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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-24984
DOVE AUDIO, INC.
Exact name of registrant as specified in its charter)
California 95-4015834
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
301 N. Canon Drive, Suite 207, Beverly Hills, California 90210
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (310) 273-7722 Securities
registered pursuant to Section 12(b) of the Act: None Securities registered
pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
State the numbers of shares outstanding of each of the registrant's classes of
common equity, as of the latest practicable date: 4,884,166
Transitional Small Business Disclosure Format (Check one):
Yes No X
--- ---
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PART I
FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
DOVE AUDIO, INC.
Consolidated Balance Sheet
March 31, 1996
ASSETS
CURRENT ASSETS
Cash and cash equivalents 5,052,000
Marketable securities 377,000
Accounts receivable, net of allowances of $2,181,000 2,356,000
Inventory 4,006,000
Prepaid expenses and other assets 150,000
Deferred tax asset - Note 5 223,000
------------
Total current assets 12,174,000
PRODUCTION MASTERS - Note 3 3,055,000
FILM COSTS, net - Note 4 1,060,000
PROPERTY AND EQUIPMENT 2,767,000
------------
Total assets $19,056,000
============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,927,000
Notes payable - Note 6 1,937,000
Royalties payable 301,000
Advances and deferred income 389,000
------------
Total current liabilities 4,554,000
COMMITMENTS AND CONTINGENCIES - Note 8 -
SHAREHOLDERS' EQUITY - Note 9
Preferred stock .01 par value; 2,000,000 shares authorized
and 214,113 shares, Series A, issued and outstanding 856,000
Common stock .01 par value; 20,000,000 shares authorized and
4,884,166 issued and outstanding 49,000
Additional paid-in capital 14,761,000
Accumulated deficit (1,164,000)
------------
Total shareholders' equity 14,502,000
-----------
Total liabilities and shareholders' equity $19,056,000
===========
See accompanying notes to consolidated financial statements.
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DOVE AUDIO, INC.
Consolidated Statements of Income
For the Quarters Ended March 31,
--------------------------------
1996 1995
------------ -------------
REVENUES - Note 10
Publishing, Net $4,138,000 $2,190,000
Film 3,259,000 28,000
---------- ----------
7,397,000 2,218,000
COST OF SALES 2,886,000 1,335,000
FILM AMORTIZATION 2,435,000 -
---------- ----------
2,076,000 883,000
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES - Note 7 1,292,000 811,000
---------- ----------
Income from operations 784,000 72,000
NET INTEREST INCOME (EXPENSE) 48,000 (19,000)
Income before income taxes 832,000 53,000
PROVISION FOR INCOME TAXES - Note 5 $ 331,000 20,000
Net income $ 501,000 $ 33,000
========== ==========
Net income per share $ .10 $ .01
========== ==========
Weighted average number of
shares outstanding 5,263,000 3,934,000
========== ==========
See accompanying notes to consolidated financial statements.
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DOVE AUDIO, INC.
Consolidated Statements of Cash Flows
For the Quarters Ended
--------------------------------
March 31,
--------------------------------
1996 1995
----------- ------------
OPERATING ACTIVITIES
Net income $ 501,000 $ 33,000
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation 56,000 15,000
Amortization of production masters 1,031,000 274,000
Amortization of film costs 2,435,000 -
Changes in operating assets and liabilities
Accounts receivable (749,000) 2,808,000
Deferred tax asset (3,000) 20,000
Inventory (301,000) (198,000)
Film costs (344,000) (100,000)
Expenditures for production masters (1,328,000) (537,000)
Prepaid expenses and other assets 452,000 (8,000)
Accounts payable and accrued expenses (210,000) (18,000)
Royalties payable (40,000) (54,000)
Income taxes - (162,000)
Advances and deferred revenue (2,561,000) (328,000)
----------- ------------
Net cash provided by (used in) operating activities (1,061,000) 1,745,000
----------- ------------
INVESTING ACTIVITIES
Purchase of marketable securities (214,000) -
Purchases of property and equipment (117,000) (58,000)
----------- ------------
Net cash used in investing activities (331,000) (58,000)
FINANCING ACTIVITIES
Proceeds from sale of common stock 1,498,000 729,000
Proceeds of bank borrowings - 500,000
Repayments of notes payable - (1,004,000)
----------- ------------
Net cash provided by financing activities 1,498,000 225,000
----------- ------------
Net increase in cash and cash equivalent 106,000 1,912,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF QUARTER 4,946,000 503,000
----------- ------------
CASH AND CASH EQUIVALENTS AT END OF QUARTER
$ 5,052,000 $ 2,415,000
=========== ============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest
Cash paid for income taxes $ 7,000 $ 33,000
-- $ 245,000
See accompanying notes to consolidated financial statements.
