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 July 31, 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
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(State or other jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
1080 N. DELAWARE AVENUE, 8TH FLOOR
PHILADELPHIA, PENNSYLVANIA 19125
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(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 September 9, 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 July 31, 2005 (unaudited) and October 31, 2004
(audited).................................................................... 1
Consolidated Statements of Operations for the Three and Nine Months Ended
July 31, 2005 and July 31, 2004 (unaudited)................................. 2
Consolidated Statements of Cash Flows for the Nine Months Ended July 31, 2005
and July 31, 2004 (unaudited)............................................... 3
Notes to Consolidated Financial Statements................................... 5
Item 2. Management's Discussion and Analysis or Plan of Operation.................... 11
Item 3. Controls and Procedures...................................................... 19
Part II. Other Information
Item 1. Legal Proceedings............................................................ 19
Item 2. Unregistered Sales of Equity................................................. 19
Item 3. Defaults Upon Senior Securities.............................................. 19
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 FINANCIAL STATEMENTS
JULY 31, 2005
TRIMEDIA ENTERTAINMENT GROUP, INC.
AND SUBSIDIARIES
C O N T E N T S
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PAGE
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CONSOLIDATED BALANCE SHEETS 1
CONSOLIDATED STATEMENTS OF OPERATIONS 2
CONSOLIDATED STATEMENTS OF CASH FLOWS 3 - 4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5 - 10
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TRIMEDIA ENTERTAINMENT GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 2005 AND OCTOBER 31, 2004
July 31, October 31,
2005 2004
------------ ------------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS
Cash $ 71,922 $ 185,096
Miscellaneous receivables 8,659 -
Convertible note receivable 250,000 -
Prepaid expenses 404,570 29,262
------------ ------------
735,151 214,358
PROPERTY AND EQUIPMENT - Net 318,679 456,135
ADVANCES TO ARTISTS 703,112 -
CAPITALIZED FILM COSTS 123,787 83,140
INVESTMENT IN AFFILIATED COMPANY 1,055,000 -
OTHER ASSETS 37,423 9,625
------------ ------------
TOTAL ASSETS $ 2,973,152 $ 763,258
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Term loans $ 1,844,208 $ 781,613
Demand notes payable - 184,602
Accounts payable and accrued expenses 920,844 3,425,599
Taxes payable 17,501 17,501
Advance from Sony 100,033 13,088
Due to stockholder 24,082 7,137
Deferred revenue - 1,167
------------ ------------
2,906,668 4,430,707
LONG-TERM DEBT 2,860,167 -
LOANS PAYABLE - STOCKHOLDER 1,100,000 1,199,040
------------ ------------
TOTAL LIABILITIES 6,866,835 5,629,747
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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; 45,560,011 and 29,511,314 shares
issued and outstanding in 2005 and 2004 4,555 2,950
Additional paid-in capital 13,116,527 7,949,420
Accumulated deficit (17,014,765) (12,818,959)
------------ ------------
TOTAL STOCKHOLDERS' DEFICIT (3,893,683) (4,866,489)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 2,973,152 $ 763,258
============ ============
See accompanying notes to consolidated financial statements.
