1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER: 1-6739
TEAM COMMUNICATIONS GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 95-4519215
------------------------------- -------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
12300 WILSHIRE BOULEVARD, SUITE 400
LOS ANGELES, CALIFORNIA 90025
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 442-3500
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
On May 24, 1999, the registrant had outstanding 3,657,833 shares of
Common Stock, no par value.
2
TEAM COMMUNICATIONS GROUP, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
ASSETS
March 31
1999
-----------
Cash and cash equivalents $ 1,137,800
Trade receivables, less allowance for doubtful accounts of $337,000 4,295,000
Television programming costs, less accumulated amortization of $10,587,000 13,800,700
Due from officer 170,400
Fixed assets, net 19,900
Other assets 555,400
-----------
Total Assets 19,979,200
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable, accrued expenses and other liabilities $ 1,897,500
Deferred revenue 85,600
Accrued participations 4,070,600
Bank line of credit 850,000
Notes payable 3,227,500
Accrued interest 619,900
Shareholder loan and note payable 450,000
-----------
Total Liabilities 11,201,100
-----------
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value; 2,000,000 shares authorized; no shares
issued and outstanding --
Common stock, no par value; 18,000,000 shares authorized; 3,316,135
issued and outstanding 1,000
Paid in capital 8,607,600
Treasury Stock --
Retained earnings 169,500
-----------
Total shareholders' equity 8,778,100
-----------
Total liabilities and shareholders' equity $19,979,200
===========
The accompanying notes are an integral part of these
consolidated financial statements.
2
3
TEAM COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE 3 MONTHS FOR THE 3 MONTHS
ENDED ENDED
MARCH 31, 1999 MARCH 31, 1998
------------------------------------
Revenues $3,502,000 $1,573,400
Cost of Revenues 2,561,200 379,000
General and administrative expense 385,600 541,500
------------------------------------
Earnings from operations 555,300 652,900
Interest expense 151,300 263,000
Interest income 31,900 48,000
------------------------------------
Earnings before income taxes 435,900 437,900
Provision for income taxes 87,000 --
------------------------------------
Net earnings $ 348,900 $ 437,900
====================================
Basic earnings per common share $ 0.11 $ 0.39
====================================
Weighted average number of shares
outstanding basic 3,149,468 1,131,344
====================================
Diluted earnings (loss) per share $ 0.09 $ 0.24
====================================
Weighted average number of shares
outstanding diluted 3,835,335 1,821,800
====================================
The accompanying notes are an integral part of these
consolidated financial statements.
3
4
TEAM COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
FOR THE 3 MONTH FOR THE 3 MONTH
ENDED ENDED
MARCH 31, 1999 MARCH 31, 1998
-------------------------------------
OPERATING ACTIVITIES:
Net income $ 348,900 $ 437,900
Adjustments to reconcile net income to cash used
for operating activities:
Depreciation and amortization (3,500) 3,600
Amortization of television programming costs 1,497,700 409,300
Allowance for doubtful accounts -- --
Additions to television programming costs (4,279,700) (994,600)
Amortization of notes payable discount 23,600 93,000
Changes in assets and liabilities:
Decrease (increase) in trade receivables 441,700 (949,900)
Increase in organizational costs and other assets (472,700) (150,300)
Increase (decrease) in accounts payable, accrued
expenses and other liabilities 218,000 383,900
Increase (decrease) in deferred revenue (387,300) 49,000
Increase in accrued participations 1,044,800 (16,500)
Increase (decrease) in accrued interest 89,000 70,400
-------------------------------------
Net cash used for operating activities (1,429,500) (664,200)
-------------------------------------
INVESTING ACTIVITIES:
Purchase of fixed assets -- --
Decrease (increase) in due from officer (25,000) (18,900)
-------------------------------------
Net cash provided (used) for investing activities (25,000) (18,900)
-------------------------------------
FINANCING ACTIVITIES:
Proceeds from issuance of note payable and warrants 1,155,300 658,100
Payments on bank line of credit (264,000) --
Principal payment on loan due to shareholder (50,000) --
Issuance of common stock 603,700 --
Sale treasury stocks 34,600 --
Principal payment of notes payable -- (60,000)
-------------------------------------
Net cash provided by financing activities 1,479,600 598,100
-------------------------------------
Net change in cash 110,100 (85,000)
Cash at beginning of period 1,027,700 174,400
-------------------------------------
Cash at end of period $ 1,137,800 $ 89,400
=====================================
The accompanying notes are an integral part of these
consolidated financial statements.
