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): February 3, 2004
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 February 18, 2004, American Vantage Companies (the "Company" or
"AVCS") filed a Current Report on Form 8-K (Date of Report: February 3, 2004) to
report an acquisition under Item 2. In such Form 8-K, the Company indicated that
it would file financial statements and pro forma information required under Item
7 of Form 8-K no later than April 19, 2004. This amendment is filed to provide
the required financial information.
On February 3, 2004, American Vantage Media Corporation, a Nevada
corporation ("AVM"), a wholly-owned subsidiary of AVCS, acquired all of the
capital stock of Wellspring Media, Inc. ("Wellspring") pursuant to a Stock
Purchase Agreement, dated as of February 3, 2004, by and among AVM, Wellspring
and Al Cattabiani, Carl Seldin Koerner, Clara Spalter Miller and Lee Miller, the
holders of all outstanding shares of Wellspring capital stock. The aggregate
purchase price for the shares of Wellspring capital stock was $8,000,000, of
which $4,000,000 was paid in cash and $4,000,000 will be paid pursuant to AVM's
secured negotiable notes and a secured non-negotiable note. The notes bear
interest at 7% per annum, payable quarterly, and mature on February 3, 2006. The
notes are guaranteed by Wellspring and are secured by a junior lien on all of
the assets of Wellspring and a pledge of Wellspring's capital stock by AVM. The
liens are subordinate to the rights of Atlantic Bank of New York, Wellspring's
principal lender. The source of the funds used in the acquisition was the
Company's cash reserves.
Wellspring is a leading distributor of world cinema and wellness
programming, with a film library consisting of more than 1,000 titles. AVM
intends to continue to operate Wellspring as an indirect wholly-owned
subsidiary.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial statements of business acquired.
The audited financial statements of Wellspring as of and for the years
ended December 31, 2003 and 2002.
(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
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.
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
Wellspring on February 3, 2004, 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.
In addition, the following unaudited pro forma condensed combined
statements of operations have been prepared to give effect to the AVM
acquisition of Enigma Media, Inc. ("Enigma") on December 31, 2003, as if the
Enigma acquisition had occurred on August 1, 2002. See Amendment No. 1 to the
Current Report on Form 8-K/A (Date of Report: December 31, 2003), filed with the
Securities and Exchange Commission on January 15, 2004. 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. AVM will continue
Enigma's business and operations through a wholly-owned subsidiary, American
Vantage Media/Hypnotic, Inc., under the trade name "Hypnotic".
The above combining companies have different fiscal year ends for
reporting purposes. AVCS maintained its accounting records on a fiscal basis,
ending on July 31. Wellspring and 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 Wellspring and 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
respective Wellspring and 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, the Report on Form 8-K for February 3, 2004 and the Report on Form 8-K
for December 31, 2003, the financial statements and related notes thereto of
Wellspring, for the calendar years ended December 31, 2003 and 2002,
respectively, 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
-----------------------------------------------------------------------
AM VANTAGE ENIGMA WELLSPRING
AS OF OCTOBER 31, AS OF OCTOBER 31, AS OF OCTOBER 31,
2003 2003 2003
----------------------- ------------------------ --------------------
ASSETS
Current assets:
Cash and cash equivalents $ 8,608,000 $ 5,000 $ 116,000
Accounts and other receivables 744,000 2,176,000 3,567,000
Inventories - - 1,514,000
Other 485,000 102,000 616,000
----------------------- ------------------------ --------------------
9,837,000 2,283,000 5,813,000
Land held for development or sale 3,544,000 - -
Film library - 63,000 11,911,000
Investments in unconsolidated investees 1,518,000 - -
Goodwill 2,939,000 - -
Deferred income tax 94,000 -
Furniture, equipment and other assets 280,000 310,000 481,000
----------------------- ------------------------ --------------------
$ 18,212,000 $ 2,656,000 $ 18,205,000
----------------------- ------------------------ --------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other current
liabilities $ 417,000 1,783,000 5,642,000
Line of credit - 2,449,000
Customer deposits 296,000 - -
Deferred revenue 1,000 319,000 -
Royalties payable - 56,000 -
Notes payable - 450,000 -
Film production liabilities 33,000 467,000 -
----------------------- ------------------------ --------------------
747,000 3,075,000 8,091,000
----------------------- ------------------------ --------------------
Long-term debt 523,000 - 936,000
----------------------- ------------------------ --------------------
Stockholders' equity:
Preferred stock - 2,000
