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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 SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NUMBER 0-24984
DOVE ENTERTAINMENT, INC.
(EXACT NAME OF COMPANY 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
LOS ANGELES, CALIFORNIA 90048
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
COMPANY'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 Company: (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 Company
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
There were 6,301,544 shares of the Company's Common Stock outstanding as of
November 19, 1997.
Transitional Small Business Disclosure Format (Check one):
Yes [ ] No [X]
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<PAGE> 2
PART I -- FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
DOVE ENTERTAINMENT, INC.
Consolidated Balance Sheet
September 30, 1997
(Unaudited)
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS
Cash and cash equivalents ............................................ $ 30,000
Accounts receivable, net of allowances of $738,000 ................... 1,148,000
Inventory ............................................................ 4,287,000
Film costs - Note 4 .................................................. 2,384,000
Prepaid expenses and other assets .................................... 42,000
Deferred tax assets .................................................. 164,000
------------
Total current assets ............................................... 8,055,000
NON-CURRENT ASSETS
Production masters - Note 3 .......................................... 1,968,000
Film costs, net - Note 4 ............................................. 1,479,000
Property and equipment, net .......................................... 3,963,000
Goodwill and other assets ............................................ 6,183,000
------------
Total non-current assets ........................................... 13,593,000
------------
Total assets ....................................................... $ 21,648,000
============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses ................................ $ 6,937,000
Notes payable current - Note 6 ....................................... 1,117,000
Due to related party, net - Note 7 ................................... 275,000
Royalties payable .................................................... 501,000
Advances and deferred income ......................................... 418,000
Accrued dividends .................................................... 299,000
------------
Total current liabilities .......................................... 9,547,000
------------
NON-CURRENT LIABILITIES
Notes payable, less current portion - Note 6 ......................... 1,795,000
Accrued liabilities .................................................. 866,000
------------
Total non-current liabilities ...................................... 2,661,000
------------
Total liabilities .................................................. 12,208,000
COMMITMENTS AND CONTINGENCIES - Note 8
SHAREHOLDERS' EQUITY - Note 9
Preferred stock $.01 par value; 2,000,000 shares authorized and
220,033 shares issued and outstanding, liquidation preference
$ 7,073,000 ........................................................ 2,000
Common stock $.01 par value; 20,000,000 shares authorized and
6,234,877 issued and outstanding ................................... 60,000
Additional paid-in capital ........................................... 27,661,000
Accumulated deficit .................................................. (18,003,000)
------------
Total shareholders' equity ......................................... 9,840,000
------------
$ 21,648,000
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</TABLE>
See accompanying notes to consolidated financial statements
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DOVE ENTERTAINMENT, INC.
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Revenues - Note 10
Publishing, net ..................................... $ 1,710,000 $ 2,481,000
Film ................................................ 4,499,000 3,113,000
----------- -----------
6,209,000 5,594,000
Less: Cost of sales
Publishing, net ..................................... 1,599,000 1,391,000
Film ................................................ 3,985,000 2,263,000
----------- -----------
5,584,000 3,654,000
----------- -----------
625,000 1,940,000
Less:
Selling, general and administrative expenses ........ 1,993,000 2,178,000
----------- -----------
Loss from operations ................................. (1,368,000) (238,000)
Less: Interest expense ............................... 92,000 75,000
----------- -----------
Loss before income taxes ............................ (1,468,000) (313,000)
Less: Income tax expense - Note 5 .................... -- (51,000)
----------- -----------
Net loss ............................................ $(1,460,000) $ (262,000)
=========== ===========
Net loss attributable to common stockholders .......... $(2,586,000) $ (262,000)
=========== ===========
Net loss per share .................................... $ (0.42) $ (0.05)
=========== ===========
Weighted average number of common shares .............. 6,120,000 5,269,000
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
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DOVE ENTERTAINMENT, INC.
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Revenues - Note 10
Publishing, net ..................................... $ 5,456,000 $ 9,026,000
Film ................................................ 7,173,000 7,167,000
------------ ------------
12,629,000 16,193,000
Less: Cost of sales
Publishing, net ..................................... 6,228,000 7,409,000
Film ................................................ 7,212,000 5,200,000
------------ ------------
13,440,000 12,609,000
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(811,000) 3,584,000
Less:
Selling, general and administrative expenses - Note 7 7,040,000 6,279,000
Employee separation costs - Note 7 .................. 1,614,000 --
------------ ------------
8,654,000 6,279,000
------------ ------------
Loss from operations ................................. (9,465,000) (2,695,000)
Less: Interest expense ............................... 285,000 81,000
------------ ------------
Loss before income taxes ............................ (9,750,000) (2,776,000)
Less: Income tax expense - Note 5 .................... 23,000 (346,000)
------------ ------------
Net loss ............................................ $ (9,773,000) $ (2,430,000)
============ ============
Net loss attributable to common stockholders .......... $(12,051,000) $ (2,430,000)
============ ============
Net loss per share .................................... $ (2.13) $ (0.48)
============ ============
Weighted average number of common shares .............. 5,651,000 5,107,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
3
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DOVE ENTERTAINMENT, INC.
Consolidated Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------
1997 1996
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss ............................................ $(9,773,000) $(2,430,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation .................................... 404,000 278,000
Amortization of goodwill ........................ 315,000 164,000
Amortization of production masters .............. 3,528,000 2,865,000
Amortization of film costs ...................... 6,832,000 5,200,000
Changes in operating assets and liabilities:
Accounts receivable ........................... 1,126,000 878,000
Inventory ..................................... (250,000) (1,463,000)
Income taxes .................................. 563,000 (967,000)
Production masters ............................ (2,093,000) (3,760,000)
Film costs .................................... (7,000,000) (6,555,000)
Other assets .................................. (7,000) 584,000
Accounts payable and accrued expenses ......... 2,338,000 1,010,000
Royalties payable ............................. (32,000) 90,000
Advances and deferred revenue ................. (743,000) 1,038,000
----------- -----------
Net cash used in operating activities ....... (4,792,000) (3,068,000)
INVESTING ACTIVITIES
Acquisition of Four Point Entertainment ............. -- (7,877,000)
Sale of marketable securities ....................... -- 377,000
Purchases of marketable securities .................. -- (214,000)
Purchases of property and equipment ................. (59,000) (154,000)
Payments for building improvements .................. -- (359,000)
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Net cash used in investing activities ......... (59,000) (8,227,000)
FINANCING ACTIVITIES - Note 9
Repayment of notes payable .......................... (541,000) (432,000)
Proceeds from sale of preferred stock ............... 4,879,000 --
Proceeds from sale exercise of options .............. 3,000 --
Proceeds from sale of common stock .................. -- 6,242,000
Proceeds of notes issued ............................ 150,000 709,000
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Net cash provided by financing activities ..... 4,491,000 6,519,000
----------- -----------
Net decrease in cash and cash equivalents ..... (360,000) (4,776,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ...... 390,000 4,946,000
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............ $ 30,000 $ 170,000
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest .............................. $ 169,000 $ 76,000
Cash paid (refunds received) for income taxes ....... $ (361,000) $ 47,000
=========== ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
211,111 shares of common stock issued for the
acquisition of audio publishing rights .............. $ 475,000 $ --
Accrual to related party arising from pledge of
deposit for acquisition of the motion picture "Wilde" $ -- $ 500,000
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
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DOVE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION, ORGANIZATION AND BUSINESS
The accompanying consolidated financial statements of Dove Entertainment,
Inc. (the "Company") and its subsidiaries 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, as amended, for the
fiscal year ended December 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 nine month period ended
September 30, 1997 are not necessarily indicative of results to be expected for
the full year.
Dove Entertainment, Inc. is a diversified entertainment company primarily
engaged in publication of audio and printed books, the production of television
programming through its wholly-owned subsidiary Dove Four Point, Inc. ("Dove
Four Point"), and the distribution of feature films and television product, both
domestically and internationally.
The Company acquires audio publishing rights for specific titles or groups of
titles for audio production and distribution, primarily in the United States of
America.
Dove Four Point is an independent production company. Dove Four Point is
often engaged 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 engaged as a producer-for-hire, Dove Four Point develops and produces
television productions for which rights are controlled by Dove Four Point.
NOTE 2 -- Summary of Significant Accounting Policies
Recognition of Publishing Revenue
Revenues from publishing, including the sale of audio books (net of provisions
for estimated returns and allowances), and related royalties payable are
recognized upon shipment of the product. The Company records an allowance for
future returns based on anticipated return rates.
