-----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, JaiA8+JkPymU0kUt+i5yEN8Sbr4cU4mpVWelGPULavm14PguQ6Wq3IipETku0WIS vdnFYA1mqLT99FmT157yJA== 0001019687-99-000733.txt : 19991119 0001019687-99-000733.hdr.sgml : 19991119 ACCESSION NUMBER: 0001019687-99-000733 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991118 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: 99760367 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 UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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: 21,612,058 as of November 1, 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) September 30, 1999 ASSETS CURRENT ASSETS Cash and cash equivalents $ 1,442,000 Accounts receivable, net of allowances of $1,210,000 3,698,000 Barter receivable 731,000 Inventory 2,481,000 Film costs 4,018,000 Due from related party 36,000 Prepaid expenses and other assets 994,000 -------------- Total current assets 13,400,000 NON-CURRENT ASSETS Production masters, net 2,906,000 Film costs, net 3,382,000 Property and equipment, net 618,000 Goodwill and other assets 5,532,000 -------------- Total non-current assets 12,438,000 -------------- Total assets $ 25,838,000 ============== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued expenses $ 5,911,000 Notes payable 16,000 Advances and deferred income 4,252,000 -------------- Total current liabilities 10,179,000 NON-CURRENT LIABILITIES Note payable 8,307,000 Accrued liabilities 437,000 -------------- Total non-current liabilities 8,744,000 -------------- Total liabilities 18,923,000 -------------- SHAREHOLDERS' EQUITY Preferred stock $.01 par value; 2,000,000 shares authorized and 220,033 shares issued and outstanding, liquidation preference $6,776,000 2,000 Common stock $.01 par value; 50,000,000 shares authorized and 21,565,658 shares issued and outstanding 216,000 Unearned compensation (129,000) Additional paid-in capital 43,271,000 Accumulated deficit (36,445,000) -------------- Total shareholders' equity 6,915,000 -------------- Total liabilities and shareholders' equity $ 25,838,000 ============== See accompanying notes to consolidated financial statements
2 NEWSTAR MEDIA INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Quarter Ended September 30, -------------------------------------- 1999 1998 ---- ---- Revenues Publishing, net $ 2,910,000 $ 1,915,000 Film 1,069,000 1,792,000 --------------- ---------------- 3,979,000 3,707,000 Cost of sales Publishing 1,922,000 1,089,000 Film 943,000 1,601,000 --------------- ---------------- 2,865,000 2,690,000 --------------- ---------------- Gross profit 1,114,000 1,017,000 Selling, general and administrative expenses 3,009,000 1,926,000 --------------- ---------------- Loss from operations (1,895,000) (909,000) Gain on sale of land and building -- 1,734,000 Interest expense, net (252,000) (318,000) --------------- ---------------- Income (loss) before income taxes (2,147,000) 507,000 Income tax expense (1,000) (2,000) --------------- ---------------- Net income (loss) $ (2,148,000) $ 505,000 =============== ================ Basic income (loss) attributable to common shareholders $ (2,148,000) $ 398,000 =============== ================ Basic income (loss) per common share $ (.10) $ .05 =============== ================ Weighted average number of common shares outstanding 21,563,000 8,596,000 =============== ================ Diluted income (loss) attributable to fully diluted common shareholders $ (2,148,000) $ 505,000 =============== ================ Diluted income (loss) per common share $ (.10) $ .04 =============== ================ Weighted average number of common shares outstanding 21,563,000 11,814,000 =============== ================ See accompanying notes to consolidated financial statements
3 NEWSTAR MEDIA INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Nine Months Ended September 30, ------------------------------------- 1999 1998 ---- ---- Revenues Publishing, net $ 5,423,000 $ 5,430,000 Film 1,460,000 8,590,000 ---------------- ---------------- 6,883,000 14,020,000 Cost of sales Publishing 3,477,000 3,593,000 Film 1,369,000 6,455,000 ---------------- ---------------- 4,846,000 10,048,000 ---------------- ---------------- Gross profit 2,037,000 3,972,000 Selling, general and administrative expenses 7,881,000 6,841,000 ---------------- ---------------- Loss from operations (5,844,000) (2,869,000) Gain on sale of land and building -- 1,734,000 Gain on sale of long-term investment 594,000 -- Interest expense, net (653,000) (620,000) ---------------- ---------------- Loss before income taxes (5,903,000) (1,755,000) Income tax expense (3,000) (2,000) ---------------- ---------------- Net loss $ (5,906,000) $ (1,757,000) ================ ================ Basic and diluted loss attributable to common shareholders $ (5,906,000) $ (2,077,000) ================ ================ Basic and diluted loss per common share $ (.30) $ (.29) ================ ================ Weighted average number of common shares outstanding 19,394,000 7,287,000 ================ ================ See accompanying notes to consolidated financial statements
