<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
----------------
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
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: 21,612,058 as of May 17, 2000.
Transitional Small Business Disclosure Format (Check one):
Yes [ ] No [X]
================================================================================
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
NEWSTAR MEDIA INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
March 31, 2000
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 511,000
Accounts receivable, net of allowances of $2,023,000 1,719,000
Publishing inventory 1,420,000
Film costs, net 4,951,000
Prepaid expenses and other assets 870,000
-------------
Total current assets 9,471,000
NON-CURRENT ASSETS
Production masters, net 2,568,000
Film costs, net 3,362,000
Property and equipment, net 419,000
Goodwill and other assets 5,413,000
-------------
Total non-current assets 11,762,000
-------------
Total assets $ 21,233,000
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 6,172,000
Notes payable 9,391,000
Advances and deferred income 4,309,000
Due to related party 81,000
Accrued dividends 212,000
-------------
Total current liabilities 20,165,000
SHAREHOLDERS' EQUITY
Preferred stock $.01 par value; 2,000,000 shares
authorized and 220,033 shares issued and
outstanding, liquidation preference $6,984,000 2,000
Common stock $.01 par value; 50,000,000 shares
authorized and 21,612,058 shares issued and
outstanding 216,000
Additional paid-in capital 43,620,000
Accumulated deficit (42,770,000)
-------------
Total shareholders' equity 1,068,000
-------------
Total liabilities and shareholders' equity $ 21,233,000
=============
See accompanying notes to consolidated financial statements
2
<PAGE>
NEWSTAR MEDIA INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31,
-----------------------------
2000 1999
------------- -------------
Revenues
Publishing, net $ 960,000 $ 1,297,000
Filmed entertainment 632,000 125,000
------------- -------------
1,592,000 1,422,000
Cost of sales
Publishing 695,000 973,000
Filmed entertainment 252,000 105,000
------------- -------------
947,000 1,078,000
------------- -------------
Gross profit 645,000 344,000
Selling, general and administrative expenses 2,441,000 2,364,000
Employee separation costs settlement (Note 4) (842,000) -
------------- -------------
Loss from operations (954,000) (2,020,000)
Gain on sale of long-term investment - 594,000
Interest expense, net (244,000) (198,000)
------------- -------------
Income (loss) before income taxes (1,198,000) (1,624,000)
Income tax expense (14,000) (2,000)
------------- -------------
Net loss $ (1,212,000) $ (1,626,000)
============= =============
Loss attributable to common shareholders $ (1,318,000) $ (1,738,000)
============= =============
Basic and diluted loss per common share $ (.06) $ (.10)
============= =============
Weighted average number of common
shares outstanding 21,612,000 17,317,000
============= =============
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,
-----------------------------
2000 1999
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (1,212,000) $ (1,626,000)
Adjustments to reconcile net loss to net cash
provided (used)
Depreciation and amortization 312,000 168,000
Amortization of goodwill 60,000 60,000
Amortization of production masters 192,000 230,000
Amortization of film costs 94,000 99,000
Provision for doubtful accounts -- 36,000
Gain on sale of long-term investment -- (594,000)
Changes in operating assets and liabilities:
Accounts receivable 2,009,000 193,000
Inventory 342,000 300,000
Prepaid expenses and other assets (14,000) 192,000
Expenditures for production masters (229,000) (607,000)
Film cost additions (764,000) (6,000)
Accounts payable and accrued expenses (997,000) (138,000)
Advances and deferred revenue 175,000 (4,000)
Accrued dividends 106,000 102,000
Other (1,000) (6,000)
------------- -------------
Net cash provided (used) by operating activities 73,000 (1,600,000)
------------- -------------
INVESTING ACTIVITIES
Proceeds from sale of long-term investment -- 613,000
Purchase of property and equipment (2,000) (19,000)
------------- -------------
Net cash provided by investing activities 419,000 594,000
------------- -------------
FINANCING ACTIVITIES
Proceeds of bank borrowings 3,020,000 1,200,000
Repayments of bank borrowings and notes payable (2,725,000) (100,000)
Proceeds from modification of warrants 100,000 --
------------- -------------
Net cash provided by financing activities 395,000 1,100,000
------------- -------------
