-----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, VQSYflRphuNTeYtmo+ErPkEw1WVgySOQYSPUH6omZ06xba/K6/+2iRxrr5xt8iHB Vzaxvv3EdREo/7S5yDN1Lg== 0000950148-96-001979.txt : 19960912 0000950148-96-001979.hdr.sgml : 19960912 ACCESSION NUMBER: 0000950148-96-001979 CONFORMED SUBMISSION TYPE: 10QSB/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960911 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DOVE AUDIO INC CENTRAL INDEX KEY: 0000930436 STANDARD INDUSTRIAL CLASSIFICATION: PHONOGRAPH RECORDS & PRERECORDED AUDIO TAPES & DISKS [3652] IRS NUMBER: 954015834 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-24984 FILM NUMBER: 96628678 BUSINESS ADDRESS: STREET 1: 8955 BEVERLY BLVD CITY: WEST HOLLYWOOD STATE: CA ZIP: 90048 BUSINESS PHONE: 3102737722 MAIL ADDRESS: STREET 2: 8955 BEVERLY BLVD CITY: WEST HOLLYWOOD STATE: CA ZIP: 90048 10QSB/A 1 FORM 10QSB/A 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-QSB/A (AMENDMENT NO. 2) (MARK ONE) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1996 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 0-24984 DOVE AUDIO, INC. Exact name of registrant as specified in its charter) California 95-4015834 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 301 N. Canon Drive, Suite 207, Beverly Hills, California 90210 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code (310) 273-7722 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- APPLICABLE ONLY TO CORPORATE ISSUERS State the numbers of shares outstanding of each of the registrant's classes of common equity, as of the latest practicable date: 4,884,166 Transitional Small Business Disclosure Format (Check one): Yes No X --- --- 2 PART I FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS DOVE AUDIO, INC. Consolidated Balance Sheet March 31, 1996 ASSETS CURRENT ASSETS Cash and cash equivalents 5,052,000 Marketable securities 377,000 Accounts receivable, net of allowances of $2,181,000 2,356,000 Inventory 4,006,000 Prepaid expenses and other assets 150,000 Deferred tax asset - Note 5 223,000 ------------ Total current assets 12,174,000 PRODUCTION MASTERS - Note 3 3,055,000 FILM COSTS, net - Note 4 1,060,000 PROPERTY AND EQUIPMENT 2,767,000 ------------ Total assets $19,056,000 ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued expenses $ 1,927,000 Notes payable - Note 6 1,937,000 Royalties payable 301,000 Advances and deferred income 389,000 ------------ Total current liabilities 4,554,000 COMMITMENTS AND CONTINGENCIES - Note 8 - SHAREHOLDERS' EQUITY - Note 9 Preferred stock .01 par value; 2,000,000 shares authorized and 214,113 shares, Series A, issued and outstanding 856,000 Common stock .01 par value; 20,000,000 shares authorized and 4,884,166 issued and outstanding 49,000 Additional paid-in capital 14,761,000 Accumulated deficit (1,164,000) ------------ Total shareholders' equity 14,502,000 ----------- Total liabilities and shareholders' equity $19,056,000 ===========
See accompanying notes to consolidated financial statements. 1 3 DOVE AUDIO, INC. Consolidated Statements of Income
For the Quarters Ended March 31, -------------------------------- 1996 1995 ------------ ------------- REVENUES - Note 10 Publishing, Net $4,348,000 $2,190,000 Film 3,259,000 28,000 ---------- ---------- 7,607,000 2,218,000 COST OF SALES - Publishing 3,136,000 1,335,000 COST OF SALES - Film 2,395,000 - ---------- ---------- 2,076,000 883,000 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Note 7 1,292,000 811,000 ---------- ---------- Income from operations 784,000 72,000 NET INTEREST INCOME (EXPENSE) 48,000 (19,000) Income before income taxes 832,000 53,000 PROVISION FOR INCOME TAXES - Note 5 $ 331,000 20,000 Net income $ 501,000 $ 33,000 ========== ========== Net income per share $ .10 $ .01 ========== ========== Weighted average number of shares outstanding 5,263,000 3,934,000 ========== ==========
See accompanying notes to consolidated financial statements. 2 4 DOVE AUDIO, INC. Consolidated Statements of Cash Flows
For the Quarters Ended -------------------------------- March 31, -------------------------------- 1996 1995 ----------- ------------ OPERATING ACTIVITIES Net income $ 501,000 $ 33,000 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 56,000 15,000 Amortization of production masters 1,031,000 274,000 Amortization of film costs 2,435,000 - Changes in operating assets and liabilities Accounts receivable (749,000) 2,808,000 Deferred tax asset (3,000) 20,000 Inventory (301,000) (198,000) Film costs (344,000) (100,000) Expenditures for production masters (1,328,000) (537,000) Prepaid expenses and other assets 452,000 (8,000) Accounts payable and accrued expenses (210,000) (18,000) Royalties payable (40,000) (54,000) Income taxes - (162,000) Advances and deferred revenue (2,561,000) (328,000) ----------- ------------ Net cash provided by (used in) operating activities (1,061,000) 1,745,000 ----------- ------------ INVESTING ACTIVITIES Purchase of marketable securities (214,000) - Purchases of property and equipment (117,000) (58,000) ----------- ------------ Net cash used in investing activities (331,000) (58,000) FINANCING ACTIVITIES Proceeds from sale of common stock 1,498,000 729,000 Proceeds of bank borrowings - 500,000 Repayments of notes payable - (1,004,000) ----------- ------------ Net cash provided by financing activities 1,498,000 225,000 ----------- ------------ Net increase in cash and cash equivalent 106,000 1,912,000 CASH AND CASH EQUIVALENTS AT BEGINNING OF QUARTER 4,946,000 503,000 ----------- ------------ CASH AND CASH EQUIVALENTS AT END OF QUARTER $ 5,052,000 $ 2,415,000 =========== ============ SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest Cash paid for income taxes $ 7,000 $ 33,000 -- $ 245,000
See accompanying notes to consolidated financial statements. 3 5 DOVE AUDIO, INC. Notes to Consolidated Financial Statements NOTE 1 - BASIS OF PRESENTATION, ORGANIZATION AND BUSINESS The accompanying consolidated financial statements of Dove Audio, Inc. ("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 Annual Report on Form 10-KSB for the fiscal year ended December 31, 1995. In the opinion of management, the accompanying consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) which are necessary for a fair presentation. The results of operations for the three month period ended March 31, 1996 are not necessarily indicative of results to be expected for the full fiscal year. Dove Audio, Inc. is engaged in the business of producing and distributing books on tape (audio books). The Company acquires audio publishing rights for specific titles or groups of titles on a worldwide basis, in perpetuity and often including interactive media applications. The Company is also engaged in the publication of printed books; the development and production of movies-for-television, mini-series and videos; and the acquisition and distribution of feature films. NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES Production Masters Production masters are stated at cost net of accumulated amortization. Costs incurred for production masters, including non-refundable advances, royalties paid to authors and readers, as well as recording and design costs, are capitalized and amortized over a two-year period from the time a title is initially distributed, consistent with the estimated revenue for a title. For audio and printed book titles released prior to January 1, 1996, this has generally resulted in amortization of approximately 80% of a title's production master costs in the initial quarter of release, with the remaining 20% amortized in the fifth quarter of release. Based on management's current estimates with respect to the timing of revenues, audio titles released on or after January 1, 1996 are amortized on a quarter-by-quarter basis over a two year period. This will result in approximately 80% of such an audio title's production master cost being amortized in the initial year of release. The change has been made to the amortization of audio title production master cost to better match such amortization to the Company's current estimated revenue for audio titles released on or after January 1, 1996. The effect of this change on the first quarter of 1996 was to reduce the production master amortization component of Cost of Sales by approximately $236,000. The amortization of printed books remains unchanged. Any portion of production masters which are not estimated to be fully recoverable from future revenues are charged to amortization expense in the period in which the loss becomes evident. 4 6 DOVE AUDIO, INC. Notes to Consolidated Financial Statements (Continued) NOTE 3 - PRODUCTION MASTERS Production masters, net of accumulated amortization of $7,419,000 at March 31, 1996 consisted of the following: Released titles $1,164,000 ---------- Unreleased titles 1,891,000 ---------- Total $3,055,000 ==========
NOTE 4 - FILM COSTS The following is an analysis of film costs as of March 31, 1996: Non Current: Television and theatrical films released less accumulated film amortization $2,058,000 ---------- $ (998,000) ---------- $1,060,000 ========== As of March 31, 1996 all net film costs will be amortized within the next three year period based upon the Company's current revenue estimates. NOTE 5 - INCOME TAXES Income taxes are computed in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." The Company provides for income taxes during interim reporting periods based upon an estimate of its annual effective tax rate. This estimate includes all anticipated federal, state and foreign income taxes. 5 7 DOVE AUDIO, INC. Notes to Consolidated Financial Statements (Continued) NOTE 6 - NOTES PAYABLE Notes payable at March 31, 1996 consist of the following: Mortgage Note $1,900,000 Other notes payable 37,000 ---------- $1,937,000 ==========
