<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-24984
DOVE AUDIO, INC.
(Exact name of registrant as specified in its charter)
California 95-4015834
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
8955 Beverly Boulevard, West Hollywood, California 90048
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (310) 786-1600.
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
------ -------
APPLICABLE ONLY TO CORPORATE ISSUERS
State the numbers of shares outstanding of each of the registrant's classes of
common equity, as of the latest practicable date: 5,269,240
Transitional Small Business Disclosure Format (Check one):
Yes No X
------- -------
<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
DOVE AUDIO, INC.
CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS
Cash and cash equivalents $ 567,000
Marketable securities 377,000
Accounts receivable, net of allowances of $2,109,000 2,030,000
Inventory 3,922,000
Prepaid expenses and other current assets 279,000
Film costs, net - Note 4 2,059,000
Deferred tax asset - Note 5 150,000
Tax receivable 948,000
------------
Total current assets 10,332,000
PRODUCTION MASTERS - Note 3 3,392,000
FILM COSTS, net - Note 4 1,044,000
PROPERTY AND EQUIPMENT 4,534,000
OTHER ASSETS 180,000
GOODWILL - Note 12 5,985,000
------------
Total assets $ 25,467,000
============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 3,483,000
Bank borrowings and notes payable - Note 6 3,679,000
Royalties payable 360,000
Advances and deferred income 1,369,000
------------
Total current liabilities 8,891,000
COMMITMENTS AND CONTINGENCIES - Note 8 --
SHAREHOLDERS' EQUITY - Note 9
Preferred stock .01 par value; 2,000,000 shares authorized
and 214,113 shares, Series A, issued and outstanding 856,000
Common stock .01 par value; 20,000,000 shares authorized and
5,269,240 issued and outstanding 52,000
Treasury stock (1,000)
Additional paid-in capital 19,502,000
Accumulated deficit (3,833,000)
------------
Total shareholders' equity 16,576,000
------------
Total liabilities and shareholders' equity $ 25,467,000
============
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE> 3
DOVE AUDIO, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30
----------------------------
1996 1995
----------- -----------
<S> <C> <C>
REVENUES - Note 10
Publishing, Net $ 2,197,000 $ 4,190,000
Film 795,000 --
----------- -----------
2,992,000 4,190,000
COST OF SALES - PUBLISHING 2,882,000 2,629,000
COST OF SALES - FILM 542,000 11,000
----------- -----------
(432,000) 1,550,000
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES - Note 7 2,679,000 1,030,000
----------- -----------
Income from operations (3,111,000) 520,000
NET INTEREST INCOME (EXPENSE) (54,000) 14,000
Loss on sale of asset -- (11,000)
----------- -----------
Income before income taxes (3,165,000) 523,000
PROVISION FOR INCOME TAXES - Note 5 626,000 (262,000)
----------- -----------
Net income $(2,539,000) $ 261,000
=========== ===========
Net income per share $(.45) $.06
=========== ===========
Weighted average number of
shares outstanding 5,630,000 4,672,000
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 4
DOVE AUDIO, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
------------------------------
1996 1995
------------ ------------
<S> <C> <C>
REVENUES - Note 10
Publishing, Net $ 6,545,000 $ 6,380,000
Film 4,054,000 28,000
------------ ------------
10,599,000 6,408,000
COST OF SALES - PUBLISHING 6,018,000 3,964,000
COST OF SALES - FILM 2,937,000 11,000
------------ ------------
1,644,000 2,433,000
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES - Note 7 4,101,000 1,841,000
------------ ------------
Income from operations (2,457,000) 592,000
NET INTEREST INCOME (EXPENSE) (6,000) (5,000)
Loss on sale of asset -- (11,000)
------------ ------------
Income before income taxes (2,463,000) 576,000
PROVISION FOR INCOME TAXES - Note 5 295,000 (282,000)
------------ ------------
Net income $ (2,168,000) $ 294,000
============ ============
Net income per share $(.40) $.06
============ ============
Weighted average number of
shares outstanding 5,464,000 4,672,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 5
DOVE AUDIO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
June 30,
----------------------------
1996 1995
------------ -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $(2,168,000) $ 294,000
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation 127,000 35,000
Amortization of production masters 1,031,000 1,050,000
Amortization of film costs 2,435,000 11,000
Amortization of good will 40,000 --
Changes in operating assets and liabilities
Accounts receivable 325,000 1,037,000
Deferred tax asset 80,000 20,000
Inventory 1,289,000 (734,000)
Film costs (2,387,000) (100,000)
Expenditures for production masters (1,665,000) (1,635,000)
Prepaid expenses and other assets (393,000) (87,000)
Accounts payable and accrued expenses (741,000) 298,000
Royalties payable 19,000 (99,000)
Income taxes -- (57,000)
Advances and deferred revenue (1,581,000) 755,000
------------ -----------
Net cash provided by (used in) operating activities (3,589,000) 788,000
------------ -----------
INVESTING ACTIVITIES
Acquisition of Four Point Entertainment (3,023,000)
Sale of marketable securities 95,000 1,701,000
Purchase of marketable securities -- (36,000)
Sale of property and equipment -- 51,000
Purchases of equipment (83,000) (91,000)
Payments for building improvements (250,000) --
------------ -----------
Net cash from (used in) investing activities (3,261,000) 1,625,000
FINANCING ACTIVITIES
Proceeds from sale of common stock 1,982,000 729,000
Proceeds from sale of preferred stock -- 2,000
Proceeds of bank borrowings 489,000 1,325,000
Repayments of notes payable -- (2,527,000)
------------ -----------
Net cash provided by financing activities 2,471,000 (471,000)
------------ -----------
Net increase (decrease) in cash and cash equivalent (4,379,000)
CASH AND CASH EQUIVALENTS AT JANUARY 1 4,946,000 503,000
------------ -----------
CASH AND CASH EQUIVALENTS AT JUNE 30 $ 567,000 $ 2,445,000
============ ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest
Cash paid for income taxes $ 80,000 $ 53,000
============ ===========
-- $ 370,000
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 6
DOVE AUDIO, INC.
