-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FTVCuYDLvIQuRUCvi1RpjNVhLQdL+Y3/YUo9L+ujQKtNmk1HjbUko4emuxhy8M1p JuQZRu+cYTRB06q2otoNVQ== 0001005150-97-000103.txt : 19970223 0001005150-97-000103.hdr.sgml : 19970223 ACCESSION NUMBER: 0001005150-97-000103 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970221 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AFFINITY ENTERTAINMENT INC CENTRAL INDEX KEY: 0000730626 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MOTION PICTURE & VIDEO TAPE PRODUCTION [7812] IRS NUMBER: 222473403 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-12193 FILM NUMBER: 97541331 BUSINESS ADDRESS: STREET 1: 15438 N FLORIDA AVE STE 103 CITY: TAMPA STATE: FL ZIP: 33613 BUSINESS PHONE: 8132641778 MAIL ADDRESS: STREET 1: 15436 NORTH FLORIDA AVE STREET 2: STE 103 CITY: TAMPA STATE: FL ZIP: 33613 FORMER COMPANY: FORMER CONFORMED NAME: AFFINITY TELEPRODUCTIONS INC /FL DATE OF NAME CHANGE: 19940322 FORMER COMPANY: FORMER CONFORMED NAME: CBNI DEVELOPMENT CO INC DATE OF NAME CHANGE: 19930702 FORMER COMPANY: FORMER CONFORMED NAME: COMPUTERIZED BUYING NETWORK INC DATE OF NAME CHANGE: 19920703 10QSB 1 FORM 10QSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-QSB (Mark One) [ X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1996 OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 0-12193 AFFINITY ENTERTAINMENT, INC. (Exact name of small business issuer as specified in its charter) Delaware 22-2473403 (State or other jurisdiction of (I.R.S. Employer) incorporation or organization) Identification No.) 15310 Amberly Drive, Suite 370, Tampa, Florida 33647 (Address of principal executive offices) (Zip Code) (813) 975-8180 (Registrant's telephone number, including area code) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the 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 filing requirements for the past 90 days. Yes X . No . Registrant has 8,284,217 shares of Common Stock outstanding as of December 31, 1996. PART I - FINANCIAL INFORMATION Item 1. Financial Statements. AFFINITY ENTERTAINMENT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) - -------------------------------------------------------------------------------- (In thousands, except per share data) Quarter Ended Dec 31, Dec 31, 1996 1995 - -------------------------------------------------------------------------------- REVENUE.................................................. $ 191 $1,465 COSTS AND EXPENSES Cost of revenue, exclusive of amortization............... 66 838 General and administrative............................... 1,013 543 Depreciation and amortization............................ 136 34 ----- ------ Total costs and expenses............................... 1,215 1,415 ----- ------ Operating income (loss)................................ (1,024) 50 OTHER INCOME, net........................................ 54 86 ----- ------ Income (loss) before provision for income taxes and extraordinary item................................. (970) 136 Provision for income taxes............................... -- (36) Minority Interest in net loss of subsidiary.............. 47 -- ----- ------ Income (loss) before extraordinary item.................. (923) 100 Utilization of net operating loss carryforwards.......... -- 36 ----- ------ Net income (loss)........................................ $ (923) $ 136 ===== ====== Loss per common share.................................... $ (.11) $ (.02) ======= ====== Weighted average shares outstanding...................... 8,284 6,008 ========= ====== The accompanying notes are an integral part of these consolidated financial statements. 2 AFFINITY ENTERTAINMENT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited) - -------------------------------------------------------------------------------- (In thousands) Dec 31, Sep 30, 1996 1996 - -------------------------------------------------------------------------------- ASSETS CURRENT ASSETS Cash and cash equivalents.............................. $ 338 $ 1,366 Accounts receivable, net............................... 924 133 Programming costs...................................... 2,384 990 Other current assets, net.............................. 145 188 ------- ------- Total current assets................................. 3,791 2,677 PROPERTY AND EQUIPMENT, at cost Edit equipment ..................................... 1,237 1,237 Other equipment........................................ 432 314 ------- ------- 1,669 1,551 Less accumulated depreciation........................ 1,113 1,072 ------- ------- 556 479 Construction in progress............................. 11 64 ------- ------- Total property and equipment....................... 567 543 OTHER ASSETS Loans receivable, net.................................. -- 539 Due from officers and employees........................ 42 68 Investment in joint venture, net....................... 250 250 Other assets........................................... 30 315 ------- ------- Total other assets................................... 322 1,172 ------- ------- Total assets....................................... $ 4,680 $ 4,392 ======= ======= The accompanying notes are an integral part of these consolidated financial statements. 3
