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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
----------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-24984
DOVE ENTERTAINMENT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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CALIFORNIA 95-4015834
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
8955 BEVERLY BOULEVARD
BEVERLY HILLS, CALIFORNIA 90048
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (310) 786-1600.
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OFTHE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
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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
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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: 5,523,766 as of May
14, 1997.
Transitional Small Business Disclosure Format (Check one):
Yes No X
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PART I -- FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
DOVE ENTERTAINMENT, INC
CONSOLIDATED BALANCE SHEET
MARCH 31, 1997
ASSETS
CURRENT ASSETS
Cash and cash equivalents .................................................. $ 1,247,000
Accounts receivable, net of allowances of $1,366,000 ....................... 611,000
Inventory .................................................................. 4,219,000
Film Costs - Note 4 ........................................................ 2,697,000
Prepaid expenses and other assets .......................................... 44,000
Income taxes receivable .................................................... 26,000
Deferred tax assets ........................................................ 529,000
------------
Total current assets .................................................. 9,373,000
PRODUCTION MASTERS, net - Note 3 .............................................. 2,824,000
FILM COSTS, net - Note 4 ...................................................... 1,566,000
PROPERTY AND EQUIPMENT, net ................................................... 4,174,000
GOODWILL AND OTHER ASSETS - Note 11 ........................................... 6,280,000
------------
Total assets ......................................................... $ 24,217,000
============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses ...................................... $ 6,772,000
Notes payable current - Note 6 ............................................. 1,253,000
Due to related party, net - Note 7 ......................................... 20,000
Royalties payable .......................................................... 529,000
Advances and deferred income ............................................... 795,000
------------
Total current liabilities ............................................ 9,369,000
LONG-TERM NOTES PAYABLE, less current portion - Note 6 ........................ 1,813,000
COMMITMENTS AND CONTINGENCIES - Note 8
SHAREHOLDERS' EQUITY - Note 9
Preferred stock $.01 par value; 2,000,000 shares authorized and
218,033 shares issued and outstanding, liquidation preference $4,776,000 2,000
Common stock $ .01 par value; 20,000,000 shares authorized and
5,483,766 issued and outstanding ........................................ 55,000
Additional paid-in capital .................................................. 24,808,000
Accumulated deficit ......................................................... (11,830,000)
------------
Total shareholders' equity ........................................... 13,035,000
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Total liabilities and shareholders' equity ........................... $ 24,217,000
============
See accompanying notes to consolidated financial statements.
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DOVE ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE QUARTER ENDED MARCH 31,
1997 1996
----------- -----------
REVENUES - Note 10
Publishing, Net ............................ $ 1,068,000 $ 4,348,000
Film ....................................... 1,593,000 3,259,000
----------- -----------
2,661,000 7,607,000
COST OF SALES ................................. 1,610,000 3,136,000
FILM AMORTIZATION ............................. 2,143,000 2,395,000
----------- -----------
(1,092,000) 2,076,000
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES - Note 7 ........... 2,187,000 1,292,000
----------- -----------
Income (loss) from operations ........... (3,279,000) 784,000
INTEREST INCOME (EXPENSE) ..................... (136,000) 48,000
----------- -----------
Income (loss) before income taxes .......... (3,415,000) 832,000
PROVISION FOR INCOME TAXES - Note 5 ........... 9,000 331,000
----------- -----------
Net income (loss) .......................... $(3,424,000) $ 501,000
=========== ===========
Net income (loss) per share ................ $ (.66) $ .10
=========== ===========
Weighted average number of common and common
equivalent shares 5,276,000 5,263,000
=========== ===========
See accompanying notes to consolidated financial statements.
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DOVE ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR QUARTER ENDED
MARCH 31,
1997 1996
----------- -----------
OPERATING ACTIVITIES
Net income (loss) ................................. $(3,424,000) $ 501,000
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation .................................. 140,000 56,000
Amortization of goodwill ...................... 63,000 --
Amortization of production masters ............ 884,000 1,031,000
Amortization of film costs .................... 2,143,000 2,435,000
Changes in operating assets and liabilities:
Accounts receivable ......................... 1,663,000 (749,000)
Deferred tax asset .......................... -- (3,000)
Inventory ................................... (182,000) (301,000)
Film costs .................................. (2,711,000) (344,000)
Expenditures for production masters ......... (780,000) (1,328,000)
Prepaid expenses and other assets ........... 319,000 452,000
Accounts payable and accrued expenses ....... 279,000 (210,000)
Royalties payable ........................... (5,000) (40,000)
Advances and deferred revenue ............... (383,000) (2,561,000)
----------- -----------
Net cash used in operating activities .... (1,994,000) (1,061,000)
----------- -----------
INVESTING ACTIVITIES
Purchase of marketable securities ................. -- (214,000)
Purchases of property and equipment ............... (6,000) (117,000)
----------- -----------
Net cash used in investing activities .... (6,000) (331,000)
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FINANCING ACTIVITIES - Note 9
Proceeds from sale of common stock ................ -- 1,498,000
Proceeds from sale of preferred stock ............. 3,244,000 --
Repayments of notes payable ....................... (387,000) --
----------- -----------
Net cash provided by financing activities 2,857,000 1,498,000
----------- -----------
Net increase in cash and cash equivalents 857,000 106,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ..... 390,000 4,946,000
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD ............................................... $ 1,247,000 $ 5,052,000
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest ......................... $ 136,000 $ 7,000
Cash paid (refunds received) for income taxes .. $ (162,000) $ --
See accompanying notes to consolidated financial statements.
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DOVE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION, ORGANIZATION AND BUSINESS
The accompanying consolidated financial statements of Dove Entertainment,
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, as amended, for the fiscal year ended
December 31, 1996. 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, 1997 are not
necessarily indicative of results to be expected for the full year.