Net increase in cash and cash equivalents 466,000 94,000
Cash and cash equivalents at beginning of the period 45,000 453,000
------------- -------------
Cash and cash equivalents at end of the period $ 511,000 $ 547,000
============= =============
</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,
-----------------------------
2000 1999
------------- -------------
<S> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 162,000 $ 198,000
NON-CASH TRANSACTIONS
Preferred stock dividends accrued $ 106,000 $ 112,000
Preferred stock dividends paid in common stock $ -- $ 10,000
Preferred stock issued as payment for amounts
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 and 10-KSB/A for the fiscal year ended December 31,
1999. The accompanying consolidated financial statements include all adjustments
(consisting only of normal recurring adjustments) which in the opinion of
management are necessary in order to make them not misleading. The results of
operations for the three months ended March 31, 2000 are not necessarily
indicative of results to be expected for the full year. These financial
statements have been prepared assuming that the Company will continue as a going
concern. The Company has suffered recurring losses from operations, has
generated net cash flow deficiencies from operations, including $7,018,000,
$10,659,000 and $8,691,000 for the years ended December 31, 1999, 1998 and 1997,
respectively, and is in violation of certain debt covenants that raise
substantial doubt about the Company's ability to continue as a going concern,
and there can be no assurance that the Company will obtain the financing
necessary to continue operations. The consolidated financial statements do not
include any adjustments that might result from the inability to continue
operations.
NewStar Media Inc. is a diversified entertainment company primarily engaged in
the publication of audio and printed books and related internet services, 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 NewStar Publishing and Internet Services, our audio book publishing
division, the Company has produced and distributed under the Dove Audio imprint
an average of approximately 100 to 120 audio titles annually since its inception
and has built a library of over 1000 audio titles. The Company has also
published printed books through its NewStar Press Division. 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 income/(loss) per common share
is decreased/(increased) by the following:
2000 1999
---- ----
Three months ended March 31,
Accrued dividends on Preferred Stock $ 106,000 $ 112,000
6
<PAGE>
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.
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,
-----------------------------
2000 1999
------------- -------------
Net loss attributable to
As reported $ (1,318,000) $ (1,738,000)
Pro forma $ (1,413,000) $ (1,760,000)
Net loss per share
As reported $ (.06) $ (.10)
Pro forma $ (.07) $ (.10)
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, 2000 the Company had net deferred tax
assets of approximately $15,599,000 against which a valuation allowance had been
fully recorded.
7
<PAGE>
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 Former Principals were to receive combined
monthly payments (the "Payments") of approximately $25,000, and medical
insurance for 60 months from September 1997. The Company did not make Payments
during 2000.
In connection with the Termination Agreement, the Company 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 was to be held in escrow and
released to the Former Principals only if the Company did not make a Payment in
cash. If the Company did not make a Payment in cash, the Series E Preferred
Stock was subject to release to the Former Principals 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 had 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. No Series E Preferred Stock was
released to the former Principals, and no Series E Preferred Stock was
converted, during 2000.
Certain payments under, and other provisions of, the Termination Agreement were
subject to arbitration proceedings. Effective March 31, 2000, the Company
entered into a settlement agreement with the Former Principals ending all the
outstanding litigation and resolving various matters relating to the Termination
Agreement, pursuant to which the Former Principals relinquished any entitlement
to Payments or Series E Preferred Stock. Also, as result of this settlement
agreement, the Company reversed the remaining accrual of $842,000 that it had
established in 1997 in connection with payments due under the Termination
Agreement.
