UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
(Amendment No. 1)
[X] Quarterly Report under Section 13 of 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended April 30, 2003
[ ] Transition Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from ____________ to _____________
Commission file number 0-10061
AMERICAN VANTAGE COMPANIES
--------------------------
(Exact name of small business issuer as specified in its charter)
Nevada 04-2709807
------ -----------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
7674 West Lake Mead Blvd., Suite 108, Las Vegas, Nevada,89128
-------------------------------------------------------------
(Address of principal executive offices)
(702) 227-9800
--------------
Issuer's telephone number
Not applicable
--------------
(Former name, former address and former fiscal year,
if changed since last report)
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: The number of shares outstanding of
the issuer's Common Stock at June 13, 2003 was 5,690,667.
Transitional Small Business Disclosure Format: [ ] YES [X] NO
EXPLANATORY NOTE
This Quarterly Report on Form 10-QSB/A of American Vantage Companies (the
"Company") for the three months ended April 30, 2003, contains amendments to the
original Quarterly Report on Form 10-QSB filed on June 13, 2003 (the "Original
Form 10-QSB") to reflect a restatement of the financial statements and related
notes for the applicable three and nine months ended April 30, 2003 included in
the Original Form 10-QSB in order to correct the accounting for the Company's
49% minority interest in its unconsolidated investee, that owns and operates a
restaurant in a casino hotel located on the Las Vegas Strip (the "Border
Grill"). The restatement affects the Company's reported non-operating income,
but has no effect on reported cash distributions from the Border Grill. In
connection with the restatement, changes have been made to (i) Part I -
Financial Information - Item 1. - Condensed Consolidated Financial Statements,
(ii) Part I - Financial Information - Item 2. - Management's Discussion and
Analysis of Financial Position and Results of Operations, and (iii) Item 3.
Controls and Procedures. This Form 10-QSB/A sets forth all information and
disclosures required to be included in the Original Form 10-QSB, as so amended
to reflect such restatement. This Form 10-QSB/A is effective for all purposes as
of the date of the filing of the Original Form 10-QSB.
TABLE OF CONTENTS
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of April 30, 2003 (unaudited --)
as restated) and July 31, 2002 4
Condensed Consolidated Statements of Operations for the Three and Nine Months
Ended April 30, 2003 (as restated) and 2002 (unaudited) 5
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended April 30, 2003 and 2002 (unaudited) 6
Notes to Condensed Consolidated Financial Statements for the Three and Nine
Months Ended April 30, 2003 and 2002 (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Position and Results of Operation 12
Item 3. Controls and Procedures 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 20
CERTIFICATIONS 21
EXHIBIT INDEX
EX-2.1
EX-10.1
EX-31.1
EX-31.2
EX-32.2
EX-99.3
3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN VANTAGE COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
APRIL 30, 2003 (unaudited) AND JULY 31, 2002
April 30, July 31,
2003 2002
------------- ---------------
ASSETS Restated-
see Note 6
Current assets:
Cash and cash equivalents $ 6,181,000 $ 1,560,000
U.S. treasury securities 2,876,000 7,785,000
Accounts receivable 731,000 --
Refundable income taxes 147,000 1,448,000
Other 348,000 63,000
------------- ---------------
10,283,000 10,856,000
Land held for development or sale 3,544,000 3,544,000
Investments in unconsolidated investees 1,495,000 1,615,000
Goodwill 2,880,000 --
Furniture, equipment and other assets, net 317,000 9,000
------------- ---------------
$ 18,519,000 $ 16,024,000
============= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other current liabilities $ 534,000 $ 50,000
Customer deposits 308,000 --
Deferred income tax 95,000 139,000
------------- ---------------
937,000 189,000
Note payable 523,000 --
------------- ---------------
Stockholders' equity:
Preferred stock, $.01 par; 10,000,000 shares authorized;
0 shares issued and outstanding
Common stock, $.01 par; 10,000,000 shares authorized; 5,690,667 and
4,865,856 shares issued and outstanding at April 30, 2003 and July 31,
2002, respectively 57,000 49,000
Additional paid-in capital 4,909,000 3,324,000
Retained earnings 12,093,000 12,462,000
------------- ---------------
17,059,000 15,835,000
------------- ---------------
$ 18,519,000 16,024,000
============= ===============
See notes to condensed consolidated financial statements
4
AMERICAN VANTAGE COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED APRIL 30, 2003 AND 2002 (unaudited)
Three Months Ended Nine Months Ended
--------------------------------------- ---------------------------------------
April 30, April 30, April 30, April 30,
2003 2002 2003 2002
---------------- ---------------- --------------------- ---------------
Restated - Restated -
see Note 6 see Note 6
Sales and services $ 113,000 $ -- $ 113,000 $ --
Cost of sales and services 55,000 55,000 --
---------------- ---------------- --------------------- ---------------
Gross profit 58,000 -- 58,000 --
---------------- ---------------- --------------------- ---------------
Costs and expenses
General and administrative 335,000 1,045,000 747,000 2,066,000
General and administrative -
related parties 40,000 38,000 264,000 139,000
---------------- ---------------- --------------------- ---------------
