<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
----------------
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the Quarterly Period Ended September 30, 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: 21,612,058 as of November 1,
1999.
Transitional Small Business Disclosure Format (Check one):
Yes No X
--- ---
================================================================================
<PAGE>
PART I
FINANCIAL INFORMATION
The Company is filing this amendment to its Quarterly Report on Form 10-QSB for
the period ended September 30, 1999 filed with the Securities and Exchange
Commission on November 18, 1999 in order to revise the Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations sections of that report. During its 1999 year end closing, the
Company learned that, based on more current information, the estimated fair
market value of certain inventory sold for cash and barter credits in the third
quarter was lower than the amount the Company had used for purposes of valuing
the transaction. Accordingly, the Company is restating its 1999 third quarter
and nine months results. This revision results in a reduction in previously
reported revenues and an increase in net loss of $288,000. Pursuant to rule
12b-15 under the Securities and Exchange Act of 1934, the Company is including
the complete text of the Quarterly Report as revised. The Company has not
updated the Quarterly Report to reflect any other developments subsequent to the
filing of the 10-QSB, which are reported in the Company's 10-KSB for the year
ended December 31, 1999.
2
<PAGE>
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
NEWSTAR MEDIA INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
September 30, 1999
ASSETS
<CAPTION>
<S> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,442,000
Accounts receivable, net of allowances of $1,210,000 3,698,000
Barter receivable 443,000
Inventory 2,481,000
Film costs 4,018,000
Due from related party 36,000
Prepaid expenses and other assets 994,000
--------------
Total current assets 13,112,000
NON-CURRENT ASSETS
Production masters, net 2,906,000
Film costs, net 3,382,000
Property and equipment, net 618,000
Goodwill and other assets 5,532,000
--------------
Total non-current assets 12,438,000
--------------
Total assets $ 25,550,000
==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 5,911,000
Notes payable 16,000
Advances and deferred income 4,252,000
--------------
Total current liabilities 10,179,000
NON-CURRENT LIABILITIES
Note payable 8,307,000
Accrued liabilities 437,000
--------------
Total non-current liabilities 8,744,000
--------------
Total liabilities 18,923,000
--------------
SHAREHOLDERS' EQUITY
Preferred stock $.01 par value; 2,000,000 shares authorized and
220,033 shares issued and outstanding, liquidation preference $6,776,000 2,000
Common stock $.01 par value; 50,000,000 shares authorized and
21,565,658 shares issued and outstanding 216,000
Unearned compensation (129,000)
Additional paid-in capital 43,271,000
Accumulated deficit (36,733,000)
--------------
Total shareholders' equity 6,627,000
--------------
Total liabilities and shareholders' equity $ 25,550,000
==============
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
<TABLE>
NEWSTAR MEDIA INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<CAPTION>
Quarter Ended September 30,
--------------------------------------
1999 1998
---- ----
<S> <C> <C>
Revenues
Publishing, net $ 2,622,000 $ 1,915,000
Film 1,069,000 1,792,000
--------------- ----------------
3,691,000 3,707,000
Cost of sales
Publishing 1,922,000 1,089,000
Film 943,000 1,601,000
--------------- ----------------
2,865,000 2,690,000
--------------- ----------------
Gross profit 826,000 1,017,000
Selling, general and administrative expenses 3,009,000 1,928,000
--------------- ----------------
Loss from operations (2,183,000) (911,000)
Gain on sale of land and building -- 1,734,000
Interest expense, net (252,000) (318,000)
--------------- ----------------
Income (loss) before income taxes (2,435,000) 507,000
Income tax expense (1,000) (2,000)
--------------- ----------------
Net income (loss) $ (2,436,000) $ 505,000
=============== ================
Basic income (loss) attributable to common
shareholders $ (2,436,000) $ 398,000
=============== ================
Basic income (loss) per common share $ (.11) $ .05
=============== ================
Weighted average number of common
shares outstanding 21,563,000 8,596,000
=============== ================
Diluted income (loss) attributable to fully
diluted common shareholders $ (2,436,000) $ 505,000
=============== ================
Diluted income (loss) per common share $ (.11) $ .04
=============== ================
Weighted average number of common
shares outstanding 21,563,000 11,814,000
=============== ================
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
<TABLE>
NEWSTAR MEDIA INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<CAPTION>
Nine Months Ended September 30,
