10QSB 1 avenue_10q-063005.txt 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 and Exchange Act of 1934 For the quarter ended June 30, 2005 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ________________ to _______________ Commission File Number: 001-12885 _______________________________________________________ AVENUE ENTERTAINMENT GROUP, INC. -------------------------------- (Exact Name of Small Business Issuer as Specified in its Charter) DELAWARE 95-4622429 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization Identification No.) 10202 W. WASHINGTON BOULEVARD CULVER CITY, CALIFORNIA 90232 ----------------------- ----- (Address of principal executive offices) (Zip Code) (310) 244-6868 -------------- (Registrant's telephone number, including area code) 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 and 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 -------- -------- Number of shares outstanding of each of issuer's classes of common stock as of August 15, 2005: Common Stock 5,371,030 AVENUE ENTERTAINMENT GROUP, INC. TABLE OF CONTENTS PART I. FINANCIAL INFORMATION PAGE NO. Item 1. Financial Statements Unaudited Consolidated Balance Sheet - June 30, 2005 1 Unaudited Consolidated Statements of Operations - Three and Six Months Ended June 30, 2005 and 2004 2 Unaudited Consolidated Statements of Cash Flows - Six Months Ended June 30, 2005 and 2004 3 Unaudited Notes to Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis or Plan of Operation 8 Item 3. Controls and Procedures 12 PART II. OTHER INFORMATION Item 1. Legal Proceedings 13 Item 2. Changes in Securities 13 Item 3. Defaults Upon Senior Securities 13 Item 4. Submissions of Matters to a Vote of Security Holders 13 Item 5. Other Information 13 Item 6. Exhibits and Reports on Form 8-K 14 Signatures 14 Statement By Principal Executive and Financial Officer Regarding Facts and Circumstances Relating to Exchange Act Filings 15 Written Statement of President and Chief Executive and Financial Officer 16 PART I. FINANCIAL INFORMATION AVENUE ENTERTAINMENT GROUP, INC. UNAUDITED CONSOLIDATED BALANCE SHEET JUNE 30, 2005 ------------ ASSETS (UNAUDITED) ------ Cash $ 2,645 Accounts receivable, net of allowance of $12,917 27,401 Film costs, net 131,473 Property and equipment, net 4,778 Other assets 5,326 ------------ TOTAL ASSETS $ 171,623 ============ LIABILITIES AND STOCKHOLDERS' DEFICIT ------------------------------------- Accounts payable and accrued expenses $ 395,139 Deferred income 282,611 Loan payable 206,132 Deferred compensation 1,252,909 Due to related party 210,983 ------------ TOTAL LIABILITIES 2,347,774 ------------ STOCKHOLDERS' DEFICIT Common stock, par value $.01 per share, 15,000,000 shares authorized, 5,371,030 shares issued and outstanding 53,710 Additional paid-in capital 7,172,839 Accumulated deficit (9,249,013) Treasury stock, at cost (3,687) Note receivable for common stock (150,000) ------------ TOTAL STOCKHOLDERS' DEFICIT (2,176,151) ------------ TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 171,623 ============ See accompanying notes to the consolidated financial statements. 1 AVENUE ENTERTAINMENT GROUP, INC. UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS Three months Three months Six months Six months ended ended ended ended June 30, June 30, June 30, June 30, 2005 2004 2005 2004 (unaudited) (unaudited) (unaudited) (unaudited) ------------ ------------ ------------ ------------ Operating revenues $ 89,461 $ 77,533 $ 163,016 $ 694,525 ------------ ------------ ------------ ------------ Cost and expenses: Film production costs 31,615 13,226 41,436 17,751 Selling, general & administrative expenses 156,646 277,847 299,372 587,813 ------------ ------------ ------------ ------------ Total costs and expenses 188,261 291,073 340,808 605,564 ------------ ------------ ------------ ------------ Income (loss) from operations (98,800) (213,540) (177,792) 88,961 Other income (expense) Interest (expense), net (6,199) 179 (8,306) (167) ------------ ------------ ------------ ------------ Profit (loss) before income tax (104,999) (213,361) (186,098) 88,794 Income tax expense 0 0 0 0 ------------ ------------ ------------ ------------ Net income (loss) $ (104,999) $ (213,361) $ (186,098) $ 88,794 ============ ============ ============ ============ Basic income (loss) per common stock $ (.02) $ (0.04) $ (.03) $ 0.02 ============ ============ ============ ============ Diluted income (loss) per common stock $ (.02) $ (0.04) $ (.03) $ 0.01 ============ ============ ============ ============ Weighted average common shares outstanding-basic 5,371,030 5,371,030 5,371,030 5,371,030 ============ ============ ============ ============ Weighted average common shares outstanding-diluted 5,371,030 5,371,030 5,371,030 6,508,398 ============ ============ ============ ============ See accompanying notes to the consolidated financial statements.