375,000 1,083,000 1,011,000 2,205,000
Non-operating income
Interest, net 34,000 47,000 105,000 212,000
---------------- ---------------- --------------------- ---------------
Loss from continuing operations before
income tax benefit (283,000) (1,036,000) (848,000) (1,993,000)
Income tax benefit 55,000 655,000 189,000 655,000
Equity in income of unconsolidated
investees, net 120,000 137,000 290,000 198,000
---------------- ---------------- --------------------- ---------------
Net loss $ (108,000) $ (244,000) $ (369,000) $ (1,140,000)
================ ================ ===================== ===============
Net loss per common share -
basic and diluted $ (0.02) $ (0.05) $ (0.08) $ (0.23)
================ ================ ===================== ===============
Weighted average number of common
shares and common share equivalents 5,005,000 4,866,000 4,911,000 4,866,000
================ ================ ===================== ===============
See notes to consolidated financial statements
5
AMERICAN VANTAGE COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED APRIL 30, 2003 AND 2002 (unaudited)
2003 2002
------------ ------------
Operating activities
Net cash provided by (used in) operating activities $ 603,000 $ (814,000)
------------ ------------
Investing activities
Purchase of furniture and equipment (23,000) --
Net proceeds from redemption of U.S. treasury bills, at
maturity 4,909,000 --
Advances to YaYa, LLC (1,110,000) --
Direct acquisition costs, YaYa, LLC (207,000) --
Capitalization of YaYa Media, Inc. (1,000) --
Cash distribution from unconsolidated restaurant subsidiary 450,000 400,000
------------ ------------
Net cash provided by investing activities 4,018,000 400,000
------------ ------------
Net increase (decrease) in cash and cash equivalents 4,621,000 (414,000)
Cash and cash equivalents, at beginning of period 1,560,000 11,565,000
------------ ------------
Cash and cash equivalents, at end of period $ 6,181,000 $ 11,151,000
============ ============
See notes to condensed consolidated financial statements
6
AMERICAN VANTAGE COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED APRIL 30, 2003 AND 2002 (unaudited)
Note 1 - Nature of operations and summary of significant accounting policies
Business activities. As discussed in Note 2, on April 16, 2003,
American Vantage Companies (the "Parent") acquired substantially all of the
assets and business and certain of the liabilities of YaYa, LLC ("YaYa"). YaYa
is an "end-to-end" interactive solutions provider, specializing in the creation
and provision of advertiser-driven interactive games and marketing solutions. In
addition to advertising applications, YaYa creates internet games for its
clients to be utilized in employee-training programs and for internal
communications solutions. YaYa Media, Inc. is a wholly-owned subsidiary of the
Parent, formed specifically to acquire the YaYa assets, business and liabilities
purchased and to continue YaYa's business and operations.
Interim financial information. The consolidated financial statements
include the accounts of the Parent and all of its controlled subsidiaries
(collectively, the "Company") from the date of their acquisition or creation.
All intercompany accounts and transactions have been eliminated. The financial
information for the three and nine months ended April 30, 2003 and 2002 is
unaudited but includes all adjustments (consisting only of normal recurring
adjustments) that the Company considers necessary for a fair presentation of the
financial position at such dates and the operating results and cash flows for
those periods. Certain information and note disclosures normally included in
annual financial statements prepared in accordance with accounting principles
generally accepted in the United States have been condensed or omitted as
permitted by the Securities and Exchange Commission under Item 310(b) of
Regulation S-B. However, management believes the disclosures made are adequate
for a fair presentation to ensure that the interim period financial statements
are not misleading.
The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the fiscal year.
These condensed interim consolidated financial statements should be read in
conjunction with the audited consolidated financial statements (and notes
thereto) for the year ended July 31, 2002, which are included in the Company's
Form 10-KSB for the year then ended and from which the July 31, 2002 balance
sheet information is derived, and the Form 8-K (Date of Report: April 16, 2003)
concerning the acquisition of substantially all of the assets and business and
certain liabilities of YaYa.
Certain amounts as previously reported for the three and nine months
ended April 30, 2002 have been reclassified to conform to the current
presentation.
Revenue recognition. Licensing revenues from long-term contracts that
include producing licensed custom software applications are generally recognized
using the percentage-of-completion method, except when collectability is not
reasonably assured in which case profit is realized using the installment
method. The percentage of completion is determined based upon labor hours
expended compared to total expected development hours. Development hours
associated with the production of the core software is included in the
measurement of the contract's progress toward completion as the software is
customized. Hours contemporaneously expended for routine enhancements of the
core software, however, are excluded from the calculation. Revenue from less
significant or short-term arrangements to develop software modifications
typically for recurring customers are generally recognized when the services are
complete.