Cash Equivalents
The Company considers all highly liquid investments with original maturities to
the Company of three months or less to be cash equivalents.
Inventory
Inventory, consisting primarily of recorded audio cassettes and printed books,
is valued at the lower of cost or market, determined using the first-in,
first-out method. Periodically, management reviews inventory on a title-by-title
basis. The Company expenses through to cost of sales inventory that management
believes will not be sold.
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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 commencing from the time a title is initially
released, consistent with the estimated timing of revenue for a title. Prior to
January 1, 1997, for printed book titles, this had 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 following release. Beginning January 1, 1997 the Company accelerated the
amortization of costs on printed book titles so that 80% of a title's production
master costs were amortized in the initial quarter of release with the remaining
20% amortized over the following three quarters. The effect of this change was
to increase the production master amortization component of Cost of Sales by
approximately $5,000 and $161,000 for the three and nine months ended September
30, 1997, respectively. Audio book titles are amortized on a quarter-by-quarter
basis over a two-year period resulting in approximately 80% of such audio
title's production master cost being amortized in the first twelve months of
release. 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 such loss becomes evident.
Television and Film Revenues and Costs
Film costs, which include development, production and acquisition costs, are
capitalized and amortized, and participations and royalties are accrued, in
accordance with the individual-film-forecast method in the proportion that the
current year's revenue bears to the estimated total revenues from all sources.
These costs are stated at the lower of unamortized costs or estimated realizable
value on an individual film basis. Revenue forecasts for films are periodically
reviewed by management and revised if warranted by changing conditions. If
estimates of total revenue indicate that a film will result in an ultimate loss,
the loss is recognized currently.
Revenues from the distribution of television and theatrical films are recognized
upon availability of the completed film to the broadcaster or the Company's
distributors. The Company licenses distribution rights to distributors and has
not recognized any revenue from the direct distribution of theatrical films.
Deferred revenues arise when distributors or broadcasters make advances to the
Company prior to the date of revenue recognition.
Revenues from producer-for-hire contracts are recognized on a
percentage-of-completion method, measured by the percentage of costs completed
to date to estimated total cost for each contract. Provisions for estimated
losses on uncompleted contracts are made in the period in which such losses are
determined.
Income Taxes
The Company provides for income taxes under Statement of Financial Accounting
Standards No. 109 (SFAS 109). In accordance with SFAS 109, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
temporary differences between the financial and tax reporting basis of the
Company's assets and liabilities.
Goodwill
Goodwill, representing the excess of the purchase price of Four Point
Entertainment, Inc. over its net assets, is included in other assets and is
being amortized over a twenty-five year period. Goodwill amounted to $5,895,000
net of accumulated amortization of $421,000 at September 30, 1997.
Management continuously monitors and evaluates the realizability of goodwill to
determine whether the carrying value has been impaired. In evaluating the value
and future benefits of goodwill, the carrying value is compared to management's
best estimate of undiscounted future cash flows over the remaining amortization
period. If such assets are considered to be impaired, the impairment to be
recognized is
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measured by the amount by which the carrying value of the assets exceeds the
fair value of the assets. The Company believes that the carrying value of the
goodwill is not impaired.
Property and Equipment
Property and Equipment is stated at cost and is depreciated using the
straight-line method over the estimated useful lives of assets as follows:
<TABLE>
<S> <C>
Building ........................ 39 years
Furniture, Fixtures and Equipment 5-7 years
</TABLE>
Leasehold improvements are amortized over the estimated useful life or the
remaining lease term, whichever is less.
Net Loss Per Common Share
Net loss per common share is based upon the weighted average number of
outstanding shares of Common Stock. The net loss utilized in the calculation of
the net loss per common share is increased by dividends on Preferred Stock.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and disclosure of contingent
assets and liabilities to prepare these financial statements in conformity with
generally accepted accounting principles. Actual results could differ from those
estimates. Significant estimates include those related to ultimate revenues and
expenses related to film and television productions, the net realizability of
Inventory and Production Masters and the allowance for returns on publishing
sales.
NOTE 3 -- PRODUCTION MASTERS
Production masters, net of accumulated amortization of $1,968,000, at September
30, 1997 consisted of the following:
<TABLE>
<S> <C>
Released titles ...................................................... $1,006,000
Unreleased titles .................................................... 962,000
----------
Total ................................................................ $1,968,000
==========
</TABLE>
NOTE 4 -- FILM COSTS
The following is an analysis of film costs as of September 30, 1997:
<TABLE>
<S> <C>
Current: Television and theatrical projects in production........... $ 2,384,000
Non-current: Television and theatrical films released less
accumulated film amortization ........................... 1,479,000
-----------
Total.................................................................... $ 3,863,000
===========
</TABLE>
The Company expects that approximately 80% of all net film costs as of September
30, 1997 will be amortized within the next three year period based upon the
Company's current revenue estimates.
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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 September 30, 1997 consist of the following:
<TABLE>
<S> <C>
Current notes payable
Sanwa Bank term loan ..................................................... $1,070,000
Current portion of long-term mortgage note payable ....................... 47,000
----------
1,117,000
Long-term mortgage note payable, less current portion ....................... 1,795,000
----------
Notes payable to unrelated parties .......................................... 2,912,000
Notes payable to related parties (included in amount due to related party) .. 150,000
----------
Total notes payable ......................................................... $3,062,000
----------
</TABLE>
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 on such building and bears interest at a fixed rate of 8% per annum.
The loan matures in April 2001 and provides for a 20 year maturity amortization
payment rate through April 2001 with a repayment of the remaining outstanding
principal amount at that time.
In August 1996, the Company refinanced the Company's existing revolving line of
credit and term loan with Sanwa Bank California ("Sanwa Bank") with a $1,365,000
term loan from Sanwa Bank. On September 1, 1996, the Company began making
principal and interest payments based on a five year amortization schedule. All
unpaid principal and interest (an amount equal to $1,124,000) matured on August
1, 1997. The Company did not repay such unpaid amount on August 1, 1997 and in
September 1997, entered into a forbearance agreement with Sanwa Bank whereby the
Company was permitted to defer the repayment of principal and interest on the
loan until the earlier of October 31, 1997 and any refinancing of the Company's
senior debt. The forbearance agreement provided for certain performance
conditions including principally, monthly interest and principal payments in an
amount equal to the monthly interest and principal repayments in August 1, 1997
and no material adverse change in the financial condition of the Company. The
Sanwa Bank loan was secured by substantially all of the Company's assets, other
than the Company's building, and was guaranteed by two former principal
shareholders/officers of the Company (the "Former Principals") and Dove Four
Point. Such security and guarantees was released on repayment of the Sanwa Bank
loan. The term loan had various covenants with which the Company was required to
adhere, including minimum tangible net worth, current ratio, debt service
coverage ratio, and debt to net worth ratio and restrictions on mergers or
acquisitions. The Company was not in compliance with certain of such financial
covenants as of September 30, 1997. The Company repaid the Sanwa Bank facility
on November 12, 1997 with the proceeds from a loan facility provided by The
Chase Manhattan Bank, and the Sanwa Bank facility was terminated.
In October 1996, the Company obtained a bridge loan of $800,000 from Morgan
Fuller Capital Group, LLC ("Morgan Fuller"). The principal payment due February
1, 1997 was made and the balance of this loan was repaid in March 1997. See
Capital Activities - Note 9.
In September 1997, the Company entered into an agreement with Media Equities
International, L.L.C. ("MEI") providing the Company with a $450,000 loan
facility for working capital purposes ("MEI Loan"). The MEI Loan was
subsequently increased to $550,000. MEI is a substantial shareholder of the
Company, see Note 7 - Related Party Transactions and Note 9 Capital Activities.
The MEI Loan was
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secured by substantially all of the Company's assets, other than the Company's
building which security interest was junior to the security interest of Sanwa
Bank. The MEI Loan provided for interest at 10% per annum, payable monthly and
to be repaid in full in the event that the Company re-financed the term loan
with Sanwa Bank. At September 30, 1997, the Company had drawn $150,000 of the
MEI Loan. Subsequently, the Company drew the entire $550,000 of the MEI Loan. On
November 12, 1997, the MEI Loan was repaid in full from the proceeds from a loan
facility provided by The Chase Manhattan Bank, and the MEI Loan was terminated.
