Maybe there is no business like show business. How else do you explain recent activity in shares of Magellan Filmed Entertainment, Inc? On Friday, January 5, 2000, more than 14 million shares of Magellan were traded on the OTC Bulletin Board. That made it the fourth most active Bulletin Board stock – for the second consecutive day. Quite a notable feat for a Company that has no current assets, no working capital and no revenues.
Why have so many Magellan shares been changing hands? And where are those shares coming from? These questions come immediately to mind – even if the answers seem elusive. Magellan says it plans to produce and distribute “filmed entertainment products.” First up is a relatively low-budget movie called “Rennie’s Landing” that was filmed last summer, and which Magellan hopes to release in the second quarter of 2001. But is there any basis for investors to conclude that “Rennie’s Landing” will prove successful, or that the Company can develop, produce, release and distribute other films – and make a profit? After all, for every “sleeper” hit like “The Blair Witch Project” there are hundreds of projects that never make it past the drawing board – including those that are filmed but are never released or sufficiently distributed.
With no track record, and no cash, Magellan’s prospects in a highly competitive industry remain uncertain. Why then have over 110 million shares of Magellan stock been traded since Thanksgiving? And why, in the face of that volume, did the price of that stock remained virtually unchanged throughout that period - until January 5th, when shares increased by 41% from 1.5 to 1.9 cents per share?
Something’s happening here. What it is, however, ain’t exactly clear.
Predicting A Hit!
Perhaps some of the recent interest in Magellan can be traced to an e-mail distributed over the Internet, on January 4th, by a service calling itself “Microcap Monthly.” Since Thanksgiving, Magellan shares had traded at approximately 1.5 cents, with negligible price changes despite brisk volume. Now, “Microcap Monthly” says it would not “be surprised with a spike to .10 in the very near future.” Why? As the e-mail put it, “[t]he news of a film deal would shoot this entertainment stock into orbit. They are current on all theit (sic) filings. They filed an 8-k today! So we think the potential for a 1000% gain is worth a little cash to invest in MFLE!”Despite all of those exclamation points, these “factors” offered little basis for investors to conclude that any projects by Magellan were likely to prove successful. As far as we can determine, Magellan has not announced any new “film deal” that is close enough to fruition, or profitability, to alter the immediate financial picture for Magellan. And while it is commendable that Magellan is current in its filings, isn’t that what we are supposed to expect from public companies?
Then there is that January 4th Form 8-K that “Microcap Monthly” found so noteworthy. That filing contains financial statements for one of the Company’s recent acquisitions, Nickel Palace, Inc. Unfortunately, those financials provides little basis for “Microcap Monthly’s” optimistic projections. They show that Nickel Palace had no cash, no revenues, and assets consisting of a $1 million convertible note that has now been assumed by Magellan.
Is there more to the story? How did Magellan emerge from relative obscurity and find a place among the OTC Bulletin Board volume leaders?
Hi Lineage
The public company that is now called Magellan has had an eventful twelve months. The Company became public in January 2000, as Hi Liner Group, Inc., a “clean public shell” that had been formed for the purpose of either merging with or acquiring “an operating company with operating history and assets.” For its part, Hi-Liner had no business, no assets and no revenues. It had issued one million shares to insiders, but none of those shares had been registered.How did Hi Liner fare in its quest for an operating business with “history and assets?” On March 31st, Hi Liner acquired a Florida corporation named Storm High Performance Sound Corp. in a reverse merger that left Storm as the surviving entity. At the time of the merger, Storm disclosed assets that included $130 in cash, $8,058 in inventory and “$60,562 in “goodwill.” For the year 1999, Storm had revenues of under $4,000.
That is not much in the way of tangible assets. As it turned out, there was not much “operating history” either. Storm originally set out to manufacture and market “high end” car stereo systems, but shut down those operations in 1999 after they proved unsuccessful. Then, on January 29, 2000, Storm acquired North Coast Productions, Inc., a private company that had been formed in December 1999 – just one month earlier – to produce and distribute films for the entertainment industry. That transaction (another reverse-merger) left North Coast in control of Storm. All of these reverse-mergers may seem somewhat confusing but, at the end of the day, the former North Coast shareholders were in charge and owned 25 million shares of stock in the public entity (formerly known as Hi Liner).
