As filed with the Securities and Exchange Commission on October 6, 1997
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AVENUE ENTERTAINMENT GROUP, INC.
(Name of small business issuer in its charter)
Delaware 781 95-4622429
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
Suite 2110, 11111 Santa Monica Blvd.
Los Angeles, California 90025
(310) 996-6800
(Address and telephone number of principal executive
offices and principal place of business or intended
principal place of business)
Mr. Cary Brokaw
Avenue Entertainment Group, Inc.
Suite 2110, 11111 Santa Monica Blvd.
Los Angeles, California 90025
(310) 996-6800
(Name, address, and telephone number of agent for service)
Copies to:
Robert J. Hasday, Esq.
Duane, Morris & Heckscher LLP
Suite 3300, 122 East 42nd Street
New York, New York 10168
(212) 692-1000
Approximate date of proposed sale to the public: As soon as practicable
after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. _
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. _
If delivery of the prospectus is expected to be made pursuant to
Rule 434 under the Securities Act, please check the following box. _
CALCULATION OF REGISTRATION FEE
Amount of Proposed
Title of Each Class Proposed Maximum
of Securities to be Amount to be Maximum Aggregate Amount of
Registered Registered Per Share (1) Price Registration fee
- ------------------- ------------ ------------- ----------- ---------------
Common Stock, par
value $.01 per share 300,000 $7.375 $2,212,500 $670.45
==================== ============ ============== =========== ===============
(1) Estimated in accordance with Rule 457(c) solely for the purpose of computing
the amount of the registration fee based on the average of the high and low
prices of the Registrant's Common Stock as reported on the American Stock
Exchange on October 3, 1997.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation, or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED OCTOBER 6, 1997
Prospectus
300,000 Shares
AVENUE ENTERTAINMENT GROUP, INC.
Common Stock
200,000 shares of Common Stock are being offered by the Company. The
Company is not utilizing an underwriter in connection with this offering and
there can be no assurance that any of the shares offered hereby will be sold.
An additional 100,000 shares of Common Stock are being offered hereby
by a selling stockholder (the "Selling Stockholder"). The Company will not
receive any proceeds from the sale of shares by the Selling Stockholder. See
"Selling Stockholder."
The Common Stock is listed on the American Stock Exchange under the
symbol PIX. The closing price of the Common Stock on October 3, 1997 was $7 1/2.
---------------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON
PAGE 4.
----------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
Offering Price by the Company: $___ Per Share
------------------- ------------------- --------------------
Price to Public Proceeds to
Company(1)
------------------- ------------------- --------------------
Per share $____ $_____
------------------- ------------------ --------------------
Total (2) $_____ $______
=================== =================== ====================
(1) Before deducting expenses of the offering estimated at $_____. The Company
does not anticipate paying any underwriting discounts or commissions in
connection with this offering.
(2) If all shares offered hereby by the Company are sold.
October , 1997
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (of which this Prospectus is a part) on
Form SB-2 (File No. 333- ) (the "Registration Statement") under the Securities
Act of 1933, as amended (the "Securities Act"), with respect to the securities
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement, certain portions of which have been omitted
as permitted by the rules and regulations of the Commission. For further
information, reference is hereby made to the Registration Statement and to the
schedules and exhibits thereto. Statements contained in this Prospectus as to
the content of any contract or other document are not necessarily complete, and
in each instance reference is made to a copy of such contract or other document
filed as an exhibit to the Registration Statement or otherwise filed with the
Commission, each such statement being qualified in all respects by such
reference.
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance with the Exchange Act, files reports, proxy statements, and other
information with the SEC. These reports, proxy statements, and other
information, as well as the Registration Statement, can be inspected and copied
at the public reference facilities maintained by the SEC at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the SEC's regional offices in
Chicago (Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511) and in New York (Seven World Trade Center, Suite 1300, New York, New
York 10048), and copies of such material can be obtained from the public
reference section of the SEC at prescribed rates by writing to the SEC at 450
Fifth Street, N.W., Washington, D.C. 20549. The Commission maintains a World
Wide Web site that contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the Commission, such
as the Company. The address of such site is http://www.sec.gov. Reports, proxy
statements, and other information concerning the Company also may be inspected
at the offices of the American Stock Exchange ("AMEX"), 86 Trinity Place, New
York, New York 10006-1881.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus.
The Company
The Company, through its two operating subsidiaries Avenue Pictures,
Inc. ("Avenue Pictures") and Wombat Productions, Inc. ("Wombat"), is an
independent entertainment company which develops and produces motion pictures
for theatrical exhibition, television, and other ancillary markets, both
domestically and internationally.
Avenue Pictures is in the business of producing feature films,
television films, and series for television. Avenue Pictures is currently active
in developing and producing projects in each of its three areas of activity.
Wombat produces one hour motion picture profiles of Hollywood's biggest stars
which are aired by the major cable networks.
The Company is a holding company which was incorporated in the state
of Delaware on March 7, 1997. Its principal executive offices are located at
Suite 2110, 11111 Santa Monica Blvd., Los Angeles, California 90025, and its
telephone number is (310) 996-6800.
The Offering
Shares Offered 200,000 shares of Common Stock by
the Company and 100,000 shares of
Common Stock by the Selling
Stockholder.
Offering Price by the Company $___ per share.
Shares Outstanding after the Offering 4,047,838 shares(1)
AMEX Symbol PIX
Risk Factors This offering involves a high degree
of risk and substantial immediate
dilution. See "Risk Factors" and
"Dilution."
_____________
(1) If all shares offered hereby by the Company are sold. Does not include (i)
791,5000 shares of Common Stock issuable upon exercise of options exercisable at
an average exercise price of $.70 per share and (ii) up to 1,750,000 shares of
Common Stock issuable pursuant to options under the Company's 1997 Stock Option
and Long Term Incentive Compensation Plan (the "1997 Plan"), of which options
for 570,000 shares at an average exercise price of $3.00 per share have been
granted as of September 30, 1997. See "Management -- Executive Compensation,"
"Certain Relationships and Related Party Transactions," "Description of
Securities," and "Selling Stockholder."
<PAGE>
RISK FACTORS
The shares offered hereby involve a high degree of risk and should be
purchased only by persons who can afford to sustain a total loss of their
investment. Prospective investors should consider carefully, in addition to the
other information contained in this Prospectus, the following risk factors.
Motion Picture and Television Industry
Substantially all of the Company's operating revenue are derived from
fees for the production of motion pictures for the theatrical exhibition,
television, and other markets. The motion picture and television industries
involve a substantial degree of risk. Each motion picture is an individual
artistic work, and its commercial success is primarily determined by audience
reaction, which is unpredictable; accordingly, there can be no assurance as to
the financial success of any motion picture. Furthermore, there can be no
assurance that the audiences for motion pictures will remain constant. The
Company's ability to compete successfully depends upon the continued
availability of rights to motion pictures (domestic and foreign) which the
Company can acquire, finance, and produce successfully. See "Business."
Competition
The motion picture industry is extremely competitive. The competition
comes from both companies within the same business and companies in other
entertainment media which create alternative forms of leisure entertainment. The
Company competes with several "major" film studios which are dominant in the
motion picture industry, as well as with numerous independent motion picture and
television production companies, television networks, and pay television systems
for the acquisition of literary properties, the services of performing artists,
directors, producers, and other creative and technical personnel, and production
financing. Many of the organizations with which the Company competes have
significantly greater financial and other resources than does the Company. The
majors are typically large, diversified entertainment concerns or subsidiaries
of diversified corporations which have strong relationships with creative
talent, exhibitors, and others involved in the entertainment industry, and whose
non-motion picture operations provide stable sources of earnings that offset
variations in the financial performance of their motion picture operations. See
"Business."
Operating Losses and Fluctuating Operating Results
The Company's revenues are derived primarily from fees for production
of a limited number of motion pictures during each year or fiscal period.
Accordingly, the Company's revenues, and thus net income, are subject to
significant fluctuations from year to year and period to period, depending upon
production and completion schedules, payment terms with respect to different
projects, and the success of individual projects. For the six month periods
ended June 30, 1996 and 1997, the Company had net losses of $(63,536) and
$(291,964), respectively.
Financial Requirements and Risks of Production, Completion, and Release of
Motion Pictures
The costs of producing and releasing motion pictures have generally
increased in recent years and may continue to increase in the future. The
Company does not have sufficient capital of its own to produce feature films and
other major productions by Avenue Pictures, although certain of Wombat's
productions are developed using the Company's capital. The Company is therefore
substantially dependent on its ability to enter into pre-production arrangements
with distributors, television networks, or others to finance production costs.
The Company also seeks
<PAGE>
to limit its exposure to cost overruns by the use of completion bonds (i.e.,
insurance policies designed to insure the completion and delivery of motion
pictures in accordance with the production agreement and the budget).
The Company does, to the extent possible, employ its own capital and
financial resources in developing a project to the point where it is ready to go
into production. Also, in some cases significant time may elapse between the
expenditure of funds by the Company and the receipt of revenues. In addition,
the Company is exploring establishing or acquiring an international sales
division. The Company will need additional financing, including the proceeds of
this offering, to support such operations. The Company has to date financed its
operations through internally generated cash flows, equity financing, and, most
recently, a line of credit for up to $250,000. The Company anticipates that its
existing capital resources, including the net proceeds of this offering and the
interest earned thereon, together with revenue generated from operations, will
enable it to fund its planned operations for a period of at least 12 months from
the date of this Prospectus. There can be no assurance that the Company will be
successful in obtaining additional financing, either through this offering or
otherwise. Obtaining such funds may result in additional dilution to existing
stockholders. If adequate funds are not available from additional financing
sources or from operations, the Company's business will be materially and
adversely affected. See "Use of Proceeds," "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources," and "Business."
Dependence on Certain Customers; Expiration of Contracts
Because the Company's revenues are derived primarily from fees for
production of a limited number of motion pictures during each year or fiscal
period, a limited number of customers, the identity of which varies period to
period, generally account for a large percentage of the Company's revenues in
any particular period. Among others, the Company has had multi-year agreements
with a subsidiary of Hallmark Entertainment, Inc. ("Hallmark"), for licensing by
Hallmark of certain rights with respect to television movies of the week; with
the A&E Cable Network ("A&E") for the production of television biographies; and
with Janson Associates, Inc. ("Janson") for distribution rights to Wombat's film
library. The agreement with Hallmark expires in October 1997, and all films have
been completed under the agreement with A&E. Although the Company has had
preliminary discussions with other parties for similar types of arrangements, no
such agreements have been entered into, and there can be no assurance that the
Company will be able to enter into arrangements with other parties on similar or
otherwise acceptable terms. A&E has informed the Company that it will not enter
into future production agreements unless A&E will own the copyright to the
production, whereas the Company had owned the copyrights under the prior
agreement. See "Business."
Potential Expansion into Foreign Distribution
The Company is currently considering establishing or acquiring an
international sales division, which will allow the Company to control a greater
number of rights and build an expanded motion picture library. The Company has
had preliminary discussions with certain persons, with a view towards either
hiring such persons, acquiring the company which currently employs such persons,
or both, to establish such an international sales division. Through an
international sales division, the Company will either act as its own sales agent
in international markets, sell foreign rights to third parties in the
international marketplace, or sell certain rights while retaining others which
the Company may exploit on its own. To the extent the Company retains any of
these foreign rights, the Company's financial commitment with respect to a
particular motion picture may be substantially increased. Although the Company
believes that its expansion into this area can provide opportunities for future
growth, foreign distribution creates certain additional risks, including the
necessity for additional capital, an increase in
<PAGE>
operating overhead, fluctuation in currency exchange rates, and changes in
foreign exchange control laws. See "Use of Proceeds" and "Business."
Dependence Upon Key Personnel
The Company's ability to compete successfully in the motion picture
industry depends substantially on its ability to attract and retain talented
officers and employees. Competition for such personnel is intense, and there can
be no assurance that the Company will be able to attract or retain such persons.
In particular, the Company will be dependent upon the continued services of Gene
Feldman, the Company's Chairman of the Board and President of Wombat, and of
Cary Brokaw, the Company's President and Chief Executive Officer and the founder
of Avenue Pictures. The loss of such key personnel, or the failure to recruit
additional key personnel, particularly in the international arena, could
significantly impede attainment of the Company's objectives and have a material
adverse affect on the Company's financial condition and results of operations.
Messrs. Feldman and Brokaw have entered into employment agreements with the
Company which terminate in 2001. The Company has obtained a $2,000,000 key man
life insurance policy on the life of Mr. Brokaw.
See "Management."
The Company will be required to make certain payments to Messrs.
Feldman and Brokaw in the event of certain changes in control (as defined in
their employment agreements). A portion of such payments may constitute excess
parachute payments, which would not be deductible by the Company for income tax
purposes. In addition, the Company may not be permitted to deduct that portion
of an executive's compensation which exceeds $1,000,000 in any year, excluding
certain performance based compensation. There can be no assurance that options
or warrants issued or which may be issued to Messrs. Feldman or Brokaw or other
executives would qualify as performance based compensation, or that the Company
will be able to deduct the entire amount earned by such executives in any year.
See "Management -- Employment Agreements."
Management of Staff Growth
The Company expects to increase its staffing levels in the future. The
Company's ability to execute its strategies will depend in part upon its ability
to integrate such new employees into its operations. The Company's planned
activities will require the addition of new personnel, including management,
particularly in the international arena. The inability to acquire such services
could have a material adverse impact on the Company's operations. See "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business," and "Management."
Use of Proceeds; Management Discretion
While the Company has identified certain uses for the proceeds of this
offering, particularly establishing an international sales division, management
of the Company will have the discretion to determine how such proceeds will be
applied within such broad category. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Control by Principal Stockholders
Prior to this offering, Mr. Brokaw, Mr. Feldman, and National Patent
Development Corporation ("National Patent") beneficially own approximately
38.9%, 9.5%, and 27.6% of the outstanding Common Stock, respectively. If all of
the shares offered hereby by the Company are sold, Mr. Brokaw, Mr. Feldman, and
National Patent will
<PAGE>
beneficially own approximately 37.0%, 9.0%, and 26.2% of the outstanding Common
Stock, respectively (without giving effect to the possible exercise of warrants
or options by the Selling Stockholder or other parties). Accordingly, such
stockholders will be able to control the business and affairs of the Company
immediately following this offering, including but not limited to having
sufficient voting power to control the election of the Board of Directors of the
Company and, in general, to substantially determine the outcome of any corporate
transaction or other matters submitted to the stockholders of the Company for
approval, including mergers, consolidations, or the sale of substantially all of
the Company's assets or preventing or causing a change in the control of the
Company. See "Principal Stockholders."
Anti-Takeover Provisions
The Amended and Restated Certificate of Incorporation of the Company
(the "Certificate") provides for a classified board, in which approximately
one-third of the directors are elected at each annual meeting. The By-laws of
the Company also require certain advance notice of nominations of directors. The
effect of such provision is to delay the ability of an insurgent group or
hostile acquirer to obtain control of the Board of Directors. In addition, the
Certificate authorizes the Board of Directors to issue up to 1,000,000 shares of
Class B Common Stock, the holders of which are entitled to cast ten votes per
share held, on all matters presented to stockholders. The Class B Common Stock
is otherwise identical to the Common Stock. Also, the Certificate authorizes the
Board of Directors to issue up to 2,000,000 shares of Preferred Stock in one or
more series, and to fix the number of shares constituting any such series, the
voting powers, designation, preferences, and relative participating, optional,
or other special rights and qualifications, limitations, or restrictions
thereof, including the dividend rights, terms of redemption (including sinking
fund provisions), conversion rights, and liquidation preferences of the shares
constituting any series, without any further vote or action by stockholders. The
Board of Directors may, therefore, issue Class B Common Stock or Preferred Stock
with voting and conversion rights which could adversely affect the voting power
of the holders of Common Stock. In addition, the issuance of Class B Common
Stock or Preferred Stock, as well as certain statutory provisions of Delaware
law, could potentially be used to discourage attempts by others to obtain
control of the Company through merger, tender offer, proxy contest, or otherwise
by making such attempts more difficult to achieve or more costly. Also, under
the employment agreements with Messrs. Feldman and Brokaw, certain payments may
be required to be made to them in the event of a change of control Such
provisions may discourage a hostile takeover even if in the best interest of all
other stockholders. See "Description of Securities."
Absence of Dividends; Dividend Policy
The Company anticipates that, for the foreseeable future, earnings will
be retained for the development of its business. Accordingly, the Company does
not anticipate paying dividends on the Common Stock in the foreseeable future.
The payment of future dividends will be at the sole discretion of the Company's
Board of Directors and will depend on, among other things, future earnings,
capital requirements, the general financial condition of the Company, and
general business conditions. See "Dividend Policy."
Substantial and Immediate Dilution; Significant Benefit to Current Stockholders
Purchasers of the shares offered hereby will incur immediate dilution
of approximately $____ per share in pro forma net tangible book value of the
Common Stock and current stockholders will realize a $____ per share increase in
such pro forma net tangible book value. See "Dilution."
<PAGE>
Volatility of Share Price; Lack of Liquidity
The market price of the Common Stock has experienced significant
volatility and limited trading volumes. There can be no assurance that the price
of the Common Stock will remain at or exceed current levels. Factors such as
announcements of production levels of the Company or its competitors,
technological changes, and general market conditions may have a significant
impact on the market price of the Common Stock.
Shares Eligible for Future Sale; Registration Rights
Sales of substantial amounts of Common Stock in the public market
following this offering could adversely affect the market price of the Common
Stock. As of September 30, 1997, there were 3,847,838 shares of Common Stock
outstanding, including ____ shares which are freely transferable without
restriction under the Securities Act (except for limits on sales by affiliates
of the Company) and ______ shares of Common Stock which were eligible for
immediate sale in the public market pursuant to Rule 144 under the Securities
Act, subject in some cases to certain volume and other limitations. In addition,
certain stockholders have certain registration rights with respect to at total
of 1,425,000 shares of Common Stock. See "Shares Eligible for Future Sale."
USE OF PROCEEDS
If all of the shares offered hereby by the Company are sold, the
Company would receive net proceeds of approximately $____ , after deducting
estimated expenses of this offering. The Company intends to apply substantially
all of such net proceeds to the development of Avenue Pictures's international
sales division.
The Company is currently considering establishing or acquiring an
international sales division, which will allow the Company to control a greater
number of rights and build an expanded motion picture library. The Company has
had preliminary discussions with certain persons, with a view towards either
hiring such persons, acquiring the company which currently employs such persons,
or both, to establish such an international sales division. Through an
international sales division, the Company will either act as its own sales agent
in international markets, sell foreign rights to third parties in the
international marketplace, or sell certain rights while retaining others which
the Company may exploit on its own. To the extent the Company retains any of
these foreign rights, the Company's financial commitment with respect to a
particular motion picture may be substantially increased. Direct involvement in
international sales may also provide opportunities for co-production and
co-financing of projects. Although the Company believes that its expansion into
this area can provide opportunities for future growth, foreign distribution
creates certain additional risks, including the necessity for additional
capital, an increase in operating overhead, fluctuation in currency exchange
rates, and changes in foreign exchange control laws. See "Risk Factors" and
"Business."
The Company anticipates that its existing capital resources, including
the net proceeds of this offering and the interest earned thereon, together with
revenue generated from operations, will enable it to fund its planned operations
for a period of at least 12 months from the date of this Prospectus.
Pending the use of such proceeds, the Company expects to invest the net
proceeds received by it from this offering in short-term, investment-grade,
interest bearing securities.
<PAGE>
MARKET PRICE OF COMMON STOCK
The Common Stock commenced trading on the American Stock Exchange
("AMEX") on July 16, 1997 under the symbol "PIX." Prior to July 16, 1997, the
Common Stock was traded on the Over-the-Counter Bulletin Board under the symbol
"FLIK." The following table sets forth the high and low sales prices for the
Common Stock on the AMEX since July 16, 1997, and, for periods prior thereto,
the high and low bid prices for the Common Stock. Quotations for periods prior
to July 16, 1997 represent bid prices between dealers and do not include retail
mark-up, mark-down, or commissions, and do not represent actual transactions.
1995 Low Bid High Bid
---- ------- --------
1st Quarter $1/2 $11/4
2nd Quarter $3/8 $11/4
3rd Quarter $1/4 $1
4th Quarter $1/4 $2
1996 Low Bid High Bid
---- ------- --------
1st Quarter $13/4 $21/2
2nd Quarter $21/4 $33/4
3rd Quarter $21/4 $31/2
4th Quarter $13/4 $31/2
1997 Low Bid High Bid
1st Quarter $2 3/4 $4 1/2
2nd Quarter $3 3/4 $6
3rd Quarter (to July 15, 1997) $5 1/2 $6 3/4
Low Sale High Sale
3rd Quarter (from July 16, 1997 to $6 1/2 $10 1/4
September 23, 1997)
As of September 30, 1997, there were 182 holders of record of Common
Stock.