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DOVE AUDIO, INC.
Notes to Consolidated Financial Statements
NOTE 1 - BASIS OF PRESENTATION, ORGANIZATION AND BUSINESS
The accompanying consolidated financial statements of Dove Audio, Inc.
("the Company") are unaudited and have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange
Commission regarding interim financial reporting. Accordingly, they do
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements and
should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1995. In the opinion
of management, the accompanying consolidated financial statements
include all adjustments (consisting only of normal recurring
adjustments) which are necessary for a fair presentation. The results
of operations for the three month period ended March 31, 1996
are not necessarily indicative of results to be expected for the full
fiscal year.
Dove Audio, Inc. is engaged in the business of producing and
distributing books on tape (audio books). The Company acquires audio
publishing rights for specific titles or groups of titles on a
worldwide basis, in perpetuity and often including interactive media
applications. The Company is also engaged in the publication of printed
books; the development and production of movies-for-television,
mini-series and videos; and the acquisition and distribution of feature
films.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Production Masters
Production masters are stated at cost net of accumulated amortization.
Costs incurred for production masters, including non-refundable
advances, royalties paid to authors and readers, as well as recording
and design costs, are capitalized and amortized over a two-year period
from the time a title is initially distributed, consistent with the
estimated revenue for a title. For audio and printed book titles
released prior to January 1, 1996, this has generally resulted in
amortization of approximately 80% of a title's production master costs
in the initial quarter of release, with the remaining 20% amortized in
the fifth quarter of release. Based on management's current estimates
with respect to the timing of revenues, audio titles released on or
after January 1, 1996 are amortized on a quarter-by-quarter basis over
a two year period. This will result in approximately 80% of such an
audio title's production master cost being amortized in the initial
year of release. The effect of this change on the first quarter of 1996
was to reduce the production master amortization component of Cost of
Sales by approximately $236,000. The amortization of printed books
remains unchanged. Any portion of production masters which are not
estimated to be fully recoverable from future revenues are charged to
amortization expense in the period in which the loss becomes evident.
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DOVE AUDIO, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 3 - PRODUCTION MASTERS
Production masters, net of accumulated amortization of $7,419,000 at
March 31, 1996 consisted of the following:
Released titles $1,164,000
----------
Unreleased titles 1,891,000
----------
Total $3,055,000
==========
NOTE 4 - FILM COSTS
The following is an analysis of film costs as of March 31, 1996:
Non Current: Television and theatrical films released
less accumulated film amortization $2,058,000
----------
$ (998,000)
----------
$1,060,000
==========
As of March 31, 1996 all net film costs will be amortized within the
next three year period based upon the Company's current revenue
estimates.
NOTE 5 - INCOME TAXES
Income taxes are computed in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." The Company
provides for income taxes during interim reporting periods based upon an
estimate of its annual effective tax rate. This estimate includes all
anticipated federal, state and foreign income taxes.
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DOVE AUDIO, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 6 - NOTES PAYABLE
Notes payable at March 31, 1996 consist of the following:
Mortgage Note $1,900,000
Other notes payable 37,000
----------
$1,937,000
==========
See "Liquidity and Capital Resources"
NOTE 7 - RELATED PARTY TRANSACTIONS
As of January 1, 1993, the Company entered employment agreements with
two principal shareholders/officers which expire in December 1999. The
agreements provide for aggregate compensation of no less than $275,000
each per year with certain provisions, including an indemnification and
benefits such as health insurance and an automobile allowance. In
addition, the majority shareholders/officers are entitled to an annual
salary increase and bonus subject to certain limitations agreed upon
with the underwriter of the Initial Public Offering at the discretion
of the Company's Board of Directors. The Board of Directors approved an
annual salary increase for the principal shareholders/officers to a
combined total of $345,000 per year for 1995. Potential increases to
the annual salary of the two principal shareholders/officers for 1996
are currently being reviewed for implementation.
During 1995 the Company entered into two executive producer service
agreements and an actor's television motion picture agreement with two
principal shareholders/officers and a director. These agreements
provide for aggregate compensation of $275,000 for acting and
production services relating to the making of Home Song.
The Company acquired audio book rights for fourteen titles which were
written by a principal shareholder. The net audio sales (net returns)
from these titles for the quarters ended March 31, 1996 and 1995 were
($63,000) and $37,000, respectively.
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DOVE AUDIO, INC.
Notes to Consolidated Financial Statements (Continued)
During the first quarter of 1996 the Company made payments totaling
$6,000 to a principal shareholder/officer for the business rental of
a condominium owned by the officer.