Media Equities International, LLC ("MEI") is a limited liability company, the
principals of which are Terrence A. Elkes, Kenneth F. Gorman, John T. Healy,
Ronald Lightstone and Bruce Maggin. Mr. Elkes is Chairman of the Board of the
Company and Chief Executive Officer, Mr. Gorman is Vice-Chairman, and Messrs
Healy, Lightstone and Maggin are directors of the Company.
During 1999, the Company reorganized the management of the Company whereby all
operating officers report to the Office of the Chief Executive of which Mr.
Elkes is Chairman and Chief Executive Officer and Mr. Gorman is Vice Chairman.
The Company has accrued the following fees payable to MEI:
Three months ended March 31, 2000 1999
------------- -------------
Guarantee fees pursuant to guarantee of
Chase Bank loan facility $ 6,250 $ 12,500
Management fees 75,000 --
Pursuant to guarantee agreements dated November 4, 1997, each of the principals
of MEI had collectively guaranteed $2,000,000 and Messrs. Elkes, Gorman and
Lightstone had collectively guaranteed $188,000 against borrowings under the
Company's loan facility ("Chase Loan") with The Chase Manhattan Bank ("Chase
Bank") to the extent such borrowings exceed the borrowing base as defined in the
Chase Loan ("Borrowing Base"). At March 31, 2000, utilization of the Chase Loan
exceeded the Borrowing Base by $2,737,000 which represented an over advance of
$549,000 against the facility. 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. During the
first week of May 2000, Chase Bank called, and the guarantors paid, $90,000 of
the $188,000 guarantee. The guarantors have sought reimbursement from the
Company, which it has not paid.
8
<PAGE>
The Company entered into a Publishing Agreement with Affinity Communications
Corp. ("Affinity") pursuant to which the Company published "The Libido
Breakthrough: A Doctor's Guide to Restoring Sexual Vigor and Peak Health" by
Stuart W. Fine, M.D. and Brenda Adderly, M.H.A. At the time of the agreement,
Peter Engel was the President of the Company's publishing division, and
controlled and maintained a significant ownership interest in Affinity. In
addition, Mr. Engel is married to Ms. Adderly. The terms of the publishing
agreement are similar to those contained in publishing agreements the Company
enters into with unrelated parties, except as follows: Affinity entered into an
agreement with Rexall Sundown pursuant to which Rexall was to purchase 33,000
copies of the book from Affinity. The Company agreed that Affinity would
purchase such 33,000 copies from the Company at cost plus $25,000. As of March
31, 2000 the Company is due approximately $25,000, net of royalties, from
Affinity.
NOTE 5 - NOTES PAYABLE
Notes payable at March 31, 2000 consist of the following:
Chase Manhattan Bank revolving credit loan $ 9,378,000
Other 13,000
-------------
Total notes payable $ 9,391,000
=============
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. 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. Prior to August
16, 1999, the Chase Loan provided that at any time, the Company could borrow up
to the Borrowing Base. In addition, the Company could borrow or have letters of
credit issued for a further $4,000,000 (provided the aggregate amount borrowed
did not exceed $10,000,000) with the consent and guarantee of the principals of
MEI, a significant shareholder of the Company. On August 16, 1999, the Chase
Loan was amended and restated and currently provides that the Company may borrow
or have letters of credit issued for up to $2,000,000 over the amount of the
Borrowing Base (provided the aggregate borrowed does not exceed $10,000,000)
without the consent or approval of MEI. The Chase Loan provides for interest at
the bank prime rate (9.00% at March 31, 2000) plus 2% per annum or the bank's
LIBOR rate (6.09% rate at March 31, 2000) 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, 2000. 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, March 31, 1999, and June 30, 1999 and requested waivers
from Chase Bank. As of August 16, 1999, the Company had received such waivers
and entered into amendments and waivers to the loan facility with Chase Bank. As
a result of such amendments and waivers, the Company was in compliance with the
aforementioned financial compliance tests. On January 28, 1999, Chase Bank and
we were notified by one of the guarantors that there would be no approvals for
guarantee of further extensions of credit under the Chase Loan. In connection
with the drafting of certain amendments and waivers to the Chase Loan, the
Company reached agreement with the guarantor for an extension and modification
of the guarantee agreement to provide for a revised guarantee of $2,000,000.