DIVIDEND POLICY
The Company anticipates that, for the foreseeable future, earnings will
be retained for the development of its business. Accordingly, the Company does
not anticipate paying dividends on the Common Stock in the foreseeable future.
The payment of future dividends will be at the sole discretion of the Company's
Board of Directors and will depend on, among other things, future earnings,
capital requirements, the general financial condition of the Company, and
general business conditions. Payment of dividends may also be limited by the
terms of any Preferred Stock or debt the Company may issue or incur. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -Liquidity and Capital Resources" and "Description of Securities --
Preferred Stock."
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as
of June 30, 1997 and (ii) as adjusted to give effect to the issuance of 100,000
shares to the Selling Stockholder (see "The Selling Stockholder") and of the
200,000 shares offered hereby by the Company.
<TABLE>
June 30, 1997
<CAPTION>
(Unaudited)
Actual As Adjusted (1)
<S> <C> <C>
Short-term debt and short-term portion of capital $162,948 $162,948
======== ========
lease obligations
Stockholders' equity:
Preferred Stock, par value $.01 per share, 2,000,000 --- ---
shares authorized; none issued and outstanding
Common Stock, par value $.01 per share, 15,000,000 $ 37,478 $ 40,478
shares authorized; 3,747,838 shares issued and
outstanding; 4,047,838 shares issued and outstanding as
adjusted(2)
Class B Common Stock, par value $.01 per share, 1,000,000
shares authorized; none issued and outstanding
--- ---
Additional paid-in capital 4,799,502
Retained (deficit) (67,963) (67,963)
Unrealized loss on marketable securities (107,581) (107,581)
Note receivable for Common Stock (150,000) (150,000)
--------- ---------
Total stockholders' equity $4,511,436 $
---------- -
Total capitalization $ $
========== =
</TABLE>
- ----------
(1) If all shares offered hereby by the Company are sold.
(2) As adjusted includes 100,000 shares issued to the Selling
Stockholder subsequent to June 30, 1997, and 200,00 shares
offered hereby by the Company. Does not include (i) 791,5000
shares of Common Stock issuable upon exercise of options
exercisable at an average exercise price of $.70 per share and
(ii) up to 1,750,000 shares of Common Stock issuable pursuant
to options under the Company's 1997 Stock Option and Long Term
Incentive Compensation Plan (the "1997 Plan"), of which
options for 570,000 shares at an average exercise price of
$3.00 per share have been granted as of September 30, 1997.
See "Management -- Executive Compensation," "Certain
Relationships and Related Party Transactions," and
"Description of Securities."
The Company has no long-term debt obligations.
<PAGE>
DILUTION
At June 30, 1997, the Company's net tangible book value was
approximately $1,917,000, or $.51 per share. "Net tangible book value"
represents the amount of total tangible assets less total liabilities.
After giving effect to the sale of the all of the shares offered hereby
by the Company at a public offering price of $___ per share and the
application of the net proceeds therefrom, and to the issuance of
100,000 shares to the Selling Stockholder subsequent to June 30, 1997,
the as adjusted net tangible book value would be approximately
$_________, or $___ per share, representing an immediate increase of
$_____ per share to existing stockholders and an immediate dilution of
$_____ per share to the purchasers of the shares offered hereby. The
following table illustrates such per share dilution:
Public offering price per share $
Net tangible book value per share prior to this
offering Increase per share attributable to purchasers
in this Offering
As adjusted net tangible book value per share of Common
Stock after this offering _________
Dilution to purchasers in this offering $
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis should be read in
conjunction with the Company's consolidated financial statements and
related notes thereto.
General
The Company is an independent entertainment company which,
through its two operating subsidiaries (Avenue Pictures and Wombat),
produces motion pictures for theatrical exhibition, television, and
other ancillary markets, both domestically and internationally.
Share Exchange and Reincorporation
Pursuant to a Share Exchange Agreement (the "Share Exchange
Agreement"), dated as of September 30, 1996, among Cary Brokaw, Avenue
Pictures, and The CineMasters Group, Inc. ("CineMasters"), CineMasters
acquired all of the outstanding capital stock of Avenue Pictures from
Mr. Brokaw, then the sole shareholder of Avenue Pictures, in exchange
for 1,425,000 shares of CineMasters common stock ("CineMasters Common
Stock") (the "Business Combination"). In connection with the Business
Combination, National Patent, a significant shareholder of CineMasters,
made a capital contribution to CineMasters of 90,566 shares of
registered National Patent common stock valued at $815,000 in the
aggregate, based upon the closing price per share of National Patent
common stock on the AMEX on September 30, 1996, in exchange for 407,500
shares of CineMasters Common Stock. Such capital contribution was made
by National Patent for investment purposes and was a condition to
closing pursuant to the Share Exchange Agreement. Prior to completion
of the Business Combination, in August 1996, certain affiliates and
employees of National Patent and CineMasters contributed $185,000 in
cash to the capital of CineMasters in exchange for 123,338 shares of
restricted CineMasters Common Stock in a private placement transaction.
In furtherance of the Business Combination, CineMasters entered into a
stockholders agreement and certain employment agreements (see
"Management -- Executive Compensation" and "Certain Relationships and
Related Transactions").
Following the Business Combination, the Board of Directors and
shareholders of CineMasters approved a transaction pursuant to which
(i) all of the assets of the Wombat Productions division (the "Wombat
Division") of CineMasters were transferred, subject to all related
liabilities and obligations, to its newly-formed, wholly-owned Delaware
subsidiary, Wombat, (ii) CineMasters was merged with and into the
Company (its newly-formed, wholly-owned Delaware subsidiary) with the
Company being the surviving corporation in the merger (the
"Reincorporation"), and (iii) each stockholder of CineMasters received
an equal number of shares of the Company in exchange for each share of
capital stock of CineMasters held by such stockholder immediately prior
to the effective time of the Reincorporation (the "Effective Time"). As
a result of the Reincorporation, Avenue Pictures became a wholly-owned
subsidiary of the Company.
The consolidated financial statements of the Company for the
period ended December 31, 1996 include the results of operations of
Avenue Pictures from the date of acquisition.
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Six Months Ended June 30, 1997
For the six months ended June 30,1997, the Company had a loss
before income taxes of $364,000 compared to a loss of $55,000 for the
six months ended June 30, 1996. The increased loss for the 1997 period
was the result of several factors. For the six months ended June 30,
1997, the Company had significantly reduced licensing revenue at the
Company's Wombat division, partially offset by the revenue generated by
the Avenue Pictures division, which was acquired on September 30, 1996.
In addition, for the six months ended June 30, 1997, the Company
recorded $140,000 of amortization of goodwill related to the
acquisition of Avenue Pictures, as well as increased general and
administrative expenses, primarily salaries and occupancy costs
incurred by Avenue Pictures for the period. These increased expenses
were partially mitigated by the revenue generated by Avenue Pictures
for the period.
Revenues
Revenues for the six months ended June 30, 1997 were
$2,126,000 compared to $971,000 for the six months ended June 30, 1996.
The revenues for the six months ended June 30, 1997 were derived from
revenues generated by Avenue Pictures which was acquired on September
30, 1996 and the operations of Wombat. Revenues from the operations of
Avenue Pictures for the six months ended June 30, 1997 amounted to
approximately $1,447,000 and were primarily derived from the delivery
to Hallmark of the made-for-television movie "Tell Me No Secrets" and
the recognition of the producing and overhead fees on the feature film
"The Road to Graceland," which accounted for approximately 68% of the
consolidated revenues for the six months ended June 30, 1997. Revenues
from Wombat's operations for the six months ended June 30, 1997 were
approximately $680,000, a decrease of $291,000 from the comparable
period of the prior year. The decrease in revenues earned by Wombat for
the six months ended June 30, 1997 were primarily due to reduced sales
of licensed programming in international markets during 1997. Of the
revenues earned by Wombat during the six months ended June 30, 1997,
approximately $250,000 was derived from the completion and availability
of two one-hour motion picture profiles for A&E. The remaining revenue
was derived from licensing of rights to Wombat programming in secondary
markets (Janson).
Film Production Costs
Cost of revenues for the six months ended June 30, 1997 was
$1,151,000 compared to $298,000 for the six months ended June 30, 1996.
The increase can be primarily attributed to the film amortization
relating to Avenue Pictures television product in the amount of
$900,000.
Selling, General, and Administrative
Selling, general, and administrative expenses for the six
months ended June 30, 1997 were $1,340,000 compared to $729,000 for the
six months ended June 30, 1996. Included in the six months ended June
30, 1997 expenses are $644,000 of SG&A expenses relating to Avenue
Pictures' operations which were principally salaries and related
benefits and occupancy expenses, including approximately $100,000
relating to costs incurred for future business development. In
addition, the Company recognized approximately $140,000 amortization of
goodwill related to the Avenue Pictures acquisition on September 30,
1996. Wombat's SG&A expenses decreased primarily as a result of reduced
licensing revenues and the related commission expense, as well as a
decrease in salaries.
<PAGE>
Five Months Ended December 31, 1996 and Years Ended July 31, 1996 and
1995
Revenues
Revenues for the five months ended December 31, 1996 were
$3,509,000. The revenues were derived from revenues generated by Avenue
Pictures which was acquired on September 30, 1996 and the operations of
Wombat. Revenues from the operations of Avenue Pictures from the
acquisition date through December 31, 1996 amounted to approximately
$2,727,000 and were primarily derived from the completion and
availability to ABC of the made-for-television movie "Tell Me No
Secrets." Revenues from Wombat operations for the five months ended
December 31, 1996 were approximately $782,000. Of this amount
approximately $454,000 was derived from the completion and availability
of four one hour motion picture profiles to A&E and Lifetime
Productions, Inc. ("Lifetime"). The remaining revenue was derived from
licensing of rights to Wombat programming in secondary markets. No
revenues were derived from the operations of Kaufman Films, Inc.
("Kaufman Films") during the five month period ended December 31, 1996
due to the Kaufman Termination Agreement (as defined below; see
"Management -- Employment Agreements").
Revenues increased approximately $168,000 or 9% for the year
ended July 31, 1996 (fiscal 1996) compared to the year ended July 31,
1995 (fiscal 1995). The increase can be attributed to an approximately
$130,000 increase due to three one hour motion picture profiles being
completed and available in fiscal 1996 as opposed to only two such
profiles becoming available in fiscal 1995, and a $130,000 increase
from the licensing of rights in secondary markets, offset by an
approximately $92,000 decrease in revenues derived from the Kaufman
Film operations.
One customer, ABC, accounted for approximately 77% of total
revenues during the five months ended December 31, 1996. During fiscal
1996 and fiscal 1995, A&E accounted for approximately 12% and 13% of
total revenues and Janson accounted for approximately 40% and 27% of
total revenues, respectively.
Cost of Revenues
Cost of revenues for the five months ended December 31, 1996
was $2,752,000 which can be attributed to the film amortization
relating to Avenue Pictures' television product in the amount of
$2,496,000 and approximately $256,000 from Wombat's operations.
Cost of revenues decreased approximately $68,000 for fiscal
1996 compared to fiscal 1995. The decrease can be primarily attributed
to lower costs on secondary licensing sales in fiscal 1996 for
production with little or no remaining capitalized production costs.
Selling, General, and Administrative
Selling, general, and administrative expenses for the five
months ended December 31, 1996 was $662,000. Included in the five
months ended December 31, 1996 expenses are $262,000 of SG&A expenses
related to Avenue Pictures operations and were principally salaries and
related benefits and occupancy expenses. SG&A expenses, exclusive of
Avenue Pictures, for the five months ended December 31, 1996 were
approximately $400,000 and were primarily salary and related benefits,
occupancy costs, and professional fees.
<PAGE>
SG&A expenses increased $135,000 or 23% for fiscal 1996
compared to fiscal 1995. The increase can be attributed to increases in
SG&A expenses related to the Kaufman Film operations of approximately
$65,000 and increases in various other miscellaneous expenses
aggregating approximately $70,000.
Other Income
During fiscal 1995, the Company sold an investment generating
a profit of $59,768. There were no similar items during fiscal 1996 or
the five months ended December 31, 1996.
Liquidity and Capital Resources
At September 30, 1997, the Company had approximately
$521,000 of cash and approximately $730,000 of short term investments.
At June 30, 1997, the Company had approximately $391,000 of cash and
approximately $707,000 of short term investments.
On May 27, 1997, the Company entered into an unsecured demand
note (the "Note") which provides the Company with borrowings in the
principal amount of $250,000, at prime plus 1%, with Fleet Bank,
National Association. The Note is payable on demand, but in any event
not later than May 27, 1998. As of June 30, 1997, $140,000 had been
borrowed under the Note. An additional $87,500 was borrowed through
September 30, 1997.
The Company believes it has adequate capital resources to meet
its short-term needs covering at least twelve months. The Company
expects to expand its production activities. Management believes that
the existing cash and short term investments are adequate to fund the
Company's operations. However, management may seek to raise additional
funds, through the issuance of Common Stock or debt, to expand the
Company's business at a greater rate. There is no guarantee that such
funding will be available, or available under terms which are
acceptable to the Company. The Company's rate of growth and investment
in projects will be adjusted as necessary based on available financing
and existing capital resources.
Recent Accounting Pronouncement
In February 1997, Statement of Financial Accounting Standards
No. 128, "Earnings per Share" (SFAS No. 128), was issued. SFAS No. 128
simplifies the standards for computing earnings per share, and makes
the United States standards for computing earnings per share more
comparable to international standards. SFAS No. 128 requires
presentation of "basic" earnings per share (which excludes dilution)
and "diluted" earnings per share. The Company does not believe the
adoption of SFAS No. 128 in fiscal 1997 will have a material impact on
the Company's reported earnings per share. SFAS No. 128 is effective
for financial statements issued for periods ending after December 15,
1997 and requires restatement of all prior period earnings per share
presented.
Forward Looking Statements
This Prospectus contains forward-looking statements.
Discussions containing such forward-looking statements may be found in
material set forth under "Business," "Management's Discussion and
Analysis of Results of Financial Condition and Results of Operations,"
as well as the Prospectus generally. Such statements are subject to a
number of risks and uncertainties. Actual results in the future could
differ materially from those described in the forward-looking
statements as a result of the matters set forth in the Prospectus
generally. The Company undertakes no obligation to publicly release the
results of any revisions to these forward-looking statements that may
be made to reflect any future events or circumstances
<PAGE>
BUSINESS
General
The Company is an independent entertainment company which,
through its two operating subsidiaries, develops and produces motion
pictures for theatrical exhibition, television, and other ancillary
markets, both domestically and internationally.
Avenue Pictures
Avenue Pictures was founded by Cary Brokaw in 1991. Mr. Brokaw
has extensive experience in the motion picture industry. He began his
career in the marketing department at Twentieth Century Fox. He also
served as executive vice president at Cineplex Odeon and was president
and chief executive officer of Island Pictures.
Mr. Brokaw has particular experience in producing and
releasing modestly budgeted independent films which appeal to the more
sophisticated theatergoer. He has enjoyed success with such films as
Choose Me, El Norte, Kiss of the Spider Woman, The Trip to Bountiful,
Mona Lisa and Spike Lee's first film, She's Gotta Have It. Mr. Brokaw
is responsible for the production and release of Gus Van Sant's Drug
Store Cowboy, James Foley's After Dark My Sweet, Michael Lindsay-Hogg's
The Object of Beauty, Jane Campion's Sweetie, and Jim Sheridan's The
Field. Mr. Brokaw was the producer of Robert Altman's The Player, the
celebrated and successful comedy which was nominated for five Academy
awards, including Best Picture. Mr. Brokaw also produced Robert
Altman's Short Cuts, which was nominated for several Academy Awards.
More recently, Mr. Brokaw produced Restoration, the Academy-Award
winning and critically acclaimed epic adventure directed by Michael
Hoffman and released by Miramax Films. In 1996, Mr. Brokaw produced
Sony Pictures' Voices from a Locked Room, directed by Malcolm Clarke
and starring Jeremy Northam and Tushka Bergen. In May 1997, Avenue
Pictures completed filming on The Road to Graceland starring Harvey
Keitel, Johnathan Schaech, and Bridget Fonda based on an original
screenplay developed by Avenue Pictures. The Road to Graceland is now
in post-production and scheduled for release in early 1998.
Avenue Pictures is in the business of producing feature films,
television films, and series for television. As set forth in greater
detail below, Avenue Pictures is currently active in developing and
producing projects in each of its three areas of activity.
Business Approach
As an independent producer of feature films and television
programming, Avenue Pictures does not have sufficient capital to
independently finance its own productions. Accordingly, most of its
financial resources are devoted to financing development activities
which include the acquisition of underlying literary works such as
books, plays, or newspaper articles and commissioning of screenplays
based upon such underlying literary works. A key element in the success
of the development process is Mr. Brokaw's reputation in the
entertainment business and his access to and relationships with
creative talent.
It is the ability to identify and develop attractive
properties which is instrumental to the success of independent
producers such as Avenue Pictures. In particular, the feature film
industry relies heavily on independent producers to identify projects
which are then developed further or produced and distributed by the
major studios. Independent producers serve a similar function in the
television industry. Avenue Pictures employs a flexible strategy in
<PAGE>
developing its motion picture and film properties. Wherever possible,
it employs its own capital and financial resources in developing a
project to the point where it is ready to go into production.
Typically, this means putting together a "package" which consists of
the underlying property, a script that is ready for production, and key
talent, including a director and principal cast. The benefit of
developing a project to this advanced stage is that Avenue Pictures
will have maximum leverage in negotiating production and financing
arrangements with a distributor. Nevertheless, there are occasions when
Avenue Pictures benefits from the financial assistance of a studio at
an earlier stage. These occasions may be necessary as a result of
lengthy development of a script, the desirability of commissioning a
script by a highly paid writer, the acquisition of an expensive
underlying work, or a significant financial commitment to a director or
star. Moreover, when developing a property for series television, it is
almost essential to involve a network at an earlier stage inasmuch as
development and production of a television series requires a much
larger financial commitment than production of a television movie.
In addition to the development and production strategies
described above, Avenue Pictures also considers various production
financing alternatives which are available whereby commitments from
various end users such as independent domestic distributors, foreign
distributors, cable networks, and video distributors can be combined to
finance a project without a major studio financial commitment. Set
forth below are Avenue Pictures's current projects in the feature film,
made-for-television, and series television categories, including a
brief description of the financial arrangements which pertain to each
type of production.
Feature Films
Currently, Mr. Brokaw serves as the producer or executive
producer of all Avenue Pictures films with overall responsibility for
their development, financing, and production arrangements. Avenue
Pictures is paid a producing fee for both the services of Mr. Brokaw
and for Avenue Pictures's services in connection with the development
and production of each feature film, in addition to a negotiated profit
participation. The nature of the profit participation is a function of
Mr. Brokaw's standing as a producer and Avenue Pictures's relative
bargaining position with respect to each project. As set forth above,
Avenue Pictures's bargaining position is enhanced by the development
and "packaging" of a project to the fullest possible extent before
seeking the financial assistance of a studio or distributor.
Current feature film projects for Avenue Pictures include the
following titles: The Road to Graceland, Angels in America, The
Moviegoer, Paying Up, and The Diviners.
Filming started on The Road to Graceland, an original
screenplay developed by Avenue Pictures, directed by David Winkler and
starring Harvey Keitel, Johnathan Schaech, and Bridget Fonda, in March
of 1997 and was completed in May 1997 and is now in post-production.
The $11 million film has been fully financed by Largo Entertainment
Corp., a wholly owned subsidiary of JVC Entertainment, Inc. ("Largo").
Largo currently plans to distribute the film in foreign markets by
licensing the rights to most major territories and through a network of
sales representatives in other territories. In the domestic market,
principally the United States and Canada, Largo will likely license the
film through a major distributor. After Largo receives a distribution
fee for its services and recoups its expenses and investment in the
film plus interest, Avenue Pictures will receive a profit participation
of approximately 50% out of which all third party participants must be
paid.
Avenue Pictures will produce the film Angels in America, based
on the Pulitzer Prize and Tony Award winning play by Tony Kushner.
Director P.J. Hogan of Muriel's Wedding and My Best Friend's Wedding,
starring Julia Roberts, has agreed to direct the picture. Several major
<PAGE>
actors, including Al Pacino and Meryl Streep, have agreed to star in
the motion picture. Developed at New Line Cinema, Avenue is now
negotiating with several studios with respect to financing of the film.
