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 JUNE 30, 2004
|_| Transition Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
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.)
4735 S. Durango Dr., Suite #105, Las Vegas, Nevada, 89147
---------------------------------------------------------
(Address of principal executive offices)
(702) 227-9800
(Issuer's telephone number)
Former fiscal year: ______________________
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES |X| NO |_|
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 August 12, 2004 was 5,704,107.
Transitional Small Business Disclosure Format: YES |_| NO |X|
EXPLANATORY NOTE
This Quarterly Report on Form 10-QSB/A of American Vantage Companies (the
"Company") for the three months ended June 30, 2004, contains amendments to the
original Quarterly Report on Form 10-QSB filed on August 12, 2004 (the Original
Form 10-QSB") to reflect a restatement of the financial statements and related
notes for the applicable three and six months ended June 30, 2004 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 equity in income of
unconsolidated investees, net, 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. - Financial Statements,
(ii) Part I - Financial Information - Item 2. - Management's Discussion and
Analysis or Plan of Operation, 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.
2
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2004
(as restated) and December 31, 2003 (unaudited) 4
Condensed Consolidated Statements of Operations for the Three and
Six Months Ended June 30, 2004 (as restated) and 2003
(unaudited) 5
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2004 and 2003 (unaudited) 6
Notes to Condensed Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis or Plan of Operation 15
Item 3. Controls and Procedures 24
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in Securities 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURES 27
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN VANTAGE COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2004 AND DECEMBER 31, 2003 (UNAUDITED)
JUNE 30, DECEMBER 31,
2004 2003
------------ ------------
Restated -
see Note 10
ASSETS
Current assets:
Cash and cash equivalents $ 4,741,000 $ 8,628,000
Certificate of deposit 2,500,000 --
Accounts and other receivables, net 4,556,000 1,435,000
Inventories 1,248,000 --
Other 430,000 494,000
------------ ------------
13,475,000 10,557,000
Film inventory, net 11,757,000 660,000
Land held for development or sale -- 3,544,000
Investments in unconsolidated investees 817,000 1,070,000
Goodwill 3,512,000 3,608,000
Furniture, equipment and other assets, net 2,132,000 1,131,000
------------ ------------
$ 31,693,000 $ 20,570,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other current liabilities $ 7,501,000 $ 1,694,000
Lines of credit 2,381,000 --
Other payables 517,000 517,000
Deferred revenue 163,000 606,000
------------ ------------
10,562,000 2,817,000
------------ ------------
Notes payable 4,523,000 523,000
------------ ------------
Stockholders' equity:
Preferred stock, $.01 par; 10,000,000 shares authorized;
0 shares issued and outstanding -- --
Common stock, $.01 par; 100,000,000 shares authorized;
5,704,107 and 5,690,667 shares issued and outstanding,
respectively 57,000 57,000
Additional paid-in capital 5,713,000 5,713,000
Retained earnings 10,838,000 11,460,000
------------ ------------
16,608,000 17,230,000
------------ ------------
$ 31,693,000 $ 20,570,000
============ ============
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
AMERICAN VANTAGE COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- --------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Restated Restated Restated Restated
see Note 10 see Note 10 see Note 10 see Note 10
REVENUES
Home video and direct
response sales $ 3,205,000 $ -- $ 5,862,000 $ --
Other sales and services
1,622,000 466,000 2,833,000 466,000
----------- ----------- ----------- -----------
4,827,000 466,000 8,695,000 466,000
COST OF SALES AND SERVICES
Home video and direct
response sales 1,629,000 -- 3,112,000 --
Other sales and services 1,601,000 193,000 2,229,000 193,000
----------- ----------- ----------- -----------
3,230,000 193,000 5,341,000 193,000
----------- ----------- ----------- -----------
GROSS PROFIT 1,597,000 273,000 3,354,000 273,000
----------- ----------- ----------- -----------
SELLING, GENERAL AND
ADMINISTRATIVE
Other
4,409,000 791,000 7,780,000 1,035,000
Related parties 110,000 60,000 187,000 90,000
----------- ----------- ----------- -----------
4,519,000 851,000 7,967,000 1,125,000
----------- ----------- ----------- -----------
OPERATING LOSS (2,922,000) (578,000) (4,613,000) (852,000)
----------- ----------- ----------- -----------
NON-OPERATING INCOME (EXPENSE)
Interest and other (expense)
income, net (75,000) 9,000 (160,000) 52,000
Gain on sale of land -- -- 3,423,000 --
----------- ----------- ----------- -----------
(75,000) 9,000 3,263,000 52,000
----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAX BENEFIT (2,997,000) (569,000) (1,350,000) (800,000)
INCOME TAX BENEFIT (951,000) (98,000) (321,000) (208,000)
EQUITY IN INCOME OF
UNCONSOLIDATED INVESTEES, NET 201,000 141,000 407,000 318,000
----------- ----------- ----------- -----------
NET LOSS $(1,845,000) $ (330,000) $ (622,000) $ (274,000)
=========== =========== =========== ===========
NET LOSS PER COMMON SHARE -
BASIC AND DILUTED $ (0.32) $ (0.06) $ (0.11) $ (0.05)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
AND COMMON SHARE EQUIVALENTS 5,704,000 5,555,000 5,700,000 5,212,000
=========== =========== =========== ===========
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
AMERICAN VANTAGE COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED)
SIX MONTHS ENDED
--------------------------
JUNE 30, JUNE 30,
2004 2003
----------- -----------
OPERATING ACTIVITIES
Net cash (used in) provided by operating activities $(4,052,000) $ 292,000
----------- -----------
INVESTING ACTIVITIES
Purchase of furniture and equipment, net (131,000) (26,000)
Proceeds from sale of land 7,007,000 --
Cash paid for acquisitions, including other direct costs (4,179,000) (207,000)
Advances to YaYa, LLC -- (110,000)
Capitalization of YaYa Media, Inc. -- (1,000)
Proceeds from U.S. treasury bills, at maturity -- 4,707,000
Purchase of standby letter of credit (350,000) --
Purchase of certificate of deposit (2,500,000) --
Cash distribution from unconsolidated restaurant investee 737,000 400,000
----------- -----------
Net cash provided by investing activities 584,000 4,763,000
----------- -----------
FINANCING ACTIVITIES
Net payments on line of credit (419,000) (118,000)
----------- -----------
Net cash used in financing activities (419,000) (118,000)
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (3,887,000) 4,937,000
CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD 8,628,000 3,442,000
----------- -----------
CASH AND CASH EQUIVALENTS, AT END OF PERIOD $ 4,741,000 $ 8,379,000
=========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Cash paid during the period for interest $ 116,000 $ --
Fair value of assets and liabilities acquired
Current assets, other than cash 6,142,000 836,000
Film inventory 9,035,000 --
Other long-term assets 435,000 337,000
Liabilities assumed 7,262,000 1,462,000
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6
AMERICAN VANTAGE COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CHANGE IN FISCAL YEAR END. On February 2, 2004, the Board of Directors of
American Vantage Companies ("AVCS") approved a change in the Company's fiscal
year ending July 31, subject to Internal Revenue Service ("IRS") approval. The
IRS approved the change in fiscal year on April 12, 2004. The new fiscal year
begins on January 1 and ends on December 31 of each year, effective with the
year ending December 31, 2004.
