<PAGE>
================================================================================
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 MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
COMMISSION FILE NUMBER 0-24984
NEWSTAR MEDIA INC.
(EXACT NAME OF SMALL BUSINESS ISSUER 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)
(310) 786-1600
(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE).
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
----------------
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
State the numbers of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 17,408,898 as of May 12, 1999.
Transitional Small Business Disclosure Format (Check one):
Yes No X
--- ---
================================================================================
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
NEWSTAR MEDIA INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
MARCH 31, 1999
ASSETS
<S> <C>
CURRENT ASSETS
Cash and cash equivalents $ 547,000
Accounts receivable, net of allowances of $1,252,000 2,252,000
Inventory 2,460,000
Film costs 213,000
Due from related party 61,000
Prepaid expenses and other assets 436,000
-----------------
Total current assets 5,969,000
NON-CURRENT ASSETS
Production masters, net 1,636,000
Film costs, net 4,338,000
Property and equipment, net 839,000
Goodwill and other assets 5,692,000
-----------------
Total non-current assets 12,505,000
-----------------
Total assets $ 18,474,000
=================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 4,429,000
Notes payable 8,550,000
Advances and deferred income 256,000
Accrued dividends 102,000
-----------------
Total current liabilities 13,337,000
NON-CURRENT LIABILITIES
Note payable 15,000
Accrued liabilities 544,000
-----------------
Total non-current liabilities 559,000
-----------------
Total liabilities 13,896,000
-----------------
SHAREHOLDERS' EQUITY
Preferred stock $.01 par value; 2,000,000 shares authorized and
220,114 shares issued and outstanding, liquidation preference $6,828,000 2,000
Common stock $.01 par value; 20,000,000 shares authorized and
17,319,289 shares issued and outstanding 173,000
Unearned compensation (212,000)
Additional paid-in capital 36,881,000
Accumulated deficit (32,266,000)
-----------------
Total shareholders' equity 4,578,000
-----------------
Total liabilities and shareholders' equity $ 18,474,000
=================
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE>
<TABLE>
NEWSTAR MEDIA INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<CAPTION>
Three Months Ended March 31,
---------------------------------------
1999 1998
---- ----
<S> <C> <C>
Revenues
Publishing, net $ 1,297,000 $ 1,549,000
Film 125,000 1,144,000
------------------ ------------------
1,422,000 2,693,000
Cost of sales
Publishing 973,000 1,186,000
Film 105,000 944,000
------------------ ------------------
1,078,000 2,130,000
------------------ ------------------
Gross profit 344,000 563,000
Selling, general and administrative expenses 2,364,000 2,179,000
------------------ ------------------
Loss from operations (2,020,000) (1,616,000)
Gain on sale of long-term investment 594,000 --
Interest expense, net (198,000) (147,000)
------------------ ------------------
Loss before income taxes (1,624,000) (1,763,000)
Income tax expense (2,000) --
------------------ ------------------
Net loss $ (1,626,000) $ (1,763,000)
================== ==================
Basic and diluted loss attributable to
common shareholders $ (1,738,000) $ (1,870,000)
================== ==================
Basic and diluted loss per common share $ (.10) $ (.28)
================== ==================
Weighted average number of common
shares outstanding 17,317,000 6,579,000
================== ==================
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
<TABLE>
NEWSTAR MEDIA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<CAPTION>
Three Months Ended March 31,
--------------------------------------
1999 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (1,626,000) $ (1,763,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 168,000 134,000
Amortization of goodwill 60,000 63,000
Amortization of production masters 230,000 473,000
Amortization of film costs 99,000 786,000
Provision for doubtful accounts 36,000 35,000
Gain on sale of long-term investment (594,000) --
Changes in operating assets and liabilities:
Accounts receivable 193,000 (910,000)
Inventory 300,000 170,000
Prepaid expenses and other assets 192,000 (214,000)
Expenditures for production masters (607,000) (354,000)
Film cost additions (6,000) (5,826,000)
Accounts payable and accrued expenses (138,000) (340,000)
Advances and deferred revenue (4,000) 4,336,000
Accrued dividends 102,000 --
Other (6,000) 54,000
----------------- -----------------
Net cash used in operating activities (1,600,000) (3,356,000)
----------------- -----------------
INVESTING ACTIVITIES
Proceeds from sale of long-term investment, net 613,000 --
Purchase of property and equipment (19,000) (82,000)
----------------- -----------------
Net cash provided by (used in) investing activities 594,000 (82,000)
----------------- -----------------