Dove Entertainment, Inc. is primarily 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.
Dove Four Point, Inc., the Company's wholly-owned subsidiary ("Dove Four
Point"), is an independent production company. Dove Four Point is engaged as a
producer-for-hire in connection with a creative concept and literary property
owned by another party to produce all forms of television productions, including
pilots, series, telefilms, miniseries, talk shows, game shows and infomercials
for network, cable and syndicated production. In addition to being engaged as a
producer-for-hire, Dove Four Point develops and produces television productions
for which rights are retained by Dove Four Point.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Recognition of Publishing Revenue
Revenues from publishing, including the sale of audio books, (net of provisions
for estimated returns and allowances), and related royalties payable are
recognized upon shipment of the product. The Company records an allowance for
future returns based on anticipated return rates.
Cash Equivalents
The Company considers all highly liquid investments with original maturities to
the Company of three months or less to be cash equivalents.
Inventory
Inventory, consisting primarily of recorded audio cassettes and printed books,
is valued at the lower of cost or market, determined using the first-in,
first-out method. Periodically, management reviews inventory on a title-by-title
basis. The Company expenses through to cost of sales inventory that management
believes will not be sold.
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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 commencing from the time a title is initially
released, consistent with the estimated timing of revenue for a title. Prior to
January 1, 1997, for printed book titles this had 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. Beginning January 1, 1997 the Company accelerated the
amortization of costs on printed book titles so that 80% of a title's production
master costs were amortized in the initial quarter of release with the remaining
20% amortized over the following three quarters and in addition, adjusted
certain printed book title costs to net realizable value. The effect of the net
realizable value adjustment on the first quarter of 1997 was to increase the
amortization component of cost of sales by approximately $200,000. Based on
management's current estimates with respect to the timing of revenues, audio
titles are amortized on a quarter-by-quarter basis over a two-year period
resulting in approximately 80% of such audio title's production master cost
being amortized in the first twelve months of release. 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 such loss becomes
evident.
Television and Film Revenues and Costs
Film costs, which include development, production and acquisition costs, are
capitalized and amortized, and participations and royalties are accrued, in
accordance with the individual-film-forecast method in the proportion that the
current year's revenue bears to the estimated total revenues from all sources.
These costs are stated at the lower of unamortized costs or estimated realizable
value on an individual film basis. Revenue forecasts for films are periodically
reviewed by management and revised if warranted by changing conditions. If
estimates of total revenue indicate that a film will result in an ultimate loss,
the loss is recognized currently.
Revenues from the distribution of television and theatrical films are recognized
upon availability of the completed film to the broadcaster or the Company's
distributors. The Company licenses distribution rights to distributors and has
not recognized any revenue from the direct distribution of theatrical films.
Deferred revenues arise when distributors or broadcasters make advances to the
Company prior to the date of revenue recognition.
Revenues from producer-for-hire contracts are recognized on a
percentage-of-completion method, measured by the percentage of costs completed
to date to estimated total cost for each contract. Provisions for estimated
losses on uncompleted contracts are made in the period in which such losses are
determined.
Income Taxes
The Company provides for income taxes under Statement of Financial Accounting
Standards No. 109 (SFAS 109). In accordance with SFAS 109, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
temporary differences between the financial and tax reporting basis of the
Company's assets and liabilities.
Goodwill
Goodwill, representing the excess of the purchase price of Four Point
Entertainment, Inc. over its net assets, is included in other assets and is
being amortized over a twenty-five year period. Goodwill amounted to $6,089,000
net of accumulated amortization of $227,000 at March 31, 1997.
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Management continuously monitors and evaluates the realizability of goodwill to
determine whether the carrying value has been impaired. In evaluating the value
and future benefits of goodwill, the carrying value is compared to management's
best estimate of undiscounted future cash flows over the remaining amortization
period. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying value of the assets
exceeds the fair value of the assets. The Company believes that the carrying
value of the goodwill is not impaired.
Property and Equipment
Property and Equipment is stated at cost and is depreciated using the
straight-line method over the estimated useful lives of assets as follows:
Building ........................ 39 years
Furniture, Fixtures and Equipment 5-7 years
Leasehold improvements are amortized over the estimated useful life or the
remaining lease term, whichever is less.
Net Income (Loss) Per Common Share
Net income per common share is based upon the weighted average number of
outstanding shares of Common Stock and common equivalent shares. The net income
(loss) utilized in the calculation of the net income (loss) per common share is
reduced by dividends on Preferred Stock.
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.
NOTE 3 -- PRODUCTION MASTERS
Production masters, net of accumulated amortization of $2,963,000, at March
31, 1997 consisted of the following:
Released titles ..................................... $1,244,000
Unreleased titles ................................... 1,580,000
----------
Total ............................................... $2,824,000
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NOTE 4 -- FILM COSTS
The following is an analysis of film costs as of March 31, 1997:
Current: Television and theatrical projects in production.................. $ 2,697,000
Noncurrent: Television and theatrical films released less
accumulated film amortization.................................. 1,566,000
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$ 4,263,000
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The Company expects that all net film costs as of March 31, 1997 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.
NOTE 6 -- NOTES PAYABLE
Notes payable at March 31, 1997 consist of the following:
Current notes payable
Term loan ........................................ $1,206,000
Current portion of long-term mortgage
note payable .................................... 47,000
----------
1,253,000
Long-term mortgage note payable, less
current portion ................................... 1,813,000
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Total notes payable ................................. $3,066,000
==========
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 Asahi Bank of California is secured by a deed
of trust on such building and bears interest at a fixed rate of 8% per annum.
The loan matures in April 2001 and provides for a 20 year maturity amortization
payment rate through April 2001 with a repayment of the remaining outstanding
principal amount at that time.