During the first quarter of 1996 the Company made payments totaling
$5,000 with respect to auto lease payments, auto allowance, and
insurance on automobiles owned by two principal
shareholders/officers.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Litigation
The Company is party to certain litigation involving the film Morning
Glory. In the first of such matters, captioned In the Matter of The
Arbitration Between Dove Audio, Inc., Michael Viner and Jerry Leider
v. Steven Stern and Sharmhill Productions (B.C.), Inc. (Los Angeles
Superior court Case No. BS 019699) (the "Enforcement Action"), the
Company sought to enforce a binding arbitration awarded issued to it
in September 1992 in the approximate amount of $4.5 million (plus
attorneys' fees and interest accruing from the date of such award)
relating to certain rights in such film and contracts relating
thereto. In August 1993, the trial court affirmed such award and
granted to the plaintiffs in such action, including the Company, a
money judgment in such amount. In March 1995, the trial court ruling
was appealed by the defendants to the California Court of Appeals,
and in June 1995, the California Court of appeals affirmed the
judgment. The Company is currently attempting to collect such
judgment. In a related matter, captioned Dove Audio, Inc., Michael
Viner and Jerry Leider v. Steven Stern, Sharma Stern, Sharmhill
Productions (B.C.), Inc. et al.(Los Angeles Superior Court Case No.
BC 072892; filed in January 1993), the Company and other plaintiffs
have brought a fraudulent conveyance action relating primarily to a
marital settlement between certain defendants named therein. The
purpose of such action is to restore certain assets to the defendants
in the Enforcement Action against which to levy if ultimately
successful therein. Such action is in discovery and no trial date has
been set. There is no assurance that the Company ultimately will
prevail in these actions, or as to if, when or in what amounts the
Company will be able to levy on any judgments issued in its favor.
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DOVE AUDIO, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 8 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company was served in February 1996 with a complaint in the
action captioned Robert H. Tourtelot v. Dove Audio, Inc., Michael
Viner and Stephen Singular (Los Angeles Superior Court Case No.
SC040739) (the "Tourtelot Action"). The Tourtelot Action arises out
of an alleged oral agreement between the Company and Tourtelot to
prepare a book for publication by the Company. The First Amended
Complaint (the"Tourtelot Complaint") alleges breach of oral contract,
fraud and deceit, suppression, breach of an implied covenant and fair
dealing, breach of fiduciary duty, infringement of common law
copyright, conversion, conspiracy and seeks an accounting. The
Company successfully removed the Tourtelot Action to the U.S.
District Court for the central district of California and has filed a
motion to dismiss all causes of action. The Tourtelot Complaint seeks
relief of $1.0 Million in damages. The district court dismissed the
copyright, breach of fiduciary duty, conversion, conspiracy and
accounting causes of action and has remanded the breach of oral
contract and fraud causes of action back to the state court. The
Company intends to vigorously defend against the Tourtelot Complaint.
While the Company believes it has good, meritorious defenses, there
is no assurance that the Company will be able to successfully defend
itself in the Tourtelot Action.
The Company was served in February 1996 with a complaint in the
action entitled Alexandra D. Datig v. Dove Audio (Los Angeles
Superior Court Case No. BC145501) (the "Datig Action"). The Datig
Action was brought by a contributor to, and relates to the writing
of, the recently released book, You'll Never Make Love In This Town
Again. Such complaint alleges breach of contract, breach of good
faith and fair dealing, libel, fraud and deceit, intentional
misrepresentation, negligent misrepresentation, interference with
business opportunity, intentional infliction of emotional distress
and negligent infliction of emotional distress. The complaint also
alleges sexual harassment on the part of Michael Viner and the
Company. The Datig Complaint prays for $1.0 Million in damages. The
Company intends to vigorously defend against the Datig Complaint and
has moved to strike all causes of action. While the Company believes
it has good, meritorious defenses, there is no assurance that the
Company will be able to successfully defend itself in the Datig
Action.
The Company has been and is currently involved in various litigation
matters and claims in the normal course of business. Based in part
upon
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DOVE AUDIO, INC.
Notes to Consolidated Financial Statements (Continued)
consultation with legal counsel, management believes that the outcome
of the various actions will not result in any significant impact on
the Company's financial position.
Office Lease
The Company leases office space under a noncancelable operating lease
expiring December 1998. The Company's lease obligation is secured by
a $15,000 irrevocable letter of credit. Rent expense was $63,000 and
$62,000 in the first quarters of 1996 and 1995, respectively. The
minimum future noncancelable lease expense under the lease is
approximately $250,000 annually for the years 1996 through 1998,
inclusive. The lease is subject to annual rent escalations and the
pass-through of costs.