FINANCING ACTIVITIES
Proceeds of bank borrowings 1,200,000 4,691,000
Repayments of bank borrowings (100,000) --
----------------- -----------------
Net cash provided by financing activities 1,100,000 4,691,000
----------------- -----------------
Net increase in cash and cash equivalents 94,000 1,253,000
Cash and cash equivalents at beginning of the period 453,000 302,000
----------------- -----------------
Cash and cash equivalents at end of the period $ 547,000 $ 1,555,000
================= =================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
<TABLE>
NEWSTAR MEDIA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
<CAPTION>
Three Months Ended March 31,
--------------------------------------
1999 1998
---- ----
<S> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 198,000 $ 147,000
NON-CASH TRANSACTIONS
Common stock issued as payment for consulting fees
to related party $ -- $ 300,000
Preferred stock dividends accrued $ 112,000 $ 107,000
Preferred stock dividends paid in common stock $ 10,000 $ --
Preferred stock issued as payment for
expenses, loans and commissions payable
to former officers of the Company $ 27,000 $ --
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
NEWSTAR MEDIA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION, ORGANIZATION AND BUSINESS
The accompanying consolidated financial statements of NewStar Media Inc. (the
"Company") are unaudited and have been prepared by the Company pursuant to the
rules and regulations of the Securities and Exchange Commission regarding
interim financial reporting. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements and should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-KSB, for the fiscal year ended December 31, 1998. In
the opinion of management, the accompanying consolidated financial statements
include all adjustments (consisting only of normal recurring adjustments) which
are necessary for a fair presentation. The results of operations for the three
months ended March 31, 1999 are not necessarily indicative of results to be
expected for the full year.
NewStar Media Inc. is a diversified entertainment company primarily engaged in
the publication of audio and printed books, the production of television
programming and the distribution of feature films and television product, both
domestically and internationally. The Company commenced business in 1985 and
changed its name from Dove Entertainment, Inc. to NewStar Media Inc. in May
1998.
Through the NewStar Publishing division, the Company produces and distributes
audio books and publishes printed books. Through Dove Four Point, Inc. and
NewStar Television Inc. (collectively "NewStar Television"), wholly owned
subsidiaries of the Company, the Company is engaged in the production and
development of television programming. NewStar Worldwide Inc. (NewStar
Worldwide"), a wholly owned subsidiary of the Company, is engaged in the
distribution of feature films and television programming.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NET LOSS PER COMMON SHARE
SFAS No. 128 replaces Accounting Principles Board Opinion ("APB") No. 15 and
simplifies the computation of earnings per share ("EPS") by replacing the
presentation of primary EPS with a presentation of basic EPS. Basic EPS includes
no dilution and is computed by dividing income available to common stockholders
by the weighted average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution from securities that could share in
the earnings of the Company. Dilutive securities have been omitted from the
diluted calculation where they are anti-dilutive.
The net loss utilized in the calculation of basic loss per common share is
increased by the following:
Three Months Ended March 31,
--------------------------------
1999 1998
---- ----
Accrued dividends on Preferred Stock $ 112,000 $ 107,000
STOCK-BASED COMPENSATION
The Company has a stock incentive plan (the "Plan") which authorizes the
granting of stock incentive awards ("Options") to qualified officers, employee
directors, key employees and third parties providing valuable services to the
Company. The company accounts for the Plan in accordance with SFAS No. 123,
"Accounting for Stock-Based Compensation", which permits entities to recognize
as expense over the vesting period the fair value of all Options on the date of
grant or, alternately, allows entities to continue to apply the provisions of
APB Opinion No. 25 and provide pro 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 apply the provisions of APB Opinion No. 25 in accounting
for its Plan, and accordingly, no compensation cost has been recognized.
6
<PAGE>
Had the Company determined compensation cost based on the fair value at the
grant date for its Options under SFAS No. 123, the Company's net loss would have
been increased to the pro forma amounts indicated below:
Three Months Ended March 31,
--------------------------------
1999 1998
---- ----
Net loss attributable to common shareholders
As reported $ (1,738,000) $ (1,870,000)
Pro forma $ (1,760,000) $ (1,870,000)
Net loss per share
As reported $ (.10) $ (.28)
Pro forma $ (.10) $ (.28)
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.
