<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB/A
(MARK ONE)
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1996
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
Commission file number 0-24984
DOVE AUDIO, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
<TABLE>
<S> <C>
California 95-4015834
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
</TABLE>
8955 Beverly Boulevard, West Hollywood, California 90048
(Address of Principal Executive Offices)
(310) 786-1600
Issuer's Telephone Number, Including Area Code
301 N. Canon Drive, Suite 207, Beverly Hills, California 90210
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
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
Check whether the issuer: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes X
No _____
APPLICABLE ONLY TO CORPORATE ISSUERS
As of July 9, 1996, the issuer had 5,313,240 shares of its common stock
outstanding.
Transitional Small Business Disclosure Format (Check one):
Yes_____ No X
<PAGE> 2
The undersigned registrant (the "Company") hereby amends the following items of
its report on Form 10-QSB filed on May 14, 1996 to be as follows:
PART II
OTHER INFORMATION
ITEM 5. OTHER INFORMATION
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 of the Company ("Common Stock"), with an
earn-out provision of up to an additional 163,636 shares of 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.
Based upon a preliminary review and evaluation, approximately $6.0
million of the $8.0 million initial purchase price has been allocated
to goodwill and will be amortized over a 25 year period. The earn-out,
to the extent earned, will be treated as an increase in goodwill and
will be amortized coterminously with the original 25 year period. If
the full earn-out were earned or paid, goodwill would be increased by a
total of $2.0 million (assuming a then current market price of $12.25
per share of Common Stock) and annual amortization expense associated
with the additional goodwill would be $80,000 (for an aggregate annual
amortization expense of $319,000). Management of the Company is in the
process of reviewing the allocation of the purchase price and, when
completed, may modify its preliminary allocation. The Four Point
acquisition has been accounted for by the Company under purchase
accounting from the April 29, 1996 acquisition date.
The former principal officers of Four Point, Shukri Ghalayini and
Ronald Ziskin entered into employment agreements with Dove Four Point,
Inc. ("Dove Four Point"), a wholly owned subsidiary of the Company,
dated April 29, 1996. Pursuant to these employment agreements, Shukri
Ghalayini became President and Chief Executive Officer of Dove Four
Point and Ronald Ziskin became Chief Operating Officer of Dove Four
Point. Shukri Ghalayini was to join the Board of Directors of the
Company. Messrs. Ghalayini and Ziskin also each received options to
purchase 300,000 shares of Dove Common Stock at an exercise price of
$11.00 per share, such options to vest subject to continuous service
for a period of approximately 10 years, or earlier in the event certain
performance thresholds are met at Dove Four Point.
On June 14, 1996, the Company and Dove Four Point terminated the
employment of Shukri Ghalayini for "cause" under his employment
agreement. As a result, Mr. Ghalayini's unvested options to purchase
300,000 shares of Common Stock were automatically canceled. The other
former principal shareholder of Four Point, Ronald Ziskin, continues
to serve as Chief Operating Officer of Dove Four Point under his
three-year employment agreement.
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 Dove) 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. The Company believes that the actions will not have a
material adverse effect on the Company's financial position or
results of operations.
Set forth herein are the following financial statements and pro forma
financial information relating to the acquisition of Four Point:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. Pro Forma Condensed Consolidated Balance Sheet (Unaudited)
as of March 31, 1996......................................... F-1
2. Pro Forma Condensed Consolidated Statement of Operations
(Unaudited) for the Three Months Ended March 31, 1996........ F-2
3. Pro Forma Condensed Consolidated Statement of Operations
(Unaudited) for the Year Ended December 31, 1995............. F-3
4. Notes to Unaudited Pro Forma Financial Information........... F-4
5. Independent Auditors' Report................................. F-6
6. Four Point Entertainment, Inc. and Subsidiary Consolidated
Balance Sheet dated January 31, 1996......................... F-7
7. Four Point Entertainment, Inc. and Subsidiary Consolidated
Statements of Operations for Fiscal Years Ended
January 31, 1996 and 1995.................................... F-8
8. Four Point Entertainment, Inc. and Subsidiary Consolidated
Statements of Stockholders' Equity for Fiscal Years Ended
January 31, 1996 and 1995.................................... F-9
9. Four Point Entertainment, Inc. and Subsidiary Consolidated
Statements of Cash Flows for Fiscal Years Ended
January 31, 1996 and 1995.................................... F-10
10. Four Point Entertainment, Inc. and Subsidiary Notes to
Consolidated Financial Statements Dated January 31, 1996..... F-11
</TABLE>
1
<PAGE> 3
CERTAIN PRO FORMA INFORMATION
(Unaudited)
The following unaudited pro forma condensed consolidated balance sheet
as of March 31, 1996 and the pro forma condensed consolidated statements of
operations of the three months ended March 31, 1996 and the year ended December
31, 1995 give effect to the April 29, 1996 acquisition by the Company of Four
Point Entertainment, Inc. ("Four Point").