See "Liquidity and Capital Resources" NOTE 7 - RELATED PARTY TRANSACTIONS As of January 1, 1993, the Company entered employment agreements with two principal shareholders/officers which expire in December 1999. The agreements provide for aggregate compensation of no less than $275,000 each per year with certain provisions, including an indemnification and benefits such as health insurance and an automobile allowance. In addition, the majority shareholders/officers are entitled to an annual salary increase and bonus subject to certain limitations agreed upon with the underwriter of the Initial Public Offering at the discretion of the Company's Board of Directors. The Board of Directors approved an annual salary increase for the principal shareholders/officers to a combined total of $345,000 per year for 1995. Potential increases to the annual salary of the two principal shareholders/officers for 1996 are currently being reviewed for implementation. During 1995 the Company entered into two executive producer service agreements and an actor's television motion picture agreement with two principal shareholders/officers and a director. These agreements provide for aggregate compensation of $275,000 for acting and production services relating to the making of Home Song. The Company acquired audio book rights for fourteen titles which were written by a principal shareholder. The net audio sales (net returns) from these titles for the quarters ended March 31, 1996 and 1995 were ($63,000) and $37,000, respectively. 6 8 DOVE AUDIO, INC. Notes to Consolidated Financial Statements (Continued) During the first quarter of 1996 the Company made payments totaling $6,000 to a principal shareholder/officer for the business rental of a condominium owned by the officer. During the first quarter of 1996 the Company made payments totaling $5,000 with respect to auto lease payments, auto allowance, and insurance on automobiles owned by two principal shareholders/officers. NOTE 8 - COMMITMENTS AND CONTINGENCIES Litigation The Company is party to certain litigation involving the film Morning Glory. In the first of such matters, captioned In the Matter of The Arbitration Between Dove Audio, Inc., Michael Viner and Jerry Leider v. Steven Stern and Sharmhill Productions (B.C.), Inc. (Los Angeles Superior court Case No. BS 019699) (the "Enforcement Action"), the Company sought to enforce a binding arbitration awarded issued to it in September 1992 in the approximate amount of $4.5 million (plus attorneys' fees and interest accruing from the date of such award) relating to certain rights in such film and contracts relating thereto. In August 1993, the trial court affirmed such award and granted to the plaintiffs in such action, including the Company, a money judgment in such amount. In March 1995, the trial court ruling was appealed by the defendants to the California Court of Appeals, and in June 1995, the California Court of appeals affirmed the judgment. The Company is currently attempting to collect such judgment. In a related matter, captioned Dove Audio, Inc., Michael Viner and Jerry Leider v. Steven Stern, Sharma Stern, Sharmhill Productions (B.C.), Inc. et al.(Los Angeles Superior Court Case No. BC 072892; filed in January 1993), the Company and other plaintiffs have brought a fraudulent conveyance action relating primarily to a marital settlement between certain defendants named therein. The purpose of such action is to restore certain assets to the defendants in the Enforcement Action against which to levy if ultimately successful therein. Such action is in discovery and no trial date has been set. There is no assurance that the Company ultimately will prevail in these actions, or as to if, when or in what amounts the Company will be able to levy on any judgments issued in its favor. 7 9 DOVE AUDIO, INC. Notes to Consolidated Financial Statements (Continued) NOTE 8 - COMMITMENTS AND CONTINGENCIES (CONTINUED) The Company was served in February 1996 with a complaint in the action captioned Robert H. Tourtelot v. Dove Audio, Inc., Michael Viner and Stephen Singular (Los Angeles Superior Court Case No. SC040739) (the "Tourtelot Action"). The Tourtelot Action arises out of an alleged oral agreement between the Company and Tourtelot to prepare a book for publication by the Company. The First Amended Complaint (the"Tourtelot Complaint") alleges breach of oral contract, fraud and deceit, suppression, breach of an implied covenant and fair dealing, breach of fiduciary duty, infringement of common law copyright, conversion, conspiracy and seeks an accounting. The Company successfully removed the Tourtelot Action to the U.S. District Court for the central district of California and has filed a motion to dismiss all causes of action. The Tourtelot Complaint seeks relief of $1.0 Million in damages. The district court dismissed the copyright, breach of fiduciary duty, conversion, conspiracy and accounting causes of action and has remanded the breach of oral contract and fraud causes of action back to the state court. The Company intends to vigorously defend against the Tourtelot Complaint. While the Company believes it has good, meritorious defenses, there is no assurance that the Company will be able to successfully defend itself in the Tourtelot Action. The Company was served in February 1996 with a complaint in the action entitled Alexandra D. Datig v. Dove Audio (Los Angeles Superior Court Case No. BC145501) (the "Datig Action"). The Datig Action was brought by a contributor to, and relates to the writing of, the recently released book, You'll Never Make Love In This Town Again. Such complaint alleges breach of contract, breach of good faith and fair dealing, libel, fraud and deceit, intentional misrepresentation, negligent misrepresentation, interference with business opportunity, intentional infliction of emotional distress and negligent infliction of emotional distress. The complaint also alleges sexual harassment on the part of Michael Viner and the Company. The Datig Complaint prays for $1.0 Million in damages. The Company intends to vigorously defend against the Datig Complaint and has moved to strike all causes of action. While the Company believes it has good, meritorious defenses, there is no assurance that the Company will be able to successfully defend itself in the Datig Action. The Company has been and is currently involved in various litigation matters and claims in the normal course of business. Based in part upon 8 10 DOVE AUDIO, INC. Notes to Consolidated Financial Statements (Continued) consultation with legal counsel, management believes that the outcome of the various actions will not result in any significant impact on the Company's financial statements. Office Lease The Company leases office space under a noncancelable operating lease expiring December 1998. The Company's lease obligation is secured by a $15,000 irrevocable letter of credit. Rent expense was $63,000 and $62,000 in the first quarters of 1996 and 1995, respectively. The minimum future noncancelable lease expense under the lease is approximately $250,000 annually for the years 1996 through 1998, inclusive. The lease is subject to annual rent escalations and the pass-through of costs. NOTE 9 - CAPITAL ACTIVITIES Private Placements In December 1995 the Company received net proceeds of approximately $4,770,000 from the initial closings of a private placement ("Placement") of the Company's equity securities. Pursuant to the December closing of the Placement the Company issued 729,687 shares of common stock and common stock purchase warrants allowing the purchase of 729,687 shares of Common Stock at $12.00 per share exercisable for a period of 51 months beginning 9 months subsequent to the initial closing of the Placement. In January 1996 the Company received additional net proceeds of approximately $1,533,000 from the Placement of the Company's equity securities. Pursuant to the January 1996 closings of the Placement the Company issued 220,313 shares of common stock and common stock purchase warrants allowing the purchase of 220,313 shares of common stock at $12.00 per share exercisable for a period of 51 months beginning 9 months subsequent to the initial closing of the Placement. Preferred Stock In 1995, Mr. Viner exercised his option to acquire 214,113 shares of Series A Preferred Stock. The Series A Preferred Stock has a stated value of $4.00 per share. Dividends are cumulative and occur at a rate of 8% (based on $8.00 per share) per annum. Each 9 11 DOVE AUDIO, INC. Notes to Consolidated Financial Statements (Continued) NOTE 9 - CAPITAL ACTIVITIES (CONTINUED) share of Series A Preferred Stock is convertible into one share common stock at the option of the holder. The Series A Preferred Stock has a liquidation preference equal to its stated value plus unpaid dividends. Stock Options And Warrants The Board of Directors of the Company adopted the 1994 Stock Incentive Plan (the "Plan"). The Plan provides for the grant of options to purchase up to an aggregate of 400,000 shares of the Common Stock of the Company (subject to an anti-dilution provision providing for adjustment in the event of certain changes in the Company's capitalization). The Plan authorizes the granting of stock incentive awards ("Awards") to qualified officers, employee directors, key employees, and third parties providing valuable services to the Company, e.g., independent contractors, consultants, and advisors to the Company. The Plan is administered by a committee appointed by the Company Board consisting of two or more members, each of whom must be disinterested (the "Committee"). The Committee determines the number of shares to be covered by an Award, the term and exercise price, if any, of the Award, and other terms and provisions of Awards; members of the Committee receive formula awards. Awards can be Stock Options, Stock Appreciation Rights, Performance Share Awards, and Restricted Stock Awards. The number and kind of shares available under the Plan are subject to adjustment in certain events. Options activity under the Plan during the first quarter of 1996 was as follows: Options outstanding at January 1, 1996 309,499 $6.00 - $9.75 Options outstanding at March 31, 1996 309,499 $6.00 - $9.75 --------
10 12 DOVE AUDIO, INC. Notes to Consolidated Financial Statements (Continued) NOTE 9 - CAPITAL ACTIVITIES (CONTINUED) At March 31, 1996 options to acquire 23,331 shares of common stock under the Plan were exercisable. In addition to the above options issued under the Plan, the Company granted options to acquire 250,000 shares of Common Stock at an exercise price of $.01 per share in 1994 and 75,000 shares of Common Stock at an exercise price of $8.00 per share in 1995. At March 31, 1996 options covering the 250,000 shares noted above were exercisable.
