SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM 8-K/A
(Amendment No. 1)
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): December 31, 2003
-----------------
AMERICAN VANTAGE COMPANIES
(Exact Name of Registrant as Specified in its Charter)
Nevada 0-10061 04-2709807
- --------------------------- ---------------------- ------------
(State or Other Jurisdiction (Commission File Number) (IRS Employer
of Incorporation) Identification No.)
4735 S. Durango Dr., Suite #105, Las Vegas, Nevada 89147
-------------------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (702) 227-9800
--------------
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On January 15, 2004, American Vantage Companies (the "Company" or
"AVCS") filed a Current Report on Form 8-K (Date of Report: December 31, 2003)
to report an acquisition under Item 2. In such Form 8-K, the Company indicated
that it would file financial information and pro forma information required
under Item 7 of Form 8-K no later than March 15, 2004. This amendment is filed
to provide the required financial information.
On December 31, 2003, American Vantage Media Corporation ("AVM"), a
wholly-owned subsidiary of American Vantage Companies (the "Company" or "AVCS"),
acquired substantially all of the assets of Enigma Media, Inc. ("Enigma")
pursuant to an Asset Purchase Agreement, dated as of December 31, 2003, by and
among the Company, AVM and Enigma. AVM will continue Enigma's business and
operations through a wholly-owned subsidiary, American Vantage Media/Hypnotic,
Inc., under the trade name "Hypnotic".
In connection with the acquisition of Enigma's assets, AVM assumed
approximately $1,839,194 of Enigma's operating liabilities and AVCS issued
warrants ("Warrants") to Enigma, valued at $0.75 per warrant, to purchase a
total of 1,000,000 shares of Registrant's common stock, par value $0.01 per
share ("Common Stock"), at an exercise price of $5.00 per share (the "Exercise
Price"), expiring on December 31, 2013. The Company and Enigma determined the
value of the Warrants pursuant to arm's-length negotiations.
In addition, commencing on July 1, 2006, AVCS may redeem the Warrants,
in whole or in part, at a redemption price of $0.75 per Warrant, provided that
the average of the closing sale prices of the Registrant's Common Stock as
reported on the Nasdaq Stock Market or other reporting system that provides last
sale prices, has been at least 200% of the Exercise Price for a period of 20
consecutive trading days ending on the third day prior to the date on which
Registrant gives notice of redemption. Holders of Warrants may exercise 800,000
Warrants immediately and the remaining 200,000 Warrants after October 31, 2004.
AVM has the right to set off indemnification claims of up to $150,000 against
Enigma by canceling up to 200,000 Warrants at a rate of $0.75 per Warrant and to
recoup up to an additional $400,000 of indemnification claims by increasing the
Exercise Price of the remaining 800,000 Warrants up to $0.50 per Warrant.
Holders of Warrants have the right to demand one registration on Form
S-3 at the expense of Registrant and two additional registrations on Form S-3 at
their own expense. They also have unlimited piggyback registrations with respect
to shares that have not been previously registered.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial statements of business acquired.
The audited financial statements of Enigma as of and for the year ended
December 31, 2002. In accordance with Item 310(d) of Regulation S-B,
audited financial statements of Enigma are required only for the most
recent fiscal year.
(b) Pro forma financial information.
Unaudited Pro Forma Condensed Combined Balance Sheet as of October 31,
2003
Unaudited Pro Forma Condensed Combined Statement of Operations for the
Fiscal Year Ended July 31, 2003
Unaudited Pro Forma Condensed Combined Statement of Operations for the
Three Months Ended October 31, 2003
Notes to Unaudited Pro Forma Condensed Combined Statement of Operations
ENIGMA MEDIA, INC.
FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2002
ENIGMA MEDIA, INC.
FOR THE YEAR ENDED DECEMBER 31, 2002
TABLE OF CONTENTS
Page
----
Independent Auditors' Report 1
Financial Statements
Balance Sheet 2
Statement of operations 3
Statement of stockholders' equity 4
Statement of cash flows 5
Notes to financial statements 6-11
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Enigma Media, Inc.
We have audited the accompanying balance sheet of Enigma Media, Inc. as of
December 31, 2002 and the related statements of operations, stockholders' equity
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principals used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Enigma Media, inc. as of
December 31, 2002 and the results of its operations and its cash flows for the
year ended, in conformity with accounting principles generally accepted in the
United States of America
Our audit was conducted for the purpose of forming an opinion on the
basic finanical statements taken as a whole. The accompanying schedules of cost
of sales and selling general and administrative expenses are presented for
purposes of additional analysis and are not a required part of the basic
financial statements. Such infomration has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
/s/ CITRIN COOPERMAN & COMPANY, LLP
-----------------------------------
CITRIN COOPERMAN & COMPANY, LLP
CERTIFIED PUBLIC ACCOUNTANTS
New York, New York
April 21, 2003
1
ENIGMA MEDIA, INC.
BALANCE SHEET
DECEMBER 31, 2002
ASSETS
------
Current assets:
Cash and cash equivalents $ 1,513,658
Accounts receivable 2,026,461
Prepaid expenses 69,021
Other current assets 7,142
------------
Total current assets 3,616,282
------------
Property and equipment, net 299,723
------------
Other assets:
Promotional credits, net allowance of $4,000,000 -
Film inventory - net of
accumulated amortization of $814,907 132,249
Security deposits 56,623
Other assets 58,194
------------
Total other assets 247,066
------------
TOTAL ASSETS $ 4,163,071
============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Account payable and accrued expenses $ 922,105
Deferred revenue 1,039,781
------------
Total liabilities 1,961,886
------------
Commitments (Notes 4 and 9)
Stockholders' equity:
Preferred stock:
Series A - $.001 par value; 107,396 shares authorized;
1,345,264 shares issued and outstanding
(liquidation preference $24,500,006) 1,345
Series B - $.001 par value; 1,073,759 shares authorized,
913,177 shares issued and outstanding (liquidation
preference $18,500,000) 50
Series C-1, $.001 par value; 1,073,759 shares
authorized, 913,177 shares issued and outstanding
(liquidation preference $18,500,000) 913
Common stock - $.001 par value; 6,000,000 shares
authorized, 1,104,020 shares issued and outstanding 1,104
Additional paid-in capital 26,038,971
Accumulated deficit (23,841,198)
------------
Total Stockholders' equity 2,201,185
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,163,071
============
See accompanying notes to financial statements.
