UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Quarterly Period ended April 30, 2006
OR
[_] TRANSITION REPORT UNDER 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.
(Exact Name of Small Business Issuer as Specified in its Charter)
DELAWARE 14-1854107
(State or other jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
1080 N. DELAWARE AVENUE, 8TH FLOOR
PHILADELPHIA, PENNSYLVANIA 19125
(Address of principal executive offices) (Zip Code)
(215) 426-5536
(Issuer's Telephone Number, including Area Code)
Check whether the issuer (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 [_]
Indicate by checkmark whether the registrant is a shell company (as defined in
Rule12b-2 of the Exchange Act). YES [_] NO [X].
There were 47,060,111 issued and outstanding shares of the registrant's common
stock, par value $.0001 per share, at June 12, 2006.
TRIMEDIA ENTERTAINMENT GROUP, INC.
INDEX
Page
----
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at April 30, 2006 (unaudited) and
October 31, 2005 (audited).................................... 1
Consolidated Statements of Operations for the Three and Six
Months Ended April 30, 2006 and April 30, 2005 (unaudited).... 2
Consolidated Statements of Cash Flows for the Six Months Ended
April 30, 2006 and April 30, 2005 (unaudited)................. 3
Notes to Consolidated Financial Statements.................... 5
Item 2. Management's Discussion and Analysis.......................... 10
Item 3. Controls and Procedures....................................... 18
Part II. Other Information
Item 1. Legal Proceedings............................................. 18
Item 3. Defaults Upon Senior Securities............................... 18
Item 6. Exhibits and Reports on Form 8-K.............................. 19
(i)
TRIMEDIA ENTERTAINMENT GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30, 2006 AND OCTOBER 31, 2005
April 30, October 31,
2006 2005
------------ ------------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS
Cash $ 41,011 $ 34,703
Miscellaneous receivables 13,255 16,547
Prepaid expenses 174,019 275,075
------------ ------------
228,285 326,325
PROPERTY AND EQUIPMENT - Net 209,887 298,737
CAPITALIZED FILM COSTS 173,223 133,910
OTHER ASSETS 9,625 27,695
------------ ------------
TOTAL ASSETS $ 621,020 $ 786,667
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Term loans $ 3,202,458 $ 2,144,208
Line of credit 2,966,316 --
Accounts payable and accrued expenses 1,343,149 1,223,097
Taxes payable 17,501 17,501
Advances from distributors 189,125 180,954
Due to stockholder 51,382 24,082
Deferred revenue 14,400 3,185
------------ ------------
7,784,331 3,593,027
LONG-TERM DEBT -- 2,881,820
LOANS PAYABLE - STOCKHOLDER 1,100,000 1,100,000
------------ ------------
TOTAL LIABILITIES 8,884,331 7,574,847
------------ ------------
STOCKHOLDERS' DEFICIT
Preferred stock, $0.0001 par value; 20,000,000
shares authorized; none issued and outstanding
in 2006 and 2005 -- --
Common stock, $0.0001 par value; 100,000,000 shares
authorized; 47,060,011 and 45,560,011 shares
issued and outstanding in 2006 and 2005 4,704 4,557
Additional paid-in capital 13,236,377 13,116,527
Accumulated deficit (21,504,392) (19,909,264)
------------ ------------
TOTAL STOCKHOLDERS' DEFICIT (8,263,311) (6,788,180)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 621,020 $ 786,667
============ ============
See accompanying notes to consolidated financial statements.
-1-
TRIMEDIA ENTERTAINMENT GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED APRIL 30, 2006 AND 2005
(UNAUDITED)
Three Months Ended Six Months Ended
April 30, April 30,
------------------------- -------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
NET REVENUE $ 13,857 $ 23,913 $ 45,988 $ 26,175
DIRECT COSTS 190,530 28,420 293,699 143,088
----------- ----------- ----------- -----------
GROSS PROFIT (LOSS) (176,673) (4,507) (247,711) (116,913)
OPERATING EXPENSES 594,901 975,483 1,263,177 3,540,675
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (771,574) (979,990) (1,510,888) (3,657,588)
OTHER INCOME (EXPENSE) (64,999) 4,457 (84,243) 7,308
----------- ----------- ----------- -----------
NET LOSS $ (836,573) $ (975,533) $(1,595,131) $(3,650,280)
=========== =========== =========== ===========
BASIC AND DILUTED
LOSS PER SHARE $ (0.02) $ (0.03) $ (0.03) $ (0.12)
=========== =========== =========== ===========
WEIGHTED AVERAGE
NUMBER OF SHARES 47,060,011 33,062,983 45,892,511 31,334,687
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
-2-
TRIMEDIA ENTERTAINMENT GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED APRIL 30, 2006 AND 2005
(UNAUDITED)
2006 2005
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,595,131) $(3,650,283)
Adjustment to reconcile net loss to net cash
used in operating activities
Foreign currency exchange loss 84,495 --
Common stock issued for services -- 13,940
Amortization of film costs -- 12,092
Depreciation and amortization 88,850 106,496
(Increase) decrease in assets
Miscellaneous receivable 3,292 (5,850)
Film costs (39,313) (24,468)
Prepaid expenses 221,056 (20,456)
Advances to artists -- (407,082)
Other assets 18,070 --
Increase (decrease) in liabilities
Accounts payable and accrued expenses 120,052 138,368
Advance from Sony 8,171 33,456
Deferred revenue 11,215 (1,167)
----------- -----------
Net cash used in operating activities (1,079,243) (3,804,954)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Due to stockholder 27,300 25,246
Purchase of investment in affiliated company -- (25,000)
----------- -----------
Net cash provided by investing activities 27,300 246
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (payments) on long-term debt -- 3,109,585
Net borrowings on demand notes -- 19,500
Net borrowings (payments) on term loans 1,058,251 120,006
Net proceeds from sale of stock -- 427,977
----------- -----------
Net cash provided by financing activities 1,058,251 3,677,068
----------- -----------
NET INCREASE (DECREASE) IN CASH 6,308 (127,640)
CASH - BEGINNING OF YEAR 34,703 185,096
----------- -----------
CASH - END OF PERIOD $ 41,011 $ 57,456
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID DURING THE YEAR FOR:
Interest $ 37,752 $ 40,370
=========== ===========
See accompanying notes to consolidated financial statements.