In August 1996 the Company refinanced the Company's existing revolving line of
credit and term loan with Sanwa Bank California ("Sanwa Bank") with a $1,365,000
term loan from Sanwa Bank. On September 1, 1996, the Company began making
principal and interest payments based on a five year amortization schedule. All
unpaid principal and interest on the term loan shall mature on August 1, 1997.
The loan is secured by the Company's assets, other than the Company's building,
and is guaranteed by the two principal shareholders/officers of the Company (the
"Principals"). The term loan has various covenants with which the Company must
adhere, including restrictions on payment of dividends, additional indebtedness,
change in the nature of business, financial covenants including minimum tangible
net worth, current ratio, debt service coverage ratio and debt to net worth
ratio and restrictions on mergers or acquisitions. The Company was not in
compliance with certain of such financial covenants as of March 31, 1997. In
May, 1997 the Company received a waiver from compliance for such period from
Sanwa Bank.
In October 1996, the Company obtained a bridge loan of $800,000 from Morgan
Fuller Capital Group, LLC ("Morgan Fuller"). The principal payment due February
1, 1997 was made and the balance of this loan was repaid in March, 1997. See
Capital Activities - Note 9.
NOTE 7 -- RELATED PARTY TRANSACTIONS
In September 1996, in connection with Samuelson Entertainment Ltd.'s production
of the motion picture presently entitled "Wilde" (the "Picture") for which the
Company provides production services and has acquired distribution rights in all
media throughout the United States and Canada (except French-speaking Canada), a
principal shareholder/officer of the Company (the "Principal") personally
guaranteed
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$1,000,000 of the payment obligations of Dove International, Inc. payable
commencing on December 1, 1996 through April 2, 1997 to Samuelson Entertainment,
Ltd. in order to extend the date as of which Dove International, Inc. is
required to make such payments. In addition, the Principal personally deposited
$500,000 at Guinness Mahon & Co. Ltd. (and pledged the deposit plus interest
thereon) to secure Dove International Inc.'s additional payment obligation to
Samuelson Entertainment Ltd. in the amount of 333,334 British Pounds Sterling
due upon delivery of the Picture. In connection with such pledge, the Company
recorded a liability to related party. In consideration for agreeing to pledge
such deposit, Samuelson Entertainment Ltd. and Dove International, Inc. agreed
that the Principal will receive a 5% commission up to a maximum of $120,000,
payable from 5% of 100% of the gross receipts (only after recoupment of Dove
International Inc.'s full distribution fee) received by all third-party
distributors (including Dove International, Inc.) from exploitation of the
distribution rights in the Picture in the United States and Canada (except
French-speaking Canada). The terms pursuant to which the Principal pledged the
deposit were based on similar terms as offered by Samuelson Entertainment Ltd.
to an independent third party. In addition, Samuelson Entertainment, Ltd. agreed
to pay the Principal 8% of 100% of Samuelson Entertainment Ltd.'s net profits
from the Picture. As of March 31, 1997 the Picture had not been delivered.
During the quarter ended March 31, 1997, $676,000 of the balance due to the
Principal discussed above was contributed to the Company in connection with the
purchase of additional Preferred Stock and warrants. See Capital Activities -
Note 9.
As of January 1, 1995, the Company entered employment agreements with two
principal shareholders/officers (the "Principals") which expire in December
1999. The agreements provide for aggregate compensation of no less than a
combined total of $345,000 per year, plus benefits such as health insurance and
an automobile allowance and the combined non-accountable expenses of $75,000 per
year. 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 Company's initial public offering at the discretion of the
Company's Board of Directors. The Board of Directors approved an increase in the
salary portion of the employment agreements with the principal
shareholders/officers to a combined total of $562,000 per year for 1996.
On August 16,1996, the Principals personally guaranteed the Company's
obligations to Sanwa Bank California to a maximum principal amount of $1,600,000
in exchange for the modification of certain covenants contained in the
applicable loan documents.
In connection with the above guarantees, in September 1996, the Company entered
into a reimbursement agreement with the Principals. The Company agreed to
immediately reimburse or provide cash collateral to the Principals upon the
occurrence and during the continuation of certain events of default relating to
the guaranteed obligations or upon the occurrence of certain other "Events"
(including a change in control of the Company) as defined in the Company's 1994
Stock Incentive Plan. The Company further agreed that should either of the
Principals terminate their employment agreement following the occurrence of an
Event or material breach of their employment agreements by the Company, the
Company would remain obligated to continue to pay them their base compensation
and other benefits due for the balance of their employment terms, together with
reimbursement of any excise tax payable with respect to such compensation. Upon
any such termination, such executives would be free to establish, invest in or
be employed by any business, whether or not in competition with the Company.
Under such agreement, the Company also granted to the Principals, one in the
first instance and the other secondarily, a right of first refusal in the event
of certain asset sales outside the ordinary course of business by the Company or
any of its subsidiaries in the next three years. This right of refusal provision
was waived in connection with the sale and issuance of shares of Series B
Preferred Stock and warrants to purchase shares of Common Stock. See Capital
Activities - Note 9.
In June 1996, the Company entered into an arrangement with an officer of the
Company whereby the officer agreed to provide certain services as a consultant
and Chairman of the Board. Such agreement provides for compensation of $125,000
annually, paid monthly in arrears.
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In September 1996, the Company entered into a consulting agreement with a
director whereby the director is to provide certain financial consulting and
investment banking services to the Company. Such agreement provides for
compensation of $3,000 per month, options to purchase 10,000 shares of Common
Stock, certain contingent compensation based on financing arranged by such
director for the Company and customary expense reimbursement. Such agreement was
terminated effective February 28, 1997.