-1-
TRIMEDIA ENTERTAINMENT GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED JULY 31, 2005 AND 2004
(UNAUDITED)
Three Months Ended Nine Months Ended
July 31, July 31,
2005 2004 2005 2004
----------- ----------- ----------- -----------
NET REVENUE $ 27,693 $ 73,561 $ 53,868 $ 230,111
DIRECT COSTS 4,316 14,600 148,038 23,226
----------- ----------- ----------- -----------
GROSS PROFIT (LOSS) 23,377 58,961 (94,170) 206,885
OPERATING EXPENSES 817,925 930,527 4,358,600 3,011,854
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (794,548) (871,566) (4,452,770) (2,804,969)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE)
Foreign currency exchange gain 249,418 - 249,418 -
Miscellaneous income (expense) (2,572) 1,100 7,546 4,500
----------- ----------- ----------- -----------
246,846 1,100 256,964 4,500
----------- ----------- ----------- -----------
NET LOSS $ (547,702) $ (870,466) $(4,195,806) $(2,800,469)
=========== =========== =========== ===========
BASIC AND DILUTED
LOSS PER SHARE $ (0.01) $ (0.03) $ (0.12) $ (0.10)
=========== =========== =========== ===========
WEIGHTED AVERAGE
NUMBER OF SHARES 45,560,011 27,974,105 36,076,462 27,151,284
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
-2-
TRIMEDIA ENTERTAINMENT GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JULY 31, 2005 AND 2004
(UNAUDITED)
2005 2004
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CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(4,195,806) $(2,800,469)
Adjustment to reconcile net loss to net cash
used in operating activities
Foreign currency exchange gain (249,418) -
Common stock issued for services 13,940 -
Warrants issued for expenses - 224,300
Amortization of film costs 12,092 -
Depreciation and amortization 159,744 146,112
Increase (decrease) in assets
Miscellaneous receivable (8,659) -
Film costs (52,739) (78,529)
Prepaid expenses 157,692 (10,057)
Advances to artists (703,112) -
Other assets (27,798) -
Increase (decrease) in liabilities
Accounts payable and accrued expenses 350,497 762,010
Advance from Sony 86,945 (122,217)
Deferred revenue (1,167) 4,667
----------- -----------
Net cash used in operating activities (4,457,789) (1,874,183)
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CASH FLOWS FROM INVESTING ACTIVITIES
Due to stockholder 22,246 128,414
Purchase of investment in affiliated company (25,000) -
Purchase of equipment (22,288) -
Increase in convertible note receivable (250,000) -
----------- -----------
Net cash provided by (used in) investing activities (275,042) 128,414
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings on long-term debt 3,109,585 69,182
Net borrowings on demand notes 19,500 -
Net borrowings on term loans 1,062,595 -
Net proceeds from sale of stock 427,977 1,665,000
----------- -----------
Net cash provided by financing activities 4,619,657 1,734,182
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NET DECREASE IN CASH (113,174) (11,587)
CASH - BEGINNING OF YEAR 185,096 14,085
----------- -----------
CASH - END OF YEAR $ 71,922 $ 2,498
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
CASH PAID DURING THE YEAR FOR:
Interest $ 60,084 $ 85,338
=========== ===========
See accompanying notes to consolidated financial statements.
-3-
TRIMEDIA ENTERTAINMENT GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
NINE MONTHS ENDED JULY 31, 2005 AND 2004
(UNAUDITED)
2005 2004
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SUPPLEMENTAL DISCLOSURES OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Warrants issued for prepaid consulting services $ 338,000 $ -
=========== ===========
Warrants issued for deferred financing fee $ 195,000 $ -
=========== ===========
Conversion of term loan to common stock $ - $ 168,787
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Accrued interest converted to term loan $ - $ 281,141
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Conversion of liabilities to common stock:
Accounts payable and accrued expenses $ 2,855,252 $ -
Due to stockholder 5,301 -
Loan payable - stockholder 99,040 -
Demand note payable 204,102 -
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$ 3,163,695 $ -
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Warrants issued for investment in affiliated company $ 250,000 $ -
Common stock issued for investment in affiliated company 780,000 -
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Investment in affiliated company $ 1,030,000 $ -
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Conversion of preferred stock to common stock:
Preferred stock $ (100) $ -
Additional paid-in capital (900) -
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Common stock $ 1,000 $ -
=========== ===========
See accompanying notes to consolidated financial statements.
-4-
TRIMEDIA ENTERTAINMENT GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 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
nine months ended July 31, 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. For the three and nine months
ended July 31, 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 July
31, 2005 had accumulated losses of $17,014,765. For the nine months ended July
31, 2005, the Company's net loss was $4,195,806. In addition, the Company had
negative working capital of $2,171,517 at July 31, 2005 and experienced negative
cash flow from operations of $4,457,789 for the nine months ended July 31, 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.
-5-
TRIMEDIA ENTERTAINMENT GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 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 $5,804,375 as of July 31, 2005. The Company has granted security
interests in substantially all of its assets to secure its obligations to repay
approximately $1,844,208 of this indebtedness. According, 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, 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 July 31, 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 - CONVERTIBLE NOTE RECEIVABLE
In June 2005, the Company entered into a convertible promissory note,
with an affiliated company, under which the Company loaned $250,000 to the
affiliated company. The promissory note accrues interest at 10%, which is due on
the maturity date, June 21, 2006. The promissory note is convertible into
250,000 shares of common stock of the affiliated company at the option of either
party.
