FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 1-10781
LANCIT MEDIA ENTERTAINMENT, LTD.
(Exact Name of Registrant as Specified in its Charter)
New York 13-3019470
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
601 West 50th Street, New York, New York, 10019
(Address of Principal Executive Office) (Zip Code)
(212) 977-9100
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
The number of shares of registrant's Common Stock, $.001 par value, outstanding
as of March 31, 1997 was 6,634,750 shares.
LANCIT MEDIA ENTERTAINMENT, LTD. AND SUBSIDIARIES
INDEX
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET - March 31, 1997
and June 30, 1996 1
CONSOLIDATED STATEMENT OF OPERATIONS - For the
nine and three months ended March 31, 1997
and 1996 2
CONSOLIDATED STATEMENT OF CASH FLOWS - For the
nine months ended March 31, 1997 and 1996 3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 5
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 10
SIGNATURES 11
PART I. FINANCIAL INFORMATION
LANCIT MEDIA ENTERTAINMENT, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31, June 30,
1997 1996
-------------- -------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,219,893 $ 3,358,230
Accounts receivable 1,670,177 2,683,433
Film and program costs, net 1,870,423 5,527,106
Prepaid expenses 160,984 268,175
-------------- -------------
TOTAL CURRENT ASSETS 9,921,477 11,836,944
ACCOUNTS RECEIVABLE - NON-CURRENT 579,625 1,378,078
FIXED ASSETS, NET 567,432 832,606
GOODWILL, NET 267,415 279,754
DEPOSITS 50,363 60,784
-------------- -------------
TOTAL ASSETS $ 11,386,312 $ 14,388,166
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 2,557,891 $ 732,158
Participation payable 1,016,324 1,199,991
Deferred revenue 1,132,194 1,651,279
-------------- -------------
TOTAL CURRENT LIABILITIES 4,706,409 3,583,428
-------------- -------------
PARTICIPATION PAYABLE - NON-CURRENT 504,146 598,461
DEFERRED REVENUE - NON-CURRENT 440,912 828,713
MINORITY INTEREST 158,780 94,056
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value, authorized
15,000,000 shares; issued and outstanding
6,634,750 shares at March 31, 1997 and
6,187,634 shares at June 30, 1996 6,635 6,188
Additional paid-in capital 17,294,536 12,579,402
Accumulated deficit (11,725,106) (3,302,082)
-------------- -------------
TOTAL STOCKHOLDERS' EQUITY 5,576,065 9,283,508
-------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 11,386,312 $ 14,388,166
============== =============
See notes to consolidated financial statements.
- 1 -
LANCIT MEDIA ENTERTAINMENT, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------- ---------------------
1997 1996 1997 1996
-------- --------- --------- ----------
(UNAUDITED) (UNAUDITED)
REVENUES:
Production and royalties $ 820,258 $ 1,234,926 $ 1,566,266 $5,956,892
Licensing agent fees 285,537 514,902 929,412 1,853,288
---------- ---------- ----------- ----------
1,105,795 1,749,828 2,495,678 7,810,180
---------- ---------- ----------- ----------
OPERATING EXPENSES:
Production and royalties 1,252,276 1,297,137 2,231,267 5,557,345
Licensing agent - direct costs 200,875 317,359 641,123 901,317
General and administrative 1,217,165 574,410 2,717,935 1,931,621
Write-down of film and
program costs 5,456,180 - 5,456,180 -
---------- ---------- ---------- ----------
8,126,496 2,188,906 11,046,505 8,390,283
---------- ---------- ----------- ----------
LOSS FROM OPERATIONS (7,020,701) (439,078) (8,550,827) (580,103)
INTEREST INCOME - NET 78,714 55,870 192,527 229,665
---------- ---------- ----------- ----------
LOSS BEFORE PROVISION FOR
INCOME TAXES AND MINORITY
INTEREST (6,941,987) (383,208) (8,358,300) (350,438)
PROVISION FOR INCOME
TAXES - CURRENT - 17,450 - 38,440
MINORITY INTEREST (13,123) 2,002 (64,724) (123,117)
---------- ---------- ----------- ----------
NET LOSS $ (6,955,110) $(398,656) $(8,423,024) $(511,995)
========== ========== =========== ==========
NET LOSS PER SHARE $ (1.05) $ (0.06) $ (1.29) $ (0.08)
========== ========== =========== ==========
WEIGHTED AVERAGE SHARES 6,632,750 6,180,387 6,506,884 6,180,305
========== ========== =========== ==========
See notes to consolidated financial statments.