During the year 1996, the Company made payments to the two Principals and
another officer of the Company totaling $365,000 under agreements for producer
services, television motion picture acting services and television motion
picture directing services and under such agreements Michael Viner, Deborah
Raffin and Jerry Leider received $175,000, $115,000, and $75,000, respectively,
for the twelve months ended December 31, 1996. No such payments were made during
the first quarter of 1997.
The Company acquired audio book rights for fourteen titles which were written by
one the the principal shareholders of the Company. The net audio sales (net of
returns) from these titles for the quarters ended March 31, 1997 and 1996 were
$14,000 and $(63,000) respectively. In 1996, the Company agreed to issue 50,000
shares of Common Stock to the shareholder for the rights to future titles.
During the quarter ended March 31, 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 quarters ended March 31, 1997 and 1996, the Company made payments
totaling $13,000 and $5,000, respectively, with respect to auto lease payments,
auto allowance, and insurance on automobiles owned by two principal
shareholders/officers.
NOTE 8 -- COMMITMENTS AND CONTINGENCIES
LITIGATION
In August 1993, the trial court confirmed an arbitration award in favor of
the Company, Michael Viner and Jerry Leider and against Steven Stern and
Sharmhill Productions in the approximate amount of $4.5 million (plus interest
accruing thereon from September 1992 and attorney's fees) relating to the film
"Morning Glory." In March 1995, defendants appealed the judgment to the
California Court of Appeals. In June 1995, the Court of Appeals affirmed the
judgment, and that judgment is now final. In a related matter, the Company
sought to restore certain fraudulent conveyances that Mr. Stern had made. In
August 1995, Mr. Stern filed for bankruptcy protection. The United States
Trustee is pursuing the fraudulent conveyance action on behalf of the bankruptcy
estate, of which the Company comprises approximately 80%, and the Company, Mr.
Viner and Mr. Leider are separately pursuing their own adversary proceeding for
conspiracy against Mr. Stern and others in the bankruptcy case. The Company is
also objecting to Mr. Stern's discharge in bankruptcy. There is no assurance
that the Company will ultimately prevail, or as to if, when or in what amount
the Company will be able to recover the amount of the original judgment in its
favor.
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In February 1996, the Company was served with a complaint in an action
entitled Robert H. Tourtelot v. Dove Audio, Inc. etc. et al (Los Angeles
Superior Court Case No. SC040739) (the "Tourtelot Action"). Mr. Tourtelot seeks
in excess of a million dollars in damages claiming that he had an oral agreement
with the Company to write a book that the Company would publish. Mr. Tourtelot
alleged causes of action for breach of oral contract, fraud, suppression, breach
of the implied covenant of good faith and fair dealing, breach of fiduciary
duty, infringement of common law copyright, conversion, conspiracy and
accounting. The Company successfully removed the action to the United States
District Court for the Central District of California, and successfully moved to
have the claims for infringement of common law copyright, breach of fiduciary
duty, conversion, conspiracy and accounting dismissed. The Tourtelot Action was
then remanded to the Los Angeles Superior Court, where the Company successfully
demurred to all of the remaining causes of action. Mr. Tourtelot was, however,
granted leave to amend the attempt to state a cause of action, which he has
done. While the Company believes that Mr. Tourtelot's amended complaint is still
defective and intends to again demurrer thereto, and that, in any event, it has
good and meritorious defenses to Mr. Tourtelot's claims, there can be no
assurance that the Company will prevail in the action.
In March 1996, the Company was served with a complaint in an action entitled
Alexandra D. Datig v. Dove Audio, et al (Los Angeles Superior Court Case No.
BC145501) (the "Datig Action"). The Datig Action was brought by a contributor
to, and relates to, the book "You'll Never Make Love In This Town Again." The
Datig complaint sought in excess of a million dollars in monetary damages. In
October 1996, the Company obtained a judgment of dismissal of the entire Datig
Action, which judgment also awarded the Company its attorney's fees and costs in
defending the matter. Thereafter, the Company sued Mr. Datig for malicious
prosecution. Datig, however, has appealed that judgment, thereby staying the
malicious prosecution action. While the Company believes that it will prevail on
the appeal, there is no assurance that the Company will in fact be successful.
In June 1996, the Company was served with a complaint in an action entitled
Shukri Ghalayini v. Dove etc. et al (Los Angeles Superior Court Case No.
BC152129) (the "Ghalayini Action"). The complaint alleges among other things,:
(i) breach of employment contract against Four Point Entertainment, Inc. ("Four
Point") due to termination of Mr. Ghalayini's employment without good cause,
adequate notice or opportunity to cure any alleged breaches and (ii) fraud in
the defendants allegedly never intended to honor the terms of the employment
agreement. The complaint seeks damages under the employment agreement of not
less that $900,000, loss of future earnings estimated at $20,000,000, and damage
to his reputation, mental and emotional distress, punitive damages and
attorney's fees.
On the same day, the Company filed an action against Ghalayini in the Los
Angeles Superior Court alleging, among other things, that (i) Ghalayini breached
his fiduciary duty to the Company by diverting corporate assets to pay his
personal expenses, (ii) that in order to induce the Company into closing the
Four Point acquisition, Mr. Ghalayini made false representations, including
misrepresenting the tangible shareholder's equity of Four Point as of the
closing, diverted production and other funds and held checks previously drawn to
pay accounts payable in order to meet a closing condition that outstanding bank
debt be below a specified level, and that Mr. Ghalayini made false
representations to induce Dove Four Point to enter into his employment
agreement. Although the Company believes that it has good and valid claims
against Mr. Ghalayini, and that it has good and meritorious defenses to his
claims, there can be no assurance that it will ultimately prevail in either of
these two actions.