-6-
TRIMEDIA ENTERTAINMENT GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2005
(UNAUDITED)
NOTE 4 - 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 nine months ended July 31, 2005 was $57,750.
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.
NOTE 5 - 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. $2,860,167) 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. TM Film Distribution, Inc. recognized
a foreign currency exchange gain of $249,418 for the three and nine months ended
July 31, 2005.
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 6 - STOCKHOLDERS' EQUITY
During the nine months ended July 31, 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 nine months ended July 31, 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 $197,200 was expensed for the nine months ended July 31, 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.
-7-
TRIMEDIA ENTERTAINMENT GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2005
(UNAUDITED)
NOTE 6 - STOCKHOLDERS' EQUITY (Continued)
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 nine
months ended July 31, 2005.
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 July 31, 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. The $510,000 is reflected as part of term loans under
current liabilities.
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 of July 31,
2005, the Company has borrowed $1,087,500 of the $1,590,000 available credit. 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. The $1,087,500 is reflected as part of term loans
under current liabilities.
-8-
TRIMEDIA ENTERTAINMENT GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2005
(UNAUDITED)
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.
Recording Film Segment Consolidated
Studio Production Total Corporate Total
------------- ------------- ------------- ------------- ---------------
Three Months Ended
July 31, 2005
- -----------------------------------
Net sales $ 25,000 $ 2,693 $ 27,693 $ - $ 27,693
Loss from operations 47,872 76,091 123,963 670,585 794,548
Total assets 1,030,359 290,979 1,321,338 1,651,814 2,973,152
Depreciation and amortization 51,625 1,623 53,248 - 53,248
Capital expenditures - 22,288 22,288 - 22,288
Three Months Ended
July 31, 2004
- -----------------------------------
Net sales $ 4,964 $ 68,597 $ 73,561 $ - $ 73,561
Loss from operations 50,886 20,873 71,759 799,807 871,566
Total assets 1,165,866 86,916 1,252,782 32,914 1,285,696
Depreciation and amortization 47,081 1,623 48,704 - 48,704
Capital expenditures - - - - -
Recording Film Segment Consolidated
Studio Production Total Corporate Total
------------- ------------- ------------- ------------- ---------------
Nine Months Ended
July 31, 2005
- -----------------------------------
Net sales $ 26,095 $ 27,773 $ 53,868 $ - $ 53,868
Loss from operations 161,211 1,715,438 1,876,649 2,576,121 4,452,770
Total assets 1,030,359 290,979 1,321,338 1,651,814 2,973,152
Depreciation and amortization 154,875 4,869 159,744 - 159,744
Capital expenditures - 22,288 22,288 - 22,288
Nine Months Ended
July 31, 2004
- -----------------------------------
Net sales $ 15,561 $ 214,550 $ 230,111 $ - $ 230,111
Loss from operations 148,544 87,031 235,575 2,569,394 2,804,969
Total assets 1,165,866 86,916 1,252,782 32,914 1,285,696
Depreciation and amortization 141,243 4,869 146,112 - 146,112
Capital expenditures - - - - -
-9-
TRIMEDIA ENTERTAINMENT GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2005
(UNAUDITED)
NOTE 7 - BUSINESS SEGMENTS (Continued)
Three Months Ended Nine Months Ended
July 31, July 31,
----------------------------- -----------------------------
Reconciliations 2005 2004 2005 2004
- ------------------------------ ----------- ----------- ----------- -----------
Total segment operating loss $ 123,963 $ 71,759 $ 1,876,649 $ 235,575
Corporate overhead expenses 670,585 799,807 2,576,121 2,569,394
Other income (246,846) (1,100) (256,964) (4,500)
----------- ----------- ----------- -----------
Total consolidated net loss $ 547,702 $ 870,466 $ 4,195,806 $ 2,800,469
=========== =========== =========== ===========
-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
year ended October 31, 2004 filed on January 31, 2005. 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 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 March 2005 and we anticipate commencing production of our new
movie, Four Point Play, in the first quarter of Fiscal 2006. We also anticipate
assisting Gerry Anderson Productions ("GAP") in the multimedia exploitation of
the New Captain Scarlet series. We have four recording artists under contract
and anticipate releasing music CD's and DVD's on their new projects during the
next twelve months. In June 2005 we entered into a record distribution agreement
for our independent music productions with Fontana Distribution LLC, a division
of Universal Music Group. The first commercial album release will be in
September 2005 with the Spin Doctors album entitled Nice Talking to Me. In
October 2005, we plan to release a CD album by Kulcha Don entitled It's All
About You. The CD albums will be distributed by Fontana Distribution LLC.
