AVENUE ENTERTAINMENT GROUP, INC.
June 8, 2005
Mr. Joseph Foti
U.S. Securities and Exchange Commission
450 Fifth Street N.W.
Washington D.C. 20549-0305
RE: AVENUE ENTERTAINMENT GROUP, INC.
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2004
COMMISSION FILE NUMBER: 001-12885
Dear Mr. Foti:
This letter addresses your letter dated May 25, 2005 in regards to the
above-referenced filing. We have reviewed each comment and provided our
responses as requested below.
ITEM 6. MD&A
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RESULTS OF OPERATIONS
- ---------------------
1. Please note that the Results of Operations have been updated per your
comment #4 regarding Other Income and due to entries to reflect imputed
interest per your comment #9.
Other Income as previously presented:
12/31/04
--------
(50,000) film festival award for WAYWARD SON
(543) interest income/bank accounts
4,599 interest expense/bank loans
-------
(45,944)
12/31/03
--------
(193,902) return of SAG bond for WAYWARD SON
76,720 film costs for WAYWARD SON
(1,233) interest income/bank accounts 5,241 interest expense/bank loans
5,241 interest expense/bank loans
--------
(113,174)
Other Income as revised for updates:
Also included now is imputed interest of $6,289 and $54,005 for the years
2004 and 2003, respectively. Calculations are listed under #9.
Mr. Joseph Foti
June 8, 2005, Page 2
12/31/04
--------
6,289 imputed interest expense on related party payable
(543) interest income/bank accounts
4,599 interest expense/bank loans
------
10,345
12/31/03
--------
54,005 imputed interest expense on related party payable
(1,233) interest income/bank accounts
5,241 interest expense/bank loans
-------
58,013
While the film festival prize of $50,000 in 2004 for WAYWARD SON is not a
recurring source of revenue it is moved from Other income to Operating
revenues as it directly relates to the Company's normal motion pictures
operations for a revised total of $995,002. Similarly the $193,902 return
of the Screen Actors Guild bond for WAYWARD SON is moved from Other income
to Operating revenues in 2003 for a revised total of $830,465 and the
additional film costs of $76,720 for WAYWARD SON is moved to Film
Production Costs for a revised total of $284,939.
Therefore, we propose the following to replace the text section of Results of
Operations:
RESULTS OF OPERATIONS
For the year ended December 31, 2004 the Company had a net loss of $63,000
as compared to a loss of $939,000 for the year ended December 31, 2003. The
substantial decrease in net loss for the year ended December 31, 2004 compared
to the year ended December 31, 2003 is primarily attributable to the $165,000
increase of revenues, the $243,000 decrease of film costs and the $221,000
impairment loss on goodwill recorded in 2003.
REVENUES
Revenues for the year ended December 31, 2004 were $995,000 as compared to
$830,000 for the year ended December 31, 2003. Revenues for the year ended
December 31, 2004 were derived primarily from producer fees for the theatrical
film CLOSER, the HBO First Look Deal, the licensing of its programming in
secondary markets through Janson Associates and a film festival award for the
project WAYWARD SON. Revenues for the year ended December 31, 2003 were derived
primarily from the licensing of its programming in secondary markets through
Janson Associates, the HBO First Look Deal, the return of a residuals bond held
in an escrow account by the Screen Actors Guild for WAYWARD SON, the balance of
producer fees from HBO for ANGELS IN AMERICA and the balance of producer fees
from Intermedia for the theatrical film MINDHUNTERS. The $165,000 increase of
revenues was primarily due to the larger producer fees earned for the theatrical
film CLOSER.
Mr. Joseph Foti
June 8, 2005, Page 3
In pursuing the development and/or production of film projects, there can
be no assurance that each project will be produced in the preferred timeframe
and with the preferred budget due to the contingencies of securing talent,
financing and distribution. The Company must rely upon the decisions of studios,
network or cable programmers who must approve and order the films in order to
provide adequate financing. Results of operations for any given period are
significantly dependent upon these factors, none of which can be predicted with
any certainty. Consequently, results of operations may fluctuate materially from
quarter to quarter and the results of any given quarter are not necessarily
indicative of results for future quarters.
FILM PRODUCTION COSTS
Film production costs for the year ended December 31, 2004 were $42,000 as
compared to $285,000 for the year ended December 31, 2003. The $243,000 decrease
of film production costs is primarily due to a write down of film production
costs for the project WAYWARD SON and a significant write down of film
production costs for THE HOLLYWOOD COLLECTION for the year ended December 31,
2003. During the year ended December 31, 2004 these projects were fully
amortized.