Advisory service fees are recognized based on contract milestones as
time is incurred. Licensing fee revenue is recognized ratably over the term of
the license except that they are recognized immediately when the Company has no
further services to provide to the licensee. Technical service fees are
recognized ratably over the term of the contract.
Concentrations. As the Company's wholly owned subsidiary, YaYa Media,
Inc. generates substantial revenue from relatively few contracts with certain
companies, a decline in the size or number of these arrangements could adversely
affect future operations.
7
AMERICAN VANTAGE COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED APRIL 30, 2003 AND 2002 (unaudited)
Note 2 - YaYa, LLC asset purchase
Consideration paid in acquiring the YaYa assets, business and
liabilities consisted of 824,811 shares of the Company's common stock and the
assumption of liabilities totaling approximately $2,500,000, including loans
aggregating $1,110,000 in principal amount made by the Company to YaYa in
December 2002 and March 2003. The 824,811 shares of Company common stock were
valued at $1.41 per share based on the closing price of the Company's common
stock on April 16, 2003.
The following table summarizes the allocated estimated fair value of
YaYa's assets and liabilities at April 16, 2003 and calculates the resulting
goodwill balance. Certain estimated working capital adjustments are still being
assessed by management.
Purchase price:
Issuance of 824,811 shares of the Company's common stock (note 4) $ 1,163,000
Pre-acquisition advances to YaYa, LLC, including $26,000 in accrued
interest receivable 1,136,000
Cash capitalization of YaYa Media, Inc. (100% interest) 1,000
--------------
Total purchase price 2,300,000
Acquisition direct costs:
Issuance of common stock options as investment banking fee (note 4) 100,000
Legal, accounting and other miscellaneous direct acquisition costs 207,000
--------------
Total costs 2,607,000
--------------
Fair value of YaYa's assets and liabilities:
Assets
Furniture and equipment 207,000
Investments and other assets (including $64,000 in identifiable
intangibles) 131,000
Current assets (including $818,000 in accounts receivable) 836,000
--------------
1,174,000
--------------
Liabilities
Note payable to YaYa, LLC members 523,000
Current liabilities 924,000
--------------
1,447,000
--------------
Fair value of identifiable net liabilities assumed (273,000)
--------------
Goodwill (costs plus fair value of net liabilities assumed) $ 2,880,000
==============
The results of the operations of YaYa Media, Inc., combined on a pro
forma basis with the operating results of the Company for the nine months ended
April 30, 2003 and 2002 as if the companies had been combined at August 1, 2001,
are not presented as the acquisition is not material.
8
AMERICAN VANTAGE COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED APRIL 30, 2003 AND 2002 (unaudited)
Note 3 - Investments in unconsolidated investees
The Company, through a wholly owned subsidiary, holds a 49% minority
interest in an unconsolidated investee (the "Restaurant Investee") that owns and
operates a restaurant in a casino hotel located on the Las Vegas Strip. The
Company has no day-to-day management responsibilities in connection with the
Restaurant Investee and the Restaurant Investee's operations. In accordance with
U.S. GAAP, the Company excludes the accounts of the Restaurant Investee in
reporting its operating results and instead records its investment using the
equity method of accounting as adjusted to reflect certain contractual
adjustments until the Restaurant Investee attains sustained profitability. The
Company has restated the income from the Restaurant Investee (See Note 6 -
Restatement of previously issued financial statements). Income from the
Restaurant Investee, as restated, for the three and nine months ended April 30,
2003 was $125,000 and $295,000, respectively.
The following summarizes the condensed balance sheet at April 30, 2003
and the statement of operations for the nine months ended April 30, 2003
(unaudited) of the Investee:
Assets $1,875,000
Liabilities 357,000
----------
Members' capital $1,518,000
==========
Revenues $3,719,000
Expenses 3,351,000
----------
Income from operations $ 368,000
==========
In addition, as a result of the YaYa asset acquisition, the Company,
through YaYa Media, Inc., obtained a 50% non-controlling interest in an
unconsolidated investee that has entered into an in-substance joint venture
arrangement to create a promotional event called a video game touring festival.
The Company has no capital requirement in connection with this joint venture and
is not obligated to provide future financing of the activities. If after good
faith efforts by the members, there are insufficient corporate sponsors to cover
all costs and expenses of staging the initial event, the joint venture shall
dissolve and liquidate, unless the members agree to the contrary.
Note 4 - Stockholders' equity
Pursuant to the April 16, 2003 asset acquisition agreement among YaYa,
YaYa Media, Inc. and the Company, the Company issued to YaYa 824,811 shares of
the Company's common stock valued at $1.41 per share, based on the closing price
of the Company's common stock on April 16, 2003.
