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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 June 30, 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 9,718,884 shares of outstanding Common Stock as of August 13 ,
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)
Quarter Ended Nine Months Ended
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUE ..................................... $ 332 $ 13 $ 412 $ 1,433
COSTS AND EXPENSES
Cost of revenue, exclusive of amortization -- 251 -- 1,568
General and administrative ............... 781 333 2,143 1,052
Depreciation and amortization ............ 102 233 306 243
------- ------- ------- -------
Total costs and expenses ........... 883 817 2,449 2,863
------- ------- ------- -------
Operating loss ........................... (551) (804) (2,037) (1,430)
OTHER INCOME, net ........................... -- 12 -- 197
------- ------- ------- -------
Loss from continuing operations ............. (551) (792) (2,037) (1,233)
DISCONTINUED OPERATIONS:
Loss from discontinued subsidiaries ....... (674) (87) (1,098) (232)
Loss on disposal of subsidiaries .......... (615) -- (615) --
------- ------- ------- -------
Loss from discontinued operations ....... $(1,289) $ (87) $(1,713) $ (232)
Net loss .................................... $(1,840) $ (879) $(3,750) $(1,465)
======= ======= ======= =======
Loss per common share ....................... $ (.19) $ (.12) $ (.43) $ (.20)
======= ======= ======= =======
Weighted average shares outstanding ......... 9,719 7,354 8,733 7,211
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
AFFINITY ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)
- --------------------------------------------------------------------------------
(In thousands)
June 30, Sept. 30,
1997 1996
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents............ $ 5 $1,366
Accounts receivable, net............ -- 133
Loan receivable..................... 120 --
Other receivables, current portion.. 110 --
Programming costs.................... 599 990
Other current assets, net............ 130 188
------ ------
Total current assets............. $ 964 $2,677
PROPERTY, PLANT AND EQUIPMENT, at cost
Edit equipment....................... $ -- $1,237
Furniture and equipment.............. 272 314
------ ------
272 1,551
Less accumulated depreciation........ 71 1,072
------ ------
201 479
Construction in progress............. -- 64
------ ------
Total property and equipment..... 201 543
OTHER ASSETS
Loans and other receivables, net..... 390 539
Investment in joint venture, net.... 250 250
Other assets........................ 10 315
------ ------
Total other assets................... 650 1,104
------ ------
Total assets......................... $1,815 $4,324
====== ======
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
AFFINITY ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited) - (Continued)
- --------------------------------------------------------------------------------
(In thousands)
June 30, Sept. 30,
1997 1996
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable..................... $ 489 $ --
Notes payable........................ 756 12
Notes payable - related party........ 14 --
Accrued liabilities.................. 87 139
------ ------
Total current liabilities....... $1,346 $ 151
------ ------
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, 9,718,884
and 8,284,217 shares issued and outstanding,
respectively..................... 97 829
Additional paid-in capital........... 15,439 14,686
Additional paid-in capital - stock options 279 394
Deficit.............................. (9,644) (5,894)
------ ------
6,658 10,502
Less:
Stock subscriptions receivable....... 5,266 5,829
Dividend-Century Technologies, Inc. stock 600 --
Note receivable - stockholders ... 132 --
Unearned compensation................ 152 432
Due from officers and directors...... 39 68
------ ------
Total stockholders' equity....... 469 4,173
------ ------
Total liabilities and stockholders' equity $1,815 $4,324
====== ======
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 Additionnal
Preferred Preferred Common Paid-In
Stock Stock Stock Additional Capital Stock Note Unearned Due
$50 Stated $10 Stated $.10 Paid In Stock Subscription Divi- Receiv- Compen- From
Value Value Par Value Capital Options Deficit Receivable dend able sation Officers Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <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............... -- -- -- -- -- -- -- -- -- 280 -- 280
Changes in par value of
common stock.............. -- -- (746) 746 -- -- -- -- -- -- -- --
Exercise of employee stock
options................... -- -- 1 286 (115) -- -- -- -- -- -- 172
Adjustment to stock price...... -- -- -- (398) -- -- 398 -- -- -- -- --
Exercise of stock options...... -- -- 13 119 -- -- -- -- (132) -- -- --
Repayment of loan.............. -- -- -- -- -- -- -- -- -- -- 29 29
Dividend of Century
Technologies, Inc............ -- -- -- -- -- -- -- (600) -- -- -- (600)
Net loss for the nine months
ended June 30, 1997.......... -- -- -- -- -- (3,750) -- -- -- -- -- (3,750)
--- ---- --- ------- ---- ------- ------- ----- ----- ----- ---- ------
Balance on June 30, 1997....... $-- $487 $ 97 $15,439 $279 $(9,644) $(5,266) $(600) $(132) $(152) $(39) $ 469