Estimates of anticipated total gross revenues are reviewed periodically and
revised when necessary. Unamortized film production costs are compared with net
realized value each reporting period on a title-by-title basis. If estimated
gross revenues are not sufficient to recover the unamortized film production
costs, the unamortized film production costs are written down to their estimated
net realizable value. These revisions can result in significant
quarter-to-quarter and year-to-year fluctuations in film write-downs and
amortization.
OTHER EXPENSE
Other expense for the year ended December 31, 2004 was $10,000 of interest
expense compared to $58,000 for the year ended December 31, 2003. Interest
expense for 2003 consisted of $54,000 of cumulative imputed interest on the
payable due to related party.
2. Due to the anticipated amended filing of Form 10-KSB at December 31, 2004,
Form 10-QSB at March 31, 2005 will need to be resubmitted. In keeping with
the better-detailed explanations incorporated above, the section under
Results of Operations will be revised at March 31, 2005 and in future
filings to clarify the significant increases and decreases.
The various sources of the fiscal 2004 revenues are not necessarily unusual
but they are not guaranteed in future periods. For the three months ended
March 31, 2004 we had earned 80% of the producer fees for the feature film
CLOSER compared to no new feature film or television movie in production
for the three months ended March 31, 2005. Additionally, while we hope that
the extended deal with HBO will derive additional revenues, there is no
assurance that will happen.
Mr. Joseph Foti
June 8, 2005, Page 4
LIQUIDITY AND CAPITAL RESOURCES
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3. We propose the following to replace the section of Liquidity and Capital
Resources:
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2004, the Company had approximately $7,000 of cash. The
accompanying financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. Revenues have been insufficient to cover costs
of operations in the past five years and the Company has a working capital
deficiency and an accumulated deficit of $9,062,915 through December 31, 2004.
To our knowledge few, if any, public entertainment companies have a working
capital deficit comparable to Avenue Entertainment Group, Inc. Most public
companies working in film and television production are much larger in size and
generally have large libraries of film and/or television properties that provide
an ongoing revenue stream. Aside from a smaller library of films that are
primarily one-hour documentary biographies, the Company derives its revenues
almost entirely from its production fee revenues earned when it produces motion
pictures or television programming. Therefore, the Company relies heavily upon
the decision makers at the studios, network and cable stations. The generation
of revenue in the motion picture and television movie industry is more
competitive than ever for the Company and other independent motion picture and
television production companies. Additionally, there is no predictable seasonal
trend or variation inherent in the entertainment business, so the timing of such
revenues is highly unpredictable.
FINANCIAL STATEMENTS
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CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------
4. Please find below the revised presentation of the Consolidated Statements
of Operations that resulted from the separation of components of other
income and the updates to revenues, film production costs and interest
expense:
Mr. Joseph Foti
June 8, 2005, Page 5
AVENUE ENTERTAINMENT GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
-----------------------------
2004 2003
---- ----
Operating revenues $ 995,002 $ 830,465
----------- -----------
Costs and expenses:
Film production costs 42,257 284,939
Selling, general and
administrative expenses 1,004,766 1,188,351
Impairment loss on goodwill 0 221,172
----------- -----------
Total costs and expenses 1,047,023 1,694,462
----------- -----------
Income (loss) from operations (52,021) (863,997)
Other income (expense)
interest (expense), net (10,345) (58,013)
----------- -----------
Profit (loss) before income tax (62,366) (922,010)
Income tax expense 165 16,492
----------- -----------
Net loss $ (62,531) $ (938,502)
=========== ===========
Basic and diluted loss per share:
$ (0.01) $ (0.17)
=========== ===========
Weighted average common
shares outstanding 5,371,030 5,371,030
=========== ===========
Mr. Joseph Foti
June 8, 2005, Page 6
LEASES
- ------
5. The previous five-year office space lease expired at October 31, 2004.
During the course of the lease the Company scaled back operations and
personnel and found it necessary to find two subtenants to partially offset
office rent by sharing office space within the suite. The Company keeps the
majority of corporate and production files at an offsite storage facility
and only requires a minimal amount of space to conduct business. The
Company produced the feature film CLOSER for Columbia Pictures and has been
allowed to use temporary office space at its Culver City studio lot free of
charge until November 1, 2005 and possibly longer.