-3-
TRIMEDIA ENTERTAINMENT GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SIX MONTHS ENDED APRIL 30, 2006 AND 2005
(UNAUDITED)
2006 2005
-------- ----------
SUPPLEMENTAL DISCLOSURES OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Common stock issued for prepaid expenses $120,000 $ --
======== ==========
Warrants issued for prepaid consulting services $ -- $ 338,000
======== ==========
Conversion of term loan to common stock $ -- $ --
======== ==========
Conversion of liabilities to common stock
subscribed:
Accounts payable and accrued expenses $ -- $2,527,830
Due to stockholder -- 5,301
Loan payable - stockholder -- 99,040
-------- ----------
$2,632,171
======== ==========
Warrants issued for investment in affiliated
company $ -- $ 250,000
Common stock issued for investment in
affiliated company -- 780,000
-------- ----------
Investment in affiliated company $ -- $1,030,000
======== ==========
Conversion of preferred stock to common stock:
Preferred stock $ -- $ (100)
Additional paid-in capital -- (900)
-------- ----------
Common stock $ -- $ 1,000
======== ==========
See accompanying notes to consolidated financial statements.
-4-
TRIMEDIA ENTERTAINMENT GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2006
(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 Annual Report on Form 10-KSB for the fiscal
year ended October 31, 2005 which the Company filed with the Securities and
Exchange Commission on March 1, 2006 (the "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 Annual Report should be read in conjunction
with the accompanying interim financial statements. The interim operating
results for the three and six months ended April 30, 2006 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 the following
wholly-owned companies: Metropolitan Recording Inc., Snipes Production, LLC,
Ruffnation Films LLC, Ruffnation Music, Trimedia Film Group, Inc., TM Film
Distribution, Inc., Four Point Play Productions, LLC and Ruffnation Films
Releasing, LLC. As of April 30, 2006, TME was inactive. In February 2006, the
Company formed Ruffnation Films Releasing, LLC, a wholly owned distribution
company. All material inter-company transactions have been eliminated in
consolidation.
Loss Per Share
The Company follows SFAS 128, "Earnings Per Share," resulting in the
presentation of basic and diluted loss per share. The basic loss per share
calculations include the change in capital structure for all periods presented.
For the three and six months ended April 30, 2006 and 2005, the basic and
diluted loss per share are the same, since the assumed conversion of the
convertible preferred stock (in 2005), stock options and warrants would be
antidilutive because the Company experienced a net loss for such periods.
NOTE 2 - GOING CONCERN
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern.
Since its inception, the Company has incurred significant losses and, as of
April 30, 2006 had accumulated losses of $21,504,392. For the six months ended
April 30, 2006, the Company's net loss was $1,595,131. In addition, the Company
had negative working capital of $7,556,046 at April 30, 2006 and experienced
negative cash flow from operations of $1,079,243 for the six months ended April
30, 2006. 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
APRIL 30, 2006
(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 $7,268,774 as of April 30, 2006. The Company has granted security
interests in substantially all of its assets to secure its obligations to repay
approximately $6,168,774 of this indebtedness. Accordingly, the Company will
require a significant amount of cash to fund the present operations and to
continue to grow the business. As the Company's operations grow, the Company's
financing requirements are expected to grow proportionately and the Company
projects the continued use of cash in operating activities for the foreseeable
future. Therefore, the Company is dependent on continued access to external
sources of financing. The current financing strategy is to pursue loans and to
sell equity securities to raise a substantial amount of working capital. The
Company also plans to leverage investment in film and music productions through
operating credit facilities, co-ventures and single-purpose production
financing. The Company plans to obtain financing commitments, including, in some
cases, foreign distribution commitments to cover, on average, at least 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 to raise at least
$10,000,000 in order to meet the anticipated cash requirements through April 30,
2007. 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 2006 to meet expected negative operating cash flows.
NOTE 3 - CONVERTIBLE NOTE RECEIVABLE
On March 13, 2006, the Company converted a $250,000 promissory note receivable
from Pure Games, Inc. into 250,000 shares of common stock of Pure Games, Inc.