Notes to Consolidated Financial Statements
NOTE 1 - BASIS OF PRESENTATION, ORGANIZATION AND BUSINESS
The accompanying consolidated financial statements of Dove Audio, Inc. (the
"Company") are unaudited and have been prepared by the Company pursuant to
the rules and regulations of the Securities and Exchange Commission
regarding interim financial reporting. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements and should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1995, and Form 10-QSB for the three month period ending
March 31, 1996. In the opinion of management, the accompanying consolidated
financial statements include all adjustments (consisting only of normal
recurring adjustments) which are necessary for a fair presentation. The
results of operations for the three month period ended June 30, 1996 are not
necessarily indicative of results to be expected for the full fiscal year.
Dove Audio, Inc. is engaged, among other things, 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.
Dove Four Point, Inc., the Company's wholly-owned subsidiary ("Dove Four
Point"), is an independent production company. Dove Four Point is hired as a
producer-for-hire in connection with a creative concept and literary
property owned by another party to produce all forms of television
productions, including pilots, series, telefilms, miniseries, talk shows,
game shows and infomercials for network, cable and syndicated production. In
addition to being hired as a producer-for-hire, the Company develops and
produces television productions for which rights may be retained by the
Company.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Production Masters
Production masters are stated at cost net of accumulated amortization. Costs
incurred for production masters, including non-refundable advances,
royalties paid to authors and readers, as well as recording and design
costs, are capitalized and amortized over a two-year period from the time a
title is initially distributed, consistent with the estimated revenue for a
title. For audio and printed book titles released prior to January 1, 1996,
this has generally resulted in amortization of approximately 80% of a
title's production master costs in the initial quarter of release, with the
remaining 20% amortized in the fifth quarter of release. Based on
management's current estimates with respect to the timing of revenues, audio
titles released on or after January 1, 1996 are amortized on a
quarter-by-quarter basis over a two year period. This will result in
approximately 80% of such an audit title's production master cost being
amortized in the initial year of release. The effect of this change was to
reduce the production master amortization component of Cost of Sales by
approximately $8,000 and $244,000 for the three and six months ended June
30, 1995, respectively. The amortization of printed books remains
unchanged. Any portion of production masters which are not estimated to be
fully recoverable from future revenues are charged to amortization expense
in the period in which the loss becomes evident.
Reclassifications
Certain reclassifications have been made to prior quarter consolidated
financial statements to conform to current quarter presentation.
NOTE 3 - PRODUCTION MASTERS
Production masters, net of accumulated amortization of $8,394,568 at June
30, 1996 consisted of the following:
<TABLE>
<S> <C>
Released titles $1,460,000
Unreleased titles 1,932,000
----------
Total $3,392,000
</TABLE>
5
<PAGE> 7
NOTE 4 - FILM COSTS
The following is an analysis of film costs as of June 30, 1996:
Television and theatrical films released less accumulated film amortization
Current - $ 3,057,000 Non-Current - $ 1,044,000
$ (998,000) --
----------- ----------
$ 2,059,000 $ 1,044,000
As of June 30, 1996 all net film costs will be amortized within the next
three year period based upon the Company's current revenue estimates.
NOTE 5 - INCOME TAXES
Income taxes are computed in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." The Company
provides for income taxes during interim reporting periods based upon an
estimate of its annual effective tax rate. This estimate includes all
anticipated federal, state and foreign income taxes.