Avenue Pictures hopes to start filming in mid 1998.
Tri-Star Pictures has financed the development of a film based
upon the Walker Percy novel, The Moviegoer. Actor Julia Roberts is
contractually committed to the film subject to approval of the final
script and choice of director. Terence Malik, director of Badlands,
Days of Heaven, and the upcoming The Thin Red Line, has written the
screenplay and will likely direct. Tri-Star has placed this project in
turnaround and Avenue is in discussions with several other studios to
finance the film.
Paying Up is an original screenplay currently in development
at Paramount Pictures. Michael Hoffman, the director of Restoration and
One Fine Day, has agreed to direct the picture. The script for the
movie, written by Nora Ephron, Beth Henley, Wendy Wasserstein, Jon
Robin Baitz, Terrence McNally, and Richard Greenberg, is presently
being rewritten. The screenplay was conceived with multiple writers
collaborating on six stories interwoven in a unique fashion so that
each writer contributes a story. Provided that development of the
project progresses satisfactorily, Avenue Pictures anticipates that the
film could begin production in late 1998.
Woody Harrelson and Liv Tyler are both in negotiations with
Avenue Pictures to star in The Diviners. The Diviners is based on a
play by Jim Leonard, Jr. who also wrote the screenplay. Avenue Pictures
has an option to acquire the screenplay and is in the process of
securing financing for the film. Avenue Pictures anticipates commencing
filming in August 1998.
Dimension Pictures/Miramax Films have recently agreed to
finance the development of JINX and AKA Goldfish, based on the
acclaimed underground comic book by Brian Michael Bendis.
Although Avenue Pictures continues to pursue vigorously the
development and/or production of these projects, there can be no
assurance that each project will be produced within the indicated time
frame and budget due to the contingencies of securing talent,
financing, and distribution.
In addition to these projects, Avenue Pictures is currently
developing approximately twelve additional projects. However, no
assurance can be given as to when or if any of these projects will be
completed.
Made-for-Television/Cable Movies
Avenue Pictures has also successfully produced
made-for-television movies and movies for cable television. Movies
produced for television include: In The Eyes of a Stranger, which aired
on CBS in the spring of 1992, See Jane Run, based on the best-selling
novel by Joy Fielding, starring Joanna Kerns (ABC) which aired in
January 1995 and was rebroadcast on ABC on June 15, 1997, and A
Stranger in Town, an adaptation of R.T. Marcus's play starring Jean
Smart and Gregory Hines, which aired on CBS in March of 1996. More
recently, Avenue Pictures produced The Almost Perfect Bank Robbery
starring Brooke Shields and Dylan Walsh for CBS, Two Mothers for
Zachary for ABC starring Valerie Bertinelli and Vanessa Redgrave, and
Tell Me No Secrets starring Lori Loughlin and Bruce Greenwood which
aired on ABC in January 1997.
For cable television, Avenue Pictures produced Amelia Earhart:
The Final Flight for Turner Network Television, starring Diane Keaton,
Rutger Hauer, and Bruce Dern, and directed by Yves Simoneau which aired
in June 1994. Avenue Pictures also completed the production of Path To
<PAGE>
Paradise: The Untold Story of the World Trade Center Bombing for HBO,
which stars Peter Gallagher, Marcia Gray Hardin, and Art Malik and is
directed by Leslie Libman and Larry Williams. Path to Paradise aired on
June 14, 1997.
Typically, the domestic broadcaster of a made-for-television
movie pays a license fee which entitles it to a limited number of
airings of the movie over a designated period of time (generally 2-5
years). The initial network/cable license fees generally range from
$2.5 -$3.5 million dependent upon the broadcaster and the nature and
content of the programming. Producers such as Avenue Pictures have
historically been required to expend production costs in excess of the
initial domestic network/cable broadcast license fee. The practice of
incurring production costs in excess of the initial domestic
network/cable broadcast license fee is generally referred to as
"deficit financing." This deficit financing is generally recovered
through sales of the made-for-television movie in media and territories
other than domestic network/cable broadcasting, such as international
free television, domestic syndication (post initial broadcast license),
domestic and international pay television, and domestic and
international home video. Unlike many television producers who must
seek licensing arrangements on a project-by-project basis to cover its
deficit financing, Avenue Pictures had entered into an output agreement
with RHI Entertainment, Inc., a distribution company which is a wholly
owned subsidiary of Hallmark. As a result, Avenue Pictures has had the
ability to assemble financing more easily and can move forward more
efficiently with its television projects. Avenue Pictures retains 100%
ownership in its made-for-television movies subject to the rights
licensed to the initial domestic network/cable broadcaster and
Hallmark.
As indicated above, pursuant to the Hallmark distribution
agreement, Avenue Pictures had granted to Hallmark the right to license
Avenue Pictures movies (i) internationally and (ii) in the domestic
market subsequent to the initial network license period. The Hallmark
agreement pertains to typical network movies of the week, i.e. movies
shown on ABC, CBS, or NBC, of two hour length, with license fees no
less than $2.5 million. Hallmark was required to pay a predetermined
advance against its distribution rights for all such movies. Avenue
Pictures was not required to supply to Hallmark movies which it does
not fully own and control.
The agreement with Hallmark expires in October 1997. Avenue
Pictures is currently negotiating a new distribution agreement with
another well established distributor of long-form television
programming. There can be no assurance that Avenue Pictures will be
able to obtain such an arrangement or as to the terms of any such
agreement which may be reached.
The Hallmark agreement does not cover television movies which
Mr. Brokaw or other Avenue Pictures executives produce pursuant to "for
hire" arrangements with programmers. In such producer-for-hire
arrangements, Mr. Brokaw and Avenue Pictures do not have financing
responsibility or ownership for the films. Mr. Brokaw receives a
substantial producer's fee for such services. Mr. Brokaw has provided
services to HBO as a producer-for-hire on Path to Paradise. Mr. Brokaw
has also been asked to executive produce Drugs, Inc.: Sympathy for the
Devil, a two hour movie about the infamous drug lord Pablo Escobar for
HBO. Sympathy for the Devil, which is still in the development stage,
is expected to begin principal photography in early 1998.
Avenue Pictures has approximately fifteen television movies in
development, including Don't Cry Now (ABC), based on Joy Fielding's
best selling novel, and Spree, The Andrew Cunanan Story (ABC). Although
Avenue Pictures is actively pursuing these projects, there can be no
assurance that each or any project will be produced due to Avenue
Pictures's reliance upon the network and cable programmers who must
approve and order the films in order to provide adequate financing.
<PAGE>
Series Television
Currently, Avenue Pictures is in preproduction on one
television series. In conjunction with New Line Television, Avenue
Pictures has developed and produced a one-hour pilot for a television
series based upon the movie, The Player, for which Mr. Brokaw serves as
Executive Producer. ABC has financed the pilot with New Line
Television. The pilot was delivered to ABC in late May 1997. ABC has
declined to produce a series based on the pilot. However, New Line
Television is currently negotiating with another network interested in
producing the series.
Avenue Pictures is also working on two other television series
which are in the developmental stage, including Street Life written by
Joseph Cacaci, which is a one hour series being developed with Warner
Brothers Television.
Competition
The motion picture industry is extremely competitive. The
competition comes from both companies within the same business and
companies in other entertainment media which create alternative forms
of leisure entertainment. Avenue Pictures competes with several "major"
film studios which are dominant in the motion picture industry, as well
as with numerous independent motion picture and television production
companies, television networks, and pay television systems for the
acquisition of literary properties, the services of performing artists,
directors, producers, and other creative and technical personnel, and
production financing. Many of the organizations with which Avenue
Pictures competes have significantly greater financial and other
resources than does Avenue Pictures. In addition, Avenue Pictures's
films compete for audience acceptance with motion pictures produced and
distributed by other companies. As a result, the success of Avenue
Pictures's production is also heavily dependent on public taste, which
is both unpredictable and susceptible to change without warning.
A limited number of independent production companies are as
actively involved in the production of both feature films and
television movies. The management of Avenue Pictures believes that its
established track record of high quality, critically acclaimed films
attracts some of the best writing, directing, and acting talent in the
industry. In addition, Mr. Brokaw's years of experience in the business
and strong reputation further enhance the competitive edge of Avenue
Pictures.
Major Customers
Avenue Pictures's revenue has historically been derived from
the production of a relatively small number of programs. Given this
fact, the limited number of outlets for the Avenue Pictures
productions, and the individually significant license fees generated
from certain of its sales, certain customers have historically
accounted for a significant portion of Avenue Pictures's revenue.
Avenue Pictures derived approximately 69% and 25% of its total revenue
from Hallmark and Largo, respectively, for the six months ended June
30, 1997 and 78% and 16% of its total revenue from ABC and Hallmark,
respectively, for the year ended December 31, 1996 and 64% and 17% of
its total revenue from Hearst Entertainment Productions and Miramax,
respectively, for the year ended December 31, 1995.
Employees
Avenue Pictures has nine full time employees and two part time
employees.
<PAGE>
Wombat
Wombat was formed in March 1997 to acquire all of the assets
of the Wombat Division of CineMasters, founded in 1969 by Gene Feldman
and his wife, Suzette St. John Feldman. Historically, Wombat's primary
focus has been the production of one hour motion picture profiles of
Hollywood's biggest stars which are aired by the major cable networks.
Gene Feldman and Suzette St. John Feldman have produced films together
for over twenty years.
The following titles, produced since 1982, are included in the
Wombat program library:
Program Library- The Hollywood Collection
"Hollywood's Children" "Clint Eastwood:The Man From Malpaso"
"The Horror Of It All" "Audrey Hepburn Remembered . . ."
"Ingrid" "Mae West...And The Men Who Knew Her"
"Marilyn Monroe: Beyond The Legend" "The Story Of Lassie"
"Steve McQueen: Man On the Edge" "Charlton Heston: For All Seasons"
"Grace Kelly: The American Princess" "Roger Moore: A Matter of Class"
"Cary Grant: The Leading Man" "Yul Brynner: The Man Who Was King"
"Gregory Peck: His Own Man" "Ingrid Bergman Remembered"
"William Holden: The Golden Boy" "Burt Lancaster: Daring To Reach"
"Vivien Leigh: Scarlett And Beyond"* "Jack Lemmon: America's Everyman"
"Anthony Quinn: An Original" "Joan Crawford: Always The Star"
"Robert Mitchum: The Reluctant Star" "Fred MacMurray: The Guy Next Door"
"Michael Caine: Breaking The Mold" "Intimate Portrait: Shirley MacLaine"
"Shirley Temple: America's Little Darling" "Barbara Stanwyck: Straight Down the
"Walter Matthau: Diamond in the Rough" Line"
"Gary Cooper: The Face of a Hero"**
* Turner Broadcasting System owns the copyright on "Vivien
Leigh: Scarlett and Beyond." All other copyrights are
owned by Wombat.
** Expected to be delivered October 9, 1997.
Wombat has recently completed the last two one-hour
documentaries under the agreement with A&E. Walter Matthau: Diamond in
the Rough was delivered on May 23, 1997, and Gary Cooper: The Face of a
Hero is expected to be delivered October 9, 1997. Wombat is currently
in pre-production on two new programs, one on Alan Ladd and the other
on Isabella Rossellini, which Wombat is self-financing. To date, Gene
Feldman and Suzette St. John Feldman have produced 30 film star
biographies. Among their awards was a Cable Ace award for a film on
Robert Mitchum and an Emmy nomination for a program on Audrey Hepburn.
The process of preparing a biography generally takes four
months from start to finish. In preparing the biography, Wombat uses
interview materials, film clips, public domain films, trailers, still
photos, archival materials, and newsreels. Wombat conducts interviews
with the subject of the biography, if he or she is still alive, and
various family members, friends, and associates of the individual.
Additional research on the figures involves the gathering and reading
of any publicly available information, including biographical and
autobiographical materials and interviews with biographers. Generally,
all interviewees sign releases and participate willingly in the
compilation of materials for the biography at no cost to Wombat.
<PAGE>
Gene Feldman and his wife, Suzette St. John Feldman, do all
research on the figures as well as produce, write, and direct the
biographies. In addition, Wombat employs a staff cameraperson/ editor
and an associate producer. Budgets for the films range from $200,000 to
$250,000 per film. Once the film is completed, Wombat submits the film
to the principal licensee for its content and technical approval.
Production Arrangements
A&E: Pursuant to an Agreement, dated as of December 5, 1994
and amended as of June 27, 1995 and as of October 1, 1996, A&E
commissioned the production of seven one-hour motion picture profiles
by Wombat, all of which have now been completed. A&E paid an advance on
each program for which it received an exclusive five-year exhibition
period per program in the United States and its territories and
possessions and, in the English language only, Canada, Mexico, Central
America, and the Caribbean. In addition, A&E had two successive
options, each to order up to five additional programs. A&E exercised
its first option for three additional programs, for which Wombat
received increased advances. A&E has determined not to exercise
additional options. A&E also has two successive options to extend the
exhibition periods of their ordered programs for an additional payment.
To date, A&E has not exercised any of its extension options.
HBO: Pursuant to a Production and License Agreement, dated as
of November 17, 1989, Wombat agreed to produce and deliver to HBO four
one-hour motion picture biographical profiles depicting the lives of
Clint Eastwood, Robert Mitchum, Michael Caine, and Anthony Quinn for a
significant license fee per program. As consideration for such license
fee, HBO was granted the exclusive perpetual right to distribute each
program, without limitation, throughout the United States and Canada
and their respective territories, possessions, and commonwealths
(collectively, the "HBO Territory"). Wombat may distribute such films
outside of the HBO Territory at any time after the first exhibition by
HBO. To the extent that HBO distributes any program by means of any
program service other than an HBO programming service, Wombat shall be
entitled to receive 20% of the net revenues (net of HBO's 35%
distribution fee) derived from such distribution after HBO has recouped
$75,000 from the distribution of each program.
Lifetime: Pursuant to an Agreement, dated as of March 26,
1996, Lifetime commissioned the production of, and agreed to license
from Wombat the exclusive right to telecast and exhibit, the television
program titled "Intimate Portrait: Shirley MacLaine" for a production
and license fee. As consideration for such production and license fee,
Lifetime was granted exclusive basic cable telecast rights in the
program for a period of five years from the date of Lifetime's initial
telecast of each program in the United States, its territories and
possessions, Bermuda, the Bahamas, and the Caribbean Islands. In
addition, Lifetime has two exclusive irrevocable options to extend the
exclusivity period for an additional two years for an additional fee.
To the extent that Wombat distributes the program as permitted by the
Agreement, Wombat shall be entitled to retain the first $50,000 of
proceeds and thereafter, a majority of the gross revenues.
PBS: Pursuant to a Production and Distribution Agreement,
dated as of June 3, 1993, Wombat agreed to produce and deliver to
Public Broadcasting Service ("PBS") the one-hour motion picture
entitled "Audrey Hepburn Remembered" for a license fee. As
consideration for such license fee, PBS was granted the exclusive right
to distribute and broadcast the program via public television stations
throughout the United States and its territories and possessions
(collectively, the "License Area"). The rights granted to PBS consist
of six public television releases during the thirty-seven month period
commencing August 1, 1993 (the "License Term"). PBS has rights of first
negotiation and last refusal with respect to the sale or license of any
broadcast or cablecast rights in the program in the License Area for
<PAGE>
any period commencing within three years after the expiration of the
License Term. Wombat shares with PBS any net revenues received from
ancillary sales of the program and program elements.
In addition to production arrangements such as those described
above, Wombat intends to build its library of programs, which are
purchased on a continuing basis for television broadcasts around the
world, as well as through cable outlets in the United States. Wombat
therefore intends to continue to produce programs, even if deficit
financing is required, in which Wombat will retain complete or
principal ownership, as well as programs for clients who finance and
own all or most of a production.
Distribution Arrangements
Pursuant to a Distribution Agreement (the "Distribution
Agreement"), dated July 1, 1995 and amended on April 28, 1996, between
Wombat and Janson, Janson was granted the sole and exclusive right,
subject to the production arrangements described above, to license
substantially all of the Wombat film library for all forms of
television and video worldwide for a period of ten years, subject to
automatic renewals in three year increments. In consideration of
Janson's services under the Distribution Agreement, Janson is entitled
to retain a distribution fee, ranging from 25% to 40%, depending upon
whether such distribution is via domestic television network,
syndication, international television, or home video, of the gross
receipts derived from the licensing of each program.
In addition, Janson is reimbursed for certain distribution
expenses out of gross receipts. The remaining balance is remitted to
Wombat as its licensor royalty. See "Certain Relationships and Related
Transactions."
Competition
Wombat was one of the first production companies specializing
in the distribution of profiles of movie stars and has since
established itself as a market leader. Competitors include independent
production companies and subsidiaries of major studios. Although some
of the Wombat competitors have the advantage of being affiliated with
established studios, and, as such, have greater financial resources,
Wombat has developed a reputation in the industry for producing quality
biographies with a personal touch.
Major Customers
Wombat has in the past substantially relied upon the financial
commitments of A&E and other United States television and cable
companies to fund the production of its programs and upon Janson for
the worldwide distribution of its programs. Wombat derived
approximately 37%, 41%, 12%, and 13% of its total revenues from A&E for
the six months ended June 30, 1997 and for the five months ended
December 31, 1996 and the years ended July 31, 1996 and July 31, 1995,
respectively. In addition, Wombat derived approximately 63%, 32%, 40%,
and 27% of its total revenues from Janson for the six months ended June
30, 1997 and for the five months ended December 31, 1996 and the years
ended July 31, 1996 and July 31, 1995, respectively.
Employees
Wombat has four full time employees and one part time
employee.
<PAGE>
Business Strategy
The Company's primary goal is significant and sustained growth
through an increased level of development and production activity in
both motion pictures and television. Future revenues and profitability
will depend on the Company's ability to successfully develop and
finance viable film and television properties.
To achieve this goal, Avenue Pictures will expand its
development and production staff. The Company will also increase its
level of development expenditure to secure a greater number of
exploitable film properties.
In order to increase its production activity in cable and long
form television, the Company will form exclusive arrangements with
other established independent producers to work within Avenue
Television's aegis. Such relationships will allow the Company to
significantly increase its production activity and to more fully
capitalize on its favorable distribution relationships. The Company
recently hired an individual to spearhead its television division with
responsibility for TV production and an additional focus on miniseries
and "event television."
In series television, the Company will continue to explore
development and production opportunities based on its film properties,
television properties, and writer relationships without committing
significant financial resources to this area of its business.
Wombat will continue to produce its film biographies and
increase its level of production by bringing in additional producers to
satisfy the demand of the upcoming biography channel. Also, A&E is
interested in dramatized biographical films, including some of Wombat's
previously profiled subjects. With budgets in the $3 million range,
such films could significantly broaden Wombat's production range and
potential growth without any increase in financial risk. The expanding
international marketplace, as well as the enhanced brand awareness of
the Avenue Pictures/Wombat label, should expand the market and
potential licensing revenue for the Wombat library. However, no
assurance can be given that additional production talent will be
available when needed by the Company. Further, no assurance can be
given that additional funding, whether from financial markets or
collaborative or other arrangements with corporate partners or from
other sources, will be available when needed or on terms acceptable to
the Company.
International Sales & Distribution
As the global market for entertainment programming continues
to expand, the Company foresees real opportunity in developing an
international sales division. With a relatively modest increase in
operating costs, the Company believes it can dramatically increase both
revenues and the control of its product overseas. With its own sales
organization the Company can optimize revenues from programming both
produced and acquired by the Company. The practice of pre-selling films
internationally significantly reduces financial risk and increases both
the cash flow and ability to finance this area of the Company's
business activity. Direct involvement in international sales also
provides favorable opportunities in the areas of co-production and
co-financing which can further benefit the Company. No assurance can be
given that such co-production and co-financing opportunities will be
available to the Company.
The Company is committed to the development and production of
high quality entertainment programming which it believes has enduring
value in all media. In addition to increasing its level of development
and production activity, the Company intends to actively explore the
creation of an
<PAGE>
international sales division as a further means by which its revenues
can be increased and its operating base broadened. No assurance can be
given that Company funds will be available to create and develop an
international sales division.
