UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-QSB
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 For the quarter ended September 30, 1998
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.)
11755 Wilshire Blvd., Suite 2200
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 13, 1998.
Common Stock 4,108,838
<PAGE>
AVENUE ENTERTAINMENT GROUP, INC.
Table of Contents
PART I. FINANCIAL INFORMATION Page No.
Consolidated Condensed Balance Sheets -
September 30, 1998 (unaudited) and
December 31, 1997 1
Consolidated Condensed Statement of Operations -
Three Months and Nine Months Ended
September 30, 1998 and 1997 2
Consolidated Condensed Statement of Cash Flows -
Nine Months Ended September 30, 1998 and 1997 3
Notes to Consolidated Condensed Financial Statements 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Signatures 13
<PAGE>
PART I. FINANCIAL INFORMATION
AVENUE ENTERTAINMENT GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
September 30, December 31,
1998 1997
Assets (unaudited)
Cash 355,741 $ 1,158,347
Short-term investments 278,526 562,711
Accounts receivable 81,471 126,492
Income tax receivable 43,000 70,000
Films costs, net 1,615,731 1,481,571
Property and equipment, net 86,626 102,356
Other assets 34,293 18,709
Goodwill 2,244,159 2,454,549
---------- -----------
Total assets $4,739,547 $5,974,735
========== ==========
Liabilities and Stockholders' Equity
Accounts payable and accrued expenses 950,442 $ 751,419
Loan payable 127,500 127,500
Capitalized lease obligations 8,459
Due to related party 94,480 94,480
---------- -----------
Total liabilities 1,172,422 981,858
---------- ----------
Stockholders' equity
Common stock, par value $.01 per share 41,088 40,728
Additional paid-in capital 6,405,821 6,232,256
Accumulated deficit (2,729,784) (1,327,818)
Accumulated comprehensive income 197,711
Note receivable for common stock (150,000) (150,000)
---------- ----------
Total stockholders' equity 3,567,125 4,992,877
---------- -----------
Total liabilities and stockholders' equity $4,739,547 $5,974,735
========== ==========
See accompanying notes to the consolidated condensed financial statements.
<PAGE>
AVENUE ENTERTAINMENT GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months Nine months
ended September 30, ended September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Operating revenues $ 144,136 $ 116,050 $553,894 $2,242,362
--------- --------- -------- ----------
Cost and expenses:
Film production costs 18,911 26,690 192,163 1,177,518
Selling, general & administrative
expenses 563,652 598,682 1,783,920 1,938,497
---------- --------- ---------- ----------
Total costs and expenses 582,563 625,372 1,976,083 3,116,015
---------- ---------- ---------- -----------
Unrealized gains (losses) on
trading securities (177,775) 27,853
---------- --------------- -----------
Loss before income tax (616,202) (509,322) (1,394,336) (873,653)
Income tax benefit (expense) (174) 100,000 (7,630) 172,367
------------- ---------- ------------ -----------
Net loss $(616,376) $(409,322) $(1,401,966) $(701,286)
========= ========= =========== =========
Basic and diluted loss per share $ (.15) $ (.11) $ (.34) $ (.19)
============= ============ ============= ============
Weighted average shares
outstanding 4,108,838 3,772,838 4,090,838 3,737,838
========== ========== ========== ==========
</TABLE>
See accompanying notes to the consolidated condensed financial statements.
<PAGE>
AVENUE ENTERTAINMENT GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months
ended September 30,
1998 1997
---------- ------
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (1,401,966) $ (701,286)
Adjustments to reconcile net income
to net cash provided by (used for)
operating activities:
Depreciation 18,094 20,340
Unrealized gain on trading securities (27,853)
Amortization-film production costs 254,463 1,136,281
Amortization-goodwill 210,390 210,390
Stock option compensation 28,125 28,125
Changes in other operating assets and liabilities:
Accounts receivable 45,021 (194,816)
Film costs (388,623) (762,501)
Other assets (15,584) 31,898
Accounts payable and accrued expenses 250,350 158,731
Income taxes receivable 27,000 (180,000)
Advances from customers (488,730)
------------- ----------
Net cash used for operating activities (1,000,583) (741,568)
----------- ----------
Cash flows from investing activities:
Proceeds from sale of trading securities 63,000 270,000
Purchase of equipment (2,364) (16,455)
------------- ----------
Net cash provided by investing
activities 60,636 253,545
------------ ----------
</TABLE>
<PAGE>
AVENUE ENTERTAINMENT GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
<TABLE>
<CAPTION>
Nine months
ended September 30,
1998 1997
--------- --------
Cash flows from financing activities:
<S> <C>
Sale of common stock $ 145,800
Proceeds from loan payable $ 227,500
Exercise of warrants 100,000
Principal payments of capital lease of obligation (8,459) (26,255)
---------- ----------
Net cash provided by financing activities 137,341 301,245
---------- ----------
Net decrease in cash (802,606) (186,778)
Cash at the beginning of period 1,158,347 687,080
---------- -----------
Cash at the end of period $ 355,741 $ 500,302
========== =========
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest $ 8,916 $ 40,924
========== ==========
Income taxes $ 7,493 $ 191,628
========== =========
</TABLE>
See accompanying notes to the consolidated condensed financial statements.