This note receivable was written-off during the year ended October 31, 2005. The
converted shares currently do not have a determinable value and have not been
recorded on the balance sheet.
NOTE 4 - LOAN PAYABLE - STOCKHOLDER
Loans payable - stockholder consist of an unsecured demand note payable to
Christopher Schwartz, accruing interest at 7% per annum. Interest expense,
associated with this note for both the six months ended April 30, 2006 and 2005
was $38,500. Christopher Schwartz does not intend to call this note during the
next fiscal year and therefore the note is reflected on the balance sheet as a
non-current liability.
-6-
TRIMEDIA ENTERTAINMENT GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2006
(UNAUDITED)
NOTE 5 - TERM LOANS
During the six months ended April 30, 2006, the Company borrowed approximately
$1,058,000 in additional funds as part of a convertible note payable entered
into with a third party lender in May 2005. Interest only, at 12% per annum, is
due monthly with outstanding principal to be paid in a lump sum on May 30, 2006.
The maturity date has been extended through October 31, 2006. 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. As of April 30, 2006, approximately $222,340
of interest is in arrears and recorded as part of accrued expenses.
NOTE 6 - LINE OF CREDIT
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 in January 2007. In December 2004 and January 2005,
TM Film Distribution, Inc. was advanced an aggregate of (pound)1,628,000 (U.S.
$2,881,820) 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
loss, associated with the outstanding line of credit, of $84,495 and $-0- for
the six months ended April 30, 2006 and 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 7 - STOCKHOLDERS' EQUITY
In December 2005, the Company issued 1,500,000 shares of its common stock in
exchange for a one year consulting agreement valued at $120,000.
NOTE 8 - INCOME TAXES
There is no income tax benefit for the losses for the three and six months ended
April 30, 2006 and 2005 since management has determined that the realization of
the net deferred tax asset is not assured and has created a valuation allowance
for the entire amount of such benefits.
NOTE 9 - 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.
-7-
TRIMEDIA ENTERTAINMENT GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2006
(UNAUDITED)
NOTE 9 - BUSINESS SEGMENTS (Continued)
Summarized financial information concerning the Company's reportable segments,
which are based in the United States, is reflected in the following table:
Recording Film Segment Consolidated
Studio Production Total Corporate Total
--------- ---------- ---------- ---------- ------------
Three Months Ended
April 30, 2006
Net sales $ -- $ 13,857 $ 13,857 $ -- $ 13,857
Loss from operations 239,573 64,470 304,043 467,531 771,574
Total assets 194,683 288,010 482,693 138,327 621,020
Depreciation and amortization 43,205 1,220 44,425 -- 44,425
Capital expenditures -- -- -- -- --
Three Months Ended
April 30, 2005
Net sales $ -- $ 23,913 $ 23,913 $ -- $ 23,913
Loss from operations 55,835 104,374 160,209 819,781 979,990
Total assets 755,801 264,093 1,019,894 1,347,992 2,367,886
Depreciation and amortization 51,625 1,623 53,248 -- 53,248
Capital expenditures -- -- -- -- --
Recording Film Segment Consolidated
Studio Production Total Corporate Total
--------- ---------- ---------- ---------- ------------
Six Months Ended
April 30, 2006
Net sales $ -- $ 45,988 $ 45,988 $ -- $ 45,988
Loss from operations 387,948 117,967 505,915 1,004,973 1,510,888
Total assets 194,683 288,010 482,693 138,327 621,020
Depreciation and amortization 86,411 2,439 88,850 -- 88,850
Capital expenditures -- -- -- -- --
Six Months Ended
April 30, 2005
Net sales $ 1,095 $ 25,080 $ 26,175 $ -- $ 26,175
Loss from operations 113,339 1,638,713 1,752,052 1,905,536 3,657,588
Total assets 755,801 264,093 1,019,894 1,347,992 2,367,886
Depreciation and amortization 103,250 3,246 106,496 -- 106,496
Capital expenditures -- -- -- -- --
-8-
TRIMEDIA ENTERTAINMENT GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2006
(UNAUDITED)
NOTE 9 - BUSINESS SEGMENTS (Continued)
Three Months Ended Six Months Ended
April 30, April 30,
------------------- -----------------------
Reconciliations 2006 2005 2006 2005
- ---------------------------- -------- -------- ---------- ----------
Total segment operating loss $304,043 $160,209 $ 505,915 $1,752,052
Corporate overhead expenses 467,531 819,781 1,004,973 1,905,536
Other income (loss) 64,999 (4,457) 84,243 (7,308)
-------- -------- ---------- ----------
Total consolidated net loss $836,573 $975,533 $1,595,131 $3,650,280
======== ======== ========== ==========
NOTE 10 - SUBSEQUENT EVENT
On June 1, 2006, the Company issued Stock Purchase Warrants to purchase 100,000
shares of its common stock at an exercise price of $0.50 per share for
consulting services.
