UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
(Mark One)
[ X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-12193
AFFINITY ENTERTAINMENT, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 22-2473403
(State or other jurisdiction of (I.R.S. Employer)
incorporation or organization) Identification No.)
15310 Amberly Drive, Suite 370, Tampa, Florida 33647
(Address of principal executive offices) (Zip Code)
(813) 975-8180
(Registrant's telephone number, including area code)
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 .
Registrant has 8,284,217 shares of Common Stock outstanding as of
December 31, 1996.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
AFFINITY ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
- --------------------------------------------------------------------------------
(In thousands, except per share data)
Quarter Ended
Dec 31, Dec 31,
1996 1995
- --------------------------------------------------------------------------------
REVENUE.................................................. $ 191 $1,465
COSTS AND EXPENSES
Cost of revenue, exclusive of amortization............... 66 838
General and administrative............................... 1,013 543
Depreciation and amortization............................ 136 34
----- ------
Total costs and expenses............................... 1,215 1,415
----- ------
Operating income (loss)................................ (1,024) 50
OTHER INCOME, net........................................ 54 86
----- ------
Income (loss) before provision for income taxes
and extraordinary item................................. (970) 136
Provision for income taxes............................... -- (36)
Minority Interest in net loss of subsidiary.............. 47 --
----- ------
Income (loss) before extraordinary item.................. (923) 100
Utilization of net operating loss carryforwards.......... -- 36
----- ------
Net income (loss)........................................ $ (923) $ 136
===== ======
Loss per common share.................................... $ (.11) $ (.02)
======= ======
Weighted average shares outstanding...................... 8,284 6,008
========= ======
The accompanying notes are an integral part of these consolidated
financial statements.
2
<PAGE>
AFFINITY ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)
- --------------------------------------------------------------------------------
(In thousands)
Dec 31, Sep 30,
1996 1996
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents.............................. $ 338 $ 1,366
Accounts receivable, net............................... 924 133
Programming costs...................................... 2,384 990
Other current assets, net.............................. 145 188
------- -------
Total current assets................................. 3,791 2,677
PROPERTY AND EQUIPMENT, at cost
Edit equipment ..................................... 1,237 1,237
Other equipment........................................ 432 314
------- -------
1,669 1,551
Less accumulated depreciation........................ 1,113 1,072
------- -------
556 479
Construction in progress............................. 11 64
------- -------
Total property and equipment....................... 567 543
OTHER ASSETS
Loans receivable, net.................................. -- 539
Due from officers and employees........................ 42 68
Investment in joint venture, net....................... 250 250
Other assets........................................... 30 315
------- -------
Total other assets................................... 322 1,172
------- -------
Total assets....................................... $ 4,680 $ 4,392
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
<TABLE>
<CAPTION>
AFFINITY ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)
- ----------------------------------------------------------------------------------------------
(In thousands)
Dec 31, Sep 30,
1996 1996
- ----------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable................................................... $ 750 $ --
Notes payable...................................................... 353 12
Notes payable - related party...................................... 1,215 --
Accured interest................................................... 135 --
Accrued liabilities................................................ 799 139
Deferred revenue................................................... 181 --
------ --------
Total current liabilities........................................ 3,433 151
MINORITY INTEREST.................................................. 207 --
STOCKHOLDERS' EQUITY
Convertible preferred stock, $1 par value, $10 stated value,
500,000 shares authorized, 48,734 shares issued and
outstanding...................................................... 487 487
Convertible preferred stock, $.0001 par value, $50 stated
value, 100,000 shares authorized, no shares issued and
outstanding...................................................... -- --
Common stock, $.01 par value, 25,000,000 shares
authorized, 8,284,217 shares issued and
outstanding...................................................... 83 829
Additional paid-in capital......................................... 13,040 14,686
Additional paid-in capital - stock options......................... 394 394
Deficit............................................................ (6,817) (5,894)
------ -------
7,187 10,502
Less:
Stock subscriptions receivable..................................... 5,742 5,829
Unearned compensation.............................................. 405 432