The pro forma information is based on the historical financial
statements of the Company and Four Point, giving effect to the Four Point
acquisition under the purchase method of accounting. The unaudited pro forma
condensed consolidated statements of operations have been prepared as if the
above transactions had occurred at the beginning of the period presented. The
unaudited pro forma condensed consolidated balance sheet data have been
prepared as if the Four Point acquisition had occurred March 31, 1996.
These pro forma statements may not be indicative of the results that
would have occurred if the above transactions had occurred on the dates
indicated or which may be obtained in the future. The pro forma financial
statements should be read in conjunction with the financial statements and
notes of the Company contained in its most recent Form 10-KSB, the Company's
Quarterly Report on Form 10-QSB for the three months ended March 31, 1996 and
the financial statements and accompanying notes of Four Point contained
elsewhere herein.
On April 29, 1996, the Company acquired Four Point for consideration of
$2.5 million in cash and 427,274 shares of common stock of the Company ("Common
Stock"), with an earn-out provision of up to an additional 163,636 shares of
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.
Based upon a preliminary review and evaluation, approximately $6.0
million of the $8.0 million initial purchase price has been allocated to
goodwill and will be amortized over a 25 year period. The earn-out, to the
extent earned, will be treated as an increase in goodwill and will be amortized
coterminously with the original 25 year period. If the full earn-out were
earned or paid, goodwill would be increased by a total of $2.0 million (assuming
a then current market price of $12.25 per share of Common Stock) and annual
amortization expense associated with the additional goodwill would be $80,000
(for an aggregate annual amortization expense of $319,000). Management of the
Company is in the process of reviewing the allocation of the purchase price and,
when completed, may modify its preliminary allocation. The Four Point
acquisition has been accounted for by the Company under purchase accounting from
the April 29, 1996 acquisition date.
2
<PAGE> 4
Pro Forma Condensed Consolidated Balance Sheet (Unaudited)
March 31, 1996
(in 000's)
<TABLE>
<CAPTION>
Four Point
Dove Entertain- Pro Forma Consolidated
Audio, Inc. ment, Inc. Adjustments Pro Forma
3/31/96(a) 4/30/96(a)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 5,052 11 (2,500)(b) 2,563
Accounts receivable 2,356 788 3,144
Inventory 4,006 - 4,006
Other current assets 760 286 1,046
Loans to officers 182 182
-------------- ---------- ----------
Total current assets 12,174 1,267 10,941
Production masters 3,055 - 3,055
Film costs 1,060 1,506 2,566
Property and equipment 2,767 682 924 (b) 4,373
Investments - 309 309
Goodwill - - 5,985 (b) 5,985
--------------- -------------- --------------
Total assets $ 19,056 3,764 27,229
============== =============== ===============
Accounts payable and accrued expenses 1,927 1,137 269 (b) 3,333
Notes payable 1,937 1,253 3,190
Other current liabilities 690 280 970
-------------- --------------- ---------------
Total current liabilities 4,554 2,670 7,493
Preferred Stock 856 10 (10)(b) 856
Common stock 49 159 4 (b) 53
(159)(b)
Additional paid-in-capital 14,761 911 5,230 (b) 19,991
(911)(b)
Accumulated deficit (1,164) 1,115 (1,115)(b) (1,164)
Treasury stock - (1,101) 1,101 (b) -
-------------- --------------- ---------------
Total shareholders' equity 14,502 1,094 19,736
-------------- --------------- ---------------
Total liabilities and shareholders' equity $ 19,056 3,764 27,229
============== =============== ===============
</TABLE>
F-1
<PAGE> 5
Pro Forma Condensed Consolidated Statement of Operations (Unaudited)
Three months ended March 31, 1996
(in 000's, except per share amounts)
<TABLE>
<CAPTION>
Four Point
Dove Entertain- Pro Forma Consolidated
Audio, Inc. ment, Inc. Adjustments Pro Forma
Three months Three months
ended ended
3/31/96(a) 4/30/96(a)