As a result of these transactions, the public company that started out as Hi Liner was now in the movie business. That certainly sounds sexy, but, in this case, what did it really mean? An April 4, 2000 Form 8-K filed by the Company indicated that North Coast was “in the process of establishing itself as a producer and distributor of filmed entertainment products.” At that point, however, it had not produced or distributed any films. After all, it had been in business for only three months or so.
Did the Company possess the expertise necessary to develop its business plan? The 8-K contained biographies for Patrick F. Charles and Terrence K. Pickens, the two individuals who had served as officers and directors of North Coast and Storm, and who would assume similar roles at the Company. Those biographies did not indicate any recent involvement in the motion picture industry by either man. They did, however, reveal that both Charles and Pickens were also serving as President and Executive Vice-President, respectively, of another OTC Bulletin Board company at the time. That company, Saratoga International Holdings, Inc., has no obvious connection to filmmaking. It markets pre-paid telephone cards.
Would Charles and Pickens be able to devote sufficient time to the Company in light of their existing obligations to Saratoga? The Form 8-K did not say. How would the Company make its leap into the movie industry? There were more mergers and acquisitions on the horizon.
Seeking Cinema Verite
Although it had neither produced nor distributed any films, North Coast had obtained options to acquire another two companies. One was an entity called Nickel Palace, Inc. of Hollywood, California. The other was Magellan Entertainment of Malibu, California – which is not to be confused with Magellan Filmed Entertainment, Inc., the public company. (To confuse matters further, the Company has occasionally referred to Magellan Entertainment as either Magellin (with an i) or True Fiction, Inc. We will simply call it MEC).According to the April 4, 2000 Form 8-K, MEC owned the rights to a script called “Tuesday’s Letters,” which was scheduled for production in the summer of 2000 and Nickel Palace owned the rights to a project known as “Rennie’s Landing.” The Company also expected “Rennie’s Landing” to be filmed in the summer of 2000, at a budget of $980,000.
The Company would eventually proceed with its acquisition of Nickel Palace and MEC, but not before it moved its corporate offices from Florida to Nevada, and changed its name to Magellan Filmed Entertainment, Inc. It made that switch in August 2000, citing the advantages of Nevada corporate laws, including, among other things, the fact that Nevada has no corporate tax, and that the identities of shareholders are not a matter of public record.
Then, on September 26th, Magellan acquired Nickel Palace in exchange for 3 million shares of the Company’s common stock and the issuance of warrants to purchase another 1.5 million shares at 18 cents per share. Magellan also assumed liability for a $1 million 8% convertible debenture that Nickel Palace had issued - just four days earlier - on September 22nd. As a general proposition, a convertible debenture entitles the individuals holding that debenture to “convert” the debt into shares of common stock in accordance with an agreed upon formula. In this case, it meant that they now had the right to convert their debentures into shares of Magellan common stock at 62% of the average closing bid price for the five days immediately preceding the notice of conversion. And, for the most part, they have done just that. As of December 13, 2000, $433,000 of those debentures had been converted into 21.8 million shares of Magellan stock. The Company anticipates that another 4.3 million shares will be issued on the remaining conversions.
Who were those debenture holders? Did they include any of the officers or directors of the Company or the principals of Nickel Palace? The Nickel Palace management team - Marc Fusco, Michael Garrity and Mike Gabrawy - are now identified as Vice-Presidents of the Company. The Company’s public filings do not indicate the identities of the debenture holders or their possible relationship to either Magellan or Nickel Palace.
What did Nickel Palace bring to the Company in exchange for all of those shares? Nickel Palace, which had been formed in March 2000, owned 50% of Rennie’s Landing LLC, the company formed to produce a film called “Rennie’s Landing.” The Company says that the movie was filmed in June and July 2000, and release is anticipated in the second quarter of 2001.
Magellan says it has made arrangements for at least some foreign distribution of “Rennie’s Landing.” On December 6th the Company announced finalization of a foreign distribution agreement with an entity called Franchise Pictures, which it described as a “major player in foreign film distribution.” Franchise would distribute three pictures for Magellan, including “Rennie’s Landing.” According to the Company, Franchise has been arranged for distribution in Spain and has been marketing the movie at “film markets” in Milan and London.
How would revenues be divided between Magellan and Franchise? The Company has not disclosed any financial terms of the agreement.
Apparently, there are no domestic distribution agreements for “Rennie’s Landing” just yet, although the Company claims it is working on those as well. Magellan did submit the film to the highly respected Sundance Film Festival, but Sundance declined to include “Rennie’s Landing” in its program.