--------------------------------------
1999 1998
---- ----
<S> <C> <C>
Revenues
Publishing, net $ 5,135,000 $ 5,430,000
Film 1,460,000 8,590,000
---------------- ----------------
6,595,000 14,020,000
Cost of sales
Publishing 3,477,000 3,593,000
Film 1,369,000 6,455,000
---------------- ----------------
4,846,000 10,048,000
---------------- ----------------
Gross profit 1,749,000 3,972,000
Selling, general and administrative expenses 7,881,000 6,841,000
---------------- ----------------
Loss from operations (6,132,000) (2,869,000)
Gain on sale of land and building -- 1,734,000
Gain on sale of long-term investment 594,000 --
Interest expense, net (653,000) (620,000)
---------------- ----------------
Loss before income taxes (6,191,000) (1,755,000)
Income tax expense (3,000) (2,000)
---------------- ----------------
Net loss $ (6,194,000) $ (1,757,000)
================ ===============
Basic and diluted loss attributable to common
shareholders $ (6,194,000) $ (2,077,000)
================ ===============
Basic and diluted loss per common share $ (.32) $ (.29)
================ ===============
Weighted average number of common
shares outstanding 19,394,000 7,287,000
================ ===============
</TABLE>
5
<PAGE>
<TABLE>
NEWSTAR MEDIA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<CAPTION>
Nine Months Ended September 30,
-----------------------------------
1999 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (6,194,000) $ (1,757,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 570,000 405,000
Amortization of goodwill 179,000 189,000
Amortization of production masters 818,000 1,232,000
Amortization of film costs 1,498,000 6,022,000
Provision for doubtful accounts 56,000 --
Gain on sale of building and land -- (1,734,000)
Gain on sale of long-term investment (594,000) --
Stock Based Compensation 125,000 125,000
Changes in operating assets and liabilities:
Accounts receivable (1,715,000) (2,040,000)
Inventory 607,000 746,000
Prepaid expenses and other assets 181,000 (372,000)
Expenditures for production masters (1,355,000) (1,105,000)
Film cost additions (4,123,000) (9,406,000)
Accounts payable and accrued expenses 1,057,000 (997,000)
Advances and deferred revenue 3,992,000 (329,000)
Other 57,000 5,000
--------------- ---------------
Net cash used in operating activities (4,841,000) (9,016,000)
--------------- ---------------
INVESTING ACTIVITIES
Proceeds from sale of long-term investment 613,000 --
Purchase of Audio Literature (200,000) --
Proceeds from sale of property and equipment, net 124,000 4,166,000
Purchase of property and equipment (118,000) --
--------------- ---------------
Net cash provided by investing activities 419,000 4,166,000
--------------- ---------------
FINANCING ACTIVITIES
Proceeds of bank borrowings 3,600,000 7,849,000
Repayments of bank borrowings and notes payable (2,734,000) (8,591,000)
Proceeds from issuance of common stock 4,545,000 5,500,000
--------------- ---------------
Net cash provided by financing activities 5,411,000 4,758,000
--------------- ---------------
Net decrease in cash and cash equivalents 989,000 (92,000)
Cash and cash equivalents at beginning of the period 453,000 302,000
--------------- ---------------
Cash and cash equivalents at end of the period $ 1,442,000 $ 210,000
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
<TABLE>
NEWSTAR MEDIA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
<CAPTION>
Nine Months Ended September 30,
---------------------------------
1999 1998
---- ----
<S> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 526,000 $ 516,000
NON-CASH TRANSACTIONS
Common stock issued as payment for consulting fees
to related party $ -- $ 450,000
Common Stock issued as payment to vendors and other
obligations $ 60,000 $ 753,000
Preferred stock dividends accrued $ -- $ 320,000
Preferred stock dividends paid in common stock $ 10,000 $ 589,000
Preferred stock issued as payment for amounts
payable to former officers of the Company $ 135,000 $ 108,000
ACQUISITION OF AMERICAN AUDIO LITERATURE, INC
Assets acquired $ 1,550,000
Liabilities incurred (300,000)
Issuance of Common Stock (1,050,000)
---------------
Net cash paid $ 200,000
</TABLE>
See accompanying notes to consolidated financial statements
7
<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,
1998. 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 nine months ended September 30, 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 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 the NewStar Publishing division, including its new website
AudioUniverse.com, 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 income (loss) utilized in the calculation of basic income/(loss) per
common share is decreased/(increased) by the following:
1999 1998
---- ----
Quarter ended September 30,
Accrued dividends on Preferred Stock $ -- $ 107,000
Nine months ended September 30,
Accrued dividends on Preferred Stock $ -- $ 320,000
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.
