PROSPECTUS SUPPLEMENTAL NO. 1 DATED NOVEMBER 17, 1997 TO PROSPECTUS DATED
NOVEMBER 7, 1997
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 For the quarter ended September 30, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from to
Commission File Number: 001-12885
AVENUE ENTERTAINMENT GROUP, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 95-4622429
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
11111 Santa Monica Blvd., Suite 2110
Los Angeles, California 90025
(Address of principal executive offices) (Zip Code)
(310) 996-6815
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 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 ______
Number of shares outstanding of each of issuer's classes of common stock as of
November 10, 1997.
Common Stock 4,033,838
<PAGE>
AVENUE ENTERTAINMENT GROUP, INC.
Table of Contents
PART I. FINANCIAL INFORMATION Page No.
Consolidated Condensed Balance Sheets -
September 30, 1997 and December 31, 1996 1
Consolidated Condensed Statement of Operations -
Three Months and Nine Months Ended
September 30, 1997 and 1996 2
Consolidated Condensed Statement of Cash Flows -
Nine Months Ended September 30, 1997 and 1996 3
Notes to Consolidated Condensed Financial Statements 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. OTHER INFORMATION
Signatures 11
<PAGE>
PART I. FINANCIAL INFORMATION
AVENUE ENTERTAINMENT GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
September 30, December 31,
1997 1996
Assets (unaudited)
Cash $ 500,302 $ 687,080
Short-term investments 730,422 696,150
Accounts receivable 422,224 149,483
Films costs, net 1,624,546 1,998,326
Property and equipment, net 113,607 117,492
Other assets 62,165 81,063
Goodwill 2,524,679 2,735,069
----------- -----------
Total assets $5,977,945 $6,464,663
========== ==========
Liabilities and Stockholders' Equity
Accounts payable $ 487,646 $ 284,784
Accrued expenses 577,186 457,426
Loan payable 227,500
Capitalized lease obligations 14,196 40,451
Income taxes payable 330,891
Advance from customers 89,000 577,730
---------- -----------
Total liabilities 1,395,528 1,691,282
---------- ----------
Stockholders' equity
Common stock, par value $.01 per share 38,478 36,978
Additional paid-in capital 4,985,802 4,631,252
Retained earnings (deficit) (477,285) 224,001
Unrealized gain (loss) on marketable securities 185,422 (118,850)
Note receivable for common stock (150,000) _________
----------
Total stockholders' equity 4,582,417 4,773,381
---------- ----------
Total liabilities and stockholders' equity $5,977,945 $6,464,663
========== ==========
See accompanying notes to the consolidated condensed financial statements.
<PAGE>
AVENUE ENTERTAINMENT GROUP, INC.
<TABLE>
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three months Nine months
ended September 30, ended September 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Operating revenues $ 116,050 $ 568,327 $2,242,362 $1,539,809
----------- ---------- ---------- ----------
Cost and expenses:
Film production costs 26,690 185,888 1,177,518 484,148
Selling, general & administrative
expenses 598,682 320,075 1,938,497 1,048,741
---------- --------- ---------- ----------
Total costs and expenses 625,222 505,963 3,116,015 1,532,889
---------- ---------- ---------- -----------
Income (loss) before income tax (509,322) 62,364 (873,653) 6,920
Income tax benefit (expense) 100,000 (39,885) 172,367 (47,977)
----------- ---------- ----------- ------------
Net income (loss) $ (409,322) $ 22,479 $(701,286) $ (41,057)
========== ========== ========= =========
Net income (loss) per share $ (.11) $ .01 $ (.19) $ (.02)
============== ============= ============ ============
Weighted average shares
outstanding 3,772,838 1,795,000 3,737,838 1,795,000
========== ========== ========== ==========
See accompanying notes to the consolidated condensed financial statements.