=== ==== ==== ======= ==== ======= ======= ===== ====== ===== ==== ======
</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)
Nine Months Ended
June June 30,
1997 1996
- --------------------------------------------------------------------------------
Cash Flows - Operating Activities:
Net loss............................................. $(3,750) $ (1,465)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization..................... 306 340
Amortization of unearned compensation related to grant
of stock options to executives................ 226 81
Changes in current assets and liabilities:
(Increase) decrease in accounts receivable........ 133 81
Increase (decrease) in loan and other receivable.. (230) --
(Increase) decrease in programming costs............. 390 (149)
(Increase) decrease in other current assets....... 57 --
Increase (decrease) in accounts payable
and accrued liabilities........................ 436 (900)
Increase (decrease) in deferred revenue........... -- (206)
Increase (decrease) in television broadcast air time -- 79
Increase (decrease) in other assets................ (117) (138)
------ -------
Net cash used in operating activities........... $(2,549) $(2,277)
------- -------
Cash Flows - Investing Activities:
Capital expenditures.............................. (57) (95)
Investments in loan receivables................... -- (600)
------- ------
Net cash used in investing activities........... (57) (695)
------- ------
Cash Flows - Financing Activities:
Proceeds from sale of common stock................ 486 6,650
Proceeds from notes payable....................... 759 145
Principal payments on notes payable............... -- (850)
------- -------
Net cash provided by financing activities....... 1,245 5,945
------- -------
(Decrease)Increase in cash and cash equivalents...... (1,361) 2,973
Cash and cash equivalents at beginning of period.. 1,366 147
------- -------
Cash and cash equivalents at end of period........ $ 5 $ 3,120
======= =======
Supplemental schedule of non-cash investing and financing activities:
During the quarter ended June 30, 1997, several foreign investors exercised
stock options and the Company issued 1,320,000 shares of the Company's common
stock at $ .10 per share, for total consideration of $132,000.
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 currently engaged in producing
and selling feature films in the United States and internationally. The Company
entered into this business following a February 1994 merger with CBNI
Development, Inc. ("CBNI"). CBNI had 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. This subsidiary was transferred to Century Technologies, Inc. in May
1997. See Note C.
On October 31, 1996, the Company entered into an agreement to purchase 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. This agreement was terminated in May 1997. See Note C.
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 March 3, 1997, the name was changed to Affinity
Television, Inc. This subsidiary was transferred to Century Technologies, Inc.
in May 1997. See Note C.
The Company formed a wholly-owned subsidiary, Affinity Entertainment
Group, Inc. on April 4, 1995, to intensify efforts on its feature film business.
Affinity Entertainment Group, Inc. has entered into an agreement with Azur
Entertainment, Ltd. to develop a made-for-television movie (working title Cote
d'Azur), that will be filmed and set in the Principality of Monaco. Once this
film is completed, the Company and other entities will enter into a partnership
for the distribution of the film to the major television networks.
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.
The Company acquired the film rights to Elvis and Leon, a contemporary
comedy/adventure film from Paramount Pictures. The film rights to Lucifer in
Cameo have also been acquired from Kazmark Entertainment. Production dates have
not been set for these projects; however, it is expected that the rights to
these projects will yield additional revenue in the future.
7
<PAGE>
NOTE B - BASIS OF PRESENTATION
The accompanying Condensed Consolidated Balance Sheet includes the
accounts of the Company and its wholly-owned subsidiary, Affinity Entertainment
Group, Inc. The statement of Operations includes the accounts of the Company and
its wholly-owned subsidiary, Affinity Entertainment Group, Inc.; and from the
date of acquisition through May 1997 for Century Technologies, Inc. and Affinity
Television, Inc. and from the beginning of the fiscal year through May 1997 for
Broadcast Edit, Inc. All significant intercompany accounts, transactions and
profits have been eliminated. The transferred subsidiaries (see Note C),
Broadcast Edit, Inc., Century Technologies, Inc. and Affinity Television, Inc.
have been presented as discontinued operations.
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.
NOTE C - SIGNIFICANT EVENTS
SALE OF SUBSIDIARIES
The Company entered into an agreement in May 1997, to sell Affinity
Television, Inc. and Broadcast Edit, Inc., its wholly-owned subsidiaries, to
Century Technologies, Inc. As a part of this transaction, Affinity returned
30,000,000 of the 37,500,000 units of Century stock that it had purchased from
Century pursuant to a stock purchase agreement dated October 31, 1996. The note
in the amount of $2,400,000 due Century Technologies, Inc. was canceled.