4 NEWSTAR MEDIA INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30, ------------------------------------ 1999 1998 ---- ---- OPERATING ACTIVITIES Net loss $ (5,906,000) $ (1,757,000) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 570,000 405,000 Amortization of goodwill 179,000 189,000 Amortization of production masters 818,000 1,232,000 Amortization of film costs 1,498,000 6,022,000 Provision for doubtful accounts 56,000 -- Gain on sale of building and land -- (1,734,000) Gain on sale of long-term investment (594,000) -- Stock Based Compensation 125,000 125,000 Changes in operating assets and liabilities: Accounts receivable (2,003,000) (2,040,000) Inventory 607,000 746,000 Prepaid expenses and other assets 181,000 (372,000) Expenditures for production masters (1,355,000) (1,105,000) Film cost additions (4,123,000) (9,406,000) Accounts payable and accrued expenses 1,057,000 (997,000) Advances and deferred revenue 3,992,000 (329,000) Other 57,000 5,000 --------------- --------------- Net cash used in operating activities (4,841,000) (9,016,000) --------------- --------------- INVESTING ACTIVITIES Proceeds from sale of long-term investment 613,000 -- Purchase of Audio Literature (200,000) -- Proceeds from sale of property and equipment, net 124,000 4,166,000 Purchase of property and equipment (118,000) -- --------------- --------------- Net cash provided by investing activities 419,000 4,166,000 --------------- --------------- FINANCING ACTIVITIES Proceeds of bank borrowings 3,600,000 7,849,000 Repayments of bank borrowings and notes payable (2,734,000) (8,591,000) Proceeds from issuance of common stock 4,545,000 5,500,000 --------------- --------------- Net cash provided by financing activities 5,411,000 4,758,000 --------------- --------------- Net decrease in cash and cash equivalents 989,000 (92,000) Cash and cash equivalents at beginning of the period 453,000 302,000 --------------- --------------- Cash and cash equivalents at end of the period $ 1,442,000 $ 210,000 =============== =============== See accompanying notes to consolidated financial statements.
5 NEWSTAR MEDIA INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
Nine Months Ended September 30, ------------------------------------------ 1999 1998 ---- ---- SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest $ 526,000 $ 516,000 NON-CASH TRANSACTIONS Common stock issued as payment for consulting fees to related party $ -- $ 450,000 Common Stock issued as payment to vendors and other obligations $ 60,000 $ 753,000 Preferred stock dividends accrued $ -- $ 320,000 Preferred stock dividends paid in common stock $ 10,000 $ 589,000 Preferred stock issued as payment for amounts payable to former officers of the Company $ 135,000 $ 108,000 ACQUISITION OF AMERICAN AUDIO LITERATURE, INC Assets acquired $ 1,550,000 Liabilities incurred (300,000) Issuance of Common Stock (1,050,000) --------------- Net cash paid $ 200,000 See accompanying notes to consolidated financial statements
6 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 and 10-KSB/A for the fiscal year ended December 31, 1998. The accompanying consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) which in the opinion of management are necessary in order to make them not misleading. The results of operations for the nine months ended September 30, 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 and related internet services, 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, including its new website AudioUniverse.com, 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 income (loss) utilized in the calculation of basic income/(loss) per common share is decreased/(increased) by the following: 1999 1998 ---- ---- Quarter ended September 30, Accrued dividends on Preferred Stock $ -- $ 107,000 Nine months ended September 30, Accrued dividends on Preferred Stock $ -- $ 320,000 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. 7 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: Nine months Ended September 30, ------------------------------------- 1999 1998 ---- ---- Net loss attributable to common shareholders As reported $ (5,906,000) $ (2,077,000) Pro forma $ (7,004,000) $ (2,178,000) Net loss per share As reported $ (.30) $ (.29) Pro forma $ (.36) $ (.30) 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 September 30, 1999, the Company had net deferred tax assets of approximately $12,493,000 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 $135,000 during the nine months ended September 30, 1999 in the form of Series E Preferred Stock for payments due by the Company for the period January through May, 1999. The Termination Agreement provides for the Former Principals to receive combined monthly payments (the "Payments") of approximately $25,000, 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 cash for the period June to September, 1999. The Former Principals are entitled to receive Series E Preferred Stock in lieu of such cash Payments but have chosen not to accept the Series E Preferred Stock. 