<PAGE>
AVENUE ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED 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 10K-SB for
the year ended December 31, 1997. 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, 1998, the results of
operations and its cash flows for the three months and nine month periods ended
September 30, 1998 and 1997 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.
The December 31, 1997 Consolidated Condensed Balance Sheet has been reclassified
for comparative purposes.
<PAGE>
AVENUE ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
2. Film costs
Film costs consist of the following:
September 30, December 31,
1998 1997
In process or development $ 9,013 47,955
Released, net of accumulated amortization
of $12,007,537 and $11,753,074 1,606,718 1,433,616
--------- ---------
$ 1,615,731 1,481,571
========= =========
3. Loan payable
On May 27, 1997, the Company entered into an unsecured demand note
which provided the Company with borrowings (the "Note") in the principal amount
of $250,000, at prime plus 1%, with Fleet Bank, National Association ("Fleet"),
which was payable on demand, but in any event not later then May 27, 1998. As of
June 1, 1998, Fleet extended the Note for an additional one-year period and
reduced the available borrowing amount of the Note to $150,000. As of September
30, 1998, $127,500 had been borrowed under the Note at an interest rate of 9.5%.
The Note is payable on demand, but in any event not later then May 27, 1999.
4. Comprehensive income
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 130. "Reporting Comprehensive Income", which establishes standards
for the reporting and display of comprehensive income and its components in
general purpose financial statements for the year ended December 31, 1998. The
following are the components of comprehensive income:
Nine months ended
September 30, September 30,
1998 1997
--------- -------
Net loss $ (1,401,966) $ (701,286)
Other comprehensive income, net of tax:
Unrealized gains on
marketable securities 304,272
----------- ------------
Comprehensive income (1,401,966) $ (397,014)
=========== ===========
<PAGE>
AVENUE ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
4. Comprehensive income (Continued)
The components of accumulated comprehensive income, net of related tax
are as follows:
September 30, December 31,
1998 1997
Unrealized gains on
marketable securities $ $ 197,711
------------ ---------
Accumulated other comprehensive income $ $ 197,711
============ ==========
In June 1998, the Company made the decision to sell in the short-term
its shares of GP Strategies common stock, which are classified on the
Consolidated Balance Sheet as a Marketable security, in order to assist in
funding its working capital needs. The effect of reclassifying these shares as
trading securities from available for sale was a $205,628 decrease in
Accumulated other comprehensive income on the Consolidated Balance Sheet at June
30, 1998.
5. Sale of stock
In May 1998, the Company sold 36,000 restricted shares of common stock
to certain investors pursuant to a private placement transaction and realized
net proceeds of approximately $146,000. The shares of common stock cannot be
sold, transferred or assigned for a one-year period. The Company claimed an
exemption from the registration requirements of the Securities Act of 1933 (the
"Act") pursuant to Rule 506 of Registration D of the Act.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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.
Liquidity and capital resources
At September 30, 1998, the Company had approximately $356,000 of cash and
approximately $279,000 of short term investments. Of the $356,000 of cash at
September 30, 1998, approximately $300,000 has been earmarked for future
residual payments which have been accrued in the financial statements. The
residual payments would be payable on the earlier of the second air date of
certain television productions or September 2000.
On May 27, 1997, the Company entered into an unsecured demand note (the "Note"),
which provided the Company with borrowings in the principal amount of $250,000,
at prime plus 1%, with Fleet Bank, National Association. The Note was payable on
demand, but in any event not later then May 27, 1998. As of June 1, 1998, Fleet
extended the Note for an additional one-year period and reduced the available
borrowing amount of the Note to $150,000. As of September 30, 1998, $127,500 had
been borrowed under the Note. The Note is payable on demand, but in any event
not later then May 27, 1999.