The Motion Picture Industry
General
The motion picture industry consists of two principal
activities: production, which involves the development, financing, and
production of motion pictures; and distribution, which involves the
promotion and exploitation of feature-length motion pictures in a
variety of media, including theatrical exhibition, home video,
television, and other ancillary markets, both domestically and
internationally. The United States motion picture industry is dominated
by the "major" studios, including The Walt Disney Company, Paramount
Pictures, Warner Brothers, Universal Pictures, Twentieth Century Fox,
Columbia/Tri-Star Pictures, and MGM/UA. The major studios are typically
parts of large diversified corporations that have strong relationships
with creative talent, exhibitors, and others involved in the
entertainment industry and whose non-motion picture operations provide
a stable source of earnings and cash flow which offset the variations
in the financial performance of their new motion picture releases and
other aspects of their motion picture operations. The major studios
have historically produced and distributed the vast majority of high
grossing theatrical motion pictures released annually in the United
States.
Independent Film
At the same time that films released by the major studios have
become more expensive, currently with average budgets exceeding $40
million (as reported by the Motion Picture Association of America
("MPAA")), low budget "independent films" have successfully entered the
market. Typically, such films are more character driven than plot
driven and originally they lacked major stars. Miramax, originally an
independent distributor (now owned by Disney), broke ground in this
area with films like "My Left Foot" and "The Piano."
Over the last several years there have been other notable
"independent-type" films such as "Four Weddings and A Funeral", "Pulp
Fiction", and "The Crow." Indeed, given the relatively small financial
risk of producing and releasing such films, all of the major studios
have started or are studying the feasibility of production and
distribution units focusing on smaller, independent-type films. The
nominees for the 1996 Academy Awards illustrate the growing importance
of such films with four(1) out of the five nominees for Best Picture
considered to be "independent" films. The four films have been released
by the four leading distributors of such films, Miramax, Fine Line,
October, and Gramercy. They were, with the exception of Miramax's "The
English Patient", all produced at budgets far below studio averages and
without major stars.
The growth of this product and market segment should provide
opportunities for Avenue Pictures which is one of the pioneers in this
area.
-----------------
(1) The films nominated for Best Picture were "Jerry Maguire"
(Tri-Star), "The English Patient" (Miramax), "Shine" (FineLine),
"Fargo" (Gramercy), and "Secrets and Lies" (October).
<PAGE>
Motion Picture Production and Financing
The production of a motion picture begins with the screenplay
adaptation of a popular novel or other literary work acquired by the
producer or the development of an original screenplay having its
genesis in a story line or scenario conceived or acquired by the
producer. In the development phase, the producer typically seeks
production financing and tentative commitments from a director, the
principal cast members and other creative personnel. A proposed
production schedule and budget are also prepared during this phase.
Upon completing the screenplay and arranging financing
commitments, pre-production of the motion picture begins. In this
phase, the producer engages creative personnel to the extent not
previously committed; finalizes the filming schedule and production
budget; obtains insurance and secures completion guaranties, if
necessary; establishes filming locations and secures any necessary
studio facilities and stages; and prepares for the start of actual
filming. Principal photography (the actual filming of the screenplay)
generally extends from seven to twelve weeks, depending upon such
factors as budget, location, weather, and complications inherent to the
screenplay.
Following completion of principal photography in what is
typically referred to as post-production, the motion picture is edited;
opticals, dialogue, music, and any special effects are added; and
voice, effects, and music sound tracks and pictures are synchronized.
This results in the production of a fully edited negative from which
release prints of the motion picture are made.
Production costs consist of acquiring or developing the
screenplay, film studio rental, principal photography, post-production,
and the compensation of creative and other production personnel.
Distribution expenses, which consist primarily of the costs of
advertising and preparing release prints, are not included in direct
production costs and vary widely depending on the extent of the release
and promotional markets. Average studio budgets currently exceed $30
million. Average independents are far lower and are often less than $10
million. The major studios generally fund production costs from cash
flow generated by motion picture and related activities or, in some
cases, from unrelated businesses or through off-balance sheet methods.
Substantial overhead costs, consisting largely of salaries and related
costs of the production staff and physical facilities maintained by the
major studios, also must be funded. Independent production companies
generally avoid incurring overhead costs as substantial as those
incurred by the major studios by hiring creative and other production
personnel and retaining the other elements required for pre-production,
principal photography, and post-production activities on a
picture-by-picture basis. Sources of funds for independent production
companies include bank loans, "pre-licensing" of distribution rights,
equity offerings, and joint ventures. Independent production companies
generally attempt to obtain all or a substantial portion of their
financing of a motion picture prior to commencement of principal
photography, at which point substantial production costs begin to be
incurred and require payment.
"Pre-licensing" of film rights is often used by independent
film companies to finance all or a portion of the direct production
costs of a motion picture. By "pre-licensing" film rights, a producer
obtains amounts from third parties in return for granting such parties
a license to exploit the completed motion picture in various markets
and media. Production companies with distribution divisions may retain
the right to distribute the completed motion picture either
domestically or in one or more international markets. Other production
companies may separately license theatrical, home video, television and
all other distribution rights among several licensees.
In connection with the production and distribution of a motion
picture, major studios and independent production companies generally
grant contractual rights to actors, directors, screenwriters, owners of
rights, and other creative and financial contributors to share in
revenues or net profits (as defined in their respective agreements)
<PAGE>
from a particular motion picture. Except for the most sought-after
talent, these third-party participants are generally payable after all
distribution fees, marketing expenses, direct production costs, and
financing costs are recouped in full.
Major studios and independent film companies typically incur
obligations to pay residuals to various guilds and unions including the
Screen Actors Guild, the Directors Guild of America, and the Writers
Guild of America. Residuals are obligations arising from the
exploitation of a motion picture in markets other than the primary
intended market for such picture. Residuals are primarily calculated as
a percentage of the gross revenues derived from the exploitation of the
picture in these secondary markets. The guilds and unions typically
obtain a security interest in all rights of the producer in the motion
picture which is usually subordinate to the financier of the motion
picture, and the completion bond company if any. The producer may
transfer the residual obligation to a distributor if the distributor
executes the appropriate guild assumption agreement.
Motion Picture Distribution
General. Distribution of a motion picture involves domestic
and international licensing of the picture for (a) theatrical
exhibition, (b) non-theatrical exhibition, which includes airlines,
hotels and armed forces facilities, (c) videocassettes and video discs,
(d) television, including pay-per-view, pay, network, syndication or
basic cable, and (e) marketing of the other rights in the picture and
underlying literary property, which may include books, merchandising,
and soundtrack albums. In recent years, revenues from the licensing of
rights to distribute motion pictures in secondary (i.e., other than
domestic theatrical) markets, particularly home video and international
theatrical pay and free television, have increased significantly.
The distributor typically acquires rights from the producer to
distribute a motion picture in one or more markets and/or media. For
its distribution rights, the distributor generally agrees to pay to the
producer a certain minimum advance or guarantee upon the delivery of
the completed motion picture, which amount is to be recouped by the
distributor out of revenues generated from the distribution of the
motion picture in particular media or territories. After the
distributor's distribution fee is deducted from the gross receipt of
the picture, the distributor recoups the amount advanced (if any) plus
its distribution costs.
Motion pictures may continue to play in theaters for up to six
months following their initial release. Concurrently with their release
in the United States, motion pictures generally are released in Canada
and may also be released in one or more other international markets. A
motion picture is typically available for distribution during its
initial distribution cycle as follows:
Months After
Marketplace Initial Domestic Approximate
Theatrical Release Release Period
----------- ------------------ --------------
Domestic theatrical ----- 4-6 months
International theatrical ----- 6-12 months
Domestic home video (initial release) 4-6 months 6 months
Domestic pay-per-view 6-9 months 2 months
International Video (initial release) 6-12 months 6-12 months
Domestic pay television 12-15 months 18 months
International television (pay or free) 18-24 months 12-36 months
Domestic free television* 30-33 months 1-5 years
----------------------
* Includes network, barter syndication, syndication, and basic cable.
<PAGE>
A substantial portion of a film's ultimate revenues are
generated in a film's initial distribution cycle (generally the first
five years after the film's initial domestic theatrical release).
Commercially successful motion pictures, however, may continue to
generate revenues after the film's initial distribution cycle from the
relicensing of distribution rights in certain media, including
television and home video, and from the licensing of distribution
rights with respect to new media and technologies.
Theatrical. The theatrical distribution of a motion picture
involves the licensing and booking of the motion picture to theatrical
exhibitors, the promotion of the picture through advertising and
publicity campaigns, and the manufacture of release prints from the
film negative. The size and success of the promotional advertising
campaign can materially affect the financial performance of the film.
Moreover, as the vast majority of these costs (primarily advertising
costs) are incurred prior to the first weekend of the film's domestic
theatrical release, there is not necessarily a correlation between
these costs and the film's ultimate box office performance. In
addition, the ability to distribute a picture during peak exhibition
seasons, including the summer months and the Christmas holidays, may
affect the theatrical success of the picture.
The distributor and theatrical exhibitor generally enter into
license agreements providing for the exhibitor's payment to the
distributor of a percentage of box office receipts after deducting the
exhibitor's overhead or a flat working amount. The percentage generally
ranges from 45-60% and may change for each week the film plays in a
specific theatre, depending on the success of the picture at the box
office and other factors. The balance ("gross film rentals") is
remitted to the distributor. The distributor then retains a
distribution fee from the gross film rentals and recoups the costs of
distributing the film, which consist primarily of advertising,
marketing, and production cost, and the cost of manufacturing release
prints. The balance of film rentals, if any, after recouping any
advance or minimum guarantee previously paid to producer and interest
thereon is then paid to the producer based on a predetermined split
between the producer and distributor.
Home Video. A motion picture typically becomes available for
videocassette distribution within four to six months after its initial
domestic theatrical release. Home video distribution consists of the
promotion and sale of videocassettes to local, regional and national
video retailers which rent or sell videocassettes to consumers
primarily for home viewing. The market for videocassettes for home use
has expanded rapidly over the past ten years, although the rate of
growth in this market has slowed in recent years. Most films are
initially made available in videocassette form at a wholesale price of
$55 to $60 and are sold at that price primarily to video rental stores,
which rent the cassettes to consumers. Owners of films generally do not
share in rental income. Following the initial marketing period,
selected films are remarketed at a wholesale price of $10 to $15 or
less for sale to consumers. These "sell-through" arrangements are used
most often with films that will appeal to a broad marketplace or to
children. Some films are initially offered at a price designed for
sell-through rather than rental when it is believed that the ownership
demand by consumers will result in a sufficient level of sales to
justify the reduced margin on each cassette sold. Home video
arrangements in international territories are similar to those in
domestic territories except that the wholesale prices may differ.
Television. Television rights are generally licensed first to
pay-per-view for an exhibition period within six to nine months
following initial domestic theatrical release, then to pay television
approximately twelve to fifteen months after initial domestic
theatrical release, thereafter in certain cases to free television for
an exhibition period, and then to pay television again. These films are
then syndicated to either independent stations or basic cable outlets.
Pay-per-view television allows subscribers to pay for individual
programs, including recently released movies and live sporting, music
<PAGE>
and other events on a per use basis. Pay television allows cable
television subscribers to view such services as HBO/Cinemax,
Showtime/The Movie Channel, Starz, or Encore Media Services offered by
their cable system operators for a monthly subscription fee. Since
groups of motion pictures are typically packaged and licensed for
exhibition on television over a period of time, revenues from these
television licensing "packages" may be received over a period that
extends beyond five years from the initial domestic theatrical release
of a particular film. Motion pictures are also "packaged" and licensed
for television broadcast in international markets.
Non-Theatrical and Other Rights. Films may be licensed for use
by airlines, schools, public libraries, community groups, the military,
correctional facilities, ships at sea, and others. Musical compositions
contained in a film which have been commissioned for that film may be
licensed for sound recording, public performances, and sheet music
publication. A soundtrack album may be released including music
contained in a film. Rights in motion pictures may be licensed to
merchandisers for the manufacturer of products such as video games,
toys, T-shirts, posters, and other merchandise. Rights may also be
licensed to create novelizations of the screenplay and other related
book publications.
International Markets. Motion picture distributors and
producers derive revenue from international markets in the same media
as domestic markets. The growth of foreign revenues has been dramatic,
now accounting for more than 50% of the total revenues of many films.
The increase in revenues is currently being driven primarily from the
growth of television abroad. The increase in foreign television values
and foreign revenues is likely to continue. Although the increased
level of foreign values affects the revenues of most films, the effect
is not uniform. Action films and films with major stars benefit most
from foreign revenues; films with uniquely American themes with unknown
actors benefit the least.
Regulation
Distribution rights to motion pictures are granted legal
protection under the copyright laws of the United States and most
foreign countries, which laws provide substantial civil and criminal
sanctions for unauthorized duplication and exhibition of motion
pictures. Motion pictures, musical works, sound recordings, art work,
still photography, and motion picture properties are separate works
subject to copyright under most copyright laws, including the United
States Copyright Act of 1976, as amended. The Company plans to take
appropriate and reasonable measures to secure, protect, and maintain or
obtain agreements to secure, protect, and maintain copyright protection
for all Company pictures under the laws of applicable jurisdictions.
Motion picture piracy is an industry-wide problem. The MPAA operates a
piracy hotline and investigates all reports of such piracy. Depending
upon the results of such investigations, appropriate legal action may
be brought by the owner of the rights. Depending upon the extent of the
piracy, the Federal Bureau of Investigation may assist in these
investigations and related criminal prosecutions.
Motion picture piracy is an international as well as a
domestic problem. Motion picture piracy is extensive in many parts of
the world, including South America, Asia (including Korea, China, and
Taiwan), the countries of the former Soviet Union, and other former
Eastern bloc countries. In addition to the MPAA, the Motion Picture
Export Association, the American Film Marketing Association, and the
American Film Export Association monitor the progress and efforts made
by various countries to limit or prevent piracy. In the past, these
various trade associations have enacted voluntary embargoes of motion
picture exports to certain countries in order to pressure the
governments of those countries to become more aggressive in preventing
motion picture piracy. In addition, the United States government has
publicly considered trade sanctions against specific countries which do
not prevent copyright infringement of United States produced motion
pictures. There can be no assurance that voluntary industry embargoes
or United States government trade sanctions will be enacted. If
enacted, such actions could impact the amount of revenue that the
Company realizes from the international exploitation of its motion
<PAGE>
pictures depending upon the countries subject to such action and the
duration of such action. If not enacted or if other measures are not
taken, the motion picture industry (including the Company) may continue
to lose an indeterminate amount of revenues as a result of motion
picture piracy.
The Code and Ratings Administration of the MPAA assigns
ratings indicating age-group suitability for theatrical distribution of
motion pictures. The Company has followed and will continue to follow
the practice of submitting its pictures for such ratings.
United States television stations and networks, as well as
foreign governments, impose additional restrictions on the content of
motion pictures which may restrict in whole or in part theatrical or
television exhibition in particular territories. Management's current
policy is to produce motion pictures for which there will be no
material restrictions on exhibition in any major territories or media.
This policy often requires production of "cover" shots or different
photography and recording of certain scenes for insertion in versions
of a motion picture exhibited on television or theatrically in certain
territories.
There can be no assurance that current and future restrictions
on the content of the Company's pictures may not limit or affect the
Company's ability to exhibit certain of its pictures in certain
territories and media.
Properties
The Company's philosophy on real estate investments is to
lease required properties and invest in the development of film and
television properties. The Company presently subleases for itself and
Avenue Pictures on a month-to-month basis approximately 3,700 square
feet of office space at its corporate headquarters at 11111 Santa
Monica Boulevard, Suite 2110, Los Angeles, California 90025. The rent
for such space is approximately $8,000 per month.
Wombat presently leases approximately 2,000 square feet of
office space at 250 West 57th Street, Suite 2421, New York, New York,
10019 pursuant to a lease that expires on April 30, 1999. Wombat's rent
for such space is approximately $5,000 per month.
Management believes the properties herein described are
adequate to handle current and short term projected business.
Legal Proceedings
The Company is not involved in any material legal proceedings.
<PAGE>
MANAGEMENT
Directors and Executive Officers
The following table sets forth the directors and officers of
the Company:
Name Age Positions
Gene Feldman 70 Chairman of the Board, President of Wombat
Cary Brokaw 45 President, Chief Executive Officer and Director
Michael Feldman 29 Executive Vice President and Director
Suzette St. John Feldman 65 Secretary, Vice President of Wombat
Sheri L. Halfon 40 Senior Vice President, Chief Financial
Officer, and Director
Doug Rowan 58 Director
James A. Janowitz 50 Director
Gene Feldman has served as Chairman of the Board of the
Company and President of Wombat since their respective formations on
March 7, 1997. Prior to the Reincorporation, Gene Feldman served as
Chairman of the Board of CineMasters and President of the Wombat
Division for more than the past five years. Gene Feldman is a Class III
Director whose term expires at the 2000 annual meeting of the Company.
Cary Brokaw has served as President, Chief Executive Officer,
and Director of the Company since its formation on March 7, 1997. Prior
to the Reincorporation, Mr. Brokaw served as President, Chief Executive
Officer, and Director of CineMasters from September 30, 1996 and
Chairman and Chief Executive Officer of Avenue Pictures since its
formation in 1991. Mr. Brokaw is a Class III Director whose term
expires at the 2000 annual meeting of the Company.
Michael Feldman has served as Executive Vice President and
Director of the Company since its formation on March 7, 1997. Prior to
the Reincorporation, Michael Feldman had served as Executive Vice
President and Director of CineMasters from September 30, 1996. Michael
Feldman served as an officer of General Physics Corporation from 1991
to 1996 and has been a Director of International Business Development
at National Patent since 1995. Michael Feldman is a Class II Director
whose term expires at the 1999 annual meeting of the Company.
Suzette St. John Feldman has served as Secretary of the
Company and Vice President of Wombat since their respective formations
on March 7, 1997. Prior to the Reincorporation, Ms. Feldman served as
Secretary of CineMasters and Vice President of the Wombat Division for
more than the past five years.
Sheri L. Halfon has served as Senior Vice President, Chief
Financial Officer, and Director of the Company since its formation on
March 7, 1997. Prior to the Reincorporation, Ms. Halfon served as
Senior Vice President, Chief Financial Officer, and Director of
CineMasters from September 30, 1996 and Senior Vice President and Chief
Financial Officer of Avenue Pictures since its formation in 1991. Ms.
Halfon is a Class II Director whose term expires at the 1999 annual
meeting of the Company.
Doug Rowan served as President and Chief Executive Officer of
Corbis Corporation, a company which is building a library of digital
images, from April 1994 to July 1997. Prior to his position at Corbis,
Mr. Rowan served as Senior Vice President of Worldwide Customer
Operations of Ungermann-Bass, Inc., a networking product company, from
November 1993 to April 1994, and President of AXS, a software
<PAGE>
corporation for the new digital content industry, from April 1, 1991
through December 31, 1992. Mr. Rowan is a Class I Director whose term
expires at the 1998 annual meeting of the Company.
James A. Janowitz has been a senior partner in the litigation
department at Pryor, Cashman, Sherman & Flynn and head of its motion
picture group for more than the past five years. Mr. Janowitz is a
Class I Director whose term expires at the 1998 annual meeting of the
Company.
Directors of the Company are divided into three classes. At
each annual meeting of stockholders, directors are elected to succeed
those directors whose terms expire and are elected for a term of office
to expire at the third succeeding annual meeting of stockholders after
their election. Under the Company's bylaws, the number of directors
constituting the entire Board of Directors shall be fixed, from time to
time, by the directors then in office, who may decrease or increase the
number of directors by majority action without soliciting stockholder
approval. The Company does not currently pay compensation to directors
for service in that capacity.
Executive Compensation
The following table sets forth the aggregate compensation paid
or accrued to the Company's executive officers for services rendered in
1996, 1995, and 1994:
SUMMARY COMPENSATION TABLE
Long-Term Compensation
Annual Compensation Awards
Securities Underlying
Name and Principal Position Year Salary Bonus Options/SARs
Cary Brokaw 199(1) 450,000 -0- 300,000(2)
President & Chief
Executive Officer
1995(1) 391,000 -0- -0-
1994(1) 415,000 -0- -0-
Gene Feldman 1996 150,000 -0- -0-
Chairman of the Board,
President of Wombat
1995 101,115 4,225 200,000(3)
1994 72,800 -0- -0-
------------------
1 Prior to completion of the Business Combination on September
30, 1996, Mr. Brokaw's compensation was paid directly by
Avenue Pictures.
2 Of the 300,000 stock options granted to Mr. Brokaw in 1996,
only 60,000 are currently vested.
3 Of the 200,000 stock options granted to Mr. Feldman in 1995,
all are currently vested.
<PAGE>
Option Grants in 1996
The following table sets forth certain information concerning
stock option grants during the year ended December 31, 1996 to the
named executive officers pursuant to the 1997 Plan.