------- -------
Total stockholders' equity....................................... 1,040 4,241
------- -------
Total liabilities and stockholders' equity..................... $ 4,680 $ 4,392
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
<TABLE>
<CAPTION>
AFFINITY ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)
(In thousands)
Convertible Convertible Additional
Preferred Preferred Common Paid-In
Stock Stock Stock Additional Capital Stock
$50 Stated $10 Stated $.10 Par Paid-In Stock Subscription
Value Value Value Capital Options Deficit Receivable
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance on October 1,
1996....................... $ -- $ 487 $ 829 $14,686 $ 394 $(5,894) $(5,829)
Cash received on
subscription receivable... -- -- -- -- -- -- 87
Amortization of unearned
compensation.............. -- -- -- -- -- -- --
Change in par value of
common stock.............. -- -- (746) 746 -- -- --
Purchase of Subsidiary..... -- -- -- (2,392) -- -- --
Net loss for the quarter
ended December 31, 1966... -- -- -- -- -- (923) --
----- ----- ----- ----- ----- ------ -----
Balance on December 31,
1996..................... $ -- $ 487 $ 83 $13,040 $ 394 $(6,817) $(5,742)
===== ===== ===== ======= ====== ======= =======
</TABLE>
Unearned
Compensation Total
- ---------------------------------------------------------
Balance on October 1,
1996....................... $ (432) $ 4,241
Cash received on
subscription receivable... -- 87
Amortization of unearned
compensation.............. 27 27
Change in par value of
common stock.............. -- --
Purchase of Subsidiary..... -- (2,392)
Net loss for the quarter
ended December 31, 1966... -- (923)
----- ------
Balance on December 31,
1996..................... $ (405) $ 1,040
====== ======
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
<TABLE>
<CAPTION>
AFFINITY ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
- -------------------------------------------------------------------------------------------
(In thousands)
Quarter Ended
Dec 31, Dec 31,
1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows - Operating Activities:
Net income (loss)............................................... $ (923) $ 136
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................................. 136 34
Assets acquired in purchase of subsidiaries................... 66 --
Minority interest in subsidiary............................... 207 --
Provision for losses on accounts receivable................... 9 --
Other assets.................................................. -- --
Amortization of unearned compensation related to grant
of stock options to executives.............................. 27 --
Changes in current assets and liabilities:
(Increase) decrease in accounts receivable.................. 27 (495)
(Increase) decrease in programming costs.................... (37) (79)
(Increase) decrease in current assets....................... 43 (111)
Increase (decrease) in accrued liabilities.................. (63) 49
Increase (decrease) in deferred revenue..................... -- (206)
------- ------
Net cash used in operating activities..................... (508) (672)
Cash Flows - Investing Activities:
Capital expenditures............................................ (34) (51)
Investments in notes receivable................................. 26 --
Investments in loans receivable................................. (844) --
Investments in joint venture.................................... -- (315)
------- ------
Net cash used in investing activities..................... (852) (366)
Cash Flows - Financing Activities:
Proceeds from sale of common stock.............................. 87 1,459
Proceeds from notes payable..................................... -- 30
Principal payments on notes payable............................. (4) (476)
------- ------
Net cash provided by financing activities................. 83 1,013
------- ------
Increase in cash and cash equivalents........................... (1,277) (25)
Cash and cash equivalents at beginning of period................ 1,366 147
------- ------
Cash and cash equivalents at end of period...................... $ 89 $ 121
======= ======
</TABLE>
Supplemental Schedule of Non-cash Investing and Financing Activities:
During the quarter ended December 31, 1996, the Company reclassified a $600,000
loan receivable to an investment in subsidiary as a part of the acquisition of
Century Technologies, Inc.
The accompanying notes are an integral part of these consolidated financial
statements
6
<PAGE>
AFFINITY ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note A - History and Organization
Affinity Entertainment, Inc. (the "Company"), formerly Affinity
Teleproductions, Inc., a Delaware corporation is engaged in producing and
selling feature films, television programs, commercials, infomercials and videos
for the home and industrial markets in the United States and internationally.
The Company entered into this business following a February 1994 merger with
CBNI Development, Inc. ("CBNI"). CBNI has been engaged in a shopping service
business.
On August 31, 1994, the Company acquired Broadcast Edit, Inc.
("Broadcast Edit"), a California corporation for 50,000 shares of common stock
in a transaction accounted for a pooling of interests. Broadcast Edit is a video
production and post-production company. It provides a full range of
communication services to corporations and advertising agencies, and it also
produces, directs and edits television programs and videos for the entertainment
industry.