At December 31, 1999 and March 31, 2000, the Company was not in compliance with
certain of the financial tests in the Chase Loan and had requested waivers from
Chase Bank. As of May 17, 2000 the Company had not received such waivers and
there is no assurance that it will receive them in the future. Also, at March
31, 2000, the Company had borrowed $9,378,000 against the facility. In addition,
Chase Bank has provided a letter of credit for $188,000 in respect of certain
litigation. The Company has no funds available for borrowing at March 31, 2000
and is overdrawn by $549,000 against the facility.
During the first week of May 2000, Chase Bank paid a $90,000 draw on the letter
of credit and called $90,000 of the $188,000 guarantee. The guarantors have
sought reimbursement from the Company, which it has not paid.
9
<PAGE>
On April 25, 2000, Chase Bank informed the Company that although the bank had
not declared the Company's indebtedness to be immediately due and payable, and
would continue to consider whether to honor borrowing requests, they were
reserving all of their remedies under the facility.
The Company and Chase Bank have been in continuing discussions regarding future
funding, and reached an oral agreement for Chase Bank to fund certain operating
expenses on an interim basis, including the Company's hiring of a consultant to
review strategic options. We have been in need of financing for some time, and
we believe that our current capital resources are not sufficient to cover our
current working capital requirements. There can be no assurance that the Company
will obtain the financing necessary to sustain further operations.
NOTE 6 - AUDIO LITERATURE ACQUISITION
On June 1, 1999, the Company entered into an Asset Purchase Agreement with
American Audio Literature, Inc. ("Audio Literature") whereby the Company
purchased certain assets of Audio Literature including all of its inventory,
production masters, prepaid expenses, sales and customer data, interests in
various contracts, the "Audio Literature" corporate name and certain other
intangible and intellectual properties. The purchase price of such assets
amounted to $1,550,000 and is comprised of 1) $200,000 in cash paid June 1,
1999, 2) $300,000 in cash subject to certain adjustments and payable June 1,
2000, and 3) 300,000 shares of Common Stock ("Closing Shares") issued June 3,
1999 and valued by the Company and Audio Literature for purposes of the
transaction at $3.50 per share. If the Company's common stock does not reach
$3.50 per share on at least one day during the period from June 1, 1999 through
December 31, 2000, the Company will be required to issue additional shares of
common stock to Audio Literature in a number equal to $3.50 minus the average of
the closing prices of the common stock for the ninety consecutive trading days
preceding and including December 31, 2000 ("Reissue Price") divided by the
Reissue Price and multiplied by the number of Closing Shares still held by Audio
Literature on December 31, 2000. In no event will the Reissue Price be less than
$0.50 per share.
The Company has accounted for the assets purchased at fair market value and no
goodwill was recorded in connection with the transaction. Included in the fair
market value of the assets recorded are production masters of $1,110,000 which
are being amortized over a five-year period, ranging form 10% to 30% per year,
consistent with the estimated timing of future revenues to be earned.
Additionally, inventory and prepaid assets of $327,000 were recorded, and
$113,000 was capitalized in connection with the estimated value of Audio
Literature's sales and customer data which is being amortized on a straight-line
basis over five years.
NOTE 7 - CAPITAL ACTIVITIES
The Company did not issue any additional shares of its common stock during the
three months ended March 31, 2000.
STOCK OPTIONS AND WARRANTS
On July 21, 1999 and March 2, 2000, the Board approved the issuance of 1,265,000
and 510,000 options under the Plan to employees, officers and directors, such
options being issued in September 1999 and May 2000, respectively.