NOTE 7 -- RELATED PARTY TRANSACTIONS
As of January 1, 1995, the Company entered into employment agreements with the
Former Principals which were to expire in December 1999. The agreements
originally provided for aggregate compensation to the Former Principals of no
less than a combined total of $345,000 per year, plus benefits such as health
insurance and an automobile allowance and a combined non-accountable expenses of
$75,000 per year. In addition, the Former Principals were entitled to an annual
salary increase and bonus subject to certain limitations agreed upon with the
underwriter of the Company's initial public offering at the discretion of the
Company's Board of Directors. The Board of Directors approved an increase in the
salary portion of the employment agreements with the Former Principals to a
combined total of $562,000 per year for 1996. On June 10, 1997, the Former
Principals entered into a "Securities Purchase Agreement" with MEI whereby they
sold all their Preferred Stock and a portion of their common stock to MEI.
Concurrently, each of the Former Principals resigned as officers and directors
of the Company and its subsidiaries pursuant to an employment termination
agreement ("Termination Agreement").
Pursuant to the Termination Agreement, and in consideration for the settlement
of their respective employment agreements, the Former Principals, Mr. Viner and
Ms. Raffin are entitled to each receive monthly payments (the "Payments") of
approximately $14,583 and $10,416, respectively, and medical insurance for 60
months (the "Term"). In addition, Mr. Viner and Ms. Raffin are entitled to each
receive a car allowance for 24 months and reimbursements for certain medical and
business expenses. Certain payments under, and other provisions of, the
Termination Agreement are subject to arbitration proceedings. See Note 8 -
Commitments and Contingencies.
To secure the Payments, the Company has issued into escrow 1,500 shares of its
Series E Preferred Stock, convertible into shares of Common Stock to the extent
set forth in the Certificate of Determination for the Series E Preferred Stock.
The Series E Preferred Stock will be held in escrow and will not be released to
the Former Principals except in the event of a default in the Payments by the
Company. In the event of a default in the Payments by the Company, the Series E
Preferred Stock will be released to the Former Principals, as the case may be,
in an amount equal to the portion of the Payments unpaid due to such default
divided by the stated value of the Series E Preferred Stock. The Former
Principals have registration rights pursuant to a registration rights agreement,
dated June 10, 1997, among the Company and the Former Principals with respect to
any Series E Preferred Stock received by them upon a default in the Payments by
the Company. The terms of the aforementioned Securities Purchase Agreement and
Termination Agreement are more fully discussed in the Company's Form 8-K dated
June 10, 1997.
During 1996, the Company made payments totaling $14,000 to the Former Principals
for the business rental of a condominium owned by the Former Principals.
During 1996, the Company made payments to the Former Principals and Mr. Leider
(a director of the Company), totaling $365,000 under agreements for producer
services, television motion picture acting services and television motion
picture directing services. In connection with the Termination Agreement,
further payments were made to the Former Principals in respect of producer
services amounting to $50,000 with a further $50,000 payable in connection with
the production "Unwed Father" of which $25,000 was paid in July 1997 and the
remaining $25,000 was paid in November 1997.
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<PAGE> 11
In September 1996, in connection with Samuelson Entertainment Ltd.'s
("Samuelson") financing of the production of the motion picture presently
entitled "Wilde" (the "Picture") for which the Company acquired certain North
American rights, one of the Former Principals personally guaranteed $1,000,000
of the payment obligations of Dove International, Inc. ("Dove International"), a
wholly owned subsidiary of the Company, payable commencing on December 1, 1996
through April 2, 1997 to Samuelson in order to obtain additional time for Dove
International to make such payments. In addition, one of the Former Principals
personally deposited $500,000 at Guinness Mahon & Co. Ltd. ("Guinness Mahon")
(and pledged the deposit plus interest thereon) to secure Dove International's
additional payment obligation to Samuelson in the amount of (pounds) 333,334 on
delivery of the Picture. The Company has made all of the required payments
including the payment due on the delivery of the Picture (other than
approximately $15,000). In consideration for agreeing to pledge such deposit,
Samuelson and Dove International agreed that one of the Former Principals will
receive a 5% commission, up to a maximum of $120,000, payable from 5% of 100% of
the gross receipts (only after recoupment of Dove International's full
distribution fee) received by all third-party distributors (including Dove
International) from exploitation of the North American distribution rights in
the Picture. The terms pursuant to which one of the Former Principals pledged
the deposit were based on similar terms as offered by the producer (Samuelson)
to a third party, which were not able to be consummated. In addition, Samuelson
agreed that one of the Former Principals will receive 8% of 100% of Samuelson's
net profits from the Picture. As partial consideration for the acquisition by
the Former Principals of Series C Preferred Stock and warrants to acquire Common
Stock of the Company (see Note 9 to the Consolidated Financial Statements), the
Company's obligation to repay one of the Former Principals the $500,000 deposit
made with Guinness Mahon and to repay one of the Former Principals the 5%
commission on proceeds from the Picture were released.
The Former Principals have also personally guaranteed the Company's obligations
to Sanwa Bank to a maximum principal amount of $1,600,000 in order to avoid an
event of default on such obligations. As of September 30, 1997, $1,139,000 was
outstanding. On November 12, 1997 such obligation to Sanwa Bank was repaid by
the Company and the guarantee was canceled.
Pursuant to an agreement, dated May 16, 1996, Mr. Leider is to provide
management consulting services to the Company until the Company and Mr. Leider
mutually agree to terminate such agreement. Such agreement provides for an
annual compensation of $125,000 payable monthly in arrears. Under the terms of
such agreement, Mr. Leider was granted options to purchase 50,000 shares of
Common Stock with an exercise price of $3.50 per share.
Pursuant to a severance agreement, dated September 4, 1996, if Mr. Leider's
consultancy pursuant to the above referenced agreement is terminated, the
Company may be required to pay all amounts accrued through the date Mr. Leider
is terminated and his consulting compensation for a period of time following the
date of termination. Further, if Mr. Leider's consultancy is terminated for any
reason other than death, Disability, Retirement or for Cause, as defined in the
agreement, or Mr. Leider terminates his consultancy within three months of any
of the following: (i) assignment of duties materially inconsistent with his
status with the Company or a material change in his reporting responsibilities,
(ii) material reduction of Mr. Leider's consulting compensation, (iii)
subsequent to an Event, failure by the Company to continue any benefit or
compensation in which Mr. Leider is participating at the time of the Event or
(iv) any purported termination of Mr. Leider's consultancy effected pursuant to
a Notice of Termination, as defined in the agreement, and such termination is
not valid or effective; then Mr. Leider may be entitled to all amounts accruing
to him as of the date of such termination and his consulting compensation for up
to six months following the date of termination.
Mr. Leider's employment with the Company was terminated on September 12, 1997
and in October 1997 he resigned as a director of the Company.
As part of the Stock Purchase Agreement described in Note 9 to the Consolidated
Financial Statements, the Company and MEI agreed to the terms of a three year
consulting arrangement with MEI which arrangement commenced on April 1, 1997.
MEI has agreed to provide substantial general management
10
<PAGE> 12
consulting advice including but not limited to, financial (including assisting
in obtaining bank financing), television and film distribution and business
affairs. As compensation for such services and advice, the Company will pay MEI
$300,000 per year, of which $200,000 will be payable in cash on a quarterly
basis in advance and the remaining $100,000 will be paid in shares of Common
Stock valued at the current market value on the date of payment, payable
quarterly in arrears. During the quarter ended September 30, 1997, the Company,
accrued $75,000 for such services, $50,000 payable in cash and $25,000 payable
in the form of common stock. At September 30, 1997, accrued fees for consulting
services and advice due to MEI are $125,000.
In September 1997, the Company entered into an agreement with MEI for a $450,000
loan - see Note 6 - Notes Payable.
The Company acquired audio book rights for fifteen titles which were written by
a substantial shareholder. The Company recorded the following net audio sales
(net of returns) from these titles:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Quarter ended September 30 ........... $18,000 $27,000
Nine months ended September 30 ....... $50,000 $58,000
</TABLE>
In 1996, the Company agreed to issue 50,000 shares of Common Stock to the
substantial shareholder for certain rights to future titles. In August 1997, the
Company issued 200,000 shares of Common Stock to the substantial shareholder for
further rights to future titles and certain rights on past titles.
The Company made the following payments in respect of auto lease payments, auto
allowance and insurance on automobiles owned by the Former Principals and other
directors of the Company.
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Quarter ended September 30 ........... $ 4,000 $ 9,000
Nine months ended September 30 ....... $25,000 $23,000
</TABLE>
During the nine months ended September 30, 1996, the Company made a payment of
$11,053 in respect of writing services to one of the Former Principals.
