-----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, U4LUJ+BSPnpw0aabpw1wSSOKER1fxyPi8X/PlAmBf/GFMNR58OhpBfb5G+AEjX5A XoUxUljs9mrf4/XXtUNKHw== 0001019687-99-000302.txt : 19990524 0001019687-99-000302.hdr.sgml : 19990524 ACCESSION NUMBER: 0001019687-99-000302 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990521 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEWSTAR MEDIA 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 SEC ACT: SEC FILE NUMBER: 000-24984 FILM NUMBER: 99631984 BUSINESS ADDRESS: STREET 1: 8955 BEVERLY BLVD CITY: LOS ANGELES STATE: CA ZIP: 90048 BUSINESS PHONE: 3107861600 MAIL ADDRESS: STREET 1: 301 NORTH CANNON DR SUITE 207 STREET 2: 8955 BEVERLY BLVD CITY: WEST HOLLYWOOD STATE: CA ZIP: 90048 FORMER COMPANY: FORMER CONFORMED NAME: DOVE ENTERTAINMENT INC DATE OF NAME CHANGE: 19970516 FORMER COMPANY: FORMER CONFORMED NAME: DOVE AUDIO INC DATE OF NAME CHANGE: 19941021 10QSB 1 NEWSTAR MEDIA INC. ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB ---------------- (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, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. COMMISSION FILE NUMBER 0-24984 NEWSTAR MEDIA INC. (EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER) ---------------- CALIFORNIA 95-4015834 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 8955 BEVERLY BOULEVARD LOS ANGELES, CALIFORNIA 90048 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (310) 786-1600 (ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE). 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 ---------------- 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 --- --- APPLICABLE ONLY TO CORPORATE ISSUERS State the numbers of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 17,408,898 as of May 12, 1999. Transitional Small Business Disclosure Format (Check one): Yes No X --- --- ================================================================================ PART I FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
NEWSTAR MEDIA INC. CONSOLIDATED BALANCE SHEET (UNAUDITED) MARCH 31, 1999 ASSETS CURRENT ASSETS Cash and cash equivalents $ 547,000 Accounts receivable, net of allowances of $1,252,000 2,252,000 Inventory 2,460,000 Film costs 213,000 Due from related party 61,000 Prepaid expenses and other assets 436,000 ----------------- Total current assets 5,969,000 NON-CURRENT ASSETS Production masters, net 1,636,000 Film costs, net 4,338,000 Property and equipment, net 839,000 Goodwill and other assets 5,692,000 ----------------- Total non-current assets 12,505,000 ----------------- Total assets $ 18,474,000 ================= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued expenses $ 4,429,000 Notes payable 8,550,000 Advances and deferred income 256,000 Accrued dividends 102,000 ----------------- Total current liabilities 13,337,000 NON-CURRENT LIABILITIES Note payable 15,000 Accrued liabilities 544,000 ----------------- Total non-current liabilities 559,000 ----------------- Total liabilities 13,896,000 ----------------- SHAREHOLDERS' EQUITY Preferred stock $.01 par value; 2,000,000 shares authorized and 220,114 shares issued and outstanding, liquidation preference $6,828,000 2,000 Common stock $.01 par value; 20,000,000 shares authorized and 17,319,289 shares issued and outstanding 173,000 Unearned compensation (212,000) Additional paid-in capital 36,881,000 Accumulated deficit (32,266,000) ----------------- Total shareholders' equity 4,578,000 ----------------- Total liabilities and shareholders' equity $ 18,474,000 =================
See accompanying notes to consolidated financial statements 2 NEWSTAR MEDIA INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended March 31, --------------------------------------- 1999 1998 ---- ---- Revenues Publishing, net $ 1,297,000 $ 1,549,000 Film 125,000 1,144,000 ------------------ ------------------ 1,422,000 2,693,000 Cost of sales Publishing 973,000 1,186,000 Film 105,000 944,000 ------------------ ------------------ 1,078,000 2,130,000 ------------------ ------------------ Gross profit 344,000 563,000 Selling, general and administrative expenses 2,364,000 2,179,000 ------------------ ------------------ Loss from operations (2,020,000) (1,616,000) Gain on sale of long-term investment 594,000 -- Interest expense, net (198,000) (147,000) ------------------ ------------------ Loss before income taxes (1,624,000) (1,763,000) Income tax expense (2,000) -- ------------------ ------------------ Net loss $ (1,626,000) $ (1,763,000) ================== ================== Basic and diluted loss attributable to common shareholders $ (1,738,000) $ (1,870,000) ================== ================== Basic and diluted loss per common share $ (.10) $ (.28) ================== ================== Weighted average number of common shares outstanding 17,317,000 6,579,000 ================== ==================