Options outstanding under the Plan including those issued in May 2000 were as
follows:
Weighted
Average
Number of Exercise Exercise
Shares Price Price
------ ----- -----
2,333,000 $.88 - $3.75 $1.21
Options to acquire 1,987,003 shares of Common Stock under the Plan were
currently exercisable.
10
<PAGE>
Warrants outstanding at March 31, 2000 were as follows:
Number of Weighted
Equivalent Common Average
Shares Exercise Price Exercise Price
------ -------------- --------------
4,413,838 $.50 - $12.00 $4.69
At March 31, 2000, all warrants to acquire shares of Common Stock were
exercisable.
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 strategy, (ii) the Company's intention to acquire or develop
additional audio book, printed book and television product, (iii) the Company's
intention to obtain financing, 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; 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. 333-82553) 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
NewStar commenced business in 1985 as one of the pioneers of the audio book
industry and has become one of the leading independent publishers (i.e.,
unaffiliated with any major book publishing company) of audio books in the
United States. Through our audio book publishing division, we have produced and
distributed approximately 100 to 120 new titles annually and have built a
library of approximately 1,000 titles currently offered for sale. We have
maintained a limited book publishing program. Although our current backlist
includes more than fifty titles, we have not published, and do not plan to
publish, any books in 2000. Through NewStar Television, we engage in the
production and development of television programming. Through NewStar Worldwide,
we engage in the distribution of feature films and television programming.
11
<PAGE>
1999 proved to be a difficult year for the Company. Although we raised
approximately $4.5 million in capital through a private placement of our common
stock, we lacked sufficient capital to complete the execution of the business
strategies that we put into effect earlier in the year in our audio book
publishing program and in the launch of our Internet site, AudioUniverse.com.
Television programming production also fell short of our expectations with many
projects in development failing to proceed into production and delivery in 1999.
We have been experiencing a severe shortage of working capital and accordingly
have been in discussions with a number of potential sources to provide capital.
At the beginning of May 2000, we reached an oral agreement with our bank for
interim financing following the Company's default under its credit agreement.
Although the bank has not declared the Company's indebtedness to be due and
payable, and stated that it would continue to consider whether to honor
borrowing requests, the bank informed the Company in April 2000 that the bank
was reserving all of its potential remedies. The Company and the bank have been
in continuing discussions regarding future funding, and have reached an oral
agreement for the bank to fund certain operating expenses on an interim basis,
including the Company's hiring of a consultant to review strategic options. We
have been in need of financing for some time and we believe that our current
capital resources are not sufficient to cover our current working capital
requirements. There can be no assurance that the Company will obtain the
financing necessary to sustain further operations.
RESULTS OF OPERATIONS
Revenues for the quarter ended March 31, 2000 were $1,592,000 compared with
$1,422,000 for the same period in 1999. Net loss for the quarter was $1,212,000
compared to a net loss of $1,626,000 for the same period in 1999.
The increase in revenues for the quarter ended March 31, 2000 was primarily
attributable to the revenues earned on the production of "The National
Enquirer", substantially offset by reduced publishing revenues resulting from
working capital restrictions. The decrease in loss from operations was due
principally to the reversal of accrued employee separation costs as a result of
a settlement reached in the first quarter of 2000.
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.
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 and a reality 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, in
order to retain the higher profit margin associated with traditional license
arrangements, 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.
12
<PAGE>
The following table sets forth divisional revenues and operating expenses as a
percentage of total revenues:
Three Months Ended March 31,
-----------------------------
2000 1999
------------- -------------
REVENUES
Publishing 60 % 91 %
Television and film 40 9
------------- -------------
Total 100 % 100 %
------------- -------------
OPERATING EXPENSES
Publishing 43 % 69 %
Television and film 16 7
Selling, general & administrative 153 166
Employee separation costs settlement (53) --
------------- -------------
Total 160 % 242 %
------------- -------------
QUARTER ENDED MARCH 31, 2000 COMPARED TO QUARTER ENDED MARCH 31, 1999
- ---------------------------------------------------------------------
Publishing
- ----------
REVENUES. Net publishing revenues for the quarter ended March 31, 2000 decreased
$337,000 to $960,000 compared with $1,297,000 for the quarter ended March 31,
1999 with the decline being attributable to a contraction of the publishing
business due to the Company's lack of working capital.