The Company made the following payments in respect of audio duplication to Tin
Man Enterprises, an associate of a substantial shareholder, from June 10, 1997
until August 1997:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Quarter ended September 30 ......... $ 45,000 $205,000
Nine months ended September 30 ..... $741,000 $833,000
</TABLE>
NOTE 8 -- COMMITMENTS AND CONTINGENCIES
Litigation
In August 1993, the trial court confirmed an arbitration award in favor of the
Company, Michael Viner and Jerry Leider and against Steven Stern and Sharmhill
Productions in the approximate amount of $4.5 million (plus interest accruing
thereon from September 1992 and attorney's fees) relating to the film "Morning
Glory." In March 1995, defendants appealed the judgment to the California Court
of Appeals. In June 1995, the Court of Appeals affirmed the judgment, and that
judgment is now final. In a related matter, the Company sought to restore
certain fraudulent conveyances that Mr. Stern had made. In August 1995, Mr.
Stern filed for bankruptcy protection. The United States Trustee is pursuing the
fraudulent conveyance action on behalf of the bankruptcy estate, of which the
Company comprises approximately 80%, and the Company, Mr. Viner and Mr. Leider
are separately pursuing their own adversary proceeding for conspiracy against
Mr. Stern and others in the bankruptcy case. The Company is also objecting to
Mr. Stern's discharge in bankruptcy. There is no assurance that the Company will
11
<PAGE> 13
ultimately prevail, or as to if, when or in what amount the Company will be able
to recover the amount of the original judgment in its favor.
In February 1993, Mr. Stern filed a complaint against the Company, Mr. Viner and
Mr. Leider entitled Steven A. Stern and Steven A. Stern as assignee of the
claims of Sharmhill Productions (B.C.), Inc., a bankrupt company v. Dove Audio,
Inc. et al. (British Columbia Supreme Court, Vancouver Registry No. C930935)
(the "Canadian Stern Action") claiming that he had been fraudulently induced to
enter into the agreement underlying the arbitration award and seeking as damages
the amount of the judgment. The Company believes that it has good and
meritorious defenses to the Canadian Stern Action. Nevertheless, there can be no
assurance that the Company will prevail in the Canadian Stern Action.
In February 1996, the Company was served with a complaint in an action entitled
Robert H. Tourtelot v. Dove Audio, Inc. etc. et al. (Los Angeles Superior Court
Case No. SC040739) (the "Tourtelot Action"). Mr. Tourtelot seeks in excess of a
million dollars in damages claiming that he had an oral agreement with the
Company to write a book that the Company would publish, and that information he
provided to the Company was used in another book published by the Company,
"Legacy of Deception." Mr. Tourtelot alleged causes of action for breach of oral
contract, fraud, suppression of fact, breach of the implied covenant of good
faith and fair dealing, breach of fiduciary duty, infringement of common law
copyright, conversion, conspiracy and accounting. The Company successfully
removed the action to the United States District Court for the Central District
of California, and successfully moved to have the claims for infringement of
common law copyright, breach of fiduciary duty, conversion, conspiracy and
accounting dismissed. The Tourtelot Action was then remanded to the Los Angeles
Superior Court, which has permitted Mr. Tourtelot to pursue claims for breach of
oral contract, fraud, suppression of fact, breach of the implied covenant of
good faith and fair dealing, breach of fiduciary duty, conversion, conspiracy
and quantum meruit. While the Company believes that it has good and meritorious
defenses to the Tourtelot Action, there can be no assurance that the Company
will prevail in the Tourtelot Action.
In March 1996, the Company was served with a complaint in an action entitled
Alexandra D. Datig v. Dove Audio, et al. (Los Angeles Superior Court Case No.
BC145501) (the "Datig Action"). The Datig Action was brought by a contributor
to, and relates to, the book "You'll Never Make Love In This Town Again." The
Datig complaint sought in excess of a million dollars in monetary damages. In
October 1996, the Company obtained a judgment of dismissal of the entire Datig
Action, which judgment also awarded the Company its attorney's fees and costs in
defending the matter. Thereafter, the Company sued Ms. Datig for malicious
prosecution. Ms. Datig, however, has appealed the judgment. While the Company
believes that it will prevail on the appeal, there can be no assurance that the
Company will in fact be successful on appeal.
In June 1996, the Company was served with a complaint in an action entitled
Shukri Ghalayini v. Dove etc. et al. (Los Angeles Superior Court Case No.
BC152129) (the "Ghalayini Action"). The complaint alleges among other things:
(i) breach of employment contract against Four Point Entertainment, Inc. ("Four
Point") due to termination of Mr. Ghalayini's employment without good cause,
adequate notice or opportunity to cure any alleged breaches and (ii) fraud in
the defendants allegedly never intended to honor the terms of the employment
agreement. The complaint seeks damages under the employment agreement of not
less than $900,000, loss of future earnings estimated at $20,000,000 and damage
to his reputation, mental and emotional distress, punitive damages and
attorney's fees.
On the same day, the Company filed an action against Mr. Ghalayini in the Los
Angeles Superior Court alleging, among other things, that (i) Ghalayini breached
his fiduciary duty to the Company by diverting corporate assets to pay his
personal expenses, (ii) that in order to induce the Company into closing the
Four Point acquisition, Mr. Ghalayini made false representations, including
misrepresenting the tangible shareholder's equity of Four Point as of the
closing, diverted production and other funds and held checks previously drawn to
pay accounts payable in order to meet a closing condition that outstanding bank
debt be below a specified level, and that Mr. Ghalayini made false
representations to induce Dove Four Point to
12
<PAGE> 14
enter into his employment agreement.
In May 1997, the Company was served with a complaint in a related action
entitled Shukri Ghalayini v. Dove Audio, Inc., et al. (Los Angeles Superior
Court Case No. BC 170340) (the "Ghalayini Defamation Action"). The complaint
alleges that Mr. Ghalayini was defamed at a Company shareholders meeting and
seeks damages accorded to proof.
In September 1997, the Company entered into an agreement with Mr. Ghalayini
providing for settlement of all claims by the Company against Mr. Ghalayini and
settlement of all claims by Mr. Ghalayini against the Company (other than claims
relating to the Fields Action discussed below). The settlement agreement
provides for the Company to issue 66,667shares of common stock to Mr. Ghalayini.
In July 1996, the Company was served with a complaint in an action entitled
Terrie Maxine Frankle and Jennie Louise Frankle v. Dove Audio (U.S. District
Court, Central District of California Case No. 96-4073 RSWL) (the "Frankle
Action"). The Frankles claim to be the authors of "You'll Never Make Love In
This Town Again," and have alleged claims for copyright infringement and fraud.
The Frankles' application for a preliminary injunction was denied because they
could not demonstrate a likelihood of success on the merits of their claims. The
Company believes that it has good and meritorious defenses and counterclaims
against the Frankles. Nevertheless, there is no assurance that the Company will
prevail.
In January 1997, the Company was served with a complaint in an action entitled
Greer v. Dove (Los Angeles Superior Court Case No. BC 160871) (the "Greer
Action"). Ms. Greer is another contributor to the book "You'll Never Make Love
In This Town Again" and has sought damages in excess of one million dollars
alleging causes of action for breach of contract, breach of the implied covenant
of good faith and fair dealing, breach of fiduciary duty, fraud, imposition of
constructive trust and an accounting, rescission, declaratory relief,
conspiracy, unfair competition, and false advertising. Although the Company
believes that it has good and meritorious defenses to the Greer Action, there
can be no assurance that the Company will ultimately prevail in the action.
In May 1997, the Company was served with a complaint in an action entitled
Kenneth Raskoff v. Dove (Los Angeles Superior Court Case No. BC171355) (the
"Raskoff Action"). Mr. Raskoff is a former employee of Dove Four Point. The
complaint seeks unspecified damages and other relief for breach of Mr. Raskoff's
alleged employment contract, breach of the implied covenant of good faith and
fair dealing, breach of implied-in-fact contract, promissory estoppel, and
fraudulent inducement. The complaint also seeks an injunction requiring that Mr.
Raskoff receive producer credit with respect to the television program entitled
"Unwed Father" and other unnamed projects. Although the Company believes that it
has good and meritorious defenses to the Raskoff Action, there can be no
assurance that the Company will prevail in the action.
In June 1997, the Company was served with a complaint in an action entitled
Michael Bass v. Penguin USA Inc., et al. (New York Superior Court Case No.
97-111143) (the "Bass Action"). The complaint alleges among other things that
Ms. Greer's contribution to the book "You'll Never Make Love In This Town Again"
defames Mr. Bass and violates his rights of publicity under New York statutes.