NOTE 9 - CAPITAL ACTIVITIES
Private Placements
In December 1995 the Company received net proceeds of approximately
$4,770,000 from the initial closings of a private placement
("Placement") of the Company's equity securities. Pursuant to the
December closing of the Placement the Company issued 729,687 shares
of common stock and common stock purchase warrants allowing the
purchase of 729,687 shares of Common Stock at $12.00 per share
exercisable for a period of 51 months beginning 9 months subsequent
to the initial closing of the Placement.
In January 1996 the Company received additional net proceeds of
approximately $1,533,000 from the Placement of the Company's equity
securities. Pursuant to the January 1996 closings of the Placement
the Company issued 220,313 shares of common stock and common stock
purchase warrants allowing the purchase of 220,313 shares of common
stock at $12.00 per share exercisable for a period of 51 months
beginning 9 months subsequent to the initial closing of the
Placement.
Preferred Stock
In 1995, Mr. Viner exercised his option to acquire 214,113 shares of
Series A Preferred Stock. The Series A Preferred Stock has a stated
value of $4.00 per share. Dividends are cumulative and occur at a
rate of 8% (based on $8.00 per share) per annum. Each
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DOVE AUDIO, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 9 - CAPITAL ACTIVITIES (CONTINUED)
share of Series A Preferred Stock is convertible into one share
common stock at the option of the holder. The Series A Preferred
Stock has a liquidation preference equal to its stated value plus
unpaid dividends.
Stock Options And Warrants
The Board of Directors of the Company adopted the 1994 Stock
Incentive Plan (the "Plan"). The Plan provides for the grant of
options to purchase up to an aggregate of 400,000 shares of the
Common Stock of the Company (subject to an anti-dilution provision
providing for adjustment in the event of certain changes in the
Company's capitalization).
The Plan authorizes the granting of stock incentive awards ("Awards")
to qualified officers, employee directors, key employees, and third
parties providing valuable services to the Company, e.g., independent
contractors, consultants, and advisors to the Company. The Plan is
administered by a committee appointed by the Company Board consisting
of two or more members, each of whom must be disinterested (the
"Committee"). The Committee determines the number of shares to be
covered by an Award, the term and exercise price, if any, of the
Award, and other terms and provisions of Awards; members of the
Committee receive formula awards.
Awards can be Stock Options, Stock Appreciation Rights, Performance
Share Awards, and Restricted Stock Awards. The number and kind of
shares available under the Plan are subject to adjustment in certain
events.
Options activity under the Plan during the first quarter of 1996 was as
follows:
Options outstanding at January 1, 1996 309,499 $6.00 - $9.75
Options outstanding at March 31, 1996 309,499 $6.00 - $9.75
--------
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DOVE AUDIO, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 9 - CAPITAL ACTIVITIES (CONTINUED)
At March 31, 1996 options to acquire 23,331 shares of common stock
under the Plan were exercisable.
In addition to the above options issued under the Plan, the Company
granted options to acquire 250,000 shares of Common Stock at an
exercise price of $.01 per share in 1994 and 75,000 shares of Common
Stock at an exercise price of $8.00 per share in 1995. At March 31,
1996 options covering the 250,000 shares noted above were
exercisable.
Number of
Shares of
Number of Common
Warrants Stock
--------- ----------
Warrants outstanding at
January 1, 1996 1,134,687 984,687 $ 6.00 - $12.00
Warrants issued 220,313 220,313 $12.00
--------- ---------
Warrants outstanding at
March 31, 1996 1,355,000 1,205,000 $6.00 - $12.00
========= =========
At March 31, 1996 warrants to acquire 405,000 shares of common stock
were exercisable.
NOTE 10 - MAJOR CUSTOMERS AND SUPPLIERS
For the quarters ended March 31, 1996 and 1995, revenues, net of
returns, from the Company's three major customers approximated 37%
and 51% of net revenues.
A significant amount of audio inventory is supplied by one
manufacturer. The Company is not dependent on the manufacturer as its
sole source of product.
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Notes to Consolidated Financial Statements (Continued)
NOTE 11 - SUBSEQUENT EVENTS
On April 29, 1996, the Company acquired Four Point Entertainment,
Inc. ("Four Point") for consideration of $2.5 million in cash and
427,273 shares of Dove Common Stock, with an earn-out provision of up
to an additional 163,636 shares of Dove Common Stock. Four Point
develops and produces various forms of television programming,
including pilots, series, telefilms, mini-series, talk shows, game
shows and infomercials for network, cable and syndicated markets. In
addition, Four Point owns and operates post-production and edit
facilities for its own and third-party programming.