EMPLOYMENT AGREEMENTS
- ---------------------
6. It is expected that the amounts due to the Chairman and President will be
repaid when and if there is a substantial increase in production fee
revenues such that the Company could afford to pay a portion of this
deferred compensation to either the Chairman and/or the President. It is
also possible that the Chairman and/or the President would agree to forfeit
their deferred compensations at some point in the future.
7. The entire balance of Deferred Compensation is derived from the voluntary
deferment of salary by both the Chairman and President. Therefore to
clarify that no other amounts are represented in that category, we propose
the following to replace the section on page 38 under Employment
Agreements:
In 2004 and 2003, the Chairman deferred additional amounts of $74,000 and
$122,000 of his compensation, respectively and the President deferred additional
amounts of $0 and $121,000 of his compensation, respectively. Total deferred
compensation as of December 31, 2004 for the Chairman and President is $407,830
and $775,879, respectively.
NOTE 9 - INCOME TAXES
- ---------------------
8. The revised footnote has been updated for the imputed interest regarding
your comment #9. The amount represents the Federal tax benefit applicable
to state taxes for all the deferred tax amounts. A more appropriate
disclosure would have been to allocate the tax affect for the various tax
assets disclosed. Therefore no additional reserve is required. We propose
the following corrected tax disclosure to replace the section under Note
(9) Income Taxes:
Mr. Joseph Foti
June 8, 2005, Page 7
(9) INCOME TAXES
Components of income tax expense (benefit) are as follows:
December 31, December 31,
2004 2003
---- ----
Federal $ -- $ --
State and local 800 800
--------- ---------
$ 800 $ 800
========= =========
Reconciliation of the statutory Federal income tax rate to the Company's
effective tax rate is as follows:
December 31, December 31,
2004 2003
---- ----
Tax (benefit)
at Federal statutory rate of 34% (21,204) $(313,484)
Increase (decrease) in taxes resulting
from:
State and local income taxes, net of
federal income tax benefit (2,660) (40,121)
Nondeductible goodwill amortization -- 75,198
Other 6,229 3,424
Change in valuation allowance 18,435 275,783
--------- ---------
Total $ 800 $ 800
========= =========
The tax effects of temporary differences between the financial reporting
and tax bases of assets and liabilities are as follows:
2004
----
Deferred tax assets
Accrued expenses and other $ 608,207
Stock options 99,885
NOLs 1,927,970
-----------
Valuation allowance (2,636,062)
-----------
Total deferred tax assets 0
===========
For Federal and State income tax purposes, the Company has unused net
operating loss carryforwards of approximately $4,826,574,and $4,702,062, as
of December 31, 2004 and 2003, respectively expiring through 2021.
Mr. Joseph Foti
June 8, 2005, Page 8
TRANSACTIONS WITH GP STRATEGIES
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9. As the related party payable does not bear interest, imputed interest was
calculated each year using a simple average based on the prime rate on the
last day of the month and rounded to the nearest tenth. The interest was
determined to be immaterial both individually and in the aggregate prior to
2003. The accrued interest of $48,000 represented 3% of revenue in 2002 and
each individual year's interest accrual never rose to the level of
materiality in the context of current year losses in operations and was
waived on summarized adjusting journal entries. We acknowledge that
cumulatively it is material in 2004 and in order to properly reflect the
accrual and the interest we have decided to amend the 10-KSB.