4
5
TEAM COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
Common Stock Retained
---------------------------- Earnings
Number Paid in Treasury Accumulated
of Shares Par Value Capital Stock (Deficit)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1998 2,816,135 $ 1,000 $7,612,700 $ (34,600) $ (179,400)
Net Income for the three months
ended March 31, 1999 -- -- -- -- 348,900
Sale of Treasury Stock 17,000 -- -- 34,600 --
Issuance of shares in connection
with extinguishment of debt 150,000 107,700
Issuance of stock for services 333,000 -- 603,700 -- --
Issuance of warrants -- -- 148,500 -- --
Issuance of debt with beneficial
conversion feature 135,000
---------- ---------- ---------- ---------- ----------
Balance at March 31, 1999 3,316,135 $ 1,000 $8,607,600 $ -- $ 169,500
========== ========== ========== ========== ==========
The accompanying notes are an integral part of these
consolidated financial statements
5
6
TEAM COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PREPARATION-SIGNIFICANT ACCOUNTING POLICIES:
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial statements.
Accordingly, they do not include all of the information and disclosures required
for annual financial statements. These financial statements should be read in
conjunction with the financial statements and related footnotes for the year
ended December 31, 1998, included in the TEAM Communications Group, Inc.
("Company") financial report in the Company's 10-KSB.
In the opinion of the Company's management, all adjustments (consisting of
normal recurring accruals) necessary to present fairly the Company's financial
position as of March 31, 1999, and the results of operations and cash flows for
the three month period ended March 31, 1999 have been included. The results of
operations for the three period ended March 31, 1999, are not necessarily
indicative of the results to be expected for the full fiscal year. For further
information, refer to the financial statements and footnotes thereto included in
the Company's 10-KSB filed for the year ended December 31, 1998.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The Company recognizes revenues from licensing agreements covering entertainment
product when the product is available to the licensee for telecast, exhibition
or distribution, and other conditions of the licensing agreements have been met
in accordance with Statement of Financial Accounting Standards ("SFAS") No. 53,
"Financial Reporting by Producers and Distributors of Motion Picture Films."
The Company, as required by SFAS No. 53, values its film cost at the lower of
unamortized cost or net realizable value on an individual title basis. Film
costs represent those costs incurred in the development, production and
distribution of television projects. These costs have been capitalized in
accordance with SFAS No. 53. Amortization of film cost is charged
6
7
to expense and third party participations are accrued using the individual film
forecast method whereby expense is recognized in the proportion that current
period revenues bear to an estimate of ultimate revenues. These estimates of
revenues are prepared and reviewed periodically by management.
During the three months ended March 31, 1999, as the Company increased its
activities related to film cost production, overhead was capitalized in
accordance with SFAS No. 53 based upon estimates of production related
activities as a percentage of anticipated film cost expenditures during 1999.
Management reviews the overhead rate throughout the year and will adjust the
overhead rate on a quarterly basis, if necessary. During the first quarter,
overhead in the amount of approximately $670,000 was capitalized to film
production costs.
NOTE 2 -- TELEVISION PROGRAM COSTS:
Television program costs as of March 31, 1999, consist of the following:
In process and development $ 668,900
Released, less accumulated amortization 13,131,800
-----------
Total television program costs $13,800,700
===========
NOTE 3 -- LITIGATION AND CONTINGENCIES:
In the ordinary course of business, the Company has or may become involved in
disputes or litigation. On the basis of information available to it, management
believes such contingencies will not have a materially adverse impact on the
Company's financial position or results of operations.