8 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 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 nine months ended September 30, 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 A. Elkes, Kenneth F. Gorman, John T. Healy, Ronald Lightstone and Bruce Maggin. Mr. Elkes is Chairman of the Board of the Company and Chief Executive Officer, and Mr. Gorman is Vice-Chairman and Messrs Healy, Lightstone and Maggin are directors of the Company. During 1999, the Company reorganized the management of the Company whereby all operating officers report to the Office of the Chief Executive of which Mr. Elkes is Chairman and Chief Executive Officer and Mr. Gorman is Co-Vice Chairman. The Company accrued the following fees payable to MEI:
Quarter ended September 30, 1999 1998 ---- ---- Consulting fees pursuant to consulting agreement $ -- $ 75,000 Guarantee fees pursuant to guarantee of Chase Bank loan facility 12,500 6,000 ------------- ------------- Total $ 12,500 $ 81,000 ============= ============= Nine months ended September 30, 1999 1998 ---- ---- Consulting fees pursuant to consulting agreement $ -- $ 225,000 Guarantee fees pursuant to guarantee of Chase Bank loan facility 37,500 19,000 ------------- ------------- Total $ 37,500 $ 244,000 ============= =============
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 August 17, 1998 102,000 $150,000 Pursuant to guarantee agreements dated November 4, 1997, each of the principals of MEI had collectively guaranteed $208,000 and Messrs. Elkes, Gorman and Lightstone had collectively guaranteed $287,000 against borrowings under the Company's loan facility ("Chase Loan") with The Chase Manhattan Bank ("Chase Bank") to the extent such borrowings exceed the borrowing base as defined in the Chase Loan ("Borrowing Base"). At September 30, 1999, utilization of the Chase Loan exceeded the Borrowing Base by $495,000. 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. 9 During the third quarter of 1999, in connection with obtaining certain amendments and waivers to the Chase Loan, the Company reached an agreement 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 entered 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. During the quarter ended September 30, 1999, MEI instituted an arbitration proceeding against the Former Principals. The Company's in-house legal staff provided legal services for MEI in connection with such proceedings. The Company entered into a Publishing Agreement with Affinity Communications Corp. ("Affinity") pursuant to which the Company published "The Libido Breakthrough: A Doctor's Guide to Restoring Sexual Vigor and Peak Health" by Stuart W. Fine, M.D. and Brenda Adderly, M.H.A. At the time of the agreement, Peter Engel, the Company's President of the publishing division, controlled and maintained a significant ownership interest in Affinity. In addition, Mr. Engel is married to Ms. Adderly. The terms of the publishing agreement are similar to those contained in publishing agreements the Company enters into with unrelated parties, except as follows: Affinity entered into and agreement with Rexall Sundown pursuant to which Rexall was to purchase 33,000 copies of the book from Affinity. The Company agreed that Affinity would purchase such 33,000 copies from the Company at cost plus $25,000. As of September 30, 1999 the Company is due $25,000, net of royalties, from Affinity. NOTE 5 - NOTES PAYABLE Notes payable at September 30, 1999 consist of the following: Chase Manhattan Bank revolving credit loan $ 8,300,000 Other 23,000 -------------- Total notes payable $ 8,323,000 ============== 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. 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. Prior to August 16, 1999, the Chase Loan provided that at any time, the Company could borrow up to the Borrowing Base. In addition, the Company could borrow or have letters of credit issued for a further $4,000,000 (provided the aggregate amount borrowed did not exceed $10,000,000) with the consent and guarantee of the principals of MEI, a significant shareholder of the Company. On August 16, 1999, the Chase Loan was amended and restated and currently provides that the Company may borrow or have letters of credit issued for up to $2,000,000 over the amount of the Borrowing Base (provided the aggregate borrowed does not exceed $10,000,000) without the consent or approval of MEI. The Chase Loan provides for interest at the bank prime rate (8.25% at September 30, 1999) plus 2% per annum or the bank's LIBOR rate (5.48% rate at September 30, 1999) plus 3% per annum, at the option of the Company. Both rates are applicable to Company draw-downs on the Chase Loan at September 30, 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, March 31, 1999 and June 30, 1999 and requested waivers from Chase Bank. As of August 16, 1999, the Company received such waivers and the Company and Chase Bank entered into amendments and waivers to the Chase Loan. As a result of such amendments and waivers, the Company was in compliance with the aforementioned financial compliance tests. 