INTERIM FINANCIAL INFORMATION. These condensed consolidated financial
statements include the accounts of AVCS 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 as of December 31, 2003 and June 30, 2004 and for the three and six
months ended June 30, 2004 and 2003 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 of the Company as of
such dates and the operating results and cash flows of the Company 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 ("U.S. GAAP") have been condensed or omitted as
permitted by the Securities and Exchange Commission under Item 310(b) of
Regulation S-B. However, the Company believes the disclosures made are adequate
for a fair presentation to ensure that the interim period financial statements
are not misleading.
The Company's results of operations for the interim periods are not
necessarily indicative of the results of operations to be expected for the
entire fiscal year. These condensed consolidated interim financial statements
should be read in conjunction with the audited consolidated financial statements
(and notes thereto) for the year ended July 31, 2003, which are included in the
Company's Form 10-KSB/A for the year then ended, as well as the financial and
other information contained in the Company's Form 10-QSB/A for the two and five
months transition period ended December 31, 2003 resulting from the change in
fiscal year end, Form 10-QSB/A for the three months ended March 31, 2004,
December 31, 2003 Forms 8-K and 8-K/A concerning the acquisition of
substantially all of the assets and business and certain liabilities of Enigma
Media, Inc. ("Enigma"), February 3, 2004 Forms 8-K and 8-K/A concerning the
acquisition of the stock of Wellspring Media, Inc. ("Wellspring"), and June 2,
2004 Form 8-K concerning restructuring activities and grants of incentive stock
options to two Company executives for the purchase the Company's common stock.
Certain amounts as previously reported for the three and six months ended
June 30, 2003 have been reclassified to conform to the current presentation.
REVENUE RECOGNITION. AVM's revenues are generated from its three
divisions, Filmed Entertainment, Branded Content and Film and TV Production.
Revenues from advisory services, development of custom software applications and
hosting and reporting services previously disclosed as the standalone YaYa
operations are included in the Branded Content divisional revenues.
Filmed Entertainment divisional revenues are generated through its home
video, direct response, worldwide sales (television) and theatrical units.
Filmed Entertainment divisional revenues generated from the home video or
direct response sales of DVDs and video tapes, net of an allowance for estimated
returns, are generally recognized at the time of shipment.
In June 2000, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 00-2,
"Accounting by Producers or Distributors of Films" ("SoP 00-2"). In accordance
with SoP 00-2, the Filmed Entertainment divisional revenues derived from
licensing agreements are recognized when there is persuasive evidence that a
licensing arrangement exists, that the license period has begun and the licensee
can begin exploitation or exhibition of the film, the license fee is fixed or
determinable, and collection of the license fee is reasonably assured.
Management regularly reviews and revises, when necessary, its
7
AMERICAN VANTAGE COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
total revenue estimates, which may result in a change in the rate of
amortization and/or write-down of all or a portion of the unamortized costs of
the film to its fair value. No assurance can be given that unfavorable changes
to revenue estimates will not occur, which may result in significant write-downs
affecting the Company's results of operations and financial condition. Film
advertising and marketing costs are expensed the first time the advertising
takes place.
Filmed Entertainment divisional revenues generated from the theatrical
release of motion pictures are recognized at the time of exhibition based on the
division's participation in box office receipts.
Branded Content divisional revenues are primarily derived from executed
agreements for programming development, producing licensed custom software
applications and advisory services. Revenues from long-term contracts that
include programming development or producing licensed custom software
applications are generally recognized using the percentage-of-completion method,
except when collectibility is not reasonably assured in which case profit is
recognized 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 are 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 generally is recognized
when the services are complete.
Advisory service fees generally 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.
The Film and TV Production divisional revenues are primarily generated
from an agreement to provide executive co-producer services for a television
series. These revenues are recognized when episodes air.
Intercompany revenues, if any, have been eliminated and are immaterial for
separate disclosure.
NOTE 2 - YAYA, LLC AND HYPNOTIC ASSET PURCHASES AND WELLSPRING STOCK PURCHASE
On April 16, 2003, AVCS acquired substantially all of the assets and
business and certain of the liabilities of YaYa, LLC. YaYa Media, Inc. ("YaYa")
is a wholly-owned subsidiary of the Company that was specifically formed to
assume the YaYa, LLC assets, business and liabilities and to continue YaYa,
LLC's business and operations following the acquisition.
At June 30, 2004, the Company has recorded $2,939,000 in goodwill related
to the April 16, 2003 acquisition of the YaYa operations.
On December 31, 2003, the Company's wholly-owned subsidiary, American
Vantage Media Corporation ("AVM"), acquired substantially all of the assets and
business and certain of the liabilities of Enigma and began operations effective
January 1, 2004. American Vantage/Hypnotic, Inc. ("Hypnotic"), a wholly-owned
subsidiary of AVM, was formed specifically to assume the branded content and
film and TV production division assets of Enigma.
8
AMERICAN VANTAGE COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On February 3, 2004, AVM acquired all of the outstanding common stock of
Wellspring and began operating Wellspring as of that date.
Certain Hypnotic estimated working capital adjustments are still being
assessed by management.
The following unaudited pro forma information represents the results of
operations of the Company as if the YaYa, Hypnotic and Wellspring acquisitions
had occurred at January 1, 2003, after giving pro forma effect to elimination of
various staffing positions, increases in certain salaries, depreciation expense
adjustments, increased interest expense for the promissory notes issued related
to the acquisitions and increased income tax benefits:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ -----------------------------
2004 2003 2004 2003
------------- ------------- ------------- ------------
Net revenues $ 4,827,000 $ 7,314,000 $ 9,036,000 $ 15,318,000
============= ============= ============= ============
Net loss $ (1,845,000) $ (1,024,000) $ (555,000) $ (1,616,000)
============= ============= ============= ============
Net loss per common share - basic and diluted $ (0.32) $ (0.18) $ (0.10) $ (0.28)
============= ============= ============= ============
The unaudited pro forma information may not be indicative of the results
that would actually have been achieved had the acquisitions occurred as of
January 1, 2003 or that may be obtained in the future.