8
<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:
Nine months Ended September 30,
-----------------------------------------
1999 1998
---- ----
Net loss attributable to
common shareholders
As reported $ (6,194,000) $ (2,077,000)
Pro forma $ (7,292,000) $ (2,178,000)
Net loss per share
As reported $ (.32) $ (.29)
Pro forma $ (.38) $ (.30)
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 September 30, 1999, the Company had net
deferred tax assets of approximately $12,493,000 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 $135,000
during the nine months ended September 30, 1999 in the form of Series E
Preferred Stock for payments due by the Company for the period January through
May, 1999. The Termination Agreement provides for the Former Principals to
receive combined monthly payments (the "Payments") of approximately $25,000, 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 cash for the period June to September, 1999. The Former
Principals are entitled to receive Series E Preferred Stock in lieu of such cash
Payments but have chosen not to accept the Series E Preferred Stock.
9
<PAGE>
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 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 nine months ended September 30, 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 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, and 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 Co-Vice
Chairman.
<TABLE>
The Company accrued the following fees payable to MEI:
<CAPTION>
Quarter ended September 30, 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 6,000
------------- -------------
Total $ 12,500 $ 81,000
============= =============
Nine months ended September 30, 1999 1998
---- ----
Consulting fees pursuant to consulting agreement $ -- $ 225,000
Guarantee fees pursuant to guarantee of Chase Bank loan facility 37,500 19,000
------------- -------------
Total $ 37,500 $ 244,000
============= =============
</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
August 17, 1998 102,000 $150,000
Pursuant to guarantee agreements dated November 4, 1997, each of the principals
of MEI had collectively guaranteed $208,000 and Messrs. Elkes, Gorman and
Lightstone had collectively guaranteed $287,000 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 September 30, 1999, utilization of the Chase
Loan exceeded the Borrowing Base by $495,000. 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.
10
<PAGE>
During the third quarter of 1999, in connection with obtaining certain
amendments and waivers to the Chase Loan, the Company reached an agreement 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 entered 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.
During the quarter ended September 30, 1999, MEI instituted an arbitration
proceeding against the Former Principals. The Company's in-house legal staff
provided legal services for MEI in connection with such proceedings.
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, the Company's President of the publishing division, 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 and 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 September 30, 1999 the Company is
due $25,000, net of royalties, from Affinity.
NOTE 5 - NOTES PAYABLE
Notes payable at September 30, 1999 consist of the following:
Chase Manhattan Bank revolving credit loan $ 8,300,000
Other 23,000
--------------
Total notes payable $ 8,323,000
==============
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 (8.25% at September 30, 1999) plus 2% per annum or the
bank's LIBOR rate (5.48% rate at September 30, 1999) plus 3% per annum, at the
option of the Company. Both rates are applicable to Company draw-downs on the
Chase Loan at September 30, 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, March 31, 1999 and June 30, 1999 and requested waivers
from Chase Bank. As of August 16, 1999, the Company received such waivers and
the Company and Chase Bank entered into amendments and waivers to the Chase
Loan. As a result of such amendments and waivers, the Company was in compliance
with the aforementioned financial compliance tests. 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. In connection with the drafting of certain amendments and waivers to
the Chase Loan, the Company reached agreement with MEI for an extension and
modification of the guarantee agreement to provide for a revised guarantee of
$2,000,000.
11
<PAGE>
At September 30, 1999, the Company had borrowed $8,300,000 against the facility
and had $1,700,000 of available funds for borrowing. In addition, Chase Bank had
provided a letter of credit for $287,000 in respect of certain litigation.
In connection with the granting of certain waivers and amendments, Chase Bank
required that the Company raise a minimum of $4.1 million of new equity. As of
the date of the amendment and restatement of the Chase Loan, the Company had
received $4,545,000 in new equity through several private placements.
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.
Management's estimate of the fair market value of the production masters is
subject to adjustment, following the completion of an in-process independent
library valuation. 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
straight-line basis over five years.
NOTE 7 - CAPITAL ACTIVITIES
COMMON STOCK
During the nine months ended September 30, 1999, the Company issued the
following shares of Common Stock:
Number of Shares Consideration
---------------- -------------
18,089 Preferred stock dividend, $10,000.