AFFINITY ENTERTAINMENT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited) - ---------------------------------------------------------------------------------------------- (In thousands) Dec 31, Sep 30, 1996 1996 - ---------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS EQUITY CURRENT LIABILITIES Accounts payable................................................... $ 750 $ -- Notes payable...................................................... 353 12 Notes payable - related party...................................... 1,215 -- Accured interest................................................... 135 -- Accrued liabilities................................................ 799 139 Deferred revenue................................................... 181 -- ------ -------- Total current liabilities........................................ 3,433 151 MINORITY INTEREST.................................................. 207 -- STOCKHOLDERS' EQUITY Convertible preferred stock, $1 par value, $10 stated value, 500,000 shares authorized, 48,734 shares issued and outstanding...................................................... 487 487 Convertible preferred stock, $.0001 par value, $50 stated value, 100,000 shares authorized, no shares issued and outstanding...................................................... -- -- Common stock, $.01 par value, 25,000,000 shares authorized, 8,284,217 shares issued and outstanding...................................................... 83 829 Additional paid-in capital......................................... 13,040 14,686 Additional paid-in capital - stock options......................... 394 394 Deficit............................................................ (6,817) (5,894) ------ ------- 7,187 10,502 Less: Stock subscriptions receivable..................................... 5,742 5,829 Unearned compensation.............................................. 405 432 ------- ------- Total stockholders' equity....................................... 1,040 4,241 ------- ------- Total liabilities and stockholders' equity..................... $ 4,680 $ 4,392 ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 4
AFFINITY ENTERTAINMENT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited) (In thousands) Convertible Convertible Additional Preferred Preferred Common Paid-In Stock Stock Stock Additional Capital Stock $50 Stated $10 Stated $.10 Par Paid-In Stock Subscription Value Value Value Capital Options Deficit Receivable - ------------------------------------------------------------------------------------------------------------------------------------ Balance on October 1, 1996....................... $ -- $ 487 $ 829 $14,686 $ 394 $(5,894) $(5,829) Cash received on subscription receivable... -- -- -- -- -- -- 87 Amortization of unearned compensation.............. -- -- -- -- -- -- -- Change in par value of common stock.............. -- -- (746) 746 -- -- -- Purchase of Subsidiary..... -- -- -- (2,392) -- -- -- Net loss for the quarter ended December 31, 1966... -- -- -- -- -- (923) -- ----- ----- ----- ----- ----- ------ ----- Balance on December 31, 1996..................... $ -- $ 487 $ 83 $13,040 $ 394 $(6,817) $(5,742) ===== ===== ===== ======= ====== ======= =======
Unearned Compensation Total - --------------------------------------------------------- Balance on October 1, 1996....................... $ (432) $ 4,241 Cash received on subscription receivable... -- 87 Amortization of unearned compensation.............. 27 27 Change in par value of common stock.............. -- -- Purchase of Subsidiary..... -- (2,392) Net loss for the quarter ended December 31, 1966... -- (923) ----- ------ Balance on December 31, 1996..................... $ (405) $ 1,040 ====== ====== The accompanying notes are an integral part of these consolidated financial statements. 5