The complaint seeks damages of $70,000,000 for defamation and $20,000,000 for
violation of the New York right of publicity statutes and an injunction taking
the book out of circulation and prohibiting the use of Mr. Bass' name. The
Company believes that it has good and meritorious defenses to the Bass Action.
Nevertheless, there can be no assurance that the Company will prevail. As a
result of the Bass Action, the Company has brought a cross-complaint against Ms.
Greer in the Greer Action.
In July 1997, the Former Principals commenced an arbitration against the
Company. In their arbitration demand, the Former Principals claim that they are
owed in excess of $1 million by the Company relating to the motion picture
entitled "Morning Glory". The Former Principals claim that they are also
entitled to the repayment of certain deferred amounts for producing and acting
services rendered by them in connection with "Morning Glory" and to 50% of the
profits. They claim that a director of the Company,
13
<PAGE> 15
Gerald Leider, is entitled to the other 50% of the profits (although, as of
September 30, 1997, Mr. Leider's claim is not the subject of any proceeding).
The Former Principals have also asserted that from any recovery of a judgment
confirming an arbitration award against Steven Stern and/or Sharmhill
Productions relating to "Morning Glory" (the "Stern Judgment") they are entitled
to receive $1 million, as well as the deferred amounts and 50% of the profits.
Present management believes it has good and sufficient defenses to the claims,
including, but not limited to the Former Principals' waiver of their claims that
any amounts are owed to them as debt, as profit participation or as deferred
compensation and that the Company has not yet recouped its investment in the
Picture. The company has also asked the arbitrator to determine that the Former
Principals are not entitled to any moneys or rights with respect to "Morning
Glory", including from the proceeds of the Stern Judgment. There can be no
assurance that the Company will prevail on these defenses and claims.
In August 1997, the Former Principals commenced an arbitration against the
Company seeking specific performance of, and alleging breach of, the Termination
Agreement to arbitration. The Former Principals subsequently identified in
writing their intention to arbitrate a variety of miscellaneous claims,
including the Company's alleged failure to timely pay the full amount of
consulting fees under the Termination Agreement, as well as the Producer and
Executive Producer fees on "Unwed Father", to reimburse charitable
contributions, business expenses, medical expenses, to return certain personal
property, to account for sales with respect to certain titles, and other
matters, including claims that the Former Principals did not receive appropriate
credit on "Unwed Father" and various audio books that they have not yet
identified. On October 16, 1997, however, the Former Principals filed an action
in the Los Angeles Superior Court (Case No. BC179639) for "Breach of Written
Contract; Specific Performance; Temporary Restraining Order, Preliminary and
Permanent Injunctive Relief" which sought damages for some of the same claims
identified as the Former Principals' claims in arbitration. In this action the
Former Principals claimed that, in addition to other damages, they were entitled
to accelerate all payments to become due under the Termination Agreement, in the
aggregate amount of $1,511,824 and to the rights to certain titles. This action
appears to have been filed for purposes of obtaining an attachment. After the
Company obtained a temporary restraining order in the action staying the
arbitration, the Former Principals and Dove II filed another action in the Los
Angeles Superior Court (Case No. BC 180301) seeking declaratory relief and an
injunction staying other arbitration proceedings between them and the Company.
After the Company defeated an application for temporary restraining order in
that action, the Former Principals and Dove II filed requests for dismissals of
both actions and are proceeding in the arbitrations. The Company believes that,
with the exception of certain immaterial amounts which it expects to pay, it has
good and meritorious defenses to the claims by the Former Principals and that
the Company has meritorious claims against the Former Principals. There can be
no assurance, however, that the Company will prevail on these issues and claims.
In July 1997, the Company was served with a complaint in an action entitled Alan
Fields v. Dove Entertainment, Inc., et al. (Los Angeles Superior Court No. BC
174659) (the "Fields Action"). The Fields Action was brought by an alleged
purchaser of Common Stock against the Company and the Former Principals as a
putative class action on behalf of all persons who acquired Common Stock between
July 25, 1995 and August 20, 1996. The complaint alleges a cause of action for
violation of Section 25400(d) of the California Corporations Code based on the
alleged dissemination of false and misleading statements about, among other
things, the success of the Company's printed book operations, financial results,
business condition and future prospects. The plaintiff seeks unspecified damages
and other relief. In August 1997, an action entitled Global Asset Allocation
consultants, L.L.C. v. Dove Entertainment, Inc., et al. (Civil Action No.
97-6253-WDK) (the "Global Asset Action"), was commenced against the Company and
the Former Principals in the United States District Court for the Central
District of California. The Global Asset Action was brought by an alleged
purchaser of Common Stock as a putative class action on behalf of all persons
who acquired Common Stock between July 25, 1995 and August 20, 1996. The
complaint alleges a cause of action for violation of Section 10(b) of the
Securities and Exchange Act of 1934 and SEC Rule 10b-5 promulgated thereunder
based on the conduct at issue in the Fields Action. The plaintiff seeks
unspecified damages and other relief. The Company has learned that another
putative federal securities class action was filed in the United States District
Court for the Central
14
<PAGE> 16
District of California by an alleged purchase of Common Stock represented by the
law firm of Berman, DeValerio & Pease LLP (the "Berman Action"; and collectively
with the Fields Action and the Global Asset Action, the "Securities Actions").
The complaint is reportedly brought on behalf of all persons who acquired Common
Stock between April 15, 1996 and October 10, 1996 and to allege a cause of
action against the Company and certain of its former officers for violation of
Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5
promulgated thereunder. As of September 30, 1997, the Company has not been
served with the complaints in the Global Asset Action or the Berman Action. The
Company has not yet filed a response to the complaints in the Securities
Actions. While the Company believes it has good and meritorious defenses against
the claim, the Company has taken a charge of $150,000 in the quarter ended June
30, 1997 in respect of potential costs associated with the claim.
In July 1997, the Company was served with a complaint in an action entitled
Steven A. Soloway v. Dove Entertainment, Inc., etc. et al. (Los Angeles Superior
Court Case No. BC 175516) (the "Soloway Action"). Mr. Soloway is a former
director and employee of the Company and has sought damages of approximately
$350,000 for breach of contract. Mr. Soloway claims that as a result of the
Securities Purchase Agreement he was entitled to declare his employment
agreement terminated without cause and to receive his base salary through
September 1999. In September 1997, Mr. Soloway obtained a writ of attachment for
$350,000 in respect of his claims, for which the Company has substituted an
undertaking for the amount of the attachment. Although the Company believes that
it has good and meritorious defenses and setoffs to the Soloway Action, there
can be no assurance that the Company will prevail in the Soloway Action. The
Company has filed a cross-complaint against Mr. Soloway for breach of fiduciary
duty and legal malpractice.
The Company is a party to various other routine legal proceedings and claims
incidental to its business. The Company believes that the ultimate resolution of
these matters, individually and in the aggregate, will not have a material
adverse effect upon the Company's financial position.
Office Lease
The Company leases office space under a non-cancelable operating lease expiring
December 1998. The Company's lease obligation is secured by a $15,000
irrevocable letter of credit. Rent expense was $69,000 and $63,000 in the three
months ended September 30, 1997 and September 30, 1996, respectively, and
$207,000 and $176,000 for the nine months ended September 30, 1997 and September
30, 1996, respectively. The minimum future non-cancelable lease expense under
the lease is approximately $206,000 annually for the years 1997 through 1998,
inclusive. The lease is subject to annual rent escalations and the pass-through
of costs.
NOTE 9 -- CAPITAL ACTIVITIES
Common Stock
In December 1995, the Company received net proceeds of approximately $4,770,000
from the initial closings of a private placement (the "Placement") of the
Company's equity securities. Pursuant to the December closing of the Placement
the Company issued 729,687 shares of Common Stock and Common Stock purchase
warrants allowing the purchase of 729,687 shares of Common Stock at $12.00 per
share exercisable for a period of 51 months beginning 9 months subsequent to the
initial closing of the Placement.
In January 1996, the Company received additional net proceeds of approximately
$1,533,000 from the Placement of the Company's equity securities. Pursuant to
the January 1996 closings of the Placement the Company issued 220,313 shares of
Common Stock and Common Stock purchase warrants allowing the purchase of 220,313
shares of Common Stock at $12.00 per share exercisable for a period of 51 months
beginning 9 months subsequent to the initial closing of the Placement.
15
<PAGE> 17
In April 1997, the Company issued 551,111 shares of unregistered Common Stock in
satisfaction for vendor payables amounting to $1,250,000, or an average of $2.26
per share.