See accompanying notes to consolidated financial statements 3 NEWSTAR MEDIA INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31, -------------------------------------- 1999 1998 ---- ---- OPERATING ACTIVITIES Net loss $ (1,626,000) $ (1,763,000) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 168,000 134,000 Amortization of goodwill 60,000 63,000 Amortization of production masters 230,000 473,000 Amortization of film costs 99,000 786,000 Provision for doubtful accounts 36,000 35,000 Gain on sale of long-term investment (594,000) -- Changes in operating assets and liabilities: Accounts receivable 193,000 (910,000) Inventory 300,000 170,000 Prepaid expenses and other assets 192,000 (214,000) Expenditures for production masters (607,000) (354,000) Film cost additions (6,000) (5,826,000) Accounts payable and accrued expenses (138,000) (340,000) Advances and deferred revenue (4,000) 4,336,000 Accrued dividends 102,000 -- Other (6,000) 54,000 ----------------- ----------------- Net cash used in operating activities (1,600,000) (3,356,000) ----------------- ----------------- INVESTING ACTIVITIES Proceeds from sale of long-term investment, net 613,000 -- Purchase of property and equipment (19,000) (82,000) ----------------- ----------------- Net cash provided by (used in) investing activities 594,000 (82,000) ----------------- ----------------- FINANCING ACTIVITIES Proceeds of bank borrowings 1,200,000 4,691,000 Repayments of bank borrowings (100,000) -- ----------------- ----------------- Net cash provided by financing activities 1,100,000 4,691,000 ----------------- ----------------- Net increase in cash and cash equivalents 94,000 1,253,000 Cash and cash equivalents at beginning of the period 453,000 302,000 ----------------- ----------------- Cash and cash equivalents at end of the period $ 547,000 $ 1,555,000 ================= =================
See accompanying notes to consolidated financial statements. 4 NEWSTAR MEDIA INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
Three Months Ended March 31, -------------------------------------- 1999 1998 ---- ---- SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest $ 198,000 $ 147,000 NON-CASH TRANSACTIONS Common stock issued as payment for consulting fees to related party $ -- $ 300,000 Preferred stock dividends accrued $ 112,000 $ 107,000 Preferred stock dividends paid in common stock $ 10,000 $ -- Preferred stock issued as payment for expenses, loans and commissions payable to former officers of the Company $ 27,000 $ --
See accompanying notes to consolidated financial statements 5 NEWSTAR MEDIA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION, ORGANIZATION AND BUSINESS The accompanying consolidated financial statements of NewStar Media 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, 1998. 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 months ended March 31, 1999 are not necessarily indicative of results to be expected for the full year. NewStar Media Inc. is a diversified entertainment company primarily engaged in the publication of audio and printed books, the production of television programming and the distribution of feature films and television product, both domestically and internationally. The Company commenced business in 1985 and changed its name from Dove Entertainment, Inc. to NewStar Media Inc. in May 1998. Through the NewStar Publishing division, the Company produces and distributes audio books and publishes printed books. Through Dove Four Point, Inc. and NewStar Television Inc. (collectively "NewStar Television"), wholly owned subsidiaries of the Company, the Company is engaged in the production and development of television programming. NewStar Worldwide Inc. (NewStar Worldwide"), a wholly owned subsidiary of the Company, is engaged in the distribution of feature films and television programming. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NET LOSS PER COMMON SHARE SFAS No. 128 replaces Accounting Principles Board Opinion ("APB") No. 15 and simplifies the computation of earnings per share ("EPS") by replacing the presentation of primary EPS with a presentation of basic EPS. Basic EPS includes no dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution from securities that could share in the earnings of the Company. Dilutive securities have been omitted from the diluted calculation where they are anti-dilutive. The net loss utilized in the calculation of basic loss per common share is increased by the following: Three Months Ended March 31, -------------------------------- 1999 1998 ---- ---- Accrued dividends on Preferred Stock $ 112,000 $ 107,000 STOCK-BASED COMPENSATION The Company has a stock incentive plan (the "Plan") which authorizes the granting of stock incentive awards ("Options") to qualified officers, employee directors, key employees and third parties providing valuable services to the Company. The company accounts for the Plan in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation", which permits entities to recognize as expense over the vesting period the fair value of all Options on the date of grant or, alternately, allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value based method defined in SFAS No. 123 had been applied. The Company has elected to apply the provisions of APB Opinion No. 25 in accounting for its Plan, and accordingly, no compensation cost has been recognized. 