AFFINITY ENTERTAINMENT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - ------------------------------------------------------------------------------------------- (In thousands) Quarter Ended Dec 31, Dec 31, 1996 1995 - ------------------------------------------------------------------------------------------- Cash Flows - Operating Activities: Net income (loss)............................................... $ (923) $ 136 Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization................................. 136 34 Assets acquired in purchase of subsidiaries................... 66 -- Minority interest in subsidiary............................... 207 -- Provision for losses on accounts receivable................... 9 -- Other assets.................................................. -- -- Amortization of unearned compensation related to grant of stock options to executives.............................. 27 -- Changes in current assets and liabilities: (Increase) decrease in accounts receivable.................. 27 (495) (Increase) decrease in programming costs.................... (37) (79) (Increase) decrease in current assets....................... 43 (111) Increase (decrease) in accrued liabilities.................. (63) 49 Increase (decrease) in deferred revenue..................... -- (206) ------- ------ Net cash used in operating activities..................... (508) (672) Cash Flows - Investing Activities: Capital expenditures............................................ (34) (51) Investments in notes receivable................................. 26 -- Investments in loans receivable................................. (844) -- Investments in joint venture.................................... -- (315) ------- ------ Net cash used in investing activities..................... (852) (366) Cash Flows - Financing Activities: Proceeds from sale of common stock.............................. 87 1,459 Proceeds from notes payable..................................... -- 30 Principal payments on notes payable............................. (4) (476) ------- ------ Net cash provided by financing activities................. 83 1,013 ------- ------ Increase in cash and cash equivalents........................... (1,277) (25) Cash and cash equivalents at beginning of period................ 1,366 147 ------- ------ Cash and cash equivalents at end of period...................... $ 89 $ 121 ======= ======
Supplemental Schedule of Non-cash Investing and Financing Activities: During the quarter ended December 31, 1996, the Company reclassified a $600,000 loan receivable to an investment in subsidiary as a part of the acquisition of Century Technologies, Inc. The accompanying notes are an integral part of these consolidated financial statements 6 AFFINITY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note A - History and Organization Affinity Entertainment, Inc. (the "Company"), formerly Affinity Teleproductions, Inc., a Delaware corporation is engaged in producing and selling feature films, television programs, commercials, infomercials and videos for the home and industrial markets in the United States and internationally. The Company entered into this business following a February 1994 merger with CBNI Development, Inc. ("CBNI"). CBNI has been engaged in a shopping service business. On August 31, 1994, the Company acquired Broadcast Edit, Inc. ("Broadcast Edit"), a California corporation for 50,000 shares of common stock in a transaction accounted for a pooling of interests. Broadcast Edit is a video production and post-production company. It provides a full range of communication services to corporations and advertising agencies, and it also produces, directs and edits television programs and videos for the entertainment industry. The Company is engaged in the production of feature films, television programs, commercials, documentaries and videos for all media worldwide. In addition, the Company, through its wholly-owned subsidiary, Broadcast Edit, Inc., produces and performs post-production editing services for programming produced internally by the Company and externally by outside parties. The Company has formed a new wholly-owned subsidiary, Affinity Entertainment Group, Inc., April 4, 1995, to intensify its efforts on the feature film portion of its business. On October 31, 1996, the Company purchased a 76% interest in Century Technologies, Inc., a publicly-held Colorado corporation that is in the business of distributing film and television products to worldwide markets. On December 9, 1996, the Company formed a new wholly-owned subsidiary, Tradewinds Television, Inc., for the purposes of operating a domestic television syndication company. Note B - Basis of Presentation The accompanying Condensed Consolidated Balance Sheet includes the accounts of the Company, its wholly-owned subsidiaries and its 76% interest in Century Technologies, Inc. ("Century"). The Statement of Operations includes the accounts of the Company and one of its wholly-owned subsidiaries for the quarter ended December 31, 1996 and the activity from the date of acquisition