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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB/A
(AMENDMENT NO. 2)
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
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OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _________________
Commission file number 0-24984
DOVE AUDIO, INC.
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(Exact name of registrant as specified in its charter)
California 95-4015834
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
301 N. Canon Drive, Suite 207, Beverly Hills, California 90210
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (310) 273-7722
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.01 per share
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
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Check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The issuer's revenues for the fiscal year ending December 31, 1995 were
approximately $11,148,000.
As of April 1, 1996, the aggregate market value of the voting stock
held by non-affiliates of the issuer was approximately $37,000,000 based upon
the average closing bid and asked price of such stock on such date.
Shares outstanding as of April 1, 1996: 4,884,166
Transitional Small Business Disclosure format: Yes No X
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the issuer's definitive proxy statement for its 1996 annual meeting
of shareholders to be filed pursuant to Regulation 14A not later than 120 days
after the end of the issuer's fiscal year (December 31) are incorporated by
reference in Part III, Items 9, 10, 11 and 12 of this Form 10-KSB.
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PART I
ITEM 1. BUSINESS
GENERAL
Dove Audio, Inc. ("Dove" or the "Company") is one of the
leading independent producers (i.e., unaffiliated with any single book
publisher) of audio books in the United States. The Company currently produces
and distributes approximately 100 to 120 new titles annually and has built a
library of over 1000 titles since commencing business in 1985 as one of the
pioneers of the audio book industry. The Company is also engaged in the
publication of printed books under the Dove imprint and the development and
production of movies-for-television, television mini-series, videos and, to a
limited extent, feature films. During the second quarter of 1995, the Company
formed a wholly-owned subsidiary, Dove International, Inc. ("Dove
International") to engage in domestic distribution of theatrical films and to
act as foreign sales agent for the international distribution of theatrical
films. In January 1996 Dove International entered into a multi-year agreement
with Paramount Home Video for the exclusive video distribution rights to the
Company's titles in the U.S. and Canada.
The Company's audio books generally consist of audio
recordings of abridged and unabridged versions of books that have had or are
expected to have commercial success or that the Company believes to have
literary merit, or original material specially adapted for the audio book
format, read by celebrity actors or the authors themselves. In 1994, the Company
was awarded a Grammy for its production of the children's audiobook Audrey
Hepburn's Enchanted Tales. The Company maintains ongoing relationships with many
well-known authors, including Sidney Sheldon, Amy Tan and Jack Higgins, and
celebrity readers, including Roger Moore, Paul Scofield, Glenda Jackson and
Gregory Peck. In July 1995, the Company entered into an agreement with Stephen
King to sell, license and distribute seven of his best-selling titles in Spanish
world-wide. The Company's audio books range from best-selling fiction and
non-fiction to movie tie-in audios, classics, humor, children's audio and
foreign language product. The Company generally produces its own masters for its
audio book products, the majority of which are recorded at the Company's own
recording studio located at its principal offices, under the supervision of
Company Vice President, actress Deborah Raffin Viner.
In March 1995, the Company entered into an agreement (the
"Reader's Digest Agreement") with Reader's Digest Association, Inc. ("Reader's
Digest") pursuant to which the Company granted to Reader's Digest certain
non-retail distribution rights (including direct mail marketing) to the
Company's audio books, including the Company's existing audio library, on an
exclusive world-wide basis. In addition, the Company is permitted to create new
audio titles under the Reader's Digest label and to publish in audio under the
Dove and/or Reader's Digest label works in Reader's Digest printed book library,
in each case with Reader's Digest's prior written consent on a title-by-title
basis. Reader's Digest is currently evaluating a proposed joint venture to
publish a printed book series on each of the 43 presidents of the United States.
It is contemplated that the series would be distributed by Reader's Digest into
certain markets and publication costs would be jointly financed.
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The Company's printed book operations, which were commenced in
1994, include the New York Times No. 1 Bestseller Nicole Brown Simpson: The
Private Diary of a Life Interrupted (a biography of Nicole Brown Simpson written
by Faye Resnick) (the "Simpson Book"), and the follow-up book by Ms. Resnick,
Shattered. In January 1996, the Company again published a New York Times
bestseller,"You'll Never Make Love In This Town Again." Other books published
during 1995 included Newt Gingrich's Bedtime Stories for Orphans, Memories of
Madison County by Jana St. James, Mark McCormack's On Negotiating and The
Private Diary of Lyle Menendez: In His Own Words. The Company's book catalogue
of upcoming publications includes White Flame by James Grady, The Private Diary
of Scarlett O'Hara, Legacy of Deception by Stephen Singular and several
children's books including The Adventures of Drippy the Runaway Raindrop by
Sidney, Mary and Alexandra Sheldon.
The Company's television and theatrical films include the
theatrical release Morning Glory (1993) and the television movie Home Song
(1996), based on novels written by LaVyrle Spencer, and the television movies
Memories of Midnight (1991) and Sands of Time (1992), based on novels written by
Sidney Sheldon. In addition, the Company has been previously involved in the
production of three other movies, Windmill Of The Gods, Night Of The Fox, and
Touched By Love. Currently, Dove has two television movie projects in
development based on the novels of LaVyrle Spencer, and the Company has obtained
a production commitment from CBS for one of them. The Company generally seeks to
limit its financial risk in the production of long-form television and feature
films by presales and licensing to third parties. The Company also has commenced
operations involving production of projects for initial release in video format,
including children's and business videos and a video documentary based on the
Company's book You'll Never Make Love In This Town Again.
In July 1995, the Company, through its newly-formed
subsidiary, Dove International, acquired certain rights with respect to 48 films
in the Skouras Pictures, Inc. library (plus the Unapix films) in consideration
of a cash advance of $750,000. The Company conducted corporate and legal due
diligence review and the Seller received an independent opinion from an
investment banking firm to determine the fairness of the consideration paid by
the Company for such rights. There were no related party affiliations in such
transaction. The Company is distributing these films and any net profits (after
the Company's recoupment of the advance and subsequent distribution costs) will
be allocated and paid 50% to the Company and 50% to Skouras Pictures, Inc. As of
March 7, 1996, Dove International had acquired eight new titles, up to five of
which will be released theatrically on a limited basis and three will be
direct-to-video through the Company's agreement with Paramount Home Video.
In April 1996, the Company reached a definitive agreement to
acquire Four Point Entertainment, Inc. ("Four Point") for consideration of $2.5
million in cash and 427,273 shares of Dove Common Stock, with an earn-out
provision of up to an additional 163,636 shares of Dove Common Stock. The
Company conducted corporate and legal due diligence review in connection with
its negotiations with representatives of the Seller with respect to the
consideration paid by the Company for such acquisition. There were no related
party affiliations in such transaction. Four Point develops and produces various
forms of television programming, including pilots, series, telefilms,
mini-series, talk shows, game shows and infomercials for network, cable and
syndicated markets. In addition, Four Point owns and operates post-production
and edit facilities for its own and third-party programming. Consummation of the
agreement is subject to delivery of customary closing documents and other
customary closing conditions and is expected to occur at or before the end of
April 1996.
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Since it was founded in 1985, the Company has predominantly
operated as a publisher of audio books and has only completed the production of
seven films to date. In addition, the Company has only recently engaged in
significant efforts in the printed book publishing and theatrical distribution
businesses. There can be no assurance that the Company's efforts at
diversification will be successful.
STRATEGY
Dove's principal business strategy is to: (i) expand its
library of audio books by acquiring and/or producing new titles licensed from
established authors or classic literature in the public domain, (ii) increase
distribution of its audio book library through new outlets (such as record
stores and video stores), direct marketing, distribution of foreign-language
audio books in the United States and abroad and international sales, (iii)
diversify its operations through the production and distribution of videos,
television movies and mini-series and theatrical films, and expanding
publication of printed books, (iv) establish and/or expand new or complementary
areas such as audio books on compact disc, interactive CD-ROM and musical
recordings, and (v) expand the Company's film library through acquisitions and
internal growth.
The Company has focused its development efforts on assembling
a group of best-selling authors as source material for its audio books. The
Company seeks to establish and expand its library of audio book titles by
establishing long-term relationships directly with book authors. The Company
believes that these types of arrangements are attractive to authors because the
Company is willing to give authors a significant amount of input and, in many
cases, control over the finished product. The Company plans to continue to
expand its audio book library by licensing new titles from book authors, by
publishing in audio formats classic literature in the public domain, through
strategic acquisitions of libraries currently owned by others and through
strategic relationships, such as that recently established with the Reader's
Digest Agreement.
The Company plans to expand by establishing new products
complementary to its audio book operations, including high-end language and
business products, in response to the changing demands of its customers. The
Company has also attempted to expand its customer base and the demographic
appeal of its audio book products. Towards such end, the Company has increased
foreign distribution (including licensing of foreign distribution rights to
third parties) of its English language products and domestic and foreign
distribution of foreign-language versions of its titles.
To complement its audio book operations, the Company has
increased significantly its publication of printed books. The Company intends to
publish up to 70 books in print in 1996. In addition, the Company intends to
continue to diversify its operations through its film production and
distribution operations. Subject to appropriate opportunities becoming available
to the Company, the Company plans to enter into production and development deals
with established exhibitors and television networks through arrangements which
seek to minimize risk of the Company's investment in such productions.
The Company considers and from time to time exploits other
activities in various entertainment fields that complement or enhance its
current operations, such as the production of records or videos. The Company
from time to time also considers the acquisition of businesses complimentary to
its current operations. Aside
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from its definitive agreement to acquire Four Point, the Company has from time
to time entered into discussions or submitted bids to acquire other companies in
related entertainment fields and film libraries.
The Company's business is dependent on its ability to acquire
rights to use new audio and/or printed book and film properties that will have
broad market appeal. To the extent the Company is unable effectively to identify
and exploit products and concepts that will achieve commercial success, or if
the Company is unable to identify and obtain rights to the works of new popular
authors and to obtain the services of popular readers, the Company's future
operating results will be adversely affected. Furthermore, if the Company is
unable to renew contracts with current authors on acceptable terms, or if there
are shifts in consumer tastes or in the popularity of the Company's current
authors, the Company's future operating results also may be adversely affected.
Ultimately, the future success of the Company's film and other operations will
depend on the ability of the Company to exploit successfully existing
opportunities and to establish new sources of product. There is no assurance
that the Company will be able to maintain or expand its sources of film and
other product.
BOOKS ON AUDIO
Industry Overview
"Audio books" consist of audio recordings of literary or other
works read by one or more persons. Historically, audio books have been sold in
traditional book stores. However, audio books are increasingly being sold
through national book clubs. Retail outlets specializing in audio books are also
expanding rapidly. The Company believes that the market for audio books is
increasing due to a number of trends, including increased demand by readers and
writers for unabridged versions of titles, movie tie-ins, expansion into the
compact disc ("CD") format, the increasing popularity of original audio material
not derived from previously published printed materials and demand by consumers
for audio recordings of particular readers (as opposed to particular titles).
Although audio books have been available to the public for
approximately ten years, the consumer market for audio books remains a niche
market. Even given increases in the popularity of audio books, the ultimate
growth of the industry is unclear. The Company believes success in the audio
book industry depends mainly upon the creative efforts of authors, readers and
producers. Public tastes are unpredictable and can shift rapidly. There is no
assurance that the Company will be able to operate profitably in this line of
business in the future.
Dove Audio Book Operations
The Company believes it is one of the leading independent
(i.e. not affiliated with any major publisher) producer of abridged and
unabridged books on audio with approximately 1,000 titles in its audio book
library currently offered for sale. The Company currently releases approximately
100 to 120 audio book titles each year. The Company, which was founded by
Michael and Deborah Raffin Viner in conjunction with Sidney Sheldon in 1985, was
one of the early pioneers in audio books and one of the first to have
best-selling authors such as Amy Tan, Sidney Sheldon and Robert Waller read
their own works. The Company's products historically have included numerous New
York Times and Publishers Weekly best selling books. The fastest
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growth areas for the Company in recent periods have been business, children's
and movie tie-in titles. The Company is also expanding its library to include
Spanish and other foreign language versions of its titles. The Company is
engaged in the simultaneous sale of abridged, unabridged and foreign language
translation versions of its audio books. The Company's audio products represent
virtually all categories of books. Although historically the Company has
published audio books primarily on cassette tape, the Company is publishing new
and existing titles in CD format.
The Company typically acquires titles for publication by
entering into exclusive agreements with book authors pursuant to which the
Company obtains the rights to current works and obtains an option or right of
first refusal as to one or more future works. Authors are typically compensated
either by advances against royalties or through profit participations. The
Company typically acquires audio publishing rights for specific titles or groups
of titles on a world-wide basis, including foreign language rights, in
perpetuity. Library acquisitions often include additional rights to use such
titles in interactive media applications and other media.
Dove uses a large array of high visibility star talent for its
recordings. Books are read by celebrity readers or, in some cases, by the
authors themselves. By virtue of its Los Angeles base, the Company believes it
has a significant advantage in gaining access to highly recognizable reading
talent. The Company seeks to maintain ongoing relationships with popular readers
which typically have been established in large part by Deborah Raffin by virtue
of her status as an accomplished actress and Michael Viner through his
relationships in the entertainment industry. Readers are typically compensated
on a flat-fee basis, though readers may be compensated on a royalty basis.
In March 1995, the Company entered into the Reader's Digest
Agreement pursuant to which the Company granted to Reader's Digest certain
non-retail distribution rights (including, direct mail marketing) to the
Company's audio books, including the Company's existing audio library, on an
exclusive world-wide basis. In addition, the Company will be permitted to create
new audio titles under the Reader's Digest label and to publish in audio under
the Dove and/or Reader's Digest label works in Reader's Digest printed book
library, in each case with Reader's Digest's prior written consent on a
title-by-title basis. The Reader's Digest Agreement expires in 1998.