2 AVENUE ENTERTAINMENT GROUP, INC. UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS Six months Six months ended ended June 30, June 30, 2005 2004 (unaudited) (unaudited) ---------- ---------- Cash flows from operating activities: Net profit (loss) $(186,098) $ 88,794 Adjustments to reconcile net loss to net cash (used for) provided by operating activities: Depreciation 2,703 2,765 Amortization - film production costs 0 13,166 Deferred compensation 69,200 (39,424) Changes in assets and liabilities which affect net income: Accounts receivable 4,715 120,131 Film costs 44,932 91,837 Other assets (223) 15 Accounts payable and accrued expenses (6,449) (26,252) Deferred income (50,359) (50,996) Deferred income 4,092 0 ---------- ---------- Net cash provided by (used for) operating activities $(117,487) $ 200,036 ---------- ---------- Cash flows from investing activities: Purchase of equipment (4,890) 0 ---------- ---------- Net cash used for investing activities (4,890) 0 ---------- ---------- See accompanying notes to the consolidated financial statements.
3 AVENUE ENTERTAINMENT GROUP, INC. UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS Six months Six months ended ended June 30, June 30, 2005 2004 ---------- ---------- (unaudited) (unaudited) Cash flows from financing activities: Proceeds from (repayment of) loan payable $ 118,170 $(168,000) ---------- ---------- Net cash provided by (used for) financing activities 118,170 (168,000) ---------- ---------- Net increase (decrease) in cash (4,207) 32,036 Cash at beginning of year 6,852 37,626 ---------- ---------- Cash at end of period $ 2,645 $ 69,662 ========== ========== Supplemental cash flow information: Cash paid during the year for: Interest $ 4,219 $ 527 ========== ========== Income taxes $ 0 $ 0 ========== ========== See accompanying notes to consolidated financial statements.
4 AVENUE ENTERTAINMENT GROUP, INC. UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES THE COMPANY Avenue Entertainment Group, Inc. (the "Company") is an independent entertainment company that produces feature films, television films, series for television, made-for-television/cable movies and one-hour-profiles of Hollywood stars both domestically and internationally. Generally, theatrical films are first distributed in the theatrical and home video markets. Subsequently, theatrical films are made available for worldwide television network exhibition or pay television, television syndication and cable television. Generally, television films are first licensed for network exhibition and foreign syndication or home video, and subsequently for domestic syndication on cable television. The revenue cycle generally extends 7 to 10 years on film and television product. BASIS OF PRESENTATION The accompanying interim consolidated financial statements of the Company are unaudited and have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Form 10-KSB/A for the year ended December 31, 2004. The Independent Auditor's Report dated March 25, 2005 on the Company's consolidated financial statements states that the Company has suffered losses from operations, has a working capital deficiency and has an accumulated deficit that raises substantial doubt about its ability to continue as a going concern. The accompanying financial statements do not include any adjustments that may result from the Company's inability to continue as a going concern. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position of the Company at June 30, 2005, and the results of its operations and its cash flows for the six months ended June 30, 2005 and 2004 have been included. The results of operations for the interim period are not necessarily indicative of results that may be realized for the full year. 5 AVENUE ENTERTAINMENT GROUP, INC. UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Loss per Common Share The Company has adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share", which established standards for computing and presenting earnings per share (EPS). The statement simplifies the standards for computing EPS, replaces the presentation of primary EPS with a presentation of basic EPS and requires a dual presentation of basic and diluted EPS on the face of the income statement. Basic EPS are based upon the weighted average number of common shares outstanding during the period. Diluted EPS are based upon the weighted average number of common shares if all dilutive potential common shares had been outstanding. The following potential common shares have been excluded from the computation of diluted net loss per share for the six months ended June 30, 2005 and the six months ended June 30, 2004 because the effect would have been anti-dilutive: Options outstanding under the Company's stock option plan 2,235,000 The following potential common shares have been excluded from the computation of diluted earnings per share for the six months ended June 30, 2005 due to the exercise price being greater than the Company's weighted average stock price for the period: Options outstanding under the Company's stock option plan 970,000 2. FILM COSTS Film costs consist of the following: JUNE 30, 2005 ---------- In process or development $ 112,593 Released, net of accumulated amortization of $17,183,912 18,880 ---------- $ 131,473 ========== 3. PROPERTY AND EQUIPMENT The major classes of property and equipment consist of the following: 6 USEFUL JUNE 30, LIFE 2005 ------------ ---------- Machinery and equipment 4 to 5 years $ 237,489 Furniture and fixtures 10 years 26,273 ---------- 263,762 Less accumulated depreciation (258,984) ---------- $ 4,778 ========== Depreciation expense was $2,703 and $2,765 for the six months ended June 30, 2005 and 2004, respectively. 