-9-
CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-QSB includes forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. We have based
these forward-looking statements on our current expectations and projections
about future events. These forward-looking statements are subject to known and
unknown risks, uncertainties and assumptions about us that may cause our actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking statements. In some
cases, you can identify forward-looking statements by terminology such as "may,"
"will," "should," "could," "would," "expect," "plan," anticipate," believe,"
estimate," continue," or the negative of such terms or other similar
expressions. Factors that might cause or contribute to such a discrepancy
include, but are not limited to, those in our other Securities and Exchange
Commission filings, including our Annual Report on Form 10-KSB filed on March 1,
2006. 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. 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. In Fiscal 2005, we
re-released Snipes as a combination DVD/CD package through Charles Street and we
distributed Train Ride, a film produced by a third party and released a CD by
our recording artists, the Spin Doctors. In March 2006, we released a CD by our
music artist Kulcha Don through our distribution agreement with Fontana
Distribution LLC, a division of Universal Music Group. In Fiscal 2006, we
anticipate assisting Gerry Anderson Productions PLC in the multimedia
exploitation of the New Captain Scarlet series, commencing production of our new
movie Four Point Play and releasing a CD by our music artist Kristy Frank
through our distribution agreement with Fontana Distribution LLC. We also plan
to market and distribute third party film and music productions.
We presently do not have sufficient cash to implement our business plan. We
have experienced this lack of liquidity throughout Fiscal 2004, Fiscal 2005 and
the first six months of Fiscal 2006, 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 nine to twelve months in order to
complete production of additional feature films or music projects for release
and distribution. Accordingly, in order to generate revenues in Fiscal 2006, we
may need to rely on other sources of revenue such as acquiring the rights to
distribute and exploit feature films, music projects and other entertainment
content produced by third parties. If we are not successful in obtaining
additional financing, we will not be able to complete the projects we have
planned for Fiscal 2006 or continue to implement our business plan.
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and the related notes thereto included in
this Form 10-QSB.
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
-10-
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; and
o collection of the arrangement fee is reasonably assured.
If we do not meet any one of the preceding conditions, then we will defer
recognizing revenue until all of the conditions are met.
Capitalized Film Costs
Costs of making motion picture films that are produced for sale to third
parties are stated at the lower of cost, less accumulated amortization, or fair
value. In accordance with SOP 00-2, we expense film costs based on the ratio of
the current period gross revenues to estimated total gross revenues from all
sources on an individual production basis. As of April 30, 2006, the film costs
of $173,223 which we have recorded on our balance sheet were incurred in
connection with the production of seven films that are in development and
pre-production. We will commence the amortization of these capitalized film
costs upon the distribution of their respective DVDs. Once revenues from a film
commence, the decision as to what portion of the costs to amortize in a given
period is dependent on the estimate of total gross revenues from that film. A
lower estimate will result in faster amortization, while a higher estimate may
result in a disproportionate amortization in later periods if actual revenues
are lower than initial estimates.
Artist Compensation Costs
The amount of royalties earned by artists, as adjusted for anticipated
returns, is charged to expense in the period in which the sale of the record
takes place. Advance royalty paid to an artist is reported as an asset only if
the past performance and current popularity of the artist to whom the advance is
made provide a sound basis for estimating that the amount of the advance will be
recoverable from future royalties earned by the artist. Capitalized advances are
charged to expense as subsequent royalties are earned by the artist. Any portion
of capitalized advances that appear not to be fully recoverable from future
royalties to be earned from the artist are charged to expense during the period
in which the loss becomes evident.
-11-
RESULTS OF OPERATIONS
Three Months Ended April 30, 2006 (Fiscal 2006-Second Quarter) vs. Three Months
Ended April 30, 2005 (Fiscal 2005-Second Quarter)
Fiscal 2006 - Fiscal 2005 -
Second Quarter Second Quarter
($) ($) $ Change
-------------- -------------- --------
Net Loss 836,573 975,533 (138,960)
Net Loss from Operations 771,574 979,990 (208,416)
Net Revenue 13,857 23,913 (10,056)
Direct Costs 190,530 28,420 162,110
Operating Expenses 594,901 975,483 (380,582)
Other Income (Expense) (64,999) 4,457 (69,456)
The $208,416 decrease in Net Loss From Operations was primarily due to a
decrease in Operating Expenses and Net Revenue offset by an increase in Direct
Costs.
The $10,056 decrease in Net Revenues primarily resulted from the decrease
in Net Revenue realized from the distribution of the Snipes DVD and the Train
Ride DVD in the current period.
The $162,110 increase in Direct Costs was a result of costs incurred in
connection with the development of new artists. During Fiscal 2006 - Second
Quarter, we incurred development costs in connection with Kulcha Don and Kristy
Frank, recording artists for which we did not incur development costs during
Fiscal 2005 - Second Quarter. 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 $380,582 decrease in Operating Expenses was primarily due to a $104,068
decrease in professional fees, a $71,593 decrease in consulting fees, a $43,959
decrease in miscellaneous expenses, a $47,577 decrease in travel expenses and a
$212,354 decrease in salary and related costs due to a reduction in costs
related to our European office and other payroll related expenses offset by an
increase of $98,969 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 $69,456 increase in Other Expense was primarily due to the fluctuation
in the foreign currency exchange rate related to a line of credit facility.