COST OF SALES. Cost of sales for the quarter ended March 31, 2000 decreased
$278,000 to $695,000 from $973,000 for the quarter ended March 31, 1999. The
decrease is primarily due to lower sales activity. Cost of sales as a percentage
of net publishing revenues was 72% in the quarter ended March 31, 2000 compared
to 75% for the quarter March 31, 1999.
Film and Television
- -------------------
REVENUES. Film and television revenues for the quarter ended March 31, 2000
increased $507,000 to $632,000 from $125,000 for the quarter ended March 31,
1999. The revenue in the first quarter of 1999 was mostly from the sale of
programs from the film library while the revenue in the same quarter this year
was made up substantially from production and related fees in connection with
the making of "The National Enquirer" in addition to library sales.
COST OF SALES. Film and television costs and amortization for the quarter March
31, 2000 increased $147,000 to $252,000 from $105,000 for the quarter ended
March 31, 1999. The increase was attributable to the higher film and television
revenues mentioned previously. Cost of sales as a percentage of net film and
television revenues was 40% and 84% for the quarters ended March 31, 2000 and
1999, respectively. The improved margin in 2000 is mainly the result of the
production and other related fees earned in connection with the for hire making
of "The National Enquirer" which does not involve any substantial out-of-pocket
cost to the Company.
General
- -------
GROSS PROFIT. The Company experienced a gross profit of $645,000 for the quarter
ended March 31, 2000 compared to $344,000 for the quarter ended March 31, 1999,
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 $77,000 to $2,441,000 for the quarter
ended March 31, 2000 from $2,364,000 for the quarter ended March 31, 1999. This
increase was mainly due to increased staff costs, operating expenses related to
the acquisition of American Audio Literature in the second quarter of 1999.
13
<PAGE>
EMPLOYEE SEPARATION COSTS. Effective March 31, 2000, the Company entered into a
settlement agreement with the Former Principals ending all the outstanding
litigation and resolving various matters relating to the Termination Agreement,
pursuant to which the Former Principals relinquished any entitlement to Payments
or Series E Preferred Stock. As result of this settlement agreement, the Company
reversed the remaining accrual of $842,000 that it had established in 1997 in
connection with payments due under the Termination Agreement.
NET INTEREST EXPENSE. Net interest expense for the quarter March 31, 2000 was
$244,000 compared with $198,000 for the quarter ended March 31, 1999. The
increase in net interest expense is primarily the result of increased
utilization of the Chase Loan facility and higher interest rates.
LIQUIDITY AND CAPITAL RESOURCES
On November 12, 1997, we entered into an agreement with Chase Bank providing us
with an $8,000,000 loan facility for working capital purposes ("Chase Loan"). On
May 21, 1998, the Chase Loan facility 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 our assets and runs for three
years until November 4, 2000. The Chase Loan establishes a "Borrowing Base"
comprising: (1) 35% of an independent valuation of the audio library, (2) 85% of
our eligible receivables and (3) 30% of the finished goods audio and book
inventory. At any time, we may borrow up to the Borrowing Base. In addition, the
Chase Loan provides that we are permitted to borrow a further $4,000,000
(increased from $2,000,000 upon amendment of the Chase Loan agreement on May 21,
1998) provided the aggregate amount borrowed does not exceed $10,000,000, and
with the consent and guarantee of Media Equities International, LLC ("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 our option. In addition, unused
commitment fees are payable at 1/2% per annum. The Chase Loan contains various
covenants to which we 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.