NOTE 6 - NOTES PAYABLE
Notes payable at June 30, 1996 consist of the following:
<TABLE>
<S> <C>
Mortgage Note $1,889,000
Other notes payable 1,790,000
----------
$3,679,000
</TABLE>
Even though the Company has reached agreement with Sanwa Bank, subject to formal
credit committee approval and final documentation, on the refinancing of its
facilities with the bank, as of the date of this report the agreement has not
been consummated; hence the Company is still in default on its revolving line of
credit to Sanwa (See "Liquidity and Capital Resources" and Item 3. "Defaults
Upon Securities"). Based on the fact that the Company's other bank loans have
cross-default clauses, all notes payable are classified as current regardless of
the original maturity.
NOTE 7 - RELATED PARTY TRANSACTIONS
The Company has acquired audio book rights for fourteen titles which were
written by a principal shareholder. The net audio sales (net of returns)
from these titles for the quarters ended June 30, 1996 and 1995 were
($22,000) and ($8,000), respectively.
During the three months ending June 30, 1996, the Company made payments
totaling $6,000 to a principal shareholder/officer for the business rental
of a condominium owned by the officer.
6
<PAGE> 8
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Litigation - See Part II Item 1. Legal Proceedings
7
<PAGE> 9
NOTE 8 - COMMITMENTS AND CONTINGENCIES (Continued)
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 deposit. Rent expense was $63,000 and $62,000 in the three months
ending June 30, 1996, and June 30, 1995, respectively, and $113,000 and
$133,000 for the six months ended June 30, 1996 and June 30, 1995
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.
Feature Film Distribution Agreement
In May 1996 the Company entered into an agreement with Samuelson
Entertainment Limited to acquire the distribution rights to a film entitled
"Wilde" in all media throughout the United States and Canada (but excluding
French-speaking Canada) and the exclusive worldwide print, audio and
interactive rights. Under the agreement the Company is required to pay sums
totalling GBP 1,333,332 (approximately $2,000,000) over the next 12 months
for such rights.
NOTE 9 - CAPITAL ACTIVITIES
In April 1996 the Company refinanced its $1,900,000 mortgage note which the
Company borrowed from the seller in conjunction with the acquisition of its
new office building. The new loan from Asahi Bank of California is secured
by a deed of trust and bears interest at a fixed rate of 8% per annum. The
loan matures in April 2001 and provides for a 20 year monthly amortization
payment rate.
In August 1996 the Company was offered a $1,365,447 term loan from Sanwa
Bank to refinance the Company's existing revolving line of credit and
term loan. The new term loan would have a maturity of August 1, 1997 with
a five year amortization schedule. In addition, the Company was offered a
further $220,000 short-term loan which would mature on October 7, 1996.
Both loans would be secured by the Company's assets and would be
guaranteed by two principal shareholders. The Company has signed documents
accepting the facilities and, as of the date of this report, is awaiting
execution of the documents by the bank.
8
<PAGE> 10
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).
Options outstanding under the Plan at June 30, 1996 were:
<TABLE>
<S> <C> <C>
Options outstanding at June 30, 1996 94,999 $6.00 - $9.75
</TABLE>
At June 30, 1996, options to acquire 67,831 shares of common stock under the
Plan were exercisable
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 in connection with the forgiveness of certain
deferred compensation owing to the Company's principal shareholders;
75,000 shares of Common Stock at an exercise price of $8.00 per share in
1995; and 300,000 shares of Common Stock at an exercise price of $11.00
in April 1996 in connection with the Four Point acquisition.
<TABLE>
<CAPTION>
Number of
Shares of
Number of Common
Warrants Stock
<S> <C> <C> <C>
Warrants outstanding at
March 31, 1996 1,535,000 1,385,000 $6.00 - $12.00
Warrants issued
(exercised) (12,500) (6,250) $8.00
--------- ----------
Warrants outstanding at
June 30, 1996 1,522,500 1,378,750 $6.00 - $12.00
========= =========
</TABLE>
At June 30, 1996 warrants to acquire 340,000 shares of common stock were
exercisable.
9
<PAGE> 11
NOTE 10 - MAJOR CUSTOMERS AND SUPPLIERS
For the six months ended June 30, 1996 and 1995, revenues, net of returns,
from the Company's three major customers approximated 20% and 49% of net
revenues respectively.
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 11 - STOCK REGISTRATION
On June 14, 1996 the Company filed a registration statement with the SEC
on Form S-3 for the registration of 2,335,000 shares of Dove Audio, Inc.
Common Stock.
NOTE 12 - FOUR POINT ACQUISITION
On April 29, 1996 the Company acquired Four Point Entertainment Inc. ("Four
Point") for consideration of $2.5 million in cash and 427,274 shares of
common stock (Initial Shares) of the Company with an earn-out provision of
up to an additional 163,636 shares of Common Stock. The acquisition has been
accounted for as a purchase, and accordingly the results of operations of
Four Point have been included in the Company's financial statements from
April 29, 1996. The excess of the purchase price over the fair value of the
net identifiable assets acquired of $6,025,000 has been recorded as goodwill
and is being amortized on a straight-line basis over 25 years.