-12-
Six Months Ended April 30, 2006 vs. Six Months Ended April 30, 2005
Fiscal 2006 - Fiscal 2005 -
Six Months Six Months
($) ($) $ Change
------------- ------------- ----------
Net Loss 1,595,131 3,650,280 (2,055,149)
Net Loss from Operations 1,510,888 3,657,588 (2,146,700)
Net Revenue 45,988 26,175 19,813
Direct Costs 293,699 143,088 150,611
Operating Expenses 1,263,177 3,540,675 (2,277,498)
Other Income (Expense) (84,243) 7,308 (91,551)
The $2,146,700 decrease in Net Loss From Operations was primarily due to a
decrease in Operating Expenses and an increase in Net Revenue offset by an
increase in Direct Costs.
The $19,813 increase in Net Revenue primarily resulted from the fact that
Net Revenue was realized from the distribution of the Snipes DVD and the Train
Ride DVD during the first six months of Fiscal 2006.
The $150,611 increase in Direct Costs was a result of the costs incurred
related to the development of new artists. During Fiscal 2006 - Six Months, we
incurred development costs in connection with Kulcha Don and Kristy Frank,
recording artists for which we did not incur development costs during Fiscal
2005 - Six Months. 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 $2,277,498 decrease in Operating Expenses was primarily due to a
decrease of $1,507,018 in fees related to financing activities, a decrease of
$105,000 in overhead related to the European office and operations, a $468,149
decrease in salaries and related costs due to a reduction in costs related to
European office and other payroll related expenses, a decrease of $121,385 in
professional fees due to reduction in European related professional services, a
$109,377 decrease in consulting fees, a $62,112 decrease in office and
miscellaneous expenses and a $108,346 decrease in travel expenses offset by a
$206,113 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 $91,551 decrease in Other Income was primarily due to fluctuation in
the foreign exchange rate related to a line of credit facility.
OFF-BALANCE SHEET ARRANGEMENTS
There were no off-balance sheet arrangements during the three months ended
April 30, 2006 that have, or are reasonably likely to have, a current or future
affect on our financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital
resources that is material to our interests.
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CHANGES IN FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
Fiscal 2006 - Fiscal 2005 -
Six Months Six Months
($) ($) $ Change
------------- ------------- ----------
Cash Flow from Operating Activities (1,079,243) (3,804,954) 2,725,711
Cash Flow from Investing Activities 27,300 246 27,054
Cash Flow from Financing Activities 1,058,251 3,677,068 (2,618,817)
Net cash used in operating activities in Fiscal 2006 - First Six Months was
due primarily to our Net Loss and an increase in capitalized film costs of
$39,313, principally offset by non-cash charges for depreciation and
amortization of $88,850, a foreign currency exchange loss of $84,495, a decrease
in prepaid expenses of $221,056, an increase in accounts payable and accrued
expenses of $120,052 and an increase in advances from distributors of $8,171.
Net cash provided by investing activities in Fiscal 2006-First Six Months
represented advances of $27,300 to us by our principal stockholder.
Net cash provided by financing activities in Fiscal 2006-First Six Months
was due to $1,058,251 advanced to us through term loans. This amount is
significantly less than Fiscal 2005-First Six Months as we did not have any
borrowings on long term debt or proceeds from the sale of common stock in Fiscal
2006-First Six Months.
At April 30, 2006, we had approximately $41,011 in cash. At June 9, 2006,
we had approximately $61,804 in cash. We do not believe that the amount of cash
that we had on hand at June 9, 2006 is sufficient to fund our operations through
June 30, 2007. 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 2006, 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 June 30, 2007. There can be no assurances that we will be
successful in our efforts to raise this amount of additional financing. In the
event that we are unable to raise these funds, we will then be required to delay
our plans to grow our business and we will rely on our net revenues to fund our
operations.
We derived a significant portion of our net revenues in Fiscal 2003 and
Fiscal 2004 from our Charles Street joint venture related to the sale of the
feature film Snipes, which was released on DVD/Home Video by Sony BMG on
February 25, 2003. In Fiscal 2004, there was a significant decrease in net
revenues due to the decline in revenues from Snipes and our failure to release
any new movies or 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 was the first film 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 $1,149,584 in Net Revenues
which we generated in Fiscal 2003 and the $239,070 of Net
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Revenues which we generated in Fiscal 2004 represented revenues primarily from
sales to rental outlets and limited retail sales of the feature film Snipes.
Through March 31, 2006, the last quarter for which a report has been
received, Sony BMG has reported gross billings for Charles Street related to the
release of the Snipes DVD/Home Video of $2,301,587 and net profits of
$1,046,368, of which our portion is $860,828. We did not receive any payments
from Sony BMG related to Snipes in Fiscal 2005 or during Fiscal 2006-Six Months.
In November 2004, Snipes was re-released as a combination DVD-CD package in the
US, UK and various European territories. Although we may receive additional
payments from Charles Street in Fiscal 2006 related to sales of Snipes, there
can be no assurance of the amount or timing of such payments. Additionally,
through March 31, 2006, the last quarter for which a report has been received,
Sony BMG has reported gross billings for Charles Street related to the release
of the TrainRide DVD/Home Video of $205,932 and net profits of $88,898 of which
our portion is $82,359. In Fiscal 2006, we have received aggregate payments of
$28,870 from Charles Street related to sales of TrainRide. Although we may
receive additional payments from Charles Street in Fiscal 2006 related to sales
of TrainRide, there can be no assurance of the amount or timing of such
payments. 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 or TrainRide.