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. In connection with the drafting of certain amendments and waivers to the Chase Loan, the Company reached agreement with MEI for an extension and modification of the guarantee agreement to provide for a revised guarantee of $2,000,000. 10 At September 30, 1999, the Company had borrowed $8,300,000 against the facility and had $1,700,000 of available funds for borrowing. In addition, Chase Bank had provided a letter of credit for $287,000 in respect of certain litigation. In connection with the granting of certain waivers and amendments, Chase Bank required that the Company raise a minimum of $4.1 million of new equity. As of the date of the amendment and restatement of the Chase Loan, the Company had received $4,545,000 in new equity through several private placements. NOTE 6 - AUDIO LITERATURE ACQUISITION On June 1, 1999, the Company entered into an Asset Purchase Agreement with American Audio Literature, Inc. ("Audio Literature") whereby the Company purchased certain assets of Audio Literature including all of its inventory, production masters, prepaid expenses, sales and customer data, interests in various contracts, the "Audio Literature" corporate name and certain other intangible and intellectual properties. The purchase price of such assets amounted to $1,550,000 and is comprised of 1) $200,000 in cash paid June 1, 1999, 2) $300,000 in cash subject to certain adjustments and payable June 1, 2000, and 3) 300,000 shares of Common Stock ("Closing Shares") issued June 3, 1999 and valued by the Company and Audio Literature for purposes of the transaction at $3.50 per share. If the Company's common stock does not reach $3.50 per share on at least one day during the period from June 1, 1999 through December 31, 2000, the Company will be required to issue additional shares of common stock to Audio Literature in a number equal to $3.50 minus the average of the closing prices of the common stock for the ninety consecutive trading days preceding and including December 31, 2000 ("Reissue Price") divided by the Reissue Price and multiplied by the number of Closing Shares still held by Audio Literature on December 31, 2000. In no event will the Reissue Price be less than $0.50 per share. The Company has accounted for the assets purchased at fair market value and no goodwill was recorded in connection with the transaction. Included in the fair market value of the assets recorded are production masters of $1,110,000 which are being amortized over a five-year period, ranging form 10% to 30% per year, consistent with the estimated timing of future revenues to be earned. Management's estimate of the fair market value of the production masters is subject to adjustment, following the completion of an in-process independent library valuation. Additionally, inventory and prepaid assets of $327,000 were recorded, and $113,000 was capitalized in connection with the estimated value of Audio Literature's sales and customer data which is being amortized on straight-line basis over five years. NOTE 7 - CAPITAL ACTIVITIES COMMON STOCK During the nine months ended September 30, 1999, the Company issued the following shares of Common Stock: Number of Shares Consideration ---------------- ------------- 18,089 Preferred stock dividend, $10,000. 300,000 Acquisition of Audio Literature 140,280 Shares issued to former principals in connection with conversion of 189 shares of Series E Preferred Stock. 37,641 Vendors paid in stock $60,000 As of September 30, 1999, the Company issued 3,768,448 shares of common stock in exchange for $4,545,000 through several private placements. During the nine months ended September 30, 1999 the Company issued 135 shares of Series E Preferred Stock pursuant to the Termination Agreement. 11 STOCK OPTIONS AND WARRANTS On January 6, 1998 and July 21, 1999, the Board approved the issuance of 601,500 and 1,265,000 options under the Plan to employees, officers and directors, such options being issued in July 1998 and September 1999, respectively. Options outstanding under the Plan at September 30, 1999 were as follows: Weighted Average Number of Exercise Exercise Shares Price Price ------ ----- ----- 1,989,000 $.88 - $6.00 $1.33 At September 30, 1999, options to acquire 1,461,497 shares of Common Stock under the Plan were exercisable. Warrants outstanding at September 30, 1999 were as follows: Number of Weighted Equivalent Common Average Shares Exercise Price Exercise Price ------ -------------- -------------- 4,628,926 $2.00 - $12.00 $5.07 At September 30, 1999 all warrants to acquire shares of Common Stock were exercisable. 