Pursuant to the terms of the acquisition agreement of Four Point
Entertainment, Inc. 40,000 shares of the Initial Shares were placed in
escrow pending the receipt of certain outstanding receivables. Accordingly
the Company has excluded such shares from the initial purchase price pending
the resolution of the related contingencies. The Company is currently in
the process of finalizing the allocation of the purchase price pending the
resolution of the above contingency and certain other items.
10
<PAGE> 12
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussion and analysis below should be read in conjunction with the
Consolidated Financial Statements of the Company and the Notes to the
Consolidated 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 of audio books
in the United States. The Company produces and distributes over 100 new titles
annually and has built a library of over 1200 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.
A significant portion of the Company's expenses are relatively fixed, and
therefore reduced sales in any quarter relating from the timing of delivery of
product or otherwise could adversely affect operating results for that quarter.
To complement its audio book operations, the Company has significantly
increased its publication of printed books. 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 has entered into a two year video output
arrangement with Paramount Pictures wherein Paramount will market and distribute
Dove product under the Dove Home Video label.
The Company's catalog of 1996 audio releases includes The Hunchback of Notre
Dame, performed by Julie Christie, Shadows of Steel by Dale Brown, and On
Managing by Mark H. McCormack. The Company's catalog of 1996 printed book
releases includes Red Mercury by Max Barclay, When Money Is King by Richard
Hack, and Values by Marva Collins.
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 the production of Family Blessings, a follow-up to the Dove production
of Home Song by LaVyrle Spencer which aired on CBS in March 1996. 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.
Dove Four Point, Inc., the Company's wholly-owned subsidiary, 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 May, Dove Four Point announced the receipt of a
production order for a new entertainment/news program for the 1996/97
television season, "Scoop with Sam and Dorothy", which will be distributed by
ACI/Pearson TV. In June, Dove Four Point announced a production order from
MGM Domestic Television Distribution for "The Bradshaw Difference," a new
syndicated talk show for the 1996/97 television season. Dove Four Point also
owns and operates post-production and edit facilities for its own and
third-party programming.
11
<PAGE> 13
RESULTS OF OPERATIONS
Except for the historical information contained herein, certain of the
matters discussed in this quarterly report are "forward-looking statements," as
defined in the Private Securities Litigation Reform Act of 1995, which involve
certain risks and uncertainties, which could cause actual results to differ
materially from those discussed herein including, but not limited to risks
relating to the Company's operating losses, the Company's need for additional
financing or liquidity, growth and acquisition risks, dependence on limited
number of projects, the impact of returns and remainder sales of audio and
printed books on results of operations and risks relating to the nature of the
entertainment industry, government regulation, competition, and control by
management. See the relevant discussion elsewhere herein and in the Company's
periodic reports and other documents filed with the Securities and Exchange
Commission including the Company's registration statement on Form S-3 for a
further discussion of these and other risks and uncertainties applicable
to the Company's business.
The following table sets forth (i) publishing and film revenues and
(ii) publishing cost of sales, film cost of sales, and selling, general and
administrative expenses as a percentage of total revenues for the periods
indicated:
<TABLE>
<CAPTION>
Three Months Ended June 30,
1996 1995
<S> <C> <C>
REVENUES
Publishing 73% 100%
Film 27 --
--- ---
Total 100% 100%
=== ===
OPERATING EXPENSES
Cost of sales - Publishing 96% 63%
Cost of sales - Film 18 --
Selling, general &
administrative 90 24
--- ---
Total 204% 87%
=== ===
</TABLE>
Three Months ended June 30, 1996 Compared to Three Months ended June 30, 1995
PUBLISHING
Revenues. Net publishing revenues for the three months ended June 30, 1996
compared to the three months ended June 30, 1995 decreased by $1,993,000 or 48%
from $4,190,000 to $2,197,000. Of the total publishing revenue for the three
months ended June 30, 1996, net audio book revenue was $1,502,000 and net
printed book revenue was $695,000. The decrease in net publishing revenue was
attributable in part to lower sales activity caused by a soft retail environment
for both audio and printed books. The provision for returns as a percentage of
gross revenue was 51% for the three months ended June 30, 1996. Substantially
all of the Company's sales of book products are and will continue to be subject
to potential returns by distributors and retailers if not resold to the public.
Although the Company makes allowances and reserves for returned product that it
believes are adequate, significant increases in return rates could materially
and adversely impact the Company's financial condition or results of operations.
Titles currently scheduled for release in the third quarter of 1996 include "A
Prime Time Life" by Aaron Spelling on audio and "When Money is King" by Richard
Hack in Print.