Management believes that the existing cash and marketable securities 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, as well as its current organizational structure will be adjusted as
necessary based on available financing and existing capital resources.
Results of operations
For the quarter and nine months ended September 30,1998 the Company had a loss
before income taxes of $616,000 and $1,394,000 compared to a loss of $509,000
and $874,000 for the quarter and nine months ended September 30, 1997. The
increased loss for the periods was the result of reduced revenues earned by both
Wombat and Avenue Pictures as well as a $178,000 unrealized loss on the transfer
of GP Strategies common stock from available for sale to trading securities in
the quarter ended September 1998.
Revenues
Revenues for the three months ended September 30, 1998 were $144,000 compared to
$116,000 for the three months ended September 30, 1997. Revenues from the
operations of Avenue Pictures for the three months ended September 30, 1998,
were approximately $122,000, which were primarily derived from development fees,
as compared to approximately $10,000 in 1997. Revenues from Wombat's operations
for the three months ended September 30, 1998 were approximately $23,000 as
compared to $106,000 for the three months ended September 30, 1997. Of the
revenues earned by Wombat during the three months ended September 30, 1997,
approximately $64,000 was derived from licensing of rights for Wombat
programming in secondary markets through Janson Associates.
Revenues for the nine months ended September 30, 1998 were $554,000 compared to
$2,242,000 for the nine months ended September 30, 1997. Revenues from the
operations of Avenue Pictures for the nine months ended September 30, 1998 were
approximately $234,000 which were primarily derived from development fees as
compared to approximately $1,457,000 for the nine months ended September 30,
1997 which 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 "Finding Graceland". Revenues
from Wombat's operations for the nine months ended September 30, 1998 were
approximately $320,000, as compared to approximately $785,000 for the nine
months ended September 30, 1997. Wombat's revenue of $320,000 in 1998 was
derived from the licensing of rights to Wombat programming in secondary markets
through Janson Associates. 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 for A&E. The
remaining revenue of $499,000 was derived from licensing of rights for Wombat
programming in secondary markets through Janson Associates.
Film Production Costs
Cost of revenues for the nine months ended September 30, 1998 was $192,000
compared to $1,178,000 for the nine months ended September 30, 1997. The
decrease is the result of reduced revenue recognized for the period.
Selling, General and Administrative
Selling, general and administrative (S,G&A) expenses for the three months ended
September 30, 1998 were $564,000 compared to $599,000 for the three months ended
September 30, 1997. The reduced S,G&A cost for the period was the results of
efforts to reduce expenses and personnel costs due to the reduced revenue level.
Selling, general and administrative expenses for the nine months ended September
30, 1998 were $1,784,000 compared to $1,938,000 for the nine months ended
September 30, 1997. The reduced S,G&A cost for the period was the results of
efforts to reduce expenses and personnel costs due to the reduced revenue level.
Recent accounting developments
The Financial Accounting Standards Board issued Accounting Standards (SFAS 130),
"Reporting Comprehensive Income", in June 1997 which requires a statement of
comprehensive income to be included in the financial statements for fiscal years
beginning after December 15, 1997. The Company has included the required
information in Note 4 to the Consolidated Financial Statements.
In addition, in June of 1997, the FASB issued SFAS 131, "Disclosures About
Segments of an Enterprise and Related Information". SFAS 131 requires disclosure
of certain information about operating segments and about products and services,
geographic areas in which a company operates, and their major customers. The
Company is presently in the process of evaluating the effect that this new
standard will have on disclosures in the Company's financial statements and the
required information will be reflected in the year ended December 31, 1998
financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. This Statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. The Company will adopt SFAS No. 133 by
January 1, 2000. The Company is currently evaluating the impact the adoption of
SFAS No. 133 will have on the consolidated financial statements.
Year 2000
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium (year 2000) approaches. The "year
2000" problem is pervasive and complex as virtually every computer operation
will be affected in some way by the rollover of the two digit year value to 00.
The issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail.
The Company is utilizing both internal and external resources to identify,
correct or reprogram and test systems for year 2000 compliance. The Company
operates its financial reporting systems through a personal computer based
accounting and general ledger package. The Company is in the process of
installing the required updates to the system to make the system year 2000
compliant. The Company believes that these updates will cost approximately
$5,000 and be complete by the end of the first quarter of 1999.