The Company is engaged in the production of feature films, television
programs, commercials, documentaries and videos for all media worldwide. In
addition, the Company, through its wholly-owned subsidiary, Broadcast Edit,
Inc., produces and performs post-production editing services for programming
produced internally by the Company and externally by outside parties.
The Company has formed a new wholly-owned subsidiary, Affinity
Entertainment Group, Inc., April 4, 1995, to intensify its efforts on the
feature film portion of its business.
On October 31, 1996, the Company purchased a 76% interest in Century
Technologies, Inc., a publicly-held Colorado corporation that is in the business
of distributing film and television products to worldwide markets.
On December 9, 1996, the Company formed a new wholly-owned subsidiary,
Tradewinds Television, Inc., for the purposes of operating a domestic television
syndication company.
Note B - Basis of Presentation
The accompanying Condensed Consolidated Balance Sheet includes the
accounts of the Company, its wholly-owned subsidiaries and its 76% interest in
Century Technologies, Inc. ("Century"). The Statement of Operations includes the
accounts of the Company and one of its wholly-owned subsidiaries for the quarter
ended December 31, 1996 and the activity from the date of acquisition through
December 31, 1996 for Century and its other wholly-owned subsidiary. All
significant intercompany accounts, transactions and profits have been
eliminated.
The Condensed Consolidated Financial Statements are unaudited and
should be read in conjunction with the audited Consolidated Financial Statements
and notes thereto for the fiscal year ended September 30, 1996.
In the opinion of management, all adjustments necessary for a fair
presentation of such Condensed Consolidated Financial Statements have been
included. Such adjustments consist only of normal recurring items. Interim
results are not necessarily indicative of results for a full year. The Condensed
Consolidated Financial Statements and notes hereto are presented as permitted by
the Securities Exchange Commission and do not contain certain information
included in the Company's annual Consolidated Financial Statements and notes
hereto as discussed above.
7
<PAGE>
Note C - Significant Events
Authorization of Preferred Stock
On October 31, 1996, the Company authorized the creation of two shares
of Series D Preferred Stock with a par value of $1 in connection with the
acquisition of Century Technologies, Inc.
Acquisition of Century Technologies, Inc.
On October 31, 1996, the Company purchased a 76% interest in Century
Technologies, Inc. ("Century"), a publicly-held Colorado corporation that is in
the business of distributing film and television products to worldwide markets.
Under the terms of the Stock Acquisition Agreement between the parties, the
Company purchased 37,500,000 Units of Century for $0.08 per unit. Each Unit
consists of one (1) share of Century Common Stock at $.0001 par value ("Century
Common Stock") and one (1) Common Stock purchase warrant to purchase one (1)
share of Century Common Stock at $2.00 per share ( the "Warrants"). The Units
are immediately separable into their component parts. In consideration for the
transfer of the Units, the Company paid Three Million Dollars ($3,000,000) to
Century consisting of (i) the conversion to equity of Four Hundred Thousand
Dollars ($400,000) cash previously advanced by the Company to Century, (ii) Two
Hundred Thousand Dollars ($200,000) cash, and (iii) a negotiable one-year
promissory note payable by the Company to Century in the amount of Two Million
Four Hundred Thousand Dollars ($2,400,000)(the "Promissory Note") which is
secured by the Company's Series D Preferred Stock.
The Promissory Note bears interest at a rate of eight percent (8%) per
annum and is secured by two (2) shares of Series D Preferred Stock of the
Company, par value $1.00 (the "Series D Preferred Stock"). Each share of Series
D Preferred Stock shall be convertible into 750,000 shares of the Company's
Common Stock only in the event of default by the Company on the Promissory Note.
The Series D Preferred Stock is not entitled to any voting or dividend rights of
any kind. Notwithstanding the foregoing, the Company shall have the right to
provide such substitute collateral as the Company and Century may mutually agree
upon in writing. The Series D Preferred Stock will be held in escrow by
Century's counsel (the "Escrow Agent") until such time as the Promissory Note is
paid in full or substitute collateral is provided by the Company. The Company
believes that the acquisition of Century will enable the Company to implement
its business plan of becoming heavily vested in the U.S. and foreign
distribution of both feature films and television programming.