Number of Shares of Number of Common Warrants Stock --------- ---------- Warrants outstanding at January 1, 1996 1,134,687 984,687 $ 6.00 - $12.00 Warrants issued 220,313 220,313 $12.00 --------- --------- Warrants outstanding at March 31, 1996 1,355,000 1,205,000 $6.00 - $12.00 ========= =========
At March 31, 1996 warrants to acquire 405,000 shares of common stock were exercisable. NOTE 10 - MAJOR CUSTOMERS AND SUPPLIERS For the quarters ended March 31, 1996 and 1995, revenues, net of returns, from the Company's three major customers approximated 37% and 51% of net revenues. A significant amount of audio inventory is supplied by one manufacturer. The Company is not dependent on the manufacturer as its sole source of product. 11 13 DOVE AUDIO, INC. Notes to Consolidated Financial Statements (Continued) NOTE 11 - SUBSEQUENT EVENTS On April 29, 1996, the Company acquired Four Point Entertainment, Inc. ("Four Point") for consideration of $2.5 million in cash and 427,273 shares of Dove Common Stock, with an earn-out provision of up to an additional 163,636 shares of Dove Common Stock. Four Point develops and produces various forms of television programming, including pilots, series, telefilms, mini-series, talk shows, game shows and infomercials for network, cable and syndicated markets. In addition, Four Point owns and operates post-production and edit facilities for its own and third-party programming. The former principal officers of Four Point, Shukri Ghalayini and Ronald Ziskin also entered into employment agreements with Dove dated April 29, 1996. Pursuant to these employment agreements, Shukri Ghalayini becomes President and Chief Executive Officer of Dove Four Point, Inc. ("Dove Four Point") and Ronald Ziskin becomes Chief Operating Officer of Dove Four Point. Shukri Ghalayini will also join the Board of Directors of the Company. Messrs. Ghalayini and Ziskin also each received options to purchase 300,000 shares of Dove Common Stock at an exercise price of $11.00 per share, such options to vest subject to continuous service for a period of approximately 10 years, or earlier in the event certain performance thresholds are met at Dove Four Point. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion and analysis below should be read in conjunction with the Consolidated Financial Statements of the Company and the Notes to the Consolidated Financial Statements included elsewhere in this Report. OVERVIEW Dove commenced business in 1985 as one of the pioneers of the audio book industry and has become one of the leading independent producers of audio books in the United States. The Company produces and distributes over 100 new titles annually and has built a library of over 1000 titles. The Company is also engaged in the publication of printed books under the Dove imprint and the development and production of movies-for-television, mini-series, and videos and the acquisition and distribution of feature films. A significant portion of the Company's expenses are relatively fixed, and therefore reduced sales in any quarter relating from the timing of delivery of product or otherwise could adversely affect operating results for that quarter. To complement its audio book operations, the Company is increasing significantly its publication of printed books. The Company is developing up to 70 titles for potential publication in print in 1996. In addition, the Company intends to continue to diversify its 12 14 DOVE AUDIO, INC. operations through its theatrical feature film division. Subject to appropriate opportunities becoming available to the Company, the Company plans to acquire independent films for distribution in the U.S. and Canada on an all rights basis (including theatrical, home video and all forms of television). The Company recently completed a two year video output arrangement with Paramount Pictures wherein Paramount will market and distribute Dove product under the Dove Home Video label. The Company's catalog of 1996 audio releases includes Drink With the Devil by Jack Higgins, The Prince of Wales by Jonathan Dimbleby, and On Selling by Mark H. McCormack. The Company's catalog of 1996 printed book releases includes White Flame by James Grady, The Heidi Principle by Rick Montgomery and Legacy of Deception by Stephen Singular. The Company's television and theatrical films have been based principally upon novels written by two authors for which the Company has published audio books. Currently, the Company has several television projects in development including a follow-up to the Dove production of Home Song by LaVyrle Spencer which aired on CBS in March 1996. The Company generally seeks to limit its financial risk in the production of television movies and mini-series and feature films by pre-sales and licensing to third parties. The production of television and theatrical films has been sporadic over the last several years and significant variances in operating results from year-to-year and quarter-to-quarter can be expected for film revenues. On April 29, 1996, the Company acquired Four Point Entertainment, Inc. ("Four Point") for consideration of $2.5 million in cash and 427,273 shares of Dove Common Stock, with an earn-out provision of up to an additional 163,636 shares of Dove Common Stock. Four Point develops, and produces various forms of television programming, including pilots, series, telefilms, mini-series, talk shows, game shows and infomercials for network, cable and syndicated markets. In addition, Four Point owns and operates post-production and edit facilities for its own and third-party programming. The acquisition has been accounted for by the Company under purchase accounting from April 29, 1996. As a result of the Four Point acquisition, the Company's results of operations for future periods may not be comparable to prior periods. RESULTS OF OPERATIONS The following table sets forth (i) publishing and film revenues and (ii) cost of sales, film amortization, selling, general and administrative expenses as a percentage of total revenues for the periods indicated: QUARTERS ENDED MARCH 31,
1996 1995 ---- ---- REVENUES Publishing 57.2% 98.7% Film 42.8 1.3 ----- ----- Total 100% 100% ===== ===== OPERATING EXPENSES Cost of sales - Publishing 41.2% 60.2% Cost of sales - Film 31.5 --- Selling, general & administrative 17.0 36.6 ----- ----- Total 89.7% 96.8% ===== =====
13 15 DOVE AUDIO, INC. QUARTER ENDED MARCH 31, 1996 COMPARED TO QUARTER ENDED MARCH 31, 1995 PUBLISHING Revenues. Net publishing revenues for the three months ended March 31, 1996 increased 99% to $4,348,000, compared with $2,190,000 for the three months ended March 31, 1995. The increase was primarily attributable to the successful release of the Company's New York Times bestselling printed book "You'll Never Make Love In This Town Again." The contribution from the Company's other audio and printed books was in line with historical performance. Net publishing revenues in the three month period ended March 31, 1995 primarily consisted of sales of audio books and revenues from the licensing of rights to the Company's products to third parties. Substantially all of the Company's sales of book products are and will continue to be subject to potential returns by distributors and retailers if not resold to the public. Although the Company makes allowances and reserves for returned product that it believes are adequate, significant increases in return rates could materially and adversely impact the Company's financial condition or results of operations. Titles currently scheduled for release in the second quarter of 1996 include "Bad As I Wanna Be" by Dennis Rodman on audio and "White Flame" by James Grady in print. Cost of Sales. Cost of sales for the three months ended March 31, 1996 increased 135% to $3,136,000, compared with $1,335,000 for the three months ended March 31, 1995. The increase was primarily attributable to an increase in the total number of audio and printed books sold compared to the equivalent period in 1995. Cost of sales as percentage of net publishing revenues increased from 61% in the period ended March 31, 1995 to 72% in the period ended March 31, 1996. The increase was primarily attributable to higher author and reader royalty advances. FILM Revenues. Film revenues for the three months ended March 31, 1996 increased to $3,259,000, compared with $28,000 for the three months ended March 31, 1995. The increase was attributable to the delivery by the Company of the television film Home Song which aired on CBS in March 1996. This production generated approximately $3,000,000 in revenues. The remaining film revenues in the first quarter of 1996 were generated by sales from the Company's theatrical feature film division. The Company is developing additional television and mini-series for CBS based on the novels of LaVyrle Spencer. In this respect, the Company has recently received a production commitment for a second television movie project, Family Blessing, which is scheduled to go into production in 1996. There is no assurance that projects in development ultimately will be produced, aired or distributed. Future film revenues will depend upon the development and success of film properties, as well as the timing of the release or licensing of such properties. The Company is also scheduled to release a theatrical project entitled "A Boy Called Hate" in the second quarter of 1996. Cost of Sales. Film cost of sales for the 3 months ended March 31, 1996 increased to $2,395,000, compared with $0 for the three months ended March 31, 1995. The increase was primarily due to the recent release of Home Song which aired on CBS in March 1996. Cost