The former principal officers of Four Point, Shukri Ghalayini and
Ronald Ziskin also entered into employment agreements with Dove dated
April 29, 1996. Pursuant to these employment agreements, Shukri
Ghalayini becomes President and Chief Executive Officer of Dove Four
Point, Inc. ("Dove Four Point") and Ronald Ziskin becomes Chief
Operating Officer of Dove Four Point. Shukri Ghalayini will also join
the Board of Directors of the Company. Messrs. Ghalayini and Ziskin
also each received options to purchase 300,000 shares of Dove Common
Stock at an exercise price of $11.00 per share, such options to vest
subject to continuous service for a period of approximately 10 years,
or earlier in the event certain performance thresholds are met at
Dove Four Point.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussion and analysis below should be read in conjunction with the
Consolidated Financial Statements of the Company and the Notes to the
Consolidated Financial Statements included elsewhere in this Report.
OVERVIEW
Dove commenced business in 1985 as one of the pioneers of the audio book
industry and has become one of the leading independent producers of audio books
in the United States. The Company produces and distributes over 100 new titles
annually and has built a library of over 1000 titles. The Company is also
engaged in the publication of printed books under the Dove imprint and the
development and production of movies-for-television, mini-series, and videos and
the acquisition and distribution of feature films.
A significant portion of the Company's expenses are relatively fixed, and
therefore reduced sales in any quarter relating from the timing of delivery of
product or otherwise could adversely affect operating results for that quarter.
To complement its audio book operations, the Company is increasing
significantly its publication of printed books. The Company is developing up to
70 titles for potential publication in print in 1996. In addition, the Company
intends to continue to diversify its
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operations through its theatrical feature film division. Subject to appropriate
opportunities becoming available to the Company, the Company plans to acquire
independent films for distribution in the U.S. and Canada on an all rights basis
(including theatrical, home video and all forms of television). The Company
recently completed a two year video output arrangement with Paramount Pictures
wherein Paramount will market and distribute Dove product under the Dove Home
Video label.
The Company's catalog of 1996 audio releases includes Drink With the Devil
by Jack Higgins, The Prince of Wales by Jonathan Dimbleby, and On Selling by
Mark H. McCormack. The Company's catalog of 1996 printed book releases includes
White Flame by James Grady, The Heidi Principle by Rick Montgomery and Legacy of
Deception by Stephen Singular.
The Company's television and theatrical films have been based principally
upon novels written by two authors for which the Company has published audio
books. Currently, the Company has several television projects in development
including a follow-up to the Dove production of Home Song by LaVyrle Spencer
which aired on CBS in March 1996. The Company generally seeks to limit its
financial risk in the production of television movies and mini-series and
feature films by pre-sales and licensing to third parties. The production of
television and theatrical films has been sporadic over the last several years
and significant variances in operating results from year-to-year and
quarter-to-quarter can be expected for film revenues.
On April 29, 1996, the Company acquired Four Point Entertainment, Inc.
("Four Point") for consideration of $2.5 million in cash and 427,273 shares of
Dove Common Stock, with an earn-out provision of up to an additional 163,636
shares of Dove Common Stock. Four Point develops, and produces various forms of
television programming, including pilots, series, telefilms, mini-series, talk
shows, game shows and infomercials for network, cable and syndicated markets.
In addition, Four Point owns and operates post-production and edit facilities
for its own and third-party programming. The acquisition has been accounted
for by the Company under purchase accounting from April 29, 1996. As a result
of the Four Point acquisition, the Company's results of operations for future
periods may not be comparable to prior periods.
RESULTS OF OPERATIONS
The following table sets forth (i) publishing and film revenues and (ii)
cost of sales, film amortization, selling, general and administrative expenses
as a percentage of total revenues for the periods indicated:
QUARTERS ENDED MARCH 31,
1996 1995
---- ----
REVENUES
Publishing 55.9% 98.7%
Film 44.1 1.3
----- -----
Total 100% 100%
===== =====
OPERATING EXPENSES
Cost of sales 39 % 60.2%
Film amortization 32.9 ---
Selling, general &
administrative 17.5 36.6
----- -----
Total 89.4% 96.8%
===== =====
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QUARTER ENDED MARCH 31, 1996 COMPARED TO QUARTER ENDED MARCH 31, 1995
PUBLISHING
Revenues. Net publishing revenues for the three months ended March 31,
1996 increased 89% to $4,138,000, compared with $2,190,000 for the three months
ended March 31, 1995. The increase was primarily attributable to the successful
release of the Company's New York Times bestselling printed book "You'll Never
Make Love In This Town Again." The contribution from the Company's other audio
and printed books was in line with historical performance. Net publishing
revenues in the three month period ended March 31, 1995 primarily consisted of
sales of audio books and revenues from the licensing of rights to the Company's
products to third parties. Substantially all of the Company's sales of book
products are and will continue to be subject to potential returns by
distributors and retailers if not resold to the public. Although the Company
makes allowances and reserves for returned product that it believes are
adequate, significant increases in return rates could materially and adversely
impact the Company's financial condition or results of operations. Titles
currently scheduled for release in the second quarter of 1996 include "Bad As I
Wanna Be" by Dennis Rodman on audio and "White Flame" by James Grady in print.