RECLASSIFICATION
Certain prior year accounts have been reclassified to conform to the current
year's presentation.
NOTE 3 - 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.
SFAS No. 109 requires that a valuation allowance be recorded against tax assets
which are not likely to be realized. Due to the uncertainty of their ultimate
realization based upon past earnings performance and the expiration dates of
carryforwards, the Company has established a valuation allowance against these
tax assets except to the extent that they are realizable through carrybacks.
Realization of additional amounts is entirely dependent upon future earnings in
specific tax jurisdictions. While the need for this valuation allowance is
subject to periodic review, if the allowance is reduced, the tax benefits of the
carryforwards will be recorded in future operations as a reduction of the
Company's income tax expense. At March 31, 1999, the Company had net deferred
tax assets of approximately $11,640,000 against which a valuation allowance had
been fully recorded.
NOTE 4 - RELATED PARTY TRANSACTIONS
Pursuant to an employment termination agreement entered into in 1997
("Termination Agreement") with then principal shareholders and officers of the
Company ("Former Principals"), the Company paid such Former Principals $27,000
during the quarter ended March 31, 1999 in the form of Series E Preferred Stock
for payments due by the Company in January. The Termination Agreement provides
for the Former Principals to receive combined monthly payments (the "Payments")
of approximately $27,000, and medical insurance for 60 months from September
1997. In addition, they are entitled to each receive a car allowance for 24
months from September 1997 and reimbursement for certain medical and business
expenses. The Company did not make Payments in February and March of 1999. The
Former Principals are entitled to receive Series E Preferred Stock in lieu of
such Payments but have chosen not to accept the Series E Preferred Stock.
7
<PAGE>
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 be released to the
Former Principals only if the Company does not make a Payment in cash. If the
Company does not make a Payment in cash, the Series E Preferred Stock may be
released to the Former Principals, as the case may be, in an amount equal to the
portion of the Payments unpaid divided by the stated value of the Series E
Preferred Stock. The Former Principals have registration rights pursuant to a
registration rights agreement, dated September 10, 1997, among the Company and
the Former Principals with respect to common stock into which Series E Preferred
Stock received by them may be converted.
During the three months ended March 31, 1998, the Company made certain payments
and entered into other transactions with the Former Principals and former
directors as more fully described in the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1998.
Media Equities International, LLC ("MEI") is a limited liability company, the
principals of which are Terrence Elkes, Kenneth Gorman, John T. Healy, Ronald
Lightstone and Bruce Maggin. Mr. Elkes is Chairman of the Board of the Company,
Mr. Gorman is Vice-Chairman of the Board, Mr. Lightstone is a director and
President and Chief Executive Officer of the Company and Messrs. Healy and
Maggin are directors of the Company.
The Company accrued the following fees payable to MEI:
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------
1999 1998
---- ----
<S> <C> <C>
Consulting fees pursuant to consulting agreement $ -- $ 75,000
Guarantee fees pursuant to guarantee of Chase Bank loan facility 12,500 --
---------------- ----------------
Total $ 12,500 $ 75,000
================ ================
</TABLE>
The Company issued the following shares of Common Stock at fair market value to
MEI in respect of consulting and guarantee fees:
Date of Issue Number of Shares Amount of Fees
------------- ---------------- --------------
January 2, 1998 240,000 $300,000
Pursuant to guarantee agreements dated November 4, 1997, each of the principals
of MEI had collectively guaranteed $1,283,000 and Messrs. Elkes, Gorman and
Lightstone had collectively guaranteed $287,000 against borrowings under the
Company's loan facility with Chase Bank ("Chase Loan") to the extent such
borrowing exceed the borrowing base as defined in the Chase Loan ("Borrowing
Base"). At March 31, 1999, utilization of the Chase Loan exceeded the Borrowing
Base by $1,283,000. In order to secure the repayment of any amounts the MEI
principals may be required to pay to Chase Bank under the guarantees, MEI has
been granted a security interest in substantially all of the assets of the
Company. Such security interest is junior to the security interest of Chase Bank
which secures the Company's obligations under the Chase Loan.
8
<PAGE>
During the second quarter of 1999, in connection with the drafting of certain
amendments and waivers to the Chase Loan, the Company has reached an agreement
in principal with MEI for a modification of the guarantee agreement to provide
for a revised guarantee of $2,000,000. In consideration of the modification of
the guarantee agreement, the Company has agreed to enter into an agreement to
extend the warrants currently held by MEI for one year and to amend the terms
thereof to permit a "cashless exercise" of such warrants.