During the quarter ended July 31, 2005, we received loans in the
aggregate principal amount of $1,590,000 and issued promissory notes to third
party lenders. Despite these cash receipts, 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 nine 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 12 to 18 months in order to complete production of
additional feature films and music productions for commercial release and
distribution. Accordingly, in order to generate additional 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 or continue to implement our business plan.
-11-
The following discussion and analysis should be read in conjunction
with the consolidated financial statements and the related notes thereto
included elsewhere in this report.
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
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 July 31, 2005, we
incurred $123,787 in film costs in connection with the production of five films
that are in development and pre-production and were recorded on our balance
sheet. 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.
-12-
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. During the nine months ended July 31, 2005,
we did not advance royalties to artists as we did not complete any projects
during that period.
RESULTS OF OPERATIONS
Three Months Ended July 31, 2005 (Fiscal 2005 Third Quarter) vs. Three Months
Ended July 31, 2004 (Fiscal 2004 Third Quarter)
- -------------------------- ------------------------------ ----------------------------- -----------------------------
Fiscal 2005 Third Quarter Fiscal 2004 Third Quarter $ Change
------------------------- ------------------------- --------
- -------------------------- ------------------------------ ----------------------------- -----------------------------
Net Loss 547,702 870,466 (322,764)
- -------------------------- ------------------------------ ----------------------------- -----------------------------
Net Revenue 27,693 73,561 (45,868)
- -------------------------- ------------------------------ ----------------------------- -----------------------------
Direct Costs 4,316 14,600 (10,284)
- -------------------------- ------------------------------ ----------------------------- -----------------------------
Operating Expenses 817,925 930,527 (112,602)
- -------------------------- ------------------------------ ----------------------------- -----------------------------
Other Income (2,572) 1,100 (245,746)
- -------------------------- ------------------------------ ----------------------------- -----------------------------
The $322,764 decrease in Net Loss From Operations was primarily due to
a decrease in Operating Expense, a decrease in Net Revenue and a foreign
currency gain of $249,418 resulting from the effect of a stronger US Dollar on
our UK Pound Sterling denominated debt.
The $45,868 decrease in Net Revenues primarily resulted from lower 2005
Train Ride revenues compared to Snipes revenues in 2004.
The $10,284 decrease in Direct Cost was a result of lower amortization
of capitalized film cost. 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 $112,602 decrease in Operating Expenses was primarily due to a
decrease of $85,000 in overhead related to the European office and operations,
$196,532 decrease in salaries, a $71,035 decrease in travel expenses, which are
all related to the closure of the European offices and operations, and an
increase of $258,765 in professional fees, a $70,505 decrease in consulting
fees, and a $34,964 increase in interest 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.
The $245,746 increase and Other Income is mainly due to a foreign
currency exchange gain of $249,418.
-13-
Nine Months Ended July 31, 2005 vs. Nine Months Ended July 31, 2004
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Nine Months Ended Nine Months Ended $ Change
----------------- ----------------- --------
July 31, 2005 July 31,2004
------------- ------------
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Net Loss 4,445,224 2,800,469 1,395,337
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Net Revenue 53,868 230,111 (176,243)
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Direct Costs 148,048 23,226 124,812
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Operating Expenses 4,358,600 3,011,854 1,346,746
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Other Income 7,546 4,500 252,464
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
The $1,395,337 increase in Net Loss From Operations was primarily due
to an increase in Operating Expenses, a decrease in Net Revenue and a foreign
currency exchange gain of $249,418.
The $176,243 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 $124,812 increase in Direct Cost 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 $1,346,746 increase in Operating Expenses was primarily due to
$1,392,170 in fees related to financing activities, an increase of $422,130 in
professional fees and an increase of $142,399 in salary related expenses offset
by, a $293,683 decrease in consulting fees, a $41,762 decrease in interest
expense and a $336,353 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.
The $252,464 increase in Other Income is mainly due to a foreign
currency exchange gain of $249,418.