NOTE 3 - FILM INVENTORY ACQUISITION COSTS
June 30, 2004 December 31, 2003
------------------------------ -----------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
Film inventory, net $ 12,568,000 $ 811,000 $ 660,000 $ --
============= ============= ============= ============
The aggregate film inventory amortization expense for the three and six
months ended June 30, 2004 was $320,000 and $811,000, respectively, as compared
to $0 expense for the comparable 2003 periods.
The film inventory is amortized over a period ranging primarily from five
to seven years. At June 30, 2004, the film inventory has unamortized costs of
$11,757,000.
9
AMERICAN VANTAGE COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - INVESTMENTS IN UNCONSOLIDATED INVESTEES
The Company, through a wholly owned subsidiary, holds a 49% minority
interest in an unconsolidated investee ("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 10 -
Restatement of previously issued financial statements). Income from the
Restaurant Investee, as restated, for the three and six months ended June 30,
2004 was $201,000 and $407,000, respectively.
The following summarizes the condensed balance sheet at June 30, 2004, and
the statement of operations for the six months ended June 30, 2004 (unaudited)
of the Restaurant Investee:
Assets $ 1,865,000
Liabilities 581,000
-------------
Members' capital $ 1,284,000
=============
Revenues $ 4,092,000
Expenses 3,271,000
-------------
Income from operations $ 821,000
=============
In addition, as a result of the YaYa asset acquisition, the Company,
through YaYa Media, Inc., obtained a 36% 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 parties to this joint venture, 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 parties agree to the
contrary. Operating results for the three and six months ended June 30, 2004 of
this joint venture are not considered material for disclosure.
NOTE 5 - LINES OF CREDIT
In conjunction with the February 3, 2004 Wellspring acquisition, the
Company assumed a Revolving Line of Credit arrangement ("Atlantic Line of
Credit") with Atlantic Bank of New York ("Atlantic"). The Atlantic Line of
Credit, which expired on May 1, 2004 provided for a $4,500,000 credit facility
and is secured by substantially all of the assets of Wellspring. The interest
rate is a floating rate of 2.75% above Atlantic's prime lending rate (which was
4.25% at June 30, 2004). To the extent that the borrowing base (defined in the
Atlantic Line of Credit as the sum of 50% of eligible accounts receivable, 70%
of wholesale inventories and 30% of retail inventories) is below the $4,500,000
maximum, the Atlantic Line of Credit is limited to the borrowing base. At June
30, 2004 there is no additional availability under the Atlantic Line of Credit.
Atlantic has formally notified the Company that the Atlantic Line of
Credit expiration date has been extended to November 13, 2004.
10
AMERICAN VANTAGE COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Effective June 30, 2004, the Company arranged with SouthwestUSA Bank
("SouthwestUSA") a $2,500,000 credit facility (the "SouthwestUSA Line of
Credit"). The SouthwestUSA Line of Credit is secured by a certificate of deposit
with a stated interest rate of 1.75% and maturity date of June 30, 2005. The
SouthwestUSA Line of Credit interest rate is a floating rate of 0.5% above
SouthwestUSA's prime lending rate. There were no borrowings under the
SouthwestUSA Line of Credit at June 30, 2004.
Jeanne Hood, a director of the Company, is a director of SouthwestUSA.
NOTE 6 - STOCKHOLDERS' EQUITY
The Company currently has two stock option plans. Under the intrinsic
value method, no compensation cost has been recognized for employee stock-based
compensation under the applicable circumstances. Had the Company used the fair
value-based method of accounting and recognized compensation expense as provided
for in Statement of Financial Accounting Standards No. 123, "Stock-Based
Compensation," pro forma net loss and pro forma net loss per share for the three
and six months ended June 30, 2004 and 2003 would have been as follows:
Three Months Ended Six Months Ended
------------------------------ -----------------------------
June 30, June 30, June 30, June 30,
2004 2003 2004 2003
------------- ------------- ------------- ------------
Net loss, as reported $ (1,845,000) $ (330,000) $ (622,000) $ (274,000)
Deduct: Total stock-based employee compensation
expense determined under
fair value based method (71,000) (19,000) (416,000) (177,000)
------------- ------------- ------------- ------------
Pro forma net loss $ (1,916,000) $ (349,000) $ (1,038,000) $ (451,000)
============= ============= ============= ============
Pro forma net loss per share
- -- basic and diluted $ (0.34) $ (0.06) $ (0.18) $ (0.09)
============= ============= ============= ============
RESTRICTED STOCK AWARD. Effective January 1, 2004, the Company's Board
Vice-Chairman, Stephen K. Bannon, assumed the AVMC Chief Executive Officer
position. On June 2, 2004, the Company reached an oral agreement with Mr. Bannon
with respect to Mr. Bannon's compensation, including as an employee of AVMC. The
oral agreement included the issuance of 120,000 shares of the Company's common
stock as a restricted stock award under the Company's 2003 Equity Incentive
Plan. As holder of the 120,000 restricted shares, Mr. Bannon is entitled to all
of the rights of a stockholder with respect to such 120,000 shares, including
voting and dividend rights. The restricted shares are subject to forfeiture if
Mr. Bannon's employment with the Company is terminated, for any reason other
than termination by the Company without cause. The forfeiture provisions lapse,
with respect to 30,000 shares on each of the first four anniversaries following
the issuance of the 120,000 restricted shares. The Company recorded a deferred
compensation charge of $370,000 upon the issuance of the restricted shares,
which is charged to expense proportionately as the restrictions lapse. No
amounts were charged to expense for the three and six months ended June 30,
2004.
11
AMERICAN VANTAGE COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - OPERATING LEASE COMMITMENTS
The Company leases space for its offices under agreements with terms
ranging from 12 to 60 months. Certain lease agreements provide for payment of
taxes, insurance, maintenance and other expenses related to the leased property.
In addition, related to the execution of two lease agreements a $350,000 standby
letter of credit was purchased. To the extent that the lease agreements are not
in default, terms of the standby letter of credit provide for individual
decreases of $50,000 on April 1 of 2005, 2006 and 2007. The standby letter of
credit is included in furniture, equipment and other assets, net on the June 30,
2004 condensed consolidated balance sheets.
As of July 1, 2004, the aggregate future minimum commitments under
operating leases are as follows:
Year ending
December 31,
-------------
2004 $ 488,000
2005 831,000
2006 826,000
2007 822,000
2008 553,000
Thereafter 113,000
-------------
$ 3,633,000
=============
Rent expense for the three and six months ended June 30, 2004 totaled
$236,000 and $457,000, respectively, as compared to $27,000 for the comparable
2003 periods.
NOTE 8 - SEGMENT REPORTING
The Company operates in the entertainment, media and lifestyle industries
and has determined that its reportable segments are those that are based on the
Company's methods of internal reporting and management structure. The Company's
two reportable segments are Filmed Entertainment and Branded Content. Our
financial reporting systems present various data for management to run the
business, including internal statements of operation that may not be prepared on
a basis consist with U.S. GAAP. The segments are designed to allocate resources
internally and provide a framework to determine management responsibility.