300,000 Acquisition of Audio Literature
140,280 Shares issued to former principals in connection with
conversion of 189 shares of Series E Preferred Stock.
37,641 Vendors paid in stock $60,000
As of September 30, 1999, the Company issued 3,768,448 shares of common stock in
exchange for $4,545,000 through several private placements.
During the nine months ended September 30, 1999 the Company issued 135 shares of
Series E Preferred Stock pursuant to the Termination Agreement.
12
<PAGE>
STOCK OPTIONS AND WARRANTS
On January 6, 1998 and July 21, 1999, the Board approved the issuance of 601,500
and 1,265,000 options under the Plan to employees, officers and directors, such
options being issued in July 1998 and September 1999, respectively.
Options outstanding under the Plan at September 30, 1999 were as follows:
Weighted
Average
Number of Exercise Exercise
Shares Price Price
------ ----- -----
1,989,000 $.88 - $6.00 $1.33
At September 30, 1999, options to acquire 1,461,497 shares of Common Stock under
the Plan were exercisable.
Warrants outstanding at September 30, 1999 were as follows:
Number of Weighted
Equivalent Average
Shares Exercise Price Exercise Price
------ -------------- --------------
4,628,926 $2.00 - $12.00 $5.07
At September 30, 1999 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 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; 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.
13
<PAGE>
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 1,700 titles (including Audio
Literature 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 September 30, 1999 were $3,691,000 compared with
$3,707,000 for the same period in 1998. Net loss for the quarter was $2,436,000
compared to net income of $505,000 for the same period in 1998.
Revenues for the nine months ended September 30, 1999 were $6,595,000 compared
with $14,020,000 for the same period last year. The Company incurred a net loss
of $6,194,000 for the nine months compared to a net loss of $1,757,000 in 1998.
The increase in revenues for the quarter ended September 30, 1999 was primarily
attributable to an individual transaction for a sale of 526,000 units of audio
book inventory, which was recorded based upon the estimated fair market value of
the inventory, in exchange for $278,000 in cash and $443,000 of barter credits
to be applied towards the future purchase of media advertising. Such higher
publishing revenue was partially offset by a reduction in television revenues
due to the timing of the delivery of television motion pictures and series
production. The increase in loss from operations for the quarter was primarily
caused by an increase in selling, general and administrative expenses. The
increase in these expenses was mainly attributed to increased staff costs,
operating expenses related to the acquisition of American Audio Literature in
the second quarter of 1999 and marketing and development cost associated with
the Company's launch of its AudioUniverse.com website in June of this year.
The decrease in revenues for the nine months ended September 30, 1999 was
principally a result of reduced television revenues due to the timing of the
delivery of television motion pictures and series production and a reduced level
of audio books release in the current nine month period. During the nine months
ended September 30, 1998, the Company had recognized in excess of $6.9 million
of revenue from the network and video sale of the television motion picture
"FutureSport". The decrease in revenue for the nine months was offset in part by
the sale of 526,000 units of audio book inventory, as described above. The
increase in loss from operations is primarily attributable to the reduction in
television revenues and the increase in selling, general and administrative
expenses in the quarter ended September 30, 1999, as described above.
During the second quarter of 1999, the Company's publishing division launched
its new website AudioUniverse.com in order to position itself to capitalize on
the growth of e-commerce. AudioUniverse offers approximately 15,000 audio books
for sale (including the Company's 1,700 titles) with sound samples for more than
1,000 titles.
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
14
<PAGE>
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.
In September 1999, principal photography was completed on "Quadroon Ball," a
movie for the Lifetime cable channel, starring Vanessa L. Williams and in
October, 1999, videotaping was completed on the initial 65 episode order of
"Random Acts of Comedy," a daily half-hour program for the Fox Family Channel,
starring David Alan Grier.