<S> <C> <C> <C> <C>
Revenues:
Publishing 4,138 - 4,138
Film 3,259 886 4,145
-------------- --------------- ---------------
Total sales 7,397 886 8,283
Cost of sales 2,886 1,039 46 (c) 3,971
Film amortization 2,435 - 2,435
-------------- --------------- ---------------
Gross profit 2,076 (153) 1,877
Selling, general and administrative 1,292 753 60 (d) 2,063
(42)(e)
-------------- --------------- ---------------
Income (loss) from operations 784 (906) (186)
Net interest income (expense) 48 (33) 15
Other income (expense) - 19 19
-------------- --------------- ------------- ---------------
Income (loss) before income taxes 832 (920) 64 (152)
Income taxes (benefit) 331 (332) (22)(f) (23)
-------------- --------------- ------------- ---------------
Net income (loss) 501 (588) 42 (129)
============== =============== ============= ===============
Net income (loss) per share
$0.10 ($0.02)
============== ===============
Weighted average number of
shares outstanding 5,263 5,690
============== ===============
</TABLE>
F-2
<PAGE> 6
Pro Forma Condensed Consolidated Statement of Operations (Unaudited)
Year ended December 31, 1995
(in 000's, except per share amounts)
<TABLE>
<CAPTION>
Four Point
Dove Entertain- Pro Forma Consolidated
Audio, Inc. ment, Inc. Adjustments Pro Forma
Year ended Year ended
12/31/95(a) 1/31/96(a)
<S> <C> <C> <C> <C>
Revenues:
Publishing 10,961 - 10,961
Film 187 21,046 21,233
-------------- --------------- ---------------
Total sales 11,148 21,046 32,194
Cost of sales 7,169 13,190 185 (c) 20,544
Film amortization 99 4,706 4,805
-------------- --------------- ---------------
Gross profit 3,880 3,150 6,845
Selling, general and administrative 3,696 2,945 239 (d) 6,264
(616)(e)
-------------- --------------- ---------------
Income from operations 184 205 581
Net interest income (expense) (22) (52) (74)
Other income (expense) (11) (37) (48)
-------------- --------------- ------------- ---------------
Income before income taxes 151 116 192 459
Income taxes 60 43 65 (f) 168
-------------- --------------- ------------- ---------------
Net income 91 73 127 291
============== =============== ============= ===============
Net income per share $0.02 $0.06
============== ===============
Weighted average number of
shares outstanding 4,365 4,792
============== ===============
</TABLE>
F-3
<PAGE> 7
Notes to Unaudited Pro Forma Financial Information
(a) The Company's first quarter ends March 31 and Four Point's first quarter
ends April 30.
(b) To record the acquisition of Four Point for $2,500,000 and 427,274 shares
of Common Stock for a purchase price of approximately $8,003,000 (including
approximately $269,000 of costs incurred in connection with the acquisition).
<TABLE>
<CAPTION>
(in 000's)
<S> <C>
Purchase price 8,003
Less:
Book value of Four Point 1,094
Estimated Purchase Price adjustment:
Fixed assets 924
-------------
Goodwill 5,985
=============
</TABLE>
The determination of the allocation of the aggregate consideration given by
Dove Audio, Inc. may be subject to adjustment based on the final determination
of fair market value of Four Point's assets and liabilities.
(c) To record additional depreciation expense accociated with the purchase
price allocation to fixed assets.
(d) To record the amortization of goodwill on a straight line method over 25
years
(e) To record an adjustment to the salary expense of Four Point's two principal
stockholders based on employment agreements entered into in conjunction
with the acquisition by Dove.
(f) To record income tax impact of pro forma adjustments using a 34% tax rate.
F-4
<PAGE> 8
FOUR POINT ENTERTAINMENT, INC.
AND SUBSIDIARY
Consolidated Financial Statements
January 31, 1996
(With Independent Auditors' Report Thereon)
F-5
<PAGE> 9
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Four Point Entertainment, Inc.:
We have audited the accompanying consolidated balance sheet of Four Point
Entertainment, Inc. and subsidiary as of January 31, 1996 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended January 31, 1996 and 1995. 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 audits.