In addition, the Company transferred to Century Technologies, Inc. all of
the Company's outstanding shares in two of its subsidiaries, Broadcast Edit,
Inc. and Affinity Television, Inc. In exchange for this transfer, Century
Technologies, Inc. will pay the Company a minimum of $500,000, to a maximum of
$2 million, from the net cash flow of Affinity Television, Inc.
The Company announced on May 28, 1997, that the remaining 7,500,000
unregistered units of Century Technologies, Inc. stock will be distributed on a
pro-rata basis as a stock dividend to all Affinity Entertainment, Inc.
shareholders as of July 1, 1997. Each unit shall consist of one (1) share of
Century Common Stock at $ .00001 par value and one (1) Warrant to purchase one
(1) share of Century Common Stock at $2.00 per share.
MOVIE PROJECTS
Affinity Entertainment Group, Inc. has entered into an agreement with Azur
Entertainment, Ltd. to develop a made-for-television movie (working title Cote
d'Azur), that will be filmed and set in the Principality of Monaco. Once this
film is completed, the Company and other entities will enter into a partnership
for the distribution of the film to the major television networks.
8
<PAGE>
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.
The Company acquired the film rights to Elvis and Leon, a contemporary
comedy/adventure film from Paramount Pictures. The film rights to Lucifer in
Cameo have also been acquired from Kazmark Entertainment. Production dates have
not been set for these projects; however, it is expected that the rights to
these projects will yield additional revenue in the future.
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. These certificates were canceled in
May 1997. (See SALE OF SUBSIDIARIES.)
ACQUISITION OF CENTURY TECHNOLOGIES, INC. AND SUBSEQUENT CANCELLATION
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 the parties, the
Company purchased 37,500,000 Units of Century for $0.08 per unit.
Each Unit consisted 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 were 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 was secured by the Company's Series D Preferred Stock.
The Promissory Note bore interest at a rate of eight percent (8%) per
annum and was 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 was 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 was not entitled to any voting for dividend rights of
any kind. Notwithstanding the foregoing, the Company had the right to provide
such substitute collateral as the Company and Century may mutually agree upon in
writing. The Series D Preferred Stock was held in escrow by Century's counsel
(the "Escrow Agent") until such time as the Promissory Note was paid in full or
substitute collateral was provided by the Company.
The agreement between the Company and Century Technologies, Inc. was
canceled in May 1997. (See SALE OF SUBSIDIARIES.)
9
<PAGE>
ACQUISITION OF THE ASSETS OF TRADEWINDS TELEVISION, LLC AND TRANSFER OF AFFINITY
TELEVISION, INC. TO CENTURY TECHNOLOGIES, INC.
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 included 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 had 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 the
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 was 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. The Company
transferred Affinity Television, Inc. to Century Technologies, Inc. in May 1997.
(See SALE OF SUBSIDIARIES.)
10
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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 June 30, 1997,
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 shares issuable
upon conversion of the Company's convertible preferred stock and exercise of the
Company's outstanding warrants and stock options. For the nine months ended June
30, 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 June 30, 1996 consolidated statements of
operations and cash flows were made to conform to June 30, 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 further reduced the price of these options to $1.25 per
share. During the quarter ended June 30, 1997, the option price was further
reduced to $ .10 and options for 1,320,000 shares were exercised. The $132,000
has not been paid as of June 30, 1997 and is presented as a note receivable in
the stockholders' equity section.
NOTE H - DISCONTINUED OPERATIONS
Discontinued operations reflect the operating results of the transferred
subsidiaries, Broadcast Edit, Inc., Affinity Television, Inc. and Century
Technologies, Inc. (See Note C.) The operating results for the quarter and the
nine months ended June 30, 1996 have been restated to reflect the transfer of
these subsidiaries as discontinued operations for comparative purposes.
11
<PAGE>
NOTE I - OTHER 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 was to 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. This agreement has been canceled by
mutual consent of both parties, with no consideration having been paid.
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. The investment group made an initial payment of
$325,000 and then defaulted on this agreement. No shares were issued and the
$325,000 was recorded as revenue. The 2,500,000 shares were canceled and
returned to treasury. This agreement was terminated in May 1997.
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. The terms of the agreement are currently being re-negotiated, as
the original agreement is in default.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The Company produces and sells feature films for all media worldwide.