Cost of Sales. Cost of sales for the three months ended June 30, 1996
compared to the three months ended June 30, 1995 increased by $253,000 or 10%
from $2,629,000 to $2,882,000. The increase in cost of sales was primarily
attributable to a write down in excess of $500,000 for certain inventory,
additional costs related to returned product, and consistent production master
costs in spite of lower sales. In addition, there was a significantly greater
mix of lower margin sales to direct marketers, specialty book clubs and discount
stores. The inventory write-down included the printed book titles "The Private
Dairy of Nicole Brown Simpson" and "The Private Diary of Lyle Menendez", and
certain obsolescent covers. Publishing cost of sales as percentage of net
publishing revenues increased from 63% in the three months ended June 30, 1995
to 131% in the three months ended June 30, 1996.
12
<PAGE> 14
FILM
Revenues. Film revenues for the three months ended June 30, 1996 compared to
the three months ended June 30, 1995 increased by $795,000. There was no film
revenue in the three months ended June 30, 1995. The increase was attributable
to the inclusion of 2 months of activity from Dove Four Point which
contributed approximately $600,000 of revenue. The Company has accounted for
the Four Point acquisition under purchase accounting from the April 29, 1996
acquisition date. The remaining film revenues in the three months ended
June 30, 1996 were generated by sales from the Company's theatrical feature
film division.
Cost of Sales. Film cost of sales increased by $531,000 from $11,000 in the
three months ended June 30, 1995 to $542,000 in the three months ended June 30,
1996. The increase was attributable to a significant increase in film sales in
the three months ended June 30, 1996. Film amortization is generally incurred in
proportion to the estimated revenues generated from the release or licensing of
film properties.
GENERAL
Gross Profit/Loss. The Company recorded a gross loss of $432,000 for the
three months ended June 30, 1996 compared to a gross profit of $1,550,000 for
the three months ended June 30, 1995. Gross profit margin as a percentage of
revenue decreased from 37% in the three months ended June 30, 1995 to (14%) in
the three months ended June 30, 1996. This decrease resulted primarily from the
substantial increase in Cost Of Sales experienced in the three months ended June
30, 1996.
Selling, General and Administrative. Selling, general and administrative
expenses ("SG&A") include costs associated with selling, marketing and promoting
the Company's products, as well as general corporate expenses including
salaries, occupancy costs, professional fees, travel and entertainment. SG&A for
the three months ended June 30, 1996 compared to the three months ended June 30,
1995 increased by $1,649,000 or 160% from $1,030,000 to $2,679,000. Of the
increase in SG&A, approximately $450,000 was attributable to increased overhead
in connection with the Company's acquisition of Four Point Entertainment and
approximately $65,000 to an increase in the provision for doubtful accounts.
The remaining increases were in occupancy costs, advertising, travel and
entertainment, depreciation, and professional fees.
Net Interest Income (Expense). The Company had net interest expense of
$54,000 in the three months ended June 30, 1996 compared to net interest income
of $14,000 in the three months ended June 30, 1995. This increase in interest
expense was primarily due to the addition of mortgage debt for the Company's
headquarter's building and the assumption of debt from the Four Point
acquisition.
13
<PAGE> 15
<TABLE>
<CAPTION>
Six Months Ended June 30,
1996 1995
<S> <C> <C>
REVENUES
Publishing 62% 99%
Film 38 1
--- ---
Total 100% 100%
=== ===
OPERATING EXPENSES
Cost of sales - Publishing 57% 62%
Cost of sales - Film 28 --
Selling, general &
administrative 39 28
--- ---
Total 124% 90%
=== ===
</TABLE>
Six Months ended June 30, 1996 Compared to Six Months ended June 30, 1995
PUBLISHING
Revenues. Net publishing revenues for the six months ended June 30, 1996
compared to the six months ended June 30, 1995 increased by $165,000 or 3% from
$6,380,000 to $6,545,000. Of the total publishing revenue for the six months
ended June 30, 1996, net audio book revenue was $3,647,000 and net printed book
revenue was $2,898,000. The increase in net publishing revenue was primarily
attributable to an increase in publishing sales in the first quarter of 1996
and to the particular success of the bestselling printed book "You'll
Never Make Love In This Town Again." The provision for returns as a percentage
of gross revenue was 44% for the six months ended June 30, 1996. Substantially
all of the Company's sales of book products are and will continue to be
subject to potential returns by distributors and retailers if not resold
to the public. Although the Company makes allowances and reserves for returned
product that it believes are adequate, significant increases in return rates
could materially and adversely impact the Company's financial condition or
results of operations.
Cost of Sales. Cost of sales for the six months ended June 30, 1996 compared
to the six months ended June 30, 1995 increased by $2,054,000 or 52% from
$3,964,000 to $6,018,000. The increase in cost of sales was primarily
attributable to a write down in excess of $500,000 for certain inventory,
certain excess fulfillment costs related to returned product, and a consistent
production master cost in spite of lower sales. The inventory write-down
included the printed book titles "The Private Diary of Nicole Brown Simpson"
and "The Private Diary of Lyle Menendez" and certain obsolescent covers.