Common stock 57,000 1,000 1,000
Additional paid-in capital 4,963,000 26,039,000 -
Retained earnings 11,922,000 -26,461,000 9,177,000
----------------------- ------------------------ --------------------
16,942,000 -419,000 9,178,000
----------------------- ------------------------ --------------------
$ 18,212,000 $ 2,656,000 $ 18,205,000
======================= ======================== ====================
PRO FORMA
------------------------------------------------------
NOTE
ADJUSTMENTS REF. COMBINED
----------------------- ------- --------------------
ASSETS
Current assets:
Cash and cash equivalents -4,000,000 a 4,729,000
Accounts and other receivables - 6,487,000
Inventories - 1,514,000
Other -462,000 a,c 741,000
----------------------- --------------------
-4,462,000 13,471,000
Land held for development or sale 3,544,000
Film library -1,280,000 b 10,694,000
Investments in unconsolidated investees - 1,518,000
Goodwill 374,000 d 3,313,000
Deferred income tax - 94,000
Furniture, equipment and other assets -180,000 b,d 891,000
----------------------- --------------------
($5,548,000) $33,525,000
----------------------- --------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other current
liabilities -589,000 b 7,253,000
Line of credit - 2,449,000
Customer deposits - 296,000
Deferred revenue - 320,000
Royalties payable - 56,000
Notes payable -450,000 b -
Film production liabilities - 500,000
----------------------- --------------------
-1,039,000 10,874,000
----------------------- --------------------
Long-term debt 3,500,000 a 4,959,000
Stockholders' equity:
Preferred stock -2,000 e -
Common stock -2,000 e 57,000
Additional paid-in capital -25,289,000 c,e 5,713,000
Retained earnings 17,284,000 e 11,922,000
----------------------- --------------------
-8,009,000 17,692,000
----------------------- --------------------
($5,548,000) $33,525,000
======================= ====================
AMERICAN VANTAGE COMPANIES
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED JULY 31, 2003
(UNAUDITED)
HISTORICAL
-----------------------------------------------------------------------
AM VANTAGE ENIGMA WELLSPRING
JULY 31, JULY 31, JULY 31,
2003 2003 (RECAST) 2003 (RECAST)
----------------------- ------------------------ --------------------
SALES AND SERVICES 576,000 6,287,000 21,079,000
COST OF SALES AND SERVICES 337,000 3,984,000 12,128,000
----------------------- ------------------------ --------------------
GROSS PROFIT 239,000 2,303,000 8,951,000
GENERAL AND ADMINISTRATIVE EXPENSES 2,120,000 4,681,000 9,723,000
NON-OPERATING INCOME (EXPENSE), NET 788,000 -5,376,000 -209,000
----------------------- ------------------------ --------------------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME
TAX BENEFIT (PROVISION) 1,093,000 7,754,000 981,000
INCOME TAX BENEFIT (PROVISION) 319,000 -32,000
----------------------- ------------------------ --------------------
NET LOSS $ 774,000 $ 7,786,000 $ 981,000
======================= ======================== ====================
NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ 0.15
=======================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
AND COMMON SHARE EQUIVALENTS $ 5,106,000
=======================
PRO FORMA
------------------------------------------------------
NOTE
ADJUSTMENTS REF. COMBINED
----------------------- ------- --------------------
SALES AND SERVICES - 27,942,000
COST OF SALES AND SERVICES - 16,449,000
----------------------- --------------------
GROSS PROFIT - 11,493,000
GENERAL AND ADMINISTRATIVE EXPENSES -438,000 f 16,086,000
NON-OPERATING INCOME (EXPENSE), NET 3,770,000 g,i -1,027,000
----------------------- --------------------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME
TAX BENEFIT (PROVISION) -4,208,000 5,620,000
INCOME TAX BENEFIT (PROVISION) 1,961,000 h 2,248,000
----------------------- --------------------
NET LOSS ($6,169,000) $ 3,372,000
----------------------- ====================
NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ 0.66
====================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
AND COMMON SHARE EQUIVALENTS $ 5,106,000
====================
AMERICAN VANTAGE COMPANIES
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED OCTOBER 31, 2003
(UNAUDITED)
HISTORICAL
-----------------------------------------------------------------------
AM VANTAGE ENIGMA WELLSPRING
AS OF OCTOBER 31, AS OF OCTOBER 31, AS OF OCTOBER 31,
2003 2003 2003
----------------------- ------------------------ --------------------
Sales and services 528,000 1,664,000 4,807,000
Cost of sales and services 197,000 2,015,000 2,757,000
----------------------- ------------------------ --------------------
Gross profit 331,000 -351,000 2,050,000
General and administrative expenses 864,000 1,204,000 2,391,000
Non-operating income (expense), net 354,000 -1,566,000 -405,000
Income (loss) from continuing operations
before income tax benefit (provision) 887,000 -11,000 -64,000
----------------------- ------------------------ --------------------
Income tax benefit (provision) -120,000 -21,000 -
----------------------- ------------------------ --------------------
Net income (loss) $ 234,000 ($1,587,000) ($405,000)
