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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
(Mark One)
[ X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-12193
AFFINITY ENTERTAINMENT, INC.
(Exact name of registrant 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)
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 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 .
--- ---
Registrant has 12,104,217 shares of outstanding Common Stock as of
April 30, 1997
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<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
<CAPTION>
AFFINITY ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
- --------------------------------------------------------------------------------------------------
(In thousands, except per share data)
Three Months Ended Six Months Ended
March 31, March 31, March 31, Sept. 30,
1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUE ..................................... $ 314 $ 338 $ 505 $ 1,803
COSTS AND EXPENSES
Cost of revenue, exclusive of amortization 78 623 144 1,460
General and administrative ............... 1,002 320 2,015 863
Depreciation and amortization ............ 288 41 424 76
Acquisition costs ......................... -- 175 -- 175
------- ------- ------- -------
Total costs and expenses ......... 1,368 1,159 2,583 2,574
------- ------- ------- -------
Operating loss ........................... (1,054) (821) (2,078) (771)
OTHER INCOME, net ........................... 19 99 73 185
------- ------- ------- -------
Income (loss) before minority interest ...... (1,035) (722) (2,005) (586)
Minority interest in net loss of subsidiary . 48 -- 95 --
------- ------- ------- -------
Net loss .................................... $ (987) $ (722) $(1,910) $ (586)
======= ======= ======= =======
Loss per common share ....................... $ (.12) $ (.10) $ (.23) $ (.09)
======= ======= ======= =======
Weighted average shares outstanding ......... 8,380 7,089 8,380 6,546
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
AFFINITY ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)
- --------------------------------------------------------------------------------
(In thousands)
March 31, Sept. 30,
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents ...................... $ -- $1,366
Accounts receivable, net ...................... 259 133
Programming costs .............................. 2,939 990
Other current assets, net ...................... 436 188
------ ------
Total current assets ....................... $3,634 $2,677
PROPERTY, PLANT AND EQUIPMENT, at cost
Edit equipment ................................. $1,237 $1,237
Other equipment ................................ 468 314
------ ------
1,705 1,551
Less accumulated depreciation .................. 1,154 1,072
------ ------
551 479
Construction in progress ....................... -- 64
------ ------
Total property and equipment ............... 551 543
OTHER ASSETS
Loans receivable, net .......................... -- 539
Goodwill ....................................... 1,355 --
Investment in joint venture, net ............... 250 250
Other assets ................................... 30 315
------ ------
Total other assets ............................. 1,635 1,104
------ ------
Total assets ................................... $5,820 $4,324
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
AFFINITY ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited) - (Continued)
- -----------------------------------------------------------------------------------
(In thousands)
March 31, Sept. 30,
1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ..................................... $ 1,304 $ --
Notes payable ........................................ 697 12
Notes payable - related party ........................ 25 --
Accrued liabilities .................................. 565 139
Deferred revenue ..................................... 38 --
-------- --------
Total current liabilities ...................... $ 2,629 $ 151
-------- --------
MINORITY INTEREST ...................................... $ 508 $ --
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 and $.10 par value;
25,000,000 shares authorized, 8,398,883
and 8,284,217 shares issued and outstanding,
respectively ..................................... 84 829
Additional paid-in capital ........................... 15,320 14,686
Additional paid-in capital - stock options ........... 279 394
Deficit .............................................. (7,804) (5,894)
-------- --------
8,366 10,502
Less:
Stock subscriptions receivable ....................... 5,266 5,829
Unearned compensation ................................ 378 432
Due from officers and directors ...................... 39 68
-------- --------
Total stockholders' equity ....................... 2,683 4,173
-------- --------
Total liabilities and stockholders' equity .......... $ 5,820 $ 4,324
======== ========
</TABLE>
The accompanying notes are an integral part of these 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
$10 Stated $10 Stated $.10 Par Paid In Stock Subscription Unearned Due From
Value Value Value Capital Options Deficit Receivable Compensation Officers Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance on October 1, 1996 ...... $-- $487 $ 829 $ 14,686 $ 394 $(5,894) $(5,829) $(432) $(68) $ 4,173
Cash received on subscription
receivable ................. -- -- -- -- -- -- 165 -- -- 165
Amortization of unearned
compensation ................ -- -- -- -- -- -- -- 54 -- 54
Changes in par value of
common stock ............... -- -- (746) 746 -- -- -- -- -- --