STOCK OPTION GRANTS IN LAST FISCAL YEAR
% of Total Market Price
Number of Options of Underlying
Securities Granted to Exercise Security on
Underlying Employees Price Date of
Options Granted in Fiscal ($ per Grant ($ Expiration
Name Year share) per share) Date
---- ---- ------ ------ ----
Cary Brokaw 300,000 60% $1.70 $2.00 9/30/06
The following table sets forth information concerning the
value of unexercised options as of December 31, 1996 held by the
executives named in the Summary Compensation Table above. No options
were exercised during 1996.
FISCAL YEAR-END OPTION VALUES
Number of Securities
Underlying Unexercised
Options at Fiscal Value of Unexercised
Year End In-the-Money Options at
Exercisable (E)/ Fiscal Year End
Unexercisable (U) Exercisable (E)
Name Unexercisable (U)
---- -----------------
Cary Brokaw 60,000 (E) $100,800 (E)
240,000 (U) $403,200 (U)
Gene Feldman 200,000 (E) $612,000 (E)
- -------------------
1 Based upon a market price per share of Common Stock of
$3.38, the price per share of Common Stock on December 31,
1996.
The Avenue Entertainment Group, Inc. Stock Option and Long Term Incentive
Compensation Plan
Introduction and Purpose
Effective as of March 10, 1997, the Board of Directors of the
Company adopted and CineMasters, as sole stockholder of the Company,
approved, the 1997 Plan. Pursuant to the terms of the 1997 Plan,
briefly summarized below, options to purchase shares of the Company's
Common Stock are awarded to eligible executive officers, key employees,
directors, and consultants of the Company and its two wholly-owned
subsidiaries, Wombat and Avenue Pictures. The 1997 Plan enables the
<PAGE>
Company and its subsidiaries to attract, retain, and maximize the
performance of executive officers, key employees, directors, and
consultants. A maximum of 1,750,000 shares of the Company's Common
Stock (subject to adjustment) has been reserved for the issuance of
awards under the 1997 Plan. As a result of the adoption of the 1997
Plan, the Company determined to terminate its prior stock option plan,
the CineMasters 1995 Non-Qualified Stock Option Plan (the "Prior
Plan"), except that the Prior Plan remains in effect with respect to
any outstanding options granted under the Prior Plan.
Effective as of September 30, 1996, in connection with the
Business Combination, (i) options to purchase an aggregate of 217,500
shares of the CineMasters Common Stock were granted to eligible
persons, subject to stockholder approval of the Reincorporation, and
(ii) options to purchase an aggregate of 282,500 shares of CineMasters
Common Stock were granted under the Prior Plan. Such options were
granted to, among others, the following persons, in the following
amounts, and in the following manner: (i) Mr. Brokaw (300,000 shares of
CineMasters Common Stock, of which 242,500 shares were available under
the Prior Plan) and (ii) Mr. Michael Feldman (150,000 shares of
CineMasters Common Stock, of which 30,000 shares were available under
the Prior Plan). In addition, effective as of February 19, 1997,
options to purchase an aggregate of 560,000 shares of CineMasters
Common Stock were granted to eligible persons, subject to stockholder
approval of the Reincorporation. Such options were granted to, among
others, the following persons, in the following amounts: (i) Mr. Brokaw
(100,000 shares of CineMasters Common Stock), (ii) Gene Feldman (75,000
shares of CineMasters Common Stock), (iii) Michael Feldman (75,000
shares of CineMasters Common Stock), and (iv) Sheri L. Halfon (75,000
shares of CineMasters Common Stock). In connection with the
Reincorporation, options to purchase an aggregate of 1,351,500 shares
of CineMasters Common Stock previously granted (including the 600,000
stock options previously granted pursuant to the Prior Plan) were
converted into options to purchase the same number of shares of the
Company's Common Stock pursuant to the 1997 Plan.
The 1997 Plan provides for the grant of "incentive stock
options" ("ISOs") within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended ("Code"), and "non-qualified stock
options" ("NQSOs") to purchase shares of Common Stock. In addition,
stock appreciation rights, restricted stock awards, and stock bonus
awards may be granted to eligible participants under the 1997 Plan with
respect to shares of Common Stock.
ISO and NQSO options will be the awards most commonly granted
under the 1997 Plan. In accordance with the requirements of the Code,
the exercise price for ISOs may not be less than 100% of the fair
market value of shares of Common Stock on the date of grant (110%
percent of fair market value in the case of ISOs granted to employees
who hold more than ten percent of the voting power of the issued and
outstanding shares of Common Stock). The exercise price for NQSOs may
be equal to or less than 100% percent of the fair market value of
shares of Common Stock on the date of grant.
In general, options granted under the 1997 Plan do not have a
term of more than a ten-year period (five years in the case of an ISO
granted to an employee holding more than ten percent of the voting
power of Common Stock). Options generally terminate three months after
the optionee's termination of employment with the Company for any
reason other than death, disability, or retirement, and are not
transferable by the optionee other than by will or the laws of descent
and distribution.
Employment Agreements
Brokaw Employment Agreement. In connection with the Business
Combination, Mr. Brokaw entered into a five-year employment agreement
(the "Brokaw Employment Agreement") with the Company pursuant to which,
among other things, Mr. Brokaw became the President and Chief Executive
<PAGE>
Officer of the Company. The Brokaw Employment Agreement provides Mr.
Brokaw with an annual base salary of $450,000 (which base salary may be
paid from any Company source other than net cash flow generated by
Wombat), subject to such increases as may be made by the Compensation
Committee of the Board of Directors. Mr. Brokaw is also eligible for
annual bonuses based upon the performance of Mr. Brokaw and the Company
during the previous fiscal year. Such annual bonuses will be determined
in the discretion of the Compensation Committee. The dollar amount of
the annual bonus will not exceed two times the annual base salary. The
Brokaw Employment Agreement provides that the Company may only
terminate Mr. Brokaw's employment with the Company for "cause." If Mr.
Brokaw's employment is terminated due to death or disability, he will
receive his base salary through the date of termination of employment.
Any vested options not exercised prior to the termination of employment
for this reason will remain exercisable for the six month period
beginning on the date of termination. If his employment is terminated
for "Cause" as defined in the Brokaw Employment Agreement, he will be
entitled to the base salary and any accrued annual bonus that has been
determined and awarded, but not paid, through the date of termination
of his employment. Any vested options not exercised prior to the
termination of employment for Cause will remain exercisable until the
end of the ninetieth day following the date of termination. If Mr.
Brokaw terminates his employment following a "Change of Control" as
defined in the Brokaw Employment Agreement, he will receive (i) his
earned but unpaid compensation as of the date of the Change of Control;
(ii) continued benefits for the remaining unexpired employment term;
(iii) a lump sum payment on the date of the Change of Control equal to
the future base salary that he would have earned if he had continued
working for the remaining unexpired employment term; and (iv) bonus
payments that would have been made to Mr. Brokaw if he had continued
working for the Company during the remaining unexpired employment term.
The Company is entitled to seek to obtain, and has obtained, $2,000,000
in "key-man" life insurance on his life. Pursuant to the Brokaw
Employment Agreement, Mr. Brokaw was granted options to purchase up to
300,000 shares of Common Stock for an exercise price of $1.70 per
share. Such stock options will vest in equal installments over the
first five years of Mr. Brokaw's employment with the Company and will
be exercisable for a period of ten years from the date of grant. The
Brokaw Employment Agreement provides for accelerated vesting of all of
Mr. Brokaw's stock options upon a "change of control" of the Company or
upon a material breach of the Brokaw Employment Agreement by the
Company. As President and Chief Executive Officer of the Company, Mr.
Brokaw is entitled to certain customary perquisites, including, without
limitation, a car allowance, term life insurance, and reimbursement of
all reasonable travel and entertainment expenses. In addition, Mr.
Brokaw is entitled to participate in all employee benefit plans offered
to executive officers of the Company.
Gene Feldman Employment Agreement. In connection with the
Business Combination, Gene Feldman entered into a five-year employment
agreement (the "Feldman Employment Agreement") with CineMasters
pursuant to which, among other things, Gene Feldman became the Chairman
of CineMasters and President of its Wombat Division. The Feldman
Employment Agreement provides Gene Feldman with an annual base salary
of $150,000 (provided that such base salary is funded solely out of net
cash flow generated by the Wombat Division of CineMasters), subject to
such increases as may be made by the Compensation Committee of the
Board of Directors. Gene Feldman is also eligible for annual bonuses
based upon the performance of Gene Feldman and CineMasters during the
previous fiscal year. Such annual bonuses will be determined in the
discretion of the Compensation Committee. The dollar amount of the
annual bonus will not exceed two times the annual base salary. The
Feldman Employment Agreement provides that CineMasters may only
terminate Gene Feldman's employment with CineMasters for "cause." If
Mr. Feldman's employment is terminated due to death or disability, he
will receive his base salary through the date of termination of
employment. Any vested options not exercised prior to the termination
of employment for this reason will remain exercisable for the six month
period beginning on the date of termination. If his employment is
terminated for "Cause" as defined in the Feldman Employment Agreement,
he will be entitled to the base salary and any accrued annual bonus
that has been determined and awarded, but not paid, through the date of
<PAGE>
termination of his employment. Any vested options not exercised prior
to the termination of employment will remain exercisable until the end
of the ninetieth day following the date of termination. If Mr. Feldman
terminates his employment following a "Change of Control" as defined in
the Feldman Employment Agreement, he will receive (i) his earned but
unpaid compensation as of the date of the Change of Control; (ii)
continued benefits for the remaining unexpired employment term; (iii) a
lump sum payment on the date of the Change of Control equal to the
future base salary that he would have earned if he had continued
working for the remaining unexpired employment term; and (iv) bonus
payments that would have been made to Mr. Feldman if he had continued
working for the Company during the remaining unexpired employment term.
As chairman of CineMasters and President of the Wombat Division, Gene
Feldman is entitled to certain customary perquisites, including,
without limitation, a car allowance, term life insurance, and
reimbursement of all reasonable travel and entertainment expenses. In
addition, Gene Feldman is entitled to participate in all employee
benefit plans offered to executive officers of CineMasters. In
connection with the Reincorporation, the Gene Feldman Employment
Agreement was amended to indicate that Gene Feldman is the Chairman of
the Board of the Company and the President of Wombat.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Gene Feldman Exit Option Agreement. In connection with the
Business Combination, Gene Feldman entered into an exit option
agreement with CineMasters pursuant to which, among other things, he
was given an option, exercisable during the six-month period commencing
on the date of termination of his employment, to purchase the
production assets of CineMasters for a cash purchase price equal to the
book value of such assets. This option does not include the CineMasters
film library. In addition, CineMasters retained the right to acquire
any future production of Mr. Feldman for nominal consideration, subject
to (i) the rights of Mr. Feldman to receive commercially reasonable
producer fees, (ii) the rights, if any, of A&E, as licensee, consistent
with past practice, and (iii) the distribution rights pursuant to the
Distribution Agreement, dated July 1, 1995, as amended, between Janson
and the Wombat Division. Upon the exercise of such option, Gene Feldman
will no longer be employed by CineMasters but will be entitled to
receive annual payments for the remainder of his life equal to the
lesser of (i) 25% of the annual net income (which shall be determined
without deduction for general and administrative expenses) derived by
CineMasters from the original CineMasters library and (ii) $100,000
annually. If Gene Feldman shall die prior to the exercise of such
option, Gene Feldman's wife, Suzette St. John Feldman, shall following
Gene Feldman's death have the right to exercise such option and to
receive such annual payments for a period of five years following the
date of such exercise. If Gene Feldman shall die after the exercise of
such option but prior to the fifth anniversary of the date of such
exercise, Suzette St. John Feldman shall following Gene Feldman's death
be entitled to receive such annual payments for a period of five years
following the date of Gene Feldman's death; provided, however, that
such annual payments shall be reduced from $100,000 to $75,000
following the fifth anniversary of the date of Gene Feldman's exercise
of such option. In addition, if CineMasters shall determine to sell its
library during the first five years following the exercise of such
option by Gene Feldman, CineMasters shall first offer to sell its
library to Gene Feldman based upon a specific price and upon specific
terms. If Gene Feldman does not accept such offer within a reasonable
period of time, CineMasters will then have a limited period of time in
which to sell its library to a third party for a price and upon terms
no less favorable to CineMasters than those offered to Gene Feldman. In
connection with the Reincorporation, the Gene Feldman Exit Option
Agreement was amended to replace CineMasters with Wombat.
Stockholders Agreement. In connection with the Business
Combination, Mr. Brokaw entered into a stockholders agreement (the
"Stockholders Agreement"), amended in connection with the
Reincorporation, with CineMasters and each of National Patent, Gene
Feldman, Jerome Feldman, Suzette St. John Feldman, and Michael Feldman
(collectively, the "Feldman Group"), pursuant to which, among other
<PAGE>
things, the Board of Directors of CineMasters was reconstituted such
that Mr. Brokaw and the Feldman Group each have three designees on a
six-person Board of Directors and, except as may be mutually agreed
upon, equal representation on any committee of the Board of Directors.
The Stockholders Agreement provides that all extraordinary transactions
(i.e., any merger or consolidation involving CineMasters or any
subsidiary, any public offering, any sale or other disposition of a
material portion of the assets of CineMasters and/or its subsidiaries,
any acquisition or investment in excess of $250,000, etc.) shall
require the prior approval of the Board of Directors of CineMasters. In
addition, the Stockholders Agreement provides that, except for ordinary
course (i) expenditures for office rent, (ii) expenditures for selling,
general, and administrative expenses, and (iii) out-of-pocket
development expenditures not in excess of $500,000 during each of the
first two fiscal years following consummation of the Business
Combination, aggregate expenditures in excess of $250,000 in any fiscal
year will require the prior approval of the Board of Directors of
CineMasters. The Stockholders Agreement also provides each of Mr.
Brokaw and the members of the Feldman Group with reciprocal rights of
first negotiation and refusal and tag-along rights in the event that
either party wishes to dispose of some or all of his, her, or its
shares of Common Stock in a privately-negotiated transaction. Mr.
Brokaw has agreed until December 31, 1997 to maintain a balance of cash
or cash equivalents (including the registered shares of National Patent
common stock held by the Company as described below) for CineMasters of
at least $500,000 and shall at all times thereafter maintain a balance
of cash or cash equivalents for CineMasters of at least $300,000.
Pursuant to the Stockholders Agreement, $500,000 in cash or cash
equivalents was placed in a separate account with any withdrawal from
such account requiring the signatures of each of Mr. Brokaw and a
representative from the Feldman Group. The balance of such account will
be reduced to $300,000 on December 31, 1997. In connection with the
Reincorporation, the Stockholders Agreement was amended to replace
CineMasters with the Company.
Transactions with National Patent. In connection with the
Business Combination, National Patent made a capital contribution
valued at $815,000 to CineMasters in the form of registered shares of
National Patent common stock in exchange for 407,500 shares of
CineMasters Common Stock.
Distribution Agreement. On March 1, July 1, 1995 and April 28,
1996, CineMasters entered into an agreement with Janson whereby Janson
(the distributor) was granted sole and exclusive rights to license
essentially all the programs of the Wombat Division for all forms of
television and video worldwide. The distributor also gained the
exclusive right to execute all contracts for the exploitation of these
rights. The President of Janson, Stephen Janson, is related to
CineMasters' Chairman, Gene Feldman, through marriage. In connection
with the Reincorporation, the agreement has been modified to replace
CineMasters with Wombat.
Transactions with Pryor, Cashman, Sherman & Flynn. As
consideration for legal services rendered in connection with the
Business Combination, Pryor, Cashman, Sherman & Flynn was paid $75,000
in legal fees in 1996. As additional consideration for such legal
services, CineMasters issued 25,000 shares of CineMasters Common Stock
to the firm. Mr. Janowitz, a director of the Company, is a senior
partner at Pryor, Cashman, Sherman & Flynn.
Kaufman Termination Agreement. Pursuant to a Termination
Agreement (the "Kaufman Termination Agreement"), dated July 3, 1996
among CineMasters, Kaufman Films, and Kevin Kaufman, who was then an
officer of CineMasters, CineMasters terminated an employment agreement
with Mr. Kaufman. In connection with the termination, options for an
aggregate of 200,000 shares of CineMasters common stock granted to
Kaufman Films were canceled, and Mr. Kaufman and Kaufman Films returned
80,000 of the 160,000 shares of CineMasters common stock previously
held by them. Mr. Kaufman agreed not to sell more than 18,000 of such
shares in any one calendar quarter, and to pay to CineMasters one-half
of all net proceeds from sale by him of the second of such groups of
18,000 shares. Such shares have since been sold. CineMasters agreed
that, through September 30, 1997 or until such time earlier as Mr.
Kaufman sold all of such 80,000 shares, none of Gene Feldman, Jerome
<PAGE>
Feldman (the brother of Gene Feldman), nor any affiliate or relative of
either would, in the public market, sell, transfer, or assign any
shares of CineMasters Common Stock. In addition, Mr. Kaufman continued
to receive his salary and benefits through July 31, 1996.
PRINCIPAL STOCKHOLDERS
The following table sets forth information as of September 30,
1997 with respect to the beneficial ownership of the Common Stock by
(i) each person known by the Company to be the beneficial owner of more
than 5% of the Company's outstanding Common Stock, (ii) the directors
and executive officers of the Company, individually, and (iii)
directors and executive officers of the Company as a group.
Amount and Nature Percent
Name and Address of Beneficial Owner of Beneficial Ownership* of Class
Cary Brokaw 1,551,3501 38.9%
c/o Avenue Pictures, Inc.
11111 Santa Monica Boulevard
Suite 2110
Los Angeles, CA 90025
National Patent Development Corporation 1,060,500 27.6%
9 West 57th Street
New York, New York 10019
Gene Feldman 385,0002 9.5%
c/o Wombat Productions, Inc.
250 West 57th Street
Suite 2421
New York, New York 10019
Michael Feldman 95,0003,4 2.4%
c/o Wombat Productions, Inc.
250 West 57th Street
Suite 2421
New York, New York 10019
Suzette St. John Feldman 47,5005,6 1.2%
c/o Wombat Productions, Inc.
250 West 57th Street
Suite 2421
New York, New York 10019
<PAGE>
Sheri L. Halfon 15,1007 **
c/o Avenue Pictures, Inc.
11111 Santa Monica Boulevard
Suite 2110
Los Angeles, CA 90025
Doug Rowan 3,0008 **
c/o Corbis Corporation
15395 SE 30th Place
Suite 300
Bellevue, WA 98007
James A. Janowitz -0-9 -0-
c/o Pryor, Cashman, Sherman & Flynn
410 Park Avenue
New York, New York
Directors and officers as a group (7 persons) 2,096,450 48.5%
- -----------------
* The term "beneficial ownership" means the sole or shared power
to vote, or to direct the voting of the Company's Common Stock
or the sole or shared investment power with respect to such
Common Stock.
** Represents less than 1% ownership of the Company's Common Stock.
(1) Includes vested options to purchase up to 120,000 shares of
the Company's Common Stock at a price of $1.70 per share,
exercisable until September 30, 2006, and vested options to
purchase up to 20,000 shares of Common Stock of the Company at
a price of $3.00, exercisable until February 19, 2007. Does
not include unvested options to purchase up to 180,000 shares
of the Company's Common Stock at a price of $1.70 per share,
exercisable until September 30, 2006 and unvested options to
purchase up to 80,000 shares of Common Stock of the Company at
a price of $3.00 per share exercisable until February 19,
2007.
(2) Does not include 17,500 shares of Common Stock of the Company
and 30,000 vested stock options which are owned by Mr.
Feldman's wife, Suzette St. John Feldman, as to which Mr.
Feldman disclaims beneficial ownership, and unvested options
to purchase up to 20,000 shares of Common Stock of the Company
at a price of $0.32 per share, exercisable until August 11,
2000. Also does not include 48,000 shares of Common Stock of
the Company which are owned by Mr. Feldman's children, Lynne
Feldman, Stephanie Edelstein, and Zara Janson, as to which Mr.
Feldman disclaims beneficial ownership. Includes vested
options to purchase up to 200,000 shares of the Company Common
Stock at a price of $0.32 per share, exercisable until August
11, 2000, and vested options to purchase up to 15,000 shares
of Common Stock of the Company at a price of $3.00 per share,
exercisable until February 19, 2007.