NOTE 5 - NOTES PAYABLE
Notes payable at March 31, 1999 consist of the following:
Chase Manhattan Bank revolving credit loan $ 8,534,000
Other 31,000
-----------------
Total notes payable $ 8,565,000
=================
Maturity of notes payable:
Year Ending December 31,
1999 $ 16,000
2000 8,549,000
-----------------
$ 8,565,000
=================
On November 12, 1997, the Company entered into an agreement with Chase Bank
providing the Company with an $8,000,000 loan facility for working capital
purposes ("Chase Loan"). In May 1998, the Chase Loan was increased to
$10,000,000 with the other terms of the original agreement remaining
substantially the same. The Chase Loan is secured by substantially all of the
Company's assets. The Chase Loan runs for three years until November 4, 2000.
The Chase Loan establishes a "Borrowing Base" comprised of: (1) 35% of an
independent valuation of the Company's audio library, (2) 85% of the Company's
eligible receivables and (3) 30% of the Company's finished goods audio and book
inventory. At any time, the Company may borrow up to the Borrowing Base. In
addition, the Company may borrow or have letters of credit issued for a further
$4,000,000 provided the aggregate amount borrowed does not exceed $10,000,000,
and with the consent and guarantee of Media Equities International, LLC ("MEI"),
a significant shareholder of the Company. The Chase Loan provides for interest
at the bank prime rate (7 3/4% at March 31, 1999) plus 2% per annum or the
bank's LIBOR rate (5.12% six-month rate at December 31, 1998) plus 3% per annum,
at the option of the Company. Both rates are applicable to Company draw-downs on
the Chase Loan at March 31, 1999. In addition, unused commitment fees are
payable at 1/2% per annum. The Chase Loan contains various covenants to which
the Company must adhere including limitations on additional indebtedness,
investments, acquisitions, capital expenditures and sale of assets, restrictions
on the payment of dividends and distributions to shareholders, and various
financial compliance tests.
The Company was not in compliance with certain of the financial compliance tests
at December 31, 1998 and March 31, 1999 and has requested waivers from Chase
Bank. As of May 19, 1999, the Company has not received any such waivers and
although the Company and Chase Bank are in the process of drafting amendments
and waivers to the Chase Loan, there is no assurance that the Company will
actually receive such amendments and waivers. Accordingly, the Company has
continued to classify Notes Payable to Chase Bank as a current liability as of
March 31, 1999. At March 31, 1999, the Company had borrowed $8,534,000 against
the facility and had $1,466,000 of available funds for borrowing. In addition,
Chase Bank had provided a letter of credit for $287,000 in respect of certain
litigation. On January 28, 1999, the Company and Chase Bank were notified by one
of the principals of MEI that there would be no approvals for guarantees of
further extensions of credit under the Chase Loan. Accordingly, as of January
28, 1999, the Company had borrowed the maximum amount permitted to be borrowed
under the Chase Loan. In connection with the drafting of certain amendments and
waivers to the Chase Loan, the Company has reached agreement with MEI for an
extension and modification of the guarantee agreement to provide for a revised
guarantee of $2,000,000.
In connection with the granting of certain waivers and amendments, Chase Bank
has required that the Company raise a minimum of $4.1 million of new equity. As
of May 19, 1999, the Company has received $2,461,000 in new equity through
several private placements. The Company believes it will meet Chase Bank's
requirement, however, there is no assurance that the Company will raise $4.1
million of new equity.
9
<PAGE>
NOTE 6 - CAPITAL ACTIVITIES
COMMON STOCK
During the three months ended March 31, 1999, the Company issued the following
shares of Common Stock:
Number of Shares Consideration
---------------- -------------
18,089 Preferred stock dividend, $10,000.
During the three months ended March 31, 1999 the Company issued 27 shares of
Series E Preferred Stock pursuant to the Termination Agreement.
As of May 19, 1999, the Company was committed to issue 1,997,780 shares of
common stock in exchange for $2,461,000 through several private placements.
STOCK OPTIONS AND WARRANTS
On January 6, 1998, the Board approved the issuance of 601,500 options under the
Plan to employees, such options being issued in July 1998.