Management will continually evaluate the allocation of shared services and other
corporate and infrastructure costs, as considered necessary, for internal
segment reporting.
12
AMERICAN VANTAGE COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Selected financial information for each reportable segment is as
follows for the six months ended June 30, 2004 and 2003:
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- --------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2004 2003 2004 2003
----------- ----------- ----------- -----------
REVENUES
Filmed Entertainment $ 3,701,000 $ -- $ 6,611,000 $ --
Branded Content 1,045,000 466,000 1,805,000 466,000
Film and TV Production 81,000 -- 279,000 --
----------- ----------- ----------- -----------
Total consolidated revenues $ 4,827,000 $ 466,000 $ 8,695,000 $ 466,000
=========== =========== =========== ===========
OPERATING LOSS
Filmed Entertainment $(1,132,000) $ -- $(1,505,000) $ --
Branded Content (52,000) (218,000) (103,000) (218,000)
Film and TV Production and selling,
general and administrative expenses (1,738,000) (360,000) (3,005,000) (634,000)
----------- ----------- ----------- -----------
Total consolidated operating loss (2,922,000) (578,000) (4,613,000) (852,000)
----------- ----------- ----------- -----------
Total consolidated non-operating income (expense) (75,000) 9,000 3,263,000 52,000
----------- ----------- ----------- -----------
Loss before income tax benefit $(2,997,000) $ (569,000) $(1,350,000) $ (800,000)
=========== =========== =========== ===========
NOTE 9 - EMPLOYEE BENEFIT PLANS
2004 EMPLOYEE STOCK PURCHASE PLAN. In June 2004, the Company's
shareholders approved the 2004 Employee Stock Purchase Plan. Eligible employees
may in the aggregate purchase up to 1,500,000 shares of common stock at
semi-annual intervals through periodic payroll deductions. Purchases are limited
to a maximum value of $25,000 per calendar year based on the Internal Revenue
Code Section 423 limitation. Shares are purchased on July 1 and January 1
(beginning January 1, 2005) of each year until termination of the plan on
December 31, 2009. The purchase price is 85% of the lower of (i) the fair market
value of the common stock on the participant's entry date into the offering
period, or (ii) the fair market value on the semi-annual purchase date.
13
AMERICAN VANTAGE COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
Subsequent to the original issuance of the Company's condensed
consolidated financial statements for the three and six months ended March 30,
2004, 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 June 30, 2004:
Equity in income from unconsolidated investees, net $ 407,000 $ 201,000
Income tax benefit $ (881,000) $ (951,000)
Net loss $ (1,709,000) $ (1,845,000)
For the six months ended June 30, 2004:
Equity in income from unconsolidated investees, net $ 821,000 $ 407,000
Income tax benefit $ (180,000) $ (321,000)
Net loss $ (349,000) $ (622,000)
At June 30, 2004
Investment in unconsolidated investees $ 1,571,000 $ 817,000
Deferred tax asset (included in furniture,
equipment and other assets, net) $ 1,615,000 $ 2,132,000
Total assets $ 31,930,000 $ 31,693,000
Deferred tax liability (included in accounts
payable and other current liabilities) $ 7,309,000 $ 7,501,000
Total current liabilities $ 10,370,000 $ 10,562,000
Retained earnings $ 11,267,000 $ 10,838,000
For the three months ended June 30, 2003:
Equity in income from unconsolidated investees, net $ 320,000 $ 141,000
Income tax benefit $ (37,000) $ (98,000)
Net loss $ (212,000) $ (330,000)
For the six months ended June 30, 2003:
Equity in income from unconsolidated investees, net $ 497,000 $ 318,000
Income tax benefit $ (147,000) $ (208,000)
Net loss $ (156,000) $ (274,000)
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN 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 Quarterly Report on Form
10-QSB/A contains certain forward-looking statements. Such statements include
expected financial performance and strategic and operations plans concerning the
Company, as well as assumptions, expectations, predictions, intentions or
beliefs about future events involving the Company, its vendors and customers and
other matters. Although the Company 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. 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:
o The success of the Company's business strategies and future plans of
operations
o General economic conditions in the United States and elsewhere, as
well as the economic conditions affecting the industries in which
the Company's operates
o Dependence on existing management
o Federal and state regulation of the film industries
o Viewer habits
o Demand for Hypnotic's and Wellspring's television and film projects
and film libraries
o Trends within the gaming and restaurant industries
o Unforeseen change in the markets for advertising applications
o Management's ability to combine the various operations so that they
may work together and grow successfully
o Management's ability to acquire additional companies and ability to
successfully integrate such acquirees, if any, into the Company's
existing operations
o Changes in federal and state tax laws or the administration of such
laws.
Readers are urged to carefully review and consider the various disclosures
made by the Company in this Quarterly Report on Form 10-QSB/A, the Annual Report
on Form 10-KSB/A and other Company filings with the SEC. These reports attempt
to advise interested parties of the risks and factors that may affect the
Company's business, financial condition and results of operations and prospects.
The forward-looking statements made in this Form 10-QSB/A speak only as of the
date hereof. 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 Form 10-QSB/A is filed, or that may have
an effect on the Company's overall performance or financial position.
RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004, COMPARED WITH THE THREE AND
SIX MONTHS ENDED JUNE 30, 2003
REVENUES. AVM's revenues are generated from its three divisions, Filmed
Entertainment, Branded Content and Film and TV Production. In total, these
divisions generated revenues of $4,827,000 and $8,695,000 for the three and six
months ended June 30, 2004, respectively.
The Film and TV Production and Filmed Entertainment segments were formed
as a result of AVMC's acquisitions of Hypnotic on December 31, 2003 and
Wellspring on February 3, 2004, respectively, and therefore, there were no
revenues from these segments for the comparable periods ended June 30, 2003.
15
Filmed Entertainment divisional revenues are generated through its home
video, direct response, worldwide sales (television) and theatrical units. The
Filmed Entertainment division, representing primarily assets acquired in the
February 3, 2004 Wellspring acquisition, is a distributor of world cinema and
wellness programming. The division's assets include a film library with
approximately 800 titles.
During the three months ended June 30, 2004 and the period from February
3, 2004 through June 30, 2004, the home video unit generated revenues totaling
$1,775,000 and $3,305,000, respectively. Revenues are generated from home video
sales to national retailers.
During the three months ended June 30, 2004 and the period from February
3, 2004 through June 30, 2004, the direct response unit generated revenues
totaling $1,430,000 and $2,557,000, respectively. Revenues are generated from
sales of home videos sold directly to customers through "The Video Collection"
catalog. On a quarterly basis, an expanded catalog is designed, printed and
mailed to the division's customer base. A smaller version of the quarterly
catalog is mailed on a monthly basis.