(3) Includes vested options to purchase up to 60,000 shares of the
Company's Common Stock at a price of $1.70 per share,
exercisable until September 30, 2006, and vested options to
purchase up to 15,000 shares of Common Stock of the Company at
a price of $3.00 per share, exercisable until February 19,
2007. Does not include unvested options to purchase up to
<PAGE>
90,000 shares of the Company's Common Stock at a price of
$1.70 per share, exercisable until September 30, 2006, and
unvested options to purchase up to 60,000 shares of Common
Stock of the Company at a price of $3.00 per share,
exercisable until February 19, 2007.
(4) Michael Feldman is Gene Feldman's nephew.
(5) Includes vested options to purchase up to 30,000 shares of the
Company's Common Stock at a price of $0.32 per share,
exercisable until August 11, 2000.
(6) Gene Feldman and Suzette St. John Feldman are husband and wife.
(7) Includes vested options to purchase up to 15,000 shares of
Common Stock of the Company at a price of $3.00 per share,
exercisable until February 19, 2007. Does not include vested
options to purchase up to 60,000 shares of Common Stock of the
Company at a price of $3.00 per share, exercisable until
February 19, 2007.
(8) Includes vested options to purchase 2,000 shares of Common
Stock of the Company at a price of $5.00 per share,
exercisable until July 1, 2007.
(9) Does not include 25,000 shares of Common Stock of the Company
which are owned by Pryor, Cashman, Sherman & Flynn, a law firm
in which Mr. Janowitz is a senior partner, as to which Mr.
Janowitz disclaims beneficial ownership.
Except for the shares of Common Stock subject to the options
described in footnotes 1 through 3, 5, and 7 above, none of such shares
is known by the Company to be shares with respect to which such
beneficial owner has the right to acquire beneficial ownership. Except
as provided in the Stockholders Agreement, the Company believes the
beneficial holders listed above have sole voting and investment power
regarding the shares shown as being beneficially owned by them.
DESCRIPTION OF SECURITIES
Common Stock
The Certificate provides for the authorization of 15,000,000
shares of Common Stock, $.01 par value per share. As of September 30,
1997, 3,847,838 shares were outstanding. The holders of Common Stock
are entitled to one vote for each share held of record on all matters
to be voted on by stockholders. The holders of Common Stock are
entitled to receive such dividends, if any, as may be declared from
time to time by the Board of Directors in its discretion from funds
legally available therefor. Upon liquidation, dissolution, or winding
up of the Company, the holders of Common Stock are entitled to receive
pro rata all assets remaining legally available for distribution to
stockholders after liquidating distributions to the holders of
Preferred Stock and any future capital stock designated as being senior
to the Common Stock. The holders of Common Stock have no right to
cumulate their votes in the election of directors. The Common Stock has
no preemptive or other subscription rights, and there are no conversion
rights or redemption or sinking fund provisions with respect to such
shares. All of the outstanding shares of Common Stock are fully paid
and non-assessable.
The Certificate also provides for the authorization of
1,000,000 shares of Class B Common Stock, $.01 par value per share. As
of September 30, 1997, no shares of Class B Common Stock were
<PAGE>
outstanding. The holders of Class B Common Stock are entitled to ten
votes for each share of Class B Common Stock held of record on all
matters to be voted on by stockholders. Each share of Class B Common
Stock shall be convertible into one share of Common Stock at any time.
The designations, preferences, privileges, and voting powers of the
shares of Class B Common Stock, and the restrictions and qualifications
thereof, are otherwise identical to those of the Common Stock.
Preferred Stock
The Certificate provides for the authorization of 2,000,000
shares of Preferred Stock, $.01 par value per share. As of September
30, 1997, no shares were outstanding. Preferred Stock may be issued
from time to time in one or more classes or series, and the Board of
Directors, without further approval of the stockholders, is authorized
to fix the dividend rights and terms, conversion rights, voting rights,
redemption rights and terms, liquidation preferences, sinking funds,
and any other rights, preferences, privileges, and restrictions
applicable to each such class or series of Preferred Stock. The
issuance of Preferred Stock, while providing flexibility in connection
with possible acquisitions and other corporate purposes, could, among
other things, adversely affect the voting power of the holders of
Common Stock and, under certain circumstances, delay or prevent a
change of control of the Company.
Transfer Agent and Registrar
Harris Trust Company of New York is the Transfer Agent and
Registrar for the Common Stock.
Limitations on Directors and Officers Liability and Indemnification
The Certificate limits the liability of directors to the
maximum extent permitted by Delaware law, which specifies that a
director of a company adopting such a provision will not be personally
liable for monetary damages for breach of fiduciary duty as a director,
except for the liability (i) for any breach of the director's duty of
loyalty to the Company or its stockholders; (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) for unlawful payments of dividends or unlawful
stock repurchases or redemptions as provided in Section 174 of the
Delaware General Corporation Law; or (iv) for any transaction from
which the director derived an improper personal benefit.
The Certificate provides for mandatory indemnification of
directors and authorizes indemnification for officers (and others) in
such manner, under such circumstances and to the fullest extent
permitted by the Delaware General Corporation Law, which generally
authorizes indemnification as to all expenses incurred or imposed as a
result of actions, suits, or proceedings if the indemnified parties act
in good faith and in a manner they reasonably believe to be in or not
opposed to the best interests of the Company and the Certificate
provides the right to such expenses in advance of the final disposition
of any such action, suit or proceeding. The Company believes that these
provisions are necessary or useful to attract and retain qualified
persons as directors.
Anti-Takeover Provisions
The Certificate includes certain provisions which may have an
anti-takeover effect. These include a classified board, in which
approximately one-third of the directors are elected at each annual
meeting. In addition, the Certificate provides that only the Chairman
of the Board, President, or a majority of the entire Board may call a
special stockholders meeting. The By-laws of the Company also require
<PAGE>
certain advance notice of nominations of directors. The effect of such
provision is to delay the ability of an insurgent group or hostile
acquirer to obtain control of the Board of Directors. In addition, the
Certificate authorizes the Board of Directors to issue up to 1,000,000
shares of Class B Common Stock, the holders of which are entitled to
cast ten votes per share held, on all matters presented to
stockholders. The Class B Common Stock is otherwise identical to the
Common Stock. Also, the Certificate authorizes the Board of Directors
to issue up to 2,000,000 shares of Preferred Stock in one or more
series, and to fix the number of shares constituting any such series,
the voting powers, designation, preferences, and relative
participating, optional, or other special rights and qualifications,
limitations, or restrictions thereof, including the dividend rights,
terms of redemption (including sinking fund provisions), conversion
rights, and liquidation preferences of the shares constituting any
series, without any further vote or action by stockholders. The Board
of Directors may, therefore, issue Class B Common Stock or Preferred
Stock with voting and conversion rights which could adversely affect
the voting power of the holders of Common Stock. In addition, the
issuance of Class B Common Stock or Preferred Stock, as well as certain
statutory provisions of Delaware law discussed below, could potentially
be used to discourage attempts by others to obtain control of the
Company through merger, tender offer, proxy contest, or otherwise by
making such attempts more difficult to achieve or more costly. Also,
under the employment agreements with Messrs. Feldman and Brokaw,
certain payments may be required to be made to them in the event of a
change of control Such provisions may discourage a hostile takeover
even if in the best interest of all other stockholders.
Delaware Anti-Takeover Law
Under Section 203 of the Delaware Corporation Law (the
"Delaware anti-takeover law"), certain "business combinations" are
prohibited between a Delaware corporation, the stock of which is
generally publicly traded or held of record by more than 2,000
stockholders, and an "interested stockholder" of such corporation for a
three-year period following the date that such stockholder became an
interested stockholder, unless (i) the corporation has elected in its
certificate of incorporation not to be governed by the Delaware
anti-takeover law (the Company has not made such an election), (ii) the
business combination was approved by the board of directors of the
corporation before the other party to the business combination became
an interested stockholder, (iii) upon consummation of the transaction
which resulted in the stockholder becoming an interested stockholder,
the interested stockholder owned at least 85% of the voting stock of
the corporation outstanding at the commencement of the transaction
(excluding voting stock owned by directors who are also officers or
held in employee benefit plans in which the employees do not have a
confidential right to tender or vote stock held by the plan), or (iv)
the business combination was approved by the board of directors of the
corporation and ratified by 66 2/3% of the voting stock which the
interested stockholder did not own. The three-year prohibition also
does not apply to certain business combinations proposed by an
interested stockholder following the announcement or notification of
certain extraordinary transactions involving the corporation and a
person who had not been an interested stockholder during the previous
three years or who became an interested stockholder with the approval
of a majority of the corporation's directors. The term "business
combination" is defined generally to include mergers or consolidations
between a Delaware corporation and an interested stockholder,
transactions with an interested stockholder involving the assets or
stock of the corporation or its majority-owned subsidiaries, and
transactions which increase an interested stockholder's percentage
ownership of stock. The term "interested stockholder" is defined
generally as those stockholders who become beneficial owners of 15% or
more of a Delaware corporation's voting stock.
These provisions, together with the ability of the Company's
Board of Directors to issue Class B Common Stock or Preferred Stock
without further stockholder action, could delay or frustrate the
removal of incumbent directors or a change in control of the Company.
<PAGE>
The provisions also could discourage, impede, or prevent a merger,
tender offer, or proxy contest, even if such event would be favorable
to the interests of stockholders.
SHARES ELIGIBLE FOR FUTURE SALE
As of September 30, 1997, there were 3,847,838 shares of
Common Stock outstanding, including ____ shares which are freely
transferable without restriction under the Securities Act (except for
limits on sales by affiliates of the Company), and 831,500 shares of
Common Stock which were eligible for immediate sale in the public
market pursuant to Rule 144 under the Securities Act, subject in some
cases to certain volume and other limitations.
In general, under Rule 144 a person (or persons whose shares
are aggregated) who (together with predecessor holders who were not
affiliates of the Company) for at least one year has beneficially owned
shares privately acquired directly or indirectly from the Company or an
affiliate of the Company would be entitled to sell within any
three-month period a number of shares of Common Stock that does not
exceed the greater of (i) 1% percent of the then outstanding shares of
the Common Stock of the Company or (ii) the average weekly trading
volume of the Common Stock during the four calendar weeks preceding
such sale. Sales under Rule 144 are also subject to certain
restrictions relating to manner-of-sale, notice, and the availability
of current public information about the Company. Under Rule 144,
however, a person who (together with predecessor holders who were not
affiliates of the Company) has held such shares for a minimum of two
years and who is not, and for three months prior to the sale of such
shares has not been, an affiliate of the Company is free to sell such
shares without regard to the volume, manner-of-sale, and other
limitations contained in Rule 144.
No prediction can be made as to the effect, if any, that sales
of shares under Rule 144 or the availability of shares for sale will
have on the market price of the Common Stock prevailing from time to
time after this offering. Sales of substantial amounts of shares in the
public market, or the perception that such sales may occur, could
adversely affect prevailing market prices for the Common Stock or the
Company's ability to raise equity in the future. See "Market for Common
Stock."
Registration Rights
The holders of 1,425,000 shares of Common Stock and options to
purchase _______ shares of Common Stock] are entitled to certain demand
and "piggyback" registration rights. Such rights require the Company,
if requested by such holders, to register such shares for sale under
the Securities Act if the Company files certain other registration
statements.
PLAN OF DISTRIBUTION
The Company may offer the shares offered hereby directly or
through agents designated from time to time. To the extent required,
any Prospectus Supplement with respect to such shares of Common Stock
will set forth the terms of the offering. To the extent required, any
agent involved in the offer or sale of the Common Stock being offered
by the Company will be named in the Prospectus Supplement. Unless
otherwise indicated in the Prospectus Supplement, any such agent will
be acting on a best efforts basis for the period of its appointment.
<PAGE>
Agents may be entitled under agreements entered into with the
Company to indemnification by the Company against certain civil
liabilities, including liabilities under the Securities Act, or to
contribution with respect to payments which the agents may be required
to make in respect of such liabilities.
Agents may engage in other transactions with or perform other
services for the Company. To the extent required, any such
relationships will be set forth in a Prospectus Supplement.
The Company will pay all of the expenses of the offering of
the shares Common Stock being sold by the Company.
SELLING STOCKHOLDER
The Selling Stockholder, Ehrenkrantz, King, Nussbaum, Inc., is
offering 100,000 shares of Common Stock. The Selling Stockholder
acquired such shares in September 1997 on exercise of warrants held by
the Selling Stockholder. The warrants were exercisable at any time
until October 1, 1997 at an exercise price of $1.00 per share. The
Selling Stockholder received such warrants as compensation for certain
consulting and investment advisory services to the Company. The Company
will not receive any of the proceeds from the sale of such shares. The
Selling Stockholder has informed the Company that the Selling
Stockholder beneficially owns [no] other shares of Common Stock.
Beneficial ownership after this offering will depend on the number of
shares sold by the Selling Stockholder.
The sale of shares of Common Stock by the Selling Stockholders
may be effected from time to time in transactions (which may include
block transactions by or for the account of the Selling Stockholder) in
the over-the-counter market or in negotiated transactions, through the
writing of options on such shares, a combination of such methods of
sale, or otherwise. Sales may be made at fixed prices which may be
changed, at market prices prevailing at the time of sale, or at
negotiated prices.
The Selling Stockholder may effect such transactions by
selling shares directly to purchasers, through broker-dealers acting as
agents for the Selling Stockholder, or to broker-dealers who may
purchase shares as principals and thereafter sell the shares from time
to time in the over-the-counter market, in negotiated transactions, or
otherwise. Such broker-dealers, if any, may receive compensation in the
form of discounts, concessions, or commissions from the Selling
Stockholder and/or the purchasers for whom such broker-dealers may act
as agents or to whom they may sell as principals or both (which
compensation as to a particular broker-dealer may be in excess of
customary commissions).
The Selling Stockholder and broker-dealers, if any, acting in
connection with such sale might be deemed to be "underwriters" within
the meaning of Section 2(11) of the Securities Act and any commission
received by them and any profit on the resale of such shares might be
deemed to be underwriting discounts and commissions under the
Securities Act.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will
be passed upon for the Company by Andrea D. Kantor, Associate General
Counsel of the Company. Ms. Kantor owns 3,333 shares of Common Stock
and has options to purchase 25,000 shares of Common Stock, of which
options to purchase 5,000 shares of Common Stock are currently
exercisable.
<PAGE>
EXPERTS
The audited financial statements of CineMasters at December
31, 1996 and for the five-month period ended December 31, 1996 included
herein have been included herein in reliance upon the report of KPMG
Peat Marwick LLP, independent certified public accountants, included
herein, and upon the authority of said firm as experts in auditing and
accounting.
The audited financial statements of CineMasters and for the
each of the years in the two year period ended July 31, 1995 included
herein have been included herein in reliance upon the report of
Israeloff, Trattner & Co., CPAs, P.C., independent certified public
accountants, included herein, and upon the authority of said firm as
experts in auditing and accounting.
The audited consolidated financial statements of Avenue
Pictures for the nine-month period ended September 30, 1996 and the
year ended December 31, 1995 included herein have been included herein
in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, included herein, and upon the authority
of said firm as experts in auditing and accounting.
<PAGE>
FINANCIAL STATEMENTS
Page
The CineMasters Group, Inc.
Independent Auditors' Report F-2
Consolidated Balance Sheet as of December 31, 1996 F-4
Consolidated Statements of Operations for the
five months ended December 31, 1996 and the
years ended July 31, 1996 and 1995 F-5
Consolidated Statement of Stockholders' Equity for the five
months ended December 31, 1996 and the years ended
July 31, 1996 and 1995 F-6
Consolidated Statement of Cash Flows for the five months
ended December 31, 1996 and the years ended July 31,
1996 and 1995 F-7
Notes to Consolidated Financial Statements F-9
Avenue Entertainment Group, Inc.
Consolidated Balance Sheets at June 30, 1997 (unaudited)
and December 31, 1996 F-20
Consolidated Statements of Operations for the six month
periods ended June 30, 1997 and 1996 (unaudited) F-21
Consolidated Statements of Cash Flows for the six month
periods ended June 30, 1997 and 1996 (unaudited) F-22
Notes to Consolidated Financial Statements F-24
The CineMasters Group, Inc. - Pro Forma Financial Information
Unaudited Pro Forma Condensed Consolidated Statements
of Operations for the five months ended December
31, 1996 and the year ended July 31, 1996 F-27
Notes to Unaudited Pro Forma Condensed Consolidated
Statements of Operations F-29
Avenue Pictures, Inc.
Independent Auditors' Report F-30
Consolidated Statement of Earnings for the nine months
ended September 30, 1996 and the year ended
December 31, 1995 F-31
Consolidated Statement of Cash Flows for the nine months
ended September 30, 1996 and the year ended
December 31, 1995 F-32
Notes to Consolidated Financial Statements F-33
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
The CineMasters Group, Inc.:
We have audited the accompanying consolidated balance sheet of
The CineMasters Group, Inc. as of December 31, 1996 and the related
statements of operations, stockholders' equity and cash flows for the
five-month period then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of The
CineMasters Group, Inc. as of December 31, 1996 and the results of its
operations and its cash flows for the five-month period then ended in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Los Angeles, California
March 28, 1997
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders
The CineMasters Group, Inc.:
We have audited the accompanying statements of operations,
stockholders' equity and cash flows of The CineMasters Group, Inc. for
the years ended July 31, 1996 and 1995. These financial statements are
the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the results of operations and
cash flows of The CineMasters Group, Inc. for the years ended July 31,
1996 and 1995 in conformity with generally accepted accounting
principles.
Israeloff, Trattner & Co., CPAs, P.C.
Valley Stream, New York
October 10, 1996, except for note 9,
which is as of October 28, 1996.
<PAGE>
THE CINEMASTERS GROUP, INC.
Consolidated Balance Sheet
December 31, 1996
Assets
Cash $ 687,080
Short-term investment 696,150
Accounts receivable 149,483
Film costs, net (note 2) 1,998,326
Property and equipment, net (note 3) 117,492
Other assets 81,063
Goodwill (note 9) 2,735,069
-------------------
Total assets $ 6,464,663
===================
Liabilities and Stockholders' Equity
Accounts payable $ 284,784
Accrued expenses 457,426
Capitalized lease obligations (note 4) 40,451
Income taxes payable (note 6) 330,891
Advances from customers 577,730
-------------------
Total liabilities 1,691,282
-------------------
Commitments and contingencies (note 4)
Stockholders' equity:
Common stock, par value $.01 per share.
Authorized 15,000,000 shares; issued and
outstanding, 3,697,838 shares 36,978
Class B common stock, no par value.
Authorized 1,000,000 shares; none issued --
Additional paid-in capital 4,631,252
Retained earnings 224,001
Unrealized loss on marketable securities (118,850)
-------------------
Total stockholders' equity 4,773,381
-------------------
Total liabilities and stockholders' equity $ 6,464,663
===================
See accompanying notes to consolidated financial statements.
<PAGE>
THE CINEMASTERS GROUP, INC.
Consolidated Statements of Operations
Five months ended Years ended July 31,
December 31, ----------------------
1996 1996 1995
----------- -------- ----------
Operating revenues $ 3,508,967 1,961,333 1,793,190
----------- --------- ----------
Costs and expenses:
Film production costs 2,752,307 1,103,291 1,170,629
Selling, general and administrative
expenses 661,766 733,243 597,797
----------- --------- ----------
Total costs and expenses 3,414,073 1,836,534 1,768,426
----------- --------- ----------
Income from operations 94,894 124,799 24,764
Gain on sale of investments (note 7) -- -- 59,768
----------- --------- ----------
Income before income taxes 94,894 124,799 84,532
Income taxes (note 6) 74,945 51,230 28,452
----------- --------- ----------
Net income $ 19,949 73,569 56,080
=========== ========= ==========
Earnings per common share (note 1) $ .01 .04 .03
=========== ========= ==========
Weighted average shares outstanding 3,321,251 1,788,525 1,795,000
=========== ========= ==========
See accompanying notes to consolidated financial statements.
<PAGE>
THE CINEMASTERS GROUP, INC.