The Agreement provides for the Company's right to repurchase the
824,811 shares of common stock issued to YaYa as the acquisition consideration.
This right is exercisable in the Company's sole discretion if YaYa Media fails
to produce net income (determined without giving effect to any interest charges
on the Company's prior loans to YaYa) for the period commencing on April 16,
2003 and terminating on April 30, 2004. The right is exercisable at the purchase
price of $1.40 per share and is exercisable in whole or in part.
9
AMERICAN VANTAGE COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED APRIL 30, 2003 AND 2002 (unaudited)
YaYa and the Company also entered into a Voting Agreement, dated as of
April 16, 2003. This agreement provides that YaYa will vote all of the shares of
the Company's common stock that it owns, including the 824,811 shares YaYa
acquired in the acquisition transaction, as directed by the Company's board of
directors, except in connection with any (a) tender offer by a party other than
YaYa or an affiliate of YaYa, (b) transaction which is subject to Rule 13e-3
promulgated under the Securities Exchange Act of 1934, as amended, or (c) merger
involving the Company where, as a result of such merger, the then stockholders
of the Company would, upon consummation of such merger, own less than 50% of the
total voting power of the entity surviving such merger. The agreement further
provides that it is terminable on the later of: (x) the day following the 20th
consecutive trading day where the closing price of the Company's common stock
exceeds $7.50 per share or (y) April 16, 2010.
The closing of the acquisition transaction also resulted in the 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 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. The options have a ten year exercise term
and a exercise price equal to the closing price of the common stock on July 12,
2002. 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 YaYa acquisition, the Company reclassified $100,000 or
approximately 4% of the overall purchase price of these capitalized prepaid
acquisition/investment fee costs as direct costs of the acquisition.
On October 25, 2002, the Company granted to certain directors
non-qualified stock options to purchase 65,000 shares of the Company's common
stock at an exercise price of $1.26 per share. The options were granted as
compensation for serving on the Company's Board or as a Board Committee Chair.
Based on the Black-Scholes option pricing model, the Company recorded
compensation expense, included in general and administrative as directors fees
expense, totaling $65,000 for these stock options.
Note 5 - Contingencies and subsequent events
Litigation. In connection with the premature termination of the
Company's contracts to provide consulting services to an Indian gaming
enterprise, the Company brought a civil action against the Table Mountain Tribe
(the "Tribe"). The lawsuit seeks to recover payments totaling $3,150,000 due
under one of the agreements and $790,000 under another. The Company also seeks
interest, court costs and additional unspecified and to-be-determined consulting
fees that would have been due during the remainder of the consulting contract
term.
In October 2002, the Company was successful in its appeal, and the
California Superior Court of Appeals reversed a California Superior Court order
dismissing the case for lack of jurisdiction. The California Supreme Court
subsequently denied the Tribe's petition to review that appellate decision. In
May 2003, the Tribe filed a Writ of Certiorari with the United States Supreme
Court, who will decide in the next few months whether or not to hear the Tribe's
appeal.
In April 2003, the Tribe filed a motion to dismiss the case based on
its assertion that its contracts with the Company were not properly authorized
by Tribal authorities, and thereby did not constitute a valid waiver of the
Tribe's sovereign immunity to suit. In May 2003, the California Superior Court
determined that the Company was entitled to discovery on the sovereign immunity
issue, and after such discovery, the California Superior Court would conduct
further proceedings on the sovereign immunity issue in August 2003.
10
AMERICAN VANTAGE COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED APRIL 30, 2003 AND 2002 (unaudited)
If the California Superior Court determines that the Tribe has waived
its sovereign immunity, and allows the case to further proceed on the merits,
the Tribe may re-file a counterclaim that was previously dismissed. The
counterclaim asserted that the contracts were invalid and sought restitution of
fees previously paid the Company relating to the contract.
Since the Company is unable to determine its losses, if any, should the
Tribe's counterclaim be successful, no accounting recognition has been given to
these matters in the accompanying financial statements.