“Rennie’s Landing” may ultimately prove successful, perhaps even beyond the Company’s projections. But it is difficult to conclude that this is the reason so many Magellan shares have been changing hands. And what about the Company’s other recent acquisition? Could that possibly account for the recent activity?
Waiting For Leonardo
On December 4th the Company announced that it had acquired MEC, also known as True Fiction, Inc. Earlier, in its September 30th Form 10-Q, the Company had stated that it had obtained an option to acquire True Fiction. No terms of that option were disclosed, although the Company acknowledged that it had advanced approximately $128,000 to True Fiction.But what’s in a name? By any name, as it turns out, MEC owned the remaining 50% of “Rennie’s Landing”. The December 4th press release did not say how much the Company paid for MEC, or disclose any other financial terms of the acquisition.
What did the Company get when it acquired MEC? According to the press release Anthony Romano and Michel Shane of MEC would be joining the Company’s management team. According to the Company, Dreamworks is committed to a film called “Catch Me If You Can,” to be produced by Romano and Shane. “Catch Me If You Can,” which chronicles the exploits of a professional “impersonator” is slated to star Leonardo DiCaprio.
At the present time, however, “Catch Me If You Can” is on hold. Mr. DiCaprio (who has been seen in only one film – The Beach – since Titanic was released in 1997) apparently has other commitments on his immediate agenda. Will “Catch Me If You Can” ever be made, and if so will Dreamworks and DiCaprio still be involved? How would the revenue stream be structured? What would be the financial benefits to Magellan? With such questions still waiting to be answered, it is difficult to believe that the Company’s potential involvement in that project has led to recent investor interest in Magellan shares.
Magellan notes the experience of the management team it has accumulated through these various acquisitions. Yet it provides few details to support that statement. For example, on its website, Magellan says that the former Nickel Palace team has “recent big picture experience,” “extensive hands-on knowledge of independently producing feature films at a fraction of their true market value,” and “exposure to leaders of the industry at Dreamworks as well as other major studios.” The Company does not, however, indicate how that expertise was gained – or identify any motion pictures with which the Nickel Palace team has previously been involved.
In a similar vein, the Company’s website points out that Messrs. Romano and Shane “have substantial film and television production and content procurement experience,” including a contract “to produce for Dreamworks, the feature length film ‘Catch Me If You Can.” The Company says that the former MEC management team “brings 20 plus years of industry experience to the Company” including acting, distribution and producing. However, aside from the repeated references to “Catch Me If You Can,” the Company does not cite any examples of that “substantial” experience, or name any films that they have written, directed or produced. Instead, the Company refers to a series of projects that are currently in various stages of development.
Like No Business We Know
None of these activities would seem to explain the activity in Magellan stock. But there are other questions that beg to be answered. Where did all of those shares come from? And just what is the public float? Magellan said that it had 63.9 million shares outstanding as of September 30th. Now, Microcap Monthly says there are 99.849 million shares outstanding – 65.6 million of which are in the public float.In order to enter the marketplace, shares must either be registered, or be exempt from registration under Rule 144 or another exemption to the registration provisions. (For more on Rule 144, read Playing By The Rules, Part I: Rule 144 – One Year and Counting). Since the time Hi Liner went public, the Company has registered only two million shares issued to consultants – on an S-8 Registration Statement filed April 7, 2000. Two Forms 144 have been filed in connection with plans to sell another 85,216 shares.
Do those two million or so shares account for all of the volume these past few months? That seems unlikely. So who holds the remaining Magellan stock and how did it enter the marketplace? The Company issued 25 million shares to the former shareholders of North Coast and 3 million shares to the former management of Nickel Palace. Magellan also issued 19.68 million shares upon conversion of the Storm debentures and another 21.8 million shares on the Nickel Palace debenture conversion. As far as we can determine, however, none of those shares have been registered.
That makes a total of approximately 69 million shares. So who holds the other 30 million shares referred to by “Microcap Monthly” – if they do exist? Was any stock issued to the former owners of MEC? The public documents we have reviewed do not contain that information.
More important, how did any of these shares enter the public float – aside from the two million included on the S-8 and the handful included on the Forms 144? And why, despite all of this volume, have price changes been imperceptible?
It’s a puzzlement. Could there be a movie in this?
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