Consolidated
Statement of Stockholders' Equity
Five months ended December 31,
1996 and years ended July 31, 1996
and 1995
<TABLE>
<CAPTION>
Retained Unrealized
Common Stock Additional earnings loss on
Number of paid-in (accumulated) marketable
Shares Amount capital deficit securities Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, August 1, 1994, as previously reported 1,795,000 $ 17,950 703,423 (53,803) -- 667,570
Prior period adjustments (note 1) 128,206 128,206
----------- ----------- ----------- ---------- ---------- -----------
-- -- -- --
Balance, August 1, 1994, as restated 1,795,000 17,950 703,423 74,403 -- 795,776
Net income - year ended July 31, 1995 56,080 56,080
----------- ----------- ----------- ---------- ---------- ------------
-- -- -- --
Balance, July 31, 1995 1,795,000 17,950 703,423 130,483 -- 851,856
Shares redeemed - net (note 8) (80,000) (800) (72,911) -- -- (73,711)
Issuance of stock (note 7) 123,338 1,233 183,767 -- -- 185,000
Net income - year ended July 31, 1996 73,569 73,569
------------ ----------- ----------- ---------- ---------- -----------
-- -- -- --
Balance, July 31, 1996 1,838,338 18,383 814,279 204,052 -- 1,036,714
Exercise of stock options 2,000 20 620 -- -- 640
Stock option compensation expense -- -- 9,375 -- -- 9,375
Issuance of common stock (note 9) 407,500 4,075 810,925 -- -- 815,000
Purchase of Avenue Pictures, Inc. (note 9) 1,450,000 14,500 2,885,500 -- -- 2,900,000
Contribution of payable, net of tax (note 9) -- -- 110,553 -- -- 110,553
Increase in unrealized loss -- -- -- -- (118,850) (118,850)
Net income - five months ended
December 31, 1996 19,949 19,949
------------ ----------- ----------- ---------- ---------- ------------
-- -- -- --
Balance, December 31, 1996 3,697,838 $ 36,978 4,631,252 224,001 (118,850) 4,773,381
========= ====== ========= ======= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
THE CINEMASTERS GROUP, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Five months ended
December 31,
Years ended July 31
------------------------------------------
1996 1996 1995
-------------------- ------------------- -------------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $ 19,949 73,569 56,080
-------------------- ------------------- -------------------
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Depreciation 10,046 51,232 32,565
Amortization - film production costs 2,624,627 351,801 326,626
Amortization - goodwill 70,130 -- --
Gain on sale of investments -- -- (59,768)
Stock option compensation 9,375 -- --
Changes in assets and liabilities which affect net income:
Accounts receivable 302,398 (133,090) 95,036
Film costs (1,569,655) (592,995) (303,304)
Other assets 56,132 19,674 8,698
Accounts payable and accrued expenses
101,083 (65,070) (28,186)
Income taxes payable -- 13,550 9,820
Advances from customers (1,716,001) 311,000 (68,669)
Other -- (11,000) 11,000
-------------------- ------------------- -------------------
Total adjustments (111,865) (54,898) 23,818
-------------------- ------------------- -------------------
Net cash provided (used) by
operating activities (91,916) 18,671 79,898
-------------------- ------------------- -------------------
Cash flows from investing activities:
Purchase of equipment (5,731) (25,340) (53,630)
Proceeds from sale of marketable securities -- -- 60,000
Cash acquired in purchase transaction 620,714 -- --
-------------------- ------------------- -------------------
Net cash provided (used) by
investing activities 614,983 (25,340) 6,370
-------------------- ------------------- -------------------
</TABLE>
(Continued)
<PAGE>
THE CINEMASTERS GROUP, INC.
Consolidated Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
Five months ended
December 31,
Years ended July 31
------------------------------------------
1996 1996 1995
-------------------- ------------------- -------------------
Cash flows from financing activities:
<S> <C> <C> <C>
Stock subscription $ 150,000 -- --
Proceeds from the issuance of common stock 640 35,000 --
Principal payments of capital lease obligation
(7,906) (35,613) (24,753)
Due to officers -- (10,000) (35,000)
Repayment of loan payable (20,000) -- --
-------------------- ------------------- -------------------
Net cash provided (used) by
financing activities 122,734 (10,613) (59,753)
-------------------- ------------------- -------------------
Net increase (decrease) in cash 645,801 (17,282) 26,515
Cash at beginning of year 41,279 58,561 32,046
-------------------- ------------------- -------------------
Cash at end of year $ 687,080 41,279 58,561
==================== =================== ===================
Supplemental cash flow information: Cash paid during the year for:
Interest $ 3,082 11,428 4,798
Income taxes 38,910 33,775 15,533
==================== =================== ===================
Noncash transactions:
During the year ended July 31, 1995, $87,498 of leased assets and
obligations was capitalized.
During the five months ended December 31, 1996, $815,000 of common stock was
issued for short-term investments, $184,255 of payables was contributed to
capital, net of a $73,702 tax liability, and Avenue Pictures, Inc. was
acquired resulting in the following:
Fair value of assets acquired $ 5,528,733
Liabilities assumed (2,662,066)
Common stock issued (2,866,667)
--------------------
Net cash paid --
Cash acquired 620,714
--------------------
Net cash acquired $ 620,714
</TABLE>
====================
See accompanying notes to consolidated financial statements.
<PAGE>
THE CINEMASTERS GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 1996, July 31, 1996 and 1995
(1) Summary of Significant Accounting Policies
Description of Business
The CineMasters Group, Inc. (the Company), through its Wombat Production
Division, writes, produces and distributes film star biographies for
television and other markets. On September 30, 1996, the Company acquired
all of the outstanding capital stock of Avenue Pictures, Inc. (Avenue)
(note 9). Avenue is an independent producer of feature films and
television programming. Subsequent to July 31, 1996, the Company changed
its year-end to December 31.
Principles of Consolidation
The Company's financial statements include the accounts of all wholly
owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Reclassifications
Certain reclassifications have been made to the July 31, 1996 and 1995
consolidated financial statements to conform to the current presentation.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments with
original maturities, to the Company, of three months or less.
Short-Term Investment
Short-term investment consists of marketable equity securities. All
marketable securities are classified as available-for-sale. In accordance
with Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," unrealized holding
gains or losses are reflected as an adjustment to stockholders' equity.
At December 31, 1996, short-term investment is comprised of registered
shares of National Patent Development Corporation, a stockholder of the
Company.
Film Costs
The Company capitalizes costs incurred to produce a film project,
including the interest expense funded under the production loans. Such
costs also include the actual direct costs of production, certain
exploitation costs and production overhead. Capitalized exploitation or
distribution costs include those costs that clearly benefit future
periods such as film prints and prerelease and early release advertising
that is expected to benefit the film in future markets. These costs, as
well as expected revenue or profit participations and talent residuals,
are amortized each period on an individual film program basis in the
ratio that the current period's
<PAGE>
THE CINEMASTERS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
gross revenues from all sources for the program bear to management's
estimate of anticipated total gross revenues for such film or program
from all sources. Revenue estimates are reviewed quarterly and adjusted
where appropriate and the impact of such adjustments could be material.
Film property costs are stated at the lower of unamortized cost or
estimated net realizable value. Losses which may arise because
unamortized costs of individual films exceed anticipated revenues are
charged to operations through additional amortization.
Property, Equipment and Depreciation
Property and equipment are stated at cost. Major expenditures for
property and those which substantially increase useful lives are
capitalized. Maintenance, repairs and minor renewals are expensed as
incurred. When assets are retired or otherwise disposed of, their costs
and related accumulated depreciation are removed from the accounts and
resulting gains or losses are included in income. Depreciation is
provided by both straight-line and accelerated methods over the estimated
useful lives of the assets.
Goodwill
Goodwill, representing the excess of the purchase price of Avenue
Pictures, Inc. over its net assets, is being amortized over a ten-year
period. Accumulated amortization at December 31, 1996 was $70,130.
In the event that the facts and circumstances indicate that the excess
purchase price over the net assets acquired may be impaired, an
evaluation of the continuing value would be performed. If an evaluation
is required, the estimated future undiscounted cash flows associated with
those assets would be compared to its carrying value to determine if a
write-down to market or discounted cash flow is required.
Financial Instruments
The Company's financial instruments include cash, accounts receivable and
payable, and customer advances for which carrying amounts approximate
fair value.
Revenue and Cost Recognition
Revenues from feature film and television program distribution licensing
agreements are recognized on the date the completed film or program is
delivered or becomes available for delivery, is available for
exploitation in the relevant media window purchased by that customer or
licensee and certain other conditions of sale have been met pursuant to
criteria specified by SFAS No. 53, "Financial Reporting by Producers and
Distributors of Motion Picture Films." Retained earnings at August 1,
1994 have been restated to properly reflect the method of revenue
recognition. The correction had no effect on net income for fiscal 1995.
<PAGE>
THE CINEMASTERS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Production costs of released films are amortized based on the ratio of
revenues earned during the current period to management's estimate of
total revenues to be derived from the related productions. It is
anticipated that production costs will be amortized over various periods
of generally up to 15 years although for certain films, the amortization
period may be longer. The market trend of each film is regularly examined
to determine the estimated future revenues and corresponding lives. Due
to the nature of the industry, management's estimates of future revenues
may change within the next year and the change could be material.
Revenues from producer-for-hire contracts are recognized on a
percentage-of-completion method, measured by the percentage of costs
completed to date to estimated total cost for each contract. Provisions
for estimated losses on uncompleted contracts are made in the period in
which such losses are determined.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Significant estimates include those related to valuation of accounts
receivable and inventories of released productions. It is at least
reasonably possible that the significant estimates used will change
within the next year.
Earnings per Common Share
Earnings per common share are computed based upon the weighted average
number of common shares and common stock equivalents (options)
outstanding during the year. Fully diluted earnings per share do not
materially differ from the earnings per share presented in the statements
of operations.
Concentration of Credit Risk
The Company's accounts receivable are due from companies in the
entertainment industry.
Stock Option Plan
Prior to January 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock
exceeded the exercise price. On January 1, 1996, the Company adopted SFAS
No. 123, "Accounting for Stock-Based Compensation," which permits
entities to recognize as
<PAGE>
THE CINEMASTERS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
expense over the vesting period the fair value of all stock-based awards
on the date of grant. Alternatively, SFAS No. 123 also 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 continue to apply the provisions of APB Opinion
No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
(2) Film Costs
Film costs consist of the following:
December 31, 1996
--------------------
In process or development $ 224,452
Released, net of accumulated amortization of $6,862,176 1,773,874
--------------------
$ 1,998,326
====================
Based upon the Company's present estimates of anticipated future revenues
at December 31, 1996, approximately 75% of the film costs related to
released product will be amortized during the three-year period ending
December 31, 1999.
(3) Property and Equipment
The major classes of property and equipment consist of the following:
December 31, 1996
--------------------
Film equipment 4 years $ 31,391
Furniture and fixtures 10 years 15,642
Computer equipment 5 years 92,612
Equipment under capital lease 5 years 87,928
Leasehold improvements Lease term 20,489
--------------------
248,062
Less accumulated depreciation and amortization
(including $29,075 attributable to equipment under
capital leases) (130,570)
------------
$ 117,492
============
Depreciation expense was $10,046 for the five months ended December 31,
1996, $51,232 and $32,565, respectively, for the years ended July 31, 1996 and
1995.
THE CINEMASTERS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
(4) Commitments and Contingencies
Leases
The Company is obligated under a lease for office space, expiring April
30, 1999, which requires minimum annual rentals, plus increases based on
real estate taxes and operating costs.
Rent expense was $10,002, $56,340 and $67,803 for the five months ended
December 31, 1996 and the years ended July 31, 1996 and 1995,
respectively. These amounts are net of $9,127 for the five months ended
December 31, 1996 and $45,142 and $24,842 for the years ended July 31,
1996 and 1995, respectively, capitalized as film costs.
Minimum annual rental commitments at December 31, 1996 under the
noncancelable operating and capital leases are as follows:
Operating Capital
----------- --------
Year ending December 31:
1997 $ 42,938 35,865
1998 42,938 8,460
1999 14,313 --
----------- -------
Total minimum obligations $ 100,189 44,325
Less amount representing interest 3,874
---------
Present value of minimum lease obligation $ 40,451
=========
Interest expense relating to the capital lease obligations was $2,806,
$11,428 and $4,798 for the five months ended December 31, 1996 and the
years ended July 31, 1996 and 1995, respectively.
Employment Agreements
Effective September 30, 1996, the Company entered into employment
agreements with its President and its Chairman providing for an annual
salary of $450,000, plus benefits (which base salary may be funded from
any Company source other than net cash generated by the Wombat Production
Division) and $150,000, plus benefits (provided that such base salary is
funded solely out of net cash flow generated by the Wombat Production
Division), respectively. Increases to base salaries and bonuses (limited
to twice the base salary) will be determined at the discretion of the
Compensation Committee of the Board of Directors.
(5) Stock Option Plan
In 1995, the Company adopted a Non-Qualified Stock Option Plan whereby
certain employees and related parties were granted non-qualified options
to purchase up to 600,000 shares of common stock of the Company. The
options may be exercised subject to continued employment and certain
other conditions. The
<PAGE>
THE CINEMASTERS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
options vest over a five-year period and expire five to ten years from
the date of grant. At December 31, 1996, 226,200 options are exercisable.
Option activity was as follows:
Weighted average
Number of Shares Exercise price exercisable price
---------------- -------------- -----------------
Options granted during the year
ended July 31,1996 417,500 $ .32 - 1.00 .48
---------- ---------- ---
Outstanding at July 31, 1996 417,500 .32 - 1.00 .48
Options granted 500,000 1.70 1.70
Options exercised (2,000) .32 .32
---------- --- ---
Outstanding at December 31, 1996 915,500 .32 - 1.70 1.29
=========== =========== ===========
Approximately 217,500 options granted during the five months ended
December 31, 1996 were granted subject to stockholders' approval of an
increase in the number of shares available for stock options.
The Company recorded compensation expense related to stock options
granted at prices less than market value totaling $9,375 for the five
months ended December 31, 1996.
At December 31, 1996, the weighted average remaining contractual life of
all outstanding options was 8.1 years.
Prior to January 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board (ABP)
Option No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock
exceeded the exercise price. On January 1, 1996, the Company adopted SFAS
No. 123, "Accounting for Stock-Based Compensation," which permits
entities to recognize as expense over the vesting period the fair value
of all stock-based awards on the date of grant. Alternatively, SFAS No.
123 also 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 continue to apply the
provisions of APB Opinion No. 25 in accounting for its Plan, and
accordingly, no compensation cost has been recognized for its stock
options granted at fair market value in the consolidated financial
statements. Compensation cost will be recorded for options granted below
fair market
<PAGE>
THE CINEMASTERS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Had the Company determined compensation cost based on the fair value at
the grant date for its stock options under SFAS No. 123, the Company's
net income would have been reduced to the pro forma amounts indicated
below:
December 31, 1996 July 31,
1996
----------- -----------
Net income (loss) As reported $ 19,949 $ 73,569
Pro forma (138,461) (2,901)
Earnings (loss) per share As reported .01 .04
Pro forma (.05) (.01)
=========== ===========
Pro forma net income reflects only options granted in the five months
ended December 31, 1996 and the year ended July 31, 1996. Therefore, the
full impact of calculating compensation cost for stock options under SFAS
No. 123 is not reflected in the pro forma net income amounts presented
above because compensation cost is reflected over the options' vesting
period of five years and compensation cost for options granted prior to
August 1, 1994 is not considered.
At December 31, 1996 and July 31, 1996, the per share weighted-average
fair value of stock options granted was $1.58 and $.46, respectively, on
the date of grant using the modified Black-Scholes option-pricing model
with the following weighted-average assumptions: December 31, 1996 -
expected dividend yield 0%, risk-free interest rate of 6.5%, expected
volatility of 73.2%, and an expected life of 9 years; July 31, 1996 -
expected dividend yield 0%, risk-free interest rate of 6.2%, expected
volatility of 94.7%, and an expected life of 2.9 years. There were no
stock options granted in the year ended July 31, 1995.
In October 1995, as part of a consulting agreement, the Company issued
options to acquire 100,000 shares of common stock at $1.00 per share
(note 7). The options were immediately exercisable for a two-year period.
In July 1994, the Company issued options to acquire 200,000 shares of
common stock at $.25 per share to Kaufman Films, Inc. (Kaufman) in
conjunction with an acquisition (note 8). These options were subsequently
returned to the Company. This activity has been excluded from the table
of stock option activity above. These options were issued outside of the
Non-Qualified Stock Option Plan. Such options were subsequently canceled
(note 8).
(6) Income Taxes
Components of income taxes are as follows:
<PAGE>
THE CINEMASTERS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
December 31, July 31
----------------------------
1996 1996 1995
------------ ------------ ------------
Federal $ 58,737 18,725 9,908
State and local 16,208 32,505 18,544
------------ ------------ ------------
$ 74,945 51,230 28,452
============ ============ ============
Reconciliation of the statutory Federal income tax rate to the Company's
effective tax rate is as follows:
December 31 July 31
--------------------
---------- --------- ----------
Tax at Federal statutory rate of 34% $ 32,264 48,639 28,741
Increase (decrease) in taxes resulting from:
State and local income taxes, net of
Federal income tax benefit 10,697 21,453 12,239
Surtax exemption -- (11,580) (11,185)
Nondeductible goodwill amortization 28,052 -- --
Other 3,932 (7,282) (1,343)
---------- --------- -----------
$ 74,945 51,230 28,452
========== ========= ==========
(7) Related Party Transactions
Transactions with National Patent Development Corporation
In December 1987, the Company and National Patent Development Corporation
(NPDC) modified the agreement whereby the Company received 400,000 common
shares of Dento-Med in exchange for cancellation of its future royalty
interests. As of July 31, 1995, the Company has sold all of these shares.
The Company sold 15,000 shares in 1995, recognizing a gain of $59,768.
The Company previously sold 385,000 shares in the years 1988 to 1994. The
Chairman of The CineMasters Group, Inc. and the President of NPDC are
brothers.
In July 1996, the Company had a private placement in which it sold
123,338 shares of common stock at $1.50 per share to people affiliated
with the Company and NPDC. At July 31, 1996, 23,334 shares were paid. The
remaining subscribed shares were paid for subsequent to year-end.
In September 1996, NPDC made a capital contribution of $815,000 to the
Company (note 9).
<PAGE>
THE CINEMASTERS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Distribution Agreement
On March 1, 1994, the Company entered into an agreement with Janson
Associates whereby Janson Associates (the distributor) was granted sole
and exclusive rights to license essentially all the programs of the
Company's Wombat Production Division for all forms of television and
video worldwide. The distributor also gained the exclusive right to
execute all contracts for the exploitation of these rights. Included in
operating expenses was $277,764 and $197,913 in commissions incurred in
1996 and 1995. The President of Janson Associates was a director of the
Company and is related to the Company's Chairman through marriage.
Consulting Agreement
In October 1995, the Company entered into a two-year agreement with a
financial consultant. The consultant will provide financial advisory and
investment banking related services. The agreement provides for monthly
payments of $4,000 per month, plus a two-year option to purchase 100,000
shares of the Company's common stock at an exercise price of $1.00 per
share. Either party may elect to terminate the agreement upon 30 days
written notice. Pursuant to its termination agreement with Kaufman (note
8), Kaufman agreed to reimburse the Company $1,000 per month for services
of such consultant.
(8) Acquisition and Disposition of Kaufman Films, Inc.
On July 26, 1994, the Company acquired the net assets of Kaufman Films,
Inc. (Kaufman). Kaufman is a media company specializing in the production
of corporate and commercial films. The net assets were acquired in
exchange for 160,000 shares of the Company's class A common stock, valued
at $.25 per share and an option for Kaufman to acquire an additional
200,000 shares at $.25 per share which may be exercised no earlier than
two years from the closing nor more than five years from the closing.
These options were not ascribed a value.
On July 3, 1996, the Company entered into a termination agreement with
Kaufman. The agreement terminated an employment agreement dated July 26,
1994 with Kevin Kaufman and canceled the stock options granted to him and
Kaufman Films, none of which have been exercised. It also assigned the
lease at Leonard Street and returned certain acquired net assets to
Kaufman. In addition, Kaufman returned 80,000 shares of the previously
issued 160,000 shares of the Company's common stock. Kevin Kaufman agreed
to provide the Company with one-half of the proceeds from the sale of
18,000 of the remaining 80,000 shares. Stockholders' equity was charged
approximately $74,000, the fair value of assets returned to Mr. Kaufman
and of the 80,000 shares of common stock returned by him, and
subsequently canceled by the Company.
(9) Acquisition of Avenue Pictures, Inc.
On October 28, 1996, the Company acquired Avenue Pictures, Inc. (Avenue),
effective September 30, 1996, in consideration for 1,425,000 shares of
its common stock which were ascribed a value of $2.00 per share.
