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, 1999
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 525
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 18, 1999.
Common Stock 4,589,030
<PAGE>
AVENUE ENTERTAINMENT GROUP, INC.
Table of Contents
PART I. FINANCIAL INFORMATION Page No.
Consolidated Condensed Balance Sheets -
September 30, 1999 (unaudited) and
December 31, 1998 1
Unaudited Consolidated Condensed Statement of Operations -
Three Months and Nine Months Ended
September 30, 1999 and 1998 2
Unaudited Consolidated Condensed Statement of Cash Flows -
Nine Months Ended September 30, 1999 and 1998 3
Unaudited Notes to Consolidated Condensed Financial Statements 5
Management's Discussion and Analysis of 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,
1999 1998
Assets (unaudited)
Cash $ 645,083 $ 427,240
Marketable securities 79,110 339,716
Accounts receivable 594,969 108,515
Income tax receivable 29,703 55,000
Films costs, net 2,145,630 1,091,646
Property and equipment, net 70,154 87,272
Other assets 18,472 29,766
Goodwill 1,963,639 2,174,029
----------- -----------
Total assets $5,546,760 $4,313,184
========== ==========
Liabilities and Stockholders' Equity
Accounts payable and accrued expenses $ 1,113,108 $1,024,862
Deferred income 700,000 0
Loan payable 842,500 127,500
Deferred compensation 325,250 145,006
Due to related party 101,172 94,481
------------ ---------
Total liabilities 3,082,030 1,391,849
----------- ---------
Stockholders' equity
Common stock, par value $.01 per share 45,890 41,088
Additional paid-in capital 6,938,519 6,415,196
Deficit (4,369,679) (3,384,949)
Note receivable for common stock (150,000) (150,000)
----------- ----------
Total stockholders' equity 2,464,730 2,921,335
----------- -----------
Total liabilities and stockholders' equity $5,546,760 $4,313,184
========== ==========
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,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Operating revenues $ 2,876,475 $ 144,136 $3,252,880 $553,894
----------- --------- ---------- --------
Cost and expenses:
Film production costs 2,685,878 18,911 2,807,450 192,163
Selling, general & administrative
expenses 422,186 563,652 1,398,575 1,783,920
------------------- ---------- ----------
Total costs and expenses 3,108,064 582,563 4,206,025 1,976,083
------------ ---------- ---------- -----------
Unrealized gains (losses) on
trading securities 17,580 (177,775) (45,708) 27,853
Gain (loss) on sale of investments 0 15,003
----------------- ------------- ----------- ----------------
Loss before income tax (214,009) (616,202) (983,850) (1,394,336)
Income tax (benefit) expense (1,837) 174 880 7,630
--------------- --------------- ---------- --------------
Net gain (loss) $ (212,172) $ (616,376) $ (984,730) $(1,401,966)
============== ========== =========== ===========
Basic and diluted loss per common stock $ (0.05) $ (0.15) $ (0.23) $ (0.34)
============== =========== ============ ============
Weighted average shares outstanding 4,428,966 4,108,838 4,215,547 4,090,838
------------- ------------ ----------- ----------
</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,
1999 1998
---- -------
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (984,730) $ (1,401,966)
Adjustments to reconcile net income (loss)
to net cash provided by (used for)
operating activities:
Depreciation 18,349 18,094
Amortization-film production costs 2,770,391 254,463
Amortization-goodwill 210,390 210,390
Loss on sale of Fixed Assets 465
Proceeds from disposal of Fixed Assets 1,360
Gain on sale of investments (15,003)
Unrealized (gain) loss on trading securities 45,708 (27,853)
Proceeds from sale of marketable securities 229,901 63,000
Deferred compensation 325,250
Stock compensation 28,125 28,125
Changes in assets and liabilities which affect net income:
Accounts receivable (486,454) 45,021
Film costs (3,824,375) (388,623)
Other assets 11,294 (15,584)
Accounts payable and accrued expenses (8,754) 250,350
Deferred income 700,000
Income taxes payable 25,297 27,000
Due to related party 6,691 _________
-------------
Net cash used in operating activities (946,095) (937,583)
Cash flows from investing activities:
Purchase of equipment (3,056) (2,364)
------------- -----------
Net cash used in investing activities (3,056) (2,364)
------------- -----------
</TABLE>
<PAGE>
AVENUE ENTERTAINMENT GROUP, INC.