We conducted our audits 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 audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Four Point
Entertainment, Inc. and subsidiary as of January 31, 1996 and the results of
their operations and their cash flows for the years ended January 31, 1996 and
1995 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Los Angeles, California
June 3, 1996
F-6
<PAGE> 10
FOUR POINT ENTERTAINMENT, INC.
AND SUBSIDIARY
Consolidated Balance Sheet
January 31, 1996
ASSETS
<TABLE>
<S> <C>
Cash $ 183,384
Accounts receivable, net of allowance for doubtful accounts of $16,000 1,840,616
Property and equipment, net (note 2) 739,280
Loans to stockholders (note 3) 281,281
Investment and advances - affiliate (note 4) 289,502
Film costs, net of amortization (note 5) 1,402,503
Other assets 23,584
-------------
Total assets $ 4,760,150
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 1,403,320
Income taxes payable (note 7) 80,184
Debt (note 6) 1,338,303
Billings in excess of costs incurred 176,445
Deferred income taxes payable (note 7) 80,483
-------------
Total liabilities 3,078,735
-------------
Stockholders' equity:
Class A convertible preferred stock, $.01 par value. Authorized 10,000,000 shares;
issued 1,000,000 shares 10,000
Common stock, $.01 par value. Authorized 20,000,000 shares; issued
15,850,000 shares 158,500
Additional paid-in capital 911,234
Retained earnings 1,703,167
Treasury stock, at cost - 890,000 shares of preferred stock and 7,822,760 shares of
common stock (1,101,486)
-------------
Total stockholders' equity 1,681,415
Commitments, contingencies and subsequent events (notes 8 and 9)
-------------
Total liabilities and stockholders' equity $ 4,760,150
=============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 11
FOUR POINT ENTERTAINMENT, INC.
AND SUBSIDIARY
Consolidated Statements of Operations
Years ended January 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
------------- ----------
<S> <C> <C>
Revenue $ 21,045,921 23,046,270
Production costs 13,190,231 18,999,749
Amortization of film costs 4,705,429 1,101,408
------------- ----------
Gross profit 3,150,261 2,945,113
Selling, general and administrative expenses 2,945,007 2,229,255
------------- ----------
Operating income 205,254 715,858
------------- ----------
Other income (expense):
Interest income 43,595 16,950
Interest expense (95,743) (81,845)
Equity in loss of affiliate (36,973) --
------------- ----------
(89,121) (64,895)
------------- ----------
Income before income taxes 116,133 650,963
Income taxes 43,176 263,253
------------- ----------
Net income $ 72,957 387,710
============= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 12
FOUR POINT ENTERTAINMENT, INC.
AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years ended January 31, 1996 and 1995
<TABLE>
<CAPTION>
Preferred stock Common stock
------------------- --------------------- Paid-in Retained Treasury
Shares Amount Shares Amount capital earnings stock Total
--------- ------- ---------- -------- ------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at February 1, 1994 1,000,000 $10,000 15,850,000 $158,500 911,234 1,850,010 (1,026,319) 1,903,425
Purchase of 195,000 preferred shares
for treasury -- -- -- -- -- -- (39,000) (39,000)
Dividend -- -- -- -- -- (507,510) -- (507,510)
Net income -- -- -- -- -- 387,710 -- 387,710
--------- ------- ---------- -------- ------- --------- ---------- ---------
Balance at January 31, 1995 1,000,000 10,000 15,850,000 158,500 911,234 1,730,210 (1,065,319) 1,744,625
Purchase of 97,500 preferred shares
for treasury -- -- -- -- -- -- (19,500) (19,500)
Purchase of 1,618,000 common shares
for treasury -- -- -- -- -- -- (16,667) (16,667)
Dividend -- -- -- -- -- (100,000) -- (100,000)
Net income -- -- -- -- -- 72,957 -- 72,957
--------- ------- ---------- -------- ------- --------- ---------- ---------
Balance at January 31, 1996 1,000,000 $10,000 15,850,000 $158,500 911,234 1,703,167 (1,101,486) 1,681,415
========= ======= ========== ======== ======= ========= ========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE> 13
FOUR POINT ENTERTAINMENT, INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended January 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
------------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 72,957 387,710
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 290,369 547,108
Amortization of film costs 4,705,429 1,101,408
Equity in loss of affiliate 36,973 --
Increase (decrease) from changes in:
Accounts receivable (260,862) (1,028,237)
Income taxes receivable -- 620
Other assets 53,089 63,206
Accounts payable and accrued expenses (853,434) 576,571
Income taxes payable (171,738) 251,922
Billings in excess of costs incurred 176,445 --
Deferred income taxes payable 113,575 9,696
------------- ----------
Net cash provided by operating activities 4,162,803 1,910,004
------------- ----------
Cash flows from investing activities:
Investment in film costs (5,188,546) (1,454,854)