6 Had the Company determined compensation cost based on the fair value at the grant date for its Options under SFAS No. 123, the Company's net loss would have been increased to the pro forma amounts indicated below: Three Months Ended March 31, -------------------------------- 1999 1998 ---- ---- Net loss attributable to common shareholders As reported $ (1,738,000) $ (1,870,000) Pro forma $ (1,760,000) $ (1,870,000) Net loss per share As reported $ (.10) $ (.28) Pro forma $ (.10) $ (.28) USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. Significant estimates include those related to ultimate revenues and expenses related to film and television productions, the net realizability of inventory and production masters and the allowance for returns on publishing sales. RECLASSIFICATION Certain prior year accounts have been reclassified to conform to the current year's presentation. NOTE 3 - 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. SFAS No. 109 requires that a valuation allowance be recorded against tax assets which are not likely to be realized. Due to the uncertainty of their ultimate realization based upon past earnings performance and the expiration dates of carryforwards, the Company has established a valuation allowance against these tax assets except to the extent that they are realizable through carrybacks. Realization of additional amounts is entirely dependent upon future earnings in specific tax jurisdictions. While the need for this valuation allowance is subject to periodic review, if the allowance is reduced, the tax benefits of the carryforwards will be recorded in future operations as a reduction of the Company's income tax expense. At March 31, 1999, the Company had net deferred tax assets of approximately $11,640,000 against which a valuation allowance had been fully recorded. NOTE 4 - RELATED PARTY TRANSACTIONS Pursuant to an employment termination agreement entered into in 1997 ("Termination Agreement") with then principal shareholders and officers of the Company ("Former Principals"), the Company paid such Former Principals $27,000 during the quarter ended March 31, 1999 in the form of Series E Preferred Stock for payments due by the Company in January. The Termination Agreement provides for the Former Principals to receive combined monthly payments (the "Payments") of approximately $27,000, and medical insurance for 60 months from September 1997. In addition, they are entitled to each receive a car allowance for 24 months from September 1997 and reimbursement for certain medical and business expenses. The Company did not make Payments in February and March of 1999. The Former Principals are entitled to receive Series E Preferred Stock in lieu of such Payments but have chosen not to accept the Series E Preferred Stock. 7 To secure the Payments, the Company has issued into escrow 1,500 shares of its Series E Preferred Stock, convertible into shares of Common Stock to the extent set forth in the Certificate of Determination for the Series E Preferred Stock. The Series E Preferred Stock will be held in escrow and will be released to the Former Principals only if the Company does not make a Payment in cash. If the Company does not make a Payment in cash, the Series E Preferred Stock may be released to the Former Principals, as the case may be, in an amount equal to the portion of the Payments unpaid divided by the stated value of the Series E Preferred Stock. The Former Principals have registration rights pursuant to a registration rights agreement, dated September 10, 1997, among the Company and the Former Principals with respect to common stock into which Series E Preferred Stock received by them may be converted. During the three months ended March 31, 1998, the Company made certain payments and entered into other transactions with the Former Principals and former directors as more fully described in the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1998. Media Equities International, LLC ("MEI") is a limited liability company, the principals of which are Terrence Elkes, Kenneth Gorman, John T. Healy, Ronald Lightstone and Bruce Maggin. Mr. Elkes is Chairman of the Board of the Company, Mr. Gorman is Vice-Chairman of the Board, Mr. Lightstone is a director and President and Chief Executive Officer of the Company and Messrs. Healy and Maggin are directors of the Company. The Company accrued the following fees payable to MEI:
Three Months Ended March 31, -------------------------------- 1999 1998 ---- ---- Consulting fees pursuant to consulting agreement $ -- $ 75,000 Guarantee fees pursuant to guarantee of Chase Bank loan facility 12,500 -- ---------------- ---------------- Total $ 12,500 $ 75,000 ================ ================
The Company issued the following shares of Common Stock at fair market value to MEI in respect of consulting and guarantee fees: Date of Issue Number of Shares Amount of Fees ------------- ---------------- -------------- January 2, 1998 240,000 $300,000 Pursuant to guarantee agreements dated November 4, 1997, each of the principals of MEI had collectively guaranteed $1,283,000 and Messrs. Elkes, Gorman and Lightstone had collectively guaranteed $287,000 against borrowings under the Company's loan facility with Chase Bank ("Chase Loan") to the extent such borrowing exceed the borrowing base as defined in the Chase Loan ("Borrowing Base"). At March 31, 1999, utilization of the Chase Loan exceeded the Borrowing Base by $1,283,000. In order to secure the repayment of any amounts the MEI principals may be required to pay to Chase Bank under the guarantees, MEI has been granted a security interest in substantially all of the assets of the Company. Such security interest is junior to the security interest of Chase Bank which secures