7
8
NOTE 4 -- LINE OF CREDIT --BANK:
The Company maintains a revolving line of credit with Mercantile National Bank.
The credit line is up to $850,000. As of March 31, 1999, the outstanding balance
of the line of credit was $850,000. The line of credit is secured by an
$860,000 certificate of deposit (included in cash and cash equivalents) which
is restricted as to withdrawal.
NOTE 5 -- NOTE PAYABLE:
Notes payable consists of the following at March 31, 1999, carrying value
approximates fair value:
Debentures:
8% secured convertible debentures, net of discounts due 2002 $1,093,900
Private placements:
12% secured notes due August 1999 225,000
10% secured convertible notes due August 1999 283,700
10% secured convertible notes due August 1999 80,000
Promissory notes:
10% secured promissory note due August 1999 250,000
12% secured promissory note due April 1999, past due 150,000
12% secured promissory note due March 1999, past due 150,000
11% unsecured promissory note past due 124,900
12% secured promissory note due April 1999, past due 350,000
18% secured note past due 115,000
12% secured promissory notes due January 2000 175,000
16% secured note due August 1999 30,000
10% secured note due March 1999, past due 200,000
----------
$3,227,500
==========
8
9
On January 30, 1999, the Company sold $850,000 principal amount of 8%
convertible debentures and 85,000 warrants. On March 16, 1999, the Company sold
$500,000 principal amount of 8% convertible debentures and 50,000 warrants.
These convertible debentures have the same terms for conversion. The conversion
price for each debenture will be the lesser of a) 90% of the average per share
market value for five consecutive days prior to the Initial Closing date or b)
85% of the per share market value for the trading day having the lowest per
share market value during the five trading days prior to the conversion date. If
not otherwise converted, the debentures mature on January 27, 2002, and March
15, 2002, respectively.
On March 31, 1999, the Company sold an additional $500,000 principal amount of
8% convertible debentures and 50,000 warrants. These debentures have the same
terms as described above and mature, unless converted prior, on March 30, 2002.
The Company finalized the sale of these debentures and received the proceeds on
April 7, 1999.
NOTE 6 -- GOING CONCERN:
The Company's financial statements for the three months ended March 31, 1999,
have been prepared on a going concern basis which contemplates the realization
of assets and the settlement of liabilities and commitments in the normal course
of business. The Company expects to incur substantial expenditures to produce
television programs and/or acquire distribution rights to television programs
produced by third parties. The Company's working capital plus limited revenue
from the licensing of its current inventory of television programs will not be
sufficient to fund the Company's ongoing operations, including maintaining the
Company's current overhead and maintaining the Company's current development and
marketing activities for the next 12 months. Further, even with the Company
successfully raising additional financing, there is no assurance the Company
will achieve profitability or positive cash flow.
9
10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Conditions and Results of
Operations contains certain "forward-looking statements" as defined in the
Private Securities Litigation Reform Act of 1995. Such statements relating to
future events and financial performance are forward-looking statements involving
risks and uncertainties that are detailed from time to time in our various
Securities and Exchange Commission filings. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of uncontrollable factors. The following discussion should be read in
conjunction with the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this 10-QSB.
RESULTS OF OPERATIONS
For the three months ended March 31, 1999, the Company reported a net income of
approximately $348,900 on total revenues of approximately $3,502,000 compared to
net income of approximately $437,900 on total revenues of approximately
$1,573,400 for the same period ended March 31, 1998. Net income decreased by
approximately $270,200 for the three months ended March 31, 1999, versus the
three months ended March 31, 1998, primarily due to lesser margins on
programming sold in 1999 compared with 1998. Revenue for the period ended March
31, 1999 included approximately $3,100,000 on the completion of seven episodes
of "Total Recall 2070: The Series" and approximately $400,000 on the recognition
of the sale of video rights for "Amazing Tails". Revenue for the period ended
March 31, 1998, included $825,000 from a sale of Latin American rights to an
acquired library of eleven movies of the week and approximately $750,000 from
the recognition of revenue on sales of the second season of the Company's
production "Amazing Tails".