Acquisition of the Assets of Tradewinds Television, LLC
On September 13, 1996, the Company and Tradewinds Television, LLC, a
California Limited Liability Company ("Tradewinds"), entered into an Interim
Financing and Security Agreement (the "Security Agreement") pursuant to which
Tradewinds granted the Company, as security for the repayment by Tradewinds of
certain loans to be made by the Company, a first priority lien on substantially
all of Tradewinds' assets (the "Assets"). The Assets include accounts
receivable, the name and mark "Tradewinds Television," the rights to the
syndicated television series "Bounty Hunters" and distribution rights to certain
other television products. As of November 19, 1996, the Company loaned
Tradewinds an aggregate of approximately $823,000 (the "Loans") pursuant to the
Security Agreement.
Concurrently, with the execution of the Security Agreement, the Company
and Tradewinds engaged in negotiations pursuant to which the Company would
purchase substantially all of the Assets. The parties entered into an Asset
Purchase Agreement, dated October 3, 1996, as amended, to provide for such
acquisition. The sale of the assets was contingent upon the resolution to which
satisfaction of the Company of various bankruptcy issues concerning other
companies affiliated with Royeric Pack, the owner of Tradewinds.
On November 14, 1996, the Company filed a complaint in Los Angeles
Superior Court asserting that Tradewinds had defaulted under the Loans and the
Security Agreement, and seeking judicial foreclosure on the
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<PAGE>
Assets, among other claims. On December 6, 1996, Tradewinds in lieu of
foreclosure on the Assets by the Company, agreed to transfer and assign to the
Company the Assets, subject to certain payables associated therewith, in
consideration of Affinity forgiving the indebtedness evidenced by the Loans.
Such indebtedness, including interest and related costs and expenses, was
approximately $1,000,000. Also on December 6, 1996, the Company entered into an
Executive Producer Agreement with Mr. Pack, providing executive producing
services in connection with the "Bounty Hunters" series. Pursuant to such
agreement, Mr. Pack received a $75,000 payment on December 6, 1996 for the first
production season, and is entitled in the second production season to a fee of
$3,000 per episode, payable upon airing of each such episode.
On December 17, 1996, the Company agreed with the Trustee of Action
Media Group, Inc., a company affiliated with Mr. Pack and which is the subject
of a bankruptcy court proceeding ("AMG"), to pay $275,000 to the Trustee of AMG,
and to secure in exchange a release of certain claims by the Trustee and AMG
against Tradewinds and the Company with regard to indebtedness owed by
Tradewinds to AMG and the assignment of Assets by Tradewinds to the Company in
lieu of foreclosure, as described above. On December 18, 1996, the Court having
jurisdiction over the AMG bankruptcy proceeding approved the $275,000 payment
and release among AMG, Tradewinds and the Company. An order to this effect (the
"Settlement Order") was entered on January 14, 1997. The Trustee subsequently
filed a motion seeking to amend the Settlement Order to carve out from the
release certain unspecified liabilities owed by Tradewinds to third parties
including AMG. The Company is contesting this motion.
Upon receipt of the Assets by the Company, the Assets were deposited in
the Company's wholly owned subsidiary, Tradewinds Television, Inc.
Loan Agreement
In October 1996, the Company reached an agreement in principal with a
European entity in which the entity agreed to lend $48.4 million to the Company.
The loan will bear interest at a rate of 9% per annum over a five year period.
The Company will pledge as collateral for the loan one hundred (100) shares of
Series C Convertible Preferred Stock, to be created upon closing, that can be
converted by the lender into Common Stock of the Company under certain
conditions of repayment of the loan, but in no instance at a price less than
$10.00 per common share. Upon conversion of the Series C Preferred Stock to
Common Stock, the holder of the Series C Preferred Stock shall also receive an
additional number of shares equal to 10% of the number of shares as calculated
above. In no event is greater than 40% of the outstanding principal of the loan
to be converted to equity in any twelve (12) month period. Any common shares
and/or preferred shares issued upon conversion of the loan to equity will not be
sold, transferred or assigned in the absence of an effective registration
statement under the Securities Act of 1933, as amended, or pursuant to Rule 144
promulgated thereunder. The loan is contingent upon the issuance of an insurance
policy to the lender guaranteeing the value of the loan. The lender has informed
the Company that its has incurred "unexpected delays" in processing the loan.
More specifically, the insurance company with which the lender is negotiating
the insurance guarantee has placed limitations on the criteria to complete the
loan which the lender believes to be onerous. The lender is currently attempting
to meet the criteria established by the insurance company. As a result, the
lender has informed the Company that it cannot place a time limit on completion
of the loan. In light of these circumstances, the Company believes that there is
substantial doubt as to whether the insurance guarantee will be issued on terms
acceptable to both the lender and the Company, or at all. Therefore, the Company
has decided to pursue additional financing opportunities.