Note 6 - Restatement of previously issued financial statements
Subsequent to the original issuance of the Company's condensed
consolidated financial statements for the three and nine months ended April 30,
2003, the Company determined that its income from the Restaurant Investee had
been recorded incorrectly. Prior to the restatement, the Company had recognized
100% of the initial losses from the Restaurant Investee's operations and its
subsequent income through June 30, 2004. The restatement recognizes that the
Restaurant Investee attained sustained profitability in February 2003, from
which point the Company has restated income from the Restaurant Investee based
on its 49% interest, subject to adjustments for any unpaid initial capital
contributions and priority return. As of July 1, 2004, all of the initial losses
were offset and its initial capital contributions and priority return were paid,
resulting in recognition of 49% of future income or losses from the Restaurant
Investee's operations prospectively. This restatement has no effect on the
Company's reported cash flows. The principal effects of the restatement on the
periods restated herein are summarized in the following table:
As Originally
Reported As Restated
-------------- --------------
For the three months ended April 30, 2003:
Equity in income from unconsolidated investees, net $ 193,000 $ 120,000
Income tax benefit $ 37,000 $ 55,000
Net loss $ (53,000) $ (108,000)
For the nine months ended April 30, 2003:
Equity in income from unconsolidated investees, net $ 363,000 $ 290,000
Income tax benefit $ 171,000 $ 189,000
Net loss $ (314,000) $ (369,000)
At April 30, 2003:
Investment in unconsolidated investees $ 1,568,000 $ 1,495,000
Total assets $ 18,592,000 $ 18,519,000
Deferred income tax $ 113,000 $ 95,000
Retained earnings $ 12,148,000 $ 12,093,000
11
Item 2. Management's Discussion and Analysis of Financial Position and Results
of Operation
The following discussion and analysis should be read in conjunction
with the explanatory note and condensed consolidated financial statements and
notes included elsewhere in this report.
Statement on Forward-Looking Statements
In addition to historical information, this report contains certain
forward-looking statements. Such statements include those concerning American
Vantage Companies and its controlled subsidiaries (collectively, the "Company")
expected financial performance and its strategic and operational plans, as well
as all assumptions, expectations, predictions, intentions or beliefs about
future events. Although management believes that its expectations are based on
reasonable assumptions, there can be no assurance that the Company's financial
goals or expectations will be realized. Such forward-looking statements involve
known and unknown risks, uncertainties and other factors that may cause the
actual results, performance, or achievements of the Company, or industry
results, to be materially different from future results, performance, or
achievements expressed or implied by such forward-looking statements. Numerous
factors may affect the Company's actual results and may cause results to differ
materially from those expressed in forward-looking statements made by or on
behalf of the Company. These risks and uncertainties include, but are not
limited to, those relating to dependence on existing management and federal and
state regulation of the restaurant industry, any unforeseen change in the
markets for advertising applications or computer and internet "gaming", domestic
and global economic conditions and changes in federal and state tax laws or the
administration of such laws. The Company assumes no obligation to update or
revise any such forward-looking statements or the factors listed below to
reflect events or circumstances that may arise after this report is filed, and
that may have an effect on the Company's overall performance.
Results of Operations
For the Three and Nine Months Ended April 30, 2003, Compared With the Three and
Nine Months Ended April 30, 2002
Sales and services. On April 16, 2003, the Company acquired
substantially all of the assets and business and certain of the liabilities of
YaYa, LLC ("YaYa"). YaYa is an "end-to-end" interactive solutions provider,
specializing in the creation and provision of advertiser-driven interactive
games and marketing solutions. In addition to advertising applications, YaYa
creates internet games for its clients to be utilized in employee-training
programs and for internal communications solutions. YaYa Media, Inc. is a
wholly-owned subsidiary of the Company which was formed specifically to assume
the YaYa assets, business and liabilities and to continue YaYa's business and
operations. YaYa generates revenue from relatively few contracts with certain
Fortune 1000 companies. The results of operations for YaYa Media, Inc. from
April 16, through April 30, 2003, are included in the following discussions.
Costs and expenses. General and administrative expenses decreased
$708,000 or 65.4% for the three months ended April 30, 2003 from those expenses
in 2002, and decreased $1,193,000 or 54.1% for the nine months ended April 30,
2003 from those expenses in 2002 primarily due to the fiscal year 2002 corporate
restructuring program to downsize and minimize corporate overhead.
During the three and nine months ended April 30, 2003, the Company
incurred payroll and payroll-related costs totaling $180,000 and $308,000,
respectively, as compared to $331,000 and $928,000 for the same respective
periods ended April 30, 2002. Although fiscal year 2003 payroll costs decreased
overall due to the fiscal year 2002 restructuring program, this decrease was
offset by the April 2003 hiring of the Company's Chief Accounting Officer and
$66,000 relating to YaYa Media, Inc. general and administrative expenses.
The decrease in payroll and payroll-related costs for the period ended
April 30, 2003 were also partially offset by increased accounting fees. Under
the direction of the Chief Executive Officer, during August 2002 to April 2003,
the Company outsourced its internal accounting and financial reporting functions
resulting in $15,000 and $63,000 of accounting fees expense for the three and
nine month periods, excluding amounts paid to its independent auditor.
12
Consulting fees for the three and nine months ended April 30, 2002
totaled $2,000 and $62,000, respectively as compared to $234,000 and $284,000
for the same respective periods ended April 30, 2002. The 2002 consulting fees
were principally paid to investment advisors for due diligence relating to
potential acquisition candidates.