the Company's obligations under the Chase Loan. 8 During the second quarter of 1999, in connection with the drafting of certain amendments and waivers to the Chase Loan, the Company has reached an agreement in principal with MEI for a modification of the guarantee agreement to provide for a revised guarantee of $2,000,000. In consideration of the modification of the guarantee agreement, the Company has agreed to enter into an agreement to extend the warrants currently held by MEI for one year and to amend the terms thereof to permit a "cashless exercise" of such warrants. NOTE 5 - NOTES PAYABLE Notes payable at March 31, 1999 consist of the following: Chase Manhattan Bank revolving credit loan $ 8,534,000 Other 31,000 ----------------- Total notes payable $ 8,565,000 ================= Maturity of notes payable: Year Ending December 31, 1999 $ 16,000 2000 8,549,000 ----------------- $ 8,565,000 ================= On November 12, 1997, the Company entered into an agreement with Chase Bank providing the Company with an $8,000,000 loan facility for working capital purposes ("Chase Loan"). In May 1998, the Chase Loan was increased to $10,000,000 with the other terms of the original agreement remaining substantially the same. The Chase Loan is secured by substantially all of the Company's assets. The Chase Loan runs for three years until November 4, 2000. The Chase Loan establishes a "Borrowing Base" comprised of: (1) 35% of an independent valuation of the Company's audio library, (2) 85% of the Company's eligible receivables and (3) 30% of the Company's finished goods audio and book inventory. At any time, the Company may borrow up to the Borrowing Base. In addition, the Company may borrow or have letters of credit issued for a further $4,000,000 provided the aggregate amount borrowed does not exceed $10,000,000, and with the consent and guarantee of Media Equities International, LLC ("MEI"), a significant shareholder of the Company. The Chase Loan provides for interest at the bank prime rate (7 3/4% at March 31, 1999) plus 2% per annum or the bank's LIBOR rate (5.12% six-month rate at December 31, 1998) plus 3% per annum, at the option of the Company. Both rates are applicable to Company draw-downs on the Chase Loan at March 31, 1999. In addition, unused commitment fees are payable at 1/2% per annum. The Chase Loan contains various covenants to which the Company must adhere including limitations on additional indebtedness, investments, acquisitions, capital expenditures and sale of assets, restrictions on the payment of dividends and distributions to shareholders, and various financial compliance tests. The Company was not in compliance with certain of the financial compliance tests at December 31, 1998 and March 31, 1999 and has requested waivers from Chase Bank. As of May 19, 1999, the Company has not received any such waivers and although the Company and Chase Bank are in the process of drafting amendments and waivers to the Chase Loan, there is no assurance that the Company will actually receive such amendments and waivers. Accordingly, the Company has continued to classify Notes Payable to Chase Bank as a current liability as of March 31, 1999. At March 31, 1999, the Company had borrowed $8,534,000 against the facility and had $1,466,000 of available funds for borrowing. In addition, Chase Bank had provided a letter of credit for $287,000 in respect of certain litigation. On January 28, 1999, the Company and Chase Bank were notified by one of the principals of MEI that there would be no approvals for guarantees of further extensions of credit under the Chase Loan. Accordingly, as of January 28, 1999, the Company had borrowed the maximum amount permitted to be borrowed under the Chase Loan. In connection with the drafting of certain amendments and waivers to the Chase Loan, the Company has reached agreement with MEI for an extension and modification of the guarantee agreement to provide for a revised guarantee of $2,000,000. In connection with the granting of certain waivers and amendments, Chase Bank has required that the Company raise a minimum of $4.1 million of new equity. As of May 19, 1999, the Company has received $2,461,000 in new equity through several private placements. The Company believes it will meet Chase Bank's requirement, however, there is no assurance that the Company will raise $4.1 million of new equity. 9 NOTE 6 - CAPITAL ACTIVITIES COMMON STOCK During the three months ended March 31, 1999, the Company issued the following shares of Common Stock: Number of Shares Consideration ---------------- ------------- 18,089 Preferred stock dividend, $10,000. During the three months ended March 31, 1999 the Company issued 27 shares of Series E Preferred Stock pursuant to the Termination Agreement. As of May 19, 1999, the Company was committed to issue 1,997,780 shares of common stock in exchange for $2,461,000 through several private placements. STOCK OPTIONS AND WARRANTS On January 6, 1998, the Board approved the issuance of 601,500 options under the Plan to employees, such options being issued in July 1998. Options outstanding under the Plan at March 31, 1999 were as follows: Weighted Average Number of Exercise Exercise Shares Price Price --------- -------- --------- 587,500 $1.50 - $6.00 $1.71 At March 31,1999, options to acquire 364,163 shares of Common Stock under the Plan were exercisable. Warrants outstanding at March 31, 1999 were as follows: Number of Weighted Equivalent Average Shares Exercise Price Exercise Price ---------- -------------- -------------- 4,664,013 $2.00 - $12.00 $5.05 At March 31, 1999 all warrants to acquire shares of Common Stock were exercisable. 