We were not in compliance with certain of the financial compliance tests at
December 31, 1998, March 31, 1999, and June 30, 1999 and requested waivers from
Chase Bank. As of August 16, 1999, we had received such waivers and entered into
amendments and waivers to the loan facility with Chase Bank. As a result of such
amendments and waivers, we were in compliance with the aforementioned financial
compliance tests. On January 28, 1999, Chase Bank and we were notified by one of
the guarantors that there would be no approvals for guarantees of further
extensions of credit under the Chase Loan. In connection with the drafting of
certain amendments and waivers to the Chase Loan, we reached agreement with the
guarantor for an extension and modification of the guarantee agreement to
provide for a revised guarantee of $2,000,000.
At December 31, 1999 and March 31, 2000, we were not in compliance with certain
of the financial tests in the Chase Loan and have requested waivers from Chase
Bank. As of April 11, 2000, we had not received such waivers and there is no
assurance that we will receive them in the future. Also, at March 31, 2000, the
Company had borrowed $9,378,000 against the facility. In addition, Chase Bank
has provided a letter of credit for $188,000 in respect of certain litigation.
The Company has no funds available for borrowing at March 31, 2000 and is
overdrawn by $549,000 against the facility.
The first week of May 2000, Chase Bank paid a $90,000 draw on the letter of
credit and called $90,000 of the $188,000 guarantee. The guarantors have sought
reimbursement from the Company, which it has not paid.
On April 25, 2000, Chase Bank informed the Company that although the bank has
not declared the Company's indebtedness to be immediately due and payable, and
would continue to consider whether to honor borrowing requests, that they were
reserving all of their remedies under the facility. The Company and Chase Bank
have been in continuing discussions regarding future funding, and reached an
oral agreement for Chase Bank to fund certain operating expenses on an interim
basis, including the Company's hiring of a consultant to review strategic
options.
We have experienced significant negative cash flows from operations, including
$7,018,000, $10,659,000 and $8,691,000 for the years ended December 31, 1999,
1998 and 1997. We believe that our current capital resources are not sufficient
to cover our current working capital requirements and accordingly are presently
in discussions with a number of potential sources to provide additional capital.
There are however no assurances that such financing will be obtained. Also see
Note 5 of Notes To Consolidated Financial Statements. In the event that
additional working capital is not obtained or not obtained in sufficient
amounts, the Company will not be able to continue operations.
14
<PAGE>
In order to obtain rights to certain properties for our publishing and
television operations, we may be required to make advance cash payments to
sources of such properties, including book authors and publishers. While we
generally attempt to minimize the magnitude of such payments and to obtain
advance commitments to offset such payments, we are not always able to do so and
there is no assurance we will be able to do so in the future.
Our television production activities can affect our capital needs in that the
revenues from the initial licensing of television programming may be less than
the associated production costs. Our ability 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, from time to
time we are required to fund at least a portion of its production costs, pending
receipt of programming revenues, out of our working capital. Although our
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 we may commence principal photography
without having obtained commitments equal to or in excess of such costs. In such
circumstances, we 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.
In the event that additional funding is not obtained in the near future, the
Company will not be able to continue operations.
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 and 10-KSB/A for the year ended December 31, 1999
which contains descriptions of pending and settled legal proceedings to which
the Company is a party.
On July 7, 1999, Baby Dica, Inc. filed a complaint against William A. Shields
("Shields"), G.E.L. Productions, Inc. ("G.E.L."), Dove International and Does 1
through 25. NewStar Worldwide Inc., formerly known as Dove International, Inc.,
has never been served in the lawsuit. Plaintiff claims to have filed an
Amendment to Complaint on April 7, 2000 naming New Star Media, Inc. as Doe 1.