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; 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. 333-82553) 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. 12 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 1,700 titles (including Audio Literature 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 September 30, 1999 were $3,979,000 compared with $3,707,000 for the same period in 1998. Net loss for the quarter was $2,148,000 compared to net income of $505,000 for the same period in 1998. Revenues for the nine months ended September 30, 1999 were $6,883,000 compared with $14,020,000 for the same period last year. The Company incurred a net loss of $5,906,000 for the nine months compared to a net loss of $1,757,000 in 1998. The increase in revenues for the quarter ended September 30, 1999 was primarily attributable to an individual transaction for the sale of 526,000 units of audio book inventory for $278,000 in cash and $731,000 of barter credits to be applied towards the future purchase of media advertising. Such higher publishing revenue was partially offset by a reduction in television revenues due to the timing of the delivery of television motion pictures and series production. The increase in loss from operations for the quarter was primarily caused by an increase in selling, general and administrative expenses. The increase in these expenses was mainly attributed to increased staff costs, operating expenses related to the acquisition of American Audio Literature in the second quarter of 1999 and marketing and development cost associated with the Company's launch of its AudioUniverse.com website in June of this year. The decrease in revenues for the nine months ended September 30, 1999 was principally a result of reduced television revenues due to the timing of the delivery of television motion pictures and series production and a reduced level of audio books release in the current nine month period. During the nine months ended September 30, 1998, the Company had recognized in excess of $6.9 million of revenue from the network and video sale of the television motion picture "FutureSport". The decrease in revenue for the nine months was offset in part by the sale of 526,000 units of audio book inventory, as described above. The increase in loss from operations is primarily attributable to the reduction in television revenues and the increase in selling, general and administrative expenses in the quarter ended September 30, 1999, as described above. During the second quarter of 1999, the Company's publishing division launched its new website AudioUniverse.com in order to position itself to capitalize on the growth of e-commerce. AudioUniverse offers approximately 15,000 audio books for sale (including the Company's 1,700 titles) with sound samples for more than 1,000 titles. 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. 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 and a reality 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, in order to retain the higher profit margin associated with traditional license arrangements, 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. 13 >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. In September 1999, principal photography was completed on "Quadroon Ball," a movie for the Lifetime cable channel, starring Vanessa L. Williams and in October, 1999, videotaping was completed on the initial 65 episode order of "Random Acts of Comedy," a daily half-hour program for the Fox Family Channel, starring David Alan Grier. RESULTS OF OPERATIONS The following table sets forth divisional revenues and operating expenses as a percentage of total revenues:
Quarter Ended September 30, Nine Months Ended September 30, --------------------------- ------------------------------- 1999 1998 1999 1998 ---- ---- ---- ---- REVENUES Publishing 75% 52% 80% 39% Television and film 25 48 20 61 ---------- ---------- ---------- ---------- Total 100% 100% 100% 100% ---------- ---------- ---------- ---------- OPERATING EXPENSES Publishing 48% 29% 51% 26% Television and film 24 43 20 46 Selling, general & administrative 76 52 114 49 ---------- ---------- ---------- ---------- Total 148% 124% 185% 121% ---------- ---------- ---------- ----------