2
ENIGMA MEDIA, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2002
Revenue:
Marketing and advertising $ 5,509,762
Distribution 845,448
Feature film and television development 33,625
------------
Total revenue 6,388,835
Cost of sales 4,189,150
------------
Gross profit 2,199,685
Selling, general and administrative expenses 4,739,794
------------
Loss from operations before special charges (2,540,109)
------------
Special charges:
Allowance for promotional credits (4,000,000)
Settlement of stockholder lawsuit (860,000)
Legal fees related to stockholder lawsuit (546,205)
------------
Total special charges (5,406,205)
------------
Loss from operations (7,946,314)
Other income (expense):
Interest income 55,247
Other expense (870)
------------
Loss before provision for taxes (7,891,937)
Provision for local taxes 24,779
------------
NET LOSS $ (7,916,716)
------------
See accompanying notes to financial statements.
3
STATEMENT OF STOCKHOLDERS' EQUITY
DECEMBER 31, 2002
Preferred Stock Class A Preferred Stock Class B Preferred Stock Class C
----------------------- -------------------------- -----------------------
Number Amount Number Amount Number Amount
------------- --------- ----------- ---------- --------- ------------
Balance - January 1, 2002 1,345,264 $1,345 107,396 $ 107 913,117 $ 913
Repurchase of common shares -- -- -- -- -- --
Repurchase of preferred shares -- -- (57,396) (57) -- --
Net loss -- -- --
--------- ------ ------- ------- ------- -----
BALANCE - DECEMBER 31, 2002 1,345,264 $1,345 50,000 $ 50 913,177 $ 913
========= ====== ======= ======= ======= =====
Common Stock Additional
-------------------- paid-in Accumulated
Number Amount Capital Deficit Total
--------- ------ ----------- ------------ -----------
Balance - January 1, 2002 1,674,156 $1,674 $26,378,344 $(15,924,428) $10,457,901
Repurchase of common shares (570,136) (570) (151,930) -- (152,500)
Repurchase of preferred shares -- -- (187,443) -- (187,500)
Net loss -- -- -- (7,916,716) (7,916,716)
--------- ------ ----------- ------------ -----------
BALANCE - DECEMBER 31, 2002 1,104,020 $1,104 $26,038,971 $(23,841,198) $ 2,201,185
========= ====== =========== ============ ===========
See accompanying notes to financial statements.
4
ENIGMA MEDIA, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2002
Operating activities:
Net loss $ (7,916,716)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 394,700
Allowance for promotional credits 4,000,000
Changes in assets and liabilities:
Accounts receivable (467,508)
Prepaid expenses (1,590)
Other current assets (343)
Security deposits 3,275
Other assets (29,254)
Accounts payable and accrued expenses 308,589
Deferred revenue (628,547)
------------
Net cash used in operating activities (4,337,394)
------------
Investing activities:
Additions to property and equipment (22,630)
Additions to film inventory (172,710)
------------
Net cash used in investing activities (195,340)
------------
Financing activities:
Cash paid for the repurchase of common stock (152,500)
Cash paid for the repurchase of preferred stock (187,500)
------------
Net cash used in financing activities (340,000)
------------
Net decrease in cash and cash equivalents (4,872,734)
Cash and cash equivalents - beginning 6,386,392
------------
CASH AND CASH EQUIVALENTS - ENDING $ 1,513,658
------------
Supplemental disclosure of cash flow information:
Income taxes paid $ 7,179
------------
5
ENIGMA MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Organization
------------
Enigma Media, Inc. (the "Company") was organized through a merger of
the assets, assumed liabilities and operations of Enigma Media LLC and
Hypnotic, Inc. as of May 23, 2001. The Company is a New York - and Los
Angeles - based branded entertainment company in traditional television
and film development, entertainment marketing, and the distribution of
short films and animations. The Company develops brand-based content
and marketing programs for advertisers. It offers its brand and agency
clients a fully integrated solution, from entertainment strategy and
creative development, to the production and distribution of branded
content and programs.
Use of Estimates
----------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements, and the
reported amounts of revenue and expenses during the reporting period.
Actual results may differ from those estimates.
Film Inventory
--------------
Production costs are stated at cost less accumulated amortization.
Production costs are amortized on a straight-line basis over a 12 month
period commencing on the date of acquisition.
Cash and Cash Equivalents
-------------------------
Cash equivalents consist of money market funds.
Deferred Taxes
--------------
The Company provides for income taxes and recognizes deferred tax
assets and liabilities using the liability method for income taxes. The
liability method requires that all deferred tax balances be determined
by using the applicable tax rate expected to be in effect when the
taxes will actually be paid or refunds received. The applicable tax
rate is applied to the differences between the tax basis of assets and
liabilities and their reported amounts in the financial statements. The
resulting deferred tax asset or liability is adjusted to reflect
changes in tax laws as they occur. Valuation allowances are
established, if necessary, to reduce deferred tax assets to their
estimated realizable amounts.
Depreciation and Amortization
-----------------------------
Property and equipment are stated at cost. Expenditures for renewals
and betterments that extend the originally estimated useful life of an
asset or materially increase its productivity are capitalized. Minor
maintenance and repairs and minor renewals and betterments are charged
to expense as incurred.
6
ENIGMA MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
-------------------------------------------------------
Revenue Recognition
-------------------
Fees for licenses and rights to films in inventory and related
liabilities are recorded when the license period begins and the program
is available for use.
Revenue from promotions under contract is recognized on the percentage
of completion method. The percentage of completion is determined by the
ratio of costs incurred to estimates of total costs to be incurred.
This percentage is then applied to the total contract price in order to
determine income earned to date.
Revenue from the Chrysler Million Dollar Film Festival ("CMDFF") is
recognized on the straight line basis.
Accounts Receivable
-------------------
No allowance for uncollectible accounts has been provided. Management
has estimated that the balance in accounts receivable is fully
collectible.