In July 1996, the Company was served with a complaint in an action entitled
Terrie Maxine Frankle and Jennie Louise Frankle v. Dove Audio (U.S. District
Court, Central District of California Case No. 96-4073 RSWL) (the "Frankle
Action"). The Frankles claim to be the authors of "You'll Never Make Love In
This Town Again," and have alleged claims for copyright infringement and fraud.
The Frankles' application for a preliminary injunction was denied because they
could not demonstrate a likelihood of success on the merits of their claims. The
Company believes that it has good and meritorious defenses and counterclaims
against the Frankles. Nevertheless, there is no assurance that the Company will
prevail.
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In January 1997, the Company was served with a complaint in an action titled
Greer v. Dove (Los Angeles Superior Court Case No. BC160871) (the "Greer
Action"). Ms. Greer is another contributor to the book "You'll Never Make Love
In This Town Again" and has sought damages in excess of one million dollars
alleging causes of action for breach of contract, breach of the implied covenant
of good faith and fair dealing, breach of fiduciary duty, fraud, imposition of
constructive trust and an accounting, recission, declaratory relief, conspiracy
and unfair competition. Although the Company believes that it has good and
meritorious defenses to the Greer Action, and, in fact, has demurred to the
complaint (which is still pending), there can be no assurance that the Company
will ultimately prevail in the action.
The Company is a party to various other legal proceedings and claims. The
Company believes that the ultimate resolution of these matters, individually and
in the aggregate, will not have a material adverse effect upon the Company's
financial position.
OFFICE LEASE
The Company leases certain 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 $66,000 and $63,000 in
the first quarters of 1997 and 1996, respectively. The minimum future
noncancelable lease expense under the lease is approximately $64,000 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
COMMON STOCK
In December 1995 the Company received net proceeds of approximately
$4,770,000 from the initial closings of a private placement (the "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 March 1997, the Company consummated a deal for an equity investment of
$6,000,000 from a private placement. In the first of two closings to be
completed under such private placement (i) Media Equities International, L.L.C.
("MEI"), purchased 3,000 shares of the Company's 6% Series B Preferred Stock
(the "Series B Preferred Stock") and warrants to purchase 500,000 shares of
Common Stock at $2.00 per share, warrants to purchase 500,000 shares of Common
Stock at $2.50 per share and warrants to purchase 500,000 shares of Common Stock
at $3.00 per share for an aggregate of $3,000,000 and (ii) two of the principal
shareholders/officers of the Company purchased 920 shares of the Company's 6%
Series C Preferred Stock (the "Series C Preferred Stock") and warrants to
purchase 166,666 shares of Common Stock at $2.00 per share, warrants to purchase
166,667 shares of Common Stock at $2.50 per share and warrants to purchase
166,667 shares of Common Stock at $3.00 per share for an aggregate of $920,000
(including the contribution of $676,000 payable by the Company to such
shareholders). The agreement contains a commitment for a second closing (the
"Second Closing"), which is currently expected to be on or
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before May 25, 1997. At the Second Closing (i) MEI has agreed to purchase 1,000
shares of the Company's Series B Preferred Stock and warrants to purchase
166,666 shares of Common Stock at $2.00 per share, warrants to purchase 166,667
shares of Common Stock at $2.50 per share and warrants to purchase 166,667
shares of Common Stock at $3.00 per share for $1,000,000 and (ii) two of the
principal shareholders/officers of the Company have agreed that they or their
assigns will purchase 1,000 shares of the Company's Series C Preferred Stock and
warrants to purchase 166,666 shares of Common Stock at $2.00 per share, warrants
to purchase 166,667 shares of Common Stock at $2.50 per share and warrants to
purchase 166,667 shares of Common Stock at $3.00 per share for an aggregate of
$1,000,000 (including the contribution of $175,000 payable by the Company to
such shareholders). Each share of Series B Preferred Stock and Series C
Preferred Stock is convertible at the option of the holder thereof into 500
shares of Common Stock, subject to certain anti-dilution adjustments, at any
time following the date six months after the issuance thereof. Each of the
Series B Preferred Stock and Series C Preferred Stock are redeemable, in whole
or in part at the option of the Company, at any time after March 28, 2002 at a
redemption price of 110% of the stated value ($1,000) plus all accumulated but
unpaid dividends thereon (plus interest on such accumulations). On May 15,1997,
each of the parties, or their asigns, funded one quarter of their Second Closing
commitment in order to meet certain current obligations of the Company. In
connection with this transaction, the Company has allocated the amounts invested
between the Preferred Stock and the warrants and will record a dividend for the
difference between the amount allocated to Preferred Stock and the value as of
the issuance date, of the Common Stock issuable upon conversion of such
Preferred Stock.
In October 1996 Morgan Fuller completed a loan to the Company in the aggregate
amount of $800,000. Such loan bore interest at the rate of 10% per annum. In
March 1997, the Company retired $500,000 of its loan from Morgan Fuller in
exchange for 210,526 shares of the Company's Common Stock along with warrants to
purchase 35,088 shares of the Company's Common Stock at $2.50 per share,
warrants to purchase 35,088 shares of the Company's Common Stock at $3.50 per
share and warrants to purchase 35,087 shares of the Company's Common Stock at
$4.50 per share. The balance of the loan plus accrued interest was repaid in
cash.
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's 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 outstanding under the Plan at March 31, 1997 was as follows:
Exercise
Price
-------------
Options outstanding at March 31, 1997....................... 379,999 $3.50 - $9.75
-------
The weighted average exercise price at March 31, 1997 was $4.39, and options
to acquire 177,999 shares of Common Stock under the Plan were exercisable.