- 2 -
LANCIT MEDIA ENTERTAINMENT, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED
MARCH 31,
-----------------------
1997 1996
---------- ----------
(UNAUDITED)
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss (8,423,024) (511,995)
---------- ----------
Adjustments to reconcile net loss to net cash from operating activities:
Amortization of film and program costs 853,032 3,295,761
Write-down of film and program costs 5,456,180 -
Depreciation and other amortization 288,256 314,120
Minority interest 64,724 123,117
Changes in operating assets and liabilities:
(Increase) decrease in accounts
receivable - current 1,013,256 2,463,981
(Increase) decrease in accounts
receivable - non-current 798,453 706,767
Additions to film and program costs (2,652,529) (5,830,096)
(Increase) decrease in prepaid expenses 107,191 (69,493)
(Increase) decrease in income taxes receivable - 434
(Increase) decrease in deposits receivable 10,421 (1,500)
Increase (decrease) in accounts payable
and accrued expenses 1,825,733 361,972
Increase (decrease) in participations
payable - current (183,667) 628,517
Increase (decrease) in participations
payable - non-current (94,315) (713,915)
Increase (decrease) in income taxes payable - (14,181)
Increase (decrease) in deferred revenue - current (519,085) (2,708,548)
Increase (decrease) in deferred revenue - non-current (387,801) (660,469)
---------- ----------
6,579,849 (2,103,533)
---------- ----------
CASH USED IN OPERATING ACTIVITIES (1,843,175) (2,615,528)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (10,742) (159,021)
---------- ----------
CASH USED IN INVESTING ACTIVITIES (10,742) (159,021)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 4,715,581 203
---------- ----------
CASH PROVIDED BY FINANCING ACTIVITIES 4,715,581 203
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,861,664 (2,774,346)
CASH AND CASH EQUIVALENTS - beginning of period 3,358,230 7,395,238
---------- ----------
CASH AND CASH EQUIVALENTS - end of period 6,219,894 4,620,892
========== ==========
CASH PAID DURING THE PERIOD FOR:
Interest -- --
========== ==========
Income taxes -- 56,526
========== ==========
See notes to consolidated financial statements.
- 3 -
LANCIT MEDIA ENTERTAINMENT, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
1. BASIS OF PRESENTATION
Reference is made to the Company's Annual Report on Form 10-K/A dated October
28, 1996 for the year ended June 30, 1996.
The accompanying financial statements reflect all adjustments which, in the
opinion of management, are necessary for a fair presentation of the financial
position and results of operations for the interim periods presented. Except as
described in note 3 below, all such adjustments are of a normal and recurring
nature. The results of operations for any interim period are not necessarily
indicative of the results of a full fiscal year.
2. NET LOSS PER SHARE
Net loss per share is computed on the basis of the weighted average number
common shares outstanding for the respective period.
3. WRITE-DOWN OF FILM AND PROGRAM COSTS
The write-down of film and program costs amounted to $5,456,180. This non-cash
charge, of which approximately $2.1 million relates to THE PUZZLE PLACE(R) and
approximately $3.3 million relates to BACKYARD SAFARI(TM), reflects the
Company's revision of its estimated future net royalty stream with respect to
the PUZZLE PLACE(R) and the Company's revision of its anticipated production
funding sources and its estimated future net royalty stream with respect to
BACKYARD SAFARI(TM). In both cases, the Company accrued for estimated remaining
project costs.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations - Three months ended March 31, 1997 as
compared to three months ended March 31, 1996
Production and royalty revenues for the three month period ended March 31, 1997
decreased to $820,258 from $1,234,926 in the comparable 1996 quarter. This
decrease is primarily the result of reduced production and royalty activity on
THE PUZZLE PLACE(R) and reduced production activity on READING RAINBOW(R) and
BACKYARD SAFARI(TM) which was partially offset by revenues from production
activity beginning in the current quarter on "NO! REALLY" and the "DISCOVERY
KIDS" project to produce interstitial material.