RESULTS OF OPERATIONS
The following table sets forth divisional revenues and operating expenses as a
percentage of total revenues:
<TABLE>
<CAPTION>
Quarter Ended September 30, Nine Months Ended September 30,
--------------------------- -------------------------------
1999 1998 1999 1998
---- ---- ---- ----
REVENUES
<S> <C> <C> <C> <C>
Publishing 71 % 52 % 78 % 39 %
Television and film 29 48 22 61
----------- ---------- ----------- ----------
Total 100 % 100 % 100 % 100 %
----------- ---------- ----------- ----------
OPERATING EXPENSES
Publishing 52 % 29 % 53 % 26 %
Television and film 26 43 21 46
Selling, general & administrative 81 52 119 49
----------- ---------- ----------- ----------
Total 159 % 124 % 193 % 121 %
----------- ---------- ----------- ----------
</TABLE>
QUARTER ENDED SEPTEMBER 30, 1999 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1998
- -----------------------------------------------------------------------------
Publishing
- ----------
REVENUES. Net publishing revenues for the quarter ended September 30, 1999
increased $707,000 to $2,622,000 compared with $1,915,000 for the quarter ended
September 30, 1998 with the increase being attributable to a sale of 526,000
units of audio book inventory, which was recorded based upon the estimated fair
market value of the inventory, in exchange for $278,000 in cash and $443,000 of
barter credits to be used towards the future purchase of media advertising.
Leading audio book publications during the current quarter included The Phantom
of Manhattan by Frederick Forsyth, Mother of Pearl by Melinda Haynes and Family
Honor by Robert B. Parker.
COST OF SALES. Cost of sales for the quarter ended September 30, 1999 increased
$835,000 to $1,922,000 from $1,089,000 for the quarter ended September 30, 1998.
The increase is primarily due to an individual transaction for the sale of
526,000 units of audio book inventory, as described above, and the related cost
of sales of $1,009,000. This increase was partially offset by lower production
and manufacturing costs and a change in the fourth quarter of 1998 in the
estimate of percentages used to amortize capitalized production costs. As a
result, cost of sales as a percentage of net publishing revenues was 69% in the
quarter ended September 30, 1999 compared to the 57% for the quarter September
30, 1998.
Film and Television
- -------------------
REVENUES. Film and television revenues for the quarter ended September 30, 1999
decreased $723,000 to $1,069,000 from $1,792,000 for the quarter ended September
30, 1998. The revenue in the third quarter of 1999 was mostly from the initial
delivery of episodes of the comedy series "Random Acts of Comedy" while the
revenue in the same quarter last year was mainly from the home video sale of
"FutureSport".
15
<PAGE>
COST OF SALES. Film and television amortization for the quarter ended September
30, 1999 decreased $658,000 to $943,000 from $1,601,000 for the quarter ended
September 30, 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 88% and 89% for the quarters ended September
30, 1999 and 1998, respectively.
General
- -------
GROSS PROFIT. The Company experienced a gross profit of $826,000 for the quarter
ended September 30, 1999 compared to $1,017,000 for the quarter ended September
30, 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 $1,083,000 to $3,009,000 for the
quarter ended September 30, 1999 from $1,926,000 for the quarter ended September
30, 1998. This increase was due to increased staff costs, operating expenses
related to the acquisition of American Audio Literature in the second quarter of
1999 and marketing and development cost associated with the Company's launch of
its AudioUniverse.com website in June of this year.
NET INTEREST EXPENSE. Net interest expense for the quarter ended September 30,
1999 was $252,000 compared with $318,000 for the quarter ended September 30,
1998. The decrease in net interest expense is primarily the result of decreased
utilization of the Chase Loan facility, partially offset by amortization of
deferred guarantee costs.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
- --------------------------------------------------------------------------------
1998
- ----
Publishing
- ----------
REVENUES. Net publishing revenues for the nine months ended September 30, 1999
decreased $295,000 to $5,135,000 compared with $5,430,000 for the quarter ended
September 30, 1998 with the decrease being primarily due to a lower volume of
titles published. This decrease is partially offset by the sale of 526,000 units
of audio book inventory, which was recorded based upon the estimated fair market
value of the inventory, in exchange for $278,000 in cash and $443,000 of barter
credits to be used towards the future purchase of media advertising. Leading
audio book publications during the current quarter included The Warren Buffet
Portfolio by Robert G. Hagstrom, Hush Money by Burt Reynolds and Mother of Pearl
by Melinda Haynes.
COST OF SALES. Cost of sales for the nine months ended September 30, 1999
decreased $116,000 to $3,477,000 from $3,593,000 for the nine months ended
September 30, 1998. The decrease is primarily due to a decrease in the number of
audio books published, lower production and manufacturing costs and a change in
the fourth quarter of 1998 in the estimate of percentages used to amortize
capitalized production costs. This decrease is partially offset by an individual
transaction for the sale of 526,000 units of audio book inventory, as described
above, and the related cost of sales of $1,009,000. As a result, cost of sales
as a percentage of net publishing revenues was 66% for the nine months ended
September 30, 1999 and 1998.