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.
As we presently do not generate sufficient cash flow from our operations to
fund our working capital needs, we have been raising the funds we need to
operate our business through the offer and sale of our securities.
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 1,628,055 pounds sterling (the "Facility")
that TM Film Distribution may draw down from time to time. To date, TM Film
Distribution has drawn down 1,625,000 pounds sterling of this Facility. Interest
accrues for each advance under the Facility at the rate of LIBOR on the date of
the advance plus 0.375%. Pursuant to the Loan Agreement, the lender determines
LIBOR in its sole discretion by reference to either (i) the relevant Reuters
page at or about 11:00 a.m. (London time) on the date an advance is drawn or
(ii) if no such rate can be ascertained at the relevant time, the rate offered
to lender by any leading bank in the London inter-bank market at or about 11:00
a.m. (London time) on the date an advance is drawn. Amounts drawn under the
Facility are due for repayment on that date which is 24 months after the date on
which the final draw down of the Facility is made. Interest is payable quarterly
during the term that each advance is outstanding. TM Film Distribution's
obligation to repay all loan amounts under the Facility is secured by a Deed of
Charge Over Cash and a Deed of Charge Over Deposit each created in favor of the
lender and covering funds held on deposit by TM Film Distribution with the
lender. These funds are part of the Printing and Advertising fund established by
KMM on behalf of TM Film Distribution, as more fully described in Business of
the Company - Film Division - Keydata Media & Marketing 1 LLP Distribution
Arrangement in our Annual Report on Form 10-KSB filed on March 1, 2006. On
December 27, 2004, we received a payment of $1,468,035 from TM Film Distribution
as payment of costs and expenses in connection with its formation and its
activities in connection with the structuring of transactions with KeyData Media
& Marketing 1, LLP.
-15-
In August 2004, we engaged Brockington Securities, Inc. as our financial
advisor and investment banker pursuant to which we issued them 250,000 shares of
our common stock. In January 2005, they assisted us in the completion of a
private placement offering pursuant to which we raised gross proceeds of
$300,000 and paid Brockington a commission of $30,000.
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 group of Sony, and they have negotiated a term sheet 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.
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,
GAP is obligated to purchase an aggregate of 1,538,462 shares of our common
stock in a private placement offering at an aggregate purchase price of
$1,000,000. During the period from September 2004 through January 2005, GAP
purchased 1,505,539 of these shares and remains obligated to purchase 32,923
shares of our common stock. 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.
On May 5, 2005, we entered into a Securities Purchase Agreement with IL
Resources, LLC ("IL Resources") pursuant to which we issued to IL Resources a
Secured Convertible Note in the aggregate principal amount of $1,590,000 and a
warrant to purchase 2,000,000 shares of our common stock. During Fiscal
2006-First Quarter, this Note was amended to provide for additional advances.
During Fiscal 2006-Six Months we received an additional $855,750 loan on the
same terms and conditions from this lender. This Note accrues interest at the
rate of 12 percent per annum and had a maturity date of May 30, 2006. We were
unable to make the principal payment or the payment of accrued interest due on
this date. On June 13, 2006, the promissory note was amended and restated to
increase the principal amount to $2,924,688, reflecting all advances that we
received from IL Resources and all accrued interest thereon through that date,
and to extend the maturity date to October 31, 2006. In exchange for the
extension of the maturity date and the waiver of any default under the original
promissory note, we agreed to issue 500,000 shares of our common stock to the
lender. Accordingly, the principal balance of this amended and restated
promissory note is now convertible into a total of 5,849,376 shares of our
common stock at a conversion price of $0.50, subject to certain adjustments.
On or about May 6, 2005, eight of our creditors agreed to exchange an
aggregate of $3,268,162 in indebtedness owed to them for shares of our common
stock at a price of $1.00 per share, for a total of 3,268,162 shares.
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 June 9, 2006 was approximately $126,708 and accrued
interest was approximately $20,000. 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 that occurred 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. 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
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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 in our April 30, 2006 Consolidated
Balance Sheet.
In addition, we have accounts payable and accrued expenses in the aggregate
amount of approximately $1,343,149 that are presently past due.
We also have other obligations that mature or may mature in the next twelve
months.
On April 11, 2003, Snipes cancelled a $400,000 promissory note, a $25,000
promissory note and $10,000 promissory note and issued an amended promissory
note in the principal amount of $435,000 to third party lenders. The amended
promissory note accrued interest at the rate of 35% per annum and was due to
mature on October 31, 2003. However, on October 30, 2003 the promissory note was
amended to extend the maturity date from October 31, 2003 until April 30, 2004.
On June 2, 2004, the promissory note was further amended to extend the maturity
date from April 30, 2004 until September 30, 2004. As of June 2, 2004, the
outstanding principal and accrued interest on the promissory note was $654,906.