QUARTER ENDED SEPTEMBER 30, 1999 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1998 - ----------------------------------------------------------------------------- Publishing - ---------- REVENUES. Net publishing revenues for the quarter ended September 30, 1999 increased $995,000 to $2,910,000 compared with $1,915,000 for the quarter ended September 30, 1998 with the increase being attributable to a sale of 526,000 units of audio book inventory, at cost, for $278,000 in cash and $731,000 of barter credits to be used towards the future purchase of media advertising. Leading audio book publications during the current quarter included The Phantom of Manhattan by Frederick Forsyth, Mother of Pearl by Melinda Haynes and Family Honor by Robert B. Parker. COST OF SALES. Cost of sales for the quarter ended September 30, 1999 increased $835,000 to $1,922,000 from $1,089,000 for the quarter ended September 30, 1998. The increase is primarily due to an individual transaction for the sale of 526,000 units of audio book inventory, at cost, as described above, and the related cost of sales of $1,009,000. This increase was partially offset by lower production and manufacturing costs and a change in the fourth quarter of 1998 in the estimate of percentages used to amortize capitalized production costs. As a result, cost of sales as a percentage of net publishing revenues was 69% in the quarter ended September 30, 1999 compared to the 57% for the quarter September 30, 1998. 14 Film and Television - ------------------- REVENUES. Film and television revenues for the quarter ended September 30, 1999 decreased $723,000 to $1,069,000 from $1,792,000 for the quarter ended September 30, 1998. The revenue in the third quarter of 1999 was mostly from the initial delivery of episodes of the comedy series "Random Acts of Comedy" while the revenue in the same quarter last year was mainly from the home video sale of "FutureSport". COST OF SALES. Film and television amortization for the quarter ended September 30, 1999 decreased $658,000 to $943,000 from $1,601,000 for the quarter ended September 30, 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 88% and 89% for the quarters ended September 30, 1999 and 1998, respectively. General - ------- GROSS PROFIT. The Company experienced a gross profit of $1,114,000 for the quarter ended September 30, 1999 compared to $1,017,000 for the quarter ended September 30, 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 $1,083,000 to $3,009,000 for the quarter ended September 30, 1999 from $1,926,000 for the quarter ended September 30, 1998. This increase was due to increased staff costs, operating expenses related to the acquisition of American Audio Literature in the second quarter of 1999 and marketing and development cost associated with the Company's launch of its AudioUniverse.com website in June of this year. NET INTEREST EXPENSE. Net interest expense for the quarter ended September 30, 1999 was $252,000 compared with $318,000 for the quarter ended September 30, 1998. The decrease in net interest expense is primarily the result of decreased utilization of the Chase Loan facility, partially offset by amortization of deferred guarantee costs. NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, - -------------------------------------------------------------------------------- 1998 - ---- Publishing - ---------- REVENUES. Net publishing revenues for the nine months ended September 30, 1999 decreased $7,000 to $5,423,000 compared with $5,430,000 for the quarter ended September 30, 1998 with the decrease being primarily due to a lower volume of titles published. This decrease is partially offset by the sale of 526,000 units of audio book inventory, at cost, for $278,000 in cash and $931,000 of barter credits to be used towards the future purchase of media advertising. Leading audio book publications during the current quarter included The Warren Buffet Portfolio by Robert G. Hagstrom, Hush Money by Burt Reynolds and Mother of Pearl by Melinda Haynes. COST OF SALES. Cost of sales for the nine months ended September 30, 1999 decreased $116,000 to $3,477,000 from $3,593,000 for the nine months ended September 30, 1998. The decrease is primarily due to a decrease in the number of audio books published, lower production and manufacturing costs and a change in the fourth quarter of 1998 in the estimate of percentages used to amortize capitalized production costs. This decrease is partially offset by an individual transaction for the sale of 526,000 units of audio book inventory, at cost, as described above, and the related cost of sales of $1,009,000. As a result, cost of sales as a percentage of net publishing revenues was 66% for the nine months ended September 30, 1999 and 1998. Film and Television - ------------------- REVENUES. Film and television revenues for the nine months ended September 30, 1999 decreased $7,130,000 to $1,460,000 from $8,590,000 for the nine months ended September 30, 1998. The decrease was primarily due to the absence in the first nine months of 1999 of revenue comparable to revenue received from the production and video sale of "FutureSport" in 1998. COST OF SALES. Film and television amortization for the nine months ended September 30, 1999 decreased $5,086,000 to $1,369,000 from $6,455,000 for the nine months ended September 30, 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 increased to 93% from 75% for the nine months ended September 30 1998 partially as a result of a film inventory valuation adjustment. 