Consolidated Condensed Statements of Cash Flows (Continued)
(Unaudited)
<TABLE>
<CAPTION>
Nine months
ended September 30,
1999 1998
----- ------
Cash flows from financing activities:
<S> <C> <C>
Sale of common stock $ 500,000 $ 145,800
Proceeds from issuance of short term debt 715,000
Repayment of loan to officers (48,006)
Principal payments of capital lease obligations 0 (8,459)
---------- -----------
Net cash provided by financing activities 1,166,994 137,341
Net increase (decrease) in cash 217,843 (802,606)
Cash at the beginning of year 427,240 1,158,347
----------- -----------
Cash at end of period $ 645,083 $ 355,741
========== =========
Supplemental cash flow information:
Cash paid during the year for:
Interest $ 7,661 $ 8,916
---------- ----------
Income taxes $ 2,717 $ 7,493
========== ===========
</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, 1998. 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, 1999, the results of
operations and its cash flows for the three months and nine month periods ended
September 30, 1999 and 1998 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 CONDENSED Financial Statements (Continued)
2. Film costs
Film costs consist of the following:
September 30, December 31,
1999 1998
------------- ------------
In process or development $ 315,927 $ 2,076
Released, net of accumulated amortization
of $15,225,637 and $12,455,246 1,829,703 1,089,570
--------- ---------
$ 2,145,630 $ 1,091,646
========= =========
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
September 30, 1999, $127,500 was outstanding.
On June 3, 1999, the Company entered into an unsecured loan for
$1,000,000 at 8.75% with City National Bank which matures on October 1, 1999. As
of September 30, 1999, $715,000 was outstanding. As of October 1, 1999 the
Company extended the note for an additional three months.
4. Sale of stock
In August 1999, the Company sold 480,192 shares of Common Stock and a
Warrant to purchase 500,000 shares of Common Stock which expires August 2002
(the "Warrant") to certain investors pursuant to a private placement
transaction. The Warrant is exercisable at an exercise price of $2.00 per share.
The shares of Common Stock and the shares of Common Stock issuable upon exercise
of the Warrant cannot be sold, transferred, pledged or assigned for a one-year
period. The Company claimed exemption from the registration requirements of the
Securities Act of 1933 (the "Act") pursuant to Rule 506 of Regulation D. of the
Act.
5. Recent Development
The Company receive a letter from the American Stock Exchange ("AMEX")
notifying the Company that it has fallen below certain of AMEX's continued
listing guidelines because of the Company's recurring losses. The Company
attended a meeting with AMEX on November 16, 1999 to discuss its listing
eligibility. At this meeting AMEX informed the Company that within three weeks
<PAGE>
it would make a determination on the Company's eligibility for continued listing
and whether an extension would be granted to enable the Company to satisfy the
listing criteria. However, there can be no assurance that the Common Stock will
not be delisted in the future.
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, 1999, the Company had approximately $645,000 of cash and
approximately $79,000 of short term investments. Of the $645,000 of cash at
September 30, 1999, 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.
The Company has a working capital deficiency and has an accumulated deficit of
$4,369,679 through September 30, 1999. The Company's continuation as a going
concern is dependent on its ability to ultimately attain profitable operations
and positive cash flows from operations. The Company's management believes that
it can satisfy its working capital needs based on its estimates of revenues and
expenses, together with improved operating cash flows, as well as additional
funding whether from financial markets, other sources or other collaborative
arrangements, such as the private placement transaction described in Note 4 to
the Notes to the Consolidated Condensed Financial Statements. The Company
believes it will have sufficient funds available to continue to exist through
the next year, although no assurance can be given in this regard. Insufficient
funds will require the Company to scale back its operations. The Independent
Auditor's Report dated April 14, 1999 on the Company's consolidated financial
statements states that the Company has suffered losses from operations, has a
working capital deficiency and has an accumulated deficit that raises
substantial doubt about its ability to continue as a going concern. The
accompanying financial statements do not include any adjustments that may result
from the Company's inability to continue as a going concern. See Note 5 to the
Notes to Consolidated Financial Statements with respect to the Company's
discussions with the American Stock Exchange with respect to the continued
listing of its Common Stock.