For the period from June 2, 2004 until September 30, 2004, the interest rate on
the promissory note was reduced from 35% to 20% and accrued on the balance of
$654,906. In June 2004, we received short-term loans in the aggregate amount of
$90,000 from a third party lender. These obligations were documented by
promissory notes that accrued interest at the rate of 10% per annum. These
promissory notes were scheduled to mature on July 1, 2005. On May 1, 2005, an
outstanding balance of $1,041,524 related to these and other third party loans
was repaid by the issuance of a promissory note in the amount of $510,000 and
conversion of the remaining $531,524 into shares of our common stock at a
conversion price of $1.00 per share. This promissory note accrues interest at
the rate of 20 percent per annum. The original maturity date of this promissory
note was May 9, 2006. We were not able to make the principal payment or payment
of accrued interest due on this date. On June 13, 2006, the lenders agreed to
extend the maturity date of this promissory note to October 31, 2006, at which
time all principal and accrued interest shall be due, and to waive the
application of the default interest rate with respect to this loan.
As described above, repayment of the loan in the principal amount of
$2,924,688 from IL Resources is due on October 31, 2006. In addition, TM Film
Distribution, Inc.'s loan facility from Fairbairn Private Bank matures in
January 2007.
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 which
accrues interest at the rate of 7% per annum. In addition, in Fiscal 2005, Mr.
Schwartz, extended short-term loans in an aggregate principal amount of $171,682
to us and our operating subsidiaries. We have repaid $253,837 of the principal
amount of these loans.
Accordingly, approximately $8,000,000 from the net proceeds of any
additional financing will 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
-17-
from that financing together with cash flow from operations, including our share
of future film production under the Charles Street co-venture with Sony, will be
available to meet known operational cash requirements. In addition, we believe
that our improved liquidity position will enable us to qualify for new lines of
credit on an as-needed basis.
These matters raise substantial doubt about our ability to continue as a
going concern. We will need to raise significant additional funding in order to
satisfy our existing obligations and to fully implement our business plan. There
can be no assurances that such funding will be available on terms acceptable to
us or at all. If we are unable to generate sufficient funds, particularly at
least $10,000,000, then we may be forced to cease or substantially curtail
operations.
We do not pay and do not intend to pay dividends on our common stock. We
believe it to be in the best interest of our stockholders to invest all
available cash in the expansion of our business. Accordingly, our stockholders
may only receive income from the appreciation in our stock price, if any.
ITEM 3. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of April 30, 2006, we carried out an evaluation of the effectiveness of
the design and operation of our "disclosure controls and procedures" (as defined
in the Exchange Act Rules 13a-15(e) and 15d-15(e)) under the supervision and
with the participation of our management, including Christopher Schwartz, our
Chief Executive Officer and Chief Financial Officer. Based upon that evaluation,
Mr. Schwartz concluded that our disclosure controls and procedures are
effective.
Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed in our reports
filed or submitted under the Exchange Act are recorded, processed, summarized
and reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in our reports filed under the Exchange Act is
accumulated and communicated to management to allow timely decisions regarding
required disclosure.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We know of no pending legal proceedings to which we or any of our
subsidiaries are a party that are material or potentially material, either
individually or in the aggregate. We are from time to time, during the normal
course of our business operations, subject to various litigation claims and
legal disputes. We do not believe that the ultimate disposition of any of these
matters will have a material adverse effect on our consolidated financial
position, results of operations or liquidity.
ITEM 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 in October 2002 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 June 9, 2006, the total outstanding
balance of this loan, including accrued interest, was approximately $146,708. As
we presently do not have sufficient cash on hand to repay this loan, if the bank
elects to
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demand repayment, then we may be faced with the bank's election to sell a
sufficient amount of the assets of Metropolitan to raise the funds necessary to
repay this loan. Any such action would have a material adverse effect on our
operations. Since Metropolitan did not receive a waiver from the bank, the total
outstanding amount of this note is reflected as a current liability on our April
30, 2006 Consolidated Balance Sheet.
On May 1, 2005, an outstanding balance of $1,041,524 related to a series of
third party loans was repaid by the issuance of a promissory note in the amount
of $510,000 and conversion of the remaining $531,524 into shares of our common
stock at a conversion price of $1.00 per share. The original maturity date of
this promissory note was May 9, 2006. We were not able to make the principal
payment of $510,000 or payment of the accrued interest due on this date, which
was an event of default under the promissory note. On June 13, 2006, the lenders
agreed to extend the maturity date of this promissory note to October 31, 2006,
at which time all principal and accrued interest shall be due, and to waive the
application of the default interest rate with respect to this loan. Accordingly,
as of the date of this report, no amount under this loan is in arrears.
The promissory note that we issued to IL Resources had a maturity date of
May 30, 2006. We were unable to make the principal payment or the payment of
accrued interest due on this date, which was an event of default under this
promissory note. On June 13, 2006, the promissory note was amended and restated
to increase the principal amount to $2,924,688 and to extend the maturity date
to October 31, 2006. In exchange for the extension of the maturity date and the
waiver of any default under the original promissory note, we agreed to issue
500,000 shares of our common stock to the lender. Accordingly, as of the date of
this report, no amount under this loan is in arrears.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
2.1 Share Exchange Agreement and Plan of Reorganization dated as of October 2,
2002 by and among US Patriot, Inc. and Christopher Schwartz (incorporated
by reference to Exhibit 1.1 of Current Report on Form 8-K filed on October
18, 2002).