The Company has entered into an agreement with Mark McCormack
(author of What They Don't Teach You at Harvard Business School) pursuant to
which the Company intends to release audio tapes of five of Mr. McCormack's
future books. In June 1994, the Company acquired an audio catalog from
Prentice-Hall, Inc. consisting of eighteen business titles. The Company also has
acquired the rights to a library of several titles read by Orson Welles, and has
published in audio format a compilation of blessings read by the Pope. In July
1995, the Company entered into an agreement with Stephen King to sell, license
and distribute seven of his best-selling titles in Spanish worldwide. The titles
are Misery, Dolores Claiborne, Gerald's Game, Langoliers, Secret Window, Library
Policeman and Sundog.
Approximately 80% of physical audio inventory was supplied in
fiscal 1995 by one manufacturer. However, the Company currently employs two
manufacturers and so is not dependent on any one manufacturer as its sole source
of physical product; the Company believes it would have access to alternate
sources at competitive prices and quality in the event that the Company were to
lose the services of any manufacturer.
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AUDIO LIBRARY
Dove has been able to develop a list of notable multi-book
authors such as Sidney Sheldon, Amy Tan, Robert James Waller, LaVyrle Spencer
and Jack Higgins. The Company's audio book library currently includes the
following titles:
<TABLE>
<CAPTION>
AUTHOR TITLE READER(S)
<S> <C> <C>
Sidney Sheldon Nothing Lasts Forever Sidney Sheldon and Candy Clark
The Stars Shine Down Sidney Sheldon
Windmills of the Gods Lee Remick
The Naked Face Roger Moore
Master of the Game Roddy McDowall
The Stars Shine Down Roddy McDowall
Morning, Noon & Night Kirk Douglas
Robert James Waller Bridges of Madison County Robert James Waller
Slow Waltz in Cedar Bend Robert James Waller
Lilian Jackson Braun The Cat Who Said Cheese Mason Adams
Jack Higgins Angel of Death Patrick Macnee
Thunder Point Roger Moore
Amy Tan The Joy Luck Club Amy Tan
The Kitchen God's Wife Amy Tan
The Hundred Secret Senses Amy Tan
LaVryle Spencer Home Song David Dukes
That Camden Summer David Dukes
Erich Segal Prizes Ken Howard
Sandra Brown The Witness Joanna Gleason
Larry Collins Black Eagles Burt Reynolds
John Gardner Cold Fall Christopher Cazenove
</TABLE>
The Company has also produced the following audio book anthologies:
The American West In Fiction
Best of Science Fiction & Fantasy
The Orson Welles Library
Murder For Love
A Valentine
I Will Sing Life (a charity presentation featuring the voices of
Dustin Hoffman, Tom Cruise, Sidney Poitier, Robin Williams and
Whoopi Goldberg).
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The Company also has produced humorous audio books of the
works of the following individuals, in many cases read by the author:
<TABLE>
<S> <C>
Art Buchwald Daniel Pinkwater
Dave Barry Andy Rooney
George Burns Jonathan Winters
Garrison Keillor Bill Geist
Al Franken
</TABLE>
The Company has published additional audio books by the
following authors:
<TABLE>
<S> <C>
James Belasco Lilian Jackson Braun
Terry Brooks Dr. Joyce Brothers
Helen Gurley Brown Gabriel Byrne
Raymond Chandler Mary Higgins Clark
Jenny Craig Edward de Bono
Alan Dershowitz Peter Drucker
Ken Follett Stephen Jay Gould
Kelsey Grammer David Haberstam
Oscar Hijuelos Erica Jong
Elmore Leonard Eric Lustbader
Ed McBain Anne McCaffrey
Robert Parker Sara Paretsky
Philip Roth Susan Sontag
Barry Switzer Tom Robbins
Donald Westlake
</TABLE>
Movie Tie-in Audios. Movie tie-in audios involve adaptations
of popular feature films, edited versions of movie soundtracks, cross-promotion
via concurrent release, or a combination of the foregoing. Movie tie-in audios
are one of the fastest growing areas for new product in the audio industry. The
Company has produced or is currently producing audios having ties to each of the
following motion pictures:
<TABLE>
<S> <C>
John Hughes, Miracle on 34th Street Little Women starring Winona Ryder
Nell Scarlett Letter
Dangerous Minds Joy Luck Club
Indiana Jones and the Last Crusade Buffy The Vampire Slayer
Batman The Princess Bride
Dracula Last of the Mohicans
Heaven & Earth Die Hard With a Vengeance
</TABLE>
Public Domain Audios. The Company is developing a library of
audio publications derived from public-domain product. Public-domain titles do
not require contracts to acquire publication rights or the payment of royalties.
Such product line attempts to integrate appealing cover art, well-known readers
and
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high-quality recording and box design. The Company supports this product line by
aggressive pricing and marketing. The Company aims to release approximately two
classic books on audio each month. In 1996, the Company is focusing on the works
of, among others, Jules Verne and Jane Austen. Audio books based on
public-domain literary works currently published by the Company include the
following:
<TABLE>
<CAPTION>
TITLE READER
----- ------
<S> <C>
H.G. Wells Library Ben Kingsley
Charles Dickens Library Paul Scofield
Jane Austen Library Glenda Jackson
Edgar Allan Poe Paul Scofield, Gregory Hines and David Warner
Dracula Edward Woodward
The Three Musketeers Michael York
Emily Dickinson poetry Meryl Streep and Glenda Jackson
Mary Stewart, Queen of Scots Julie Christie
Mary Shelley's Frankenstein Julie Harris
The Bible - New Testament Gregory Peck
Les Miserables Christopher Cazenove
Call of the Wild Ethan Hawke
The Psalms Michael York
Fables of Aesop Rod Steiger, Eddie Alpert, Harvey Fierstein and Sharon Stone
</TABLE>
Dove Kids
"Dove Kids" is the children's publishing and audio imprint of
the Company, designed to compete with audio book publishers for a share of the
growing children's market in both the educational and entertainment areas. The
Company has released several titles under the Dove Kids audio imprint, including
the 1994 Grammy Award-winning audio, Audrey Hepburn's Enchanted Tales, Mary
Sheldon's The Summer Friend performed by Julie Andrews, Elliot Gould and Michael
York and The Santasaurus performed by Jonathan Winters, as well as Princess and
the Goblin performed by Glenda Jackson. Soon-to-be-released audio titles
include The Wind In The Willows performed by Terry Jones of Monty Python fame,
Treasure Island performed by Michael York, The Wonderful O performed by Melissa
Manchester, and The Hunchback of Notre Dame performed by Julie Christie.
Future Dove Kids Books planned by Dove include The Adventures
of Drippy the Runaway Raindrop by Sidney, Mary and Alexandra Sheldon, Grandma,
What Is Learning? by Marva Collins, The Quite Remarkable Adventures of the Owl
and the Pussycat by Eric Idle, The Adventures of Little Nettie Windship by
Cheryl Ladd, The Magic Paw -Paw by Michael York, Daddy Day, Daughter Day by
Larry and Chaia King, The Long Journey of the Little Seed and The History of
Christmas by Annie Reiner, Megan's Two Houses by Erica Jong, The Big Galoot and
The Button-Sided Hooey by Shadoe Stevens and The Silver Headdress by Mary
Sheldon.
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Foreign Language and International
The Company has identified certain markets outside the United
States as providing opportunities for sales growth and is expanding its
distribution to other countries. The expansion of international activities
applies not only to the Company's publishing business, but also to its
television and film activities, where the exploitation of overseas markets is a
key component of the Company's strategy. The Company generally seeks to acquire
audio publishing rights for specific titles or groups of titles on a world-wide
basis, in perpetuity. Such acquisitions enable the Company to exploit such
titles in international markets .
Dove has entered into agreements with HarperCollins, Isis,
Viking Penguin and others for distribution of some of its product via licensing
its masters for publication in the United Kingdom. The Company is also party to
an agreement with Pickwick Group Ltd. ("Pickwick") pursuant to which Pickwick
will distribute and market in the United Kingdom and Ireland a minimum of 300
titles from the Company's existing audio book library. Such agreement has a term
ending in 1997 with the Company having an option for a five year extension and
provides for certain advances to the Company against specified royalties.
The Company is expanding its activities in the foreign and
domestic foreign language markets. The Company has entered into an agreement
with Televisa Mexico to translate books on audio into Spanish versions and
distribute the Spanish language tapes in Mexico. During the course of fiscal
1995, the Company and Televisa published nine additional Spanish language
titles, including two novels written by Sidney Sheldon.
The Company's audio book products are also distributed and
licensed for distribution in several languages to various countries throughout
the world through third-party distributors.
Production, Sales, Marketing and Distribution
The Company typically produces its own masters for its audio
book products, a majority of which are recorded at the recording studio located
at the Company's Los Angeles offices. Virtually all recordings are produced
under the supervision of the Company's in house staff, headed by Deborah Raffin
Viner. Once a master is produced, the Company contracts with one of several
duplication contractors who then duplicate and assemble the tapes or CD's for
distribution.
The Company designs its own product packaging to enhance the
marketability of its audio books. The Company seeks to acquire and use original
book art, when available. Dove makes use of foil and other design options to
enhance mass marketing. Dove also designs alternative packaging using
multi-packs, box sets and gift box designs to present its products more
effectively by making the products easier to display and increasing consumer
awareness of audio books as a gift option. Dove has also initiated the use of
compact disc sets of its best selling audios.
The Company's audio books are sold to book stores, several
book clubs (including the three major book clubs), record stores and specialty
audio book retail outlets. The Company currently sells to all major book
retailers, including Ingram Entertainment (including Crown) ("Ingram"),
Waldenbooks and B. Dalton. Audio books distributed by the Company to Ingram,
Waldenbooks and B. Dalton accounted for 16%,8% and 12% of
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the Company's net publishing revenues in fiscal 1995, respectively. While the
Company does not believe there is any significant risk of losing any of these
bookstore chains as outlets for its product, the level of the Company's sales of
audio books through these and other outlets significantly depends on the amount
of product ordered thereby and shelf space allocated to such products. Dove also
sells to rack jobbers and is represented in all major wholesale clubs, including
Pace, Sams and Price/Costco. The Company has identified video stores, mass
merchandisers and music stores as areas of potential expansion and growth.
Sales to retail and other outlets are effected through a
combination of Dove's own sales force and third party distributors. Dove
established its audio book sales operation in 1989 and has historically
independently sold audio books primarily to book stores, retail chains and
record and specialty stores. At present, the Company has an internal sales and
marketing force of four persons.
In January 1995, the Company entered into an agreement with
Penguin USA, Inc. ("Penguin") pursuant to which Penguin began serving as the
Company's exclusive outside distributor of audio and printed book products
(other than certain non-retail and remainder sales). Under such agreement,
Penguin is responsible for, among other things, order solicitation, order entry,
invoicing, customer service, warehousing, handling and fulfillment of orders and
for receiving returns; the Company is responsible for marketing, promotion,
publicity and advertising. Under such agreement, Penguin, which is compensated
on the basis of a percentage of sales and reimbursed for certain shipping and
other expenses, is also responsible for billing, collections and for the
issuance of credit to customers. Such agreement provides that Penguin advances
revenues to the Company within sixty days of shipment of book product, net of a
contractually-established reserve.
In March 1995, the Company entered into the Reader's Digest
Agreement pursuant to which the Company granted to Reader's Digest certain
non-retail distribution rights (including, direct mail marketing) to the
Company's audio books, including the Company's existing audio library, on an
exclusive world-wide basis. In addition, the Company will be permitted to create
new audio titles under the Reader's Digest label and to publish in audio under
the Dove and/or Reader's Digest label works in Reader's Digest's printed book
library, in each case with Reader's Digest's prior written consent on a
title-by-title basis. The Reader's Digest Agreement expires in 1998. Sales
through Reader's Digest will be fulfilled through Penguin.
Substantially all of the Company's sales of audio book
products are and will continue to be subject to potential return by distributors
and retailers if not sold thereby to the public. Historically, the Company has
experienced significant returns, and there is no assurance that the Company will
not experience materially higher returns than its historical return experience.
In addition, the Company from time to time makes price concessions or allowances
or grant credits to distributors or retailers in order to minimize returns, and
such concessions and allowances may adversely affect the Company's operating
results.
Certain of the Company's revenues are derived from sales at
discount prices of excess inventory of audio and printed books, including
returned audio book product, effected through warehouse, outlet and other stores
("remainder sales"). Such sales produce net revenues for the Company on a
per-unit basis that typically have not exceeded the Company's per-unit costs on
a fully-costed basis. The availability of remainder product at discount prices
also may have the collateral effect of reducing sales of audio books at full
price, and thereby could adversely affect the Company's operating results.
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The Company advertises its products in various publishing
trade publications. The Company also occasionally advertises its products on a
remainder-time basis on CNN.
PRINTED BOOK PUBLISHING
As part of establishing its library of approximately 30
printed book titles, the Company has been a leader in publishing books involving
participants involved in several national interest murder trials: The O.J.
Simpson case (including the New York Times number One bestseller Nicole Brown
Simpson: The Private Diary of a Life Interrupted, a biography of Nicole Brown
Simpson written by Faye Resnick; and the first book written by an excused juror
- - The Private Diary of an O.J. Juror: Behind the Scenes of the Trial of the
Century, written by Michael Knox); and the Menendez brothers' trial (The Private
Diary of Lyle Menendez: In His Own Words as told to Norma Novelli). The
Company's book catalogue of prior and upcoming publications also includes Curtis
Mayfield's Poetic License; Dream Into Action by Milton Katselas; Colin Powell
and The American Dream by Stefan Rudnicki; On Negotiating by Mark H. McCormack;
Inside The NRA by Jack Anderson; The Phoenix Solution by Vincent T. Buglios; and
several children's books including The Adventures of Drippy the Runaway
Raindrop, by Sidney, Mary and Alexandra Sheldon, and The Quite Remarkable
Adventures of The Owl and The Pussycat by Eric Idle.