Options outstanding under the Plan at March 31, 1999 were as follows:
Weighted
Average
Number of Exercise Exercise
Shares Price Price
--------- -------- ---------
587,500 $1.50 - $6.00 $1.71
At March 31,1999, options to acquire 364,163 shares of Common Stock under the
Plan were exercisable.
Warrants outstanding at March 31, 1999 were as follows:
Number of Weighted
Equivalent Average
Shares Exercise Price Exercise Price
---------- -------------- --------------
4,664,013 $2.00 - $12.00 $5.05
At March 31, 1999 all warrants to acquire shares of Common Stock were
exercisable.
10
<PAGE>
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.
FORWARD LOOKING STATEMENTS
Certain statements in this report, including those utilizing the phrases "will",
"expects", "intends", "estimates", "contemplates", and similar phrases, are
"forward-looking" statements (as such term is defined in Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended), including statements regarding, among other items, (i)
the Company's growth strategy, (ii) the Company's intention to acquire or
develop additional audio book, printed book and television product, (iii) the
Company's intention to enter or broaden distribution markets, and (iv) the
Company's ability to successfully implement its business strategy. Certain, but
not necessarily all, of such forward-looking statements can be identified by the
use of forward-looking terminology such as "believes", "expects", "may", "will",
"should", or "anticipates" or the negative thereof or other variations thereon
or comparable terminology, or be discussions of strategy that involve risks and
uncertainties. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
and achievements of the Company and its subsidiaries to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, but are not limited to,
the following: uncertainty as to future operating results; growth and
acquisition risks; certain risks relating to the entertainment industry;
dependence on a limited number of projects; possible need for additional
financing; potential for liability claims; dependence on certain outlets for
publishing product; competition and legal proceedings and claims. Other factors
which may materially affect actual results include, among others, the following:
general economic and business conditions, industry capacity, changes in
political, social and economic conditions and various other factors beyond the
Company's control. The Company does not undertake and specifically declines any
obligation to publicly release the results of any revisions which may be made to
any forward-looking statements to reflect events or circumstances after the date
of such statements or to reflect the occurrence of anticipated or unanticipated
events. See the relevant discussions elsewhere herein, in the Company's
registration statement on Form S-3 (Registration No. 333-43527) and in the
Company's periodic reports and other documents filed with the Securities and
Exchange Commission for further discussions of these and other risks and
uncertainties applicable to the Company and its business.
OVERVIEW
The Company 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 approximately 1,400 titles currently offered
for sale. Additionally, 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 programming.
Revenues for the quarter ended March 31, 1999 were $1,422,000 compared with
$2,693,000 for the same period in 1998. Net loss for the quarter was $1,626,000
compared to a net loss of $1,763,000 for the same period in 1998.
The decrease in revenues for the quarter ended March 31, 1999 was primarily a
result of reduced television revenues due to timing of the delivery of
television motion pictures and a reduced level of audio books released in the
current quarter. The increase in loss from operations for the quarter was
primarily due to such reduced revenues. These items were offset substantially by
the sale of the Company's long-term investment in the Empire Studios.
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.
11
<PAGE>
Substantially all of the Company's sales of audio and printed 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.
The Company has a number of television concepts under development including
several television motion pictures, a reality series and one producer-for-hire
television comedy series. While the overall television market continues to
expand with the growth of new networks and cable channels, increasingly,
networks are striving to acquire full ownership rights to new product as
distinct from the traditional license basis. Consequently, the Company's focus
in the development of television product is to link high-profile event type
projects with high-profile talent that will be attractive to networks on a
license basis.
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 motion pictures and mini-series by pre-sales and licensing to third
parties. The production of television programming 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 television programming
revenues due to the variable demand for content from broadcast and cable
networks.
RESULTS OF OPERATIONS
The following table sets forth divisional revenues and operating expenses as a
percentage of total revenues:
Three Months Ended March 31,
--------------------------------
1999 1998
---- ----
REVENUES
Publishing 91 % 58 %
Television and film 9 42
------------ ------------
Total 100 % 100 %
------------ ------------
OPERATING EXPENSES
Publishing 69 % 44 %
Television and film 7 35
Selling, general & administrative 166 81
------------ ------------
Total 242 % 160 %
------------ ------------
QUARTER ENDED MARCH 31, 1999 COMPARED TO QUARTER ENDED MARCH 31, 1999
- ---------------------------------------------------------------------
Publishing
- ----------
REVENUES. Net publishing revenues for the quarter ended March 31, 1999 decreased
$252,000 to $1,297,000 compared with $1,549,000 for the quarter ended March
31, 1998 with the decrease being primarily attributable to a lower volume of new
titles published. Leading audio book publications during the current quarter
included THE WARREN BUFFET PORTFOLIO by Robert G. Hagstrom, HUSH MONEY by Robert
B. Parker and BREACH OF DUTY by J. A. Jance.
COST OF SALES. Cost of sales for the quarter ended March 31, 1999 decreased
$213,000 to $973,000 from $1,186,000 for the quarter ended March 31,1998. The
decrease was attributable to a decrease in the number of audio books published
and lower production and distribution costs. Cost of sales as a percentage of
net publishing revenues of 75% in the quarter ended March 31, 1999 was
comparable to the 77% for the quarter ended March 31, 1998.
Film and Television
- -------------------
REVENUES. Film and television revenues for the quarter ended March 31, 1999
decreased $1,019,000 to $125,000 from $1,144,000 for the quarter ended March 31,
1998. The decrease was primarily due to the absence in the first quarter of 1999
of the delivery of newly produced programming as compared to the same quarter
last year.
12
<PAGE>
COST OF SALES. Film and television amortization for the quarter ended March 31,
1999 decreased $839,00 to $105,000 from $944,000 for the quarter ended March 31,
1998. The decrease was attributable to the decline in film and television
revenues mentioned previously. Cost of sales as a percentage of net film and
television revenues was 84% and 83% for the quarters ended March 31, 1999 and
1998, respectively.
General
- -------
GROSS PROFIT. The Company experienced a gross profit of $344,000 for the quarter
ended March 31, 1999 compared to $563,000 for the quarter ended March 31, 1998,
resulting from the matters previously discussed regarding publishing and film
revenues and cost of sales.
SELLING, GENERAL AND ADMINISTRATIVE ("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 increased to $2,364,000 for the quarter ended
March 31, 1999 from $2,179,000 for the quarter ended March 31, 1998.
NET INTEREST EXPENSE. Net interest expense for the quarter ended March 31, 1999
was $198,000 compared with $147,000 for the quarter ended March 31, 1998. The
increase in net interest expense is primarily the result of increased
utilization of the Chase Loan.
LIQUIDITY AND CAPITAL RESOURCES
On November 12, 1997, the Company entered into an agreement with Chase Bank
providing the Company with an $8,000,000 loan facility for working capital
purposes ("Chase Loan"). This facility was increased in July 1998 to
$10,000,000. The Chase Loan is secured by substantially all of the Company's
assets. The Chase Loan terminates on November 4, 2000. The Chase Loan
establishes a "Borrowing Base" comprising: (1) 35% of an independent valuation
of the Company's audio library, (2) 85% of the Company's eligible receivables
and (3) 30% of the Company's finished goods audio and book inventory. At any
time, the Company may borrow or have letters of credit issued up to the
Borrowing Base. In addition, the Company may borrow or have letters of credit
issued for a further $4,000,000 (provided the aggregate amount borrowed does not
exceed $10,000,000) with the consent and guarantee of the principals of MEI. The
Chase Loan provides for interest at the bank prime rate plus 2% per annum or the
bank's LIBOR rate plus 3% per annum, at the option of the Company. In addition,
unused commitment fees are payable at 1/2% per annum. The Chase Loan contains
various covenants to which the Company must adhere including limitations on
additional indebtedness, investments, acquisitions, capital expenditures and
sale of assets, restrictions on the payment of dividends and distributions to
shareholders, and various financial compliance tests.
The Company was not in compliance with certain of the financial compliance tests
at December 31, 1998 and March 31, 1999 and has requested waivers from Chase
Bank. As of May 19, 1999, the Company has not received any such waivers and
although the Company and Chase Bank are in the process of drafting amendments
and waivers to the Chase Loan, there is no assurance that the Company will
actually receive such amendments and waivers. Accordingly, the Company has
continued to classify Notes Payable to Chase Bank as a current liability as of
March 31, 1999. At March 31, 1999, the Company had borrowed $8,534,000 against
the total facility of $10,000,000. In addition, Chase Bank had provided a letter
of credit for $287,000 in respect of certain litigation. On January 28, 1999,
the Company and Chase Bank were notified by one of the principals of MEI that
there would be no approvals for guarantees of further extensions of credit under
the Chase Loan. Accordingly, as of January 28, 1999, the Company had borrowed
the maximum amount permitted to be borrowed under the Chase Loan. In connection
with the drafting of certain amendments and waivers to the Chase Loan, the
Company has reached agreement with MEI for an extension and modification of the
guarantee agreement to provide for a revised guarantee of $2,000,000.