of sales is primarily film amortization which is generally incurred in proportion to the estimated revenues generated from the release or licensing of film properties. GENERAL Gross Profit. The Company's gross profit for the 3 months ended March 31, 1996 increased 135% to $2,076,000, compared with $883,000 for the three months ended March 31, 1995. Gross profit margin as a percentage of revenue decreased from 40% in the first quarter of 1995 to 28% in the first quarter of 1996. This decrease resulted primarily from the fact that $3,259,000 of the 1996 first quarter 14 16 DOVE AUDIO, INC. revenue was from film activities, which carry a lower profit margin than publishing activities. Selling, General and Administrative. Selling, general and administrative expenses ("SG&A) include costs associated with selling, marketing and promoting the Company's products, as well as general corporate expenses including salaries, occupancy costs, professional fees, travel and entertainment. SG&A increased 59% to $1,292,000 for the three months ended March 31, 1996, compared to $811,000 for the three months ended March 31, 1995. The increase in SG&A was primarily attributable to increased salary costs related to the Company's increase in headcount which will facilitate future growth. The Company expects SG&A costs to continue to increase as the Company grows further including as a result of the recent Four Point acquisition. Net Interest Income (Expense). Net Interest Income for the 3 months ended March 31,1996 was $48,000, compared to Net Interest Expense for the 3 months ended March 31, 1995 of $14,000 due to lower borrowings and the repayment and cancellation of the Company's line of credit with Bank of America. LIQUIDITY AND CAPITAL RESOURCES The Company's operations, in general, are typically capital intensive. The Company has experienced from time to time significant negative cash flows from operating activities which have been offset by equity and debt financings. As the Company expands its publishing, production and distribution activities, it expects to continue to experience negative cash flows from operating activities from time to time. In such circumstances, the Company will be required to fund at least a portion of production and distribution costs, pending receipt of anticipated future revenues, from working capital or from additional debt or equity financings from outside sources. There is no assurance that the Company will be able to obtain such financing or that such financing, if available, will be on terms satisfactory to the Company. The Company's film production activities can affect its capital needs in that the revenues from the initial licensing of television programming or films may be less than the associated production costs. The ability of the Company to cover the production costs of particular programming or films is dependent upon the availability, timing and the amount of fees obtained from distributors and other third parties, including revenues from foreign or ancillary markets where available. In any event, the Company from time to time is required to fund at least a portion of its production costs, pending receipt of film revenues, out of its working capital. Although the Company's strategy generally is not to commence principal photography without first obtaining commitments which cover all or substantially all of the budgeted production costs, from time to time the Company may commence principal photography without having obtained commitments equal to or in excess of such costs. In order to obtain rights to certain properties for the Company's publishing and film operations, the Company may be required to make advance cash payments to sources of such properties, including book authors and publishers. While the Company generally attempts to minimize the magnitude of such payments and to obtain advance commitments to offset such payments, the Company is not always able to do so. Since its inception, the Company has satisfied its liquidity needs principally through the sale of equity securities, loans from or guaranteed by certain of its shareholders, other debt, and cash generated from operations. In December 1995 and January 1996, the Company raised net proceeds of $6,303,000 from the sale of 76 Units in a private placement. Each Unit consisted 15 17 DOVE AUDIO, INC. of 12,500 shares of the Company's Common Stock and 12,500 warrants to purchase 12,500 shares of the Company's Common Stock at $12.00 (exercisable on or after September 14, 1996). The net proceeds are being used by the Company to fund increased working capital needs during 1996 and to finance strategic acquisitions of product and complementary business (i.e. the Four Point acquisition). The Company is obligated to register the shares and warrant shares underlying the Units on or prior to June 14, 1996. In connection with the acquisition of Four Point, which was completed on April 29, 1996, the Company guaranteed certain term debt (in the principal amount of $852,000 as of May 10, 1996) and a $1.0 million revolving line of credit ($573,000 principal amount outstanding as of May 10, 1996) of Four Point from Sanwa Bank California. The term loan and the line of credit mature on October 3, 1998 and June 3, 1996 respectively and are secured by substantially all of Four Point's assets. The Company is in discussions with the bank to consider a term-out of the line of credit when it expires on June 3, 1996. The credit documents contain various financial and other covenants to which Four Point must adhere. While Four Point was out of compliance with the net worth covenant as of March 31, 1996, the Company and the bank have agreed to discuss a mutually satisfactory adjustment to such covenant or other remedy in light of the change in control of Four Point (to which the bank consented) and the receipt by the bank of the Dove corporate guarantee. In April 1996 the Company refinanced its $1,900,000 mortgage note which the Company borrowed from the seller in conjunction with the acquisition of its new office building. The new loan from a bank is secured by a deed of trust and bears interest at a fixed rate of 8% per annum. The loan matures in April 2001 and provides for a 20 year monthly amortization payment rate. As of May 9, 1996 the Company had cash and short-term investments of approximately $2,000,000. The Company used $1,061,000 for operating activities during the three month period ended March 31, 1996, which was offset from the proceeds of the sale of common stock. See "Consolidated Financial Statements of the Company - Consolidated Statements of Cash 16 18 DOVE AUDIO, INC. Flows." The Company believes its existing working capital, together with borrowings under its line of credit, anticipated cash flows from operations and other funding sources, will be sufficient to meet the Company's working capital requirements with respect to its current commitments for at least the next twelve months. However, the Company intends to seek to augment its working capital through an increased bank line of credit, the issuance of equity or debt securities or otherwise, the availability or terms of which cannot be assured. The Company plans to expand its development, production and distribution activities, including the expansion of its printed book publishing and film operations (although there is no assurance that the Company will expand or that such expansion will be profitable). Such expansion may include future acquisitions of library product or other assets complementary to its current operations or acquisition of rights involving significantly greater outlays of capital than required in the business conducted to date by the Company. Expansion of the Company or acquisitions of particular properties or libraries, to a significant extent, would require capital resources beyond those available to the Company, in which case such expansion will be dependent upon the ability of the Company to obtain additional sources of working capital, whether through the issuance of additional equity or debt securities, additional bank financing or otherwise. INFLATION The Company does not believe its business and operations have been materially affected by inflation. 