In August 1997, the Company issued 200,000 shares of Common Stock to the
substantial shareholder for the acquisition of further rights to a future title
and certain rights on past titles.
In October 1997, the Company issued 66,667 shares of Common Stock to Shukri
Ghalayini in settlement of all claims by him against the Company.
Preferred Stock
In the first of two closings under a private placement of preferred stock and
warrants to purchase Common Stock (i) MEI purchased 3,000 shares of the
Company's 6% Series B Preferred Stock (the "Series B Preferred Stock") and
warrants to purchase 500,000 shares of Common Stock at $2.00 Per share, warrants
to purchase 500,000 shares of Common Stock at $2.50 Per share and warrants to
purchase 500,000 shares of Common Stock at $3.00 Per share for an aggregate of
$3,000,000 and, (ii) the Former Principals purchased 920 shares of the Company's
6% Series C Preferred Stock (the "Series C Preferred Stock") and warrants to
purchase 166,666 shares of Common Stock at $2.00 Per share, warrants to purchase
166,667 shares of Common Stock at $2.50 Per share and warrants to purchase
166,667 shares of Common Stock at $3.00 Per share for an aggregate of $920,000
(including the contribution of $676,000 payable by the Company to the Former
Principals). On June 3, 1997, the second closing (the "Second Closing") was
completed whereby (i) MEI purchased 1,000 shares of Series B Preferred Stock and
warrants to purchase 166,666 shares of Common Stock at $2.00 Per share, warrants
to purchase 166,667 shares of Common Stock at $2.50 Per share and warrants to
purchase 166,667 shares of Common Stock at $3.00 Per share for $1,000,000 in
cash and (ii) the Former Principals and their assigns purchased 1,000 shares of
Series C Preferred Stock and warrants to purchase 166,666 shares of Common Stock
at $2.00 Per share, warrants to purchase 166,667 shares of Common Stock at $2.50
Per share and warrants to purchase 166,667 shares of Common Stock at $3.00 Per
share for an aggregate of $1,000,000 (including the contribution of $175,000
payable by the Company to the Former Principals). Each share of Series B
Preferred Stock and Series C Preferred Stock is convertible at the option of the
holder thereof into 500 shares of Common Stock, subject to certain anti-dilution
adjustments, at any time following the date six months after the issuance
thereof. Each of the Series B Preferred Stock and Series C Preferred Stock are
redeemable, in whole or in part at the option of the Company, at any time after
March 28, 2002 at a redemption price of 110% of the stated value ($1,000) plus
all accumulated but unpaid dividends thereon (plus interest on such
accumulations). In connection with this transaction, the Company has allocated
the amounts invested between the Preferred Stock and the warrants and will
record a dividend for the difference between the amount allocated to Preferred
Stock and the value, as of the issuance date, of the Common Stock issuable upon
conversion of such Preferred Stock. For the quarter ended September 30, 1997,
the amount of such divided is $975,000 and for the nine months ended September
30, 1997, is $1,032,000. On June 10, 1997, MEI purchased all of the Preferred
Stock held by the Former Principals along with 500,000 shares of Common Stock
(see Related Party Transactions). In August, 1997, MEI purchased 350 shares of
the Company's Series C Preferred Stock with warrants to purchase 175,000 shares
of Common Stock under the same terms as described above applying to the
Company's Series C Preferred Stock from the assigns of the Former Principals
under the same terms as described above applying to the Company's Series C
Preferred Stock. MEI has agreed to defer its right to demand the Company to
prepare and file with the Securities and Exchange Commission one or more
registration statements until 30 days after MEI issues notice to the Company of
its demand to prepare and file such registration.
16
<PAGE> 18
In October 1996 Morgan Fuller completed a loan to the Company in the aggregate
amount of $800,000. Such loan bore interest at the rate of 10% per annum. In
March 1997, the Company retired $500,000 of its loan from Morgan Fuller in
exchange for 210,526 shares of the Company's Common Stock along with warrants to
purchase 35,088 shares of the Company's Common Stock at $2.50 per share,
warrants to purchase 35,088 shares of the Company's Common Stock at $3.50 per
share and warrants to purchase 35,087 shares of the Company's Common Stock at
$4.50 per share. The balance of the loan plus accrued interest was repaid in
cash.
Stock Options And Warrants
The Board of Directors of the Company has adopted the 1994 Stock Incentive Plan
(the "Plan"). The Plan provides for the grant of options to purchase up to an
aggregate of 750,000 shares of the Common Stock of the Company (subject to an
anti-dilution provision providing for adjustment in the event of certain changes
in the Company's capitalization).
The Plan authorizes the granting of stock incentive awards ("Awards") to
qualified officers, employee directors, key employees, and third parties
providing valuable services to the Company, e.g., independent contractors,
consultants, and advisors to the Company. The Plan is administered by a
committee appointed by the Company's Board consisting of two or more members,
each of whom must be disinterested (the "Committee"). The Committee determines
the number of shares to be covered by an Award, the term and exercise price, if
any, of the Award, and other terms and provisions of Awards; members of the
Committee receive formula awards.
Awards can be Stock Options, Stock Appreciation Rights, Performance Share
Awards, and Restricted Stock Awards. The number and kind of shares available
under the Plan are subject to adjustment in certain events.
Options outstanding under the Plan at September 30, 1997 were as follows:
<TABLE>
<CAPTION>
Exercise Price
--------------
<S> <C> <C>
Options outstanding at September 30, 1997........ 177,333 $2.50 - $9.75
</TABLE>
The weighted average exercise price at September 30, 1997 was $3.69, and options
to acquire 101,331 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 and 75,000 shares of Common Stock at an exercise price of
$8.00 per share in 1995. At September 30, 1997 options covering the 250,000
shares noted above had been exercised, and options covering the 75,000 shares
had expired. In 1996, in conjunction with the acquisition of Four Point, options
to purchase 300,000 shares of Common Stock at $11.00 per share were issued to
one of the principals of Dove Four Point as part of an employment agreement.
Vesting of these options will accelerate based on meeting certain performance
criteria. At September 30, 1997 none of these options were exercisable.
Additionally, during 1996, the Company issued options to purchase 80,000 shares
of Common Stock under the Plan with an exercise price of $3.50 per share to the
Company's public relations firm of which 53,334 were exercisable as of September
30, 1997.
Prior to January 1, 1996, the Company accounted for the Plan in accordance
with the provisions of Accounting Principles Board (ABP) Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. As
such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant or
alternatively, allow entities to continue to apply the provisions of APB Opinion
No. 25 and provide pro
17
<PAGE> 19
forma net income and pro forma earnings per share disclosures for employee stock
option grants made in 1995 and future years as if the fair-value-based method
defined in SFAS No. 123 had been applied. The Company has elected to continue to
apply the provisions of APB Opinion No. 25 in accounting for its Plan, and
accordingly, no compensation cost has been recognized for its stock options
granted at fair market value in the consolidated financial statements.
Compensation cost will be recorded for options granted below fair market value
and options granted to hourly employees.
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS No. 123, the Company's net loss
would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Nine months ended September 30, Quarters Ended September 30,
1997 1996 1997 1996
--------------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
Net loss
As reported $ (12,051,000) $ (2,430,000) $ (2,486,000) $ (262,000)
Pro forma $ (12,465,000) $ (2,833,000) $ (2,724,000) $ (396,000)
Loss per share
As reported $ (2.13) $ (0.48) $ (0.42) $ (0.05)
Pro forma $ (2.20) $ (0.55) $ (0.45) $ (0.08)
</TABLE>
Pro forma net loss reflects only options granted since January 1, 1995.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net loss amounts presented
above because compensation cost is reflected over the options' vesting period of
five years and compensation cost for options granted prior to January 1, 1995 is
not considered.
<TABLE>
<CAPTION>
Number of
Shares of
Number of Common Exercise
Warrants Stock Price
--------- --------- --------------
<S> <C> <C> <C>
Warrants outstanding at January 1, 1997 .. 1,607,500 1,558,750 $2.75 - $12.00
Warrants issued .......................... 3,105,263 3,105,263 $2.00 - $ 4.50
--------- ---------
Warrants outstanding at September 30, 1997 4,712,763 4,664,013 $2.00 - $12.00
========= =========
</TABLE>
The weighted average exercise price at September 30, 1997 was $5.05, and
warrants to acquire 4,664,013 shares of Common Stock were exercisable.
NOTE 10 -- MAJOR CUSTOMERS AND SUPPLIERS
Revenues, net of returns, from the Company's three major customers approximated
the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Quarter ended September 30, .................... 50% 31%
Nine months ended September 30, ................ 34% 30%
</TABLE>
A significant amount of audio inventory is supplied by one manufacturer, a
substantial shareholder. The Company is not dependent on the manufacturer as its
sole source of product.