10 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. FORWARD LOOKING STATEMENTS Certain statements in this report, including those utilizing the phrases "will", "expects", "intends", "estimates", "contemplates", and similar phrases, are "forward-looking" statements (as such term is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended), including statements regarding, among other items, (i) the Company's growth strategy, (ii) the Company's intention to acquire or develop additional audio book, printed book and television product, (iii) the Company's intention to enter or broaden distribution markets, and (iv) the Company's ability to successfully implement its business strategy. Certain, but not necessarily all, of such forward-looking statements can be identified by the use of forward-looking terminology such as "believes", "expects", "may", "will", "should", or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or be discussions of strategy that involve risks and uncertainties. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance and achievements of the Company and its subsidiaries to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to, the following: uncertainty as to future operating results; growth and acquisition risks; certain risks relating to the entertainment industry; dependence on a limited number of projects; possible need for additional financing; potential for liability claims; dependence on certain outlets for publishing product; competition and legal proceedings and claims. Other factors which may materially affect actual results include, among others, the following: general economic and business conditions, industry capacity, changes in political, social and economic conditions and various other factors beyond the Company's control. The Company does not undertake and specifically declines any obligation to publicly release the results of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. See the relevant discussions elsewhere herein, in the Company's registration statement on Form S-3 (Registration No. 333-43527) and in the Company's periodic reports and other documents filed with the Securities and Exchange Commission for further discussions of these and other risks and uncertainties applicable to the Company and its business. OVERVIEW The Company commenced business in 1985 as one of the pioneers of the audio book industry and has become one of the leading independent producers (i.e., unaffiliated with any single book publisher) of audio books in the United States. The Company produces and distributes approximately 100 to 120 new titles annually and has built a library of approximately 1,400 titles currently offered for sale. Additionally, the Company is engaged in the production and development of television programming. Other activities of the Company include a limited printed book publishing program and the distribution of feature films and television programming. Revenues for the quarter ended March 31, 1999 were $1,422,000 compared with $2,693,000 for the same period in 1998. Net loss for the quarter was $1,626,000 compared to a net loss of $1,763,000 for the same period in 1998. The decrease in revenues for the quarter ended March 31, 1999 was primarily a result of reduced television revenues due to timing of the delivery of television motion pictures and a reduced level of audio books released in the current quarter. The increase in loss from operations for the quarter was primarily due to such reduced revenues. These items were offset substantially by the sale of the Company's long-term investment in the Empire Studios. The demand for audio books is seasonal, with the majority of shipments taking place in the third and fourth quarters of the year. The Company believes that demand for audio books will remain seasonal, and this may adversely affect results of operations for the first and second quarters. Because a significant portion of the Company's expenses are relatively fixed, below-expectation sales in any quarter could adversely affect operating results for that quarter. 11 Substantially all of the Company's sales of audio and printed book products are and will continue to be subject to potential returns by distributors and retailers if not sold to the public. Although the Company makes allowances and reserves for returned product that it believes are adequate, significant increases in return rates can materially and adversely impact the Company's financial condition or results of operations. The Company has a number of television concepts under development including several television motion pictures, a reality series and one producer-for-hire television comedy series. While the overall television market continues to expand with the growth of new networks and cable channels, increasingly, networks are striving to acquire full ownership rights to new product as distinct from the traditional license basis. Consequently, the Company's focus in the development of television product is to link