NOTE 2. CONCENTRATION OF CREDIT RISK
----------------------------
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash and accounts
receivable. The Company maintains balances at various financial
institutions that are insured by the Federal Deposit Insurance
Corporation up to an aggregate of $100,000 at each financial
institution. At December 31, 2002, the Company's uninsured bank
balances totaled $1,481,048.
At December 31, 2002, three customers represented approximately 8.1% of
the Company's accounts receivable. The Company controls credit risk
through credit approvals, credit limits, and monitoring procedures, and
generally does not require collateral to support its accounts
receivable.
NOTE 3. PROPERTY AND EQUIPMENT
----------------------
Property and equipment consist of the following at December 31, 2002:
Estimated
Useful Life
--------------
Computer equipment $ 497,130 3-5 years
Furniture, fixtures and equipment 271,454 3-5 years
Website 227,919 5 years
Leasehold improvements 31,092 1 year
---------
1,027,595
Less: accumulated depreciation (727,872)
---------
Net property and equipment $ 299,723
=========
Depreciation expense for the year ended December 31, 2002, amounted to $209,094.
7
ENIGMA MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
NOTE 4. COMMITMENTS AND CONTINGENCIES
-----------------------------
Leases
------
The Company leases office space under two noncancelable operating
leases. The current agreements expire on March 31, 2004, and August 31,
2004, respectively. Future minimum lease payments under the
noncancelable leases are as follows:
Year ending December 31
-----------------------
2003 $ 292,545
2004 123,158
----------------
$ 415,703
================
Rent expense for the year ended December 31, 2002, aggregated $313,639.
Royalty Agreements
------------------
The Company has commitments for various royalty agreements related to
the distribution of films. The amount of a particular commitment is
dependent upon the market in which it is distributed.
NOTE 5. DEFERRED REVENUE
----------------
The Company has entered into an agreement with DaimlerChrysler Motors
Corporation ("Chrysler") to provide certain services regarding the
production of the CMDFF for 2002 and 2003. These agreements call for
the Company to provide services in different phases over the term of
the agreements for a fixed fee of $3,650,000 per contract, payable in
various installments beginning in 2001. The 2002 contract period is for
the period October 1, 2001 to September 30, 2002, and the 2003 contract
runs from October 1, 2002 to September 30, 2003. For the 2002 contract,
the Company and Chrysler are each committed to provide $250,000 of the
financing for the winning production. Chrysler funded their commitment
during 2002. For the 2003 contract, the Company is committed to provide
$250,000 of the financing for the winning production. The balance of
the funding required for the winning production, $500,000 and $750,000
for the 2002 and 2003 productions, respectively, is to be provided by
Universal Pictures Corporation (a stockholder of the Company)
("Universal").
At December 31, 2002, deferred revenues consist of amounts billed for
the 2003 CMDFF in excess of revenues recognized, as well as other
amounts received with respect to the distribution of films prior to the
commencement of the license period.
NOTE 6. PROVISION FOR TAXES
-------------------
The provision for taxes represents state and city minimum income and
franchise taxes.
For income tax purposes, the Company has available a net operating loss
carryforward at December 31, 2002, of approximately $11,529,000, which
will expire through the year 2022. The Company's deferred tax asset
resulting from the tax benefit of the carryforward amounts to
approximately $3,900,000.
8
ENIGMA MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
NOTE 6. PROVISION FOR TAXES (CONTINUED):
--------------------------------
However, the Company has provided a valuation allowance of a
corresponding amount to offset the deferred tax asset. In addition,
through the merger with Hypnotic, Inc. in 2001, the Company acquired a
net operating loss carryforward of approximately $6,500,000. Based on
current tax regulations, the use of this loss carryforward will be
limited and, accordingly, no deferred tax benefit has been recorded
related to this item.
NOTE 7. PROMOTIONAL CREDITS
-------------------
During 2001, the Company issued 394,888 shares of common stock to
Universal in exchange for Universal's agreement to provide the Company
with $4,000,000 in non-cash promotional credits. Under the terms of the
agreement, the promotional credits are to be provided over a three-year
period beginning May 2001. If the promotional credits have not been
fully utilized by the end of the promotional period, the promotional
period will be extended by the shorter of one year or until the credits
have been fully utilized. As of December 31, 2002, the Company has been
unable to utilize any of the promotional credits. Based on management's
assessment of their utilization, the Company has provided a valuation
allowance for the full amount of these credits, as their realizable
value is difficult to assess.
NOTE 8. CONVERTIBLE PREFERRED STOCK
---------------------------
During 2001, in connection with the merger discussed in Note 1, the
Company issued its Series A, B and C par value $.001 preferred stock.
The preferred stock was issued for $9.11, $10.00 and $10.13 per share
for the Series A, B and C shares, respectively. The holders of
convertible preferred stock are not entitled to receive any dividends.
They are entitled to one vote for each share of common stock into which
their preferred shares can be converted.
Upon the liquidation, dissolution or winding up of the Company, the
holders of preferred stock are entitled to receive a liquidation
preference, based on a formula, prior to distribution to holders of
common stock. This formula provides that holders of Class A or C shares
are entitled to 200% of the original issue price of the preferred stock
(as adjusted for stock splits, stock dividends, combinations and
similar transactions) and holders of Class B share are entitled to 100%
of the original issue price (as adjusted for stock splits, stock
dividends, combinations, and similar transactions).
Preferred stock is convertible into shares of common stock based on a
formula, as defined, in effect at the time of conversion. The initial
conversion ratio was 1:1.
At any time after February 6, 2005, any holder of record of at least
122,000 shares of preferred stock may provide the Company with a
written request to have the Company redeem these shares at a price
equal to the greater of the liquidation preference at such date or the
fair market value.
9
ENIGMA MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
NOTE 9. STOCK OPTIONS AND WARRANTS
--------------------------
The Company adopted the 2001 Stock Incentive Plan ("the Plan"). The
Plan provides for issuance of options for up to 763,669 shares of
common stock to eligible officers and employees. Options shall expire
no more than 10 years after the date of the grant and shall be
exercisable to the extent of 25% on each anniversary date of the grant.