</TABLE>
<PAGE>
AVENUE ENTERTAINMENT GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months
ended September 30,
1997 1996
---------- ------
Cash flows from operating activities:
Net loss $ (701,286) $ 188,230
Adjustments to reconcile net income
to net cash provided by (used for)
operating activities:
Depreciation 20,340 1,553
Gain on disposal of fixed assets (786)
Amortization-film production costs 1,136,281 3,524,000
Amortization-goodwill 210,390
Stock option compensation 28,125
Decrease in due to stockholder (61,529)
Increase in deferred income 1,981,731
Changes in other operating assets and liabilities:
Accounts receivable (194,816) 2,521
Film costs (762,501) (5,197,855)
Other assets 31,898 (85,784)
Accounts payable and accrued expenses 158,731 266,671
Income taxes payable (180,000)
Advances from customers (488,730)
-----------
Net cash (used for) provided by
operating activities (741,568) 618,752
---------- ---------
Cash flows from investing activities:
Proceeds from sale of marketable securities 270,000
Proceeds from sale of fixed assets 2,500
Purchase of equipment (16,455) (11,598)
----------- ---------
Net cash (used for) provided by investing
activities 253,545 (9,098)
------------ --------
<PAGE>
AVENUE ENTERTAINMENT GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
Nine months
ended September 30,
1997 1996
--------- --------
Cash flows from financing activities:
Proceeds from loan payable $ 227,500 $
Exercise of warrants 100,000
Principal payments of capital lease of obligation (26,255)
-----------
Net cash used for financing activities 301,245
------------
Net increase (decrease) in cash (186,778) 609,654
Cash at the beginning of period 687,080 11,060
---------- ----------
Cash at the end of period $ 500,302 $ 620,714
========== =========
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest $ 40,924 $ 4,097
========== =========
Income taxes $ 191,628 $ 38,946
========= =========
See accompanying notes to the consolidated condensed financial statements.
<PAGE>
AVENUE ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Summary of Significant Accounting Policies
The Company
Avenue Entertainment Group, Inc. (the "Company") is principally engaged in the
development, production and distribution of feature films, television series,
movies-for-television, mini-series and film star biographies.
Generally, theatrical films are first distributed in the theatrical and home
video markets. Subsequently, theatrical films are made available for world-wide
television network exhibition or pay television, television syndication and
cable television. Generally, television films are first licensed for network
exhibition and foreign syndication or home video, and subsequently for domestic
syndication on cable television. The revenue cycle generally extends 7 to 10
years on film and television product.
Basis of Presentation
The accompanying interim consolidated financial statements of the Company are
unaudited and have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission regarding interim
financial reporting. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements and should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Form 10-SB and
Form 2-SB for the year ended December 31, 1996. In the opinion of management,
all adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial position of the Company at September 30, 1997, the
results of operations and its cash flows for the three months and nine month
periods ended September 30, 1997 and 1996 have been included. The results of
operations for the interim period are not necessarily indicative of results
which may be realized for the full year.
<PAGE>
AVENUE ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
2. Film Costs
Film costs consist of the following:
September 30, December 31,
1997 1996
In process or development $ 398,218 $ 224,452
Released, net of accumulated amortization
of $7,998,457 and $6,862,176, respectively 1,226,328 1,773,874
----------- ----------
$1,624,546 $1,998,326
3. Loan Payable
On May 27, 1997, the Company entered into an unsecured demand note which
provides the Company with borrowings (the "Note") in the principal amount of
$250,000, at prime plus 1%, with Fleet Bank, National Association, which is
payable on demand, but in any event not later than May 27, 1998. As of September
30, 1997, $227,500 had been borrowed under the Note at an interest rate of
9.50%.
4. Subsequent Event
On November 7, 1997, the Company sold 170,000 shares of common stock to an
investment group and realized proceeds of $850,000.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion and analysis should be read in conjunction with the
Company's consolidated condensed financial statements and related notes thereto.
General
The Company is an independent entertainment company which, through its two
operating subsidiaries, (Avenue Pictures and Wombat Productions) produces motion
pictures for theatrical exhibition, television and other ancillary markets, both
domestically and internationally.