The Company has experienced significant negative cash flows from operations,
including $10,659,000 for the year ended December 31, 1998 and $1,600,000 for
the three months ended March 31, 1999 - see "Financial Statements of the Company
Consolidated Statements of Cash Flows". Such negative cash flows have resulted
from, among other things, losses from operations, use of working capital for
expansion of audio and printed book publishing, development of television
programming and the acquisition of theatrical motion picture product. The
Company plans to significantly increase the level of activity in both its audio
book and television production operations. In addition, the Company has plans to
expand its development, production and distribution activities, including the
expansion of its publishing and television operations (although there is no
assurance that the Company will expand or that such expansion will be
13
<PAGE>
profitable). Such expansion may include future acquisitions of library product
or other assets complementary to its current operations or acquisitions of
rights involving significantly greater outlays of capital than required in the
business conducted to date by the Company. In the event that additional working
capital is not obtained or not obtained in sufficient amounts, the Company's
operations may be significantly curtailed.
The Company's television production activities can affect its capital needs in
that the revenues from the initial licensing of television programming may be
less than the associated production costs. The ability of the Company to cover
the production costs of particular programming is dependent upon the
availability, timing and the amount of fees obtained from distributors and other
third parties, including revenues from foreign or ancillary markets where
available. In any event, the Company from time to time is required to fund at
least a portion of its production costs, pending receipt of programming
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 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, including bank financing. There is no assurance
that any such additional financing will be available on acceptable terms. If the
Company is unable to obtain such financing, it may be required to reduce or
curtail certain operations.
In order to obtain rights to certain properties for the Company's publishing and
television operations, the Company may be required to make advance cash payments
to sources of such properties, including book authors and publishers. While the
Company generally attempts to minimize the magnitude of such payments and to
obtain advance commitments to offset such payments, the Company is not always
able to do so and there is no assurance it will be able to do so in the future.
Between April 1, 1999 and May 19, 1999, the Company committed to issue
approximately 1,997,780 shares of common stock in exchange for $2,461,000
through several private placements. An additional amount of approximately,
$1,500,000 in exchange for 1,250,000 shares of common stock is expected to be
received by May 31,1999.
As of May 19, 1999 the Company's unused sources of funds consisted primarily of
approximately $1,199,000 in cash.
INFLATION
The Company does not believe its business and operations have been materially
affected by inflation.
YEAR 2000
Some of the Company's financial business systems or those of its vendors or
customers may have been written using two digits rather than four, to define the
applicable year. As a result, those systems may have date-sensitive software
that recognizes a date "00" as the year 1900 rather than 2000. If not modified
or updated, this could cause system failure or miscalculations, potentially
resulting in the temporary disruption of operations due to the inability to
process certain transactions.
The Company has contracted with Mercedes Distribution to provide a full
distribution service for its publishing operations. This distribution service
includes complete computer systems needs for distribution of the Company's
publishing operations together with information systems pertaining thereto. If
Mercedes were to experience year 2000 problems, the Company could experience
significant deterioration of operating efficiency. Mercedes Distribution has
represented to the Company that such systems are year 2000 compliant.
The Company utilizes MAS 90, a widely available package system for its financial
systems. The vendor of MAS 90 has represented to the Company that MAS 90 is year
2000 compliant.
14
<PAGE>
The Company has initiated communications with significant suppliers and
customers to determine the extent that they may be vulnerable to their own year
2000 issues. Based on the representations of suppliers and customers contacted,
management does not believe the Company's continued operation is at risk due to
key business partners not addressing the year 2000 issue.
The Company does not believe that year 2000 problems that may be experienced by
its customers, suppliers and vendors (other than Mercedes) would result in a
significant deterioration of operating efficiency. However, until the Company
has completed its evaluation of the year 2000 issue, no assurance can be given
that the Company will avoid deterioration of operating efficiency or programming
costs because of year 2000 problems.
The Company estimates the incremental costs associated with addressing and
fixing potential year 2000 problems to be no more than $25,000.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The discussion in this Item 1 should be read in conjunction with the Company's
Annual Report on Form 10-KSB for the fiscal year ended December 31, 1998, which
contains a description of pending legal proceedings to which the Company is a
party.