15 General - ------- GROSS PROFIT. The Company experienced a gross profit of $2,037,000 for the nine months ended September 30, 1999 compared to $3,972,000 for the same period in 1998, resulting from the matters previously discussed regarding publishing and film revenues and cost of sales. SELLING, GENERAL AND ADMINISTRATIVE. 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 $7,881,000 for the nine months ended September 30, 1999 from $6,841,000 for the nine months ended September 30, 1998. This increase occurred almost entirely in the third quarter of 1999 as described above in the discussion of the three months ended September 30, 1999. NET INTEREST EXPENSE. Net interest expense for the period ended September 30, 1999 was $653,000 compared with $620,000 for the nine months ended September 30, 1998. The increase in net interest expense is primarily the result of amortization of deferred guarantee costs, offset in part by lower utilization of the Chase Loan facility. 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. Prior to August 16,1999, the Chase Loan provided that at any time, the Company could borrow or have letters of credit issued up to the Borrowing Base. In addition, the Company could borrow or have letters of credit issued for a further $4,000,000 (provided the aggregate amount borrowed did not exceed $10,000,000) with the consent and guarantee of the principals of MEI. On August 16, 1999, the Chase Loan was amended and restated and currently provides that the Company may borrow or have letters of credit issued for up to $2,000,000 over the amount of the Borrowing Base (provided the aggregate amount borrowed does not exceed $10,000,000) without the consent or approval 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, March 31, 1999 and June 30, 1999 and requested waivers from Chase Bank. As of August 16, 1999, the Company received such waivers and the Company and Chase Bank entered into amendments and waivers to the Chase Loan. As a result of such amendments and waivers, the Company was in compliance with the aforementioned financial compliance tests. 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. In connection with entering into certain amendments and waivers to the Chase Loan, the Company reached agreement with MEI for an extension and modification of the guarantee agreement to provide for a revised guarantee of $2,000,000. At September 30, 1999, the Company had borrowed $8,300,000 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. The Company has experienced significant negative cash flows from operations, including $10,659,000 for the year ended December 31, 1998 and $4,841,000 for the nine months ended September 30, 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 16 capital for expansion of audio and printed book publishing, Internet website development, 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 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. In the second quarter ended June 30, 1999, the Company issued 3,768,448 shares of common stock in exchange for $4,545,000 through several private placements. As of November 5, 1999 the Company's unused sources of funds was approximately $849,000 and consisted of availability under the Chase Loan facility and cash. In order to maintain its operations over the next twelve months, it will be necessary for the Company obtain additional capital. There is no assurance that the Company will be successful in obtaining such additional capital, and if additional capital is obtained, that it may not be obtained on favorable terms. On September 23, 1999, The Nasdaq-Amex Market Group ("Nasdaq") informed the Company that the Company's common stock failed to maintain a minimum bid price greater than or equal to $1.00 over the last thirty consecutive trading days, as required under Marketplace Rule 4310(c)(4). The Company will be provided ninety (90) calendar days, or until December 23, 1999, to regain compliance with the minimum bid price requirement of Rule 4310(c)(4). If at any time before December 23, 1999, the bid price of the Company's shares is equal to or greater than $1.00 for a minimum of ten consecutive trading days, the staff of Nasdaq will determine if compliance with the requirement has been achieved. If the Company is unable to demonstrate compliance with the requirement on or before December 23, 1999, the Company's securities will be delisted from The Nasdaq SmallCap Market at the opening of business on December 28, 1999. If the Company's common stock is delisted, it would likely be more difficult to buy or sell the Company's common stock or obtain timely and accurate quotations to buy or sell. In addition, the delisting 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. 