Licensing agent fee revenues for the three month period ended March 31, 1997
decreased to $285,537 from $514,902 in the comparable 1996 quarter. This
decrease is primarily the result of reduced revenue recognition resulting from
the adjustment of the licensing terms for several licensees on THE PUZZLE
PLACE(R) and lower royalties on SONIC THE HEDGEHOG(TM).
Production and royalty expenses for the three month period ended March 31, 1997
decreased to $1,252,276 from $1,297,137 in the comparable 1996 quarter
reflecting primarily the decreased production and royalty activity on THE PUZZLE
PLACE(R) and reduced production activity on READING RAINBOW(R) and BACKYARD
SAFARI(TM), largely offset by production activity beginning in the current
quarter on "NO! REALLY" and the "DISCOVERY KIDS" interstitial project as well as
additional development expenses.
Direct costs of licensing agent activities for the three month period ended
March 31, 1997 decreased to $200,875 from $317,359 in the comparable 1996
quarter primarily as a result of reduced personnel, travel and marketing costs.
General and administrative expenses for the three month period ended March 31,
1997 rose to $1,217,165 from $574,410 in the comparable 1996 quarter. This
increase is due to costs related to the hiring of the new Chief Executive
Officer, a severance charge and a reduction in project activities resulting in
reduced project absorption of personnel costs, office expenses and facilities
costs.
The write-down related to film and program costs amounted to $5,456,180. This
non-cash charge, of which approximately $2.1 million relates to THE PUZZLE
PLACE(R) and approximately $3.3 million relates to BACKYARD SAFARI(TM), reflects
the Company's revision of its estimated future net royalty stream with respect
to the PUZZLE PLACE(R) and the Company's revision of its anticipated production
funding sources and its estimated future net royalty stream with respect to
BACKYARD SAFARI(TM). In both cases, the Company accrued for estimated remaining
projectcosts.
With respect to THE PUZZLE PLACE(R), the licensing relaunch plan recently
prepared by the Company does not appear to have the revenue generating
capabilities that the Company previously anticipated, particularly in the
short-term. In addition, unexploited licensing categories previously identified
by the Company have not met expectations. Further, internationally, the Company
is finding it to be a greater challenge than anticipated to both distribute the
television program andbuild a licensing campaign.
With respect to BACKYARD SAFARI(TM), based on negotiations the Company was
having with certain distribution outlets, the Company expected to have secured
an airing commitment which would have included an initial license fee. While the
Company continues to believe that the program will air, it no longer expects to
receive an initial license fee. In addition, because the Company currently
expects that any airing of the program will be on a limited basis, at least
initially, reduced production revenues are expected. Furthermore, negotiations
with certain venues that were expected to help drive merchandise sales were not
successfully completed which further reduced previously estimated licensing
revenues. Because the program has not yet been cleared domestically,
international exploitation of this property, at least initially, is no longer
expected to be significant.
Management anticipates focusing more of the Company's time and resources on
properties which are currently on the development slate which may have more
near-term financial benefit to the Company. These include HUMONGOUS and
programming for DISCOVERY to fill a minimum of 1/6 of the programming on
DISCOVERY CHANNEL KIDS.
Interest income, net for the three month period ended March 31, 1997 increased
to $78,714 compared to $55,870 in the comparable 1996 quarter, as a result of an
increased level of cash invested in the current year.
There was no provision for income taxes recorded for the three month period
ended March 31, 1997 compared to $17,450 for state and local taxes recorded in
the comparable 1996 quarter.
Minority interest in licensing activities for the three month period ended March
31, 1997 was $13,123 compared to a benefit of $2,002 in the comparable 1996
quarter.