On July 6, 1998, a first amended complaint in the action entitled Mattken Corp.
and Gerald J. Leider v. NewStar Media, Inc. was filed in the Los Angeles
Superior Court (BC 191736). The plaintiffs allege breach of contract arising out
of a purported agreement between Mr. Leider and the Company in connection with
executive producer services on the motion picture "Morning Glory", and a
purported sales agency agreement between Mattken Corp. and the Company.
Plaintiffs are seeking in excess of $350,000. In April 1999, the Plaintiffs
unsuccessfully sought to obtain a writ of attachment in respect of their claims.
The Company believes that it has good and meritorious defenses to the action.
Nevertheless, there is no assurance that the Company will prevail in the action.
In addition to the above claims and the claims identified in the Company's
Annual Report on Form 10-KSB for the fiscal year ended December 31, 1998, the
Company is a party to various other routine legal proceedings and claims
incidental to its business.
There can be no assurance that the ultimate outcome of these matters will be
resolved in favor of the Company. In addition, even if the ultimate outcome is
resolved in favor of the Company, involvement in any litigation or claims could
entail considerable cost to the Company and the diversion of the attention of
management, either of which could have a material adverse effect on the business
of the Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
See the discussion in Note 5 of the Notes to Consolidated Financial Statements
in Item 1 of Part I herein which discussion is incorporated by reference in this
Item 3 of Part II.
ITEM 5. OTHER INFORMATION
On April 19, 1999, The Nasdaq Stock Market, Inc. ("Nasdaq") informed the Company
that Nasdaq had determined that the Company was not in compliance with the net
tangible assets/market capitalization/net income requirements pursuant to NASD
Marketplace Rule 4310(c)(2). Also on that date, Nasdaq sent separate
correspondence to the Company in which Nasdaq noted that the Company had
received a "going concern" opinion from its independent auditor, and expressed
concern that, in light thereof, the Company may not be able to sustain
compliance with Nasdaq's continued listing requirements. In connection
therewith, Nasdaq requested information from the Company by May 5, 1999 about
the Company's proposal for achieving compliance with Marketplace Rule 4310(c)(2)
and a timeline for resolution of the items that led to the "going concern"
opinion. On May 5, 1999, the Company submitted its response to Nasdaq. If Nasdaq
does not deem the response sufficient to warrant continued listing, Nasdaq will
immediately issue a formal notice of deficiency which specifies the date that
the Company's common stock would be delisted from the Nasdaq SmallCap Market.
Although the Company believes that it can come into compliance with the
15
<PAGE>
continued listing requirements in a reasonable period of time, there can be no
assurance that it will do so or that the Company's common stock will remain
listed on the Nasdaq SmallCap Market. If the Company's common stock is delisted,
it would likely be more difficult to buy or sell the Company's common stock or
to obtain timely and accurate quotations to buy and sell. In addition, the
delisting process could result in a decline in the trading market for the
Company's common stock which could potentially depress the Company's stock
price, among other consequences.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the quarter ended March 31, 1999.
16
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: May 21, 1999 NEWSTAR MEDIA INC.
By /s/ RONALD LIGHTSTONE
----------------------------------------
Ronald Lightstone, President,
Chief Executive Officer and Director
Date: May 21, 1999 By /S/ JOHN T. BRADY
----------------------------------------
John T. Brady
Chief Financial Officer
17
<PAGE>
NEWSTAR MEDIA INC.
INDEX TO EXHIBITS
Exhibit
Number
- -------------
27 Financial Data Schedule
18
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<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 547
<SECURITIES> 0
<RECEIVABLES> 2252
<ALLOWANCES> 0
<INVENTORY> 2460
<CURRENT-ASSETS> 5969
<PP&E> 839
<DEPRECIATION> 0
<TOTAL-ASSETS> 18474
<CURRENT-LIABILITIES> 13337
<BONDS> 0
0
2
<COMMON> 173
<OTHER-SE> 4403
<TOTAL-LIABILITY-AND-EQUITY> 18474
<SALES> 1422
<TOTAL-REVENUES> 1422
<CGS> 1078
<TOTAL-COSTS> 1078
<OTHER-EXPENSES> 2364
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 198
<INCOME-PRETAX> (1624)
<INCOME-TAX> (2)
<INCOME-CONTINUING> (1626)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1626)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
</TABLE>