Recently, the company has produced another New York Times
bestseller with the release of You'll Never Make Love In This Town Again. The
Company also published the follow-up book by Faye Resnick entitled Shattered.
FILM PRODUCTION
The Company from time to time has developed and produced films
and mini-series made for television as well as low and medium budget theatrical
films. The Company's strategy is to develop and produce films and miniseries
substantially financed by third parties through presale contracts with U.S.
television networks, foreign distributors and other sources and through
co-production arrangements. Although the Company enters into such arrangements,
there is no assurance that the Company's funding of such productions will not be
at risk. The Company's films are and will continue to be distributed primarily
by third parties, but, in certain circumstances, the Company may undertake
limited distribution or co-distribution activities for films it produces or
acquires.
Dove has completed three productions of Sidney Sheldon novels
for television with stars such as Jaclyn Smith, Omar Sharif and Jane Seymour; a
Jack Higgins mini-series starring Michael York; the theatrical film Morning
Glory starring Christopher Reeve and Deborah Raffin; and the television movie
Home Song (aired on CBS in March 1996). Currently Dove has a development and
production deal with CBS pursuant to which the Company will develop and produce
television movies or mini-series based on the novels of LaVyrle Spencer. The
agreement with CBS provides for a guarantee of the Company of two production
orders which the Company has fulfilled. CBS will also evaluate further projects
and give production commitments to the Company for those projects which CBS
wishes to license. At the time of giving the Company a production
commitment, CBS agrees to pay a license fee to the Company for the rights to
broadcast the project. The Company has completed one television movie, Home
Song, and has received a production commitment as to a further television movie
project, Family Blessings, pursuant to such arrangement. The Company entered
into a co-production agreement with Signboard Hill Productions, Inc.
("Signboard") as to such films. Under such agreement, the Company also has
licensed to Signboard exclusive world-wide rights to
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<PAGE> 13
distribute such films in virtually all media, other than the rights granted to
CBS for domestic television broadcast. The Company is compensated for such
licenses on the basis of an advance against specified royalties. In addition,
the Company currently has additional projects in development, including
Forgiving by LaVyrle Spencer and sequels to three of Sidney Sheldon's works (The
Sands of Time, Memories of Midnight and Windmills of the Gods). There is no
assurance that projects in development ultimately will be produced and aired.
The Company has also commenced development and production of
video products. Videos currently in production include business videos featuring
Mark McCormack and Jim Belasco, videos for children, and a video documentary
based on the Company's best selling book You'll Never Make Love In This Town
Again.
Historically, the Company has acquired its film and other
properties through relationships of Michael Viner and Deborah Raffin Viner and
through authors whose works are published by the Company in audio format. In
addition, the Company's film production division to date has been largely
dependent on adaptations of the novels of Sidney Sheldon and LaVyrle Spencer. If
the works of either of these authors were lost to the Company as a source of
film product or if the Company is unable to identify and acquire other sources
of film product, the future success of the Company's film production operations
likely would be adversely impacted.
The Company's film operations are dependent on a limited
number of television and other projects. There is no assurance the Company will
have any film projects or revenues from film projects in any given quarterly or
annual period.
FILM LIBRARY AND THEATRICAL DIVISION
In conjunction with the formation of its new film distribution
subsidiary, Dove International, the Company completed the purchase of certain
rights to 48 films from the Skouras Pictures library. Motion pictures acquired
from Skouras, now in the Company's film library, includes stars such as F.
Murray Abraham, Dyan Cannon, Ben Cross, Bruce Dern, Peter Gallagher, Jon Heard,
Anthony Hopkins, Kris Kristofferson, Sam Neill, Natasha Richardson, Martin
Sheen, Talisa Soto, George Takai and Shannon Tweed. The library includes certain
distribution rights to My Life As A Dog, which received several "Best Foreign
Film" awards in 1987, and recently released films such as A Boy Called Hate and
Watch It.
Dove International has been actively seeking to acquire
independent films for distribution in the U.S. and Canada on an all rights basis
(including theatrical, home video and all forms of television). The Company had
a strong presence at this years' Sundance Film Festival and the American Film
Market where it acquired two additional motion pictures for release in 1996. The
Company recently completed a two year exclusive video output arrangement with
Paramount Pictures wherein Paramount will market and distribute Dove product
under the Dove Home Video label.
Dove also owns international rights to a number of motion
pictures and has contracted with Keystone Releasing for sub-distribution in
certain foreign territories.
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<PAGE> 14
A list of current Dove International projects is detailed below showing
estimated release dates and media in which the projects are expected to be
introduced, subject in each case to modifications in the future based on
availability and other factors:
<TABLE>
<CAPTION>
RELEASE PRINCIPAL
TITLE DATE MEDIA TALENT
----- ------- ----- ---------
<S> <C> <C> <C>
A BOY CALLED HATE May-96 Theatrical James Caan
Scott Caan
Missy Crider
Elliott Gould
WAVELENGTH Jun-96 Video Jeremy Piven
Kelli Williams
Richard Attenborough
POINT OF BETRAYAL Jul-96 Video Dina Merrill
Rebecca Broussard
Rod Taylor
INSIDE THE Jul-96 Theatrical Josh Evans
GOLDMINE Alicia Tully Jensen
SOLITAIRE FOR TWO Aug-96 Video Amanda Pays
Mark Frankel
Maryam D'Abo
NOTHING TO LOSE Aug-96 Theatrical Adrien Brody
Sybil Temchen
DIRTY WEEKEND Sep-96 Video Lia Williams
David McCallum
Ian Richardson
FLIPPING Sep-96 Theatrical Keith David
Gene Mitchell
HONEYMOON Oct-96 Video Stephen Shellen
Pascale Brussieres
Tammy Lauren
WRONG EXIT Nov-96 Theatrical Billy Campbell
Heather Graham
</TABLE>
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<PAGE> 15
COMPETITION
The audio book business is becoming increasingly competitive.
Many major publishing houses have begun audio book operations, and the Company
anticipates increased competition in the future from major record companies.
Most of the competitors of the Company have substantially greater financial,
personnel, technological, marketing and other resources than the Company. The
cost of obtaining audio publishing rights from popular authors is escalating
and, in certain cases, obtaining such rights is beyond the Company's capital
resources. The Company expects this trend to continue. As a result of this
trend, it may become more difficult to acquire rights to "blockbuster" works by
authors with past successes. The capitalization and financial resources of
publishing houses enable such entities to expend considerably greater amounts to
obtain the rights to such works than the Company is able to expend given its
resources. In addition, major publishing houses may have the ability to require
authors to include audio rights in any publishing deal with such publishers.
Such ability may preclude Dove and other audio book publishers from having the
opportunity to publish in audio format the works of such authors. In addition,
increased competition within the audio book industry could result in greater
price competition in the sale of audio books. Reductions in prices of audio
books, as a result of competition or otherwise, will adversely affect the
Company's margins. There is no assurance that the Company will be able to
compete successfully with major publishing houses and other competitors in the
future.
Competition in the television and motion picture industry is
extremely intense. The Company competes with the major motion picture studios,
numerous independent producers of television programming and feature films and
the major U.S. networks for the services of actors, other creative and technical
personnel and creative material. Most of the Company's principal competitors
have greater financial, distribution, technical and creative resources than the
Company. There is no assurance that the Company will be able to continue to
compete in the various businesses in which it operates.
EMPLOYEES; LABOR RELATIONS
At March 29, 1996, the Company had 46 employees. On occasion,
the Company employs temporary workers on a short-term basis to meet particular
clerical and other needs. The Company believes employee relations are
satisfactory.
In the film production segment, in accordance with industry
practice, the Company meets a substantial part of its personnel needs by
retaining temporary employees, directors, actors, technicians and other
specialized personnel on a per-production, weekly or per-diem basis.
GOVERNMENT REGULATION
In a decision released September 6, 1995, the Federal
Communications Commission ("FCC") repealed its financial interest and
syndication rules effective as of September 21, 1995. Those FCC rules, which
were adopted in 1970 to limit television network control over television
programming and thereby foster the development of diverse programming sources,
had restricted the ability of the three established major U.S. networks (i.e.
ABC, CBS and NBC), to own and syndicate television programming. The impact of
the repeal
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<PAGE> 16
of the FCC's financial interest and syndication rules on the Company's
operations cannot be predicted at the present time, although it is expected that
there will be an increase in in-house productions of television programming for
the networks' own use. It is possible that this change will have a negative
impact on the Company's business. Additionally, in international markets, the
Company may be subject to local content and quota requirements which effectively
prohibit or limit access to particular markets.
In a decision released September 1, 1995, the FCC repealed the
Prime Time Access Rule, effective August 30, 1996. The Prime Time Access Rule
generally prohibits network-affiliated television stations in the top 50
television markets from broadcasting more than three hours of network programs,
or programs previously aired on a network during the four prime time viewing
hours (i.e., 7:00 p.m. - 11:00 p.m. Eastern and Pacific times, and 6:00 p.m. -
10:00 p.m. Central and Mountain times). Due to the Prime Time Access Rule,
network-affiliated television stations often acquire a certain amount of
programming (typically including game shows) for exhibition during the prime
time access period from independent television producers and syndicators. While
the Company's sale of syndicated programming during prime time is primarily to
independent television stations rather than to network-affiliated stations, it
is possible that the repeal of the Prime Time Access Rule may constrict the
market for the Company's television programming product and that the Company
might be subject to increased market competition.
On February 1, 1996, Congress passed the Telecommunications Act
of 1996 ("the 1996 Act"), and President Clinton signed it into law on February
8, 1996. The 1996 Act is the first comprehensive re-write of the Communications
Act of 1934, as amended ("the 1934 Act") and dramatically changed the ground
rules for competition and regulation in virtually all sectors of the
telecommunications industry, from local and long-distance telephone services, to
broadcasting, cable television, and equipment manufacturing. The 1996 Act
eliminates many entry barriers to the telecommunications business, relaxes
concentration and merger rules, and delegates authority for implementing the Act
to the Federal Communications Commission ("FCC").
Pursuant to the 1996 Act, the FCC has revised broadcast
multiple ownership rules so as to allow a single individual person or entity to
own or control or have a cognizable interest in television stations that reach
as much as 35 percent of the nation's television households. In addition, as
mandated by the 1996 Act, the FCC has eliminated the numerical limits previously
set forth in the FCC's rules on the number of television stations that a given
individual or entity could own, or have an attributable interest in.
Under the 1996 Act, manufacturers of television set equipment
will be required to equip all new television receivers with a so-called "V-Chip"
which would allow for parental blocking of violent, sexually-explicit or
indecent programming based on a rating for any given program that would be
broadcast along with the program. Unless the television industry establishes a
voluntary ratings system by February 1998, the FCC is directed by the 1996 Act
to develop a ratings system based upon the recommendations of an advisory
committee selected by the FCC. A coalition of various segments of the
entertainment industry has announced plans to devise a voluntary industry
ratings code for rating video programming with respect to violent, sexual or
indecent content. The industry coalition has announced its intent to have these
new guidelines in place before February 1997.
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<PAGE> 17
Other provisions of the 1996 Act allow local exchange telephone
companies to offer multichannel video programming service, subject to certain
regulatory requirements, and allow for cable companies to offer local exchange
telephone service. The 1996 Act thus fosters the development of a larger number
of video program distribution sources.
The impact on the Company of the changes in the Communications
Act brought about by the 1996 Act and by accompanying changes in FCC Rules
cannot be predicted at the present time, although it is expected that there will
be an increase in the demand for video programming product as a result of the
likelihood that these regulatory changes will facilitate the advent of
additional exhibition sources for such programming. However, it is possible that
recent alliances of certain program producers and television station group
owners, coupled with the recent FCC rule revisions allowing a single television
station licensee to own television stations reaching up to 35 percent of the
nation's television households, may place additional competitive pressures on
program suppliers who are unaligned with any television station group owners.
In foreign markets, the Company's ability to distribute its
film productions may be subject to local content and quota requirements which
prohibit or limit the amount of programming produced outside of the local
market. Although the Company believes these requirements have not affected the
Company's licensing of its programs in foreign markets to date, such
restrictions, or new or different restrictions, could have an adverse impact on
the Company's operations in the future as a result of their impact on
third-party distributors with whom the Company contracts for foreign
distribution.
PROPRIETARY RIGHTS
Copyrights in the Company's audio book recordings and the
underlying works from which such recordings are derived are separate and
distinct rights. The Company generally obtains a license to use (as opposed to a
proprietary copyright interest in) the works underlying its audio books from the
owner of the copyright thereon. Such licenses may in certain cases be subject to
restrictions, such as limiting distribution to particular markets, duration of
term, method of sale and use of recordings; however, the Company acquires
world-wide rights in perpetuity in most cases. The Company copyrights all audio
works it produces. In those limited instances in which the Company acquires
pre-recorded audio product (rather than the underlying work), the Company's
rights are limited to the terms of the Company's agreement with respect to such
product.