Cost of Sales. Cost of sales for the three months ended March 31, 1996
increased 116% to $2,886,000, compared with $1,335,000 for the three months
ended March 31, 1995. The increase was primarily attributable to an increase in
the total number of audio and printed books sold compared to the equivalent
period in 1995. Cost of sales as percentage of net publishing revenues increased
from 61% in the period ended March 31, 1995 to 70% in the period ended March 31,
1996. The increase was primarily attributable to higher author and reader
royalty advances.
FILM
Revenues. Film revenues for the three months ended March 31, 1996
increased to $3,259,000, compared with $28,000 for the three months ended March
31, 1995. The increase was attributable to the delivery by the Company of the
television film Home Song which aired on CBS in March 1996. This production
generated approximately $3,000,000 in revenues. The remaining film revenues in
the first quarter of 1996 were generated by sales from the Company's theatrical
feature film division. The Company is developing additional television and
mini-series for CBS based on the novels of LaVyrle Spencer. In this respect, the
Company has recently received a production commitment for a second television
movie project, Family Blessing, which is scheduled to go into production in
1996. There is no assurance that projects in development ultimately will be
produced, aired or distributed. Future film revenues will depend upon the
development and success of film properties, as well as the timing of the release
or licensing of such properties. The Company is also scheduled to release a
theatrical project entitled "A Boy Called Hate" in the second quarter of 1996.
Film Amortization. Film Amortization for the 3 months ended March 31, 1996
increased to $2,435,000, compared with $0 for the three months ended March 31,
1995. The increase was primarily due to the recent release of Home Song which
aired on CBS in March 1996. Film amortization is generally incurred in
proportion to the estimated revenues generated from the release or licensing of
film properties.
GENERAL
Gross Profit. The Company's gross profit for the 3 months ended March 31,
1996 increased 135% to $2,076,000, compared with $883,000 for the three months
ended March 31, 1995. Gross profit margin as a percentage of revenue decreased
from 40% in the first quarter of 1995 to 28% in the first quarter of 1996. This
decrease resulted primarily from the fact that $3,259,000 of the 1996 first
quarter
14
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DOVE AUDIO, INC.
revenue was from film activities, which carry a lower profit margin than
publishing activities.
Selling, General and Administrative. Selling, general and administrative
expenses ("SG&A) include costs associated with selling, marketing and promoting
the Company's products, as well as general corporate expenses including
salaries, occupancy costs, professional fees, travel and entertainment. SG&A
increased 59% to $1,292,000 for the three months ended March 31, 1996,
compared to $811,000 for the three months ended March 31, 1995. The increase in
SG&A was primarily attributable to increased salary costs related to the
Company's increase in headcount which will facilitate future growth. The Company
expects SG&A costs to continue to increase as the Company grows further
including as a result of the recent Four Point acquisition.
Net Interest Income (Expense). Net Interest Income for the 3 months ended
March 31,1996 was $48,000, compared to Net Interest Expense for the 3 months
ended March 31, 1995 of $14,000 due to lower borrowings and the repayment and
cancellation of the Company's line of credit with Bank of America.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations, in general, are typically capital intensive. The
Company has experienced from time to time significant negative cash flows from
operating activities which have been offset by equity and debt financings. As
the Company expands its publishing, production and distribution activities, it
expects to continue to experience negative cash flows from operating activities
from time to time. In such circumstances, the Company will be required to fund
at least a portion of production and distribution costs, pending receipt of
anticipated future revenues, from working capital or from additional debt or
equity financings from outside sources. There is no assurance that the Company
will be able to obtain such financing or that such financing, if available, will
be on terms satisfactory to the Company.
The Company's film production activities can affect its capital needs in
that the revenues from the initial licensing of television programming or films
may be less than the associated production costs. The ability of the Company to
cover the production costs of particular programming or films is dependent upon
the availability, timing and the amount of fees obtained from distributors and
other third parties, including revenues from foreign or ancillary markets where
available. In any event, the Company from time to time is required to fund at
least a portion of its production costs, pending receipt of film revenues, out
of its working capital. Although the Company's strategy generally is not to
commence principal photography without first obtaining commitments which cover
all or substantially all of the budgeted production costs, from time to time the
Company may commence principal photography without having obtained commitments
equal to or in excess of such costs.
In order to obtain rights to certain properties for the Company's
publishing and film operations, the Company may be required to make advance cash
payments to sources of such properties, including book authors and publishers.