high-profile event type projects with high-profile talent that will be attractive to networks on a license basis. From time to time, the Company may have several television projects in development and generally seeks to limit its financial risk in the production of television motion pictures and mini-series by pre-sales and licensing to third parties. The production of television programming 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 television programming revenues due to the variable demand for content from broadcast and cable networks. RESULTS OF OPERATIONS The following table sets forth divisional revenues and operating expenses as a percentage of total revenues: Three Months Ended March 31, -------------------------------- 1999 1998 ---- ---- REVENUES Publishing 91 % 58 % Television and film 9 42 ------------ ------------ Total 100 % 100 % ------------ ------------ OPERATING EXPENSES Publishing 69 % 44 % Television and film 7 35 Selling, general & administrative 166 81 ------------ ------------ Total 242 % 160 % ------------ ------------ QUARTER ENDED MARCH 31, 1999 COMPARED TO QUARTER ENDED MARCH 31, 1999 - --------------------------------------------------------------------- Publishing - ---------- REVENUES. Net publishing revenues for the quarter ended March 31, 1999 decreased $252,000 to $1,297,000 compared with $1,549,000 for the quarter ended March 31, 1998 with the decrease being primarily attributable to a lower volume of new titles published. Leading audio book publications during the current quarter included THE WARREN BUFFET PORTFOLIO by Robert G. Hagstrom, HUSH MONEY by Robert B. Parker and BREACH OF DUTY by J. A. Jance. COST OF SALES. Cost of sales for the quarter ended March 31, 1999 decreased $213,000 to $973,000 from $1,186,000 for the quarter ended March 31,1998. The decrease was attributable to a decrease in the number of audio books published and lower production and distribution costs. Cost of sales as a percentage of net publishing revenues of 75% in the quarter ended March 31, 1999 was comparable to the 77% for the quarter ended March 31, 1998. Film and Television - ------------------- REVENUES. Film and television revenues for the quarter ended March 31, 1999 decreased $1,019,000 to $125,000 from $1,144,000 for the quarter ended March 31, 1998. The decrease was primarily due to the absence in the first quarter of 1999 of the delivery of newly produced programming as compared to the same quarter last year. 12 COST OF SALES. Film and television amortization for the quarter ended March 31, 1999 decreased $839,00 to $105,000 from $944,000 for the quarter ended March 31, 1998. The decrease was attributable to the decline in film and television revenues mentioned previously. Cost of sales as a percentage of net film and television revenues was 84% and 83% for the quarters ended March 31, 1999 and 1998, respectively. General - ------- GROSS PROFIT. The Company experienced a gross profit of $344,000 for the quarter ended March 31, 1999 compared to $563,000 for the quarter ended March 31, 1998, resulting from the matters previously discussed regarding publishing and film revenues and cost of sales. SELLING, GENERAL AND ADMINISTRATIVE ("SG&A"). SG&A includes 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 to $2,364,000 for the quarter ended March 31, 1999 from $2,179,000 for the quarter ended March 31, 1998. NET INTEREST EXPENSE. Net interest expense for the quarter ended March 31, 1999 was $198,000 compared with $147,000 for the quarter ended March 31, 1998. The increase in net interest expense is primarily the result of increased utilization of the Chase Loan. LIQUIDITY AND CAPITAL RESOURCES On November 12, 1997, the Company entered into an agreement with Chase Bank providing the Company with an $8,000,000 loan facility for working capital purposes ("Chase Loan"). This facility was increased in July 1998 to $10,000,000. The Chase Loan is secured by substantially all of the Company's assets. The Chase Loan terminates on November 4, 2000. The Chase Loan establishes a "Borrowing Base" comprising: (1) 35% of an independent valuation of the Company's audio library, (2) 85% of the Company's eligible receivables and (3) 30% of the Company's finished goods audio and book inventory. At any time, the Company may borrow or have letters of credit issued up to the Borrowing Base. In addition, the Company may borrow or have letters of credit issued for a further $4,000,000 (provided the aggregate amount borrowed does not exceed $10,000,000) with the consent and guarantee of the principals of MEI. The Chase Loan provides for interest at the bank prime rate plus 2% per annum or the bank's LIBOR rate plus 3% per annum, at the option of the Company. In addition, unused commitment fees are payable at 1/2% per annum. The Chase Loan contains various covenants to which the Company must adhere including limitations on additional indebtedness, investments, acquisitions, capital expenditures and sale of assets, restrictions on the payment of dividends and distributions to shareholders, and various financial compliance tests. The Company was not in compliance with certain of the financial compliance tests at December 31, 1998 and March 31, 1999 and has requested waivers from Chase Bank. As of May 19, 1999, the Company has not received any such waivers and