Net loss for the three month period ended March 31, 1997 was $6,955,110 ($1.05
per share) compared to a net loss of $398,656 ($.06 per share) in the comparable
1996 quarter primarily as a result of the combination of all factors discussed
above. Weighted average shares outstanding for the three month period ended
March 31, 1997 increased to 6,632,750 from 6,180,387 in the comparable 1996
quarter primarily as a result of the issuance of shares related to the purchase
of a 6.6% equity stake in the Company by Discovery Communications, Inc. ("DCI")
in September 1996 as well as the exercise of stock options during the twelve
month period since March 31, 1996.
Results of Operations - Nine months ended March 31, 1997 as
compared to nine months ended March 31, 1996
Production and royalty revenues for the nine month period ended March 31, 1997
decreased to $1,566,266 from $5,956,892 in the comparable 1996 nine month
period. This decrease is primarily the result of significantly reduced
production activity on THE PUZZLE PLACE(R), BACKYARD SAFARI(TM) and READING
RAINBOW(R), all which was partially offset by production activity beginning in
the quarter ended March 31, 1997 on "NO! REALLY" and the "DISCOVERY KIDS"
interstitial project.
Licensing agent fee revenues for the nine month period ended March 31, 1997
decreased to $929,412 from $1,853,288 in the comparable 1996 nine month period.
This decrease is primarily the result of reduced revenue recognition resulting
from the adjustment of the licensing terms for several licensees on THE PUZZLE
PLACE(R) and reduced royalties on SONIC THE HEDGEHOG(TM).
Production and royalty expenses for the nine month period ended March 31, 1997
decreased to $2,231,267 from $5,557,345 in the comparable 1996 nine month period
reflecting primarily decreased production and royalty activity on THE PUZZLE
PLACE(R) and reduced production activity on READING RAINBOW(R) and BACKYARD
SAFARI(TM), all of which was partially offset by production activity beginning
in the comparable 1997 period on "NO! REALLY" and the "DISCOVERY KIDS"
interstitial project as well as additional development expenses.
Direct costs of licensing agent activities for the nine month period ended March
31, 1997 decreased to $641,123 from $901,317 in the comparable 1996 nine month
period primarily as a result of reduced personnel, travel and marketing costs.
General and administrative expenses for the nine month period ended March 31,
1997 rose to $2,717,935 from $1,931,621 in the comparable 1996 nine month
period. This increase is due to costs related to the hiring of the new Chief
Executive Officer, a severance charge as well as a reduction in project
activities resulting in reduced project absorption of personnel and facilities
costs being absorbed by project activities.
The write-down of film and program costs is discussed in the results of
operations for the three months ended March 31, 1997.
Interest income, net for the nine month period ended March 31, 1997 decreased to
$192,527 from $229,665 in the comparable 1996 nine month period. This decrease
is primarily due to a reduced level of cash invested during the earlier part of
the fiscal year, resulting from the Company's utilization of cash for
production, development and corporate needs.
There was no provision for income taxes recorded for the nine month period ended
March 31, 1997 compared to $38,440 for state and local taxes in the comparable
1996 nine month period.
Minority interest in licensing activities for the nine month period ended March
31, 1997 was $64,724 compared to $123,117 in the comparable 1996 nine month
period. This reduction is the direct result of the reduced profitability of the
licensing agent.
Net loss for the nine month period ended March 31, 1997 was $8,423,024 ($1.29
per share) compared to net loss of $511,995 ($.08 per share) in the comparable
1996 nine month period primarily as a result of the combination of all factors
discussed above. Weighted average shares outstanding for the nine month period
ended March 31, 1997 increased to 6,506,884 from 6,180,305 in the comparable
1996 nine month period primarily as a result of the issuance of shares related
to DCI's purchase of its 6.6% equity stake in the Company as well as the
exercise of stock options during the twelve month period since March 31, 1996.
Liquidity and Capital Resources
The Company had cash and cash equivalents as of March 31, 1997 of approximately
$6.2 million, and no long-term debt. The Company is not generating cash flow
from operations sufficient to fund its current level of operating expenses, and
additional funding from strategic alliances and/or distribution arrangements is
believed by management to be important for sustaining the Company's operations
on a long-term basis. The Company also expects to take steps to reduce its
operating expenses.