Publishing Cost of sales as percentage of net publishing revenues increased
from 62% in the six months ended June 30, 1995 to 92% in the six months ended
June 30, 1996. The increase was primarily attributable to a significantly
greater mix of lower margin sales to direct marketers, specialty book clubs and
discount stores.
FILM
Revenues. Film revenues for the six months ended June 30, 1996 compared to
the six months ended June 30, 1995 increased by $4,026,000 from $28,000 to
$4,054,000. The increase was primarily attributable to the delivery of the
HomeSong television movie to CBS in the first quarter of 1996, combined with the
inclusion of 2 months of activity from Dove Four Point which contributed
approximately $600,000 of revenue. The remaining film revenues in the six months
ended June 30, 1996 were generated by sales from the Company's theatrical
feature film division.
Cost of Sales. Film cost of sales increased by $2,926,000 to $2,937,000 in
the six months ended June 30, 1996 compared to $11,000 in the six months ended
June 30, 1995. The increase was attributable to a significant increase in film
sales in the six months ended June 30, 1996. Film amortization is generally
incurred in proportion to the estimated revenues generated from the release
or licensing of film properties.
14
<PAGE> 16
GENERAL
Gross Profit. The Company's gross profit for the six months ended June 30,
1996 compared to the six months ended June 30, 1995 decreased by $789,000 or 32%
from $3,433,000 to $1,644,000. Gross profit margin as a percentage of revenue
decreased from 38% in the six months ended June 30, 1995 to 16% in the six
months ended June 30, 1996. This decrease resulted primarily from the
substantial increase in Publishing Cost Of Sales discussed above.
Selling, General and Administrative. Selling, general and administrative
expenses ("SG&A") include costs associated with selling, marketing and promoting
the Company's products, as well as general corporate expenses including
salaries, occupancy costs, professional fees, travel and entertainment. SG&A for
the six months ended June 30, 1996 compared to the six months ended June 30,
1995 increased by $2,260,000 or 123% from $1,841,000 to $4,101,000. Of the
increase in SG&A approximately $450,000 was attributable to the increased
overhead in connection with the Company's acquisition of Four Point
Entertainment and approximately $65,000 to an increase in the provision for
doubtful accounts. The remaining increases were in occupancy costs,
advertising, travel and entertainment, depreciation, and professional fees.
Net Interest Income (Expense). Net Interest Expense for the six months ended
June 30,1996 compared to the six months ended June 30, 1995 increased by $1,000.
This increase was primarily due to the addition of mortgage debt for the
Company's headquarter's building and the assumption of debt from the Four
Point acquisition.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations, in general, 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 publishing, 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.
15
<PAGE> 17
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.
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, other debt, 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 Company's Common Stock and 12,500 warrants to purchase 12,500
shares of the Company's Common Stock at $12.00 (exercisable on or after
September 14, 1996). The net proceeds were used by the Company to fund increased
working capital needs during 1996 and to finance strategic acquisitions of
product and complementary business (i.e. the Four Point acquisition). The
Company filed a registration statement on Form S-3 for the shares and warrant
shares underlying the Units on June 14, 1996.
In connection with the acquisition of Four Point, which was completed on
April 29, 1996, the Company guaranteed certain term debt (in the principal
amount of $800,702 as of August 9, 1996) and a $1.0 million revolving line of
credit ($564,745 principal amount outstanding as of August 9, 1996) of Four
Point from Sanwa Bank California. The term loan matures on October 3, 1998 and
the line of credit, which had an original maturity of June 3, 1996, was extended
to July 15, 1996. Four Point is past due on its obligation to repay the
revolving line of credit at its maturity. The Company and the bank have agreed
to the terms of a new facility by the bank, subject to formal bank credit
committee approval and final documentation, to refinance the existing loans and
extend the maturity date thereof to August 1997. As of the date of this report,
the new facility has not been consummated and the Company remains in default
under the revolving line of credit. Such a default would trigger a cross
default under the term loan with Sanwa Bank and an additional loan
(approximately $1,899,000 principal amount outstanding as of August 9, 1996).
While the Company believes that it has secured new financing there is no
assurance that the new financing will be consummated. Both of the existing Sanwa
Bank loans are secured by substantially all of the Company's assets, other than
the Company's building, and the Company's principal shareholders and Dove Four
Point have agreed to guarantee such new facility. In addition, the original
credit documents contain various financial and other covenants to which
Four Point must adhere. Four Point is out of compliance with such financial
covenants as of August 9, 1996. The Company believes that Sanwa Bank will waive
such non-compliance as part of its extension of the credit facility. However, at
this time the Company has not received a formal waiver and there is no assurance
that such waiver will be received. Accordingly, Sanwa Bank has the right to
exercise various remedies to collect on the outstanding loans, as set forth
above, which would likely cause a default under the Company's other outstanding
loans.