although the Company and Chase Bank are in the process of drafting amendments and waivers to the Chase Loan, there is no assurance that the Company will actually receive such amendments and waivers. Accordingly, the Company has continued to classify Notes Payable to Chase Bank as a current liability as of March 31, 1999. At March 31, 1999, the Company had borrowed $8,534,000 against the total facility of $10,000,000. In addition, Chase Bank had provided a letter of credit for $287,000 in respect of certain litigation. On January 28, 1999, the Company and Chase Bank were notified by one of the principals of MEI that there would be no approvals for guarantees of further extensions of credit under the Chase Loan. Accordingly, as of January 28, 1999, the Company had borrowed the maximum amount permitted to be borrowed under the Chase Loan. In connection with the drafting of certain amendments and waivers to the Chase Loan, the Company has reached agreement with MEI for an extension and modification of the guarantee agreement to provide for a revised guarantee of $2,000,000. The Company has experienced significant negative cash flows from operations, including $10,659,000 for the year ended December 31, 1998 and $1,600,000 for the three months ended March 31, 1999 - see "Financial Statements of the Company Consolidated Statements of Cash Flows". Such negative cash flows have resulted from, among other things, losses from operations, use of working capital for expansion of audio and printed book publishing, development of television programming and the acquisition of theatrical motion picture product. The Company plans to significantly increase the level of activity in both its audio book and television production operations. In addition, the Company has plans to expand its development, production and distribution activities, including the expansion of its publishing and television operations (although there is no assurance that the Company will expand or that such expansion will be 13 profitable). Such expansion may include future acquisitions of library product or other assets complementary to its current operations or acquisitions of rights involving significantly greater outlays of capital than required in the business conducted to date by the Company. In the event that additional working capital is not obtained or not obtained in sufficient amounts, the Company's operations may be significantly curtailed. The Company's television production activities can affect its capital needs in that the revenues from the initial licensing of television programming may be less than the associated production costs. The ability of the Company to cover the production costs of particular programming 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 programming 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 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, from additional debt or equity financings from outside sources or from other financing arrangements, including bank financing. There is no assurance that any such additional financing will be available on acceptable terms. If the Company is unable to obtain such financing, it may be required to reduce or curtail certain operations. In order to obtain rights to certain properties for the Company's publishing and television 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 and there is no assurance it will be able to do so in the future. Between April 1, 1999 and May 19, 1999, the Company committed to issue approximately 1,997,780 shares of common stock in exchange for $2,461,000 through several private placements. An additional amount of approximately, $1,500,000 in exchange for 1,250,000 shares of common stock is expected to be received by May 31,1999. As of May 19, 1999 the Company's unused sources of funds consisted primarily of approximately $1,199,000 in cash. INFLATION The Company does not believe its business and operations have been materially affected by inflation. YEAR 2000 Some of the Company's financial business systems or those of its vendors or customers may have been written using two digits rather than four, to define the applicable year. As a result, those systems may have date-sensitive software that recognizes a date "00" as the year 1900 rather than 2000. If not modified or updated, this could cause system failure or miscalculations, potentially resulting in the temporary disruption of operations due to the inability to process certain transactions. The Company has contracted with Mercedes Distribution to provide a full distribution service for its publishing operations. This distribution service includes complete computer systems needs for distribution of the Company's publishing operations together with information systems pertaining thereto. If Mercedes were to experience year 2000 problems, the Company could experience significant deterioration of operating efficiency. Mercedes Distribution has represented to the Company that such systems are year 2000 compliant. The Company utilizes MAS 90, a widely available package system for its financial systems. The vendor of MAS 90 has represented to the Company that MAS 90 is year 2000 compliant. 