Legal fees decreased $256,000 and $350,000 for the three and nine
months ended April 30, 2003 as compared to the same respective periods ended
April 30, 2002. The 2002 legal expenses were primarily related to legal fees,
due diligence and other related services rendered in connection with the
Company's ongoing merger and acquisition efforts. Legal fees for the three and
nine months ended April 30, 2003 totaled $73,000 and $198,000, respectively, and
primarily related to monthly retainers for general SEC and corporate matters,
and the Tribe litigation.
Rental expense for the three and nine months ended April 30, 2002
totaled $28,000 and $84,000, respectively. During May 2002, the Company
terminated its month-to-month lease for its former executive offices. The
Company does not pay a monthly rent for its current executive offices nor is
there an agreement between the parties for any future monthly rental. The fair
value of the Company's current arrangement is not material. However, the Company
is now seeking new executive office space that will result in rental expense
charges being incurred. YaYa's executive office, located in Los Angeles,
California and its satellite sales office in New York City incur monthly rental
charges of $11,000 and $3,000, respectively.
On October 25, 2002, the Company granted to Jeanne Hood, Steven G.
Barringer and Stephen K. Bannon, non-qualified stock options to purchase 20,000,
20,000 and 25,000, respectively, of the Company's common stock shares at an
exercise price of $1.26 per share. The options were granted as compensation for
serving on the Company's Board or as a Board Committee Chair. Based on the
Black-Scholes option pricing model, the Company recorded compensation expense,
included in general and administrative-related parties as directors fees
expense, totaling $65,000 for these stock options.
Equity in income of unconsolidated investees, net. The Company, through a
wholly owned subsidiary, holds a 49% minority interest in an unconsolidated
investee (the "Restaurant Investee") that owns and operates a restaurant in a
casino hotel located on the Las Vegas Strip. The Company has no day-to-day
management responsibilities in connection with the Restaurant Investee and the
Restaurant Investee's operations. In accordance with U.S. GAAP, the Company
excludes the accounts of the Restaurant Investee in reporting its operating
results and instead records its investment using the equity method of accounting
as adjusted to reflect certain contractual provisions contained in the operating
agreement for the Restaurant Investee with respect to recognition of profits and
losses by the members of the Restaurant Investee. These provisions required the
Company to recognize profits to the initial extent of an amount equal to 100% of
the initial losses the Company recognized in prior periods and then recognize an
accumulated 5% priority return on the unpaid portion of the Company's initial
investment of $2,750,000 until paid, which the Company believes to have occurred
in the quarter ended April 30, 2003.
Income from the Company's Restaurant Investee, for the three and nine
months ended April 30, 2003 totaled $125,000 and $295,000, respectively, as
compared to $137,000 and $198,000, respectively, for the comparable 2002
periods. Future reported income from the Company's Restaurant Investee may
fluctuate as it is subject to seasonality factors, occupancy rates and
convention usage at the hotel at which the restaurant is located and other
factors that may affect tourism in the Las Vegas metropolitan area, and may
differ from cash distributions discussed in the Liquidity and Capital Resources
section.
Critical accounting policies and estimates
Principals of consolidation. The Company, through a wholly owned
subsidiary, has a 49% minority interest in an unconsolidated investee that owns
and operates a restaurant in a casino hotel located on the Las Vegas Strip. The
Company is involved in long-term strategic planning, but has no day-to-day
management responsibilities in connection with the Investee and the Investee's
operations. Subsequent to the issuance of the Company's consolidated financial
statements for the three and six months ended April 30, 2003, the Company
determined that the non-operating income from its unconsolidated subsidiary, the
Border Grill Restaurant had been recorded incorrectly. Prior to June 30, 2004,
the Company recorded its investment using the equity method of accounting
subject to certain contractual adjustments until the Border Grill Restaurant
attained sustained profitability. The effect of the adjustments is that, through
June 30, 2004, the Company recognized 100% of the Border Grill Restaurant's
income and losses and had received 100% of its capital contribution and priority
return. The restatement adjustment recognizes that the Border Grill Restaurant
attained sustained profitability at February, 2003. This restatement has no
effect on the Company's reported cash flows.
13
Revenue recognition. Licensing revenues from long-term contracts that
include producing licensed custom software applications are generally recognized
using the percentage-of-completion method, except when collectability is not
reasonably assured in which case profit is realized using the installment
method. The percentage of completion is determined based upon labor hours
expended compared to total expected development hours. Development hours
associated with the production of the core software is included in the
measurement of the contract's progress toward completion as the software is
customized. Hours contemporaneously expended for routine enhancements of the
core software, however, are excluded from the calculation. Revenue from less
significant or short-term arrangements to develop software modifications
typically for recurring customers are generally recognized when the services are
complete.
Advisory service fees are recognized based on contract milestones as
time is incurred. Licensing fee revenue is recognized ratably over the term of
the license except that they are recognized immediately when the Company has no
further services to provide to the licensee. Technical service fees are
recognized ratably over the term of the contract.