4. LOSS PER SHARE The Company calculates loss per share in accordance with SFAS No. 128, "Earnings per Share." Basic loss per share is computed by dividing the loss available to common shareholders by the weighted-average number of common shares outstanding. Diluted loss per share is computed similar to basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Because the Company has incurred net losses, basic and diluted loss per share are the same. 5. LOAN PAYABLE On June 21, 2004 the Company entered into an unsecured loan for $200,000 at prime plus 1% with City National Bank which matured on June 15, 2005 and renewed for the same amount with a maturity date of June 15, 2006. As of June 30, 2005 $175,000 had been borrowed under the loan. Subsequently, as of August 15, 2005 an additional amount of $10,000 has been borrowed for a total amount of $185,000. During March 2005 the Chairman loaned $30,000 to the Company to cover operating expenses. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION Except for the historical information presented in this document, the matters discussed in this Form 10-QSB, and specifically in "Management's Discussion and Analysis or Plan of Operation," or otherwise incorporated by reference into this document, are "forward looking statements" (as such term is defined in the Private Securities Litigation Reform Act of 1995). These statements can be identified by the use of forward- looking terminology such as "believes," "expects," "may," "will," "intends," "should," or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. The safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, apply to forward-looking statements made by Avenue Entertainment Group, Inc. (the "Company"). You should not place undue reliance on forward-looking statements. Forward-looking statements involve risks and uncertainties. The actual results that we achieve may differ materially from any forward-looking statements due to such risks and uncertainties. These forward-looking statements are based on current expectations, and we assume no obligation to update this information. Readers are urged to carefully review and consider the various disclosures made by us in this report on Form 10-QSB and in our other reports filed with the Securities and Exchange Commission ("SEC") that attempt to advise interested parties of the risks and factors that may affect our business. The following discussion and analysis of our financial condition and plan of operation should be read in conjunction with the unaudited financial statements and accompanying notes and the other financial information appearing elsewhere in this report and with the audited financial statements contained in our Form 10-KSB/A for the year ended December 31, 2004. OVERVIEW Avenue Entertainment Group, Inc. (the "Company") is an independent entertainment company that produces feature films, television films, series for television, made-for-television/cable movies and one-hour-profiles of Hollywood stars both domestically and internationally. Generally, theatrical films are first distributed in the theatrical and home video markets. Subsequently, theatrical films are made available for worldwide television network exhibition or pay television, television syndication and cable television. Generally, television films are first licensed for network exhibition and foreign syndication or home video, and subsequently for domestic syndication on cable television. The revenue cycle generally extends 7 to 10 years on film and television product. 8 BASIS OF PRESENTATION The accompanying interim consolidated financial statements of the Company are unaudited and have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Form 10-KSB/A for the year ended December 31, 2004. The Independent Auditor's Report dated March 25, 2005 on the Company's consolidated financial statements states that the Company has suffered losses from operations, has a working capital deficiency and has an accumulated deficit that raises substantial doubt about its ability to continue as a going concern. The accompanying financial statements do not include any adjustments that may result from the Company's inability to continue as a going concern. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position of the Company at June 30, 2005, and the results of its operations and its cash flows for the six months ended June 30, 2005 and 2004 have been included. The results of operations for the interim period are not necessarily indicative of results that may be realized for the full year. CRITICAL ACCOUNTING POLICIES Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of financial statements require management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expense and disclosures at the date of the financial statements. On an on-going basis, we evaluate our estimates, including, but not limited to, those related to revenue recognition, accounts receivables, inventories and impairment of intangibles. We use authoritative pronouncements, historical experience and other assumptions as the basis for making estimates. Actual results could differ from those estimates. We believe that the following critical accounting policies affect our more significant judgments and estimates in the preparation of our consolidated financial statements. REVENUE RECOGNITION The Company recognizes revenue in accordance with the provisions of Statement of Financial Accounting Standards No. 139 and American Institute of Certified Public Accountants Statement of Position 00-2 (collectively referred to as "SOP 00-2"). Revenues from feature film distribution licensing agreements are recognized on the date the completed film is delivered or becomes available for delivery, is available for exploitation in the relevant media window purchased by that customer or licensee and certain other conditions of sale have been met pursuant to criteria set by SOP 00-2. Revenues from domestic television and video licensing contracts, which provide for the receipt of non-refundable guaranteed amounts, are recognized when the film is available for exhibition, provided that the other conditions of sale required by SOP 00-2 have been met. Until all conditions of sale have been met, amounts received on such licensing contracts are reflected in the accompanying financial statements as deferred income. International sales and other sales in the United States are recognized in the period in which payment is received. 9 The market trend of each film is regularly examined to determine the estimated future revenues and corresponding lives. Due to the nature of the industry, management's estimates of future revenues may change within the next year and the change could be material. Revenues from producer-for-hire contracts are recognized on a percentage-of-completion method, measured by the percentage of costs completed to date to estimated total cost for each contract. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS, INCLUDING FILM COSTS Long-lived assets, consisting primarily of property, plant and equipment and intangibles, including film costs comprise a significant portion of the Company's total assets. Long-lived assets, including intangibles and film costs, are reviewed for impairment whenever events or changes in circumstances have indicated that their carrying amounts may not be recoverable. Recoverability of assets is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by that asset. The cash flow projections are based on historical experience, management's view of growth rates within the industry and the anticipated future economic environment. Factors we consider important which could trigger an impairment review include the following: o significant underperformance relative to expected historical or projected future operating results; o significant changes in the manner of our use of the acquired assets or the strategy for our overall business; o significant negative industry or economic trends; o significant decline in our stock price for a sustained period; and (a) our market capitalization relative to net book value. When we determine that the carrying value of intangibles and long-lived assets may not be recoverable based upon the existence of one or more of the above indicators of impairment, we measure any impairment based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model. THE THREE AND SIX MONTHS ENDED JUNE 30, 2005 ARE COMPARED TO THE THREE AND SIX MONTHS ENDED JUNE 30, 2004. REVENUES Revenues for the three and six months ended June 30, 2005 were approximately $89,000 and $163,000 compared to $78,000 and $695,000 for the three and six months ended June 30, 2004. Revenues earned in 2005 were derived primarily from the HBO First Look Deal and the licensing of rights of the 10 "Hollywood Collection" in secondary markets through Janson Associates. Revenues earned in 2004 were derived primarily from producer fees for the feature film CLOSER, the HBO First Look Deal, the licensing of rights of the "Hollywood Collection" in secondary markets through Janson Associates and a film festival award for WAYWARD SON. The decrease in revenues is due to the Company earning 80% of the producer fees for the feature film CLOSER during the six months ended June 30, 2004 compared to no new feature film or television movie in production for the six months ended June 30, 2005. FILM PRODUCTION COSTS Film production costs for the three and six months ended June 30, 2005 were approximately $32,000 and $41,000 compared to $13,000 and $18,000 for the three and six months ended June 30, 2004. The net increase in film production costs is primarily due to the write down of more projects in development that were abandoned during 2005. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative (S,G&A) expenses for the three and six months ended June 30, 2005 were approximately $157,000 and $299,000 compared to $278,000 and $588,000 for the three and six months ended June 30, 2004. The decrease in S,G&A is significant and is primarily due to the decrease in payroll expenses and office rent. LIQUIDITY AND CAPITAL RESOURCES At June 30, 2005, the Company had approximately $3,000 of cash. Revenues were insufficient to cover costs of operations for the quarter ended June 30, 2005. The Company has a working capital deficiency and has an accumulated deficit of $9,249,013 through June 30, 2005. The Company believes it will have sufficient funds available to continue to exist through the next year, although no assurance can be given in this regard. Insufficient funds will require the Company to scale back its operations. The Independent Auditor's Report dated March 25, 2005 on the Company's consolidated financial statements for the year ended December 31, 2004 states that the Company has suffered losses from operations, has a working capital deficiency and has an accumulated deficit that raises substantial doubt about its ability to continue as a going concern. The accompanying financial statements do not include any adjustments that may result from the Company's inability to continue as a going concern. To our knowledge few, if any, public entertainment companies have a working capital deficit comparable to Avenue Entertainment Group, Inc. Most public companies working in film and television production are much larger in size and generally have large libraries of film and/or television properties that provide an ongoing revenue stream. Aside from a smaller library of films that are primarily one-hour documentary biographies, the Company derives its revenues almost entirely from its production fee revenues earned when it produces motion pictures or television programming. Therefore, the Company relies heavily upon the decision makers at the studios, network and cable stations. The generation of revenue in the motion picture and television movie industry is more competitive than ever for the Company and other independent motion picture and television production companies. Additionally, there is no predictable seasonal trend or variation inherent in the entertainment business, so the timing of such revenues is highly unpredictable. 11 FORWARD-LOOKING STATEMENTS This report contains certain forward-looking statements reflecting management's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements, including, but not limited to, the ability of the Company to reverse its history of operating losses; the ability to obtain additional financing and improved cash flow in order to meet its obligations and continue to exist as a going concern; production risks; dependence on contracts with certain customers; future foreign distribution arrangements; and dependence on certain key management personnel. All of these above factors are difficult to predict, and many are beyond the control of the Company. ITEM 3. CONTROLS AND PROCEDURES Based on the evaluation conducted by the Chief Executive and Financial Officer, as of a date within 90 days of the filing date of this quarterly report, of the effectiveness of the Company's disclosure controls and procedures, the CEO/CFO concluded that, as of the evaluation date (1) there were no significant deficiencies or material weaknesses in the Company's disclosure controls and procedures, (2) there were no significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the evaluation date, and (3) no corrective actions were required to be taken. 12 AVENUE ENTERTAINMENT GROUP, INC. JUNE 30, 2005 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We may become involved in litigation arising out of operations in the normal course of business. As of June 30, 2005, we are not a party to any pending legal proceedings the adverse outcome of which could reasonably be expected to have a material adverse effect on our operating results or financial position. ITEM 2. CHANGES IN SECURITIES (a) There were no modifications of instruments defining the rights of the holders of any class of registered securities. (b) The rights evidenced by any class of registered securities have not been materially limited or qualified by the issuance or modification of any other class of securities. (c) In the first and second quarters ended June 30, 2005 there were no sales of unregistered securities. (d) Rule 463 of the Securities Act is not applicable to the Company. (e) In the first and second quarters ended June 30, 2005 there were no repurchases by the Company of its Common Stock. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS In the first quarter and second quarters ended June 30, 2005 there were no matters submitted to a vote of security holders. ITEM 5. OTHER INFORMATION None. 13 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 31. Certification of Chief Executive and Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2003. 32. Written Statement of the President and Chief Executive and Financial Officer pursuant to 18 U.S.C. ss.1350. (b) Reports NO REPORTS WERE FILED UNDER FORM 8-K FOR THE QUARTER ENDED JUNE 30, 2005 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed in its behalf by the undersigned thereunto duly authorized. AVENUE ENTERTAINMENT GROUP, INC. DATE: August 15, 2005 BY: /s/ Cary Brokaw ------------------------------------ Cary Brokaw President and Chief Executive and Financial Officer, Director 14