17 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 various companies to provide distribution services for its publishing operations. These distribution services include computer systems needed for distribution of the Company's publishing operations together with information systems pertaining thereto. If there are year 2000 problems, the Company could experience significant deterioration of operating efficiency. The distribution companies have 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. 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 the Company's audiobook distribution companies) would result in a significant deterioration of operating efficiency. The Company has completed its evaluation of the year 2000 issue in November 1999, but 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 was 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 and 10-KSB/A for the year ended December 31, 1998 and the Company's Quarterly Reports on Form 10-QSB for the quarters ended March 31, and June 30, 1999, which contain descriptions of pending legal proceedings to which the Company is a party. On August 30, 1999, the plaintiffs in the action entitled Palisades Pictures, LLC, Nothing To Lose Productions Inc., CUB Films, Mark Severini, Eric Bross and Jeff Dowd v. Dove International, Inc., Dove Audio, Inc. and NewStar Media, Inc. (Los Angeles Superior Court (BC194069)) dismissed the action without prejudice for the purpose of settlement discussions, and the defendants entered into a tabling agreement so that the plaintiffs could refile the action if the matter is not settled. In addition to the above claims and the claims identified in the Company's Annual Report on Form 10-KSB and 10-KSB/A for the year ended December 31, 1998 and the Company's Quarterly Reports on Form 10-QSB for the quarters ended March 31 and June 30, 1999, 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. 18 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS As previously reported in the Company's Quarterly Report on Form 10-QSB for the quarter ended June 30, 1999, on July 6, 1999 the Company issued 37,641 shares of common stock of the Company to Steinberg, Nutter & Brent in satisfaction of amounts owed by the Company to that firm. On October 21, 1999, the Company issued 46,400 shares of common stock for fees in connection with the placement of securities by the Company. All of the shares were issued in reliance on Section 4(2) of the Securities Act of 1933 as amended. The Amended and Restated Credit, Security, Guaranty and Pledge Agreement, dated as of November 4, 1997, as amended and restated as of August 16, 1999, among the Company, the guarantors named therein and The Chase Manhattan Bank provides that the Company is prohibited from declaring cash dividends on its common stock. 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. 19 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (A) Exhibits: 27 Financial Data Schedule (B) Reports on Form 8-K: A report on Form 8-K (dated September 23, 1999) was filed on October 1, 1999 reporting under Item 5 the following information: On September 23, 1999, The Nasdaq-Amex Market Group ("Nasdaq") informed the Company that the Company's common stock failed to maintain a minimum bid price greater than or equal to $1.00 over the last thirty consecutive trading days, as required under Marketplace Rule 4310(c)(4). The Company will be provided ninety (90) calendar days, or until December 23, 1999, to regain compliance with the minimum bid price requirement of Rule 4310(c)(4). If at any time before December 23, 1999, the bid price of the Company's shares is equal to or greater than $1.00 for a minimum of ten consecutive trading days, the staff of Nasdaq will determine if compliance with the requirement has been achieved. If the Company is unable to demonstrate compliance with the requirement on or before December 23, 1999, the Company's securities will be delisted from The Nasdaq SmallCap Market at the opening of business on December 28, 1999. If the Company's common stock is delisted, it would likely be more difficult to buy or sell the Company's common stock or obtain timely and accurate quotations to buy or sell. In addition, the delisting 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. 20 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: November 18, 1999 NEWSTAR MEDIA INC. By /S/ Terrence A. Elkes ---------------------------------- Terrence A. Elkes Chairman and Chief Executive Officer Date: November 18, 1999 By /S/ John T. Brady ------------------------------------ John T. Brady Chief Financial Officer 21 NEWSTAR MEDIA INC. INDEX TO EXHIBITS Exhibit Number ------------ 27 Financial Data Schedule 22 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 1,442 0 3,453 0 2,481 13,400 618 0 25,838 10,179 0 0 2 216 6,697 25,838 6,883 6,883 4,846 12,727 0 0 653 (5,903) 3 (5,906) 0 0 0 (5,906) (.30) (.30)
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