Significant related party transactions
Non-employee directors received $20,000 and $60,000, for the three and
nine months ended April 30, 2003, respectively, for serving on the Board of
Directors of the Company. In addition to a quarterly director's fee, a director
was also paid $0 and $60,000 for consulting services provided during the three
and nine months ended April 30, 2003, respectively.
The closing of the YaYa acquisition resulted in the options previously
granted to Stephen K. Bannon on July 12, 2002, to purchase up to 175,000 shares
of the Company's common stock at $1.41 per share and the option previously
granted to Jay H. Brown 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. Mr.
Bannon is the Vice-Chairman of the board of directors and Mr. Brown is outside
corporate counsel and the beneficial owner of more than 5% of the Company's
common stock.
These options were granted as compensation for future and past
services while 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. The options have a ten-year
exercise term and a exercise price equal to the closing price of the common
stock on July 12, 2002. 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 YaYa acquisition, the
Company reclassified $100,000 or approximately 4% of the overall purchase price
of these capitalized prepaid acquisition/investment fee costs as direct costs of
the acquisition.
As compensation for serving on the Company's board or as a board
committee chair, on October 25, 2002, the Company granted to Jeanne Hood, Steven
G. Barringer and Stephen K. Bannon, non-qualified stock options to purchase
20,000, 20,000 and 25,000 shares, respectively, of the Company's common stock
each at an exercise price of $1.26 per share. Based on the Black-Scholes option
pricing model, the Company recorded compensation expense, included in general
and administrative-related parties, totaling $65,000 in connection with granting
these stock options.
In addition to the options granted to attorney Jay H. Brown for his
services on the Company's special advisory group, as consideration for legal and
consulting services, the Company also paid him approximately $15,000 and $74,000
during the three and nine months ended April 30, 2003, respectively.
14
Liquidity and Capital Resources
A portion of the consideration paid in acquiring YaYa assets, business
and liabilities included loans aggregating $1,110,000 in principal amount made
by the Company to YaYa in December 2002 and March 2003. Cash outflows for direct
acquisition costs related to legal, accounting and other costs totaled
approximately $207,000. The Company funded the loans and direct acquisition
costs of the Company's acquisition of YaYa from its existing working capital
resources. Principal and interest payments on the long-term debt assumed in the
YaYa acquisition may only be paid from available cash resources generated from
YaYa Media, Inc. revenues after settlement of YaYa Media, Inc.'s other current
liabilities and operating expenses.
The Company intends to continue funding its operating costs and merger
and acquisition activities from its existing working capital resources, which
are substantially in excess of its perceived current needs. However, it is
possible that future merger and acquisition opportunities may require additional
capital resources. Historically, the Company has provided for such requirements
with financing from financial institutions and the sale of equity securities.
The Company will continue to consider such alternatives, if additional capital
is required.
Prior to fiscal year end July 31, 2002, the Company's board of
directors determined that it was in the Company's best interests to downsize and
minimize corporate overhead. As a result of such a determination, a corporate
restructuring program was implemented which resulted in the termination of all
employees (except the President and Chief Executive Officer) in an effort to
lower ongoing salaries and general and administrative expenses. Until April
2003, internal accounting and financial reporting functions were outsourced but
remained under the direction of the President and Chief Executive Officer. On
April 16, 2003, the Company hired a Chief Accounting Officer to manage these
functions.
During the three and nine months ended April 30, 2003 the Company has
received capital distributions from its unconsolidated restaurant Investee
totaling $150,000 and $450,000, respectively.
Recurring operating costs primarily for payroll and payroll-related
costs, legal retainers, accounting fees, directors' fees and insurance decrease
the Company's working capital. Interest income and capital distributions from
its investment in the unconsolidated restaurant should partially offset this
effect. However, the operating agreement for the unconsolidated restaurant does
not provide for guaranteed capital distributions. Therefore, future
distributions from the Investee may not occur, even if the Investee is
profitable.
Impact of Inflation
The Company believes that inflation has not had a material impact on
its operations.
Factors That May Affect Future Results
The Company's board of directors organized a "special advisory group"
to seek, review and advise the board on merger and acquisition candidates. The
success of the Company is dependent on its ability to identify and consummate
one or more mergers or acquisitions within its core strategy to expand into
areas of interest in the gaming, entertainment, media and lifestyle industries.
At April 30, 2003, YaYa Media, Inc. incurred an operating loss of
$46,000. To mitigate these losses, YaYa Media, Inc. decreased its
pre-acquisition staffing levels and reduced certain other operating expenses.
However, there is no assurance that, combined with an anticipated expansion of
YaYa Media, Inc.'s existing product and service lines and customer base, these
efforts will result in future profitable operations and positive cash flows.
Risks of terror attacks including the effects of a war are likely to
have far-reaching effects on economic activity in the United States for an
indeterminate period. And as such, the long-term impact on the Company's
business and merger and acquisition activities from future terrorist acts cannot
be predicted at this time but could be substantial.