ITEM 2. PROPERTIES
The Company has completed the purchase of an office building
and two residential houses (and the underlying land) (collectively, the
"Property") in West Hollywood, California for $2,500,000. The purchase price was
paid $600,000 in cash and $1,900,000 pursuant to a seller carryback note
(maturing December 11, 1996), payable to the seller, the Writers' Guild of
America, West, Inc. (the "Guild"). The Seller carryback note is secured by a
first deed of trust against the Property. The office building contains
approximately 22,000 rentable square feet, and the two residential houses
contain 1,463 and 1,105 square feet, respectively. The Company leased the office
building back to the Guild through February 15, 1996, by which date the Guild
had vacated the Property. The Company plans to move its corporate headquarters
to the new site in April 1996 and will incur related moving expenses. In
connection with the acquisition of the Property, the Company is
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<PAGE> 18
reviewing potential improvements to the Property. The Company will also incur
applicable property taxes and necessary insurance expense. The Company at
present anticipates that, owing to its expansion plans, it will continue to also
occupy the office space it is currently leasing. The Company's lease obligation
with respect to its current headquarters is secured by a $15,000 Letter of
Credit. The annual rent for such lease is $250,000. The minimum future
noncancelable lease expense under the lease is approximately $250,000 annually
for the years 1995 through 1998 inclusive. The lease is subject to annual rent
escalations and the pass-through of costs. The Company will continue to review
its need for additional office space based upon the outcome of its expansion
plans.
ITEM 3. LEGAL PROCEEDINGS
The Company is party to certain litigation involving the film
Morning Glory. In the first of such matters, captioned In the Matter of The
Arbitration Between Dove Audio, Inc., Michael Viner and Jerry Leider v. Steven
Stern and Sharmhill Productions (B.C.), Inc. (Los Angeles Superior Court Case
No. BS 019699) (the "Enforcement Action"), the Company sought to enforce a
binding arbitration award issued to it in September 1992 in the approximate
amount of $4.5 million (plus attorneys' fees and interest accruing from the date
of such award) relating to certain rights in such film and contracts relating
thereto. In August 1993, the trial court affirmed such award and granted to the
plaintiffs in such action, including the Company, a money judgment in such
amount. In March 1995, the trial courts ruling was appealed by the defendants to
the California Court of Appeals, and in June 1995, the California Court of
Appeals affirmed the judgment. The Company is currently attempting to collect
such judgment. In a related matter, captioned Dove Audio, Inc., Michael Viner
and Jerry Leider v. Steven Stern, Sharma Stern, Sharmhill Productions (B.C.),
Inc. et al. (Los Angeles Superior Court Case No. BC 072892; filed in January
1993), the Company and other plaintiffs have brought a fraudulent conveyance
action relating primarily to a marital settlement between certain defendants
named therein. The purpose of such action is to restore certain assets to the
defendants in the Enforcement Action against which to levy if ultimately
successful therein. Such action is in discovery and no trial date has been set.
There is no assurance that the Company ultimately will prevail in these actions,
or as to if, when or in what amounts the Company will be able to levy on any
judgments issued in its favor.
The Company was served in February 1996 with a complaint in
the action captioned Robert H. Tourtelot v. Dove Audio, Inc., Michael Viner
and Stephen Singular (Los Angeles Superior Court Case No. SC040739) (the
"Tourtelot Action"). The Tourtelot Action arises out of an alleged oral
agreement between the Company and Tourtelot to prepare a book for publication
by the Company. The First Amended Complaint (the "Tourtelot Complaint")
alleges breach of oral contract, fraud and deceit, suppression, breach of an
implied covenant and fair dealing, breach of fiduciary duty, infringement of
common law copyright, conversion, conspiracy and seeks an accounting. The
Company has successfully removed the Tourtelot Action to the U.S. District
Court for the central district of California and has filed a motion to dismiss
all causes of action. The Tourtelot Complaint seeks relief of $1.0 million in
damages. The Company intends to vigorously defend against the Tourtelot
Complaint. While the Company believes it has good, meritorious defenses, there
is no assurance that the Company will be able to successfully defend itself in
the Tourtelot Action.
The Company was served in February 1996 with a complaint in the
action entitled Alexandra D. Datig v. Dove Audio (Los Angeles Superior Court
Case No. BC145501) (the "Datig Action"). The Datig Action
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<PAGE> 19
was brought by a contributor to, and relates to the writing of, the recently
released book, You'll Never Make Love In This Town Again. Such complaint alleges
breach of contract, breach of good faith and fair dealing, libel, fraud and
deceit, intentional misrepresentation, negligent misrepresentation, interference
with business opportunity, intentional infliction of emotional distress and
negligent infliction of emotional distress. The complaint also alleges sexual
harassment on the part of Michael Viner and the Company. The Datig Complaint
prays for $1.0 million in damages. The Company and Mr. Viner intend to
vigorously defend against the Datig Complaint. While the Company believes it has
good, meritorious defenses, there is no assurance that the Company will be able
to successfully defend itself in the Datig Action.
The Company is party to various other legal proceedings and
claims. The Company believes that the ultimate resolution of these matters,
individually and in the aggregate, will not have a material adverse effect upon
the Company's financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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<PAGE> 20
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock is traded in the Nasdaq SmallCap
Market under the symbol DOVE. The following table sets forth, for the periods
indicated, the range of low and high bid quotations as reported by the National
Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ").
The prices reflect inter-dealer quotations without retail mark-ups, mark-downs
or commissions and may not represent actual transactions. As of April 4, 1996,
there were 111 holders of record of Common Stock.
<TABLE>
<CAPTION>
LOW HIGH
--- ----
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1994
Fourth Quarter (from December 1, 1994) $8 $10
YEAR ENDED DECEMBER 31, 1995
First Quarter (through March 31, 1995) 9 10 3/8
Second Quarter (through June 30, 1995) 6 5/8 10 3/8
Third Quarter (through September 30, 1995) 6 3/4 11 1/4
Fourth Quarter (through December 31, 1995) 9 1/4 13 1/4
YEAR ENDED DECEMBER 31, 1996
First Quarter (through March 31, 1996) 9 7/8 14 5/8
</TABLE>
- ---------------------
DIVIDENDS
The Company has not declared or paid any cash dividends on its
Common Stock and does not intend to declare any dividends in the foreseeable
future. The payment of dividends, if any, is within the discretion of the Board
of Directors and will depend on the Company's earnings, if any, its capital
requirements and financial condition and such other factors as the Board of
Directors may consider. In addition, if the Company is able to negotiate a new
credit facility, such facility will likely include restrictions on the Company's
ability to pay dividends.
In connection with the December 1994 Initial Public Offering
("IPO") the Company issued to Michael Viner options to purchase 214,113 shares
of its Series A Preferred Stock. The total stated value of the preferred stock
is $856,000 which accrues dividends at 8% compounded quarterly. $53,000 in
preferred stock dividends were paid or accrued in 1995.
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<PAGE> 21
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The discussion and analysis below should be read in conjunction with
the Financial Statements of the Company and the Notes to the Financial
Statements included elsewhere in this Report.
OVERVIEW
Dove commenced business in 1985 as one of the pioneers of the audio book
industry and has become one of the leading independent producers (i.e.,
unaffiliated with any single book publisher) of audio books in the United
States. The Company produces and distributes approximately 100 to 120 new titles
annually and has built a library of over 1000 titles. The Company is also
engaged in the publication of printed books under the Dove imprint and the
development and production of movies-for-television, mini-series, and videos and
the acquisition and distribution of feature films.
The demand for audio books is seasonal, with the majority of shipments
taking place in the third and fourth quarters of the year. The Company believes
that demand for audio books will remain seasonal, and this may adversely affect
results of operations for the first and second quarters. Because a significant
portion of the Company's expenses are relatively fixed, below-expectation sales
in any quarter could adversely affect operating results for that quarter.
The Company's television and theatrical films have been based
principally upon novels written by two authors for which the Company has
published audio books. Currently, the Company has several television projects in
development including a follow-up to the Dove production of Home Song by LaVyrle
Spencer which recently aired on CBS. The Company generally seeks to limit its
financial risk in the production of television movies and mini-series and
feature films by pre-sales and licensing to third parties. The production of
television and theatrical films has been sporadic over the last several years
and significant variances in operating results from year-to-year and
quarter-to-quarter can be expected for film revenues.
To complement its audio book operations, the Company is increasing
significantly its publication of printed books. The Company intends to publish
up to 70 titles in print in 1996. In addition, the Company intends to continue
to diversify its operations through its theatrical feature film division.
Subject to appropriate opportunities becoming available to the Company, the
Company plans to acquire independent films for distribution in the U.S. and
Canada on an all rights basis (including theatrical, home video and all forms of
television). The Company recently completed a two year video output arrangement
with Paramount Pictures wherein Paramount will market and distribute Dove
product under the Dove Home Video label.
In accordance with industry practice, substantially all of the
Company's sales of audio and printed book products are and will continue to be
subject to potential return by distributors and retailers. Although the Company
estimates allowances and reserves for returned products, significant increases
in actual return rates above these estimates could materially and adversely
impact the Company's results of operation or financial condition.
Selling, general and administrative expenses include costs associated
with selling, marketing and promoting the Company's products, as well as general
corporate expenses including salaries, occupancy costs and other overhead,
professional fees, and travel and entertainment. The Company believes that these
expenses will continue to increase as the Company grows.
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<PAGE> 22
RESULTS OF OPERATIONS
The following table sets forth (i) publishing and film
revenues and (ii) publishing, film, and selling, general and administrative
expenses as a percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
REVENUES
Publishing 96% 91% 99%
Film 4 9 1
- - -
Total 100% 100% 100%
==== ==== ====
OPERATING EXPENSES
Publishing 59% 65% 64%
Film 2 6 1
Selling, general &
administrative 36 26 33
-- -- --
Total 97% 97% 98%
=== === ===
</TABLE>
YEAR ENDED DECEMBER, 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
PUBLISHING
Revenues. Net publishing revenues decreased by $323,000 or 3% from
$11,284,000 in 1994 to $10,961,000 in 1995. Of the 1995 net publishing revenue,
net audio book revenue was approximately $8,635,000 and net printed book revenue
was approximately $2,326,000. In 1994, net audio book revenue was approximately
$7,150,000 and net printed book revenue was approximately $4,134,000. The
decrease in 1995 net printed book revenue compared to 1994 was primarily
attributable to an increase in the provision for returns. In particular, "The
Private Diary of Lyle Menendez" experienced return rates which were
significantly greater than the industry average. The increase in 1995 net audio
book review was primarily attributable to a larger number of audio releases in
1995 compared to 1994. The provision for returns as a percentage of gross
revenue increased from 31% in 1994 to 47% in 1995. Although the Company makes
allowances and reserves for returned product, significant increases in return
rates could materially and adversely impact the Company's financial condition or
results of operations. Remainder sales were less than 3% of total publishing
sales in 1995.
The Company's catalog of 1996 audio releases includes Drink With the
Devil by Jack Higgins, The Prince of Wales by Jonathan Dimbleby, and On Selling
by Mark H. McCormack. In the printed books business, the Company is developing
up to 70 books for potential publication in 1996. The Company's catalog of 1996
printed book releases includes White Flame by James Grady, The Heidi Principle
by Rick Montgomery and Legacy of Deception by Stephen Singular.
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Cost of Sales. Publishing cost of sales fell by $812,000 or 10% from
$7,981,000 in 1994 to $7,169,000 in 1995. The decrease in 1995 cost of sales
compared to 1994 was primarily attributable to the decrease in publishing
revenue and a decrease in fulfillment costs resulting from certain volume
discounts from the Company's distributor.
FILM
Revenues Film revenues decreased from $1,071,000 in 1994 to $187,000 in
1995. The decrease was attributable to the fact that the Company had no new
releases in 1995 and the $187,000 in revenue was primarily related to licensing
receipts from Morning Glory. Future film revenues will depend upon the
development and success of film properties, as well as the timing of the release
or licensing of such properties.
The Company has completed the production of a television film project Home Song
which aired on CBS in March 1996. The Company will also develop and produce
additional television and mini-series for CBS based on the novels of LaVyrle
Spencer. In this respect, the Company has received a production commitment as to
a further television movie project, Family Blessing, which is scheduled to go
into production in 1996. There is no assurance that projects in development
ultimately will be produced and aired or distributed.
Film Amortization Film Amortization costs decreased from $716,000 in
1994 to $99,000 in 1995. The decrease was due to the absence of new releases in
1995. Film amortization expenses are generally incurred upon the release or
licensing of film properties.
GENERAL
Gross Profit. The Company's gross profit increased by 6% from
$3,658,000 in 1994 to $3,880,000 in 1995. Gross profit margin increased from 30%
in 1994 to 35% in 1995. This increase resulted primarily from lower fulfillment
costs, offset by an increase in production master amortization.
Selling, General and Administrative. Selling, General and
Administrative expenses ("SG&A") increased by $514,000 or 16% from $3,182,000 in
1994 to $3,696,000 in 1995. The increase in SG&A was primarily attributable to
increased salary and occupancy costs related to the Company's expansion. The
Company expects SG&A costs to continue to increase as the Company grows further.
Interest Expense. Interest expense, net declined from $342,000 in 1994
to $22,000 in 1995 due to lower borrowings and the repayment and cancellation of
the Company's line of credit with Bank of America.
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<PAGE> 24
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
PUBLISHING
Revenues. Publishing revenues increased by $3,814,000 or 51% from
$7,470,000 in 1993 to $11,284,000 in 1994. Net audio book revenue in 1994 was
approximately $7,150,000 and net printed book revenue was approximately
$4,134,000. There were no revenues from printed books in 1993. The increase in
net printed book revenue was primarily attributable to sales of "Nicole Brown
Simpson:" The Private Diary of A Life Interrupted ("the Simpson Book"), the
Company's first printed book release. Net audio book revenue decreased as a
result of reduced revenues from licensing of rights for the Company's products
to third parties in 1994 compared to 1993, and lower average unit sales prices
of audio books. Allowance for returns as a percentage of gross publishing
revenues was increased by approximately 5% of gross revenues. Although the
Company makes allowances and reserves for returned product, significant
increases in return rates could materially and adversely impact the Company's
financial condition or results of operations. Remainder sales, which accounted
for less than 5% of total publishing sales for 1994 and 1993, also had the
effect of reducing excess audio inventory.