2.2 Agreement and Plan of Merger between US Patriot, Inc. and TriMedia
Entertainment Group, Inc. (incorporated by reference to Exhibit 3.4 of
Current Report on Form 8-K filed on December 2, 2002).
2.3 Articles of Merger as filed in the State of South Carolina (incorporated
by reference to Exhibit 2.1 of Current Report on Form 8-K filed on
December 2, 2002).
2.4 Certificate of Merger as filed in the State of Delaware (incorporated by
reference to Exhibit 3.5 of Current Report on Form 8-K filed on December
2, 2002).
3.1 Certificate of Incorporation of TriMedia Entertainment Group, Inc.
(incorporated by reference to Exhibit 3.1 of Current Report on Form 8-K
filed on December 2, 2002).
3.2 Certificate of Amendment of Certificate of Incorporation Before Payment of
Capital of TriMedia Entertainment Group, Inc. (incorporated by reference
to Exhibit 3.2 of Current Report on Form 8-K filed on December 2, 2002).
3.3 By-laws of TriMedia Entertainment Group, Inc. (incorporated by reference
to Exhibit 3.3 of Current Report on Form 8-K filed on December 2, 2002).
4.1 Specimen Stock Certificate (incorporated by reference to Exhibit 4.1 to
the Annual Report on Form 10-KSB for the fiscal year ended October 31,
2002 filed on March 17, 2003).
4.2 Certificate of Designations of Series A Convertible Preferred Stock of US
Patriot, Inc. (incorporated by reference to Exhibit 4.2 to the Annual
Report on Form 10-KSB for the fiscal year ended October 31, 2002 filed on
March 17, 2003).
10.1 Employment Agreement dated as of October 9, 2002 by and between US
Patriot, Inc. and Christopher Schwartz (incorporated by reference to
Exhibit 10.1 to the Annual Report on Form 10-KSB for the fiscal year ended
October 31, 2002 filed on March 17, 2003).
10.2 Co-Venture Agreement between Sony Music, a Group of Sony Music
Entertainment, Inc., Ruffnation Films, LLC and Christopher Schwartz dated
as of September 20, 2002 (incorporated by reference to Exhibit 10.2 to the
Annual Report on Form 10-KSB for the fiscal year ended October 31, 2002
filed on March 17, 2003).
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10.3 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).
10.4 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).
10.5 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).
10.6 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).
10.7 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).
10.8 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).
10.9 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).
10.10 Loan Agreement between Metropolitan Recording, Inc. and Founders Bank
dated August 21, 2001 (incorporated by reference to Exhibit 10.19 to the
Annual Report on Form 10-KSB for the fiscal year ended October 31, 2002
filed on March 17, 2003).
10.11 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).
10.12 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).
10.13 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).
10.14 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).
10.15 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).
10.16 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).
10.17 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).
10.18 Distribution Agreement between New Line Television, Inc. and Ruffnation
Films LLC dated November 26, 2002 (incorporated by reference to Exhibit
10.7 of the Quarterly Report on Form 10-QSB filed on September 17, 2003).
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10.19 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).
10.20 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).
10.21 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).
10.22 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).
10.23 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).
10.24 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).
10.25 Stock Purchase Warrant to purchase 50,000 shares of common stock issued to
Larry Feinstein dated June 1, 2004 (incorporated by reference to Exhibit
10.1 of the Quarterly Report on Form 10-QSB filed on September 14, 2004).
10.26 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).
10.27 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).
10.28 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).
10.29 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).
10.30 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).
10.31 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).
10.32 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).
10.33 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).
10.34 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).
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10.35 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).
10.36 Secured Convertible Term Note dated May 5, 2005 (incorporated by reference
to Exhibit 10.2 to the Current Report on Form 8-K filed on June 8, 2005).
10.37 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 Current Report on Form 8-K filed on June
8, 2005).
10.38 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 Current Report on From 8-K filed on June 8, 2005).
10.39 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 Current Report on Form 8-K filed on June 8, 2005).
10.40 Subsidiary Guaranty dated May 5, 2005 (incorporated by reference to
Exhibit 10.4 to the Current Report on Form 8-K filed on June 8, 2005).
10.41 Consulting Agreement dated December 20, 2005 by and between TriMedia
Entertainment Group, Inc. and Walt Beach (incorporated by reference to
Exhibit 10.41 to the Annual Report on Form 10-KSB filed on March 1, 2006).
31.1 Certification dated June 14, 2006 pursuant to Exchange Act Rule 13a-14(a)
or 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 by Christopher Schwartz, Chief Executive Officer and Chief
Financial Officer.
32.1 Certification dated June 14, 2006 pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 made by
Christopher Schwartz, Chief Executive Officer and Chief Financial Officer.
(b) We did not file any Current Reports on Form 8-K during the fiscal
quarter ended April 30, 2006.
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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: June 14, 2006 /s/Christopher Schwartz
--------------------------------------
Christopher Schwartz
Chief Executive Officer and Chief
Financial Officer
(principal financial officer and
principal accounting officer)