through December 31, 1996 for Century and its other wholly-owned subsidiary. All significant intercompany accounts, transactions and profits have been eliminated. The Condensed Consolidated Financial Statements are unaudited and should be read in conjunction with the audited Consolidated Financial Statements and notes thereto for the fiscal year ended September 30, 1996. In the opinion of management, all adjustments necessary for a fair presentation of such Condensed Consolidated Financial Statements have been included. Such adjustments consist only of normal recurring items. Interim results are not necessarily indicative of results for a full year. The Condensed Consolidated Financial Statements and notes hereto are presented as permitted by the Securities Exchange Commission and do not contain certain information included in the Company's annual Consolidated Financial Statements and notes hereto as discussed above. 7 Note C - Significant Events Authorization of Preferred Stock On October 31, 1996, the Company authorized the creation of two shares of Series D Preferred Stock with a par value of $1 in connection with the acquisition of Century Technologies, Inc. Acquisition of Century Technologies, Inc. On October 31, 1996, the Company purchased a 76% interest in Century Technologies, Inc. ("Century"), a publicly-held Colorado corporation that is in the business of distributing film and television products to worldwide markets. Under the terms of the Stock Acquisition Agreement between the parties, the Company purchased 37,500,000 Units of Century for $0.08 per unit. Each Unit consists of one (1) share of Century Common Stock at $.0001 par value ("Century Common Stock") and one (1) Common Stock purchase warrant to purchase one (1) share of Century Common Stock at $2.00 per share ( the "Warrants"). The Units are immediately separable into their component parts. In consideration for the transfer of the Units, the Company paid Three Million Dollars ($3,000,000) to Century consisting of (i) the conversion to equity of Four Hundred Thousand Dollars ($400,000) cash previously advanced by the Company to Century, (ii) Two Hundred Thousand Dollars ($200,000) cash, and (iii) a negotiable one-year promissory note payable by the Company to Century in the amount of Two Million Four Hundred Thousand Dollars ($2,400,000)(the "Promissory Note") which is secured by the Company's Series D Preferred Stock. The Promissory Note bears interest at a rate of eight percent (8%) per annum and is secured by two (2) shares of Series D Preferred Stock of the Company, par value $1.00 (the "Series D Preferred Stock"). Each share of Series D Preferred Stock shall be convertible into 750,000 shares of the Company's Common Stock only in the event of default by the Company on the Promissory Note. The Series D Preferred Stock is not entitled to any voting or dividend rights of any kind. Notwithstanding the foregoing, the Company shall have the right to provide such substitute collateral as the Company and Century may mutually agree upon in writing. The Series D Preferred Stock will be held in escrow by Century's counsel (the "Escrow Agent") until such time as the Promissory Note is paid in full or substitute collateral is provided by the Company. The Company believes that the acquisition of Century will enable the Company to implement its business plan of becoming heavily vested in the U.S. and foreign distribution of both feature films and television programming. Acquisition of the Assets of Tradewinds Television, LLC On September 13, 1996, the Company and Tradewinds Television, LLC, a California Limited Liability Company ("Tradewinds"), entered into an Interim Financing and Security Agreement (the "Security Agreement") pursuant to which Tradewinds granted the Company, as security for the repayment by Tradewinds of certain loans to be made by the Company, a first priority lien on substantially all of Tradewinds' assets (the "Assets"). The Assets include accounts receivable, the name and mark "Tradewinds Television," the rights to the syndicated television series "Bounty Hunters" and distribution rights to certain other television products. As of November 19, 1996, the Company loaned Tradewinds an aggregate of approximately $823,000 (the "Loans") pursuant to the Security Agreement. Concurrently, with the execution of the Security Agreement, the Company and Tradewinds engaged in negotiations pursuant to which the Company would purchase substantially all of the Assets. The parties entered into an Asset Purchase Agreement, dated October 3, 1996, as amended, to provide for such acquisition. The sale of the assets was contingent upon the resolution to which satisfaction of the Company of various bankruptcy