Cost of Sales. Publishing cost of sales increased by 74%, or
$3,385,000, from $4,596,000 in 1993 to $7,981,000 in 1994, primarily as a result
of higher unit volume in 1994 than in 1993. Publishing cost of sales as a
percentage of publishing sales increased from 62% in 1993 to 71% in 1994. The
increase resulted in part from lower margins primarily caused by a higher
reserve against returns attributable to the Simpson Book. While unit costs,
particularly for audio books, remained essentially unchanged, margins were
depressed by lower average unit sales prices.
FILM
Revenues. Film licensing revenues increased by $731,000 (more than
tripled), from $340,000 in 1993 to $1,071,000 in 1994, substantially all of
which increase was due to licensing of Morning Glory. Revenues in 1993 were
primarily related to domestic video licensing and those in 1994 were primarily
related to domestic television licensing.
Film Amortization. Film amortization costs increased 298%, or $536,000,
from $180,000 in 1993 to $716,000 in 1994, substantially all of which increase
was attributable to revenues recorded for Morning Glory. Film amortization
expenses are generally incurred upon the release or licensing of film
properties.
GENERAL
Gross Profit. The Company's gross profit increased by 21%, or $624,000,
from $3,034,000 in 1993 to $3,658,000 in 1994. Gross profit margin decreased
from 39% in 1993 to 30% in 1994. This decrease resulted primarily from decreased
gross margin attributable to the Simpson Book and to decreased gross profit
realized
23
<PAGE> 25
from increased film revenues. This decrease was exacerbated by decreased margins
on publishing sales (other than the Simpson Book), and was offset by an increase
in licensing revenue. As a result of entering into the Penguin Agreement, the
Company incurred higher initial costs of sales, including fulfillment costs.
Selling, General and Administrative. Selling, general and
administrative ("SG&A") expenses increased by 14%, or $391,000, from $2,791,000
in 1993 to $3,182,000 in 1994. The increase in selling, general and
administrative costs was primarily attributable to increased salary and lease
expenses. Selling, general and administrative expenses decreased from 36% of
sales in 1993 to 26% of sales in 1994.
Interest Expense. Interest expense, net increased from $136,000 in 1993
to $342,000 in 1994 primarily as a result of higher borrowings and, to a lesser
extent, higher interest rates on the debt.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations in general, and its film and publishing
operations in particular, are typically capital intensive. The Company has
experienced from time to time significant negative cash flows from operating
activities which have been offset by equity and debt financings. As the Company
expands its production and distribution activities, it expects to continue to
experience negative cash flows from operating activities from time to time. In
such circumstances, the Company will be required to fund at least a portion of
production and distribution costs, pending receipt of anticipated future
revenues, from working capital or from additional debt or equity financings from
outside sources. There is no assurance that the Company will be able to obtain
such financing or that such financing, if available, will be on terms
satisfactory to the Company.
The Company's film production activities can affect its capital needs
in that the revenues from the initial licensing of television programming or
films may be less than the associated production costs. The ability of the
Company to cover the production costs of particular programming or films is
dependent upon the availability, timing and the amount of fees obtained from
distributors and other third parties, including revenues from foreign or
ancillary markets where available. In any event, the Company from time to time
is required to fund at least a portion of its production costs, pending receipt
of film revenues, out of its working capital. Although the Company's strategy
generally is not to commence principal photography without first obtaining
commitments which cover all or substantially all of the budgeted production
costs, from time to time the Company may commence principal photography without
having obtained commitments equal to or in excess of such costs.
Since its inception, the Company has satisfied its liquidity needs
principally through the sale of equity securities, loans from or guaranteed by
certain of its shareholders, and cash generated from operations. In December
1995 and January 1996, the Company raised net proceeds of $6,303,000 from the
sale of 76 Units in a private placement. Each Unit consisted of 12,500 shares of
the Common Stock of the Company and 12,500 warrants to purchase shares of Common
Stock at $12.00. The net proceeds will be used by the Company to fund the
Company's increased working capital needs during 1996 and to finance strategic
acquisitions. During fiscal 1995, the Company used cash from operations, the
sale of equity securities and bank borrowings primarily to fund expenditures for
rights acquisition, production masters and the printing and distribution costs
of printed books. In September 1994, the Company completed the sale of 300,000
Units consisting of one share
24
<PAGE> 26
of Common Stock and one Redeemable Warrant in a private placement. The net
proceeds of the sale to the Company were approximately $926,000. In December
1994, the Company completed its IPO, resulting in net proceeds of approximately
$4,805,000 to the Company. In January 1995, the underwriter of the IPO exercised
its overallotment option relating to the IPO in full resulting in additional net
proceeds to the Company of $770,000. Of the proceeds from the IPO, $900,000 was
used to repay fully a convertible note and an additional $300,000 was used to
repay certain amounts owed to affiliates of the Company.
At the beginning of 1995, the Company had a $1,000,000 unsecured line
of credit with Bank of America guaranteed by two of the Company's principal
shareholders. The amounts outstanding under the facility were repaid and the
line has now been cancelled by the Company. The Company is seeking to secure a
replacement facility with other lenders that is better suited to the Company's
working capital needs. There is no assurance that the Company will be able to
secure a replacement credit line on terms acceptable to the Company.
Publishing accounts receivable, net of sales returns, generally are to
be paid pursuant to a specified payment formula, as defined in the relevant
agreements. The Company's distribution agreements typically provide for a
distribution of certain bad debt risk between the Company and its distributors.
As of April 4, 1996 the Company's unused sources of funds consisted
primarily of approximately $5,279,000 in cash and short-term investments. The
Company intends to use the remainder of the net proceeds of the Private
Placement for general corporate and working capital purposes, including
financing the acquisition of book and film properties and strategic corporate
acquisitions. Subject to the closing of the Four Point acquisition, the Company
expects to use $2,500,000 in cash as a portion of the purchase price and to
assume approximately $1,200,000 of Four Point term and revolving bank debt. As
part of the agreement to acquire Four Point, it is expected that the majority of
the assumed debt will be paid down from various Four Point receivables prior to
June 30, 1996.
In order to obtain rights to certain properties for the Company's
publishing and film operations, the Company may be required to make advance cash
payments to sources of such properties, including book authors and publishers.
While the Company generally attempts to minimize the magnitude of such payments
and to obtain advance commitments to offset such payments, the Company is not
always able to do so.
The Company has historically experienced significant negative cash
flows from operations, including $1,502,000 and $3,350,000 for the years ended
December 31, 1993 and 1994, respectively. However, in the year ending December
31,1995 the Company generated $186,000 from operating activities. See "Financial
Statements of the Company - Statements of Cash Flows." The Company believes its
capital resources will be sufficient to meet the Company's working capital
requirements with respect to its current commitments for at least the next
twelve months. The Company plans to expand its development, production and
distribution activities, including the expansion of its print publishing and
film operations (although there is no assurance that the Company will expand or
that such expansion will be profitable). Such expansion may include future
acquisitions of library product or other assets complementary to its current
operations or acquisition of rights involving significantly greater outlays of
capital than required in the business conducted to date by the Company.
Expansion of the Company or acquisitions of particular properties or libraries,
to a significant extent, would require capital resources beyond those available
to the Company, in which case such expansion
25
<PAGE> 27
will be dependent upon the ability of the Company to obtain additional sources
of working capital, whether through the issuance of additional equity or debt
securities, additional bank financing or otherwise.
INFLATION
The Company does not believe its business and operations have been
materially affected by inflation.
ITEM 7. FINANCIAL STATEMENTS
The financial statements, including notes thereto, required by Item 7
are set forth in the pages indicated in Item 13(a)(1).
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL
DISCLOSURE
On July 24, 1995, Ernst & Young LLP, successor to Kenneth, Leventhal &
Company, resigned as the Company's independent accountants. Kenneth, Leventhal &
Company audited the Company's 1992, 1993 and 1994 financial statements and
effective June 1, 1995 was merged into Ernst & Young LLP. In connection with the
Company's fiscal year ended December 31, 1994, there were no disagreements with
Kenneth Leventhal & Company on any manner of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which, if not
resolved to their satisfaction, would have caused them to make reference to the
subject matter of the disagreement in connection with the Company's Report on
Form 8-K filed July 26, 1995.
The audit report of Kenneth Leventhal & Company on the consolidated
financial statements of the Company for the fiscal year ended December 31, 1994
did not contain any adverse opinion or disclaimer of opinion, nor was it
qualified or modified as to uncertainty, audit scope, or accounting principles.
The Company engaged KPMG Peat Marwick LLP as its principal accountants
as of September 18, 1995.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
There is hereby incorporated by reference the information appearing
under the caption "Directors and Executive Officers" in the Company's definitive
Proxy Statement to be filed with the Securities and Exchange Commission.
ITEM 10. EXECUTIVE COMPENSATION
There is hereby incorporated by reference the information appearing
under the caption "Executive Compensation" in the Company's definitive Proxy
Statement to be filed with the Securities and Exchange Commission.
26
<PAGE> 28
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There is hereby incorporated by reference the information appearing
under the caption "Security Ownership of Certain Beneficial Owners and
Management" in the Company's definitive Proxy Statement to be filed with the
Securities and Exchange Commission.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is hereby incorporated by reference the information appearing
under the caption "Certain Relationships and Related Transactions" in the
Company's definitive Proxy Statement to be filed with the Securities and
Exchange Commission.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS PART OF THIS REPORT:
<TABLE>
<CAPTION>
(1) Financial Statements Page
<S> <C>
Report of Kenneth Leventhal & Company..............................................F-1
Report of KPMG Peat Marwick LLP....................................................F-2
Balance Sheets at December 31, 1995 ...............................................F-3
Statements of Income for the Years Ended December 31, 1995 and 1994 ...............F-4
Statements of Shareholder's Equity (Deficit) for the Years
Ended December 31, 1995 and 1994...................................................F-5
Statements of Cash Flows for the Years Ended December 31, 1995 and 1994............F-6
Notes to Financial Statements......................................................F-7
</TABLE>
27
<PAGE> 29
(2) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
3.1 Articles of Incorporation of the Company (filed as Exhibit 3.1
to the Registration Statement)
3.2 Certificate of Amendment of Articles of Incorporation of the
Company filed with the Secretary of State of the State of
California on March 14, 1990 (filed as Exhibit 3.2 to the
Registration Statement)
3.3 Certificate of Amendment of Articles of Incorporation of the
Company filed with the Secretary of State of the State of
California on November 17, 1990 (filed as Exhibit 3.3 to the
Registration Statement)
3.4 Certificate of Amendment of Articles of Incorporation of the
Company filed with the Secretary of State of the State of
California on August 26, 1994 (filed as Exhibit 3.4 to the
Registration Statement)
3.5 Bylaws of the Company, as amended (filed as Exhibit 3.5 to the
Registration Statement)
4.1 Specimen common stock certificate of the Company (filed as
Exhibit 4.1 to Amendment No. 2 to the Registration Statement
("Amendment No. 2") filed with the Commission on November 29,
1994)
4.2 Specimen Series A Preferred Stock certificate of the Company
(filed as Exhibit 4.2 to Amendment No. 2)
4.3 Form of Certificate of Determination of the Series A Preferred
Stock of the Company (filed as Exhibit 4.3 to the Registration
Statement)
4.4 Form of Underwriter's Warrant Agreement (filed as Exhibit 4.4 to
the Registration Statement)
4.5 Form of Warrant Agreement (filed as Exhibit 4.5 to the
Registration Statement)
4.6 Form of Subscription Agreement (filed as Exhibit 4.6 to
Amendment No. 1 to the Registration Statement ("Amendment No.
1") filed with the Commission on November 2, 1994)
4.7 Placement Agency Agreement dated August 1, 1994 between the
Company and Joseph Stevens & Company, L.P. (filed as Exhibit 4.7
to Amendment No. 1)
4.8 Placement Agent Warrant Agreement dated December 24, 1995
between Whale Securities Co., L.P. and Dove Audio (filed as the
same numbered Exhibit to the Annual Report on Form 10-KSB for
the fiscal year ended 1995).
4.9 Placement Agent Warrant (filed as the same numbered Exhibit to
the Annual Report on Form 10-KSB for the fiscal year ended 1995).
4.10 Form of Registration Rights Agreement (filed as the
same numbered Exhibit to the Annual Report on Form 10-KSB for
the fiscal year ended 1995).
4.11 Form of Common Stock Purchase Warrant (filed as the
same numbered Exhibit to the Annual Report on Form 10-KSB for
the fiscal year ended 1995).
10.1 Employment Agreement dated as of January 1, 1993 between the
Company and Michael Viner (filed as Exhibit 10.8 to the
Registration Statement)
10.2 Employment Agreement dated as of January 1, 1993 between the
Company and Deborah Raffin (filed as Exhibit 10.9 to the
Registration Statement)
10.3 Office Building Lease for Suite 203, 301 N. Canon Drive, Beverly
Hills, California 90210 (the "Office Lease") between Village on
Canon and Dove, Inc. dated July 3, 1990 and Amendment appended
thereto dated 1992 (filed as Exhibit 10.10 to the Registration
Statement)
10.4 Second Amendment to the Office Lease between Village on Canon
and Dove, Inc. dated March 12, 1990 (filed as Exhibit 10.11 to
the Registration Statement)
10.5 Third Amendment to the Office Lease between Pinkwood Properties
Corp. and Dove, Inc. dated December 1, 1992 (filed as Exhibit
10.12 to the Registration Statement)
</TABLE>
28
<PAGE> 30
<TABLE>
<S> <C>
10.13 Agreement to Assume and Amend Lease of Dove, Inc. dated
February, 1994 among Pinkwood Properties Corp., Michael Viner
and the Company (filed as Exhibit 10.13 to the Registration
Statement)
10.14 Letter Agreement between Pinkwood Properties Corp. and the
Company dated February 3, 1994 amending the Office Lease (filed
as Exhibit 10.14 to the Registration Statement)
10.15 Letter Agreement dated July 1, 1994 between Penguin Books USA,
Inc. and the Company (filed as Exhibit 10.15 to the Registration
Statement)
10.16 Form of Publishing Agreement (filed as Exhibit 10.16 to
Amendment No. 1)
10.17 Form of Artist Agreement (filed as Exhibit 10.17 to Amendment
No. 1)
10.18 Form of Company's 1994 Stock Incentive Plan (filed as Exhibit
10.18 to the Registration Statement)
10.19 Settlement Agreement dated as of July 13, 1994 among the
Company, SBT-Batif, S.A. and Ethos Capital Management, Inc.