Calculation to record imputed interest on the related party payable:
Avg Imputed
Year Prime Int Total Due Interest
- ---- --------- --------- --------
1997 8.43% 47,413 198
1998 8.37% 94,481 7,908
1999 7.97% 99,172 7,904
2000 9.18% 147,046 13,499
2001 7.89% 146,597 11,567
2002 4.70% 146,597 6,890
2003 4.12% 146,597 6,040
2004 4.29% 146,597 6,289
The following entries are to be recorded causing an amended Form 10-KSB to be
filed:
2003:
- -----
DR Interest expense 54,005
CR Due to related party (54,005)
2004:
- -----
DR Interest expense 6,289
CR Due to related party (6,289)
We propose the following amended schedules to replace the Statements of
Operations (see #4), Statement of Stockholders' Equity (Deficit), Statements of
Cash Flows:
Mr. Joseph Foti
June 8, 2005, Page 9
AVENUE ENTERTAINMENT GROUP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2004 AND 2003
Common Stock
------------ Additional Stock
Number of Treasury Paid-in Accumulated subscription
Shares Amount Stock capital Deficit receivable Total
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2002 5,371,030 53,710 (3,687) 7,172,839 (8,061,882) (150,000) (989,020)
- ------------------------------------------------------------------------------------------------------------------------------
Net loss (938,502) (938,502)
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2003 5,371,030 53,710 (3,687) 7,172,839 (9,000,384) (150,000) (1,927,522)
- ------------------------------------------------------------------------------------------------------------------------------
Net loss (62,531) (62,531)
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2004 5,371,030 53,710 (3,687) 7,172,839 (9,062,915) (150,000) (1,990,053)
- ------------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Mr. Joseph Foti
June 8, 2005, Page 10
AVENUE ENTERTAINMENT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-------------------------
2004 2003
---- ----
Cash flows from operating activities
Net loss $ (62,531) (938,502)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 4,476 8,633
Amortization - film production costs 13,492 148,823
Impairment of goodwill 0 221,172
Changes in assets and liabilities affecting net loss:
Accounts receivable 100,506 (77,687)
Film costs 66,752 (85,278)
Other assets 12,692 (541)
Accounts payable and accrued expenses 5,281 (116,385)
Deferred compensation 22,476 242,954
Due to related party 6,289 54,005
Deferred income (101,391) 32,216
---------- ----------
Net cash provided by (used in)
operating activities 68,042 (510,590)
Cash flows from investing activities:
Disposal of equipment 3,222 0
---------- ----------
Net cash used in investing activities 3,222 0
---------- ----------
(Continued)
Mr. Joseph Foti
June 8, 2005, Page 11
AVENUE ENTERTAINMENT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31,
------------------------
2004 2003
---- ----
Cash flows from financing activities:
(Payments on), receipts from loan payable $ (102,038) $ 190,000
---------- ----------
Net cash (used for) provided by
financing activities (102,038) 190,000
Net increase (decrease) in cash (30,774) (320,590)
Cash at beginning of year 37,626 358,216
---------- ----------
Cash at end of year $ 6,852 $ 37,626
========== ==========
Supplemental cash flow information:
Cash paid during the year for:
Interest $ 4,599 $ 5,241
========== ==========
Income taxes $ 165 $ 16,492
========== ==========
See accompanying notes to consolidated financial statements
Mr. Joseph Foti
June 8, 2005, Page 12
NOTE 12 - SUBSEQUENT EVENTS
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10. & 11. The potential sale transaction detailed on page 2 and summarized
under Subsequent Events was not consummated because the parties involved
could not come to agreement on the final terms. However, at the time of the
audit report the Company was contemplating these transactions that would
have had a substantial material impact on its future. This subsequent event
was initially labeled "Unaudited" because it had not occurred but
management wanted to be forthright and inform the reader of a series of
transactions that they felt were very likely to occur. However, ultimately
no additional progress was made in the negotiation process and as of June
8, 2005, the sale has not transpired and the Company does not expect it to
occur.
The potential sale transaction detail should be removed from the amended
10-KSB on page 2 and in the places where it is also briefly referenced in
other sections throughout the entire form.
Therefore, we propose the following to replace footnote (12):
(12) SUBSEQUENT EVENTS
At March 25, 2005, the Company was contemplating entering into a series of
transactions pursuant to which the Company would sell a substantial portion of
all the assets (subject to certain liabilities) that it holds through its Avenue
Pictures, Inc. and its Wombat Productions, Inc. subsidiaries. As of June 8, 2005
no progress was made in the negotiation process and the Company no longer
expects the sale to occur.
Additionally, the audit opinion would be amended to read:
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
March 25, 2005, except for Note 12
as to which the date is June 8, 2005
Mr. Joseph Foti
June 8, 2005, Page 13
THE COMPANY ACKNOWLEDGES THE FOLLOWING:
o the Company is responsible for the adequacy and accuracy of the
disclosure in the filings;
o staff comments or changes to disclosure in response to staff comments
in the filings reviewed by the staff do not foreclose the Commission
from taking any action with respect to the filing; and
o the Company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the federal
securities laws of the United States.
We hope that the responses in this letter address all of your comments and
requests. We understand that after reviewing our responses you may have
additional comments. We look forward to hearing from you. As before our fax
number is 310-244-6869. Please feel free to contact us by telephone as well.
Judy Geletko can be reached at 310-244-7358.
Best regards,
/s/ CARY BROKAW
- ----------------------------------------
Cary Brokaw
President and Chief Executive and
Financial Officer
/s/ JUDY GELETKO
- ----------------------------------------
Judy Geletko
Controller