Loans to stockholders (78,670) (422,184)
Investment and advances - affiliate (23,802) --
Purchase of treasury stock (36,167) (39,000)
Acquisition of property and equipment (283,360) (225,253)
------------- ----------
Net cash used in investing activities (5,610,545) (2,141,291)
Cash flows from financing activities:
Proceeds from long-term borrowings 2,827,453 376,597
Repayment of long-term debt (2,276,806) (437,601)
------------- ----------
Net cash provided by (used in) financing activities 550,647 (61,004)
------------- ----------
Net decrease in cash (897,095) (292,291)
Cash at beginning of year 1,080,479 1,372,770
------------- ----------
Cash at end of year $ 183,384 1,080,479
============= ==========
</TABLE>
(Continued)
<PAGE> 14
FOUR POINT ENTERTAINMENT, INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
1996 1995
------------ ----------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 82,845 81,845
Income taxes 61,780 123,560
Noncash investing and financing activities:
Purchase of investment in and advances to affiliate
through reduction of loans to stockholders -- 302,673
Dividend distributed through reduction of loans
to stockholders 100,000 507,510
------------ ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE> 15
FOUR POINT ENTERTAINMENT, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
January 31, 1996
(1) DESCRIPTION OF THE BUSINESS AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Four Point Entertainment, Inc. is an independent production company
founded in 1984. The Company 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 are retained by the Company.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Four Point
Entertainment, Inc. and a wholly owned subsidiary (collectively the
Company). All significant intercompany accounts and transactions have
been eliminated.
REVENUE RECOGNITION
The Company recognizes contract revenues using the
percentage-of-completion method. Under this method, the percentage of
contract revenues to be recognized currently is computed at that
percentage of estimated total revenues that incurred cost to date bears
to total estimated cost, after giving effect to the most recent estimate
of costs to complete. Revisions in cost and revenue estimates are
reflected in the period in which the facts which require the revision
become known. When revised cost estimates indicate a loss on an
individual contract, the total estimated loss is provided for currently
in its entirety without regard to the percentage of completion.
For those projects in which the Company has continuing ownership interest,
revenue from television licensing agreements is recognized on the date
the completed program is delivered or becomes available for delivery and
certain other conditions of sale have been met.
ACCOUNTING FOR FILM COSTS
For those projects in which the Company has continuing ownership
interest, the Company capitalizes all costs incurred to produce a film.
Such costs also include the actual direct costs of production, certain
exploitation costs and production overhead. Capitalized exploitation or
distribution costs include those costs that clearly benefit future
periods such as film prints and prerelease and early release advertising
that is expected to benefit the film in future markets. These costs, as
well as participation and talent residuals, are amortized each period on
an individual-film or television-program basis in the ratio that the
current period's gross revenues from all sources for the program bear to
management's estimate of anticipated total gross revenues for such film
or program from all sources. Revenue estimates are reviewed quarterly.
Film costs are stated at the lower of unamortized cost or estimated net
realizable value. Losses which may arise because unamortized costs of
individual films or television series exceed anticipated revenues are
charged to operations through additional amortization at the time such
losses are determined.
F-11
<PAGE> 16
FOUR POINT ENTERTAINMENT, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
PROPERTY AND EQUIPMENT
Property and equipment are stated at their cost and depreciated over
estimated useful lives using the straight-line method for financial
statements and accelerated methods for tax purposes. The estimated
useful lives are as follows:
<TABLE>
<S> <C>
Computer equipment 5 years
Edit equipment 5 years
Furniture and fixtures 7 years
Leasehold improvements Lesser of estimated useful life or remaining term of lease
</TABLE>
INCOME TAXES
The Company accounts for income taxes using Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Under
SFAS No. 109, deferred income taxes reflect the impact of "temporary
differences" between the amount of assets and liabilities for financial
reporting purposes and such amounts as measured by tax laws and
regulations.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities to prepare these
consolidated financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.