Revenues totaling $265,000 and $464,000 were generated from the worldwide
sales (television) unit for the three and six months ended June 30, 2004. The
division licenses its television broadcasting rights primarily in North America,
Europe, Asia and Latin America.
The theatrical unit releases and distributes films to "art houses" which
are primarily located in major metropolitan areas. From February 3, 2004 through
June 30, 2004, the theatrical unit has premiered five films in various U.S.
cities. During the three months ended June 30, 2004 and the February 3, 2004
through June 30, 2004 period, the films generated total revenues of $231,000 and
$285,000, respectively.
The Branded Content division generates revenue from advisory services and
production of content in various media. Revenues from advisory services,
development of custom software applications and hosting and reporting services
previously disclosed as the standalone YaYa operations are included in the
Branded Content divisional revenues. Revenues from development and related
services obtained in connection with the December 31, 2003 Enigma Media, Inc.
dba Hypnotic ("Hypnotic") acquisition are also included in the Branded Content
division.
For the three and six months ending June 30, 2004, Branded Content
divisional revenues totaled $1,045,000 and $1,805,000, respectively. For the
three and six months ending June 30, 2004, these revenues primarily included
$890,000 and $1,165,000, respectively, generated from an agreement to develop
and provide executive producer services on a new television show; $132,000 and
$264,000, respectively, generated from web services, licensing and merchandising
fees; and advisory and other services performed for various Fortune 1000
companies that generated revenues of $23,000 and $330,000, respectively.
The Film and TV Production divisional revenues are primarily generated
from an agreement to provide executive co-producer services on a television
series. These revenues, totaling $81,000 and $279,000 for the three and six
months ended June 30, 2004, are recognized in installments when episodes air.
COST OF SALES AND SERVICES. Cost of sales and services consist primarily
of royalties fees, amortization of the film library, inventory costs for the
home video and direct response DVD and video tapes sales, film print costs for
theatrical releases, and related internal labor and materials costs associated
with providing the Branded Content and Film and TV Production divisional
services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $3,668,000 and $6,842,000 or 430.5% and 608.2%
for the three and six months ended June 30, 2004, respectively, from
corresponding periods in 2003. These increases primarily are the result of the
April 16, 2003 acquisition of YaYa, December 31, 2003 acquisition of Hypnotic,
January 2004 establishment of the AVM corporate operations, and February 3, 2004
acquisition of Wellspring. From January 1 through April 15, 2003, the Company
had limited operations and only one employee as compared to expanded business
operations and approximately 60 employees at June 30, 2004.
16
During the three months ended June 30, 2004, the Company incurred payroll
and payroll-related costs totaling $1,797,000 and $143,000, respectively, as
compared to $417,000 and $37,000 for the same respective periods ended June 30,
2003. The Company incurred payroll and payroll-related costs totaling $3,131,000
and $287,000, respectively, for the six months ended June 30, 2004, as compared
to $487,000 and $43,000 for the same respective period ended June 30, 2003. The
increased payroll costs primarily reflect the increase in employee staffing from
the Hypnotic and Wellspring acquisitions and establishment of AVM's operations
resulting in increased payroll and payroll-related costs totaling $2,621,000 and
$251,000, respectively, for the six months ended June 30, 2004.
Consulting fees for the three and six months ended June 30, 2004 totaled
$245,000 and $387,000, respectively, from $21,000 for the three and six months
ended June 30, 2003. Prior to January 1, 2004, Stephen K. Bannon received
periodic consulting fees of $10,000 per month as Vice-Chairman of the board of
directors and Chairman of the Company's special advisory group to the board of
directors. Effective January 1, 2004, Mr. Bannon assumed the AVM Chief Executive
Officer position. Effective March 1, 2004, Mr. Bannon's consulting fees were
increased to $29,000 per month. For the three and six months ended June 30,
2004, Mr. Bannon received consulting fees of $88,000 and $137,000. The Company
is currently negotiating the terms of an employment agreement with Mr. Bannon.
For the three and six months ended June 30, 2004, AVM also paid another
consultant $29,000 per month for management services performed for its Branded
Content division. The Company is currently negotiating the terms of an
employment agreement with this consultant.
On a quarterly basis, the Filmed Entertainment division produces an
expanded catalog entitled "The Video Collection" that, during the period, is
mailed to the division's customer base. A smaller version of the quarterly
catalog is mailed on a monthly basis. For the three months ended June 30, 2004
and the period from February 3, 2004 through June 30, 2004, the catalog design
and postage costs totaled $595,000 and $959,000, respectively.
Business and employee-related insurance costs increased from $30,000 and
$45,000, respectively, for the three and six months ended June 30, 2003, to
$162,000 and $346,000 for the comparable 2004 periods. The $301,000 increase in
insurance costs for the six month ending June 30, 2004 reflects the acquisitions
of the AVM-group business operations and the increase from one employee at
January 1, 2003 to approximately 60 employees at June 30, 2004.
Legal fees for the three and six months ended June 30, 2004 totaled
$115,000 and $240,000, respectively, as compared to $76,000 and $136,000,
respectively, for the same respective periods ended June 30, 2003. The
comparative periods include monthly legal retainers paid to the Company's SEC
and corporate counsels, fees incurred related to sales contracts and the Table
Mountain Tribe litigation. Such legal expenses do not include legal fees related
to consummated acquisitions.
During the three and six months ended June 30, 2004, the Company's office
rental expense increased $208,000 and $428,000, respectively, from the same
respective periods ended June 30, 2003. Rental expense for the six months ending
June 30, 2003 represents a rental lease assumed from the YaYa acquisition for
its Los Angeles, California corporate office and a satellite sales office in New
York City, New York. As of October 1, 2003, the Company relocated its executive
offices. The rent for the Company's executive office is approximately $3,000 per
month.
During the three months ended March 31, 2004, the AVM-group leased offices
in Santa Monica, California, Los Angeles, California and New York City, New York
with a total rent expense of $222,000. Subsequent to March 31, 2004, rental
leases held for one New York City, New York office and one Los Angeles,
California office expired. AVM-group personnel previously staffed in these
offices were relocated to other AVM-group previously-existing or newly leased
offices. At June 30, 2004, the Company has rental leases for one location in Las
Vegas, Nevada, one location in New York City, New York, one location in Los
Angeles, California and two locations in Santa Monica, California at a total
annual base rental cost of approximately $960,000.
Total travel-related costs increased from $38,000 and $39,000,
respectively, for the three and six months ended June 30, 2003, to $277,000 and
$372,000, respectively, for the comparable 2004 periods. The increase primarily
reflects on-site transition activities required to consolidate the YaYa,
Hypnotic and Wellspring New York and California operations, and travel to film
markets (i.e., Sundance Film Festival, Cannes International Film Festival,
Tribeca Film Festival, etc.) related to the Filmed Entertainment and Film and TV
Production divisions.