Exercise of stock options ....... -- -- 1 286 (115) -- -- -- -- 172
Repayment of loan ............... -- -- -- -- -- -- -- -- 29 29
Adjustment to stock price ....... -- -- -- (398) -- -- 398 -- -- --
Net loss for the six months ended
March 31, 1996 ............ -- -- -- -- -- (1,910) -- -- -- (1,910)
---- ---- ----- -------- ----- ------- ------- ----- ---- -------
Balance on March 31, 1997 ....... $-- $487 $ 84 $ 15,320 $ 279 $(7,804) $(5,266) $(378) $(39) $ 2,683
==== ==== ===== ======== ===== ======= ======= ===== ==== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
AFFINITY ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
- --------------------------------------------------------------------------------
(In thousands)
Quarter Ended
March 31, March 31,
1997 1996
- --------------------------------------------------------------------------------
Cash Flows - Operating Activities:
Net loss ................................................. $(1,910) $ (586)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ......................... 424 75
Minority interest in subsidiary ....................... 508 --
Amortization of unearned compensation related to grant
of stock options to executives .................... 54 --
Changes in current assets and liabilities:
(Increase) decrease in accounts receivable ............ 316 (498)
(Increase) decrease in programming costs .............. (926) 149
(Increase) decrease in current assets ................. (247) (88)
Increase (decrease) in accounts payable
and accrued liabilities ............................ (472) (77)
Increase (decrease) in deferred revenue ............... -- (164)
Increase (decrease) in television broadcast air time ... -- 78
Increase (decrease) in loan receivable ................. 568 (600)
Increase (decrease) in other assets .................... 285 --
------- -------
Net cash used in operating activities ............... $(1,400) $(1,711)
------- -------
Cash Flows - Investing Activities:
Capital expenditures .................................. (60) (73)
Investment in joint venture ........................... -- --
Purchase of goodwill ................................... (600) --
------- -------
Net cash used in investing activities ............ (660) (73)
------- -------
Cash Flows - Financing Activities:
Proceeds from sale of common stock .................... 337 6,617
Proceeds from notes payable ........................... 357 145
Principal payments on notes payable ................... -- (834)
------- -------
Net cash provided by financing activities ........... 694 5,928
------- -------
(Decrease)Increase in cash and cash equivalents .......... (1,366) 4,144
Cash and cash equivalents at beginning of period ...... 1,366 147
------- -------
Cash and cash equivalents at end of period ............ $ -- $ 4,291
======= =======
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 as a part of the acquisition of
Century Technologies, Inc.
The accompanying notes are an integral part of these 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, and documentaries 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 73% 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 purpose of operating a domestic television
syndication company. On December 9, 1996, the name was changed to Affinity
Television, Inc.
NOTE B - BASIS OF PRESENTATION
The accompanying Condensed Consolidated Balance Sheet includes the
accounts of the Company, its wholly-owned subsidiaries and its 73% 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 March 31, 1997 and the activity from the date of acquisition through March
31, 1997 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.
7
<PAGE>
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.
NOTE C - SIGNIFICANT EVENTS
MOVIE PROJECTS
The Company's first film, Men Seeking Women, premiered on March 8, 1997 at
the Santa Barbara Film Festival (California). The Company will receive half of
the gross revenues from this motion picture after recouping the costs already
expended.
On February 13, 1997, the Company entered into an agreement with Azur
Entertainment, Ltd. to develop a made-for-television movie that will be filmed
and set in the principality of Monaco. The Executive Producer of the movie will
be Jorge Zamacona and the script will be written by Vivian and Valerie Mayhew.
TELEVISION PROJECTS
The Company's reality based series, Bounty Hunters, has cleared more than
75% of the country for the series renewal, with ten of the top ten television
markets being sold. An additional twenty-six episodes of this series that
follows fearless crime fighting agents as they apprehend fugitives from justice
will be produced. This series is sold on a barter advertising sales basis. This
show is produced by Forever Blue Entertainment and Affinity Television, Inc.
In January the Company co-launched sales of Looking Beyond, a show that
explores the paranormal world, taking highly emotional stories from the point of
view of the victims of such phenomena and examines the greatest mysteries of our
age. Currently, the Company has 70% of the country sold, including ten of the
top ten markets. Looking Beyond is being produced in association with First
Television and will have twenty-six hour-long episodes available.
AGREEMENT WITH TRIBUNE ENTERTAINMENT
The Company entered into an agreement with Tribune Entertainment Company
on March 26, 1997, to sell the commercial time for both Bounty Hunters and
Looking Beyond for the 1997/1998 television broadcast season. Tribune
Entertainment Company, a subsidiary of Tribune Broadcasting Company, is one of
the fastest-growing suppliers of diverse product to the television marketplace.