(filed as Exhibit 10.19 to Amendment No. 1)
10.20 Form of Option and Stock Purchase Agreement among Michael Viner,
Deborah Raffin Viner, Dove, Inc., Dove II, Inc., Dove
Communications, Inc. and the Company (filed as Exhibit 10.20 to
Amendment No. 2)
10.21 Agreement between the Company and Reader's Digest Association,
Inc. dated as of March 15, 1995
10.22 Agreement between Dove International and Skouras Pictures, Inc.
dated July 1, 1995 (filed as Exhibit 1 to the Current Report on
Form 8-K filed with the Commission on July 17, 1995 (the "July
17 Current Report")
10.23 Employment Agreement between Dove International and Dimitri T.
Skouras dated as of July 1, 1995 together with Stock Option
10.24 Award Agreement between Dove Audio and Dimitri T. Skouras, dated
as of July 1, 1995 (filed as Exhibit 2 to the July 17 Current
Report) Agreement for Purchase and Sale of Real Estate and Joint
Escrow Instructions dated September 15, 1995 among the Writers
Guild of America, west, Inc. and the Company and Amendment No. 1
thereto dated October 3, 1995 (filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-QSB filed with the
Commission on November 14, 1995)
16 Letter from Ernst & Young LLP to the Securities and Exchange
Commission dated July 26, 1995 (filed as Exhibit 16 to the
current Report on Form 8-K filed with the commission on July 26,
1995)
21 Subsidiaries of Dove (filed as Exhibit 21 to the Annual Report on
Form 10-KSB for the fiscal year ended 1995)
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Ernst & Young LLP
</TABLE>
(b) REPORTS ON FORM 8-K. None.
29
<PAGE> 31
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
Dove Audio, Inc.
We have audited the accompanying consolidated statements of operations,
shareholders' (deficit) equity and cash flows of Dove Audio, Inc. for the
year ended December 31, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Dove Audio, Inc. for the year ended December 31, 1994 in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
March 28, 1995
Los Angeles, California
F-1
<PAGE> 32
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Dove Audio, Inc.
We have audited the accompanying consolidated balance sheet of Dove Audio, Inc.
and subsidiaries as of December 31, 1995, and the related consolidated
statements of income, shareholders' equity, and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit. The accompanying financial
statements of Dove Audio, Inc. and subsidiaries for the year ended December 31,
1994 were audited by other auditors whose reports thereon dated March 28, 1995,
expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1995 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Dove Audio,
Inc. and subsidiaries as of December 31, 1995, and the results of its operations
and its cash flows for the year then ended in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Los Angeles, California
April 12, 1996
F-2
<PAGE> 33
<TABLE>
<CAPTION>
DOVE AUDIO, INC.
Consolidated Balance Sheet
December 31, 1995
ASSETS
CURRENT ASSETS
<S> <C>
Cash and cash equivalents $4,946,000
Marketable securities 163,000
Accounts receivable, net of allowances of $2,161,000 1,607,000
Inventory 3,705,000
Film Costs - Note 6 2,134,000
Prepaid expenses and other assets 587,000
Deferred tax asset - Note 7 230,000
-----------
Total current assets 13,372,000
PRODUCTION MATTERS - Note 5 2,758,000
FILM COSTS, net - Note 6 1,017,000
PROPERTY AND EQUIPMENT - Note 4 2,721,000
-----------
Total assets $19,868,000
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 2,137,000
Notes payable - Note 8 1,937,000
Royalties payable 341,000
Advances and deferred income 2,950,000
-----------
Total current liabilities 7,365,000
COMMITMENTS AND CONTINGENCIES - Note 10 -
SHAREHOLDERS' EQUITY - Note 11
Preferred stock 856,000
Common stock .01 par value; 20,000,000 shares authorized and
4,663,853 issued and outstanding 47,000
Additional paid-in capital 13,265,000
Accumulated deficit 1,665,000)
-----------
Total shareholders' equity 12,503,000
-----------
Total liabilities and shareholders' equity $19,868,000
===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 34
<TABLE>
<CAPTION>
DOVE AUDIO, INC.
Consolidated Statements of Income
For the Years Ended December 31,
--------------------------------
1995 1994
---- ----
REVENUES - Note 12
<S> <C> <C>
Publishing, Net $ 10,961,000 $ 11,284,000
Film 187,000 1,071,000
------------ -------------
11,148,000 12,355,000
COST OF SALES 7,169,000 7,981,000
FILM AMORTIZATION 99,000 716,000
------------ -------------
3,880,000 3,658,000
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES - Note 9 3,696,000 3,182,000
------------ -------------
Income from operations 184,000 476,000
INTEREST EXPENSE - net of interest income of
$86,000 and $10,000 respectively (22,000) (342,000)
GAIN (LOSS) ON SALE OF ASSETS (11,000) 4,000
------------ -------------
Income before income taxes 151,000 138,000
PROVISION FOR INCOME TAXES - Note 7 60,000 -
------------ -------------
Net income $ 91,000 $ 138,000
============ =============
Net income per share $ .02 $ .04
============ =============
Weighted average number of
shares outstanding 4,365,000 3,386,000
============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 35
<TABLE>
<CAPTION>
DOVE AUDIO, INC.
Statements of Shareholders' Equity (Deficit)
For the Years Ended December 31, 1994 and 1995
Common Stock Preferred Stock Additional
------------ --------------- Paid-In Accum
Shares Amount Shares Amount Capital Deficit Total
------ ------ ------ ------ ---------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
JANUARY 1, 1994 2,525,000 $ 25,000 -- $ -- $ 1,158,000 $ (1,841,000) $ (658,000)
NET INCOME 138,000 138,000
OPTION ISSUANCE 1,857,000 1,857,000
SALE OF COMMON STOCK 300,000 3,000 923,000 926,000
PUBLIC OFFERING 950,000 10,000 4,649,000 4,659,000
--------- --------- --------- --------- ------------ ------------ -----------
DECEMBER 31, 1994 3,775,000 38,000 -- -- 8,587,000 (1,703,000) 6,922,000
NET INCOME 91,000 91,000
SALE OF COMMON STOCK 888,853 9,000 5,532,000 5,541,000
PREFERRED STOCK
OPTION ISSUANCE 214,114 856,000 (854,000) 2,000
PREFERRED STOCK
DIVIDEND (53,000) (53,000)
--------- --------- --------- --------- ------------ ------------ -----------
DECEMBER 31, 1995 4,663,853 $ 47,000 214,114 $ 856,000 $ 13,265,000 ($ 1,665,000) $ 12,503,000
========= ============ ======= ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 36
<TABLE>
<CAPTION>
DOVE AUDIO, INC.
Statements of Cash Flows
For the Years Ended
-------------------
December 31,
------------
1995 1994
------------ -------------
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 91,000 $ 138,000
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation 79,000 67,000
Amortization of production masters 2,718,000 1,773,000
Amortization of film costs 99,000 716,000
(Gain) on sale of assets 11,000 4,000
Changes in operating assets and liabilities
Accounts receivable 4,880,000 (5,253,000)
Deferred tax asset (20,000) (210,000)
Inventory (1,969,000) 517,000
Film costs (2,995,000) (101,000)
Expenditures for production masters (4,352,000) (2,245,000)
Prepaid expenses and other assets (559,000) 90,000
Accounts payable and accrued expenses (159,000) 706,000
Royalties payable (50,000) (53,000)
Income taxes (210,000) 173,000
Advances and deferred revenue 2,622,000 328,000
------------ -------------
Net cash provided by (used in) operating activities 186,000 (3,350,000)
------------ -------------
INVESTING ACTIVITIES
Purchase of marketable securities (163,000) (1,703,000)
Maturities of marketable securities 1,703,000 -
Purchases of property and equipment (790,000) (30,000)
Proceeds from sale of equipment 35,000 1,000
------------ ------------
Net cash provided by (used in) investing activities 785,000 (1,732,000)
------------ ------------
FINANCING ACTIVITIES
Proceeds from sale of common stock 5,541,000 5,497,000
Proceeds of bank borrowings 859,000 549,000
Repayments of convertible senior promissory note - (1,000,000)
Repayments of notes payable (2,877,000) -
Issuance of preferred stock 2,000 -
Preferred Series A dividend (53,000)
Proceeds from (repayments to) related parties - (300,000)
------------ ------------
Net cash provided by financing activities 3,472,000 4,746,000
------------ ------------
Net increase (decrease) in cash and 4,443,000 (336,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 503,000 839,000
------------ -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,946,000 $ 503,000
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 96,000 $ 352,000
Cash paid for income taxes 420,000 -
Non cash transactions:
Acquisition of property and equipment in exchange for
mortgage note 1,900,000 --
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 37
DOVE AUDIO, INC.
Notes to Consolidated Financial Statements
NOTE 1 - ORGANIZATION AND BUSINESS
Dove Audio, Inc. (the Company) is primarily engaged in the
business of producing and distributing books on tape (audio
books). The Company acquires audio publishing rights for specific
titles or groups of titles on a worldwide basis, in perpetuity and
often including interactive media applications. The Company is
also engaged in the publication of printed books; the development
and production of movies-for-television, mini-series and videos;
and the acquisition and distribution of feature films.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Recognition of Publishing Revenue
Revenues from publishing, including the sale of audio books, (net
of provisions for estimated returns and allowances), and related
royalties payable are recognized upon shipment of the product.
The Company records an allowance for future returns based on
anticipated return rates. The activity relating to the allowance
for returns during the years ended December 31, 1995 and 1994 was
as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Balance at beginning of year $3,048,000 $ 682,000
Provision for returns 8,823,000 4,854,000
Actual Returns (9,739,000) (2,488,000)
---------- ----------
Balance at end of year $2,132,000 $2,048,000
========== ==========
</TABLE>
Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less when purchased to be cash
equivalents.
F-7
<PAGE> 38
DOVE AUDIO, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Inventory
Inventory, consisting primarily of recorded audio cassettes and
printed books, is valued at the lower of cost or market,
determined using the first-in, first-out method. Periodically,
management reviews inventory on a title-by-title basis. The
Company writes off, to cost of sales, inventory that management
believes will not be sold.
Production Masters
Production masters are stated at cost. Costs incurred for
production masters, including nonrefundable advance royalties paid
to authors and readers, as well as recording and packaging design
costs, are capitalized and amortized over a two-year period from
the time the title is initially distributed, consistent with the
expected revenue for a title's initial distribution, which has
generally resulted in amortization of approximately 80% of the
production master cost in the initial year of release. Any portion
of production masters that is not estimated to be fully
recoverable from future revenues is charged to expense in the
period in which the loss becomes evident.
Film Revenues and Costs
Film costs, which include development, production and acquisition
costs, are capitalized and amortized, and participations and
royalties are accrued, in accordance with the
individual-film-forecast method in the proportion that current
year's revenue bears to the estimated total revenues from all
sources.
These costs are stated at the lower of unamortized costs or
estimated realizable value on an individual film basis. Revenue
forecasts for films are periodically reviewed by management and
revised if warranted by changing conditions. If estimates of total
revenue indicate that a film will result in an ultimate loss, the
loss is recognized currently.
Revenues from the distribution of television and theatrical films
are recognized upon availability of the completed film to the
broadcaster or the Company's
F-8
<PAGE> 39
DOVE AUDIO, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
distributors. The Company licenses distribution rights to
distributors and has not recognized any revenue from the direct
distribution of theatrical films. Deferred revenues arise when
distributors or broadcasters make advances to the Company prior
to the date of revenue recognition.
Income Taxes
The Company provides for income taxes under Statement of Financial
Accounting Standards No. 109 (SFAS 109). In accordance with SFAS
109, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to temporary differences
between the financial and tax reporting basis of the Company's
assets and liabilities.
Property and Equipment
Property and Equipment is stated at cost and is depreciated using
the straight-line method over the estimated useful lives of assets
as follows:
<TABLE>
<S> <C>
Building 40 years
Furniture, Fixtures and Equipment 5-7 years
</TABLE>
Leasehold improvements are amortized over the estimated useful
life or the remaining lease term, whichever is less.
Marketable Securities
Marketable securities includes investments in equity securities.
All such securities are classified as available-for-sale. At
December 31, 1995 the fair market value of such securities
approximated their cost.
Net Income Per Share
Net income per share is based upon the weighted average number of
outstanding shares of Common Stock and common equivalent shares.
Pursuant to a Securities and Exchange Commission Staff Accounting
Bulletin, common and common equivalent shares issued by the
Company at prices below the assumed initial public offering price
during the twelve months immediately preceding the offering date
have been included in the calculation as if they were outstanding
for all periods presented.
Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities
and disclosure of contingent
F-9
<PAGE> 40
DOVE AUDIO, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
Reclassification
Certain prior year accounts have been reclassified to conform to
the current year's presentation.