14 The Company has initiated communications with significant suppliers and customers to determine the extent that they may be vulnerable to their own year 2000 issues. Based on the representations of suppliers and customers contacted, management does not believe the Company's continued operation is at risk due to key business partners not addressing the year 2000 issue. The Company does not believe that year 2000 problems that may be experienced by its customers, suppliers and vendors (other than Mercedes) would result in a significant deterioration of operating efficiency. However, until the Company has completed its evaluation of the year 2000 issue, no assurance can be given that the Company will avoid deterioration of operating efficiency or programming costs because of year 2000 problems. The Company estimates the incremental costs associated with addressing and fixing potential year 2000 problems to be no more than $25,000. PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The discussion in this Item 1 should be read in conjunction with the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1998, which contains a description of pending legal proceedings to which the Company is a party. On July 6, 1998, a first amended complaint in the action entitled Mattken Corp. and Gerald J. Leider v. NewStar Media, Inc. was filed in the Los Angeles Superior Court (BC 191736). The plaintiffs allege breach of contract arising out of a purported agreement between Mr. Leider and the Company in connection with executive producer services on the motion picture "Morning Glory", and a purported sales agency agreement between Mattken Corp. and the Company. Plaintiffs are seeking in excess of $350,000. In April 1999, the Plaintiffs unsuccessfully sought to obtain a writ of attachment in respect of their claims. The Company believes that it has good and meritorious defenses to the action. Nevertheless, there is no assurance that the Company will prevail in the action. In addition to the above claims and the claims identified in the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1998, the Company is a party to various other routine legal proceedings and claims incidental to its business. There can be no assurance that the ultimate outcome of these matters will be resolved in favor of the Company. In addition, even if the ultimate outcome is resolved in favor of the Company, involvement in any litigation or claims could entail considerable cost to the Company and the diversion of the attention of management, either of which could have a material adverse effect on the business of the Company. ITEM 3. DEFAULTS UPON SENIOR SECURITIES See the discussion in Note 5 of the Notes to Consolidated Financial Statements in Item 1 of Part I herein which discussion is incorporated by reference in this Item 3 of Part II. ITEM 5. OTHER INFORMATION On April 19, 1999, The Nasdaq Stock Market, Inc. ("Nasdaq") informed the Company that Nasdaq had determined that the Company was not in compliance with the net tangible assets/market capitalization/net income requirements pursuant to NASD Marketplace Rule 4310(c)(2). Also on that date, Nasdaq sent separate correspondence to the Company in which Nasdaq noted that the Company had received a "going concern" opinion from its independent auditor, and expressed concern that, in light thereof, the Company may not be able to sustain compliance with Nasdaq's continued listing requirements. In connection therewith, Nasdaq requested information from the Company by May 5, 1999 about the Company's proposal for achieving compliance with Marketplace Rule 4310(c)(2) and a timeline for resolution of the items that led to the "going concern" opinion. On May 5, 1999, the Company submitted its response to Nasdaq. If Nasdaq does not deem the response sufficient to warrant continued listing, Nasdaq will immediately issue a formal notice of deficiency which specifies the date that the Company's common stock would be delisted from the Nasdaq SmallCap Market. Although the Company believes that it can come into compliance with the 15 continued listing requirements in a reasonable period of time, there can be no assurance that it will do so or that the Company's common stock will remain listed on the Nasdaq SmallCap Market. If the Company's common stock is delisted, it would likely be more difficult to buy or sell the Company's common stock or to obtain timely and accurate quotations to buy and sell. In addition, the delisting process could result in a decline in the trading market for the Company's common stock which could potentially depress the Company's stock price, among other consequences. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. No reports on Form 8-K were filed during the quarter ended March 31, 1999. 16 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: May 21, 1999 NEWSTAR MEDIA INC. By /s/ RONALD LIGHTSTONE ---------------------------------------- Ronald Lightstone, President, Chief Executive Officer and Director Date: May 21, 1999 By /S/ JOHN T. BRADY ---------------------------------------- John T. Brady Chief Financial Officer 17 NEWSTAR MEDIA INC. INDEX TO EXHIBITS Exhibit Number - ------------- 27 Financial Data Schedule 18 EX-27 2 FINANCIAL DATA SCHEDULE
5 1000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 547 0 2252 0 2460 5969 839 0 18474 13337 0 0 2 173 4403 18474 1422 1422 1078 1078 2364 0 198 (1624) (2) (1626) 0 0 0 (1626) (.10) (.10)
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