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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, 1997 options covering the 250,000 shares
noted above were exercisable. In 1996, in conjunction with the acquisition of
Four Point, options to purchase 300,000 shares of Common Stock at $11.00 per
share were issued to one of the Principals of Four Point as part of an
employment agreement. Vesting of these options will accelerate based on meeting
certain performance criteria. At March 31, 1997 none of these options were
exercisable. Additionally, during 1996, the Company issued options to purchase
80,000 shares of Common Stock under the Plan with an exercise price of $3.50 per
share to the Company's public relations firm of which 26,667 were exercisable as
of March 31, 1997.
Prior to January 1, 1996, the Company accounted for the Plan in accordance
with the provisions of Accounting Principles Board (ABP) Option No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. As
such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant or
alternatively, allow 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 continue to apply the provisions of APB Opinion No. 25 in
accounting for its Plan, and accordingly, no compensation cost has been
recognized for its stock options granted at fair market value in the
consolidated financial statements. Compensation cost will be recorded for
options granted below fair market value and options granted to hourly employees.
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS No. 123, the Company's net income
would have been reduced to the pro forma amounts indicated below:
Quarters Ended March 31,
1997 1996
---- ----
Net income (loss) As reported $ (3,424,000) $ 501,000
Pro forma (3,698,000) 414,000
Earnings (loss) per share As reported (.66) .10
Pro forma (.71) .08
Pro forma net income (loss) reflects only options granted since January 1,
1995. Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the options' vesting
period of five years and compensation cost for options granted prior to January
1, 1995 is not considered.
NUMBER OF
SHARES OF
NUMBER OF COMMON EXERCISE
WARRANTS STOCK PRICE
--------- --------- ---------------
Warrants outstanding at January 1, 1997 1,607,500 1,558,750 $ .01 - $12.00
Warrants issued 2,105,263 2,105,263 $ 2.00 - $ 4.50
--------- ---------
Warrants outstanding at March 31, 1997 3,712,763 3,664,013 $ 2.00 - $12.00
========= =========
The weighted average exercise price at March 31, 1997 was $5.75, and
warrants to acquire 3,664,013 shares of Common Stock were exercisable.
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NOTE 10 -- MAJOR CUSTOMERS AND SUPPLIERS
For the quarters ended March 31, 1997 and 1996, revenues, net of returns,
from the Company's three major customers approximated 23%, and 37%,
respectively, 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.
NOTE 11 -- FOUR POINT ACQUISITION
On April 29, 1996 the Company acquired Four Point Entertainment Inc. ("Four
Point") for consideration of $2.5 million in cash and 427,274 shares of Common
Stock (Initial Shares) of the Company with an earn-out provision of up to an
additional 163,636 shares of Common Stock. The acquisition has been accounted
for as a purchase, and accordingly the results of operations of Four Point have
been included in the Company's financial statements from April 29, 1996. The
excess of the purchase price over the fair value of the net identifiable assets
acquired of $6,316,000 has been recorded as goodwill and is being amortized on a
straight-line basis over 25 years.
Pursuant to the terms of the acquisition agreement of Four Point, 40,000
shares of the Initial Shares were placed in escrow pending the receipt of
certain outstanding receivables. Accordingly, the Company has excluded such
shares from the initial purchase price pending the resolution of the related
contingencies.
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 (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 over 1,200 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, the
acquisition and distribution of feature films and the production and development
of television programming through Dove Four Point.
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.
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. 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. In April 1997, Dove Four Point received an order from the ABC
Television Network for a made for television movie entitled "Unwed Father" and
has entered into a distribution
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agreement with respect to the non US network rights with Bonneville Worldwide
Entertainment ("Bonneville").
To complement its audio book operations, the Company is scheduled to publish
up to 75 print titles in 1997. Subject to appropriate opportunities becoming
available to the Company, the Company plans to acquire independent films for
distribution in the United States and Canada on an all rights basis (including
theatrical, home video and all forms of television). In December 1995, the
Company entered into a two year video output arrangement (which commenced in
July 1996) with Paramount Pictures wherein Paramount Pictures will market and
distribute Dove product, meeting certain minimum acceptance criteria, under the
Dove Home Video label. The Company expects to continue to expand its television
program production and development activities through Dove Four Point.
In accordance with the industry practice, substantially all of the Company's
sales of audio and printed book products are and will continue to be subject to
potential return by distributors and retailers. Although the Company estimates
allowances and reserves for returned products, significant increases in actual
return rates above these estimates could materially and adversely impact the
Company's results of operation or financial condition.
Selling, general and administrative expenses include costs associated
with selling, marketing and promoting the company's products, as well as general
corporate expenses including salaries, occupancy costs and other overhead,
professional fees, and travel and entertainment. The company believes that these
expenses will continue to increase as the company grows.
RESULTS OF OPERATIONS
The following table sets forth (i) publishing and film revenues and (ii)
cost of sales, film amortization, selling, general and administrative expense as
a percentage of total revenues or the periods indicated:
QUARTERS ENDED MARCH 31,
1997 1996
----- -----
REVENUES
Publishing ................................... 40.1% 57.2%
Film ......................................... 59.9 42.8
----- -----
Total ............................... 100.0% 100.0%
OPERATING EXPENSES
Cost of sales - Publishing ................... 60.5% 41.2%
Cost of sales - Film ......................... 80.5 31.5
Selling, general & administrative ............ 82.2 17.0
----- -----
Total ............................... 223.2% 89.7%
QUARTER ENDED MARCH 31, 1997 COMPARED TO QUARTER ENDED MARCH 31, 1996.
PUBLISHING
Revenues. Net publishing revenues for the three months ended March
31,1997 decreased $3,280,000 to $1,068,000, compared with $4,348,000 for the
three months ended March 31,1996. The decrease was primarily attributable to a
delay in the planned new release of most printed book titles as well as some
audio titles due to working capital shortages pending the injection of new
equity received at the end of March 1997. In
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addition, such shortages have affected planned releases of new printed book
titles for the balance of the year. The Company has also continued to experience
high returns of both printed and audio materials consistent with the publishing
industry in general. Net publishing revenues in the three month period ended
March 31, 1996 had been substantially augmented by sales of "You'll Never Make
Love In This Town Again". 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 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.