NOTE 3 - CONCENTRATION OF CREDIT RISK AND FAIR VALUE OF
FINANCIAL INSTRUMENTS
The Company's cash deposits periodically exceed federally insured
limits. Based on the quality of the depository institutions,
management does not believe the Company faces an unacceptable
credit risk.
The carrying amounts of cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities, other
notes payable and advances and deferred income approximate fair
value because of the short maturity of those instruments. The
carrying amount of the mortgage note payable approximates fair
value as the note was issued in December 1995.
NOTE 4 - PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31, 1995 is as
follows:
<TABLE>
<S> <C>
Land $ 502,000
Building 1,801,000
Furniture, Fixtures and Equipment 615,000
Leasehold Improvements $ 113,000
---------
Total $3,031,000
Less accumulated depreciation and $310,000
amortization ----------
$2,721,000
==========
</TABLE>
F-10
<PAGE> 41
DOVE AUDIO, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 5 - PRODUCTION MASTERS
Production masters, net of accumulated amortization of $6,389,000
at December 31, 1995 consist of the following:
<TABLE>
<S> <C>
Released titles $ 671,000
Unreleased titles 2,087,000
---------
Total $2,758,000
==========
</TABLE>
NOTE 6 - FILM COSTS
The following is an analysis of film costs as of December 31,
1995:
<TABLE>
<S> <C>
Current:
Television films in production $2,134,000
Non Current:
Television and theatrical films released
less amortization $1,017,000
----------
$3,151,000
==========
</TABLE>
As of December 31, 1995 approximately 90% of the unamortized
balance of film costs will be amortized within the next three-year
period based upon the Company's revenue estimates at that date.
F-11
<PAGE> 42
DOVE AUDIO, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 7 - INCOME TAXES
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1995 1994
---- ----
Current tax expense
<S> <C> <C>
Federal $62,000 $170,000
State 18,000 40,000
------ --------
Total current 80,000 210,000
------ -------
Deferred tax expense (benefit)
Federal (15,000) (170,000)
State (5,000) ( 40,000)
------- ---------
Total deferred (20,000) (210,000)
-------- ---------
$60,000 $ -
======= =========
</TABLE>
Net deferred tax assets at December 31, 1995 is comprised of the
following:
<TABLE>
<S> <C>
Royalties payable 136,000
Deferred income 40,000
Sales returns and other assets 275,000
Other 110,000
--------
Gross deferred assets 561,000
--------
Valuation allowance (331,000)
--------
$230,000
========
</TABLE>
The deferred tax asset valuation allowance was reduced by $118,000
from $449,000 at December 31, 1993, to $331,000 at December 31,
1994. The Company believes that it is more likely than not that
the net deferred assets of $230,000 at December 31, 1995 will be
realized on future tax returns.
F-12
<PAGE> 43
DOVE AUDIO, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 7 - INCOME TAXES (CONTINUED)
The provision for income taxes differs from amounts computed by
applying the statutory federal income tax rate to income before
income taxes for the years ended December 31, 1995 and 1994,
respectively, as a result of the following differences:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Federal income tax expense
based on federal statutory
rates $51,000 $47,000
Increase (reduction in taxes resulting from:
State income taxes 9,000 12,000
Net temporary differences - 9,000
Utilization of net operating
loss carryforwards - (68,000)
------- --------
$60,000 $ -
======= ========
</TABLE>
NOTE 8 - NOTES PAYABLE
Notes payable at December 31, 1995 consist of the following:
<TABLE>
<S> <C>
Mortgage Note $1,900,000
Other notes payable 37,000
----------
$1,937,000
==========
</TABLE>
In December 1995, the Company borrowed $1,900,000 from the seller
in conjunction with the acquisition of a new office building. The
note bears interest at prime payable on a monthly basis and is
secured by a deed of trust. The entire principal amount plus any
unpaid interest is due in December 1996.
F-13
<PAGE> 44
DOVE AUDIO, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 9 - RELATED PARTY TRANSACTIONS
As of January 1, 1993, the Company entered employment agreements
with two principal shareholders/officers which expire in December
1999. The agreements provide for aggregate compensation of no less
than $275,000 each per year with certain provisions, including an
indemnification and benefits such as health insurance and an
automobile allowance. In addition, the majority
shareholders/officers are entitled to an annual salary increase
and bonus subject to certain limitations agreed upon with the
underwriter of the Initial Public Offering at the discretion of
the Company's Board of Directors. The Board of Directors approved
an annual salary increase for the principal shareholders/officers
to a combined total of $345,000 per year for 1995.
During 1995 the Company entered into two executive producer
service agreements and an actor's television motion picture
agreement with two principal shareholders/officers and a director.
These agreements provide for aggregate compensation of $275,000
for acting and production services relating to the making of Home
Song.
The Company acquired audio book rights for fourteen titles which
were written by a principal shareholder. The net audio sales from
these titles for the years ended December 31, 1995 and 1994 were
$357,000 and $87,000, respectively.
In April 1992, the Company entered into a two-year consulting
agreement with a shareholder/director for $100,000 per year,
payable at the beginning of each year. Through 1994, $125,000 had
been paid to the shareholder, and the remaining $75,000 was paid
in January 1995.
During 1995 the Company made payments totalling $66,000 to a
principal shareholder/officer for the business rental of a
condominium owned by the officer.
During 1995 the Company made payments totaling $24,000 with
respect to auto lease payments, auto allowance, and insurance on
automobiles owned by two principal shareholders/officers.
The Company paid a premium of $4,000 for life insurance for a
principal shareholder/officer.
The Company paid or accrued for preferred stock dividends of
$53,000 to a principal shareholder/officer.
F-14
<PAGE> 45
DOVE AUDIO, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Litigation
The Company is party to certain litigation involving the film
Morning Glory. In the first of such matters, captioned In the
Matter of The Arbitration Between Dove Audio, Inc., Michael Viner
and Jerry Leider v. Steven Stern and Sharmhill Productions (B.C.),
Inc. (Los Angeles Superior court Case No. BS 019699) (the
"Enforcement Action"), the Company sought to enforce a binding
arbitration awarded issued to it in September 1992 in the
approximate amount of $4.5 million (plus attorneys' fees and
interest accruing from the date of such award) relating to certain
rights in such film and contracts relating thereto. In August
1993, the trial court affirmed such award and granted to the
plaintiffs in such action, including the Company, a money judgment
in such amount. In March 1995, the trial court ruling was appealed
by the defendants to the California Court of Appeals, and in June
1995, the California Court of appeals affirmed the judgment. The
Company is currently attempting to collect such judgment. In a
related matter, captioned Dove Audio, Inc., Michael Viner and
Jerry Leider v. Steven Stern, Sharma Stern, Sharmhill Productions
(B.C.), Inc. et al.(Los Angeles Superior Court Case No. BC 072892;
filed in January 1993), the Company and other plaintiffs have
brought a fraudulent conveyance action relating primarily to a
marital settlement between certain defendants named therein. The
purpose of such action is to restore certain assets to the
defendants in the Enforcement Action against which to levy if
ultimately successful therein. Such action is in discovery and no
trial date has been set. There is no assurance that the Company
ultimately will prevail in these actions, or as to if, when or in
what amounts the Company will be able to levy on any judgments
issued in its favor.
The Company was served in February 1996 with a complaint in the
action captioned Robert H. Tourtelot v. Dove Audio, Inc., Michael
Viner and Stephen Singular (Los Angeles Superior Court Case No.
SC040739) (the "Tourtelot Action"). The Tourtelot Action arises
out of an alleged oral agreement between the Company and Tourtelot
to prepare a book for publication by the Company. The First
Amended Complaint (the "Tourtelot Complaint") alleges breach of
oral contract, fraud and deceit, suppression, breach of an implied
covenant and fair dealing, breach of fiduciary duty, infringement
of common law copyright, conversion, conspiracy and seeks an
accounting. The Company has successfully removed the Tourtelot
Action to the U.S. District Court for the central district of
California and has filed a motion to dismiss all causes of action.
The Tourtelot Complaint seeks relief of $1.0 Million in damages.
The Company intends to vigorously defend against the Tourtelot
Complaint. While the Company believes
F-15
<PAGE> 46
DOVE AUDIO, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 10 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
it has good, meritorious defenses, there is no assurance that the
Company will be able to successfully defend itself in the
Tourtelot Action.
The Company was served in February 1996 with a complaint in the
action entitled Alexandra D. Datig v. Dove Audio (Los Angeles
Superior Court Case No. BC145501) (the "Datig Action"). The Datig
Action was brought by a contributor to, and relates to the writing
of, the recently released book, You'll Never Make Love In This
Town Again. Such complaint alleges breach of contract, breach of
good faith and fair dealing, libel, fraud and deceit, intentional
misrepresentation, negligent misrepresentation, interference with
business opportunity, intentional infliction of emotional distress
and negligent infliction of emotional distress. The complaint also
alleges sexual harassment on the part of Michael Viner and the
Company. The Datig Complaint prays for $1.0 Million in damages.
The Company intends to vigorously defend against the Datig
Complaint. While the Company believes it has good, meritorious
defenses, there is no assurance that the Company will be able to
successfully defend itself in the Datig Action.
In addition to the items discussed above, the Company has been
and is currently involved in various litigation matters and
claims in the normal course of business. Based upon consultation
with legal counsel, management believes that the outcome of the
various actions discussed above and other actions will not
result in any significant impact on the Company's financial
statements.
Office Lease
The Company leases office space under a noncancelable operating
lease expiring December 1998. The Company's lease obligation is
secured by a $15,000 irrevocable letter of credit. Rent expense
was $254,000 and $228,000 in 1995 and 1994, respectively. The
minimum future noncancelable lease expense under the lease is
approximately $250,000 annually for the years 1996 through 1998,
inclusive. The lease is subject to annual rent escalations and the
pass-through of costs.
NOTE 11 - CAPITAL ACTIVITIES
Stock Split; Change in Capital Structure; Preferred Stock
In August 1994, the Company (i) effected a stock split (the Stock
Split) to increase the number of shares of Common Stock, par value
$.01, of the Company
F-16
<PAGE> 47
DOVE AUDIO, INC.
Notes to Consolidated Financial Statements (Continued)
(the Common Stock) issued and outstanding from 103.16 to 2,525,000,
and (ii) increased the authorized capital stock of the Company from
1,000 shares of
NOTE 11 - CAPITAL ACTIVITIES (CONTINUED)
Common Stock to 22,000,000 shares, consisting of 20,000,000 shares of
Common Stock and 2,000,000 shares of preferred stock. The Stock Split
has been given retroactive treatment for financial statement
presentation purposes. No shares of preferred stock were outstanding
at December 31, 1994. The preferred stock is issuable in series with
such rights, preferences, privileges, and restrictions as the
Company's Board of Directors (the Company Board) may from time to
time determine, including voting rights, redemption provisions,
dividend rates, liquidation preferences, and conversion rights,
without any further shareholder approval.
On September 2, 1994, the Company consummated the sale of 300,000
Units, each Unit consisting of one share of Common Stock and one
Redeemable Warrant (the "Redeemable Warrants") in a Private Placement
Offering (the "Private Placement Offering"). Each two Redeemable
Warrants entitle the holder thereof to purchase one share of Common
Stock at a price of $8.00 per share (subject to adjustment) for a
period of four years commencing on the date of closing of the sale of
the Units (the "Closing Date" or the "Closing"). The Redeemable
Warrants are redeemable by the Company at a price of five cents
($.05) per share underlying the Redeemable Warrants at any time after
six months from the Closing Date, provided the Common Stock has
traded on a nationally recognized stock exchange or on NASDAQ at a
per-share closing price of $11.00 per share or more (subject to
adjustment) for twenty (20) consecutive trading days, and provided
further that the Redeemable Warrants may only be redeemed by the
Company at such time as a majority of the holders thereof have (or
are granted) the right to demand registration of the Common Stock
underlying the Redeemable Warrants under the Securities Act of 1933.
Option Issuance
Upon closing of the sale of the Units, the Company issued to Mr.
Michael Viner, President and a Director of the Company, and Deborah
Raffin Viner, Vice President and a Director of the Company, an option
to purchase up to 250,000 shares of Common Stock (exercisable at $.01
per share) in consideration of the cancellation of all deferred
compensation owed to them, including interest thereon (with such
interest, the "Deferred Compensation Amount") and such portion of the
noninterest-bearing amounts due to affiliated entities owned by the
majority
F-17
<PAGE> 48
DOVE AUDIO, INC.
Notes to Consolidated Financial Statements (Continued)
shareholders as equaled, in the aggregate with the Deferred
Compensation Amount, $1,000,000 (the "Option Issuance").
NOTE 11 - CAPITAL ACTIVITIES (CONTINUED)
Initial Public Offering ("IPO")
In December 1994, the Company completed an IPO of 950,000 shares of
Common Stock at $6.00 per share, in which the Company raised $5.7
million, less approximately $1,050,000 in offering costs. In
connection with the IPO, (i) the Company issued in 1995 an additional
142,500 shares of Common Stock to the underwriter to cover
over-allotments with net proceeds to the Company of $770,000; (ii)
the Company granted to the underwriter 95,000 Warrants, of which
95,000 shares of Common Stock are issuable at $7.20 per share; (iii)
the Company issued to Michael Viner options to purchase 214,114
shares of its Series A Preferred Stock having a stated value of $4.00
per share in repayment of all remaining debt owed to Mr. Viner by the
Company (after paying Mr. Viner $300,000 out of the net proceeds of
the IPO); (iv) the Company registered 466,000 shares of Common Stock,
which was not part of the IPO, 150,000 shares of which are issuable
pursuant to certain warrants and 16,666 of which are issuable upon
exercise of an option; and (v) the Company issued a Warrant to
purchase 10,000 shares of Common Stock.