Cost relating to revenues was $2,561,200 for the three months ended March 31,
1999 as compared to $379,000 for the three months ended March 31, 1999. The
costs relate to amortization of production costs of television programming for
which revenue was recognized during the period. Gross profit margin on sales of
television programming for the three months end March 31, 1999 was 27 percent
compared to 76 percent for the period ended March 31, 1998. The lower gross
profit margin for the three months ended March 31, 1999 was due to the Company
selling more expensive, higher profile television drama programming produced and
owned by the Company and its partners as opposed to distributing reality based
programming and programming previously produced and acquired by the Company in
the three months ended March 31, 1998.
General and administrative expense decreased to $385,600 for the three months
ended March 31, 1999 from $541,500 for the same period in 1998. The decrease is
due to the Company's increased activities related to film cost production and
the related approximately $670,000 overhead was capitalized to film product
costs in accordance with SFAS No. 53. The amount of capitalized overhead was
partially offset by increases in salaries primarily due to hiring employees for
development and production of television programming.
10
11
Interest expense was $151,300 for the three months ended March 31, 1999, as
compared to $263,000 for the three months ended March 31, 1998. The decrease is
due to the retirement of debt.
Receivables at March 31, 1999 were $4,295,000. All the receivables as of
March 31, 1999, are receivables from entities domiciled outside the United
States. These receivables represent approximately 21% of the total assets of the
Company. In May 1999, in order to accelerate collections on a receivable
arising from a sale of Latin American film rights to library product, the
Company conveyed these rights to a new distributor. Payments in the aggregate
amount of $250,000 were received in May 1999, with an additional four equal
quarterly installments of $502,250 payable June 15, 1999, September 15, 1999,
December 15, 1999 and March 15, 2000. In as much as the original receivable
amount was, in management's opinion, collectible there was no impact on
operating results for the quarter ended March 31, 1999. Management will
continue to monitor the collection experience of the new contract and if the
installment payments due in June are not received, will then provide reserves
for the remaining contract balance.
LIQUIDITY AND CAPITAL RESOURCES
The entertainment industry is highly capital intensive. As of March 31, 1999, we
had a liquidity deficit of ($5,597,000). Liquidity deficit is defined as cash
and cash equivalents plus accounts receivables (net), and due from officer less
accounts payable, line of credit, notes payable, accrued expenses and other
liabilities, deferred revenue, accrued participation, shareholder loans and
notes payable, and accrued interest.
We continue to finance our operations from our own sales and production
activities, notes payables, lines of credit and loans from our shareholders.
Despite our public offering on July 29, 1998, our operations have been hurt by
ongoing capital shortages caused by a slowness in collecting receivables and the
inability to complete a long term banking relationship. We continue to address
our capital requirements by (i) selling up to $3,000,000 in convertible debt,
$1,850,00 of which has been subscribed for, (ii) entering into a letter of
intent to complete an offering of our common stock on the German Bourse market,
and (iii) entering into an agreement with an investment banking firm to provide
up to $5,000,000 of additional debt as a bridge to the German Offering.