17 19 PART II OTHER INFORMATION Item 1. Legal Proceedings The Company was served in February 1996 with a complaint in the action captioned Robert H. Tourtelot v. Dove Audio, Inc., Michael Viner and Stephen Singular (Los Angeles Superior Court Case No. SC040739) (the "Tourtelot Action"). The Tourtelot Action arises out of an alleged oral agreement between the Company and Tourtelot to prepare a book for publication by the Company. The First Amended Complaint (the"Tourtelot Complaint") alleges breach of oral contract, fraud and deceit, suppression, breach of an implied covenant and fair dealing, breach of fiduciary duty, infringement of common law copyright, conversion, conspiracy and seeks an accounting. The Company successfully removed the Tourtelot Action to the U.S. District Court for the central district of California and has filed a motion to dismiss all causes of action. The Tourtelot Complaint seeks relief of $1.0 Million in damages. The district court dismissed the copyright, breach of fiduciary duty, conversion, conspiracy and accounting causes of action and has remanded the breach of oral contract and fraud causes of action back to the state court. The Company intends to vigorously defend against the Tourtelot Complaint. While the Company believes it has good, meritorious defenses, there is no assurance that the Company will be able to successfully defend itself in the Tourtelot Action. The Company was served in February 1996 with a complaint in the action entitled Alexandra D. Datig v. Dove Audio (Los Angeles Superior Court Case No. BC145501) (the "Datig Action"). The Datig Action was brought by a contributor to, and relates to the writing of, the recently released book, You'll Never Make Love In This Town Again. Such complaint alleges breach of contract, breach of good faith and fair dealing, libel, fraud and deceit, intentional misrepresentation, negligent misrepresentation, interference with business opportunity, intentional infliction of emotional distress and negligent infliction of emotional distress. The complaint also alleges sexual harassment on the part of Michael Viner and the Company. The Datig Complaint prays for $1.0 Million in damages. The Company intends to vigorously defend against the Datig Complaint and has moved to strike all causes of action. While the Company believes it has good, meritorious defenses, there is no assurance that the Company will be able to successfully defend itself in the Datig Action. Item 5. Other Information On April 29, 1996, the Company acquired Four Point Entertainment, Inc. ("Four Point") for consideration of $2.5 million in cash and 427,274 shares of common stock of the Company ("Common Stock"), with an earn-out provision of up to an additional 163,636 shares of Common Stock. Four Point develops and produces various forms of television programming, including pilots, series, telefilms, mini-series, talk shows, game shows and infomercials for network, cable and syndicated markets. In addition, Four Point owns and operates post-production and edit facilities for its own and third-party programming. Based upon a preliminary review and evaluation, approximately $6.0 million of the $8.0 million initial purchase price has been allocated to goodwill and will be amortized over a 25 year period. The earn-out, to the extent earned, will be treated as an increase in goodwill and will be amortized coterminously with the original 25 year period. If the full earn-out were earned or paid, goodwill would be increased by a total of $2.0 million (assuming a then current market price of $12.25 per share of Common Stock) and annual amortization expense associated with the additional goodwill would be $80,000 (for an aggregate annual amortization expense of $319,000). Management of the Company is in the process of reviewing the allocation of the purchase price and, when completed, may modify its preliminary allocation. The Four Point acquisition has been accounted for by the Company under purchase accounting from the April 29, 1996 acquisition date. The former principal officers of Four Point, Shukri Ghalayini and Ronald Ziskin entered into employment agreements with Dove Four Point, Inc. ("Dove Four Point"), a wholly owned subsidiary of the Company, dated April 29, 1996. Pursuant to these employment agreements, Shukri Ghalayini became President and Chief Executive Officer of Dove Four Point and Ronald Ziskin became Chief Operating Officer of Dove Four Point. Shukri Ghalayini was to join the Board of Directors of the Company. Messrs. Ghalayini and Ziskin also each received options to purchase 300,000 shares of Dove Common Stock at an exercise price of $11.00 per share, such options to vest subject to continuous service for a period of approximately 10 years, or earlier in the event certain performance thresholds are met at Dove Four Point. On June 14, 1996, the Company and Dove Four Point terminated the employment of Shukri Ghalayini for "cause" under his employment agreement. As a result, Mr. Ghalayini's unvested options to purchase 300,000 shares of Common Stock were automatically canceled. The other former principal shareholder of Four Point, Ronald Ziskin, continues to serve as Chief Operating Officer of Dove Four Point under his three-year employment agreement. On June 17, 1996, the Company and Dove Four Point filed a complaint against Shukri Ghalayini in the Superior Court for the State of California for the County of Los Angeles. The complaint alleges, among other things, that Mr. Ghalayini (i) breached his fiduciary duty to Four Point (now owned by Dove) by diverting corporate assets to pay personal expenses, (ii) made false representations to induce the Company and Dove Four Point to complete the acquisition, including misrepresenting the tangible shareholders' equity of Four Point as of the closing and diverting production funds and holding checks previously drawn to pay accounts payable in order to meet a closing condition that outstanding bank debt be below a specified level and (iii) made false representations to induce Dove Four Point to enter into his employment agreement, including that he was essential to the performance of Four Point. On June 17, 1996, Shukri Ghalayini filed a complaint against the Company, Dove Four Point, Michael Viner and Charles Weber in the Superior Court for the State of California for the County of Los Angeles. The complaint alleges, among other things, (i) breach of contract against Dove Four Point due to termination of his employment without good cause, adequate notice or the opportunity to cure any alleged breaches and (ii) fraud in that defendants allegedly never intended to perform his employment agreement. Mr. Ghalayini seeks damages under his employment agreement estimated at not less than $900,000, loss of future earnings during his work life expectancy estimated at not less than $20,000,000, damages to his professional reputation and from mental and emotional distress, punitive damages and attorney's fees. The Company believes that it has good and valid claims against Mr. Ghalayini and good and meritorious defenses to his claims, although the above actions are in the preliminary stage and there can be no assurance that the Company will ultimately prevail in either of the two actions. The Company believes that the actions will not have a material adverse effect on the Company's financial position or results of operations. Set forth herein are the following financial statements and pro forma financial information relating to the acquisition of Four Point:
PAGE ---- 1. Pro Forma Condensed Consolidated Balance Sheet (Unaudited) as of March 31, 1996......................................... F-1 2. Pro Forma Condensed Consolidated Statement of Operations (Unaudited) for the Three Months Ended March 31, 1996........ F-2 3. Pro Forma Condensed Consolidated Statement of Operations (Unaudited) for the Year Ended December 31, 1995............. F-3 4. Notes to Unaudited Pro Forma Financial Information........... F-4 5. Independent Auditors' Report................................. F-6 6. Four Point Entertainment, Inc. and Subsidiary Consolidated Balance Sheet dated January 31, 1996......................... F-7 7. Four Point Entertainment, Inc. and Subsidiary Consolidated Statements of Operations for Fiscal Years Ended January 31, 1996 and 1995.................................... F-8 8. Four Point Entertainment, Inc. and Subsidiary Consolidated Statements of Stockholders' Equity for Fiscal Years Ended January 31, 1996 and 1995.................................... F-9 9. Four Point Entertainment, Inc. and Subsidiary Consolidated Statements of Cash Flows for Fiscal Years Ended January 31, 1996 and 1995.................................... F-10 10. Four Point Entertainment, Inc. and Subsidiary Notes to Consolidated Financial Statements Dated January 31, 1996..... F-11
Item 6. Exhibits and Reports on Form 8-K (a) Exhibits
Exhibit Number - ------- 2.1 Agreement and Plan of Merger by and among the Company, Dove Four Point, Inc., Four Point Entertainment, Inc. and holders of capital stock of Four Point Entertainment, Inc., dated as of April 12, 1996 (filed as the same number exhibit in the Company's Quarterly Report on Form 10-QSB filed with the Commission on May 13, 1996) 4.1 Form of Registration Rights Agreement (filed as the same number exhibit in the Company's Quarterly Report on Form 10-QSB filed with the Commission on May 13, 1996) 10.1 Employment Agreement dated as of April 29, 1996 between Shukri Ghalayini and the Company, together with Stock Option Award Agreement between the Company and Mr. Ghalayini dated April 29, 1996 (filed as the same number exhibit in the Company's Quarterly Report on Form 10-QSB filed with the Commission on May 13, 1996) 10.2 Employment Agreement dated as of April 29, 1996 between Ronald Ziskin and the Company, together with Stock Option Agreement between the Company and Mr. Ziskin dated April 29, 1996 (filed as the same number exhibit in the Company's Quarterly Report on Form 10-QSB filed with the Commission on May 13, 1996) 10.3 Business Loan Agreement between Asahi Bank of California and Dove Audio, Inc. dated April 24, 1996 in the amount of $1,900,000 (filed as the same number exhibit in the Company's Quarterly Report on Form 10-QSB filed with the Commission on May 13, 1996). 23.1 Consent of KPMG Peat Marwick LLP 27 Financial Data Schedule