Film and Television
- -------------------
REVENUES. Film and television revenues for the nine months ended September 30,
1999 decreased $7,130,000 to $1,460,000 from $8,590,000 for the nine months
ended September 30, 1998. The decrease was primarily due to the absence in the
first nine months of 1999 of revenue comparable to revenue received from the
production and video sale of "FutureSport" in 1998.
COST OF SALES. Film and television amortization for the nine months ended
September 30, 1999 decreased $5,086,000 to $1,369,000 from $6,455,000 for the
nine months ended September 30, 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 increased to 93% from 75% for the
nine months ended September 30 1998 partially as a result of a film inventory
valuation adjustment.
16
<PAGE>
General
- -------
GROSS PROFIT. The Company experienced a gross profit of $1,749,000 for the nine
months ended September 30, 1999 compared to $3,972,000 for the same period in
1998, resulting from the matters previously discussed regarding publishing and
film revenues and cost of sales.
SELLING, GENERAL AND ADMINISTRATIVE. 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 $7,881,000 for the nine months ended
September 30, 1999 from $6,841,000 for the nine months ended September 30, 1998.
This increase occurred almost entirely in the third quarter of 1999 as described
above in the discussion of the three months ended September 30, 1999.
NET INTEREST EXPENSE. Net interest expense for the period ended September 30,
1999 was $653,000 compared with $620,000 for the nine months ended September 30,
1998. The increase in net interest expense is primarily the result of
amortization of deferred guarantee costs, offset in part by lower utilization of
the Chase Loan facility.
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. Prior to
August 16,1999, the Chase Loan provided that at any time, the Company could
borrow or have letters of credit issued 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. 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 amount 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 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, March 31, 1999 and June 30, 1999 and requested waivers
from Chase Bank. As of August 16, 1999, the Company received such waivers and
the Company and Chase Bank entered into amendments and waivers to the Chase
Loan. As a result of such amendments and waivers, the Company was in compliance
with the aforementioned financial compliance tests. 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. In connection with entering into certain amendments and waivers to
the Chase Loan, the Company reached agreement with MEI for an extension and
modification of the guarantee agreement to provide for a revised guarantee of
$2,000,000.
At September 30, 1999, the Company had borrowed $8,300,000 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.
The Company has experienced significant negative cash flows from operations,
including $10,659,000 for the year ended December 31, 1998 and $4,841,000 for
the nine months ended September 30, 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
17
<PAGE>
capital for expansion of audio and printed book publishing, Internet website
development, 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 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.
In the second quarter ended June 30, 1999, the Company issued 3,768,448 shares
of common stock in exchange for $4,545,000 through several private placements.
As of November 5, 1999 the Company's unused sources of funds was approximately
$849,000 and consisted of availability under the Chase Loan facility and cash.
In order to maintain its operation over the next twelve months, it will be
necessary for the Company obtain additional capital. There is no assurance that
the Company will be successful in obtaining such additional capital, and if
additional capital is obtained is obtained it may not be obtained on favorable.
On September 23, 1999, The Nasdaq-Amex Market Group ("Nasdaq") informed the
Company that the Company's common stock failed to maintain a minimum bid price
greater than or equal to $1.00 over the last thirty consecutive trading days, as
required under Marketplace Rule 4310(c)(4).
The Company will be provided ninety (90) calendar days, or until December 23,
1999, to regain compliance with the minimum bid price requirement of Rule
4310(c)(4). If at any time before December 23, 1999, the bid price of the
Company's shares is equal to or greater than $1.00 for a minimum of ten
consecutive trading days, the staff of Nasdaq will determine if compliance with
the requirement has been achieved. If the Company is unable to demonstrate
compliance with the requirement on or before December 23, 1999, the Company's
securities will be delisted from The Nasdaq SmallCap Market at the opening of
business on December 28, 1999.
If the Company's common stock is delisted, it would likely be more difficult to
buy or sell the Company's common stock or obtain timely and accurate quotations
to buy or sell. In addition, the delisting 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.
18
<PAGE>
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 various companies to provide distribution
services for its publishing operations. These distribution services include
computer systems needed for distribution of the Company's publishing operations
together with information systems pertaining thereto. If there are year 2000
problems, the Company could experience significant deterioration of operating
efficiency. The distribution companies have 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.