Exercise price will not be less than the greater of the par value of
the stock, the lesser of $7.50 and the greater of recent financing, not
less than 85% of the fair market value for incentive stock options or
110% of fair market value to certain participants, as defined. Options
terminate immediately upon termination of employment.
During 2002, options to acquire 200 shares at an exercise price of
$7.50 per share were issued to employees.
At December 31, 2002, outstanding options to acquire 200,000, 26,764,
134,794, and 33,590 shares of common stock were exercisable at $10.13,
$9.80, $7.50, and $6.86 per share, respectively. In addition, warrants
were granted and assumed in connection with the merger and
reorganization, as follows:
Preferred stock:
Series C-2: 160,582 shares at $10.94 per share through
May 23, 2002
Series A-3: 100,000 shares at $12.50 per share through
February 6, 2002
Series A-4: 90,033 shares at $30.85 per share through
March 13, 2002
Series A-5: 90,033 shares at $46.28 per share through
March 13, 2002
Common stock 3,826 shares at $13.13 per share through
February 2, 2002
In 2002, the preferred stock warrants were extended for an additional
year. In 2003, the preferred stock warrants lapsed.
At December 31, 2002, all of the preferred stock warrants were
exercisable. The common stock warrant expired on February 2, 2002.
10
ENIGMA MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
NOTE 10. LITIGATION
----------
During 2002, the Company was involved in litigation with a former
officer and other stockholders of the Company (the "Claimants"). In two
separate lawsuits, the Claimants alleged wrongful termination and
securities fraud by the Company. The Claimants were seeking $1,550,000
for breach of employment contract $6,360,000 in damages relating to the
securities fraud claim, plus attorney's costs. In October 2002, the
Company settled both matters and agreed to pay the Claimants a total of
$1,200,000. The settlement provided that the Company repurchase and
retire 570,136 shares of common stock and 57,396 shares of Class B
preferred stock held by the Claimants. These shares were repurchased at
their respective issue prices. The balance of the cost of the
settlement ($860,000) and related legal fees of approximately $546,000
have been presented as special charges in the accompanying statement of
operations.
NOTE 11. MAJOR CUSTOMERS
---------------
During the year ended December 31, 2002, the Company derived revenue
from four customers amounting to approximately $5,000,000, or
approximately 78% of its total revenues.
NOTE 12. SUBSEQUENT EVENT (UNAUDITED)
----------------------------
On December 31, 2003, the Company sold substantially all of its assets,
subject to certain liabilities, to American Vantage Companies ("AVC"),
a public company. In connection with the purchase, AVC assumed
liabilities of the Company aggregating approximately $1,839,000, and
issued warrants to the Company's shareholders to purchase 1,000,000
shares of AVC common stock, par value $ .01 per share, at an exercise
price of $5 per share expiring on December 31, 2013. The warrants were
valued at $ .75 per warrant.
AMERICAN VANTAGE COMPANIES
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined statements of
operations have been prepared to give effect to the AVM acquisition of Enigma on
December 31, 2003, as if this acquisition had occurred on August 1, 2002. The
following unaudited pro forma condensed combined balance sheet has been prepared
to give effect to the acquisition as if it had occurred on October 31, 2003.
The combining companies have different fiscal year ends for reporting
purposes. AVCS maintained its accounting records on a fiscal basis, ending on
July 31. Enigma maintained its accounting records on a calendar basis, ending on
December 31. As the combining companies' fiscal years differ by more than 93
days, the Enigma unaudited pro forma combined condensed statements of operations
have been recast. The unaudited pro forma combined condensed statements of
operations for the fiscal year ended July 31, 2003 and the three months ended
October 31, 2003 gives effect to the acquisition as if it had occurred on August
1, 2002, combining the AVCS historical consolidated statements of operations for
the fiscal year ended July 31, 2003 and the three months ended October 31, 2003,
respectively, with the Enigma historical statement of operations for the recast
fiscal year and comparable interim period.
The unaudited pro forma condensed combined financial statements should
be read in conjunction with the Company's historical consolidated financial
statements and related notes thereto, "Management's Discussion and Analysis or
Plan of Operation" included in the Company's Annual Report on Form 10-KSB for
the year ended July 31, 2003, the Quarterly Report on Form 10-QSB as of October
31, 2003, and the financial statements and related notes thereto of Enigma for
the calendar year ended December 31, 2002 contained herein.
This pro forma financial information reflects certain assumptions and
estimates deemed probable by management regarding the acquisition based upon the
assets and liabilities acquired. These estimates and assumptions have been made
solely for purposes of developing this pro forma information.
The pro forma adjustments do not reflect any future operating
efficiencies and cost savings that may be achieved with respect to the combined
entity. Unaudited pro forma condensed combined financial information is
presented for information purposes only and is not necessarily indicative of the
results that actually would have been realized had the acquisition been
completed on the date indicated or which may be expected to occur in the future.