(2) PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
<TABLE>
<S> <C>
Edit equipment $ 3,100,323
Computer equipment 146,481
Furniture and fixtures 71,461
Leasehold improvements 11,633
---------------
3,329,898
Accumulated depreciation (2,590,618)
$ 739,280
===============
</TABLE>
(3) LOANS TO STOCKHOLDERS
Loans to the Company's two primary stockholders are unsecured, bear
interest at 6% per annum and are due January 31, 1997.
F-12
<PAGE> 17
FOUR POINT ENTERTAINMENT, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(4) INVESTMENT AND ADVANCES - AFFILIATE
On January 2, 1996, the Company purchased from the two primary
stockholders their 95% interest in the stock of Infomedia Marketing, Inc.
(IMI) in exchange for the reduction of certain outstanding stockholder
loans amounting to approximately $100,000. This investment was recorded
at the stockholders' cost, which at the date of transfer was
approximately zero, and as such, the amount of the reduction in
stockholder loans has been recorded by the Company as a distribution in
the form of a dividend.
On January 31, 1995, the Company purchased from the two primary
stockholders their 33-1/3% interest in the stock of Empire Burbank
Studios, Inc. (Empire) and the rights to certain notes receivable from
Empire in exchange for the reduction of certain outstanding loans to
stockholders amounting to approximately $801,000. The amount by which
the reduction in stockholders' loans exceeds the sum of the stockholders'
historical cost basis of the investment in and notes receivable from
Empire has been recorded by the Company as a distribution in the form of
a dividend. The Company's investment in Empire is accounted for using
the equity method. Empire's unaudited financial data as of and for the
year ended January 31, 1996 is summarized as follows:
<TABLE>
<S> <C>
Total assets $ 4,275,421
Total liabilities 3,891,614
Net loss 110,876
============
</TABLE>
(5) FILM COSTS
The following is an analysis of film costs:
<TABLE>
<S> <C>
Released, net of amortization $ 1,208,174
Development costs 194,329
-------------
$ 1,402,503
=============
</TABLE>
As of January 31, 1996, approximately 95% of the unamortized balance of
film inventories will be amortized within the next three-year period
based upon the Company's revenue estimates at that date.
F-13
<PAGE> 18
FOUR POINT ENTERTAINMENT, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(6) DEBT
Debt consists of the following:
<TABLE>
<S> <C>
Term loan, original balance of $1,000,000, fixed monthly principal and
interest installments of $31,863 payable through November 3, 1998,
bears interest at 9.01%, secured by equipment and guaranteed by the
Company's two primary stockholders (a) $ 951,359
Revolving credit loans, facility of $1,000,000, due June 3, 1996, bears
interest at bank's index rate (8.5% at January 31, 1996) plus 1%, and
are secured by the Company's assets and guaranteed by the Company's
two primary stockholders (a) 272,746
Note payable, monthly installments of $10,000 payable through
February 1, 1997, with interest imputed at 9.25%, and is guaranteed
by one of the Company's primary stockholders 114,198
----------
$1,338,303
==========
</TABLE>
Maturities of debt are as follows:
<TABLE>
<S> <C>
Year ending January 31:
1997 $ 695,557
1998 337,451
1999 305,295
-----------
$ 1,338,303
===========
</TABLE>
(a) The Company is required under the terms of the $1,000,000 term loan
and the credit facility to maintain compliance with specified
financial ratios. The Company is not in compliance with these
financial ratios at January 31, 1996. In addition, subsequent to
January 31, 1996, the Company became in default on revolving credit
loans of approximately $950,000, which were due on June 3, 1996.
Management is in ongoing discussions with the bank to refinance the
credit facility into a term loan. As of April 29, 1996, the
guarantee of debt has been transferred from the two primary
stockholders to the new stockholder of the Company, Dove Audio, Inc.
(see note 9).