In April 1996 the Company refinanced its $1,900,000 mortgage note which the
Company borrowed from the seller in conjunction with the acquisition of its new
office building. The new loan from a bank is secured by a deed of trust and
bears interest at a fixed rate of 8% per annum. The loan matures in April 2001
and provides for a 20 year monthly amortization payment rate.
In May 1996 the Company entered into an agreement with Samuelson
Entertainment Limited to acquire the distribution rights to a film entitled
"Wilde" in all media throughout the United States and Canada (but excluding
French-speaking Canada) and the exclusive worldwide print, audio and interactive
rights. Under the agreement the Company is required to pay sums totalling
GBP 1,333,332 (approximately $2,000,000) over the next 12 months for such
rights.
As of August 9, 1996 the Company had cash and short-term investments of
approximately $1,073,000.
The Company used $3,589,000 for operating activities during the six month
period ended June 30, 1996. See "Consolidated Financial Statements of the
Company - Consolidated Statements of Cash Flows." The Company believes its
existing working capital, together with borrowings under its line of credit
(assuming the consummation of the extension of the Company's line of credit)
anticipated cash flows from operations, including from the commencement of
significant television productions for the 1996/97 television season, and other
funding sources, will be sufficient to meet the Company's working capital
requirements with respect to its current commitments for the next twelve months.
While the Company believes that it has reached agreement with its lender,
subject to formal credit committee approval by the bank and the completion of
final documentation, to refinance its past due line of credit, there is no
assurance that such refinancing will be consummated. If such refinancing is not
consummated, such lender would have the right to exercise its collection
remedies, which would have a material adverse effect on the Company's
operations, financial condition and prospects including the curtailment of its
operations and the sale or other disposition of some or all of its assets to
satisfy outstanding loan amounts (which would include amounts outstanding under
both the term loan and the revolving credit facility with its lender and likely
would include amounts outstanding under a loan with an additional lender secured
by a mortgage on the Company's building). In any event, absent additional
capital or liquidity, the Company will be substantially constrained in its
ability to commit to new projects requiring cash outlays and, accordingly, the
Company is currently seeking to augment its working capital through an increased
bank line of credit, the issuance of equity or debt securities or otherwise, the
availability or terms of which cannot be assured. In addition, any further
expansion of the Company or acquisitions of particular properties or libraries,
would require capital resources beyond those currently available to the Company,
which acquisition of such resources would 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.
16
<PAGE> 18
INFLATION
The Company does not believe its business and operations have been
materially affected by inflation.
17
<PAGE> 19
PART II
OTHER INFORMATION
Item 1. 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 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 March 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 alleged 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 alleged
sexual harassment on the part of Michael Viner and the Company. The Datig
Complaint prayed for $1.0 Million in damages. The Company's demurrer to all
causes of action was sustained by the court on June 18, 1996; however, the
plaintiff was given thirty (30) days leave to amend the complaint. The
plaintiff filed an amended complaint on July 18, 1996 alleging the same
causes of action. The Company plans to once again move to dismiss all causes
of action. 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.
On June 25, 1996 another contributor to "You'll Never Make Love In This
Town Again", Melinda Hammon, also filed a complaint in the Los Angeles
Superior Court against Dove Audio, Inc. and Michael Viner alleging sexual
harassment, (the "Hammon Action") (Los Angeles Superior Court Case No.
BC152664). Although Hammon never had a summons issued and never served
any of the defendants, the Company and Michael Viner have demurred to what
the Company contends to be a meritless claim. 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 Hammon Action.
The Company was served in July 1996 with a complaint in the action entitled
Terri Maxine Frankle and Jennie Luis Frankle v. Dove Audio (U.S. District
Court, Central District of California Case No. 96-4073 RSWL) (the "Frankle
Action"). This action relates to a claim that the plaintiffs were the
authors of "You'll Never Make Love In This Town Again" and alleges copyright
infringement and fraud. The plaintiffs' applications for a temporary
restraining order and preliminary injunction were denied for failure to
demonstrate a sufficient likelihood of success on the merits. At this time,
no trial date has been set. 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 Frankle Action.
On June 17, 1996, the Company and Dove Four Point filed a complaint against
Shukri Ghalayini in the Superior Court for the State of California for the
County of Los Angeles. The complaint alleges, among other things, that
Mr. Ghalayini (i) breached his fiduciary duty to Four Point (now owned by
the Company) by diverting corporate assets to pay personal expenses,
(ii) made false representations to induce the Company and Dove Four Point
to complete the acquisition, including misrepresenting the tangible
shareholders' equity of Four Point as of the closing and diverting
production funds and holding checks previously drawn to pay accounts
payable in order to meet a closing condition that outstanding bank debt be
below a specified level and (iii) made false representations to induce
Dove Four Point to enter into his employment agreement, including that he
was essential to the performance of Four Point.