Pursuant to the Share Exchange Agreement, CineMasters acquired all of the
outstanding capital stock of Avenue Pictures from Mr. Brokaw, the sole
shareholder of Avenue Pictures, in exchange for 1,425,000 shares of CineMasters
Common Stock. In connection with the Business Combination, National Patent made
a capital contribution to CineMasters of 90,566 shares of registered National
Patent common stock valued at $815,000 in the aggregate based upon the closing
price per share of National Patent common stock on the American Stock Exchange
on September 30, 1996 in exchange for 407,500 shares of CineMasters Common
Stock. Such capital contribution was made by National Patent for investment
purposes and was a condition to closing pursuant to the Share Exchange
Agreement.
Following the Business Combination, the Board of Directors and shareholders of
CineMasters approved a transaction pursuant to which (i) all of the assets of
the Wombat Division of CineMasters were transferred, subject to all related
liabilities and obligations, to its newly-formed, wholly-owned Delaware
subsidiary, Wombat, (ii) CineMasters was merged with and into the Company (its
newly-formed, wholly-owned Delaware subsidiary) with the Company being the
surviving corporation in the merger and (iii) each stockholder of CineMasters
received an equal number of shares of the Company in exchange for each share of
capital stock of CineMasters held by such stockholder immediately prior to the
effective time of the Reincorporation. As a result of the Reincorporation,
Avenue Pictures became a wholly-owned subsidiary of the Company.
Results of Operations
For the quarter and nine months ended September 30,1997 the Company had a loss
before income taxes of $509,000 and $874,000 compared to income of $62,000 and
$7,000 for the quarter and nine months ended September 30, 1996. The loss for
the periods was the result of several factors. For the quarter ended September
30,1997, the Company's licensing revenue decreased significantly at its Wombat
division. In addition, for the quarter ended September 30, 1997, the Company
recorded $70,000 of amortization of goodwill related to the acquisition of
Avenue Pictures, as well as increased expenses related to the operations and the
business development of Avenue Pictures. The increased loss before income taxes
for the nine months ended September 30, 1997 was the result of increased general
and administrative expenses, which were primarily salaries, professional fees,
occupancy costs and $210,000 of amortization of goodwill related to the purchase
of Avenue Pictures on September 30, 1996. In addition, Wombat experienced
reduced revenues for the period which were partially mitigated by the revenue
generated by Avenue Pictures for the period.
Comparison of Three Months Ended September 30, 1997 and 1996
Revenues
Revenues for the three months ended September 30, 1997 were $116,000 compared to
$568,000 for the three months ended September 30, 1996. The revenues for the
three months ended September 30, 1997 were primarily derived from the operations
of Wombat and were approximately $106,000, a decrease of $462,000 from the
comparable period of the prior year. Of the revenues earned by Wombat during the
three months ended September 30, 1997, approximately $64,000 was derived from
licensing of rights to Wombat programming in secondary markets (Janson
Associates), which accounted for 61% of revenues in 1997, as compared to 5% of
revenues in 1996.
Film Production Costs
Film production costs for the three months ended September 30, 1997 was $27,000
compared to $186,000 for the three months ended September 30, 1996 as a result
of reduced revenues recognized by Wombat for the 1997 period.
Selling, General and Administrative
Selling, general and administrative (S,G&A) expenses for the three months ended
September 30, 1997 were $599,000 compared to $320,000 for the three months ended
September 30, 1996. Included in the three months ended September 30, 1997
expenses are $325,000 of S,G&A expenses relating to Avenue Pictures' operations
and were principally salaries and related benefits, professional fees and
occupancy expenses. In addition, the Company recognized approximately $70,000
amortization of goodwill related to the Avenue acquisition on September 30,
1996.
Comparison of Nine Months Ended September 30, 1997 and 1996
Revenues
Revenues for the nine months ended September 30, 1997 were $2,242,000 compared
to $1,540,000 for the nine months ended September 30, 1996. The revenues for the
nine months ended September 30, 1997 were derived from revenues generated by
Avenue Pictures which was acquired on September 30, 1996 and the operations of
Wombat. Revenues from the operations of Avenue Pictures for the nine months
ended September 30, 1997 amounted to approximately $1,457,000 and were primarily
derived from the delivery to Hallmark of the made-for-television movie "Tell Me
No Secrets" and the recognition of the producing and overhead fees on the
feature film "The Road to Graceland", which accounted for approximately 61% of
the consolidated revenues for the nine months ended September 30, 1997. Revenues
from Wombat operations for the nine months ended September 30, 1997 were
approximately $785,000, a decrease of $754,000 from the comparable period of the
prior year. Of the revenues earned by Wombat during the nine months ended
September 30, 1997, approximately $286,000 was derived from the completion and
availability of two one-hour motion picture profiles to A&E. The remaining
revenue was derived from licensing of rights to Wombat programming in secondary
markets (Janson Associates), which accounted for 63% of revenues in 1997, as
compared to 43% of revenues in 1996.