F-14
<PAGE> 19
FOUR POINT ENTERTAINMENT, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(7) INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1996 1995
---------- -------
<S> <C> <C>
Federal:
Current $ (71,997) 238,705
Deferred 98,910 (36,448)
---------- -------
26,913 202,257
---------- -------
State:
Current 1,600 100,426
Deferred 14,663 (39,430)
---------- -------
16,263 60,996
---------- -------
Total $ 43,176 263,253
========== =======
</TABLE>
The differences which give rise to deferred tax assets and liabilities at
January 31, 1996 are as follows:
Assets (Liabilities)
<TABLE>
<S> <C>
Film amortization $ (104,960)
Accrued expenses 79,763
Depreciation (74,281)
Net operating loss carryforward 5,790
Other 13,205
-----------
Net deferred income taxes payable $ (80,483)
===========
</TABLE>
Reconciliation of effective rate of income taxes is as follows:
<TABLE>
<CAPTION>
1996 1995
------- --------
<S> <C> <C>
Provision for income taxes based upon Federal
statutory rate of 35% $40,646 227,837
Equity in loss of affiliate (15,176) --
State taxes 7,019 39,347
Net operating loss carryforward 4,803 --
Nondeductible expenses 6,681 2,038
Other (797) (5,969)
------- -------
Provision for income taxes $43,176 263,253
======= =======
</TABLE>
F-15
<PAGE> 20
FOUR POINT ENTERTAINMENT, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
The Internal Revenue Service has informed the Company that the Company's
tax returns are subject to examination by Federal taxing authorities.
Because many types of transactions are susceptible to varying
interpretations under Federal income tax laws and regulations, the
amounts reported in the accompanying consolidated financial statements
may be subject to a change at a later date upon final determination by
the taxing authorities. Management is of the opinion that adequate
provisions have been made in the accompanying financial statements.
(8) COMMITMENTS AND CONTINGENCIES
The Company leases certain property and equipment under noncancelable
lease arrangements which expire at various dates through 2000. Rent
expense under all operating leases was approximately $264,000 and
$281,000 in 1996 and 1995, respectively. Future minimum lease payments
under these noncancelable operating leases as of January 31, 1996 are as
follows:
<TABLE>
<S> <C>
Year ending January 31:
1997 $ 108,422
1998 17,995
1999 17,995
2000 17,995
-----------
$ 162,407
===========
</TABLE>
The Company is contingently liable with respect to various matters,
including litigation in the ordinary course of business and otherwise
wherein substantial amounts are claimed. In the opinion of the Company's
management, the ultimate resolution of these matters will not have a
material adverse effect on the Company's financial condition or results
of operations.
(9) SUBSEQUENT EVENTS
On April 29, 1996, all of the Company's stockholders sold their interest
to Dove Audio, Inc. (Dove) for consideration of $2,500,000 in cash,
427,274 shares of Dove common stock and additional future consideration
of 163,636 shares of Dove common stock, which is dependent upon Four
Point Entertainment, Inc.'s financial results during the period from May
1, 1996 through April 30, 1997.
On April 15, 1996, the Company repurchased the remaining 110,000 shares
of Class A convertible preferred stock for a total price of $65,000. The
purchase agreement released the Company from all obligations related to
these shares.
The Company has established a 401(k) savings plan (the Plan) as of March
1, 1996. The Plan requires the Company to match 5% of eligible
employees' contributions, and these matching contributions vest equally
over four years from the date of hire. Employees are eligible to
participate in the Plan once they have attained age 21, completed 12
months of service and have worked at least 1,000 hours. The Company has
filed an application for determination with the Internal Revenue Service
on April 11, 1996 and has not yet received a reply.
F-16
<PAGE> 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit
No.
- -------
23.1 Consent of KPMG Peat Marwick LLP
<PAGE> 22
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Date: July , 1996
DOVE AUDIO, INC.
By /s/ Michael Viner
------------------------------
Michael Viner, President,
Chief Executive Officer and
Director
Date: July , 1996
By /s/ Simon Baker
------------------------------
Simon Baker, Chief Financial Officer
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Dove Audio, Inc.
We consent to the incorporation by reference in the registration statement
(No. 333-06059) on Form S-3 of Dove Audio, Inc. and the registration statement
(No. 333-06595) on Form S-8 of our report dated June 3, 1996, with respect
to the consolidated balance sheet of Four Point Entertainment, Inc. and
subsidiaries as of January 31, 1996, and the related consolidated statements
of operations, stockholders' equity, and cash flows for the years ended
January 31, 1996 and 1995, which report appears in the Form 10-QSB/A of
Dove Audio, Inc. dated July 12, 1996.
KPMG Peat Marwick LLP
Los Angeles, California
July 12, 1996