AMERICAN VANTAGE COMPANIES
PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF OCTOBER 31, 2003
(unaudited)
Historical Pro Forma
---------------------------------- --------------------------------------
Am Vantage Cos. Enigma
As of October 31, As of October 31, Note
2003 2003 Adjustments Ref. Combined
------------ ------------ ------------ ---- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 8,608,000 $ 5,000 - 8,613,000
Accounts and other receivables 744,000 2,176,000 - 2,920,000
Other
485,000 102,000 (127,000) a 460,000
------------ ------------ ------------ ------------
9,837,000 2,283,000 (127,000) 11,993,000
Land held for development or sale 3,544,000 - - 3,544,000
Film library - 63,000 - 63,000
Investments in unconsolidated investees 1,518,000 - - 1,518,000
Goodwill 2,939,000 - 374,000 b 3,313,000
Deferred income tax 94,000 - - 94,000
Furniture, equipment and other assets 280,000 310,000 (117,000) b 473,000
------------ ------------ ------------ ------------
$ 18,212,000 $ 2,656,000 $ 130,000 $ 20,998,000
============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and
other current liabilities $ 417,000 1,783,000 (589,000) b 1,611,000
Customer deposits 296,000 - - 296,000
Deferred revenue 1,000 319,000 - 320,000
Royalties payable - 56,000 - 56,000
Notes payable - 450,000 (450,000) b -
Film production liabilities 33,000 467,000 - 500,000
------------ ------------ ------------ ------------
747,000 3,075,000 (1,039,000) 2,783,000
------------ ------------ ------------ ------------
Note payable 523,000 - 523,000
------------ ------------ ------------ ------------
Stockholders' equity:
Preferred stock - 2,000 (2,000) c -
Common stock 57,000 1,000 (1,000) c 57,000
Additional paid-in capital 4,963,000 26,039,000 (25,289,000) a,c 5,713,000
Retained earnings 11,922,000 (26,461,000) 26,461,000 c 11,922,000
------------ ------------ ------------ ------------
16,942,000 (419,000) 1,169,000 17,692,000
------------ ------------ ------------ ------------
$ 18,212,000 $ 2,656,000 $ 130,000 $ 20,998,000
============ ============ ============ ============
AMERICAN VANTAGE COMPANIES
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED JULY 31, 2003
(unaudited)
Historical Pro Forma
---------------------------------- --------------------------------------
Am Vantage Cos. Enigma
July 31, July 31, Note
2003 2003 (recast) Adjustments Ref. Combined
------------ ------------ ------------ ---- ------------
Sales and services 576,000 6,287,000 - 6,863,000
Cost of sales and services 337,000 3,984,000 - 4,321,000
------------ ------------ ------------ ------------
Gross profit 239,000 2,303,000 - 2,542,000
General and administrative expenses 2,120,000 4,681,000 (458,000) d 6,343,000
Non-operating income (expense), net 788,000 (5,376,000) 4,000,000 e (588,000)
------------ ------------ ------------ ------------
Loss from continuing operations before
income tax benefit (provision) 1,093,000 7,754,000 (4,458,000) 4,389,000
Income tax benefit (provision) 319,000 (32,000) 1,469,000 f 1,756,000
------------ ------------ ------------ ------------
Net loss $ 774,000 $ 7,786,000 $ (5,927,000) $ 2,633,000
============ ============ ============ ============
Net loss per common share - basic and diluted $ 0.15 $ 0.52
============ ============
Weighted average number of common shares
and common share equivalents 5,106,000 5,106,000
============ ============
AMERICAN VANTAGE COMPANIES
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED OCTOBER 31, 2003
(unaudited)
Historical Pro Forma
---------------------------------- --------------------------------------
Am Vantage Cos. Enigma
October 31, October 31, Note
2003 2003 Adjustments Ref. Combined
------------ ------------ ------------ ---- ------------
Sales and services 528,000 1,664,000 - 2,192,000
Cost of sales and services 197,000 2,015,000 - 2,212,000
------------ ------------ ------------ ------------
Gross profit 331,000 (351,000) - (20,000)
General and administrative expenses 864,000 1,204,000 (114,000) d 1,954,000
Non-operating income (expense), net 887,000 (11,000) - 876,000
------------ ------------ ------------ ------------
Income (loss) from continuing operations before
income tax benefit (provision) 354,000 (1,566,000) 114,000 (1,098,000)
Income tax benefit (provision) (120,000) (21,000) 585,000 f 444,000
------------ ------------ ------------ ------------
Net income (loss) $ 234,000 $ 1,587,000) $ 699,000 $ (654,000)
============ ============ ============ ============
Net income (loss) per common share - basic
and diluted $ 0.04 $ (0.11)
============ ============
Weighted average number of common shares
and common share equivalents 5,691,000 5,691,000
============ ============
AMERICAN VANTAGE COMPANIES
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(unaudited)
The following pro forma adjustments have been reflected in the
unaudited pro forma condensed combined balance sheet and statements of
operations:
(a) The calculation of the purchase price for the assets acquired and
liabilities assumed is presented below -
- Consideration paid in acquiring the Enigma assets, business
and liabilities consisted of the issuance of 1,000,000
warrants (each, a "Warrant") to Enigma. Each Warrant, which we
have valued at $0.75 per Warrant, grants its holder the right
to purchase one share of the Company's common stock, par value
$0.01 per share, at an exercise price of $5.00 per share, at
any time on or before December 31, 2013. The terms of the
Warrants were based on arm's-length negotiations between the
Company and Enigma.
- From costs previously recorded as prepaid
acquisition/investment fees, the Company reclassified $30,000
or approximately 4% of the overall purchase price, as direct
costs of the acquisition. The April 2003 closing of the YaYa
acquisition transaction resulted in the contingent option
previously granted to a director on July 12, 2002 to purchase
up to 175,000 shares of the Company's common stock at $1.41
per share, and the contingent option previously granted to the
Company's outside corporate counsel on July 12, 2002 to
purchase up to 87,500 shares of the Company's common stock at
$1.41 per share, to each become fully exercisable. These
options were granted as compensation for serving on the
Company's special advisory group to the board of directors.
The special advisory group was established on July 12, 2002 to
identify, review and perform initial due diligence services of
potential merger and acquisition candidates on behalf of the
company. Based on the Black-Scholes option pricing model, the
Company initially capitalized approximately $365,000 as
prepaid acquisition/investment fee costs.
- $97,000 of estimated direct acquisition expenses.
(b) Recognition of the purchase cost of $877,000 over the fair value of the
net assets acquired, have been recorded as goodwill as follows -
Book value of net assets $(419,000)
Fair value changes:
Intangibles 29,000
Furniture, equipment and other assets (146,000)
Liabilities not assumed 1,039,000
----------
Adjusted net assets 503,000
Purchase price (877,000)
----------
Goodwill $ 374,000
==========
The above allocation of the purchase price differs from the actual
allocation due to differences in net assets acquired on the date of closing
versus the date of the unaudited pro forma as of October 31, 2003.
AMERICAN VANTAGE COMPANIES
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(unaudited)
(c) To reflect the elimination of the historical stockholders' equity of
Enigma.
(d) To reflect elimination of redundant staffing positions with total
annual and three-month salaries of $508,000 and $127,000, respectively.
These eliminations were offset by annual and three-month salary net
increases totaling $50,000 and $13,000, respectively, to certain
Hypnotic executives.