issues concerning other companies affiliated with Royeric Pack, the owner of Tradewinds. On November 14, 1996, the Company filed a complaint in Los Angeles Superior Court asserting that Tradewinds had defaulted under the Loans and the Security Agreement, and seeking judicial foreclosure on the 8 Assets, among other claims. On December 6, 1996, Tradewinds in lieu of foreclosure on the Assets by the Company, agreed to transfer and assign to the Company the Assets, subject to certain payables associated therewith, in consideration of Affinity forgiving the indebtedness evidenced by the Loans. Such indebtedness, including interest and related costs and expenses, was approximately $1,000,000. Also on December 6, 1996, the Company entered into an Executive Producer Agreement with Mr. Pack, providing executive producing services in connection with the "Bounty Hunters" series. Pursuant to such agreement, Mr. Pack received a $75,000 payment on December 6, 1996 for the first production season, and is entitled in the second production season to a fee of $3,000 per episode, payable upon airing of each such episode. On December 17, 1996, the Company agreed with the Trustee of Action Media Group, Inc., a company affiliated with Mr. Pack and which is the subject of a bankruptcy court proceeding ("AMG"), to pay $275,000 to the Trustee of AMG, and to secure in exchange a release of certain claims by the Trustee and AMG against Tradewinds and the Company with regard to indebtedness owed by Tradewinds to AMG and the assignment of Assets by Tradewinds to the Company in lieu of foreclosure, as described above. On December 18, 1996, the Court having jurisdiction over the AMG bankruptcy proceeding approved the $275,000 payment and release among AMG, Tradewinds and the Company. An order to this effect (the "Settlement Order") was entered on January 14, 1997. The Trustee subsequently filed a motion seeking to amend the Settlement Order to carve out from the release certain unspecified liabilities owed by Tradewinds to third parties including AMG. The Company is contesting this motion. Upon receipt of the Assets by the Company, the Assets were deposited in the Company's wholly owned subsidiary, Tradewinds Television, Inc. Loan Agreement In October 1996, the Company reached an agreement in principal with a European entity in which the entity agreed to lend $48.4 million to the Company. The loan will bear interest at a rate of 9% per annum over a five year period. The Company will pledge as collateral for the loan one hundred (100) shares of Series C Convertible Preferred Stock, to be created upon closing, that can be converted by the lender into Common Stock of the Company under certain conditions of repayment of the loan, but in no instance at a price less than $10.00 per common share. Upon conversion of the Series C Preferred Stock to Common Stock, the holder of the Series C Preferred Stock shall also receive an additional number of shares equal to 10% of the number of shares as calculated above. In no event is greater than 40% of the outstanding principal of the loan to be converted to equity in any twelve (12) month period. Any common shares and/or preferred shares issued upon conversion of the loan to equity will not be sold, transferred or assigned in the absence of an effective registration statement under the Securities Act of 1933, as amended, or pursuant to Rule 144 promulgated thereunder. The loan is contingent upon the issuance of an insurance policy to the lender guaranteeing the value of the loan. The lender has informed the Company that its has incurred "unexpected delays" in processing the loan. More specifically, the insurance company with which the lender is negotiating the insurance guarantee has placed limitations on the criteria to complete the loan which the lender believes to be onerous. The lender is currently attempting to meet the criteria established by the insurance company. As a result, the lender has informed the Company that it cannot place a time limit on completion of the loan. In light of these circumstances, the Company believes that there is substantial doubt as to whether the insurance guarantee will be issued on terms acceptable to both the lender and the Company, or at all. Therefore, the Company has decided to pursue additional financing opportunities. Note D - Income Taxes The Company provides for the tax effects of transactions reported in the Condensed Consolidated Financial Statements. The provision, if any, consists of taxes currently due plus deferred taxes related primarily to differences between the basis of assets and liabilities for financial and income tax reporting. The deferred tax assets and liabilities, if any, represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. As of December 31, 1996, the Company had no material current tax liability, deferred tax assets or liabilities. Note E - Loss Per Common Share The loss per share of common stock is calculated by dividing net loss by the weighted average shares of common stock and common stock equivalents outstanding during the period. Common stock equivalents include 9 shares issuable upon conversion of the Company's convertible preferred stock and exercise of the Company's outstanding warrants and stock options. For the quarter ended December 31, 1996, common stock equivalents were anti-dilutive and were not included in the calculation of weighted average common shares outstanding. Note F - Reclassifications Reclassifications to the December 31, 1995 consolidated statements of operations and cash flows were made to conform to December 31, 1996 presentation. 10 Item 2. Management's Discussion and Analysis The Company produces feature films, television programs, commercials, documentaries and videos for all media worldwide. A. RESULTS OF OPERATIONS The following table summarizes the changes in selected items, including absolute dollar changes, percentage changes and percent of net revenue for the quarter ended December 31, 1996 compared to the quarter ended December 31, 1995:
Quarter Ended Line Item % of Net Dec 31, Dec 31, $ Change % Change Revenue 1996 1995 Fav./(Unfav.) Fav./(Unfav.) 1996 1995 ---- ---- ------------- ------------- ---- ---- (In Thousands, except %) Net Revenue......................... $ 191 $1,465 $(1,247) (87)% 100% 100% Cost of revenue................... 66 838 772 92 34 58 General and administrative........ 1,013 543 (470) (87) 530 37 Depreciation and amortization.................... 136 34 (102) (300) 71 2 ----- ------ ------- ------ --- Operating loss...................... (1,024) 50 (1,074) (2,148) (535) 3 Other income, net................... 54 86 (32) (37) 28 6 ----- ------ ------- ------ --- Income (loss) before provision for income taxes and extraordinary item................ $(970) $ 136 $(1,106) (813) (507) 9 Provision before income taxes....... -- (36) 36 100 -- (2) Minority Interest in net loss of subsidiary............ 47 -- (47) -- 24 -- ----- ------ ------- ------ --- Income (loss) before extraordinary item................ (923) 100 (1,023) (1,023) (483) 7 Utilization of net operating loss carryforwards................ -- 36 (36) (100) -- 2 ----- ------ ------ ------ ------ Net income (loss)................... $(923) $ 136 $(1,059) (779) (483) 9 ===== ====== ====== ====== ======
Net Revenue For the quarter ended December 31, 1996, the decrease in revenues is primarily due to the Company ceasing the airing of its television project, "EdenQuest", and all of its ancillary sources of income, and its "The Contemporary Collectibles Show" series. For the quarter ended December 31, 1995, the Company produced three original episodes, and a compilation ("best of") of its popular "EdenQuest" television series. As of December 31, 1996, the third and fourth episodes have not been telecast on free television or basic cable, as the Company plans to syndicate these episodes through its subsidiary, Tradewinds Television, Inc., for airing in the summer of 1997. The decrease in revenue described above was offset in part by the revenues generated by Tradewinds Television, Inc. derived mainly from the syndicated television series "Bounty Hunters" and "Ghostwriter." Cost of Revenue For the quarter ended December 31, 1996, the significant decrease in cost of revenue can be attributed to several factors. For the quarter ended December 31, 1995, television distributors commissions were paid by the Company based on total cumulative sales of "EdenQuest". As sales in "EdenQuest" increased, so did commission percentages. In addition, the Company canceled the launch of the second season of "The 11 Contemporary Collectibles Show", due to a variety of factors, including the uncertainty regarding the availability of its satellite air time. As a result, the Company took a one time charge of approximately $125,000 to operations for expenses incurred in connection with the Lifetime Channel. General and Administrative For the quarter ended December 31, 1996, the increase in general and administrative expenses is primarily due to higher professional expenses as the Company seeks to position itself to make acquisitions and expand its operations into feature films and distribution. Further, the Company hired additional staff to better implement it business plan and increased salaries of some key personnel to levels commensurate to their job descriptions. Additionally, the general and administrative expenses also increased due to the acquisition