Cost of Sales. Cost of sales for the three months ended March 31, 1997
decreased $1,526,000, to $1,610,000 compared with $3,136,000 for the three
months ended March 31,1996. The decrease was mostly attributable to the
reduction in the total number of audio and printed books sold compared to the
equivalent period in 1996. Cost of sales as a percentage of net publishing
revenues increased from 72% in the period ended March 31, 1996 to 151% in the
period ended March 31, 1997. This percentage increase was primarily
attributable to the effect of fixed elements of cost of sales, such as product
development expense, being spread over a lower revenue base, and a reduction
in future sales estimates for a number of titles.
FILM
Revenues. Film revenues for the three months ended March 31,1997 decreased
to $1,593,000, compared with $3,259,000 for the three months ended March 31,
1996. The decrease was attributable to the delivery in the first quarter of 1996
by the Company of the television film "Home Song" which aired on CBS in March
1996 with no similar sale in the 1997 first quarter. This production generated
approximately $3,000,000 in revenues in 1996. The preceding was partially offset
by significant revenues generated by Dove Four Point which was acquired on April
29, 1996.
Amortization. Film amortization for the three months ended March 31, 1997
decreased to $2,143,000, compared with $2,395,000 for the same quarter last
year. Lower film amortization is primarily the result of reduced cost
amortization on lower revenues offset partially by cost overages on certain
television projects.
GENERAL
Gross Profit. The Company experienced a negative gross margin of $1,092,000
for the first quarter of 1997 versus a positive gross margin of $2,076,000 for
the same period last year. Gross profit margin as a percentage of revenue
decreased from 27% in the first quarter of 1996 to a negative 41% in the first
quarter of 1997. This decrease resulted primarily from the matters previously
discussed regarding publishing and film revenues and cost of sales.
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 69%
to $2,187,000 for the three months ended March 31, 1997 when compared to last
year's $1,292,000. The increase in SG&A was mostly attributable to the
acquisition of Dove Four Point in April of 1996. The Company expects SG&A costs
may continue to increase as the Company grows further.
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Net Interest Income (Expense). Net interest expense for the first quarter of
1997 was $136,000, compared to net interest income of $48,000 for the same
period last year. This is primarily the result of the utilization of funds and
the assumption or incurrence of debt in connection with the acquisition of Four
Point and purchase of the Company's new office building (See also, Notes Payable
- - Note 6) and the operating cash losses experienced during 1996 and the first
quarter of 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations, in general, are 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, from additional debt or equity financings
from outside sources, or for other financing arrangements. 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 television film and 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, and cash generated from operations. In March 1997,
the Company entered into an agreement with a group of outside investors and two
of the principal shareholders/officers of the Company for an equity investment
of approximately $6,000,000 through the sale of Preferred Stock and warrants to
purchase Common Stock of the Company in a private placement. In the first of two
closings, the Company received an aggregate of $3,920,000 (including the
contribution of $676,000 payable by the Company to two of the principal
shareholders/officers) and in a partial second closing on May 15, 1997 received
an additional $500,000, with the balance of $1,500,000 due on or prior to May
25, 1997. See Note 9 of Notes to Consolidated Financial Statements.
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In October 1996 Morgan Fuller completed a loan to the Company in the
aggregate amount of $800,000. Such loan bore interest at the rate of 10% per
annum. In March 1997, the Company retired $500,000 of such loan from Morgan
Fuller in exchange for 210,526 shares of Common Stock along with warrants to
purchase 35,088 shares of Common Stock at $2.50 per share, warrants to purchase
35,088 shares of Common Stock at $3.50 per share and warrants to purchase 35,087
shares of Common Stock at $4.50 per share. The balance of the loan plus accrued
interest was repaid in cash.
On September 17,1996, the Company's registration statement on Form S-3,
registering 2,335,000 shares of Common Stock then outstanding or issuable upon
exercise of certain warrants, was declared effective by the Securities and
Exchange Commission.
In December 1995 and January 1996, the Company raised net proceeds of
approximately $6,303,000 from the sale of 76 Units in a private placement. Each
Unit consisted of 12,500 shares of the Common Stock of the Company and 12,500
warrants to purchase shares of Common Stock at $12.00 per share. In September
1994, the Company completed the sale of 300,000 Units for an aggregate of
approximately $926,000, each Unit consisting of one share of Common Stock and
one Redeemable Warrant to purchase Common Stock at $8.00 per share in a private
placement. In December 1994, the Company completed its IPO, resulting in net
proceeds of approximately $4,805,000 to the Company. In January 1995, the
underwriter of the IPO exercised its overallotment option relating to the IPO in
full resulting in additional net proceeds to the Company of approximately
$770,000.
In connection with the acquisition of Four Point, which was completed on
April 29, 1996, the Company guaranteed certain term debt and a $1 million
revolving line of credit of Four Point from Sanwa Bank. Such term loan
originally was scheduled to mature on October 3, 1998 and the line of credit,
which had an original maturity of June 3, 1996, was extended to July 15, 1996.
On August 16, 1996, the Company and Sanwa Bank entered into a term loan
agreement to refinance such debt and line of credit for an aggregate amount of
approximately $1,365,000. On September 1, 1996, the Company began making
principal and interest payments based on a five year amortization schedule. All
unpaid principal and interest shall mature on August 1, 1997. The existing Sanwa
Bank loan is secured by substantially all of the Company's assets, other than
the Company's building, and certain of the Company's shareholders and Dove Four
Point have guaranteed such new facility. The term loan has various covenants
with which the Company must adhere, including minimum tangible net worth,
current ratio, debt service coverage ratio, and debt to net worth ratio and
restrictions on mergers or acquisitions. The Company was not in compliance with
certain of such financial covenants as of March 31, 1997. In May, 1997 the
Company received a waiver from compliance with such covenants for such period
from Sanwa Bank.