(e) During 2001, Enigma issued 394,888 shares of its common stock in
exchange for $4,000,000 in non-cash promotional credits. Enigma was not
able to utilize the promotional credits by December 31, 2002, and as a
result, recorded an allowance against the promotional credits. The pro
forma condensed combined financial statements assume that, based on the
estimated fair value, these assets would have had a zero valuation on
the date of acquisition. As such, this adjustment is to reverse the
allowance for the promotional credits.
(f) Assumes a combined federal and state statutory rate of 40.0% for the
year ended July 31, 2003 and the three months ended October 31, 2003.
WELLSPRING MEDIA, INC.
FINANCIAL STATEMENTS
AND SUPPLEMENTAL INFORMATION
DECEMBER 31, 2003 AND 2002
SCHNEIDER, SCHECTER & YOSS, LLP
CERTIFIED PUBLIC ACCOUNTANTS
NEW YORK
SCHNEIDER, SCHECTER & YOSS LLP
- --------------------------------------------------------------------------------
CERTIFIED PUBLIC ACCOUNTANTS 7 PENN PLAZA, SUITE 830 NEW YORK, NY 10001
TEL: (212) 244-1682 FAX: (212) 594-0484
EMAIL: SSYCPA@SSYCPA.COM
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Wellspring Media, Inc.
We have audited the accompanying balance sheets of Wellspring Media, Inc. as of
December 31, 2003 and 2002, and the related statements of operations and
retained earnings, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Wellspring Media, Inc. as of
December 31, 2003 and 2002 and the results of its operations and its cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States of America.
/s/ Schneider, Schecter & Yoss LLP
- ----------------------------------
New York, NY
January 30, 2004
WELLSPRING MEDIA, INC.
BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
ASSETS
2003 2002
----------- -----------
Current Assets:
Cash $ 483,349 $ 250,950
Accounts receivable 3,903,636 3,935,157
Inventories 1,337,853 2,646,166
Prepaid expenses and other current assets 644,914 431,913
----------- -----------
Total Current Assets 6,369,752 7,264,186
----------- -----------
Property and Equipment 310,539 300,363
----------- -----------
Other Assets:
Programming rights library 10,496,548 9,122,390
Accounts receivable long-term portion 707,933 191,591
Investments 126,996 126,996
Security deposits 37,567 37,567
----------- -----------
Total Other Assets 11,369,044 9,478,544
----------- -----------
TOTAL ASSETS $18,049,335 $17,043,093
=========== ===========
See the accompanying notes to these financial statements.
WELLSPRING MEDIA, INC.
BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
LIABILITIES AND STOCKHOLDERS' EQUITY
2003 2002
----------- -----------
Current Liabilities:
Note payable, bank $ 2,798,988 $ 1,293,988
Note payable, vendor 109,919 137,597
Accounts payable 4,459,676 4,475,345
Accrued expenses 255,913 200,025
Deferred revenue 440,019 112,296
Notes payable, stockholders 500,000 500,000
----------- -----------
Total Current Liabilities 8,564,515 6,719,251
----------- -----------
Long Term Liabilities:
Note payable, vendor 0 109,756
----------- -----------
Total Long Term Liabilities 0 109,756
----------- -----------
Total Liabilities 8,564,515 6,829,007
----------- -----------
Stockholders' Equity:
Capital stock, no par value, 200 shares
authorized, issued and outstanding 1,000 1,000
Retailed earnings 9,483,820 10,213,086
----------- -----------
Total Stockholders' Equity 9,484,820 10,214,086
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $18,049,335 $17,043,093
=========== ===========
See the accompanying notes to these financial statements.
WELLSPRING MEDIA, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
DECEMBER 31, 2003 AND 2002
2003 2002
------------ ------------
Sales $ 21,108,599 $ 21,878,303
Cost of Goods Sold 12,055,593 11,360,333
------------ ------------
Gross Profit 9,053,006 10,517,970
------------ ------------
Operating Expenses
Selling 4,740,943 4,970,595
General and administrative 5,018,527 5,431,009
------------ ------------
Total Operating Expenses 9,759,470 10,401,604
------------ ------------
Net income (loss) before provision for income taxes (706,464) 116,366
Provision for income taxes 22,802 9,815
------------ ------------
Net Income (Loss) (729,266) 106,551
Retained earnings - beginning of the period 10,213,086 10,106,535
------------ ------------
Retained earnings - end of the period $ 9,483,820 $ 10,213,086
============ ============
See the accompanying notes to these financial statements.
WELLSPRING MEDIA, INC.
STATEMENTS OF CASH FLOWS
DECEMBER 31, 2003 AND 2002
2003 2002
----------- -----------
Cash Flows From Operating Activities:
Net Income (Loss) $ (729,266) $ 106,551
Adjustments to reconcile net income (loss)
to net cash provided by operations:
Depreciation 84,718 51,485
Amortization of programming rights library 4,708,679 4,938,414
(Increase) Decrease in:
Accounts receivable (484,821) 1,932,915
Inventories 1,308,313 937,142
Prepaid expenses and other current assets (213,001) (182,520)
Security deposits 0 4,000
Increase (Decrease in):
Accounts payable and accrued expenses 40,219 (1,035,552)
Deferred revenue 327,723 19,896
----------- -----------
Net Cash Provided by Operating Activities 5,042,564 6,772,331
----------- -----------
Cash Flows From Investing Activities:
Additions to programming rights library (6,082,837) (7,861,211)
Purchase of property and equipment (94,894) (139,829)
Investment in corporate stock 0 (50,000)
----------- -----------
Net Cash (Used by) Investing Activities (6,177,731) (8,051,040)
----------- -----------
Cash Flows From Financing Activities:
Due to factor 0 (306,070)
Principal paymens, vendor (137,434) (96,647)
Net proceeds from bank borrowings 1,505,000 1,293,988
----------- -----------
Ne Cash Provided by Financing Activities 1,367,566 891,271
----------- -----------
Increase/(Decrease) in Cash 232,399 (387,438)
Cash - Beginning of Year 250,950 638,388
----------- -----------
Cash - End of Year $ 483,349 $ 250,950
=========== ===========
Supplemental Cash Flow Information
Cash payments for interest expense $ 283,929 $ 131,406
Cash payments for income taxes $ 12,802 $ 9,815
See the accompanying notes to these financial statements.