While the Company generally attempts to minimize the magnitude of such payments
and to obtain advance commitments to offset such payments, the Company is not
always able to do so.
Since its inception, the Company has satisfied its liquidity needs
principally through the sale of equity securities, loans from or guaranteed by
certain of its shareholders, other debt, and cash generated from operations. In
December 1995 and January 1996, the Company raised net proceeds of $6,303,000
from the sale of 76 Units in a private placement. Each Unit consisted
15
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DOVE AUDIO, INC.
of 12,500 shares of the Company's Common Stock and 12,500 warrants to purchase
12,500 shares of the Company's Common Stock at $12.00 (exercisable on or after
September 14, 1996). The net proceeds are being used by the Company to fund
increased working capital needs during 1996 and to finance strategic
acquisitions of product and complementary business (i.e. the Four Point
acquisition). The Company is obligated to register the shares and warrant shares
underlying the Units on or prior to June 14, 1996.
In connection with the acquisition of Four Point, which was completed on
April 29, 1996, the Company guaranteed certain term debt (in the principal
amount of $852,000 as of May 10, 1996) and a $1.0 million revolving line of
credit ($573,000 principal amount outstanding as of May 10, 1996) of Four Point
from Sanwa Bank California. The term loan and the line of credit mature on
October 3, 1998 and June 3, 1996 respectively and are secured by substantially
all of Four Point's assets. The Company is in discussions with the bank to
consider a term-out of the line of credit when it expires on June 3, 1996. The
credit documents contain various financial and other covenants to which Four
Point must adhere. While Four Point was out of compliance with the net worth
covenant as of March 31, 1996, the Company and the bank have agreed to discuss a
mutually satisfactory adjustment to such covenant or other remedy in light of
the change in control of Four Point (to which the bank consented) and the
receipt by the bank of the Dove corporate guarantee.
In April 1996 the Company refinanced its $1,900,000 mortgage note which the
Company borrowed from the seller in conjunction with the acquisition of its new
office building. The new loan from a bank is secured by a deed of trust and
bears interest at a fixed rate of 8% per annum. The loan matures in April 2001
and provides for a 20 year monthly amortization payment rate.
As of May 9, 1996 the Company had cash and short-term investments of
approximately $2,000,000.
The Company used $1,061,000 for operating activities during the three month
period ended March 31, 1996, which was offset from the proceeds of the sale of
common stock. See "Consolidated Financial Statements of the Company -
Consolidated Statements of Cash
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DOVE AUDIO, INC.
Flows." The Company believes its existing working capital, together with
borrowings under its line of credit, anticipated cash flows from operations and
other funding sources, will be sufficient to meet the Company's working capital
requirements with respect to its current commitments for at least the next
twelve months. However, the Company intends to seek to augment its working
capital through an increased bank line of credit, the issuance of equity or debt
securities or otherwise, the availability or terms of which cannot be assured.
The Company plans to expand its development, production and distribution
activities, including the expansion of its printed book publishing and film
operations (although there is no assurance that the Company will expand or that
such expansion will be profitable). Such expansion may include future
acquisitions of library product or other assets complementary to its current
operations or acquisition of rights involving significantly greater outlays of
capital than required in the business conducted to date by the Company.
Expansion of the Company or acquisitions of particular properties or libraries,
to a significant extent, would require capital resources beyond those available
to the Company, in which case such expansion will be dependent upon the ability
of the Company to obtain additional sources of working capital, whether through
the issuance of additional equity or debt securities, additional bank financing
or otherwise.
INFLATION
The Company does not believe its business and operations have been
materially affected by inflation.
17
19
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The Company was served in February 1996 with a complaint in the
action captioned Robert H. Tourtelot v. Dove Audio, Inc., Michael
Viner and Stephen Singular (Los Angeles Superior Court Case No.
SC040739) (the "Tourtelot Action"). The Tourtelot Action arises out
of an alleged oral agreement between the Company and Tourtelot to
prepare a book for publication by the Company. The First Amended
Complaint (the"Tourtelot Complaint") alleges breach of oral contract,
fraud and deceit, suppression, breach of an implied covenant and fair
dealing, breach of fiduciary duty, infringement of common law
copyright, conversion, conspiracy and seeks an accounting. The
Company successfully removed the Tourtelot Action to the U.S.
District Court for the central district of California and has filed a
motion to dismiss all causes of action. The Tourtelot Complaint seeks
relief of $1.0 Million in damages. The district court dismissed the
copyright, breach of fiduciary duty, conversion, conspiracy and
accounting causes of action and has remanded the breach of oral
contract and fraud causes of action back to the state court. The
Company intends to vigorously defend against the Tourtelot Complaint.