In April 1996 the Company refinanced its $1,900,000 mortgage note which the
Company borrowed from the seller in connection with the acquisition of its new
office building. The new loan from Asahi Bank of California is secured by a deed
of trust on such building and such loan 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.
In May 1996 the Company entered into an agreement with Samuelson
Entertainment Ltd. to acquire the distribution rights to the theatrical film
"Wilde" in all media throughout the United States and Canada
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(excluding French-speaking Canada) and the exclusive worldwide print, audio and
interactive rights. Under the agreement the Company is required to pay sums
totaling 1,333,333 British Pounds Sterling (approximately $2,000,000) over the
12 months subsequent to the agreement for such rights. As of April 1997,
approximately $215,000 remained unpaid and $500,000 is held on deposit by the
film financier, Guinness Mahon & Co. Ltd. In April 1997, the Company and
Guinness Mahon & Co. Ltd. agreed to a deferral of payment of the final
installment of 133,333 Pounds Sterling due on April 2, 1997 partly as a result
of delays in delivery of the picture. Such payment will be due on May 28, 1997
with interest thereon at a rate of 2% per annum plus Pound Sterling LIBOR
payable from April 2, 1997 until May 28, 1997, calculated on a daily basis.
In October 1996 the Company entered into a financial advisory agreement with
Morgan Fuller pursuant to which Morgan Fuller agreed to provide certain
financial advisory services for the Company. As compensation for such services,
the Company granted to Morgan Fuller warrants to purchase for a period of three
years from the date thereof, up to 180,000 shares of Common Stock of the Company
at an exercise price of $2.75.
Publishing accounts receivable, net of sales returns, generally are to be
paid pursuant to a specified payment formula, as defined in the relevant
agreements. The Company's distribution agreements typically provide for a
distribution of certain bad debt risk between the Company and its distributors.
The Company has historically experienced significant negative cash flows
from operations, including $2,670,000 for the quarter ended March 31, 1997. See
"Financial Statements of the Company - Consolidated Statements of Cash Flows."
The Company believes that, subject to the establishment of a new bank credit
line to replace the existing Sanwa Bank facility on or prior to August 1, 1997,
existing working capital (including the funds from the equity private placement
consummated in March 1997 and expected to be fully funded by May 25, 1997) and
anticipated cash flows from operations will be sufficient to meet the Company's
working capital requirements with respect to its current commitments for at
least the next twelve months. While the Company believes that it will complete
the Second Closing, negotiate a new bank line of credit and realize its
anticipated cash flow from operations, there is no assurance that any of this
will be accomplished. If the Company is unable to complete the Second Closing,
if the Company is unable to establish new bank credit lines, if the Company is
unable to realize anticipated revenues, or if the Company incurs costs
inconsistent with anticipated levels, the Company would either need to obtain
additional financing (including possibly through the sale of debt or equity
securities, by obtaining additional bank financing or through the sale of
certain assets), limit its commitments to new projects or possibly curtail its
current operations. In addition, any further expansion of the Company or
acquisitions of particular properties or libraries, would require capital
resources beyond those currently available to the Company, which acquisition of
such resources would be dependent upon the ability of the Company to obtain
additional sources of working capital. There is no assurance that any such
additional sources of working capital will be available on acceptable terms.
INFLATION
The Company does not believe its business and operations have been
materially affected by inflation.
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PART II -- OTHER INFORMATION
ITEM 1. THROUGH 5.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
10.31.1 Letter of Amendment dated April 8, 1997 amending the Letter
Agreement of September 12, 1996, by and between Dove
International, Inc., Guinness Mahon & Co. Ltd., Samuelson
Entertainment Limited and Michael Viner.
10.34 Key Executive Severance Agreement dated as of September 4, 1996
by and between the Company and Gerald Leider
10.43 Supplemental Loan Agreement dated April 28, 1997 by and among
Dove Entertainment, Inc. and Sanwa Bank California, and
guaranteed by Michael Viner and Deborah Raffin.
10.44 Supplemental Security Agreement dated April 28, 1997 by and
among Dove Four Point, Inc., Dove Entertainment, Inc. and Sanwa
Bank California.
27 Financial Data Schedule
(B) REPORTS ON FORM 8-K
No reports of Form 8-K were filed during the quarter for which this
report is filed.
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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 20, 1997 DOVE ENTERTAINMENT, INC.
By /s/ Michael Viner
--------------------------------
Michael Viner, President,
Chief Executive Officer and Director
Date: May 20, 1997 By /s/ Neil Topham
--------------------------------
Neil Topham
Acting Chief Financial Officer
21
23
DOVE ENTERTAINMENT, INC.
INDEX TO EXHIBITS
EXHIBIT
NUMBER
10.31.1 Letter of Amendment dated April 8, 1997 amending the Letter Agreement of
September 12, 1996, by and between Dove International, Inc., Guinness
Mahon & Co. Ltd., Samuelson Entertainment Limited and Michael Viner.
10.34 Key Executive Severance Agreement dated as of September 4, 1996 by and
between the Company and Gerald Leider
10.43 Supplemental Loan Agreement dated April 28, 1997 by and among Dove
Entertainment, Inc. and Sanwa Bank California, and guaranteed by Michael
Viner and Deborah Raffin.
10.44 Supplemental Security Agreement dated April 28, 1997 by and among Dove
Four Point, Inc., Dove Entertainment, Inc. and Sanwa Bank California.
27 Financial Data Schedule
22