WELLSPRING MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
--------------------------
NOTE 1 NATURE OF ORGANIZATION
Wellspring Media, Inc. (the "Company") produces, licenses and
distributes programming for the worldwide home video, television,
theatrical, online and consumer markets. The Company's library consists
of over 600 titles including classic American independent and foreign
language films, information on holistic living and various
documentaries.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Revenue Recognition - The Company recognizes revenue from licensing
agreements from films and television programs when the licensee can
begin its exploitation of the license, when the license period has
begun and when the fee is fixed or determinable. Revenue from sales
of video tapes and DVDs are recognized on the accrual basis.
b) Inventory - Inventory is stated at the lower of cost or market
using the first in - first out (FIFO) method. Inventory consists
primarily of finished goods.
c) Property and Equipment - Property and equipment are carried at
cost. Depreciation is provided for, by using the straight-line
method over the useful lives of the respective assets.
d) Programming Rights Library - The Company's programming rights
library is recorded at the lower of cost or market less accumulated
amortization. Amortization is calculated using the individual-film-
forcast computation method. This method amortizes programming
rights costs based upon current revenue over total estimated
revenue that is expected to be recognized on each program.
e) Income Taxes - The Company has available as of December 31, 2003,
unused federal net operating loss carry forwards of approximately
$12,700,000. The use of this loss carry forward is subject to
limitation each year of approximately $50,000 as prescribed in the
Internal Revenue Code. The current year provision is for various
state and local taxes primarily based upon capital.
f) Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amount of income and expenses
during the reporting period. Actual results could differ from those
estimates.
WELLSPRING MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
NOTE 3 ACCOUNTS RECEIVABLE
Accounts receivable of $4,611,569 and $4,126,748 as of December
31, 2003 and 2002 consists of the following:
2003 2002
---- ----
Accounts receivable $ 5,309,683 $ 4,979,170
Allowance for sales returns (373,192) (538,504)
Allowance for doubtful accounts (324,922) (313,918)
----------- -----------
4,611,569 4,126,748
Less Long-term Portion 707,933 191,591
----------- -----------
Current Portion $ 3,903,636 $ 3,935,157
=========== ===========
NOTE 4 PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
2003 2002
---- ----
Software and office equipment costs $ 451,043 $ 355,442
Less accumulated depreciation 140,504 55,079
--------- ---------
$ 310,539 $ 300,363
========= =========
NOTE 5 INVESTMENTS
The Company's investments are recorded at cost which approximates
market value. As of December 31, 2003 and 2002 investments are as
follows:
2003 2003
---- ----
Investments in Classics JV $ 76,996 $ 76,996
5000 shares Hidden Treasures Inc. 50,000 50,000
--------- ---------
Total Investments $ 126,996 $ 126,996
========= =========
WELLSPRING MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
NOTE 6 NOTE PAYABLE, BANK
The Company has a Revolving Line of Credit arrangement (the
"Agreement") with the Atlantic Bank of New York, ("Atlantic")
which expires on May 1, 2004. The agreement allows the Company to
borrow up to $4,500,000 with interest to be charged at a rate of
2.75% above Atlantic's prime lending rate. The loan is secured by
substantially all of the Company's assets and the limited personal
guarantee of the Company's principal shareholders. As of December 31,
2003 and 2002, the Companys outstanding balance due Atlantic totaled
$2,798,988 and $1,293,988 respectively.
The agreement also requires the Company to maintain various financial
covenants. One of those covenants requires the Company to maintain a
minimum tangible net worth ("net worth") of $9,750,000 at December 31,
2003. The Company's net worth however was $9,484,820. Management's
opinion however, is that Atlantic will waive this requirement.
NOTE 7 FACTORING AGREEMENT
The Company had a factoring agreement with Prestige Capital Corporation
("Prestige") which was terminated in June 2002 after Prestige was paid
in full. The agreement allowed the Company to factor their receivables
with recourse for a fee ranging from 3%-9% as defined in the agreement.
The fee was reduced by 1% in March 2002. In addition, Prestige also
advanced the Company $1,000,000 for the purpose of acquiring Winstar TV
and Video. Factor fee expense totaled $243,454 for the year ended
December 31, 2002.
NOTE 8 NOTE PAYABLE, VENDOR
On November 30, 2001, the Company converted a trade accounts payable
for $334,000 due Media Productions International into a promissory
note. Interest is charged at ten (10%) percent per annum and is payable
on a monthly basis. Monthly principal payments in the amount of $11,467
began in July 2002. The note is secured by accounts receivable and the
programming rights library, subordinated to Atlantic's security
interest. As of December 31, 2003 and 2002, the Company's outstanding
balance was $109,919 and $247,353. A final payment is due on December
1, 2004 when all principal and accrued interest is due.
WELLSPRING MEDIA, INC,
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
NOTE 9 DEFERRED REVENUE
Deferred revenue represents license revenue that has been received or
is receivable primarily before the applicable revenue recognition
periods begin. Deferred revenue at December 31, 2003 and 2002 was
$440,019 and $112,296 respectively.
NOTE 10 NOTES PAYABLE TO STOCKHOLDERS
As of December 31, 2003 and 2002, the Company has $500,000 in
subordinated notes payable to its two principal stockholders. These
notes are subordinated to the repayment of any outstanding balance due
Atlantic. Payments of interest only are due quarterly. Interest is
charged at a rate of 10% per annum. The Company charged $50,000 of
interest expense against operations on these notes for the years ended
December 31, 2003 and 2002.
NOTE 11 OPERATING LEASE
The Company leases two (2) floors for office space in New York, New
York. This lease is classified as an operating lease which expires on
June 30, 2008.
Future minimum lease payments under this lease as of December 31, 2003
are as follows:
Year ending December 31,
------------------------
2004 $ 393,900
2005 393,900
2006 393,900
2007 393,900
Thereafter 196,950
-----------
$ 1,772,550
===========
NOTE 12 EMPLOYMENT CONTRACTS
The Company had an employment agreement with a stockholder of the
Company which expired July 3, 2003. The agreement called for an annual
salary of $180,000. Currently the stockholder is being paid $15,000 on
a month to month basis.