17
In addition, certain general and administrative expenses (i.e., sales
commissions, internet charges, telephone, etc.) also increased for the three and
six months ending June 30, 2004 due to the YaYa, Hypnotic and Wellspring
acquisitions, as well as establishment of the AVM corporate operations.
NON-OPERATING INCOME (EXPENSE)
On January 30, 2004, American Care Group, Inc. ("Subsidiary"), a
wholly-owned subsidiary of the Company and R & S Tropical, LLC, as assignee of a
national home building company ("Assignee"), completed the sale of approximately
40 acres of undeveloped land owned by the Company and located in North Las
Vegas, Nevada. The Company recognized a pre-tax gain of approximately $3,400,000
upon consummation of this land sale transaction.
During the three months ended June 30, 2004, the Company recognized a tax
benefit of $951,000 primarily related to the period's loss from operations
totaling $2,922,000. For the six months ended June 30, 2004, the tax benefit of
$321,000 included a tax provision of $1,164,000 for the January 2004 gain on
sale of land.
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. Future reported income from the Company's Restaurant Investee may differ
from cash distributions discussed in the Liquidity and Capital Resources
section.
Income from the Restaurant Investee increased from $148,000 and $283,000,
respectively, for the three and six months ended June 30, 2003 to $201,000 and
$407,000, respectively, for the three and six months ended June 30, 2004. Future
reported income from the 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of the Company's financial condition and
results of operations are based upon the Company's condensed consolidated
financial statements included in this Quarterly Report on Form 10-QSB/A, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires the Company to make estimates, assumptions and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities.
The Company believes that the estimates, assumptions and judgments
involved in applying the accounting policies described below are critical with
regards to their potential impact on the condensed consolidated financial
statements, so these are considered to be the critical accounting policies.
Because of the uncertainty inherent in these matters, actual results could
differ from the estimates used in applying the critical accounting policies.
Certain of these critical accounting policies affect working capital account
balances, including the policies for revenue recognition and accounts
receivable.
Within the context of these critical accounting policies and estimates,
the Company is not currently aware of any reasonably likely events or
circumstances that would result in materially different estimates or other
amounts being reported.
18
PRINCIPLES 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. In accordance with U.S. GAAP, the Company excludes the accounts of
the Restaurant Investee and instead records its investment using the equity
method of accounting subject to certain contractual adjustments.
INVENTORIES. Inventories are stated at the lower of cost or market, with
cost being determined using the first-in, first out (FIFO) method. Inventories
primarily consist of finished goods that include DVDs, video tapes and packaging
materials.
ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS RECEIVABLE. Certain Branded Content
and Film and TV Production division accounts receivable balances are based on
contractual agreements that are primarily with Fortune 1000 companies. The
Company does not believe there is any significant risk relating to the
collectibility of these accounts receivable that would require a general
allowance for any estimated losses resulting from the inability of its clients
to make required payments. However, the Company does periodically analyze each
client account, and, when it becomes aware of a specific client's inability to
meet its financial obligations, such as in the case of bankruptcy filings or
deterioration in the client's overall financial condition, the Company would
record a specific provision for uncollectible accounts to reduce the related
receivable to the amount that is estimated to be collectible.
For Filmed Entertainment division sales, the Company records a monthly
accrual for bad debt expense based upon historical collections experience and
other factors. The monthly accrual and individual customer accounts are reviewed
periodically to ensure overall reasonableness and collectibility. If the Company
determines that amounts owed from customers are uncollectible, such amounts are
charged against the allowance for doubtful accounts.
GOODWILL AND OTHER INTANGIBLE ASSETS. In accordance with the Statement of
Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets," periodic impairment tests for goodwill and other indefinite-lived
intangible assets are based on a comparison of the estimated fair value of
goodwill and other intangible assets to the carrying value. If the carrying
value exceeds the estimate of fair value, impairment is calculated as the excess
of the carrying value over the estimate of fair value. The estimates of fair
value utilized in goodwill and other indefinite-lived intangible asset tests may
be based upon a number of factors, including assumptions about the expected
future operating performance of the reporting units.
The Company's periodic impairment assessments of indefinite-lived assets
are an integral part of the Company's ongoing strategic review of its business
operations. Therefore, the Company's estimates may change in future periods due
to, among other things, technological change, economic conditions, change in
business plans or an inability to successfully implement business plans. Such
changes may result in impairment charges recorded in future periods.
With respect to goodwill related to the April 16, 2003 acquisition of the
YaYa operations, a valuation of the carrying value of the YaYa goodwill will be
performed prior to December 31, 2004 in conjunction with the annual impairment
analysis required by FAS 142, "Goodwill and Other Intangible Assets." Any
impairment charges could have an adverse impact on the Company's financial
results for the period(s) in which the impairment charges are recorded.
With respect to goodwill related to the December 31, 2003 acquisition of
the Hypnotic operations certain estimated working capital adjustments are still
being assessed by management. No impairment test of goodwill was performed at
June 30, 2004 given the short operating period. Any impairment charges could
have an adverse impact on the Company's financial results for the period(s) in
which the impairment charges are recorded.
Intangible assets, such as patents or trademarks, that are determined to
have definite lives continue to be amortized over their useful lives and are
measured for impairment only when events or circumstances indicate that the
carrying value may be impaired. In these cases, the Company estimates the future
undiscounted cash flows to be derived from the asset to determine whether or not
a potential impairment exists. If the carrying value exceeds the estimate of
future undiscounted cash flows, the impairment is calculated as the excess of
the carrying value of the asset over the estimate of its fair value. Any
impairment charges would be classified as other expense within the consolidated
statement of operations.
19
REVENUE RECOGNITION. AVM's revenues are generated from its three
divisions, Filmed Entertainment, Branded Content and Film and TV Production.
Included in the Branded Content divisional revenues are the advisory services,
development of custom software applications and hosting and reporting services
previously disclosed as the YaYa operations.
Filmed Entertainment divisional revenues are generated through its home
video, direct response, worldwide sales (television) and theatrical units.
Filmed Entertainment divisional revenues generated from the home video or
direct response sales of DVDs and video tapes, net of an allowance for estimated
returns, are generally recognized at the time of shipment.
In June 2000, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 00-2,
"Accounting by Producers or Distributors of Films" ("SoP 00-2"). In accordance
with SoP 00-2, the Filmed Entertainment divisional revenues derived from
licensing agreements are recognized when there is persuasive evidence that a
licensing arrangement exists, that the license period has begun and the licensee
can begin exploitation or exhibition of the film, the license fee is fixed or
determinable, and collection of the license fee is reasonably assured.