Film Production Costs
Film production costs for the nine months ended September 30, 1997 was
$1,178,000 compared to $484,000 for the nine months ended September 30, 1996.
The increase can be primarily attributed to the film amortization relating to
"Tell Me No Secrets" in the amount of $916,000.
Selling, General and Administrative
Selling, general and administrative (S,G&A) expenses for the nine months ended
September 30, 1997 were $1,923,000 compared to $1,049,000 for the nine months
ended September 30, 1996. Included in the nine months ended September 30, 1997
expenses are $973,000 of SG&A expenses relating to Avenue Pictures' operations
and were principally salaries and related benefits, professional fees and
occupancy expenses. Wombat's SG&A expenses decreased by approximately $344,000
primarily as a result of decreased commissions paid to Janson Associates
resulting from decreased licensing revenues. In addition, the Company recognized
approximately $210,000 amortization of goodwill related to the Avenue
acquisition on September 30, 1996.
Liquidity and Capital Resources
At September 30, 1997, the Company had approximately $500,000 of cash and
approximately $730,000 of short term investments. On November 7, 1997, the
Company sold 170,000 shares of common stock to an investment group and realized
proceeds of $850,000.
During the nine months ended September 30, 1997, the Company's cash decreased by
$187,000. On May 27, 1997, the Company entered into an unsecured demand note
which provides the Company with borrowings (the "Note") in the principal amount
of $250,000, at prime plus 1%, with Fleet Bank, National Association, which is
payable on demand, but in any event not later than May 27, 1998. As of September
30, 1997, $227,000 had been borrowed under the Note.
The Company believes it has adequate capital resources to meet its short-term
need covering at least twelve months. The Company expects to expand its
production activities. Management believes that the existing cash and short term
investments are adequate to fund the Company's operations, however, management
may seek to raise additional funds, through the issuance of common stock or
issuance of debt, to expand the Company's business at a greater rate. However,
there is no guarantee that such funding will be available, or available under
terms which are acceptable to the Company. The Company's rate of growth and
investment in projects will be adjusted as necessary based on available
financing and existing capital resources.
Recent accounting pronouncement
In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings per Share" (SFAS No. 128), was issued. SFAS No. 128 simplifies the
standards for computing earnings per share, and makes the United States
standards for computing earnings per share more comparable to international
standards. SFAS No. 128 requires presentation of "basic" earnings per share
(which excludes dilution) and "diluted" earnings per share. The Company does not
believe the adoption of SFAS No. 128 in fiscal 1997 will have a material impact
on the Company's reported earnings per share. SFAS No. 128 is effective for
financial statements issued for periods ending after December 15, 1997 and
requires restatement of all prior period earnings per share presented.
Forward-Looking Statements. This report contains certain forward-looking
statements reflecting management's current views with respect to future events
and financial performance. These forward-looking statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those in the forward-looking statements, including, but not
limited to the Company's ability to generate an operating profit and the
Company's ability to secure additional financing on acceptable terms.
<PAGE>
PART II. OTHER INFORMATION
AVENUE ENTERTAINMENT GROUP, INC.
September 30, 1997
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
AVENUE ENTERTAINMENT GROUP, INC.
DATE: November 14, 1997 BY: Gene Feldman
Chairman of the Board
DATE: November 14, 1997 BY: Cary Brokaw
President and Chief Executive
Officer, Director
DATE: November 13, 1997 BY: Sheri L. Halfon
Vice President and Chief
Financial Officer, Director