WELLSPRING MEDIA, INC,
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
NOTE 12 EMPLOYMENT CONTRACTS (CONTINUED)
The Company had a consulting agreement with Regulus International
Capital Corp. ("Regulus") which is wholly owned by an officer of the
Company. The agreement called for $180,000 of consulting fees to be
paid to Regulus per annum, paid in monthly installments. The agreement
expired on October 10, 2003. Regulus is currently being paid $15,000 on
a monthly basis.
NOTE 13 EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) Plan for eligible employees. The
Company's contributions to the plan are discretionary. The Company made
no contributions to the plan for the years ended December 31,
2003 and 2002.
NOTE 14 MAJOR CUSTOMERS
Six customers accounted for approximately 27% and 31% of the Company's
sales for the years ended December 31, 2003 and 2002 respectively.
NOTE 15 CONTINGENCY
On July 19, 2001, the Company entered into an agreement to merge with
Winstar TV & Video for a purchase price ranging from $2,000,000 and up
to $5,000,000. $2,000,000 was paid by the Company at closing. The
remaining amount up to $3,000,000 would be due based upon a working
capital computation as defined in the merger agreement. This
computation calculated and determined that no additional amount was
due. Winstar TV & Video has disputed this calculation. The Company
anticipates being able to settle the dispute and vigorously defend any
action in the event that a settlement is not reached.
NOTE 16 LITIGATION
The Company is involved in various legal actions and claims arising in
the normal course of business. After taking into consideration legal
counsel's evaluation of such actions, management is of the opinion that
their outcome will not have a significant effect on the company's
financial statement.
WELLSPRING MEDIA, INC,
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
NOTE 17 RECLASSIFICATION
Certain liabilities for the year ended December 31, 2002 have been
reclassified to deferred revenue to conform to the current year's
presentation.
NOTE 18 SUBSEQUENT EVENT
During January 2004, the Company's stockholders are in negotiations to
sell the Company to a publicly traded entity.
SCHNEIDER, SCHECTER & YOSS LLP
- --------------------------------------------------------------------------------
CERTIFIED PUBLIC ACCOUNTANTS 7 PENN PLAZA, SUITE 830 NEW YORK, NY 10001
TEL: (212) 244-1682 FAX: (212) 594-0484
EMAIL:SSYCPA@SSYCPA.COM
INDEPENDENT AUDITOR'S REPORT
ON ADDITIONAL INFORMATION
To the Board of Directors and Stockholders of
Wellspring Media Inc.
Our report on our audits of the basic financial statements of Wellspring Media
Inc. for 2003 and 2002 appears on page one. These audits were made for the
purpose of forming an opinion on the basic financial statements taken as a
whole. The supplementary information is presented for purposes of additional
analysis and is not a required part of the basic financial statements. Such
information has been subjected to the auditing procedures applied in the audits
of the basic financial statements and, in our opinion, is fairly stated in all
material respects in relation to the basic financial statements taken as a
whole.
/s/ Schneider, Schecter & Yoss LLP
- ----------------------------------
New York, NY
January 30, 2004
WELLSPRING MEDIA, INC.
SUPPLEMENTARY INFORMATION
SCHEDULES OF COST OF GOODS SOLD AND SELLING EXPENSES
DECEMBER 31, 2003 AND 2002
Cost of Goods Sold:
2003 2002
------------ ------------
Inventories - beginning of period $2,646,166 $3,583,308
Purchases 2,515,781 2,199,185
Amortization of programming rights library 4,432,158 4,938,414
Duplications, sleeves and printing 1,658,999 1,427,653
Fulfillment 1,335,258 1,098,020
Mastering costs and sundry 495,763 481,737
Freight 309,321 278,182
----------- -----------
13,393,446 14,006,499
Less inventories - end of period 1,337,853 2,646,166
----------- -----------
Total Cost of Goods Sold $12,055,593 $11,360,333
=========== ===========
Selling Expenses:
Catalog postage, printing and artwork $1,911,996 $1,821,017
Packaging and design 181,347 185,887
Mailing lists 288,619 219,053
Advertising 442,970 724,964
Marketing and general 408,261 451,256
Travel and entertainment 239,016 318,675
Promotional mailings 108,799 310,698
Commissions and selling salaries 961,170 730,959
Trade shows 198,765 208,086
----------- -----------
Total Selling Expenses $4,740,943 $4,970,595
=========== ===========
See independent auditor's report on supplementary information.
WELLSPRING MEDIA, INC.
SUPPLEMENTARY INFORMATION
SCHEDULES OF GENERAL AND ADMINISTRATIVE EXPENSES
DECEMBER 31,2003 AND 2002
2003 2002
------------ ------------
Payroll $2,319,473 2,524,606
Payroll tax expense 269,665 239,689
Medical insurance and other employee benefits 266,484 241,610
Outside services 118,219 238,164
Office supplies and expense 113,043 137,154
Shipping and postage 96,202 150,771
Telephone 113,520 132,311
Web sites 102,933 66,560
Insurance 95,874 106,143
Rent and utilities 560,466 519,678
Professional 115,232 55,104
Travel and entertainment 81,794 111,894
Consulting 192,025 292,830
Bad debt expense 184,000 159,326
Interest and bank charges 304,879 160,230
Factor fees 0 243,454
Depreciation 84,718 51,485
----------- -----------
Total General and Administrative Expenses $5,018,527 $5,431,009
=========== ===========
See independent auditor's report on supplementary information.
(c) Exhibits
Number Exhibit -
2.1 Asset Purchase Agreement, dated as of December 31, 2003, among American
Vantage Companies, American Vantage Media Corporation and Enigma Media,
Inc. *
4.1 Warrant Certificate No. A-1 - 200,000 Common Stock Purchase Warrants,
dated December 31, 2003. *
4.2 Warrant Certificate No. A-2 - 800,000 Common Stock Purchase Warrants,
dated December 31, 2003. *
99.1 Press Release, dated and disseminated on January 8, 2004. *
- -----------------
* Filed with Current Report on Form 8-K (Date of Report: December 31,
2003).
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
AMERICAN VANTAGE COMPANIES
Date: March 15, 2004 By: /s/ Anna M. Morrison
------------------------
Anna M. Morrison,
Chief Accounting Officer