-14-
CHANGES IN FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
- ---------------------------- -------------------------- --------------------------- -------------------------
Nine Months Ended Nine Months Ended $ Change
----------------- ----------------- --------
July 31, 2005 July 31, 2004
------------- -------------
- ---------------------------- -------------------------- --------------------------- -------------------------
Cash Flow used in
Operating Activities (4,457,789) (1,874,183) (2,583,606)
- ---------------------------- -------------------------- --------------------------- -------------------------
Cash Flow from Investing
Activities (25,042) 128,414 (153,456)
- ---------------------------- -------------------------- --------------------------- -------------------------
Cash Flow from Financing
Activities 4,369,657 1,734,182 2,635,475
- ---------------------------- -------------------------- --------------------------- -------------------------
The use of cash from operations in Fiscal 2005 was due primarily to our
Net Loss and advances to artists of $703,112, principally offset by a decrease
of prepaid expenses of $157,692 and an increase in accounts payable and accrued
expenses of $350,497, and non-cash charges for depreciation and amortization of
$159,744.
Our investing activities used cash of $25,042 in Fiscal 2005-Third
Quarter. This amount reflects a $25,000 investment in an affiliated company
offset by an advance from our principal stockholder of $22,246.
In the Nine Months ended July 31, 2005, financing activities provided
$4,369,657 in cash through the sale of 885,002 shares of our common stock,
$3,109,585 in proceeds from long-term debt and a total of $1,082,075 in net
borrowings offset by a $250,000 loan to an affiliated company.
At July 31, 2005, we had approximately $72,000 in cash. At September
12, 2005, we had approximately $109,000 in cash. We do not believe that the
amount of cash that we had on hand at September 12, 2005 is sufficient to fund
our operations through July 31, 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 July 31, 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
-15-
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.
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 films that 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 July 31, 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 July 31, 2005
Consolidated Balance Sheet.
In addition, we have accounts payable and accrued expenses in the
aggregate amount of approximately $920,844, a substantial portion of which are
presently past due.
We also have other obligations that mature or may mature in the next
twelve months.
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.
-17-
Accordingly, approximately $2,900,000 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.
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.
OFF-BALANCE SHEET ARRANGEMENTS
There were no off-balance sheet arrangements during the fiscal year
ended October 31, 2004 or during the nine month period ended July 31, 2005 that
have or are reasonably likely to have a current or future effect 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 investors.
ITEM 3. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, 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.
-18-
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
In May 2005, a creditor converted debt of $531,524 into 531,524 shares
of our common stock in a private placement under Section 4(2) of 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 July 31, 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 in 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).
-19-
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).
4.3 Common Stock Purchase Warrant dated May 5, 2005 issued to IL
Resources, LLC (incorporated by reference to Exhibit 4.1 to
the 8K filed on June 8, 2005).
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).
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).
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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).
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).
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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).
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).
10.39 Secured Convertible Term Note dated May 5, 2005 (incorporated
by reference to Exhibit 10.2 to the 8K filed on June 8,
2005).
10.40 Securities Purchase Agreement dated May 5, 2005 by and
between TriMedia Entertainment Group, Inc. and IL Resources,
LLC (incorporated by reference to Exhibit 10.1 to the 8K
filed on June 8, 2005).
10.41 Securities Pledge Agreement dated May 5, 2005 by and between
TriMedia Entertainment Group, Inc. and IL Resources, LLC
(incorporated by reference to Exhibit 10.3 to the 8K filed on
June 8, 2005).
10.42 Security Agreement dated May 5, 2005 by and between TriMedia
Entertainment Group, Inc. and IL Resources, LLC (incorporated
by reference to Exhibit 10.5 to the 8K filed on June 8,
2005).
10.43 Subsidiary Guaranty dated May 5, 2005 (incorporated by
reference to Exhibit 10.4 to the 8K filed on June 8, 2005).
31.1 Certificate dated September 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.
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31.2 Certificate dated September 14, 2005 of the Principal
Financial 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 September 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 and Shawn Taylor, Chief Financial
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
Date: [/S/CHRISTOPHER SCHWARTZ]
-------------------------------------------
[CHRISTOPHER SCHWARTZ]
Chief Financial Officer
(principal financial officer and principal
accounting officer)