A. RESULTS OF OPERATIONS
The following table summarizes the changes in selected items, including
absolute dollar changes, for the nine months ended June 30, 1997, compared to
the nine months ended June 30, 1996.
Nine Months Ended
-----------------
June 30 June 30 $ Change
1997 1996 Fav/(Unfav)
---- ---- -----------
(In Thousands, except %)
Net Revenue......................... $ 412 $1,433 $ (1,021)
Cost of Revenue.................... -- -- --
General and administrative......... (2,143) (1,052) (1,091)
Depreciation and
amortization.................... (306) (243) (63)
Operating loss...................... (2,037) (1,430) (607)
Other income, net................... -- 197 (197)
Net income (loss)................... (3,750) (1,465) (2,285)
NET REVENUE
For the nine months ended June 30, 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, and the sale of two of its subsidiaries. For the nine
months ended June 30, 1996, the Company produced three original episodes, and a
compilation ("best of") of its popular EdenQuest television series. As of June
12
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30, 1997, the third and fourth episodes have not been telecast on free
television or basic cable. These programs have been transferred to Century
Technologies, Inc. as part of the May 1997 agreement. 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, prior to their sale in May 1997.
COST OF REVENUE
For the nine months ended June 30, 1997, the significant decrease in cost
of revenue can be attributed to several factors. For the quarter ended June 30,
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.
In May 1997, all production projects involving Broadcast Edit, Inc. and
Affinity Television, Inc. were transferred to Century Technologies, Inc. (See
Note C.)
GENERAL AND ADMINISTRATIVE
For the nine months ended June 30, 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.
Depreciation and Amortization
For the nine months ended June 30, 1997, the increase in depreciation and
amortization expense is primarily due to the accelerated amortization of
Edenquest and Adventure Quest program costs becoming fully amortized.
B. FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
The Company expects to meet its cash requirements for the balance of
fiscal year 1997 with funds generated from operations, including the sale or
joint venturing of its movie properties, 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 the remainder of fiscal year
1997, although there can be no assurance that this will be the case.
For the nine months ended June 30, 1997, the predominate sources of
operating funds were advertising revenues from Bounty Hunters, 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.
13
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ALL-STAR BROADCAST SALES, INC.
In May 1997, a proceeding was commenced against the Company and others in
the Supreme Court of the State of New York, County of New York. The proceeding
is styled All-Star Broadcast Sales, Inc. v. Affinity Entertainment, Inc.,
Tradewinds Television, LLC, and Tribune Entertainment, Inc. (Index No.
97/602626). In June 1997, defendants removed this action to the United States
District Court for the Southern District of New York. The plaintiff asserts
causes of action against the Company for tortious interference and breach of
contract and seeks injunctive relief, specific performance of an agreement and
approximately $650,000 in damages.
Each cause of action specifically relates to an agreement between the
plaintiff and defendant, Tradewinds Television LLC. In the agreement, the
plaintiff agreed to be the exclusive sales agent and representative for
Tradewinds Television LLC on a national basis for the sale of barter commercial
inventory in certain television programming. Plaintiff claims damages as a
result of the alleged assignment of the agreement to the Company without the
plaintiff's consent. Because the rights to the television shows which are the
subject of the agreement between the plaintiff and Tradewinds Television LLC
were previously assigned to the Company's subsidiary, Affinity Television, Inc.
(which is now wholly-owned by Century Technologies, Inc.), the Company believes
that it will ultimately prevail on this matter.
Subsequent to June 30, 1997, the parties to this matter entered into a
Stipulation of Settlement which will resolve the parties' dispute. The Company
is not required to make any payment to the plaintiff or any other party pursuant
to the terms of the settlement agreement. The plaintiff has agreed to fully
release the Company for any and all liability.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
(b) Reports on Form 8-K
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 August 19, 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 NINE MONTHS ENDED
JUNE 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 5
<SECURITIES> 0
<RECEIVABLES> 330
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 964
<PP&E> 272
<DEPRECIATION> 71
<TOTAL-ASSETS> 1,815
<CURRENT-LIABILITIES> 1,346
<BONDS> 0
0
487
<COMMON> 97
<OTHER-SE> (115)
<TOTAL-LIABILITY-AND-EQUITY> 1,815
<SALES> 412
<TOTAL-REVENUES> 412
<CGS> 0
<TOTAL-COSTS> 2,449
<OTHER-EXPENSES> 615
<LOSS-PROVISION> (3,750)
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,750)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,037)
<DISCONTINUED> (1,098)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,750)
<EPS-PRIMARY> (.43)
<EPS-DILUTED> (.43)
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