Private Placements
In December 1995 the Company received net proceeds of approximately
$4,770,000 from the initial closings of a private placement
("Placement") of the Company's equity securities. Pursuant to the
December closing of the Placement the Company issued 729,687 shares
of common stock and common stock purchase warrants allowing the
purchase of 729,687 shares of Common Stock at $12.00 per share
exercisable for a period of 51 months beginning 9 months subsequent
to the initial closing of the Placement.
In January 1996 the Company received additional net proceeds of
approximately $1,533,000 from the Placement of the Company's equity
securities. Pursuant to the January 1996 closings of the Placement
the Company issued 220,313 shares of common stock and common stock
purchase warrants allowing the purchase of 220,313 shares of common
stock at $12.00 per share exercisable for a period of 51 months
beginning 9 months subsequent to the initial closing of the
Placement.
F-18
<PAGE> 49
DOVE AUDIO, INC.
Notes to Consolidated Financial Statements (Continued)
Preferred Stock
In 1995, Mr. Viner exercised his option to acquire 214,114 shares of
Series A Preferred Stock. The Series A Preferred Stock has a stated
value of $4.00 per share. Dividends are cumulative and occur at a
rate of 8% per annum. Each share
NOTE 11 - CAPITAL ACTIVITIES (CONTINUED)
of Series A Preferred Stock is convertible into one share common
stock at the option of the holder. The Series A Preferred Stock has a
liquidation preference equal to its stated value plus unpaid
dividends.
Stock Options And Warrants
The Board of Directors of the Company adopted the 1994 Stock
Incentive Plan (the "Plan"). The Plan provides for the grant of
options to purchase up to an aggregate of 400,000 shares of the
Common Stock of the Company (subject to an anti-dilution provision
providing for adjustment in the event of certain changes in the
Company's capitalization).
The Plan authorizes the granting of stock incentive awards ("Awards")
to qualified officers, employee directors, key employees, and third
parties providing valuable services to the Company, e.g., independent
contractors, consultants, and advisors to the Company. The Plan is
administered by a committee appointed by the Company Board consisting
of two or more members, each of whom must be disinterested (the
"Committee"). The Committee determines the number of shares to be
covered by an Award, the term and exercise price, if any, of the
Award, and other terms and provisions of Awards; members of the
Committee receive formula awards.
Awards can be Stock Options, Stock Appreciation Rights, Performance
Share Awards, and Restricted Stock Awards. The number and kind of
shares available under the Plan are subject to adjustment in certain
events.
Options activity under the Plan was as follows:
<TABLE>
<S> <C> <C>
Options granted during 1994 62,500 $6.00
------
Options outstanding of December 31, 1994 62,500 $6.00
Options issued 269,500 $6.75 - $9.75
</TABLE>
F-19
<PAGE> 50
DOVE AUDIO, INC.
Notes to Consolidated Financial Statements (Continued)
<TABLE>
<S> <C> <C>
Options cancelled (22,001) $6.00
------
Options outstanding of December 31, 1995 309,999 $6.00 - $9.75
=======
</TABLE>
At December 31, 1995 options to acquire 23,331 shares of common stock
under the Plan were exercisable.
NOTE 11 - CAPITAL ACTIVITIES (CONTINUED)
In addition to the above options issued under the Plan, the Company
granted options to acquire 250,000 shares of Common Stock at an
exercise price of $.01 per share in 1994 and 75,000 shares of Common
Stock at an exercise price of $8.00 per share in 1995. At December
31, 1995 options covering the 250,000 shares noted above were
exercisable.
<TABLE>
<CAPTION>
Number of
Shares of
Number of Common
Warrants Stock
-------- -----
<S> <C> <C> <C>
Warrants Issued In 1994 421,666 271,666 $0.01 - $8.20
--------- -------
Warrants outstanding at
December 31, 1994 421,666 271,666 $0.01 - $8.20
Warrants issued 729,687 729,687 $12.00
Warrants exercised (16,666) (16,666) $.01
--------- -------
Warrants outstanding of
December 31, 1999 1,134,687 984,687 $6.00 - $12.00
========= =======
</TABLE>
At December 31, 1995 warrants to acquire 405,000 shares of common
stock were exercisable.
NOTE 12 - MAJOR CUSTOMERS AND SUPPLIERS
For the years ended December 31, 1995 and 1994, revenues, net of
returns, as a percentage of the Company's net revenues from the
Company's three major customers were as follows:
1995 1994
---- ----
Ingram 16% 17%
Waldenbooks 8% 14%
B. Dalton 12% 20%
F-20
<PAGE> 51
DOVE AUDIO, INC.
Notes to Consolidated Financial Statements (Continued)
A significant amount of audio inventory is supplied by one
manufacturer. The Company is not dependent on the manufacturer as its
sole source of product.
NOTE 13 - SUBSEQUENT EVENTS
In April 1996, the Company entered into a definitive agreement to
acquire Four Point Entertainment, Inc. ("Four Point") for
consideration of $2.5 million in cash and 427,273 shares of Dove
Common Stock, with an earn-out provision of up to an additional
163,636 shares of Dove Common Stock. Four Point develops and produces
various forms of television programming, including pilots, series,
telefilms, mini-series, talk shows, game shows and infomercials for
network, cable and syndicated markets. In addition, Four Point owns
and operates post-production and edit facilities for its own and
third-party programming. Consummation of the agreement is subject to
delivery of customary closing documents and other customary closing
conditions and is expected to occur on or before the end of April
1996.
NOTE 14 - FOURTH QUARTER ADJUSTMENT
During the fourth quarter of fiscal 1995 the Company recorded an
increase to the reserve for returns of approximately $1,000,000 due
to higher than anticipated return rates principally on its printed
book sales.
F-21
<PAGE> 52
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
DOVE AUDIO, INC.
By /s/ MICHAEL VINER
--------------------------------------------
Michael Viner, President
In accordance with the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ MICHAEL VINER Chief Executive Officer, September 11, 1996
- ----------------------------------- President and Director
Michael Viner
/s/ SIMON BAKER Chief Financial Officer September 11, 1996
- -----------------------------------
Simon Baker
/s/ GERALD LEIDER Chairman and Director September 11, 1996
- -----------------------------------
Gerald Leider
/s/ DEBORAH RAFFIN Vice President, Secretary and September 11, 1996
- ----------------------------------- Director
Deborah Raffin
Director September , 1996
- -----------------------------------
Freddie Fields
/s/ JAMES BELASCO Director September 11, 1996
- -----------------------------------
James Belasco
Director September , 1996
- ----------------------------------
Gary Matus
Director September , 1996
- ----------------------------------
Charles Weber
</TABLE>
<PAGE> 53
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
3.1 Articles of Incorporation of the Company (filed as Exhibit 3.1 to
the Registration Statement)
3.2 Certificate of Amendment of Articles of Incorporation of the Company
filed with the Secretary of State of the State of California on
March 14, 1990 (filed as Exhibit 3.2 to the Registration Statement)
3.3 Certificate of Amendment of Articles of Incorporation of the Company
filed with the Secretary of State of the State of California on
November 17, 1990 (filed as Exhibit 3.3 to the Registration
Statement)
3.4 Certificate of Amendment of Articles of Incorporation of the Company
filed with the Secretary of State of the State of California on
August 26, 1994 (filed as Exhibit 3.4 to the Registration Statement)
3.5 Bylaws of the Company, as amended (filed as Exhibit 3.5 to the
Registration Statement)
4.1 Specimen common stock certificate of the Company (filed as Exhibit
4.1 to Amendment No. 2 to the Registration Statement ("Amendment No.
2") filed with the Commission on November 29, 1994)
4.2 Specimen Series A Preferred Stock certificate of the Company (filed
as Exhibit 4.2 to Amendment No. 2)
4.3 Form of Certificate of Determination of the Series A Preferred Stock
of the Company (filed as Exhibit 4.3 to the Registration Statement)
4.4 Form of Underwriter's Warrant Agreement (filed as Exhibit 4.4 to the
Registration Statement)
4.5 Form of Warrant Agreement (filed as Exhibit 4.5 to the Registration
Statement)
4.6 Form of Subscription Agreement (filed as Exhibit 4.6 to Amendment
No. 1 to the Registration Statement ("Amendment No. 1") filed with
the Commission on November 2, 1994)
4.7 Placement Agency Agreement dated August 1, 1994 between the Company
and Joseph Stevens & Company, L.P. (filed as Exhibit 4.7 to
Amendment No. 1)
4.8 Placement Agent Warrant Agreement dated December 24, 1995 between
Whale Securities Co., L.P. and Dove Audio (filed as the same
numbered Exhibit to the Annual Report on Form 10-KSB for the
fiscal year ended 1995)
4.9 Placement Agent Warrant (filed as the same numbered Exhibit to the
Annual Report on Form 10-KSB for the fiscal year ended 1995)
4.10 Form of Registration Rights Agreement (filed as the same numbered
Exhibit to the Annual Report on Form 10-KSB for the fiscal year
ended 1995)
4.11 Form of Common Stock Purchase Warrant (filed as the same numbered
Exhibit to the Annual Report on Form 10-KSB for the fiscal year
ended 1995)
10.1 Employment Agreement dated as of January 1, 1993 between the Company
and Michael Viner (filed as Exhibit 10.8 to the Registration
Statement)
10.2 Employment Agreement dated as of January 1, 1993 between the Company
and Deborah Raffin (filed as Exhibit 10.9 to the Registration
Statement)
10.3 Office Building Lease for Suite 203, 301 N. Canon Drive, Beverly
Hills, California 90210 (the "Office Lease") between Village on
Canon and Dove, Inc. dated July 3, 1990 and Amendment appended
thereto dated 1992 (filed as Exhibit 10.10 to the Registration
Statement)
10.4 Second Amendment to the Office Lease between Village on Canon and
Dove, Inc. dated March 12, 1990 (filed as Exhibit 10.11 to the
Registration Statement)
10.5 Third Amendment to the Office Lease between Pinkwood Properties
Corp. and Dove, Inc. dated December 1, 1992 (filed as Exhibit 10.12
to the Registration Statement)
<PAGE> 54
10.13 Agreement to Assume and Amend Lease of Dove, Inc. dated February,
1994 among Pinkwood Properties Corp., Michael Viner and the Company
(filed as Exhibit 10.13 to the Registration Statement)
10.14 Letter Agreement between Pinkwood Properties Corp. and the Company
dated February 3, 1994 amending the Office Lease (filed as Exhibit
10.14 to the Registration Statement)
10.15 Letter Agreement dated July 1, 1994 between Penguin Books USA, Inc.
and the Company (filed as Exhibit 10.15 to the Registration
Statement)
10.16 Form of Publishing Agreement (filed as Exhibit 10.16 to Amendment
No. 1)
10.17 Form of Artist Agreement (filed as Exhibit 10.17 to Amendment No. 1)
10.18 Form of Company's 1994 Stock Incentive Plan (filed as Exhibit 10.18
to the Registration Statement)
10.19 Settlement Agreement dated as of July 13, 1994 among the Company,
SBT-Batif, S.A. and Ethos Capital Management, Inc. (filed as Exhibit
10.19 to Amendment No. 1)
10.20 Form of Option and Stock Purchase Agreement among Michael Viner,
Deborah Raffin Viner, Dove, Inc., Dove II, Inc., Dove
Communications, Inc. and the Company (filed as Exhibit 10.20 to
Amendment No. 2)
10.21 Agreement between the Company and Reader's Digest Association, Inc.
dated as of March 15, 1995
10.22 Agreement between Dove International and Skouras Pictures, Inc.
dated July 1, 1995 (filed as Exhibit 1 to the Current Report on Form
8-K filed with the Commission on July 17, 1995 (the "July 17 Current
Report"))
10.23 Employment Agreement between Dove International and Dimitri T.
Skouras dated as of July 1, 1995 together with Stock Option Award
Agreement between Dove Audio and Dimitri T. Skouras, dated as of
July 1, 1995 (filed as Exhibit 2 to the July 17 Current Report)
10.24 Agreement for Purchase and Sale of Real Estate and Joint Escrow
Instructions dated September 15, 1995 among the Writers Guild of
America, west, Inc. and the Company and Amendment No. 1 thereto
dated October 3, 1995 (filed as Exhibit 10.1 to the Company's
Quarterly Report on Form 10-QSB filed with the Commission on
November 14, 1995)
16 Letter from Ernst & Young LLP to the Securities and Exchange
Commission dated July 26, 1995 (filed as Exhibit 16 to the current
Report on Form 8-K filed with the commission on July 26, 1995)
21 Subsidiaries of Dove (filed as Exhibit 21 to the Annual Report on
Form 10-KSB for the fiscal year ended 1995)
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Ernst & Young LLP
<PAGE> 1
Exhibit 23.1
The Board of Directors
Dove Audio, Inc.:
We consent to the incorporation by reference in the registration statement (No.
333-06595) on Form S-8 of Dove Audio, Inc. of our report dated April 12, 1996,
with respect to the consolidated balance sheet of Dove Audio, Inc subsidiaries
as of December 31, 1995, and the related consolidated statements of operations,
shareholders' equity, and cash flows for the year then ended, which report
appears in the December 31, 1995 annual report on Form 10-KSB/A of Dove Audio,
Inc.
/s/ KPMG Peat Marwick LLP
Los Angeles, California
September 9, 1996
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated March 28, 1995, with respect to the
consolidated statements of operations, shareholders' (deficit) equity and cash
flows of Dove Audio, Inc. for the year ended December 31, 1994 included in
Amendment No. 2 to its Annual Report (Form 10-KSB/A) for the year ended
December 31, 1995 filed with the Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
Los Angeles, California
September 6, 1996