15
Qualitative and Quantitative Disclosures About Market and Interest Rate Risk
The Company is exposed to minimal market risks as its investment policy
allows only short-term, high-rated securities. The Company does not hold or
issue derivatives, derivative commodity instruments or other financial
instruments, for trading purposes. At April 30, 2003, the Company's cash and
cash equivalents and U.S. treasury securities approximate their fair values due
to the short-term nature of these instruments.
During the next 12 months, the Company does not anticipate entering
into financing arrangements which would expose it to interest rate risk.
16
Item 3. Controls and Procedures
The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in its Exchange Act
reports is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to management, to allow timely decisions regarding required
disclosure based closely on the definition of "disclosure controls and
procedures" in Rule 13a-14(c). In designing and evaluating the disclosure
controls and procedures, management recognizes that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives, and management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.
An evaluation was performed, as of April 30, 2003, under the
supervision and with the participation of our management, including our
President, Chief Executive Officer and Acting Chief Financial Officer and our
Chief Accounting Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures. Based on such evaluation, our management
has concluded that the Company's disclosure controls and procedures were not
effective as of April 30, 2003 for the reasons described below.
As is described elsewhere in this Quarterly Report on Form 10-QSB/A,
the Company has determined that the non-operating income from the Restaurant
Investee originally had been recorded incorrectly. The correction of the error
resulted in the restatement of the Company's consolidated financial statements
contained in the Annual Report on Form 10-KSB for the fiscal year ended July 31,
2003, and Quarterly Reports on Form 10-QSB for the quarters and transitional
period ended April 30, 2003, October 31, 2003, December 31, 2003, March 31,
2004, June 30, 2004 and September 30, 2004.
After evaluating the nature of the deficiency and the resulting
restatement, the Company's management concluded that a material weakness existed
in the Company's internal control over financial reporting at April 30, 2003.
During the third quarter of fiscal 2003, there were no significant
changes in the Company's internal control over financial reporting that
materially affected or were reasonably likely to materially affect internal
control over financial reporting.
The Company's management, along with the Audit Committee of the
Company's Board of Directors, has reviewed the process employed in determining
the recording and reporting of complex and unusual accounting matters. As a
result of this review, the Company has adopted a policy of retaining, if
necessary, the services of a qualified certified public accountant or
specialist, other than the Company's independent auditor, to assist the Company
with respect to, the reporting of transactions that involve complex and unusual
accounting matters.
The Company's management has evaluated this matter relative to its
current and prior internal control environment and disclosure controls and
procedures. It has concluded that the material weakness that led to this error
not being detected timely has been mitigated as of December 31, 2004 as a result
of the additional controls that were placed into effect as of that date, which
enabled the Company to detect the need for the restatement.
17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Part I "Note 5 - Contingencies and subsequent events" of the Notes
to Condensed Consolidated Financial Statements for current information
concerning material litigation involving the Company.
Item 2. Changes in Securities
In connection with the Company's acquisition of the assets and
liabilities of YaYa, LLC, the Company issued to YaYa, LLC 824,811 shares of the
Company's common stock. These securities were issued in a transaction the
Company believes was exempt from the registration requirements of the Securities
Act of 1933 pursuant to the provisions of Section 4(2) of the Securities Act.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2.1 Asset Purchase Agreement, dated as of April 16, 2003, among YaYa,
LLC, American Vantage Companies and YaYa Media, Inc. (1)
10.1 Voting Agreement, dated as of April 16, 2003, among YaYa, LLC
and American Vantage Companies. (1)
31.1 Certification of Ronald J. Tassinari pursuant to Exchange Act
Rule 13a-14(a) **
31.2 Certification of Anna M. Morrison pursuant to Exchange Act
Rule 13a-14(a) **
32.1 Certification of Ronald J. Tassinari pursuant to 18 U.S.C.
Section 1350 **
32.2 Certification of Anna M. Morrison pursuant to 18 U.S.C.
Section 1350 **
99.3 Press Release, dated and disseminated on April 16, 2003 (1)
- -------------------
** Filed herewith.
(1) Incorporated by reference from the Company's Current Report on Form 8-K
filed on April 16, 2003.
18
(b) Reports on Form 8-K.
On April 16, 2003, the Company filed a Current Report on Form 8-K under
Item 2 reporting the Company's acquisition of substantially all of the assets
and business and certain of the liabilities of YaYa, LLC.
19
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AMERICAN VANTAGE COMPANIES
Dated: May 3, 2005 By: /s/ Ronald J. Tassinari
-------------------------------------
Ronald J. Tassinari,
President and Chief Executive Officer
Dated: May 3, 2005 By: /s/ Anna M. Morrison
-------------------------------------
Anna M. Morrison
Chief Accounting Officer
20