Management regularly reviews and revises, when necessary, its total revenue
estimates, which may result in a change in the rate of amortization and/or
write-down of all or a portion of the unamortized costs of the film to its fair
value. No assurance can be given that unfavorable changes to revenue estimates
will not occur, which may result in significant write-downs affecting the
Company's results of operations and financial condition. Film advertising and
marketing costs are expensed the first time the advertising takes place.
Filmed Entertainment divisional revenues generated from the theatrical
release of motion pictures is recognized at the time of exhibition based on the
division's participation in box office receipts.
Branded Content divisional revenues are primarily derived from executed
agreements for programming development, producing licensed custom software
applications or advisory services. Revenues from long-term contracts that
include programming development or producing licensed custom software
applications are generally recognized using the percentage-of-completion method,
except when collectibility is not reasonably assured in which case profit is
recognized 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 are 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 is generally recognized
when the services are complete.
Advisory service fees are generally 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.
The Film and TV Production divisional revenues are primarily generated
from an agreement to provide executive co-producer services for a television
series. These revenues are recognized when installments air.
Intercompany revenues, if any, have been eliminated and are immaterial for
separate disclosure.
OTHER CONTINGENCIES. In the ordinary course of business, the Company may
be involved in legal proceedings regarding contractual and employment
relationships, trademark or patent rights, and a variety of other matters.
Contingent liabilities are recorded when it is probable that a liability has
been incurred and the amount of the loss is reasonably estimable. The Company
discloses contingent liabilities when there is a reasonable possibility that the
ultimate loss will materially exceed the recorded liability. Estimating probable
losses requires analysis of multiple factors, in some cases including judgments
about the potential actions of third party claimants and courts. Therefore,
20
actual losses in any future period are inherently uncertain. Currently, the
Company believes that no pending legal proceedings or claims, in the ordinary
course of business, will have a material impact on the Company's financial
position or results of operations. However, if actual or estimated probable
future losses exceed the recorded liability for such claims, additional charges
may be recorded as other expense in the Company's consolidated statement of
operations during the period in which the actual loss or change in estimate
occurs.
SIGNIFICANT RELATED PARTY TRANSACTIONS
Non-employee directors received $26,000 and $49,000 for the three and six
months ended June 30, 2004 for serving on the Board of Directors of the Company.
In addition to a quarterly director's fee, Stephen K. Bannon was also paid
$88,000 and $137,000 for consulting services provided during the three and six
months ended June 30, 2004. Mr. Bannon is the Vice-Chairman of the board of
directors and Chairman of the Company's special advisory group to the board of
directors. Effective January 1, 2004, Mr. Bannon assumed the AVM Chief Executive
Officer position. The Company is currently negotiating the terms of an
employment agreement with Mr. Bannon.
Jay Brown is outside corporate counsel and the beneficial owner of more
than 5% of the Company's common stock. For Mr. Brown's services as corporate
counsel, the Company paid him legal retainers of $15,000 and $30,000 during the
three and six months ended June 30, 2004.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2004, the Company had cash and cash equivalents totaling
$4,741,000 and a restricted certificate of deposit totaling $2,500,000. The
Company also had consolidated working capital of $3,105,000 at June 30, 2004, as
compared with its working capital of $7,932,000 at December 31, 2003. The
$4,827,000 net decrease in working capital primarily reflects the following:
o Net proceeds from the January 30, 2004 sale of the land totaling
$7,007,000;
o Cash consideration and direct acquisition costs totaling $4,164,000
for the February 3, 2004 Wellspring acquisition;
o An increase in net accounts and other receivables of $3,121,000 due
primarily to the Wellspring acquisition;
o Acquisition of the Wellspring inventories totaling $1,248,000 at
June 30, 2004;
o An increase in accounts payable and other current liabilities
totaling $5,807,000 due primarily to the February 3, 2004 Wellspring
acquisition;
o Assumption of the Atlantic Bank Line of Credit (totaling $2,381,000
at June 30, 2004) in the Wellspring acquisition; and,
o The net loss from operations totaling $4,613,000 for the six months
ended June 30, 2004.
Cash used in operations was $4,052,000 for the six months ended June 30,
2004, as compared to cash provided by operations of $292,000 for the comparable
2003 period. The increase reflects expanded business operations due to the April
2003 YaYa acquisition, December 2003 Hypnotic acquisition and February 2004
Wellspring acquisition. For the six months ended June 30, 2004, a significant
use of cash for operations included film acquisition costs of $2,868,000.
Cash provided by investing activities consists of the January 30, 2004
sale of the land classified on the consolidated balance sheet as "land held for
development or sale" and capital distributions from the Restaurant Investee. The
net proceeds from the sale of the land (excluding legal and consulting fees),
totaling $7,007,000, are being utilized in the Company's operations and in the
previously announced strategy of expanding into areas of interest in the gaming,
entertainment, media and lifestyle industries through mergers or acquisitions.
During the six months ended June 30, 2004 and 2003, the Company received
capital distributions from its unconsolidated Restaurant Investee totaling
$737,000 and $400,000, respectively. The Operating Agreement for the Restaurant
Investee does not provide for guaranteed capital distributions. Therefore,
future distributions from the Restaurant Investee are subject to fluctuation.
21
On February 3, 2004, AVM acquired all of the capital stock of Wellspring
pursuant to a Stock Purchase Agreement. 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. Cash utilized in the
Wellspring acquisition is classified as an investing activity in the condensed
consolidated statements of cash flows.
Effective June 30, 2004, the Company arranged with SouthwestUSA a
$2,500,000 credit facility. The SouthwestUSA Line of Credit is secured by a
certificate of deposit with a stated interest rate of 1.75% and maturity date of
June 30, 2005. The SouthwestUSA Line of Credit interest rate is a floating rate
of 0.5% above SouthwestUSA's prime lending rate. There were no borrowings at
June 30, 2004. Included in net cash provided by investing activities is a
$2,500,000 certificate of deposit, purchased by the Company, as collateral for
the SouthwestUSA Line of Credit.
Jeanne Hood, a director of the Company, is a director of SouthwestUSA.
During April 2004, AVM entered into a five-year operating lease
arrangement for two office spaces located in Santa Monica, California. As a
provision of the operating lease, the Company executed a $350,000 standby letter
of credit.
In conjunction with the February 3, 2004 Wellspring acquisition, the
Company assumed a Revolving Line of Credit arrangement with Atlantic. The
Atlantic Line of Credit with total borrowings of $2,381,000 at June 30, 2004,
expired on May 1, 2004, provided for a $4,500,000 credit facility and is secured
by substantially all of the assets of Wellspring. The interest rate is a
floating rate of 2.75% above Atlantic's prime lending rate (which was 4.25% at
June 30, 2004). To the extent that the borrowing base (defined in the Atlantic
Line of Credit as the sum of 50% of eligible accounts receivable, 70% of
wholesale inventories and 30% of retail inventories) is below the $4,500,000
maximum, the Atlantic Line of Credit is limited to the borrowing base. Net
payment on the Atlantic Line of Credit totaling $419,000 are included in net
cash used in financing activities for the six months ended June 30, 2004.