Note D - Income Taxes
The Company provides for the tax effects of transactions reported in
the Condensed Consolidated Financial Statements. The provision, if any, consists
of taxes currently due plus deferred taxes related primarily to differences
between the basis of assets and liabilities for financial and income tax
reporting. The deferred tax assets and liabilities, if any, represent the future
tax return consequences of those differences, which will either be taxable or
deductible when the assets and liabilities are recovered or settled. As of
December 31, 1996, the Company had no material current tax liability, deferred
tax assets or liabilities.
Note E - Loss Per Common Share
The loss per share of common stock is calculated by dividing net loss
by the weighted average shares of common stock and common stock equivalents
outstanding during the period. Common stock equivalents include
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shares issuable upon conversion of the Company's convertible preferred stock and
exercise of the Company's outstanding warrants and stock options. For the
quarter ended December 31, 1996, common stock equivalents were anti-dilutive and
were not included in the calculation of weighted average common shares
outstanding.
Note F - Reclassifications
Reclassifications to the December 31, 1995 consolidated statements of
operations and cash flows were made to conform to December 31, 1996
presentation.
10
<PAGE>
Item 2. Management's Discussion and Analysis
The Company produces feature films, television programs, commercials,
documentaries and videos for all media worldwide.
A. RESULTS OF OPERATIONS
The following table summarizes the changes in selected items, including
absolute dollar changes, percentage changes and percent of net revenue for the
quarter ended December 31, 1996 compared to the quarter ended December 31, 1995:
<TABLE>
<CAPTION>
Quarter Ended Line Item % of Net
Dec 31, Dec 31, $ Change % Change Revenue
1996 1995 Fav./(Unfav.) Fav./(Unfav.) 1996 1995
---- ---- ------------- ------------- ---- ----
(In Thousands, except %)
<S> <C> <C> <C> <C> <C> <C>
Net Revenue......................... $ 191 $1,465 $(1,247) (87)% 100% 100%
Cost of revenue................... 66 838 772 92 34 58
General and administrative........ 1,013 543 (470) (87) 530 37
Depreciation and
amortization.................... 136 34 (102) (300) 71 2
----- ------ ------- ------ ---
Operating loss...................... (1,024) 50 (1,074) (2,148) (535) 3
Other income, net................... 54 86 (32) (37) 28 6
----- ------ ------- ------ ---
Income (loss) before provision
for income taxes and
extraordinary item................ $(970) $ 136 $(1,106) (813) (507) 9
Provision before income taxes....... -- (36) 36 100 -- (2)
Minority Interest in
net loss of subsidiary............ 47 -- (47) -- 24 --
----- ------ ------- ------ ---
Income (loss) before
extraordinary item................ (923) 100 (1,023) (1,023) (483) 7
Utilization of net operating
loss carryforwards................ -- 36 (36) (100) -- 2
----- ------ ------ ------ ------
Net income (loss)................... $(923) $ 136 $(1,059) (779) (483) 9
===== ====== ====== ====== ======
</TABLE>
Net Revenue
For the quarter ended December 31, 1996, the decrease in revenues is
primarily due to the Company ceasing the airing of its television project,
"EdenQuest", and all of its ancillary sources of income, and its "The
Contemporary Collectibles Show" series. For the quarter ended December 31, 1995,
the Company produced three original episodes, and a compilation ("best of") of
its popular "EdenQuest" television series. As of December 31, 1996, the third
and fourth episodes have not been telecast on free television or basic cable, as
the Company plans to syndicate these episodes through its subsidiary, Tradewinds
Television, Inc., for airing in the summer of 1997. The decrease in revenue
described above was offset in part by the revenues generated by Tradewinds
Television, Inc. derived mainly from the syndicated television series "Bounty
Hunters" and "Ghostwriter."
Cost of Revenue
For the quarter ended December 31, 1996, the significant decrease in
cost of revenue can be attributed to several factors. For the quarter ended
December 31, 1995, television distributors commissions were paid by the Company
based on total cumulative sales of "EdenQuest". As sales in "EdenQuest"
increased, so did commission percentages. In addition, the Company canceled the
launch of the second season of "The
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<PAGE>
Contemporary Collectibles Show", due to a variety of factors, including the
uncertainty regarding the availability of its satellite air time. As a result,
the Company took a one time charge of approximately $125,000 to operations for
expenses incurred in connection with the Lifetime Channel.