The Complaint alleges claims for fraud, breach of contract, conversion, and
breach of fiduciary duty relating to written agreements entered into in 1995 and
1996 between plaintiff and Shields and G.E.L. concerning G.E.L.'s distribution
of four of plaintiff's motion pictures: "Checkmate" aka "Deep Cover," "The
Palace," "Victim of Desire," and "Showtime." The Complaint requests damages in
excess of $1,400,000 and punitive damages of not less than $1,000,000. We
believe that if the action is pursued against us, there would be no basis for
liability on the part of the Company nor NewStar Worldwide. However, there can
be no assurance that we 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 and 10-KSB/A for the year ended December 31, 1999
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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
There were no changes in securities during the quarter ended March 31, 2000.
15
<PAGE>
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An Annual Meeting of Shareholders was held on January 18, 2000. The following
matters were submitted to shareholders and received the following vote
tabulation.
Election of Directors to serve for a term of one year or until their successors
are duly elected and qualified:
Terrence A. Elkes 20,174,833 votes for 101,276 votes withheld
Ronald Lightstone 20,174,833 votes for 101,276 votes withheld
Bruce Maggin 20,174,833 votes for 101,276 votes withheld
Lee Masters 20,174,833 votes for 101,276 votes withheld
John R. Sprieser 20,174,833 votes for 101,276 votes withheld
<TABLE>
<CAPTION>
Series B Director Nominees
- --------------------------
<S> <C> <C> <C> <C>
Ken Gorman 2,000,000 votes for 0 votes against 0 votes abstaining 0 broker non-votes
John T. Healy 2,000,000 votes for 0 votes against 0 votes abstaining 0 broker non-votes
</TABLE>
<TABLE>
<CAPTION>
Ratification of the appointment of KPMG LLP as the Company's independent
accountants for the fiscal year ending December 31, 1999:
<S> <C> <C> <C>
20,142,467 votes for 89,491 votes against 44,051 votes abstaining 0 broker non-votes
</TABLE>
<TABLE>
<CAPTION>
Adoption of the NewStar Media Inc. 1999 Stock Incentive Plan:
<S> <C> <C> <C>
13,751,696 votes for 157,641 votes against 36,506 votes abstaining 6,310,266 broker non-votes
</TABLE>
ITEM 5. OTHER INFORMATION
On May 17, 2000, the Company accepted the resignation of John T. Brady
as Vice President and Chief Financial Officer effective May 26, 2000. The
Company is entering into a consulting agreement under which Mr. Brady will
provide services to the Company as Acting Chief Financial Officer. On May 17,
2000, Lee Masters resigned as a Director of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) Exhibits:
27 Financial Data Schedule
(B) Reports on Form 8-K:
A report on Form 8-K (dated February 3, 2000) was filed on March 9,
2000, reporting under item 5 the Company's new publishing management, the status
of the listing of the Company's common stock on the Nasdaq SmallCap Market, the
settlement of three lawsuits, and the Risk Factors contained in the Company's
filing under Rule 424b.
A report on Form 8-K (dated March 13, 2000) was filed on March 16,
2000, reporting under item 5 the delisting of the Company's common stock from
the Nasdaq SmallCap Market and its listing on the OTC Bulletin Board.
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.
NEWSTAR MEDIA INC.
Date: May 19, 2000 By /S/ TERRENCE A. ELKES
-------------------------------------
Terrence A. Elkes
Chairman and Chief Executive Officer
Date: May 19, 2000 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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<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 511
<SECURITIES> 0
<RECEIVABLES> 1719
<ALLOWANCES> 0
<INVENTORY> 1420
<CURRENT-ASSETS> 9471
<PP&E> 419
<DEPRECIATION> 0
<TOTAL-ASSETS> 21233
<CURRENT-LIABILITIES> 20165
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0
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<COMMON> 216
<OTHER-SE> 1068
<TOTAL-LIABILITY-AND-EQUITY> 21233
<SALES> 1592
<TOTAL-REVENUES> 1592
<CGS> 947
<TOTAL-COSTS> 2546
<OTHER-EXPENSES> 0
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