Tribune Company is a leading information and entertainment company that owns and
operates sixteen television stations (the second largest television station
group in the U. S.), five radio stations, publishes four daily newspapers,
provides educational products and services and has ownership interest in the WB
Television Network.
8
<PAGE>
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 73% 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 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 for 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.
9
<PAGE>
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 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
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 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 Company Trustee subsequently filed a motion
seeking to amend the 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, Affinity Television, Inc.
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 March 31, 1997,
the Company had no material current tax liability, deferred tax assets or
liabilities.
10
<PAGE>
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 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 March
31, 1997, 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 March 31, 1996 consolidated statements of
operations and cash flows were made to conform to March 31, 1997 presentation.
NOTE G - ISSUANCE OF STOCK
The Company had previously granted options to purchase the Common Stock of
the Company exercisable at $5.00 per share to several foreign investors pursuant
to the July 1995 Option Agreements between the Company and such holders. On
February 12, 1997, the exercise price was reduced to $2.00 per share. On March
31, 1997, the Company reduced the price of these options to $1.25 per share.
Subsequently, the Company issued 1,575,000 shares of restricted Common Stock at
$1.25 per share.
The Company re-negotiated the receivable due for stock subscription
agreements by reducing the option exercise price of the original options granted
to foreign investors to $1.00 per share for 295,000 shares.
NOTE H - SUBSEQUENT EVENTS
The Company entered into a two year agreement dated April 4, 1997 for
referral of full-length feature motion picture projects to the Company. In
consideration, the Company will issue 100,000 shares of the Company's
unrestricted common shares, and beginning May 1, 1997, pay $10,000 per month for
the remaining tenure of the agreement.
On April 4, 1997, the Company entered into an agreement to sell 2,500,000
shares of the Company's shares of restricted common stock at $1.25 per share
payable over several months.
Effective April 1,1997, the Company entered into a separation agreement
with an employee to terminate the employee under his employment contract dated
July 14, 1994. As compensation for the employee's termination, he will be paid
all accrued and unpaid salary, a severance payment of $75,000, continued use of
the leased automobile through the term of the lease, and issuance of 400,000
shares of the Company's unrestricted common stock.
11
<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 March 31, 1997, compared to the quarter ended March 31, 1996.
Quarter Ended
March 31 March 31 $ Change
1997 1996 Fav/(Unfav)
---- ---- -----------
(In Thousands,
except %)
Net Revenue ................. $ 314 $ 338 $ (24)
Cost of Revenue ............ 78 623 545
General and administrative . 1,002 320 (682)
Depreciation and
amortization ............ 288 41 (247)
Acquisition costs ........... -- 175 175
Operating loss .............. (1,054) (821) (233)
Other income, net ........... 19 99 (80)
Income (loss) before
minority interest ......... (1,035) (722) (313)
Minority interest in net loss
of subsidiary .............. 48 -- 48
Net income (loss) ........... (987) (722) (265)
NET REVENUE
For the quarter ended March 31, 1997, 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 March 31, 1996, the Company
produced three original episodes, and a compilation ("best of") of its popular
EDENQUEST television series. As of March 31, 1997, 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, Affinity Television, Inc.,
for airing in the summer of 1997. The decrease in revenue described above was
offset in part by the revenues generated by Affinity Television, Inc. derived
mainly from the syndicated television series BOUNTY HUNTERS and GHOSTWRITER.
12
<PAGE>
COST OF REVENUE
For the quarter ended March 31, 1997, the significant decrease in cost of
revenue can be attributed to several factors. For the quarter ended March 31,
1996, 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 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 March 31, 1997, 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 its 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 March 31, 1997, 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.
For the quarter ended March 31, 1997, the predominate sources of operating
funds were editing services and exercise of stock options.
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.
13
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27 - Financial Data Schedule (Electronic filing only)
(b) Reports on Form 8-K
1. Amended Form 10-KSB, Annual Report of Affinity Entertainment,
Inc. and Subsidiaries for the year ended September 30,1996,
filed March 13,1997, relating to the consolidated financial
statements of Affinity Entertainment, Inc. and Subsidiaries.
2. Current Report of Form 8-K, dated March 13, 1997, regarding
the acquisition of all assets of Tradewinds Television, LLC
and pro forma financial statements thereto.
14
<PAGE>
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 May 14, 1997.
AFFINITY ENTERTAINMENT, INC.
/s/ William J. Bosso
----------------------------------------
William J. Bosso
Chairman, President, Secretary, Director
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF AFFINITY ENTERTAINMENT, INC. FOR THE SIX MONTHS ENDED
MARCH 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 0
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0
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