NOTE 11 -- 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. 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
18
<PAGE> 20
purchase price over the fair value of the net identifiable assets acquired of
$6,316,000 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 40,000 shares
of the Initial Shares were placed in escrow pending the receipt of certain
outstanding receivables. As of September 30, 1997, the shares were still held in
escrow and accordingly, the Company has excluded such shares from the initial
purchase price pending the resolution of the related contingencies.
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 (i.e.,
unaffiliated with any single book publisher) of audio books in the United
States. The Company produces and distributes approximately 100 to 120 new titles
annually and has built a library of over 1,200 titles. Through Dove Four Point,
the Company is engaged in the production and development of television
programming. Other activities of the Company include a limited printed book
publishing program and the distribution of feature films and television.
The demand for audio books is seasonal, with the majority of shipments taking
place in the third and fourth quarters of the year. The Company believes that
demand for audio books will remain seasonal, and this may adversely affect
results of operations for the first and second quarters. Because a significant
portion of the Company's expenses are relatively fixed, below-expectation sales
in any quarter could adversely affect operating results for that quarter.
From time to time, the Company may have several television projects in
development and 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. In April 1997, Dove Four Point received an order from the ABC
Television Network for a made for television movie entitled "Unwed Father" and
has entered into a distribution agreement with respect to the non US network
rights with Bonneville Worldwide Entertainment ("Bonneville"). This movie was
delivered to ABC in September 1997.
In 1996, the Company embarked on a major printed book publishing program with a
scheduled 75 print titles for 1997. However, following disappointing results
from the 1996 and early 1997 list, the Company has substantially curtailed the
printed book program to one primarily designed to complement the audio book
list. In July 1996, the Company embarked on a program to acquire independent
films and videos for distribution in the United States and Canada on an all
rights basis (including theatrical, home video and all forms of television and a
video output arrangement), but following review in 1997, has discontinued the
video distribution operations and has limited the film and television
distribution operations to the existing film and television library, and
television programs produced by Dove Four Point.
In accordance with the industry practice, substantially all of the Company's
sales of audio and printed book products are and will continue to be subject to
potential return by distributors and retailers. Although the Company estimates
allowances and reserves for returned products, significant increases in actual
return rates above these estimates could materially and adversely impact the
Company's results of operations or financial condition. In June 1997, the
Company received notice from its major audio and book distributor of
discontinuance of its exclusive distribution agreement at the end of December
1997 and the Company is actively seeking to establish new distribution
arrangements.
19
<PAGE> 21
Selling, general and administrative expenses include costs associated with
selling, marketing and promoting the Company's products, as well as general
corporate expenses including salaries, occupancy costs and other overhead,
professional fees, and travel and entertainment.
Results Of Operations
The following table sets forth (i) publishing and film revenues and (ii) cost of
sales, film amortization, selling, general and administrative expense as a
percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------- ---------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
Publishing ............... 28% 44% 43% 56%
Film & television ........ 72 56 57 44
--- --- --- ---
Total .................. 100% 100% 100% 100%
--- --- --- ---
Operating expenses
Cost of sales - Publishing 26% 25% 49% 46%
Cost of sales - Film &
television ............. 64 40 57 32
Selling, general &
administrative.......... 32 39 56 39
Employee separation costs -- -- 13 --
--- --- --- ---
Total .................. 122% 104% 175% 117%
--- --- --- ---
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1996
PUBLISHING
Revenues. Net publishing revenues for the three months ended September
30,1997 decreased $771,000 to $1,710,000, compared with $2,481,000 for the three
months ended September 30, 1996. The decrease was primarily attributable to
lower sales of printed book following a reduction in the book publishing program
announced in the second quarter of 1997 and lower sales of audio book product
due to liquidity restrictions on working capital affecting the Company's ability
to publish product during the quarter ended September 30, 1997. In addition,
such working capital constraints have affected planned releases of new titles
for the balance of the year. 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 sold to the public. Although the Company makes
allowances and reserves for returned product that it believes are adequate,
significant increases in return rates can materially and adversely impact the
Company's financial condition or results of operations.
Cost of Sales. Cost of sales for the three months ended September 30, 1997
increased $208,000 to $1,599,000 compared with $1,391,000 for the prior year.
The increase was mostly attributable to the write-off of $606,000 in production
costs in respect of canceled audio book and printed book titles during the
period. Cost of sales as a percentage of net publishing revenues increased from
56% in the period ended September 30, 1996 to 94% for the three months ended
September 30, 1997.
FILM AND TELEVISION
Revenues. Film and television revenues for the three months ended September
30, 1997 increased $1,386,000 to $4,499,000, compared with $3,113,000 for the
same period in the prior year. The increase was primarily attributable to the
inclusion of revenues arising from delivery of the television movie, "Unwed
Father" in the third quarter of 1997.
Cost of Sales. Film and television amortization for the three months ended
September 30, 1997 increased $1,722,000 to $3,985,000, compared with $2,263,000
for the same period last year. Cost of
20
<PAGE> 22
sales as a percentage of net film and television revenues increased from 73% in
the period ended September 30, 1996 to 88% for the three months ended September
30, 1997 in accordance with the costs of production of "Unwed Father".
GENERAL
Gross Profit. Gross profit for the three months ended September 30, 1997 was
$625,000, a reduction of $1,315,000 compared with $1,940,000 for the same period
last year due to the lower revenues and gross margin in publishing discussed
above.
Selling, General and Administrative. Selling ("SG&A"). SG&A includes 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 decreased 18% to $1,993,000 for the three
months ended September 30, 1997 compared to $2,176,000 for the same period last
year. The decrease in SG&A was attributable to lower SG&A costs as a result of a
cost savings program implemented in the second quarter of 1997. The cost savings
are primarily in the form of a reduction in salaries, traveling and
entertainment, expenses, professional fees and occupancy costs.
Net Interest Expense. Net interest expense for the three months ended
September 30, 1997 was $92,000, compared to net interest expense of $75,000 for
the same period in the prior year. This is primarily due to the infusion of
equity into the Company in June 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
PUBLISHING
Revenues. Net publishing revenues for the nine months ended September 30,
1997 decreased $3,570,000 to $3,746,000 compared with $9,026,000 for the nine
months ended September 30, 1996. The decrease was primarily attributable to a
delay in the planned new release of most printed book titles, as well as some
audio titles, due to working capital constraints and high returns of printed
book throughout the period and audio book product during the three months ended
March 31, 1997. Furthermore, working capital constraints have affected planned
releases of new titles for the balance of the year. 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 sold to the public.
Although the Company makes allowances and reserves for returned product that it
believes are adequate, significant increases in return rates can materially and
adversely impact the Company's financial condition or results of operations.
Cost of Sales. Cost of sales for the nine months ended September 30, 1997
decreased $1,181,000 to $6,228,000 compared with $7,409,000 for the prior year.
The decrease was mostly attributable to the decrease in revenues for the period.
Cost of sales as a percentage of net publishing revenues increased from 82% in
the nine months ended September 30, 1996 to 114% for the nine months ended
September 30 1997 due primarily to the effect of fixed elements of cost of
sales, such as product development expense, being spread over a lower revenue
base, and a reduction in future sales estimates for a number of titles, a charge
of $564,000 made to cost of sales in the second quarter of 1997 following the
decision to discontinue the Dove Kids and Video Books lines, and the write-off
of $606,000 due to the cancellation of product under development in the third
quarter of 1997.
FILM AND TELEVISION
Revenues. Film and television revenues for the nine months ended September
30, 1997 increased $6,000 to $7,173,000, compared with $7,167,000 for the same
period in the prior year. Revenues in the nine months to September 1997
benefited from the acquisition of Dove Four Point late in April 1996.
Cost of sales. Film and television amortization for the nine months ended
September 30, 1997 increased $2,012,000 to $7,212,000, compared with $5,200,000
for the same period last year. Cost of
21
<PAGE> 23
sales as a percentage of net film and television revenues increased from 72% in
the period ended September 30, 1996 to 100% for the nine months ended September
30, 1997, due to cost overages on certain film projects as well as the write off
of $590,000 in production costs arising from an assessment of film net
realizable values in the second quarter of 1997.
GENERAL
Gross Profit. The Company experienced a gross loss of $611,000 for nine
months ended September 30, 1997 versus a gross profit of $3,584,000 for the same
period last year, resulting from the matters previously discussed regarding
publishing and film revenues and cost of sales.