of its two new subsidiaries. The Company is in the process of consolidating its California operations to reduce costs. Depreciation and amortization For the quarter ended December 31, 1996, the significant increase in depreciation and amortization expense is primarily due to the accelerated amortization of Edenquest and Adventure Quest. B. FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES The Company expects to meet its cash requirements for fiscal year 1997 with funds generated from operations, the exercise of employee stock options, sales of restricted common stock via private placements and loans. The Company believes that these sources will be adequate to meet the Company's expected needs for fiscal year 1997, although there can be no assurance that this will be the case. The Company has not formalized its plan for paying the $2,400,000 Promissory Note payable to Century Technologies, Inc. on October 31, 1997. The Company expects that this Promissory Note will be repaid with some combination of the assets and receivables of Tradewinds Television, Inc. In October 1996, the Company reached an agreement in principal with a European entity in which the entity has agreed to lend $48.4 million to the Company. The loan will bear interest at a rate of 9% per annum over a five year period. The Company will pledge as collateral for the loan one hundred (100) shares of Series C Convertible Preferred Stock, to be created upon closing, that can be converted by the lender into Common Stock of the Company under certain conditions of repayment of the loan, but in no instance at a price less than $10.00 per common share. Upon conversion of the Series C Preferred Stock to Common Stock, the holder of the Series C Preferred Stock shall also receive an additional number of shares equal to 10% of the number of shares as calculated above. In no event is greater than 40% of the outstanding principal of the loan to be converted to equity in any twelve (12) month period. Any common shares and/or preferred shares issued upon conversion of the loan to equity will not be sold, transferred or assigned in the absence of an effective registration statement under the Securities Act of 1933, as amended, or pursuant to Rule 144 promulgated thereunder. The loan is contingent upon the issuance of an insurance policy to the lender guaranteeing the value of the loan. The lender has informed the Company that it has incurred "unexpected delays" in processing the loan. More specifically, the insurance company with which the lender is negotiating the insurance guarantee has placed limitations on the criteria to complete the loan which the lender believes to be onerous. The lender is currently attempting to meet the criteria established by the insurance company. As a result, the lender has informed the Company that it cannot place a time limit on completion of the loan. In light of these circumstances, the Company believes that there is substantial doubt as to whether the insurance guarantee will be issued on terms acceptable to both the lender and the Company, or at all. Therefore, the Company has decided to pursue additional financing opportunities. 12 For the quarter ended December 31, 1996, the predominate sources of operating funds were editing services. Other than discussed above, the Company is not aware of any known trends or uncertainties that have or are reasonably likely to have a material effect on the Company's financial position, liquidity or capital resources. Any other projects not contemplated herein will be funded by joint ventures or other outside capital. PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 27.01 Financial Data Schedule (b) Reports on Form 8-K 1. Current Report of Form 8-K dated November 14, 1996 regarding the acquisition of Century Technologies, Inc., the termination of the Offshore Securities Subscription Agreement with Baron Banker Limited, and the Access America Lawsuit. 2. Current Report of Form 8-K dated December 24, 1996 regarding the acquisition of all assets of Tradewinds Television, LLC. 13 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on February 21, 1997. AFFINITY ENTERTAINMENT, INC. /s/WILLIAM J. BOSSO ----------------------------------------- William J. Bosso Chairman, President, Secretary, Director /s/ TAYRA AN COX ----------------------------------------- Tayra An Cox Controller (Principal Accounting Officer) 14 EX-27 2 FDS --
5 (Replace this text with the legend) 0000730626 AFFINITY ENTERTAINMENT, INC. 1000 US-Dollars 3-MOS SEP-30-1997 OCT-01-1996 DEC-31-1996 1 338 8284 924 0 0 3791 16 1113 4680 3433 0 0 487 83 (6617) 4680 191 191 66 66 1048 (0) 0 (923) 0 (923) 0 0 0 (923) (.11) 0
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