On June 17, 1996, Shukri Ghalayini filed a complaint against the Company,
Dove Four Point, Michael Viner and Charles Weber in the Superior Court for
the State of California for the County of Los Angeles. The complaint
alleges, among other things, (i) breach of contract against Dove Four
Point due to termination of his employment without good cause, adequate
notice or the opportunity to cure any alleged breaches and (ii) fraud in
that defendants allegedly never intended to perform his employment
agreement. Mr. Ghalayini seeks damages under his employment agreement
estimated at not less than $900,000, loss of future earnings during his
work life expectancy estimated at not less than $20,000,000, damages to
his professional reputation and from mental and emotional distress,
punitive damages and attorney's fees.
The Company believes that it has good and valid claims against Mr.
Ghalayini and good and meritorious defenses to his claims, although the
above actions are in the preliminary stage and there can be no assurance
that the Company will ultimately prevail in either of the two actions.
Item 3. Defaults Upon Securities.
In connection with the acquisition of Four Point, which was completed on
April 29, 1996, the Company guaranteed certain term debt (in the principal
amount of $800,702 as of August 9, 1996) and a $1.0 million revolving line
of credit ($564,745 principal amount outstanding as of August 9, 1996) of
Four Point from Sanwa Bank California. The term loan matures on October 3,
1998 and the line of credit, which had an original maturity of June 3, 1996,
was extended to July 15, 1996. Four Point is past due on its obligation
to repay the revolving line of credit at its maturity. The Company and the
bank have agreed to the terms of a new facility by the bank, subject to
formal bank credit committee approval and final documentation, to refinance
the existing loans and extend the maturity date thereof to August 1997. As
of the date of this report, the new facility has not been consummated and
the Company remains in default under the revolving line of credit. Such a
default would trigger a cross default under the term loan with Sanwa Bank
and an additional loan (approximately $1,899,000 principal amount
outstanding as of August 9, 1996). While the Company believes that it has
secured new financing there is no assurance that the new financing will be
consummated. Both of the existing Sanwa Bank loans are secured by
substantially all of the Company's assets, other than the Company's
building, and the Company's principal shareholders and Dove Four Point have
agreed to guarantee such new facility. In addition, the original credit
documents contain various financial and other covenants to which Four
Point must adhere. Four Point is out of compliance with such financial
covenants as of August 9, 1996. The Company believes that Sanwa Bank will
waive such non-compliance as part of its extension of the credit facility.
However, at this time the Company has not received a formal waiver and there
is no assurance that such waiver will be received. Accordingly, Sanwa
Bank has the right to exercise various remedies to collect on the
outstanding loans, as set forth above, which would likely cause a default
under the Company's other outstanding loans.
Item 5. Other Information
Effective as of August 1, 1996 Charles Weber has agreed to provide
consulting services to the Company on a project-by-project basis and will
no longer serve as Chief Operating Officer. The Company has retained
Gerald Leider, Chairman of the Board, to provide various management
services on an on-going basis.
18
<PAGE> 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27. Financial Data Schedule
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter for which
this report is filed.
19
<PAGE> 21
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.
Date: August 19, 1996
DOVE AUDIO, INC.
By /s/ MICHAEL VINER
Michael Viner, President
(Chief Executive Officer)
Date: August 19, 1996
By /s/ SIMON BAKER
Simon Baker, Chief Financial Officer
20
<PAGE> 22
DOVE AUDIO, INC.
INDEX TO EXHIBITS
EXHIBIT PAGE
NUMBER NUMBER
------- ------
27 Financial Data Schedule
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED STATEMENTS OF INCOME AND CONSOLIDATED BALANCE SHEET AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 567
<SECURITIES> 377
<RECEIVABLES> 2,030
<ALLOWANCES> 2,109
<INVENTORY> 3,922
<CURRENT-ASSETS> 10,332
<PP&E> 4,534
<DEPRECIATION> 3,018,000
<TOTAL-ASSETS> 25,467
<CURRENT-LIABILITIES> 8,891
<BONDS> 1,889
0
856
<COMMON> 52
<OTHER-SE> 15,668
<TOTAL-LIABILITY-AND-EQUITY> 25,467
<SALES> 10,599
<TOTAL-REVENUES> 10,599
<CGS> 8,955
<TOTAL-COSTS> 13,056
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 65
<INTEREST-EXPENSE> 6
<INCOME-PRETAX> (2,463)
<INCOME-TAX> (295)
<INCOME-CONTINUING> (2,168)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,168)
<EPS-PRIMARY> (.40)
<EPS-DILUTED> (.40)
</TABLE>