While the Company believes it has good, meritorious defenses, there
is no assurance that the Company will be able to successfully defend
itself in the Tourtelot Action.
The Company was served in February 1996 with a complaint in the
action entitled Alexandra D. Datig v. Dove Audio (Los Angeles
Superior Court Case No. BC145501) (the "Datig Action"). The Datig
Action was brought by a contributor to, and relates to the writing
of, the recently released book, You'll Never Make Love In This Town
Again. Such complaint alleges breach of contract, breach of good
faith and fair dealing, libel, fraud and deceit, intentional
misrepresentation, negligent misrepresentation, interference with
business opportunity, intentional infliction of emotional distress
and negligent infliction of emotional distress. The complaint also
alleges sexual harassment on the part of Michael Viner and the
Company. The Datig Complaint prays for $1.0 Million in damages. The
Company intends to vigorously defend against the Datig Complaint and
has moved to strike all causes of action. While the Company believes
it has good, meritorious defenses, there is no assurance that the
Company will be able to successfully defend itself in the Datig
Action.
Item 5. Other Information
On April 29, 1996, the Company acquired Four Point Entertainment,
Inc. ("Four Point") for consideration of $2.5 million in cash and
427,273 shares of Dove Common Stock, with an earn-out provision of up
to an additional 163,636 shares of Dove Common Stock. Four Point
develops and produces various forms of television programming,
including pilots, series, telefilms, mini-series, talk shows, game
shows and infomercials for network, cable and syndicated markets. In
addition, Four Point owns and operates post-production and edit
facilities for its own and third-party programming.
The former principal officers of Four Point, Shukri Ghalayini and
Ronald Ziskin also entered into employment agreements with Dove dated
April 29, 1996. Pursuant to these employment agreements, Shukri
Ghalayini becomes President and Chief Executive Officer of Dove Four
Point, Inc. ("Dove Four Point") and Ronald Ziskin becomes Chief
Operating Officer of Dove Four Point. Shukri Ghalayini will also join
the Board of Directors of the Company. Messrs. Ghalayini and Ziskin
also each received options to purchase 300,000 shares of Dove Common
Stock at an exercise price of $11.00 per share, such options to vest
subject to continuous service for a period of approximately 10 years,
or earlier in the event certain performance thresholds are met at
Dove Four Point.
Item 6. Exhibits and Reports on Form 8-k
(a) Exhibits
Exhibit
Number
- - -------
2.1 Agreement and Plan of Merger by and among the Company, Dove
Four Point, Inc., Four Point Entertainment, Inc. and holders
of capital stock of Four Point Entertainment, Inc., dated
as of April 12, 1996
4.1 Form of Registration Rights Agreement
10.1 Employment Agreement dated as of April 29, 1996 between
Shukri Ghalayini and the Company, together with Stock Option
Award Agreement between the Company and Mr. Ghalayini dated
April 29, 1996
10.2 Employment Agreement dated as of April 29, 1996 between
Ronald Ziskin and the Company, together with Stock Option
Agreement between the Company and Mr. Ziskin dated
April 29, 1996
10.3 Business Loan Agreement between Asahi Bank of California and Dove
Audio, Inc. dated April 24, 1996 in the amount of $1,900,000.
27 Financial Data Schedule
(b) Reports on Form 8-K
A Form 8-K/A was filed on March 8, 1996 submitting an unredacted exhibit
previously filed as a redacted exhibit on the Company's Form 8-K filed July 17,
1995.
20
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 14, 1996 DOVE AUDIO, INC.
By /s/ MICHAEL VINER
---------------------------
Michael Viner, President and Chairman
(Chief Executive Officer)
Date: May 14, 1996 By /s/ SIMON BAKER
---------------------------
Simon Baker, Chief Financial Officer
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DOVE AUDIO, INC.
INDEX TO EXHIBITS
Exhibit Page
Number Number
- - ------- ------
2.1 Agreement and Plan of Merger by and among the Company, Dove
Four Point, Inc., Four Point Entertainment, Inc. and holders
of capital stock of Four Point Entertainment, Inc., dated
as of April 12, 1996
4.1 Form of Registration Rights Agreement
10.1 Employment Agreement dated as of April 29, 1996 between
Shukri Ghalayini and the Company, together with Stock Option
Award Agreement between the Company and Mr. Ghalayini dated
April 29, 1996
10.2 Employment Agreement dated as of April 29, 1996 between
Ronald Ziskin and the Company, together with Stock Option
Agreement between the Company and Mr. Ziskin dated
April 29, 1996
10.3 Business Loan Agreement between Asahi Bank of California and Dove
Audio, Inc. dated April 24, 1996 in the amount of $1,900,000.
27 Financial Data Schedule