As of May 10, 1999, we had cash and accounts receivable due to be collected with
one year of approximately $3,170,000. As of May 10, 1999 we has indebtedness and
related accrued interest of $5,213,500 including notes payable of $3,325,800 of
which all matures within one year, accrued interest of $587,700, $850,000
outstanding on a revolving line of credit and $450,000 outstanding on a
shareholder loan. Included in such sums are amounts which have already started
to mature. We have approximately $2,655,000 principal amount of notes which
mature over the next 6 months, including $1,090,000 of notes which have matured
and are
11
12
currently in default. We are currently negotiating with these noteholders and
have not yet received any written action regarding the defaults under these
notes. We believe, however, that we will be able to cure these defaults by
either converting the notes to equity or raising additional financings to repay
them. Of the remaining debt, approximately $1,815,000 matures by September 30,
1999. No assurances can be given that we will be able to effectuate any of the
foregoing alternatives, or that if we seek to extend such obligations or
refinance them, that such extensions or refinancing alternatives will be on
terms which are financially advantageous to us.
As we continue to pursue financing alternatives and search for additional
capital as described above, we continue to explore a variety of other financial
alternatives to increase its working capital, including increasing the Company's
line of credit with a commercial bank, or pursuing other types of debt or equity
financing. No assurance can be given that such financing can be obtained or that
it will be on reasonably attractive terms.
Assuming the foregoing defaults are cured, we believe that our current resources
of cash, accounts receivable and available credit line will enable it to operate
at current expenditure levels through July 31, 1999. We further believe that our
projected cash flow from operations, with contemplated sales of certain acquired
programming and collections from those sales, will be sufficient to permit the
Company to conduct its operations as contemplated for only the next 6 months,
through October 30, 1999. Our belief is based upon certain assumptions,
including assumptions regarding the anticipated level of operations and
overhead, the anticipated sales of certain acquired programming, and anticipated
expenditures required for development and production of programming. If sales do
not materialize and financing is not completed by these dates, we will have to
limit our development and production activities, reduce our overhead spending,
restructure debt pay outs and take other cost reduction measures. Further, even
with if we successfully raising additional financing, there is no assurance that
we will be profitable or maintain positive cash flow.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, Statement of Position 98-5 "Reporting on the Costs of Start-Up
Activities" ("SOP 98-5") was issued. SOP 98-5 provides guidance on the financial
reporting of start-up costs and organization costs. We have adopted this SOP and
the adoption of this statement did not materially effect our financial
statements.
12
13
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", effective for fiscal year beginning after
June 15, 1999. WE anticipate that due to our limited use derivative instruments,
the adoption of SFAS No. 133 will not have a material effect on our financial
statements.
In October 1998, the FASB released an exposure draft of the proposed statement
on "Rescission of FASB Statement No. 53, Financial Reporting by Producers and
Distributors of Motion Picture Films." An entity that previously was subject to
the requirements of SFAS No. 53 would follow the guidance in a proposed
Statement of Position, "Accounting by Producers and Distributors if Films." This
proposed Statement of Position would be effective financial statements for
fiscal years beginning after December 15, 1999 and could have a significant
impact on our results of operations and financial position depending on its
final outcome. We have not concluded on its impact given the preliminary stages
of the proposed Statement of Position.
YEAR 2000 COMPLIANCE
As has been widely reported, many computer systems process dates based on two
digits for the year of a transaction and are unable to process dates in the year
2000 and beyond. Since our formation in 1995, we have installed new information
systems which are year 2000 compliant. Although we do not expect year 2000 to
have a material adverse effect on our internal operations, it is possible that
year 2000 problems could have a significant adverse effect on our suppliers and
their ability to service us and to accurately process payments received.
13
14
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
In the ordinary course of business, the Company has or may become involved in
disputes or litigation. On the basis of information available to it, management
believes such contingencies will not have a materially adverse impact on the
Company's financial position or results of operations.
Item 6 - Exhibits and Reports on Form 8-K
Exhibits
27 Financial Data Schedule
Form 8-K
None
14
15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: May 26, 1999
TEAM COMMUNICATIONS GROUP, INC.
By: /s/ DREW S. LEVIN
------------------------------
Drew S. Levin
Chairman of the Board of
Directors and Chief Executive
Officer
By: /s/ TIMOTHY A. HILL
------------------------------
Timothy A. Hill
Chief Financial Officer