(b) Reports on Form 8-K A Form 8-K/A was filed on March 8, 1996 submitting an unredacted exhibit previously filed as a redacted exhibit on the Company's Form 8-K filed July 17, 1995. 20 CERTAIN PRO FORMA INFORMATION (Unaudited) The following unaudited pro forma condensed consolidated balance sheet as of March 31, 1996 and the pro forma condensed consolidated statements of operations of the three months ended March 31, 1996 and the year ended December 31, 1995 give effect to the April 29, 1996 acquisition by the Company of Four Point Entertainment, Inc. ("Four Point"). The pro forma information is based on the historical financial statements of the Company and Four Point, giving effect to the Four Point acquisition under the purchase method of accounting. The unaudited pro forma condensed consolidated statements of operations have been prepared as if the above transactions had occurred at the beginning of the period presented. The unaudited pro forma condensed consolidated balance sheet data have been prepared as if the Four Point acquisition had occurred March 31, 1996. These pro forma statements may not be indicative of the results that would have occurred if the above transactions had occurred on the dates indicated or which may be obtained in the future. The pro forma financial statements should be read in conjunction with the financial statements and notes of the Company contained in its most recent Form 10-KSB, the Company's Quarterly Report on Form 10-QSB for the three months ended March 31, 1996 and the financial statements and accompanying notes of Four Point contained elsewhere herein. On April 29, 1996, the Company acquired Four Point for consideration of $2.5 million in cash and 427,274 shares of common stock of the Company ("Common Stock"), with an earn-out provision of up to an additional 163,636 shares of Common Stock. Four Point develops and produces various forms of television programming, including pilots, series, telefilms, mini-series, talk shows, game shows and infomercials for network, cable and syndicated markets. In addition, Four Point owns and operates post-production and edit facilities for its own and third-party programming. Based upon a preliminary review and evaluation, approximately $6.0 million of the $8.0 million initial purchase price has been allocated to goodwill and will be amortized over a 25 year period. The earn-out, to the extent earned, will be treated as an increase in goodwill and will be amortized coterminously with the original 25 year period. If the full earn-out were earned or paid, goodwill would be increased by a total of $2.0 million (assuming a then current market price of $12.25 per share of Common Stock) and annual amortization expense associated with the additional goodwill would be $80,000 (for an aggregate annual amortization expense of $319,000). Management of the Company is in the process of reviewing the allocation of the purchase price and, when completed, may modify its preliminary allocation. The Four Point acquisition has been accounted for by the Company under purchase accounting from the April 29, 1996 acquisition date. 21 Pro Forma Condensed Consolidated Balance Sheet (Unaudited) March 31, 1996 (in 000's)
Four Point Dove Entertain- Pro Forma Consolidated Audio, Inc. ment, Inc. Adjustments Pro Forma 3/31/96(a) 4/30/96(a) Cash and cash equivalents $ 5,052 11 (2,500)(b) 2,563 Accounts receivable 2,356 788 3,144 Inventory 4,006 - 4,006 Other current assets 760 286 1,046 Loans to officers 182 182 -------------- ---------- ---------- Total current assets 12,174 1,267 10,941 Production masters 3,055 - 3,055 Film costs 1,060 1,506 2,566 Property and equipment 2,767 682 924 (c) 4,373 Investments - 309 309 Goodwill - - 8,003 (b) 5,985 (924)(c) (1,094)(d) --------------- -------------- -------------- Total assets $ 19,056 3,764 27,229 ============== =============== =============== Accounts payable and accrued expenses 1,927 1,137 269 (b) 3,333 Notes payable 1,937 1,253 3,190 Other current liabilities 690 280 970 -------------- --------------- --------------- Total current liabilities 4,554 2,670 7,493 Preferred Stock 856 10 (10)(d) 856 Common stock 49 159 4 (b) 53 (159)(d) Additional paid-in-capital 14,761 911 5,230 (b) 19,991 (911)(d) Accumulated deficit (1,164) 1,115 (1,115)(d) (1,164) Treasury stock - (1,101) 1,101 (d) - -------------- --------------- --------------- Total shareholders' equity 14,502 1,094 19,736 -------------- --------------- --------------- Total liabilities and shareholders' equity $ 19,056 3,764 27,229 ============== =============== ===============
F-1 22 Pro Forma Condensed Consolidated Statement of Operations (Unaudited) Three months ended March 31, 1996 (in 000's, except per share amounts)
Four Point Dove Entertain- Pro Forma Consolidated Audio, Inc. ment, Inc. Adjustments Pro Forma Three months Three months ended ended 3/31/96(a) 4/30/96(a) Revenues: Publishing 4,138 - 4,138 Film 3,259 886 4,145 -------------- --------------- --------------- Total sales 7,397 886 8,283 Cost of sales 2,886 1,039 46 (e) 3,971 Film amortization 2,435 - 2,435 -------------- --------------- --------------- Gross profit 2,076 (153) 1,877 Selling, general and administrative 1,292 753 60 (f) 2,063 (42)(g) -------------- --------------- --------------- Income (loss) from operations 784 (906) (186) Net interest income (expense) 48 (33) 15 Other income (expense) - 19 19 -------------- --------------- ------------- --------------- Income (loss) before income taxes 832 (920) 64 (152) Income taxes (benefit) 331 (332) (22)(h) (23) -------------- --------------- ------------- --------------- Net income (loss) 501 (588) 42 (129) ============== =============== ============= =============== Net income (loss) per share $0.10 ($0.02) ============== =============== Weighted average number of shares outstanding 5,263 5,690 ============== ===============
F-2 23 Pro Forma Condensed Consolidated Statement of Operations (Unaudited) Year ended December 31, 1995 (in 000's, except per share amounts)
Four Point Dove Entertain- Pro Forma Consolidated Audio, Inc. ment, Inc. Adjustments Pro Forma Year ended Year ended 12/31/95(a) 1/31/96(a) Revenues: Publishing 10,961 - 10,961 Film 187 21,046 21,233 -------------- --------------- --------------- Total sales 11,148 21,046 32,194 Cost of sales 7,169 13,190 185 (c) 20,544 Film amortization 99 4,706 4,805 -------------- --------------- --------------- Gross profit 3,880 3,150 6,845 Selling, general and administrative 3,696 2,945 239 (d) 6,264 (616)(e) -------------- --------------- --------------- Income from operations 184 205 581 Net interest income (expense) (22) (52) (74) Other income (expense) (11) (37) (48) -------------- --------------- ------------- --------------- Income before income taxes 151 116 192 459 Income taxes 60 43 65 (f) 168 -------------- --------------- ------------- --------------- Net income 91 73 127 291 ============== =============== ============= =============== Net income per share $0.02 $0.06 ============== =============== Weighted average number of shares outstanding 4,365 4,792 ============== ===============
F-3 24 Notes to Unaudited Pro Forma Financial Information (a) The Company's first quarter ends March 31 and Four Point's first quarter ends April 30. (b) To record the acquisition of Four Point for $2,500,000 and 427,274 shares of Common Stock for a purchase price of approximately $8,003,000 (including approximately $269,000 of costs incurred in connection with the acquisition). The determination of the allocation of the aggregate consideration given by Dove Audio, Inc. may be subject to adjustment based on the final determination of fair market value of Four Point's assets and liabilities. (c) Reflects the reevaluation of property and equipment to fair value. (d) Reflects the reevaluation of property and equipment to fair value and the elimination of Dove Audio, Inc.'s investment in Four Point Entertainment, Inc. (e) To record additional depreciation expense associated with the purchase price allocation to fixed assets. (f) To record the amortization of goodwill on a straight line method over 25 years (g) To record an adjustment to the salary expense of Four Point's two principal stockholders based on employment agreements entered into in conjunction with the acquisition by Dove. (h) To record income tax impact of pro forma adjustments using a 34% tax rate. F-4 25 FOUR POINT ENTERTAINMENT, INC. AND SUBSIDIARY Consolidated Financial Statements January 31, 1996 (With Independent Auditors' Report Thereon) F-5 26 INDEPENDENT AUDITORS' REPORT The Board of Directors Four Point Entertainment, Inc.: We have audited the accompanying consolidated balance sheet of Four Point Entertainment, Inc. and subsidiary as of January 31, 1996 and the related consolidated statements of operations, stockholders' equity and cash flows for the years ended January 31, 1996 and 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Four Point Entertainment, Inc. and subsidiary as of January 31, 1996 and the results of their operations and their cash flows for the years ended January 31, 1996 and 1995 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Los Angeles, California June 3, 1996 F-6 27 FOUR POINT ENTERTAINMENT, INC. AND SUBSIDIARY Consolidated Balance Sheet January 31, 1996 ASSETS Cash $ 183,384 Accounts receivable, net of allowance for doubtful accounts of $16,000 1,840,616 Property and equipment, net (note 2) 739,280 Loans to stockholders (note 3) 281,281 Investment and advances - affiliate (note 4) 289,502 Film costs, net of amortization (note 5) 1,402,503 Other assets 23,584 ------------- Total assets $ 4,760,150 ============= LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable and accrued expenses $ 1,403,320 Income taxes payable (note 7) 80,184 Debt (note 6) 1,338,303 Billings in excess of costs incurred 176,445 Deferred income taxes payable (note 7) 80,483 ------------- Total liabilities 3,078,735 ------------- Stockholders' equity: Class A convertible preferred stock, $.01 par value. Authorized 10,000,000 shares; issued 1,000,000 shares 10,000 Common stock, $.01 par value. Authorized 20,000,000 shares; issued 15,850,000 shares 158,500 Additional paid-in capital 911,234 Retained earnings 1,703,167 Treasury stock, at cost - 890,000 shares of preferred stock and 7,822,760 shares of common stock (1,101,486) ------------- Total stockholders' equity 1,681,415 Commitments, contingencies and subsequent events (notes 8 and 9) ------------- Total liabilities and stockholders' equity $ 4,760,150 =============