Selling, General and Administrative. 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 increased 9% to $7,040,000 for the nine months
ended September 30, 1997 compared to $6,279,000 for the same period last year.
The increase in SG&A was mostly attributable to the acquisition of Dove Four
Point in late April of 1996 partially offset by cost savings implemented late in
the second quarter of 1997. On June 10, 1997, the Former Principals resigned as
officers and directors of the Company following the sale to MEI of their
Preferred Stock and certain Common Stock in the Company. As a result of this
change, the Company has expensed $1,614,000 in employee separation costs
representing contracted payments to the Former Principals in their employment
capacity together with associated costs. The contracted payments to the Former
Principals are payable over the next five years in approximately equal monthly
installments.
Net Interest Expense. Net interest expense for the nine months ended
September 30, 1997 was $285,000 and $81,000 for the same period in the prior
year. This is primarily the result of the utilization of funds and the
assumption or incurrence of debt in connection with the acquisition of Dove Four
Point and purchase of the Company's new office building (See also, Notes Payable
- - Note 6) and the operating cash losses experienced during 1996 and 1997.
Liquidity And Capital Resources
The Company's operations, in general, are 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. The Company
plans to expand its audio publishing, television production and film &
television distribution activities and 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, from additional debt or equity financings from
outside sources, or from other financing arrangements. 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 television and 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 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.
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
22
<PAGE> 24
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, and cash generated from operations. In March 1997, the Company
entered into an agreement with MEI and the Former Principals for an equity
investment of approximately $6,000,000 through the sale of Preferred Stock and
warrants to purchase Common Stock of the Company in a private placement. In the
first of two closings, the Company received an aggregate of $3,920,000
(including the contribution of $676,000 payable by the Company to the Former
Principals) and in a second closing completed May 31, 1997 received an
additional $2,000,000. See Note 9 of Notes to Consolidated Financial Statements.
In October 1996 Morgan Fuller completed a loan to the Company in the aggregate
amount of $800,000. Such loan bore interest at the rate of 10% per annum. In
March 1997, the Company retired $500,000 of such loan from Morgan Fuller in
exchange for 210,526 shares of Common Stock along with warrants to purchase
35,088 shares of Common Stock at $2.50 per share, warrants to purchase 35,088
shares of Common Stock at $3.50 per share and warrants to purchase 35,087 shares
of Common Stock at $4.50 per share. The balance of the loan plus accrued
interest was repaid in cash.
On September 17, 1996, the Company's registration statement on Form S-3,
registering 2,335,000 shares of Common Stock then outstanding or issuable upon
exercise of certain warrants, was declared effective by the Securities and
Exchange Commission.
In connection with the acquisition of Four Point, which was completed on April
29, 1996, the Company guaranteed certain term debt and a $1 million revolving
line of credit of Four Point from Sanwa Bank. Such term loan originally was
scheduled to mature on October 3, 1998 and the line of credit, which had an
original maturity of June 3, 1996, was extended to July 15, 1996. On August 16,
1996, the Company and Sanwa Bank entered into a term loan agreement to refinance
such debt and line of credit for an aggregate amount of approximately
$1,365,000. On September 1, 1996, the Company began making principal and
interest payments based on a five year amortization schedule. All unpaid
principal and interest matured on August 1, 1997 and the Company received a
deferral of the repayment of all unpaid principal and interest until October 31,
1997 from Sanwa Bank. The term loan had various covenants with which the Company
was required to adhere, including minimum tangible net worth, current ratio,
debt service coverage ratio, and debt to net worth ratio and restrictions on
mergers or acquisitions. The Company was not in compliance with certain of such
financial covenants as of September 30, 1997. The Sanwa Bank loan was secured by
substantially all of the Company's assets, other than the Company's building,
and the Former Principals and Dove Four Point guaranteed such facility. On
November 12, 1997, the Sanwa Bank loan was repaid in full with the proceeds from
a loan facility provided by The Chase Manhattan Bank.
In April 1996 the Company refinanced its $1,900,000 mortgage note which the
Company borrowed from the seller in connection with the acquisition of its new
office building. The new loan from Asahi Bank of California is secured by a deed
of trust on such building and such loan 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
Ltd. to acquire the distribution rights to the theatrical film "Wilde" in all
media throughout the United States and Canada (excluding French-speaking Canada)
and the exclusive worldwide print, audio and interactive rights. Under the
agreement the Company is required to pay sums totaling 1,333,333 British Pounds
Sterling (approximately $2,000,000) over the 12 months subsequent to the
agreement for such rights. As of September 30, 1997, approximately $15,000
remained unpaid and interest at a rate of 2% per annum plus
23
<PAGE> 25
Pound Sterling LIBOR payable will be payable thereon from April 2, 1997 until
repayment, calculated on a daily basis.
In October 1996 the Company entered into a financial advisory agreement with
Morgan Fuller pursuant to which Morgan Fuller agreed to provide certain
financial advisory services for the Company. As compensation for such services,
the Company granted to Morgan Fuller warrants to purchase for a period of three
years from the date thereof, up to 180,000 shares of Common Stock of the Company
at an exercise price of $2.75 per share.
Publishing accounts receivable, net of sales returns, generally are to be paid
pursuant to a specified payment formula, as defined in the relevant agreements.
The Company's distribution agreements typically provide for a distribution of
certain bad debt risk between the Company and its distributors.
The Company has received notice from its primary audio book and printed book
distributor of discontinuance of distribution on behalf of the Company effective
December 31, 1997. Since September 30, 1997, the Company has entered into
discussions with potential distributors with a planned implementation by
December 31, 1997.
The Company has historically experienced significant negative cash flows from
operations, including $2,599,000 for the quarter ended September 30, 1997 - see
"Financial Statements of the Company - Consolidated Statements of Cash Flows."
If the Company is unable to realize anticipated revenues or if the Company
incurs costs inconsistent with anticipated levels, the Company would either need
to obtain additional financing (including possibly through the sale of debt or
equity securities, by obtaining additional bank financing or through the sale of
certain assets), limit its commitments to new projects or possibly curtail its
current operations. 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. There is no assurance that any such
additional sources of working capital will be available on acceptable terms.
Inflation
The Company does not believe its business and operations have been materially
affected by inflation.
24
<PAGE> 26
PART II -- OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
See Note 8 to the Consolidated Financial Statements.
ITEM 2 CHANGES IN SECURITIES
As discussed in Note 8 - Commitments and Contingencies, in October 1997, the
Company issued 66,667 shares of Common Stock to Shukri Ghalayini in settlement
of certain claims against the Company. As discussed in Note 9 - Capital
Activities, in August 1997, the Company issued 200,000 shares of Common Stock to
a substantial shareholder for further rights to future titles and certain rights
to past titles. All of such shares were issued in reliance on Section 4(2) of
the Securities Act of 1933, as amended.
ITEM 3
See Note 6 to the Consolidated Financial Statements.
ITEMS 4 AND 5
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
27 Financial Data Schedule
(B) REPORTS ON FORM 8-K
Not applicable.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: November 19, 1997 DOVE ENTERTAINMENT, INC.
By /s/ Ronald Lightstone
-------------------------------------
Ronald Lightstone, President,
Chief Executive Officer and Director
Date: November 19, 1997 By /s/ Neil Topham
-------------------------------------
Neil Topham
Chief Financial Officer
25
<PAGE> 27
DOVE ENTERTAINMENT, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<S> <C>
27 Financial Data Schedule.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DOVE
ENTERTAINMENT, INC. FORM 10-Q FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH DOCUMENT.
</LEGEND>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 30,000
<SECURITIES> 0
<RECEIVABLES> 1,886,000
<ALLOWANCES> 738,000
<INVENTORY> 4,287,000
<CURRENT-ASSETS> 8,255,000
<PP&E> 4,789,000
<DEPRECIATION> 1,026,000
<TOTAL-ASSETS> 21,648,000
<CURRENT-LIABILITIES> 9,547,000
<BONDS> 2,661,000
0
2,000
<COMMON> 60,000
<OTHER-SE> 9,778,000
<TOTAL-LIABILITY-AND-EQUITY> 21,648,000
<SALES> 6,209,000
<TOTAL-REVENUES> 6,209,000
<CGS> 5,584,000
<TOTAL-COSTS> 5,584,000
<OTHER-EXPENSES> 1,993,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 92,000
<INCOME-PRETAX> (1,460,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,460,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,460,000)
<EPS-PRIMARY> (0.17)
<EPS-DILUTED> (0.36)
</TABLE>