Atlantic has formally notified the Company that the Atlantic Line of
Credit expiration date has been extended to November 13, 2004.
The Company intends to fund its operating costs and merger and acquisition
activities from its existing working capital resources, lines of credit and land
sale proceeds. It is possible that future operations and merger and acquisition
opportunities may require additional financing resources. The Company may
provide for such requirements with financing from financial institutions and/or
the issuance of equity securities. No assurance can be given that such financing
will be available on advantageous terms to the Company, or at all.
IMPACT OF INFLATION
The Company believes that inflation has not had a material impact on its
operations.
FACTORS THAT MAY AFFECT FUTURE RESULTS
For the three and six months ended June 30, 2004, the AVM-group, which was
formed utilizing the assets and business obtained in the April 2003 YaYa
acquisition, December 2003 Hypnotic acquisition and February 2004 Wellspring
acquisition, incurred net operating losses of $2,457,000 and $3,764,000.
Management is continuing to consolidate business operations and analyze overhead
costs to effectively eliminate or minimize duplicative costs. Despite the
AVM-group's efforts to significantly decrease labor and other costs, there is no
assurance that the AVM-group will be successful in its efforts to attain
profitability in 2004.
The Branded Content and Film and TV Production divisions generate revenues
from relatively few contracts. A decline in the size or number of these
arrangements could adversely affect its future operations.
22
The Filmed Entertainment division primarily generates revenues through
sales of DVDs and videos to retailers and to catalog customers. An inability to
obtain sufficient inventories, loss of a significant number of distribution
rights, loss of distribution rights on popular film titles, or an inability to
obtain and/or finance distribution rights for future films could adversely
affect its future operations.
The Company's success depends in large part on the continued services of
its executive officers, senior managers and other key personnel. The loss of
these people could have a material adverse impact on the Company's results of
operations. Also, to accommodate future growth, operating results may also be
adversely impacted by the Company's inability to attract and retain highly
skilled personnel.
Risks of terror attacks including the effects of a war are likely to
continue to have far-reaching effects on economic activity in the United States
for an indeterminate period. And as such, any long-term adverse 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.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET AND INTEREST RATE RISK
Except for exceeding insured deposit limits (approximately $4,149,000 at
June 30, 2004), the Company is exposed to minimal market risks as its cash and
cash equivalents 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 or otherwise.
At June 30, 2004, the Company's cash and cash equivalents approximate their fair
values due to the short-term nature of these instruments.
During the next 12 months, the Company may enter into financing
arrangements which would expose it to interest rate risk.
23
ITEM 3. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures (as such term is
defined in Rule 13a-15(e)) 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.
An evaluation was performed, as of June 30, 2004, under the supervision
and with the participation of the Company's management, including its President
and Chief Executive Officer and its Chief Accounting Officer, of the
effectiveness of the design and operation of its 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 June 30,
2004 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 June 30, 2004.
During the second quarter of 2004, 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.
24
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is hereby made to Item 3 of the Company's Annual Report on Form
10-KSB, for the fiscal year ended July 31, 2003, filed with the Securities and
Exchange Commission on October 29, 2003 (Commission File No.: 0-10061), and to
the references made in such Item for a discussion of all material pending legal
proceedings to which the Company or any of its subsidiaries are parties.
Reference is hereby made to Part I "Note 9 - Contingencies" of the Notes
to Condensed Consolidated Financial Statement of the Company's Quarterly Report
on Form 10-QSB, for the three months ended March 31, 2004, filed with the
Securities and Exchange Commission on May 18, 2004 (Commission File No.:
0-10061), and to the references made in such Note for a discussion of all
material pending legal proceedings to which the Company or any of its
subsidiaries are parties.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An Annual Meeting of Stockholders of the Company was held on June 11, 2004
to consider and act upon the following matters: (i) to elect Ronald J. Tassinari
and Audrey K. Tassinari as Class A directors of the Company to serve for the
ensuing three years or until their successors are duly elected and qualified;
(ii) to consider and act upon a proposal to increase the number of shares
available under the Company's 2003 Equity Incentive Plan; and (iii) to consider
and act upon a proposal to implement the Company's 2004 Employee Stock Purchase
Plan.
The holders of 5,704,107 shares of Common Stock of the Company were
entitled to vote at the meeting, of which 5,396,896 shares of common stock were
represented in person or by proxy. The stockholders voted as follows with
respect to the:
o Election of Class A Directors to terms expiring in 2007 --
Name For Withheld Authority
------------------- --------- ------------------
Ronald J. Tassinari 5,289,354 107,542
Audrey K. Tassinari 4,880,497 516,399
o 2,112,375 shares in favor, 2,176,540 shares against, and 2,840
shares abstaining for an increase in the number of shares available
under the Company's 2003 Equity Incentive Plan;
o 3,646,121 shares in favor, 642,694 shares against, and 2,940 shares
abstaining for the adoption of the Company's 2004 Employee Stock
Purchase Plan.
ITEM 5. OTHER INFORMATION
None.
25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Revolving Line of Credit Agreement between Wellspring Media, Inc.
and Atlantic Bank of New York. (1)
10.2 Revolving Line of Credit Agreement between American Vantage
Companies and SouthwestUSA Bank. (3)
10.3 2004 Employee Stock Purchase Plan. (2)
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**
- ----------
** Filed herewith.
(1) Incorporated by reference to the Company's Current Report on Form
8-K (Date of Report: February 3, 2004).
(2) Incorporated by reference to Appendix C of the Company's Proxy
Statement forming a portion of the Company's Schedule 14A filed with
the Commission on May 10, 2004.
(3) Incorporated by reference to the Company's Quarterly Report on Form
10-QSB for the three months ended June 30, 2004.
(b) Reports on Form 8-K
On June 15, 2004, the Company filed a Current Report on Form 8-K (Date of
Report: June 10, 2004) reporting under Item 4 the change in the Company's
independent public accountants.
On June 4, 2004, the Company filed a Current Report on Form 8-K (Date of
Report: June 2, 2004) reporting under Item 3 the current results of the
restructuring of its wholly-owned subsidiary, American Vantage Media
Corporation, including termination of certain executives and negotiated
employment agreements with other executives.
On May 12, 2004, the Company filed a Current Report on Form 8-K (Date of
Report: May 10, 2004) reporting under Item 12 the dissemination of a press
release announcing its financial results for the quarter ended March 31, 2004.
26
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
27