======================= ======================== ====================
Net income (loss) per common share - basic
and diluted $0.04
=======================
Weighted average number of common shares
and common share equivalents $ 5,691,000
=======================
PRO FORMA
------------------------------------------------------
NOTE
ADJUSTMENTS REF. COMBINED
----------------------- ------- --------------------
Sales and services - 6,999,000
Cost of sales and services - 4,969,000
----------------------- --------------------
Gross profit - 2,030,000
General and administrative expenses -114,000 f 4,345,000
Non-operating income (expense), net -58,000 i 754,000
----------------------- --------------------
Income (loss) from continuing operations
before income tax benefit (provision) 56,000 -1,561,000
Income tax benefit (provision) 770,000 h 629,000
----------------------- --------------------
Net income (loss) $ 826,000 ($932,000)
======================= ====================
Net income (loss) per common share - basic
and diluted ($0.16) ($0.16)
======================= ====================
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 Wellspring assets
acquired and liabilities assumed is presented below -
o The aggregate purchase price for all the capital stock of Wellspring
was $8,000,000, of which $4,000,000 was paid in cash and $4,000,000
will be paid pursuant to AVM's secured negotiable notes and a
secured non-negotiable note.
o From costs previously recorded as prepaid acquisition/investment
fees the Company reclassified $235,000 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.
o $100,000 of estimated direct acquisition expenses.
(b) The allocation of the purchase cost of $8,335,000 over the fair value
of the net assets acquired (including unassumed liabilities totaling
$1,039,000) resulted in the allocation of `negative goodwill' totaling
$1,280,000 and $64,000 to the film library and fixed assets,
respectively.
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.
(c) The calculation of the purchase price for the Enigma assets acquired
and liabilities assumed is presented below -
o 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.
AMERICAN VANTAGE COMPANIES
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
o 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.
As a result of the Enigma transaction, the Company reclassified
$30,000 or approximately 4% of the overall purchase price, as direct
costs of the acquisition.
o $97,000 of estimated direct acquisition expenses.
(d) Recognition of the Enigma 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.
(e) To reflect the elimination of the historical stockholders' equity of
Wellspring and Enigma.
(f) 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
increases totaling $70,000 and $18,000, respectively, to certain
Wellspring and Hypnotic executives.
(g) 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.
AMERICAN VANTAGE COMPANIES
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
(h) 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.
(i) To reflect interest expense that would result from the issuance of
$4,000,000 in notes payable at the date of the Wellspring acquisition.
The notes bear interest at 7% per annum with interest-only payments due
quarterly. The computed interest expense for the year ended July 31,
2003 and the three months ended October 31, 2003 of $280,000 and
$70,000, respectively, was reduced due to the repayment of $500,000 in
stockholder notes payable at the date of the Wellspring acquisition.
The stockholder notes payable bear interest at 10% per annum.
(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. **
10.1 Stock Purchase Agreement, dated as of February 3, 2004, by and among Al
Cattabiani, Carl Seldin Koerner, Clara Spalter Miller and Lee Miller,
Wellspring Media, Inc. and American Vantage Media Corporation. **
10.2 Secured Negotiable Note, dated February 3, 2004, in the principal amount
of $1,076,704 issued to Al Cattabiani. **
10.3 Secured Negotiable Note, dated February 3, 2004, in the principal amount
of $65,472 issued to Carl Seldin Koerner. **
10.4 Secured Negotiable Note, dated February 3, 2004, in the principal amount
of $965,712 issued to Clara Spalter Miller. **
10.5 Secured Negotiable Note, dated February 3, 2004, in the principal amount
of $965,712 issued to Lee Miller. **
10.6 Secured Non-Negotiable Note, dated February 3, 2004, in the principal
amount of $200,000 issued to Al Cattabiani. *
10.7 Guaranty, dated February 3, 2004, by Wellspring Media, Inc. **
10.8 Security Agreement, dated February 3, 2004, by Wellspring Media, Inc. in
favor of Lee Miller as security agent. **
10.9 Stock Pledge Agreement, dated February 3, 2004, from American Vantage
Media Corporation to Lee Miller as pledge agent. **
23.1 Consent of Independent Public Accountants. *
99.1 Press Release, dated and disseminated on February 4, 2004. **
99.2 Press Release, dated and disseminated on January 8, 2004. **
- ------------------------
* Filed herewith.
** Filed with Current Report on Form 8-K (Date of Report: February 3, 2004).
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