5, 2005).
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10.36 Lease Agreement by and between Delpar L.P. and TriMedia
Entertainment Group, Inc. (incorporated by reference to
Exhibit 10.36 to the Annual Report on Form 10-KSB for the
fiscal year ended October 31, 2004 filed on January 31,
2005).
10.37 Sale and Purchase Agreement between TriMedia Film Group, Inc.
and Keydata Media and Marketing I, LLP dated as of October
2004 (incorporated by reference to Exhibit 10.37 to the
Annual Report on Form 10-KSB for the fiscal year ended
October 31, 2004 filed on January 31, 2005).
10.38 Distribution Agreement between Keydata Media and Marketing I,
LLP and TM Film Distribution, Inc. dated as of October 2004
(incorporated by reference to Exhibit 10.38 to the Annual
Report on Form 10-KSB for the fiscal year ended October 31,
2004 filed on January 31, 2005).
31.1 Certification dated June 14, 2005 of the Principal Executive
Officer pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a)
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 June 14, 2005 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.
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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: /s/Christopher Schwartz
--------------------------------------------------
Christopher Schwartz
Chief Executive Officer and
Chief Financial Officer