General and Administrative
For the quarter ended December 31, 1996, the increase in general and
administrative expenses is primarily due to higher professional expenses as the
Company seeks to position itself to make acquisitions and expand its operations
into feature films and distribution. Further, the Company hired additional staff
to better implement it business plan and increased salaries of some key
personnel to levels commensurate to their job descriptions. Additionally, the
general and administrative expenses also increased due to the acquisition of its
two new subsidiaries. The Company is in the process of consolidating its
California operations to reduce costs.
Depreciation and amortization
For the quarter ended December 31, 1996, the significant increase in
depreciation and amortization expense is primarily due to the accelerated
amortization of Edenquest and Adventure Quest.
B. FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
The Company expects to meet its cash requirements for fiscal year 1997
with funds generated from operations, the exercise of employee stock options,
sales of restricted common stock via private placements and loans. The Company
believes that these sources will be adequate to meet the Company's expected
needs for fiscal year 1997, although there can be no assurance that this will be
the case.
The Company has not formalized its plan for paying the $2,400,000
Promissory Note payable to Century Technologies, Inc. on October 31, 1997. The
Company expects that this Promissory Note will be repaid with some combination
of the assets and receivables of Tradewinds Television, Inc.
In October 1996, the Company reached an agreement in principal with a
European entity in which the entity has agreed to lend $48.4 million to the
Company. The loan will bear interest at a rate of 9% per annum over a five year
period. The Company will pledge as collateral for the loan one hundred (100)
shares of Series C Convertible Preferred Stock, to be created upon closing, that
can be converted by the lender into Common Stock of the Company under certain
conditions of repayment of the loan, but in no instance at a price less than
$10.00 per common share. Upon conversion of the Series C Preferred Stock to
Common Stock, the holder of the Series C Preferred Stock shall also receive an
additional number of shares equal to 10% of the number of shares as calculated
above. In no event is greater than 40% of the outstanding principal of the loan
to be converted to equity in any twelve (12) month period. Any common shares
and/or preferred shares issued upon conversion of the loan to equity will not be
sold, transferred or assigned in the absence of an effective registration
statement under the Securities Act of 1933, as amended, or pursuant to Rule 144
promulgated thereunder. The loan is contingent upon the issuance of an insurance
policy to the lender guaranteeing the value of the loan. The lender has informed
the Company that it has incurred "unexpected delays" in processing the loan.
More specifically, the insurance company with which the lender is negotiating
the insurance guarantee has placed limitations on the criteria to complete the
loan which the lender believes to be onerous. The lender is currently attempting
to meet the criteria established by the insurance company. As a result, the
lender has informed the Company that it cannot place a time limit on completion
of the loan. In light of these circumstances, the Company believes that there is
substantial doubt as to whether the insurance guarantee will be issued on terms
acceptable to both the lender and the Company, or at all. Therefore, the Company
has decided to pursue additional financing opportunities.
12
<PAGE>
For the quarter ended December 31, 1996, the predominate sources of
operating funds were editing services.
Other than discussed above, the Company is not aware of any known
trends or uncertainties that have or are reasonably likely to have a material
effect on the Company's financial position, liquidity or capital resources. Any
other projects not contemplated herein will be funded by joint ventures or other
outside capital.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27.01 Financial Data Schedule
(b) Reports on Form 8-K
1. Current Report of Form 8-K dated November 14, 1996
regarding the acquisition of Century Technologies,
Inc., the termination of the Offshore Securities
Subscription Agreement with Baron Banker Limited, and
the Access America Lawsuit.
2. Current Report of Form 8-K dated December 24, 1996
regarding the acquisition of all assets of Tradewinds
Television, LLC.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized on February 21, 1997.
AFFINITY ENTERTAINMENT, INC.
/s/WILLIAM J. BOSSO
-----------------------------------------
William J. Bosso
Chairman, President, Secretary, Director
/s/ TAYRA AN COX
-----------------------------------------
Tayra An Cox
Controller (Principal Accounting Officer)
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000730626
<NAME> AFFINITY ENTERTAINMENT, INC.
<MULTIPLIER> 1000
<CURRENCY> US-Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 338
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0
487
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