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 the Company's audiobook
distribution companies) would result in a significant deterioration of operating
efficiency. The Company has completed its evaluation of the year 2000 issue in
November 1999, but 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 was 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 and 10-KSB/A for the year ended December 31, 1998
and the Company's Quarterly Reports on Form 10-QSB for the quarters ended March
31, and June 30, 1999, which contain descriptions of pending legal proceedings
to which the Company is a party.
On August 30, 1999, the plaintiffs in the action entitled Palisades Pictures,
LLC, Nothing To Lose Productions Inc., CUB Films, Mark Severini, Eric Bross and
Jeff Dowd v. Dove International, Inc., Dove Audio, Inc. and NewStar Media, Inc.
(Los Angeles Superior Court (BC194069)) dismissed the action without prejudice
for the purpose of settlement discussions, and the defendants entered into a
tabling agreement so that the plaintiffs could refile the action if the matter
is not settled.
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, 1998
and the Company's Quarterly Reports on Form 10-QSB for the quarters ended March
31 and June 30, 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.
19
<PAGE>
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
As previously reported in the Company's Quarterly Report on Form 10-QSB for the
quarter ended June 30, 1999, on July 6, 1999 the Company issued 37,641 shares of
common stock of the Company to Steinberg, Nutter & Brent in satisfaction of
amounts owed by the Company to that firm.
On October 21, 1999, the Company issued 46,400 shares of common stock for fees
in connection with the placement of securities by the Company.
All of the shares were issued in reliance on Section 4(2) of the Securities Act
of 1933 as amended.
The Amended and Restated Credit, Security, Guaranty and Pledge Agreement, dated
as of November 4, 1997, as amended and restated as of August 16, 1999, among the
Company, the guarantors named therein and The Chase Manhattan Bank provides that
the Company is prohibited from declaring cash dividends on its common stock.
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.
20
<PAGE>
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 September 23, 1999) was filed on October 1, 1999
reporting under Item 5 the following information:
On September 23, 1999, The Nasdaq-Amex Market Group ("Nasdaq") informed the
Company that the Company's common stock failed to maintain a minimum bid
price greater than or equal to $1.00 over the last thirty consecutive
trading days, as required under Marketplace Rule 4310(c)(4).
The Company will be provided ninety (90) calendar days, or until December
23, 1999, to regain compliance with the minimum bid price requirement of
Rule 4310(c)(4). If at any time before December 23, 1999, the bid price of
the Company's shares is equal to or greater than $1.00 for a minimum of ten
consecutive trading days, the staff of Nasdaq will determine if compliance
with the requirement has been achieved. If the Company is unable to
demonstrate compliance with the requirement on or before December 23, 1999,
the Company's securities will be delisted from The Nasdaq SmallCap Market at
the opening of business on December 28, 1999.
If the Company's common stock is delisted, it would likely be more difficult
to buy or sell the Company's common stock or obtain timely and accurate
quotations to buy or sell. In addition, the delisting 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.
21
<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: April 18, 2000 By /s/ TERRENCE A. ELKES
----------------------
Terrence A. Elkes
Chairman and Chief Executive Officer
Date: April 18, 2000 By /s/ JOHN T. BRADY
------------------
John T. Brady
Chief Financial Officer
22
<PAGE>
NEWSTAR MEDIA INC.
INDEX TO EXHIBITS
Exhibit
Number
------------
27 Financial Data Schedule
23
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,442
<SECURITIES> 0
<RECEIVABLES> 3,453
<ALLOWANCES> 0
<INVENTORY> 2,481
<CURRENT-ASSETS> 13,112
<PP&E> 618
<DEPRECIATION> 0
<TOTAL-ASSETS> 25,550
<CURRENT-LIABILITIES> 11,179
<BONDS> 0
0
2
<COMMON> 216
<OTHER-SE> 6,409
<TOTAL-LIABILITY-AND-EQUITY> 25,550
<SALES> 6,595
<TOTAL-REVENUES> 6,595
<CGS> 4,846
<TOTAL-COSTS> 12,727
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 653
<INCOME-PRETAX> (6,191)
<INCOME-TAX> 3
<INCOME-CONTINUING> (6,194)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,194)
<EPS-BASIC> (.32)
<EPS-DILUTED> (.32)
</TABLE>