See accompanying notes to consolidated financial statements. F-7 28 FOUR POINT ENTERTAINMENT, INC. AND SUBSIDIARY Consolidated Statements of Operations Years ended January 31, 1996 and 1995
1996 1995 ------------- ---------- Revenue $ 21,045,921 23,046,270 Production costs 13,190,231 18,999,749 Amortization of film costs 4,705,429 1,101,408 ------------- ---------- Gross profit 3,150,261 2,945,113 Selling, general and administrative expenses 2,945,007 2,229,255 ------------- ---------- Operating income 205,254 715,858 ------------- ---------- Other income (expense): Interest income 43,595 16,950 Interest expense (95,743) (81,845) Equity in loss of affiliate (36,973) -- ------------- ---------- (89,121) (64,895) ------------- ---------- Income before income taxes 116,133 650,963 Income taxes 43,176 263,253 ------------- ---------- Net income $ 72,957 387,710 ============= ==========
See accompanying notes to consolidated financial statements. F-8 29 FOUR POINT ENTERTAINMENT, INC. AND SUBSIDIARY Consolidated Statements of Stockholders' Equity Years ended January 31, 1996 and 1995
Preferred stock Common stock ------------------- --------------------- Paid-in Retained Treasury Shares Amount Shares Amount capital earnings stock Total --------- ------- ---------- -------- ------- --------- ---------- --------- Balance at February 1, 1994 1,000,000 $10,000 15,850,000 $158,500 911,234 1,850,010 (1,026,319) 1,903,425 Purchase of 195,000 preferred shares for treasury -- -- -- -- -- -- (39,000) (39,000) Dividend -- -- -- -- -- (507,510) -- (507,510) Net income -- -- -- -- -- 387,710 -- 387,710 --------- ------- ---------- -------- ------- --------- ---------- --------- Balance at January 31, 1995 1,000,000 10,000 15,850,000 158,500 911,234 1,730,210 (1,065,319) 1,744,625 Purchase of 97,500 preferred shares for treasury -- -- -- -- -- -- (19,500) (19,500) Purchase of 1,618,000 common shares for treasury -- -- -- -- -- -- (16,667) (16,667) Dividend -- -- -- -- -- (100,000) -- (100,000) Net income -- -- -- -- -- 72,957 -- 72,957 --------- ------- ---------- -------- ------- --------- ---------- --------- Balance at January 31, 1996 1,000,000 $10,000 15,850,000 $158,500 911,234 1,703,167 (1,101,486) 1,681,415 ========= ======= ========== ======== ======= ========= ========== =========
See accompanying notes to consolidated financial statements. F-9 30 FOUR POINT ENTERTAINMENT, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows Years ended January 31, 1996 and 1995
1996 1995 ------------- ---------- Cash flows from operating activities: Net income $ 72,957 387,710 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 290,369 547,108 Amortization of film costs 4,705,429 1,101,408 Equity in loss of affiliate 36,973 -- Increase (decrease) from changes in: Accounts receivable (260,862) (1,028,237) Income taxes receivable -- 620 Other assets 53,089 63,206 Accounts payable and accrued expenses (853,434) 576,571 Income taxes payable (171,738) 251,922 Billings in excess of costs incurred 176,445 -- Deferred income taxes payable 113,575 9,696 ------------- ---------- Net cash provided by operating activities 4,162,803 1,910,004 ------------- ---------- Cash flows from investing activities: Investment in film costs (5,188,546) (1,454,854) Loans to stockholders (78,670) (422,184) Investment and advances - affiliate (23,802) -- Purchase of treasury stock (36,167) (39,000) Acquisition of property and equipment (283,360) (225,253) ------------- ---------- Net cash used in investing activities (5,610,545) (2,141,291) Cash flows from financing activities: Proceeds from long-term borrowings 2,827,453 376,597 Repayment of long-term debt (2,276,806) (437,601) ------------- ---------- Net cash provided by (used in) financing activities 550,647 (61,004) ------------- ---------- Net decrease in cash (897,095) (292,291) Cash at beginning of year 1,080,479 1,372,770 ------------- ---------- Cash at end of year $ 183,384 1,080,479 ============= ==========
(Continued) 31 FOUR POINT ENTERTAINMENT, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows, Continued
1996 1995 ------------ ---------- Supplemental disclosure of cash flow information: Cash paid during the year for: Interest $ 82,845 81,845 Income taxes 61,780 123,560 Noncash investing and financing activities: Purchase of investment in and advances to affiliate through reduction of loans to stockholders -- 302,673 Dividend distributed through reduction of loans to stockholders 100,000 507,510 ------------ ----------
See accompanying notes to consolidated financial statements. F-10 32 FOUR POINT ENTERTAINMENT, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements January 31, 1996 (1) DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Four Point Entertainment, Inc. is an independent production company founded in 1984. The Company is hired as a producer-for-hire in connection with a creative concept and literary property owned by another party to produce all forms of television productions, including pilots, series, telefilms, miniseries, talk shows, game shows and infomercials for network, cable and syndicated production. In addition to being hired as a producer-for-hire, the Company develops and produces television productions for which rights are retained by the Company. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Four Point Entertainment, Inc. and a wholly owned subsidiary (collectively the Company). All significant intercompany accounts and transactions have been eliminated. REVENUE RECOGNITION The Company recognizes contract revenues using the percentage-of-completion method. Under this method, the percentage of contract revenues to be recognized currently is computed at that percentage of estimated total revenues that incurred cost to date bears to total estimated cost, after giving effect to the most recent estimate of costs to complete. Revisions in cost and revenue estimates are reflected in the period in which the facts which require the revision become known. When revised cost estimates indicate a loss on an individual contract, the total estimated loss is provided for currently in its entirety without regard to the percentage of completion. For those projects in which the Company has continuing ownership interest, revenue from television licensing agreements is recognized on the date the completed program is delivered or becomes available for delivery and certain other conditions of sale have been met. ACCOUNTING FOR FILM COSTS For those projects in which the Company has continuing ownership interest, the Company capitalizes all costs incurred to produce a film. Such costs also include the actual direct costs of production, certain exploitation costs and production overhead. Capitalized exploitation or distribution costs include those costs that clearly benefit future periods such as film prints and prerelease and early release advertising that is expected to benefit the film in future markets. These costs, as well as participation and talent residuals, are amortized each period on an individual-film or television-program basis in the ratio that the current period's gross revenues from all sources for the program bear to management's estimate of anticipated total gross revenues for such film or program from all sources. Revenue estimates are reviewed quarterly. Film costs are stated at the lower of unamortized cost or estimated net realizable value. Losses which may arise because unamortized costs of individual films or television series exceed anticipated revenues are charged to operations through additional amortization at the time such losses are determined. F-11 33 FOUR POINT ENTERTAINMENT, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued PROPERTY AND EQUIPMENT Property and equipment are stated at their cost and depreciated over estimated useful lives using the straight-line method for financial statements and accelerated methods for tax purposes. The estimated useful lives are as follows: Computer equipment 5 years Edit equipment 5 years Furniture and fixtures 7 years Leasehold improvements Lesser of estimated useful life or remaining term of lease
INCOME TAXES The Company accounts for income taxes using Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Under SFAS No. 109, deferred income taxes reflect the impact of "temporary differences" between the amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities to prepare these consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (2) PROPERTY AND EQUIPMENT Property and equipment is comprised of the following: Edit equipment $ 3,100,323 Computer equipment 146,481 Furniture and fixtures 71,461 Leasehold improvements 11,633 --------------- 3,329,898 Accumulated depreciation (2,590,618) $ 739,280 ===============