<PAGE>
Results of operations
For the quarter and nine months ended September 30, 1999 the Company had a loss
before income taxes of $214,000 and $984,000, respectively compared to losses of
$616,000 and $1,394,000 for the quarter and nine months ended September 30,
1998. The decreased loss for the periods was the result of increased revenues
earned by Avenue Pictures.
Revenues
Revenues for the three months ended September 30, 1999 were $2,876,000 compared
to $144,000 for the three months ended September 30, 1998. Of the revenues
earned by Avenue during the three months ended September 30, 1999, approximately
$2,696,000 was derived from the delivery of the "Timeshifters" to Turner
Broadcast Systems. The revenues earned by Wombat during the three months ended
September 30, 1999, were derived from the licensing of "Harry Connick, Jr." to
Bravo and from the licensing of rights for Wombat programming in secondary
markets primarily through Janson Associates.
Revenues for the nine months ended September 30, 1999 were $3,253,000 compared
to $554,000 for the nine months ended September 30, 1998. Revenues from the
operations of Avenue Pictures for the nine months ended September 30, 1999 were
approximately $2,956,000 which was primarily derived from delivery to TBS of the
"Timeshifters." Revenues from Wombat's operations for the nine months ended
September 30, 1999 were approximately $297,000. Wombat's revenue of $297,000 was
derived from the availability of two one-hour profiles for Bravo. The remaining
revenue of $126,000 was derived from licensing of rights for Wombat programming
in secondary markets primarily through Janson Associates.
Film Production Costs
Cost of revenues for the nine months ended September 30, 1999 was $2,807,000
compared to $192,000 for the nine months ended September 30, 1998. The increase
is the result of increased revenue recognized for the period.
Selling, General and Administrative
Selling, general and administrative (S,G&A) expenses for the three months ended
September 30, 1999 were $422,000 compared to $564,000 for the three months ended
September 30, 1998. The reduced S,G&A cost for the period was the results of
efforts to reduce expenses and personnel costs.
Selling, general and administrative expenses for the nine months ended September
30, 1999 were $1,399,000 compared to $1,784,000 for the nine months ended
September 30, 1998. The reduced S,G&A cost for the period was the results of
efforts to reduce expenses and personnel costs.
<PAGE>
Recent accounting developments
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 second month of the fourth 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 fourth 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.
<PAGE>
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 fourth 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, 1999
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 22, 1999 BY: Gene Feldman
Chairman of the Board
DATE: November 22, 1999 BY: Cary Brokaw
President and Chief Executive
Officer, Director
DATE: November 22, 1999 BY: Sheri L. Halfon
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001023298
<NAME> AVENUE ENTERTAINMENT GROUP, INC.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 645,083
<SECURITIES> 79,110
<RECEIVABLES> 594,969
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,494,495
<PP&E> 70,154
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,546,760
<CURRENT-LIABILITIES> 3,082,030
<BONDS> 0
0
0
<COMMON> 45,890
<OTHER-SE> 2,418,840
<TOTAL-LIABILITY-AND-EQUITY> 5,546,760
<SALES> 3,252,880
<TOTAL-REVENUES> 3,252,880
<CGS> 2,807,450
<TOTAL-COSTS> 4,206,025
<OTHER-EXPENSES> (30,705)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (983,850)
<INCOME-TAX> (880)
<INCOME-CONTINUING> (984,730)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (984,730)
<EPS-BASIC> (.23)
<EPS-DILUTED> 0
</TABLE>