Cash used in operating activities was approximately $1.9 million for the nine
month period ended March 31, 1997, compared to approximately $2.6 million for
the same period last year. A net loss of approximately $8.4 million for the nine
month period ended March 31, 1997, which included non-cash project related
write-downs of approximately $5.5 million, net additions to film and program
costs of approximately $1.8 million, a decrease in deferred revenues of
approximately $0.9 million and a decrease in participations payable of
approximately $0.3 million, was partially offset by a decrease in accounts
receivable of approximately $1.8 million, an increase in accounts payable and
accrued expenses of approximately $1.8 million and depreciation and other
amortization of approximately $0.3 million.
Cash used in investing activities was approximately $11,000 for the nine month
period ended March 31, 1997, compared to approximately $159,000 for the same
period last year. The Company acquired equipment during the first nine months of
fiscal 1996 as part of its expansion of post production capabilities as well as
the improvement of its management information systems.
Cash provided from financing activities was approximately $4.7 million for the
nine month period ended March 31, 1997 compared to $203 for the same period last
year. In September 1996, DCI invested $5 million, which was partially offset by
costs relating to the transaction, in return for a 6.6% equity stake in the
Company, and the right to purchase what currently represents an additional 6.2%
equity stake in the Company through the exercise of warrants at $13 per share.
As of March 31, 1997, the Company is continuing with the outreach, publicity and
rights renewals for the first 65 episodes of THE PUZZLE PLACE(R). All these
remaining costs were accrued and included in the calculation of the film and
program cost write-down related to the property. The Company estimates that,
after it receives the balance of the monies due from Corporation for Public
Broadcast and KCET, its remaining funding requirement will be no more than
approximately $0.1 million. With respect to THE PUZZLE PLACE(R) licensing
effort, the Company and KCET have agreed to, and may in the future, adjust the
licensing terms for certain licensees in order to free up existing licensed
categories.
The Company is completing post production on the initial season of 13 episodes
of BACKYARD SAFARI(TM) which was partially funded through a major grant from the
National Science Foundation. The Company estimates that its remaining funding
requirement for this project is approximately $0.5 million to cover primarily
outreach and promotion activities. All of these remaining costs were accrued for
at March 31, 1997 and included in the calculation of the film and program cost
write-down related to the property.
Management does not expect inflation to have a significant impact on the
business.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report, including, without limitation, descriptions of the Company's
targets or goals and Management's views concerning the Company's pending and
proposed projects, prospects and future financial performance contained in this
discussion and analysis and elsewhere, constitute forward-looking statements
made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 and involve known and unknown risks and uncertainties which
may cause the Company's actual results in future periods to differ materially
from forecasts. These risks include, among others: network and studio acceptance
of television and motion picture projects; negotiation of appropriate license
and distribution and other partnership and business arrangements; the ability of
the Company to secure timely funding; less than anticipated consumer acceptance
of entertainment projects or licensed products; as well as risks generally
associated with the production of a television series, movie or other
entertainment project. These and other risks are described in the Company's
Annual Report on Form 10-K/A filed with the Securities and Exchange Commission,
copies of which are available from the SEC or may be obtained upon request from
the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
10.19 Employment Agreement with Susan Solomon and Exhibits
Thereto
10.20 Employment Agreement with David Michaels
10.21 Mutual Separation Agreement with Britten & Stone
b) Reports on Form 8-K
The Company filed a Report on Form 8-K on May 8, 1997 reporting a change
in certifying accountants. The filing included a letter from the former
certifying accountants pursuant to Item 304 (a) (3) of Regulation S-K.
SIGNATURES
Pursuant to the requirements of 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.
LANCIT MEDIA ENTERTAINMENT, LTD.
Date: May 20, 1997 By: /s/ Gary Appelbaum
Gary Appelbaum
Senior Vice President, Chief Financial Officer &
Treasurer
Date: May 20, 1997 By: /s/ Laurence A. Lancit
Laurence A. Lancit
Co-President