(3) LOANS TO STOCKHOLDERS Loans to the Company's two primary stockholders are unsecured, bear interest at 6% per annum and are due January 31, 1997. F-12 34 FOUR POINT ENTERTAINMENT, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (4) INVESTMENT AND ADVANCES - AFFILIATE On January 2, 1996, the Company purchased from the two primary stockholders their 95% interest in the stock of Infomedia Marketing, Inc. (IMI) in exchange for the reduction of certain outstanding stockholder loans amounting to approximately $100,000. This investment was recorded at the stockholders' cost, which at the date of transfer was approximately zero, and as such, the amount of the reduction in stockholder loans has been recorded by the Company as a distribution in the form of a dividend. On January 31, 1995, the two primary stockholders contributed to the Company their 33-1/3% ownership interest in Empire Burbank Studio, Inc. ("Empire") and their rights to certain notes receivable from Empire in exchange for the reduction of certain outstanding loans to these stockholders held by the Company amounting to approximately $801,000. The amount by which the reduction in stockholders' loans exceeds the sum of the stockholders' historical cost basis of the investment in and notes receivable from Empire has been recorded by the Company as a distribution in the form of a dividend. The Company's investment in Empire is accounted for using the equity method. Empire's unaudited financial data as of and for the year ended January 31, 1996 is summarized as follows: Total assets $ 4,275,421 Total liabilities 3,891,614 Net loss 110,876 ============
(5) FILM COSTS The following is an analysis of film costs: Released, net of amortization $ 1,208,174 Development costs 194,329 ------------- $ 1,402,503 =============
As of January 31, 1996, approximately 95% of the unamortized balance of film inventories will be amortized within the next three-year period based upon the Company's revenue estimates at that date. F-13 35 FOUR POINT ENTERTAINMENT, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (6) DEBT Debt consists of the following: Term loan, original balance of $1,000,000, fixed monthly principal and interest installments of $31,863 payable through November 3, 1998, bears interest at 9.01%, secured by equipment and guaranteed by the Company's two primary stockholders (a) $ 951,359 Revolving credit loans, facility of $1,000,000, due June 3, 1996, bears interest at bank's index rate (8.5% at January 31, 1996) plus 1%, and are secured by the Company's assets and guaranteed by the Company's two primary stockholders (a) 272,746 Note payable, monthly installments of $10,000 payable through February 1, 1997, with interest imputed at 9.25%, and is guaranteed by one of the Company's primary stockholders 114,198 ---------- $1,338,303 ==========
Maturities of debt are as follows: Year ending January 31: 1997 $ 695,557 1998 337,451 1999 305,295 ----------- $ 1,338,303 ===========
(a) The Company is required under the terms of the $1,000,000 term loan and the credit facility to maintain compliance with specified financial ratios. The Company is not in compliance with these financial ratios at January 31, 1996. In addition, subsequent to January 31, 1996, the Company became in default on revolving credit loans of approximately $950,000, which were due on June 3, 1996. Management is in ongoing discussions with the bank to refinance the credit facility into a term loan. As of April 29, 1996, the guarantee of debt has been transferred from the two primary stockholders to the new stockholder of the Company, Dove Audio, Inc. (see note 9). F-14 36 FOUR POINT ENTERTAINMENT, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (7) INCOME TAXES The provision for income taxes consists of the following:
1996 1995 ---------- ------- Federal: Current $ (71,997) 238,705 Deferred 98,910 (36,448) ---------- ------- 26,913 202,257 ---------- ------- State: Current 1,600 100,426 Deferred 14,663 (39,430) ---------- ------- 16,263 60,996 ---------- ------- Total $ 43,176 263,253 ========== =======
The differences which give rise to deferred tax assets and liabilities at January 31, 1996 are as follows: Assets (Liabilities) Film amortization $ (104,960) Accrued expenses 79,763 Depreciation (74,281) Net operating loss carryforward 5,790 Other 13,205 ----------- Net deferred income taxes payable $ (80,483) ===========
Reconciliation of effective rate of income taxes is as follows:
1996 1995 ------- -------- Provision for income taxes based upon Federal statutory rate of 35% $40,646 227,837 Equity in loss of affiliate (15,176) -- State taxes 7,019 39,347 Net operating loss carryforward 4,803 -- Nondeductible expenses 6,681 2,038 Other (797) (5,969) ------- ------- Provision for income taxes $43,176 263,253 ======= =======
F-15 37 FOUR POINT ENTERTAINMENT, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued The Internal Revenue Service has informed the Company that the Company's tax returns are subject to examination by Federal taxing authorities. Because many types of transactions are susceptible to varying interpretations under Federal income tax laws and regulations, the amounts reported in the accompanying consolidated financial statements may be subject to a change at a later date upon final determination by the taxing authorities. Management is of the opinion that adequate provisions have been made in the accompanying financial statements. (8) COMMITMENTS AND CONTINGENCIES The Company leases certain property and equipment under noncancelable lease arrangements which expire at various dates through 2000. Rent expense under all operating leases was approximately $264,000 and $281,000 in 1996 and 1995, respectively. Future minimum lease payments under these noncancelable operating leases as of January 31, 1996 are as follows: Year ending January 31: 1997 $ 108,422 1998 17,995 1999 17,995 2000 17,995 ----------- $ 162,407 ===========
The Company is contingently liable with respect to various matters, including litigation in the ordinary course of business and otherwise wherein substantial amounts are claimed. In the opinion of the Company's management, the ultimate resolution of these matters will not have a material adverse effect on the Company's financial condition or results of operations. (9) SUBSEQUENT EVENTS On April 29, 1996, all of the Company's stockholders sold their interest to Dove Audio, Inc. (Dove) for consideration of $2,500,000 in cash, 427,274 shares of Dove common stock and additional future consideration of 163,636 shares of Dove common stock, which is dependent upon Four Point Entertainment, Inc.'s financial results during the period from May 1, 1996 through April 30, 1997. On April 15, 1996, the Company repurchased the remaining 110,000 shares of Class A convertible preferred stock for a total price of $65,000. The purchase agreement released the Company from all obligations related to these shares. The Company has established a 401(k) savings plan (the Plan) as of March 1, 1996. The Plan requires the Company to match 5% of eligible employees' contributions, and these matching contributions vest equally over four years from the date of hire. Employees are eligible to participate in the Plan once they have attained age 21, completed 12 months of service and have worked at least 1,000 hours. The Company has filed an application for determination with the Internal Revenue Service on April 11, 1996 and has not yet received a reply. F-16 38 SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: September 10, 1996 DOVE AUDIO, INC. By /s/ MICHAEL VINER --------------------------- Michael Viner, President, Chief Executive Officer and Director Date: September 10, 1996 By /s/ SIMON BAKER --------------------------- Simon Baker, Chief Financial Officer 39 DOVE AUDIO, INC. INDEX TO EXHIBITS
Exhibit Page Number Number - ------- ------ 2.1 Agreement and Plan of Merger by and among the Company, Dove Four Point, Inc., Four Point Entertainment, Inc. and holders of capital stock of Four Point Entertainment, Inc., dated as of April 12, 1996 (filed as the same number exhibit in the Company's Quarterly Report on Form 10-QSB filed with the Commission on May 13, 1996) 4.1 Form of Registration Rights Agreement (filed as the same number exhibit in the Company's Quarterly Report on Form 10-QSB filed with the Commission on May 13, 1996) 10.1 Employment Agreement dated as of April 29, 1996 between Shukri Ghalayini and the Company, together with Stock Option Award Agreement between the Company and Mr. Ghalayini dated April 29, 1996 (filed as the same number exhibit in the Company's Quarterly Report on Form 10-QSB filed with the Commission on May 13, 1996) 10.2 Employment Agreement dated as of April 29, 1996 between Ronald Ziskin and the Company, together with Stock Option Agreement between the Company and Mr. Ziskin dated April 29, 1996 (filed as the same number exhibit in the Company's Quarterly Report on Form 10-QSB filed with the Commission on May 13, 1996) 10.3 Business Loan Agreement between Asahi Bank of California and Dove Audio, Inc. dated April 24, 1996 in the amount of $1,900,000 (filed as the same number exhibit in the Company's Quarterly Report on Form 10-QSB filed with the Commission on May 13, 1996) 23.1 Consent of KPMG Peat Marwick LLP 27 Financial Data Schedule
EX-23.1 2 CONSENT OF IND. AUDITORS 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS The Board of Directors Dove Audio, Inc. We consent to the incorporation by reference in the registration statement (No. 333-06595) on Form S-8 of Dove Audio, Inc. of our report dated June 3, 1996, with respect to the consolidated balance sheet of Four Point Entertainment, Inc. and subsidiary as of January 31, 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years ended January 31, 1996 and 1995, which report appears in the March 31, 1996 Form 10-QSB/A Amendment No. 2 of Dove Audio, Inc. /s/ KPMG Peat Marwick LLP Los Angeles, California September 9, 1996 EX-27 3 AMENDED FINANCIAL DATA SCHEDULE
5 AMENDMENT NO. 1 TO FINANCIAL DATA SCHEDULE THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AT MARCH 31, 1996 AND THE CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 5,052 377 4,537 2,181 150 12,174 3,033 266 19,056 4,554 0 0 856 49 13,597 19,056 7,607 7,607 5,531 6,823 0 0 (48) 832 331 501 0 0 0 501 0.10 0.10
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