The Company has also identified various ancillary programs that need to be
updated and has contracted with third parties for this work to be completed
within the next six months. It is expected that the cost of these modifications
will be approximately $5,000.
In addition, the Company is examining their exposure to the year 2000 in other
areas of technology. These areas include telephone and E-mail systems, operating
systems and applications in free standing personal computers, local area
networks and other areas of communication. A failure of these systems, which may
impact the ability of the Company to service their customers which could have a
material effect on their results of operations. These issues are being handled
by the finance team at the Company by identifying the problems and obtaining
from service providers either the necessary modifications to the software or
assurances that the systems will not be disrupted. The Company believes that the
cost of the programming and equipment upgraded will not be in excess of $7,500.
In addition, certain personnel computers and other equipment that is not year
2000 compliant will be upgraded through the Company's normal process of
equipment upgrades. The Company believes that the evaluation and implementation
process will be complete no later than the second quarter of 1999. Over the next
year, the Company plans to continue to develop and implement other information
technology projects needed in the ordinary course of business.
The Company expects to finance these expenditures from working capital.
Therefore, the Company does not expect the year 2000 issue to have a material
adverse impact on its financial position or results of operations.
Like other companies, the Company relies on its customers for revenues and on
its vendors for products and services of all kinds; these third parties all face
the year 2000 issue. An interruption in the ability of any of them to provide
goods or services, or to pay for goods or services provided to them, or an
interruption in the business operations of our customers causing a decline in
demand for services, could have a material adverse effect on the Company in
turn.
In addition, there is a risk, the probability of which the Company is not in a
position to estimate, that the transition to the year 2000 will cause wholesale,
perhaps prolonged, failures of electrical generation, banking,
telecommunications or transportation systems in the United States or abroad,
disrupting the general infrastructure of business and the economy at large. The
effect of such disruptions on the Company could be material.
The Company's various departments will communicate with their principal
customers and vendors about their year 2000 readiness, and expect this process
to be completed no later than the third quarter of 1999. None of the responses
received to date suggests that any significant customer or vendor expects the
year 2000 issue to cause an interruption in its operations which would have a
material adverse impact on the Company. However, because so many firms are
exposed to the risk of failure not only of their own systems, but of the systems
of other firms, the ultimate effect of the year 2000 issue is subject to a very
high degree of uncertainty.
The Company believes that its preparations currently under way are adequate to
assess and manage the risks presented by the year 2000 issue, and does not have
a formal contingency plan at this time.
The statements in this section regarding the effect of the year 2000 and the
Company's responses to it are forward-looking statements. They are based on
assumptions that the Company believes to be reasonable in light of its current
knowledge and experience. A number of contingencies could cause actual results
to differ materially from those described in forward-looking statements made by
or on behalf of the Company.
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 ability of the
Company to reverse its history of operating losses; production risks; dependence
on contracts with certain customers; future foreign distribution arrangements;
the risk that the Company's preparations with respect to the risks presented by
the year 2000 issue will not be adequate; and dependence on certain key
management personnel. All of these above factors are difficult to predict, and
many are beyond the control of the Company.
<PAGE>
PART II. OTHER INFORMATION
AVENUE ENTERTAINMENT GROUP, INC.
September 30, 1998
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 16, 1998 BY: Gene Feldman
Chairman of the Board
DATE: November 16, 1998 BY: Cary Brokaw
President and Chief Executive
Officer, Director
DATE: November 16, 1998 BY: Ira J. Sobotko
Principal Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001023298
<NAME> AVENUE ENTERTAINMENT GROUP, INC.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 355,741
<SECURITIES> 278,526
<RECEIVABLES> 81,471
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,739,547
<PP&E> 243,545
<DEPRECIATION> 156,919
<TOTAL-ASSETS> 4,739,547
<CURRENT-LIABILITIES> 1,172,422
<BONDS> 0
0
0
<COMMON> 41,088
<OTHER-SE> 3,526,037
<TOTAL-LIABILITY-AND-EQUITY> 4,739,547
<SALES> 553,894
<TOTAL-REVENUES> 553,894
<CGS> 192,163
<TOTAL-COSTS> 1,783,920
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,916
<INCOME-PRETAX> (1,394,336)
<INCOME-TAX> (7,630)
<INCOME-CONTINUING> (1,401,966)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,401,966)
<EPS-PRIMARY> (.34)
<EPS-DILUTED> 0
</TABLE>