<PAGE>
THE CINEMASTERS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
In connection with the purchase, the Company intends to change its name
to Avenue Entertainment Group, Inc. In conjunction with the acquisition
of Avenue, NPDC, together with its affiliates, contributed $815,000 in
the form of its common stock in exchange for 407,500 shares of common
stock ($2.00 per share) of the Company prior to the consummation of this
business combination. In addition, accrued expenses due to the Chairman
and President of the Wombat Production Division amounting to $185,000
were forgiven. The forgiveness, net of the related tax liability, was
recorded as a capital contribution. An additional 25,000 shares were
issued to the Company's legal counsel for services rendered to the
Company and Avenue relating to the acquisition. The portion of the legal
fees relating to the Company was capitalized as part of the transaction
cost. The portion of the legal fees relating to services provided to
Avenue was expensed.
Goodwill, relating to the acquisition of Avenue Pictures, Inc. is as
follows:
Purchase Price $2,866,667
Fair Market value of net assets acquired:
Assets 2,723,534
Liabilities 2,662,066
Net assets acquired 61,468
Goodwill $2,805,199
The pro forma results listed below are unaudited, reflect the acquisition
of Avenue using purchase accounting and assume the acquisition occurred
at the beginning of each of the periods:
Five months ended
December 31, 1996
Year ended
July 31, 1996
------------------- -------------------
Revenues $ 3,651,925 6,357,802
Net loss (58,055) (247,560)
Net loss per share (.02) (.07)
=================== ===================
The pro forma financial information is presented for informational
purposes only and is not necessarily indicative of the operating results
that would have occurred had the Avenue acquisition been consummated as
of the above date, nor are they indicative of future operating results.
Postretirement Benefit
Pursuant to an agreement dated September 30, 1996, the Company is
obligated to pay its Chairman, his spouse, or estate, as the case may be,
commencing upon the termination of his employment, monthly payments of
$8,333, for the greater of five years or the remainder of his life. Under
certain circumstances, a reduced benefit may be payable to the Chairman's
wife for a period not to exceed five years from the date of his death.
The Company is accruing the $640,000 then present value of the expected
benefit payments at December 31, 2001, on a straight-line basis over the
term of the Chairman's employment contract, which covers the period
September 30, 1996 to December 31, 2001.
<PAGE>
THE CINEMASTERS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
This agreement also gives the Chairman the option to purchase certain
assets of the Wombat Production Division of the Company at book value
following the termination of his employment, and a right of first refusal
if the Company wishes to sell the Wombat film library. The Company
retained the rights to acquire any future productions of the Chairman for
normal consideration, subject to reasonable producer fees, rights of
licensees and existing distribution rights.
(10) Significant Customers
Significant customers, exceeding 10% of revenue, were as follows:
Five months ended
December 31, 1996
Years ended July 31, 1996
------- -----------------------------------
1996 1995
------------ -----------
ABC 77% --% --%
A&E -- 12 13
Janson Associates -- 40 27
======= ============ ===========
(11) Preferred Stock
The Company has authorized 2,000,000 shares of preferred stock with a
$.01 par value. No preferred stock has been issued.
<PAGE>
AVENUE ENTERTAINMENT GROUP, INC.
Consolidated Condensed Balance Sheets
(in thousands)
<TABLE>
June 30, December 31,
<CAPTION>
1997 1996
Assets (unaudited)
<S> <C> <C>
Cash $ 390,678 $ 687,080
Short-term investment 707,419 696,150
Accounts receivable 444,039 149,483
Films costs, net 1,546,169 1,998,326
Property and equipment, net 120,772 117,492
Other assets 63,581 81,063
Goodwill 2,594,809 2,735,069
----------- -----------
Total assets $5,867,467 $6,464,663
========== ==========
Liabilities and Stockholders' Equity
Accounts payable $ 489,979 284,784
Accrued expense 574,104 457,426
Loan payable 140,000
Capitalized lease obligations 22,948 40,451
Income taxes payable 87,000 330,891
Advance from customers 42,000 577,730
------------ -----------
Total liabilities 1,356,031 1,691,282
---------- ----------
Stockholders' equity
Common stock, par value $.01 per share 37,478 36,978
Class B capital stock, no par value
Additional paid-in capital 4,799,502 4,631,252
Retained earnings (deficit) (67,963) 224,001
Unrealized loss on marketable securities (107,581) (118,850)
Note receivable for common stock (150,000) _________
-----------
Total stockholders' equity 4,511,436 4,773,381
----------- -----------
Total liabilities and stockholders' equity $5,867,467 $6,464,663
========== ==========
</TABLE>
See accompanying notes to the consolidated condensed financial
statements.
<PAGE>
AVENUE ENTERTAINMENT GROUP, INC.
Consolidated Condensed Statements of Operations
(Unaudited)
(in thousands, except per share data)
Six months
ended June 30,
1997 1996
Operating revenues $2,126,312 $ 971,482
Cost and expenses:
Film production costs 1,150,828 298,260
Selling, general & administrative
expenses 1,339,815 728,666
--------- --------
Total costs and expenses 2,490,643 1,026,926
--------- -----------
Loss before income tax (364,331) (55,444)
Income tax benefit (expense) 72,367 (8,092)
------ -----------
Net loss $(291,964) $ (63,536)
========= =========
Net loss per share $ (.08) $ (.04)
============== ============
Weighted average shares
outstanding 3,719 1,795
===== ============
See accompanying notes to the consolidated condensed financial
statements.
<PAGE>
AVENUE ENTERTAINMENT GROUP, INC.
Consolidated Condensed Statements of Cash Flows
(Unaudited)
(in thousands)
<TABLE>
Six months
<CAPTION>
ended June 30,
1997 1996
Cash flows from operating activities:
<S> <C> <C>
Net $ (291,964) $(63,536)
----------- ---------
Adjustments to reconcile net income
to net cash provided (used) for
operating activities:
Depreciation 13,175 15,000
Amortization-film production costs 1,110,382 155,800
Amortization-goodwill 140,260
Stock option compensation 18,750
Changes in assets and liabilities which affect net income:
Accounts receivable (294,556) 12,951
Film costs (658,225) (65,114)
Other assets 17,482 (1,086)
Accounts payable and accrued expenses 297,982 (191,906)
Income taxes payable (80,000) 137,154
Advances from customers (535,730) 80,500
----------- ---------
Net cash provided (used) by investing activities (262,444) (79,763)
---------- ----------
Cash flows from investing activities:
Purchase of equipment (16,455) (9,809)
------------ -----------
Net cash provided (used) by investing activities (16,455) (9,809)
----------- ----------
<PAGE>
AVENUE ENTERTAINMENT GROUP, INC.
Consolidated Condensed Statements of Cash Flows, (Continued)
(Unaudited)
(in thousands)
</TABLE>
<TABLE>
Six months
<CAPTION>
ended June 30,
1997 1996
Cash flows from financing activities:
<S> <C> <C>
Principal payments of capital lease of obligation (17,503) (21,076)
-------- --------
Net cash (used for) financing activities (17,503) (21,076)
--------- ---------
Net increase (decrease) in cash (296,402) 48,878
Cash at the beginning of year 687,080 9,277
--------- --------
Cash at the end of period $390,678 $ 58,155
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest $ 400 $ x,xxx
========== =========
Income taxes $ 33,798 $ xxx
========= ==========
</TABLE>
See accompanying notes to the consolidated condensed financial
statements.
<PAGE>
AVENUE ENTERTAINMENT GROUP, INC.
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
The Company
Avenue Entertainment Group, Inc. (the "Company") is principally engaged
in the development, production and distribution of feature films,
television series, movies-for-television, mini-series and film star
biographies.
Generally, theatrical films are first distributed in the theatrical and
home video markets. Subsequently, theatrical films are made available for
world-wide television network exhibition or pay television, television
syndications and cable television. Generally, television films are first
licensed for network exhibition and foreign syndication or home video, and
subsequently for domestic syndication on cable television. The revenue cycle
generally extends 7 to 10 years on film and television product.
Basis of Presentation
The accompanying interim consolidated financial statements of 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
Form 10-SB for the year ended December 31, 1996. In the opinion of management,
all adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial position of the Company at June 30, 1997, the
results of operations and its cash flows for the three months and six month
periods ended June 30, 1997 and 1996 have been included. The results of
operations for the interim period are not necessarily indicative of results
which may be realized for the full year.
2. Film Costs
Film costs consist of the following:
June 30, December 31,
1997___ 1996___
In process or development $ 295,394 $ 224,452
Released, net of accumulated amortization of
$7,972,558 (1997) and $6,010,876 (1996),
respectively 1,250,775 1,773,874
--------- ---------
$ 1,546,169 $ 1,998,326
========= =========
<PAGE>
AVENUE ENTERTAINMENT GROUP, INC.
Notes to Consolidated Financial Statements, Continued
3. Loan Payable
On May 27, 1997, the Company entered into an unsecured demand note
which provides the Company with borrowings (the "Note") in the principal amount
of $250,000, at prime plus 1%, with Fleet Bank, National Association, which is
payable on demand, but in any event not later than May 27, 1998. As of June 30,
1997, $140,000 had been borrowed under the Note.
<PAGE>
THE CINEMASTERS GROUP, INC.
Pro forma Financial Information
The following unaudited pro forma condensed consolidated statements of
operations for the five months ended December 31, 1996 and for the year ended
July 31, 1996 have been prepared giving effect to the Company's acquisition of
Avenue Pictures, Inc. (Avenue). On September 30, 1996, the Company issued
1,450,000 shares of its common stock in connection with the acquisition of 100%
of Avenue. The unaudited pro forma condensed consolidated statements of
operations for the periods noted present the results of operations of the
Company assuming the Merger has been consummated as of the beginning of the
periods indicated.
The unaudited pro forma condensed consolidated financial statements have been
prepared by the Company and all calculations have been made based upon
assumptions deemed appropriate. Certain of these assumptions are set forth under
the notes to the unaudited pro forma condensed consolidated financial
statements. The unaudited pro forma condensed consolidated financial statements
were prepared utilizing the accounting policies of the Company as outlined in
its historical financial statements and reflect preliminary allocations of the
purchase price which may be subject to further adjustments as the Company
finalizes the allocation of the purchase price in accordance with generally
accepted accounting principles.
The unaudited pro forma financial information does not purport to be indicative
of the results of operations which would have actually been obtained if the
acquisition had been consummated on the date indicated. In addition, the
unaudited pro forma financial information does not purport to be indicative of
results of operations or financial information which may be achieved in the
future.
The unaudited pro forma financial information should be read in conjunction with
the Company's historical financial statements and notes included herein.
<PAGE>
THE CINEMASTERS GROUP, INC.
Unaudited Pro forma Condensed Consolidated Statements of Operations
Five months ended December 31, 1996
<TABLE>
The CineMasters
Group, Inc. Avenue Pictures,
Inc. (1)
------------------- -----------------------
<CAPTION>
Five months ended Two months ended
December 31, 1996 September 30, 1996
Pro forma Pro forma
adjustments combined
------------------- ------------------- --------------------- -----------------
<S> <C> <C> <C>
Operating revenues $ 3,508,967 142,958 -- 3,651,925
------------------- ------------------- --------------------- -----------------
Costs and expenses:
Film production costs 2,752,307 9,538 -- 2,761,845
Selling, general and administrative
expenses 661,766 143,840 45,584 (2) 873,190
22,000 (3)
------------------- ------------------- --------------------- -----------------
Total costs and expenses 3,414,073 153,378 67,584 3,635,035
------------------- ------------------- --------------------- -----------------
Income (loss) before income
taxes 94,894 (10,420) (67,584) 16,890
Income taxes 74,945 -- -- 74,945
------------------- ------------------- --------------------- -----------------
Net income (loss) $ 19,949 (10,420) (67,584) (58,055)
=================== =================== ===================== =================
Loss per common share $ (.01) (.02)
=================== =================
Weighted average shares outstanding
3,321,251 3,263,421
=================== =================
</TABLE>
See accompanying notes to unaudited condensed consolidated statements of
operations.
<PAGE>
THE CINEMASTERS GROUP, INC.
Unaudited Pro forma Condensed Consolidated Statement of Operations
Year ended July 31, 1996
<TABLE>
The CineMasters
<CAPTION>
Group, Inc. Avenue Pictures, Pro forma Pro forma
Inc. adjustments condensed
------------ -------------- -------------------- -----------------
<S> <C> <C> <C> <C>
Operating revenues $ 1,961,333 4,396,469 -- 6,357,802
------------ -------------- -------------------- -----------------
Costs and expenses:
Film production costs 489,782 3,537,339 -- 4,027,121
Selling, general and administrative
expenses 1,346,752 771,752 273,507 (2)
110,000 (3) 2,502,011
------------ -------------- -------------------- -----------------
Total costs and expenses 1,836,534 4,309,091 383,507 6,529,132
------------ -------------- -------------------- -----------------
Income (loss) before income
taxes 124,799 87,378 (383,507) (171,330)
Income taxes 51,230 25,000 -- 76,230
------------ -------------- -------------------- -----------------
Net income (loss) $ 73,569 62,378 (383,507) (247,560)
============ ============== ==================== =================
Earnings (loss) per common share $ .04 (.07)
============ =================
Weighted average shares outstanding
1,788,525 3,646,025
============ =================
</TABLE>
See accompanying notes to unaudited condensed consolidated statements of
operations.
<PAGE>
THE CINEMASTERS GROUP, INC.
Notes to Unaudited Pro forma Condensed Consolidated Statements of Operations
1. The acquisition was effective September 30, 1996. Avenue's results of
operations are included in CineMasters' consolidated results from that
date. Accordingly, Avenue's results for the two months ended September
30, 1996 are included to reflect the pro forma results for the five
months ended December 31, 1996.
2. To record amortization of goodwill.
Goodwill, relating to the acquisition of Avenue Pictures, Inc. is as
follows:
Purchase Price $2,866,667
Fair Market value of net assets acquired:
Assets $2,723,534
Liabilities 2,662,066
Net assets acquired $ 61,468
------------
Goodwill $2,805,199
3. To adjust executive compensation based on employment agreements entered
into and compensatory stock options issued in conjunction with the
acquisition of Avenue.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Avenue Pictures, Inc.:
We have audited the accompanying consolidated statements of earnings and cash
flows of Avenue Pictures, Inc. and subsidiaries for the nine-month period ended
September 30, 1996 and year ended December 31, 1995. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. We conducted our audits in accordance with
generally accepted auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. In our opinion, the consolidated statements of
earnings and cash flows referred to above present fairly, in all material
respects, the results of their operations and their cash flows for the
nine-month period ended September 30, 1996 and year ended December 31, 1995 in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Los Angeles, California
March 28, 1997
<PAGE>
AVENUE PICTURES, INC.
AND SUBSIDIARIES
Consolidated Statements of Earnings
<TABLE>
Nine-month period
<CAPTION>
ended Year ended
September 30, 1996 December 31, 1995
-------------------- -------------------
<S> <C> <C>
Revenue $ 4,361,854 654,853
-------------------- -------------------
Costs and expenses:
Film cost amortization 3,537,338 192
General and administrative 616,036 692,963
-------------------- -------------------
Total cost and expenses 4,153,374 693,155
-------------------- -------------------
Income (loss) from operations 208,480 (38,302)
Other income 4,750 10,400
-------------------- -------------------
Net income (loss) before taxes 213,230 (27,902)
Income tax expense 25,000 --
-------------------- -------------------
Net income (loss) $ 188,230 (27,902)
==================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
AVENUE PICTURES, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
Nine-month period
<CAPTION>
ended Year ended
September 30, 1996 December 31, 1995
-------------------- -------------------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 188,230 (27,902)
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization of film costs 3,524,000 --
Depreciation and amortization 1,553 2,013
Gain on disposal of fixed assets (786) --
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 2,521 (155,609)
Increase in film costs (5,197,855) (32,705)
Increase in other assets (85,784) (80)
Increase (decrease) in accounts payable and accrued expenses
266,671 35,316
Increase (decrease) in due to stockholder (61,529) 190,027
Increase (decrease) in deferred income 1,981,731 --
-------------------- -------------------
Net cash provided by operating activities 618,752 11,060
-------------------- -------------------
Cash flows from investing activities:
Purchase of property and equipment (11,598) --
Payments received from sale of fixed assets 2,500 --
-------------------- -------------------
Net cash used by investing activities (9,098) --
-------------------- -------------------
Increase in cash and cash equivalents 609,654 11,060
Cash and cash equivalents at beginning of period 11,060 --
--------------------
-------------------
Cash and cash equivalents at end of period $ 620,714 11,060
==================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
AVENUE PICTURES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Nine-month period ended September 30, 1996
and year ended December 31, 1995
(1) Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated statements of earnings and cash flows
include the accounts of Avenue Pictures, Inc. and its wholly owned
subsidiaries. All significant intercompany balances and transactions have
been eliminated.
Description of Business
The Company is an independent producer of feature films and television
programming.
Cash and Cash Equivalents
The Company considers money market accounts and other highly liquid
investments with original maturities of three months or less to be cash
equivalents.
Film Costs and Film Cost Amortization
Included in film costs are production, distribution and allocated
production overhead costs expected to benefit future periods. Film costs
are amortized on an individual-film basis in the ratio that current
period gross revenues bear to management's estimate of total ultimate
gross revenues from all sources. Revenue estimates are reviewed annually
and adjusted where appropriate.
The Company charges profit participation and talent residuals, if any, to
expense in the same manner as amortization of production costs, based on
the ratio of current period gross revenues to management's estimate of
total ultimate gross revenues. Payments for profit participations, when
applicable, are made in accordance with the participants' contractual
agreements.
Film costs are stated at the lower of unamortized cost or estimated net
realizable value. Losses which may arise because unamortized costs of
individual films exceed anticipated revenues are charged to income
through additional amortization.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets,
ranging from three to five years.
<PAGE>
AVENUE PICTURES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Revenue Recognition
Revenues from feature film and television program distribution licensing
agreements are recognized on the date the completed film or program is
delivered or becomes available for delivery, is available for
exploitation in the relevant media window purchased by that customer or
licensee and certain other conditions of sale have been met pursuant to
criteria specified by SFAS No. 53, "Financial Reporting by Producers and
Distributors of Motion Picture Films."
Producer fees received from production of films and television programs
for outside parties where the Company has no continuing ownership
interest in the project are recognized on a percentage-of-completion
basis as determined by applying the cost-to-cost method. The cost of such
films and television programs is expensed as incurred.
Income Taxes
The Company accounts for income taxes using Statement of Financial
Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income
Taxes." Under SFAS No. 109, deferred income taxes reflect the impact of
"temporary differences" between assets and liabilities for financial
reporting purposes as such amounts are measured by tax laws and
regulations.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash
equivalents. The Company has investment policies that limit investments
to money market accounts and other highly liquid investments with
original maturities of three months or less.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
(2) Income Taxes
Components of income taxes for the nine-month period ended September 30,
1996 are as follows:
Federal State Total
------------------- ------------- -----------
Current $ 10,000 15,000 25,000
=================== ============= ===========
<PAGE>
AVENUE PICTURES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Reconciliation of the Federal income tax rate to the Company's
affiliation tax rate is as follows:
<TABLE>
Nine-month
<CAPTION>
period ended Year ended
September 30, 1996 December 31, 1995
--------------------- --------------------
<S> <C> <C>
Tax at Federal statory rate of 34% $ 73,000 16,000
State tax, net of Federal benefit 15,000 4,000
Reduction valuation allowance (74,000) (18,000)
Nondeductible expenses 11,000 (2,000)
--------------------- --------------------
$ 25,000 --
===================== ====================
</TABLE>
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Based on the level of historical taxable income and
projections of future taxable income over the periods which the deferred
tax assets are deductible, management believes that it is not more likely
than not that the Company will realize the benefits of these deductible
differences as of September 30, 1996. Accordingly, a valuation allowance
has been provided for the total gross deferred tax assets.
(3) Commitment
The Company has an operating lease for office space which can be
terminated by 90 days notification by the lessee or the lessor. Total
rental expense under the operating lease for the nine-month period ended
September 30, 1996 and year ended December 31, 1995 was approximately
$64,000 and $82,000, respectively.
(4) Significant Customers
Significant customers exceeding 10% of revenue were as follows:
1996 1995
---------------- --------------------
ABC 65% --%
Hallmark Entertainment 25 --
Hearst Entertainment -- 64
Miramax -- 17
================ ====================
<PAGE>
AVENUE PICTURES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(5) Acquisition
Effective September 30, 1996, 100% of the Company's outstanding common
stock was acquired by The CineMasters Group, Inc.
<PAGE>
THE CINEMASTERS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
No dealer, salesperson, or any other person has been authorized to give any
information or to make any representations other than those contained in
this Prospectus, and, if given or made, such information or representations
must not be relied upon as having been authorized by the Company. This
Prospectus does not constitute an offer to sell or the solicitation of any
offer to buy any of the securities offered hereby to anyone in any
jurisdiction in which such offer or solicitation is unlawful. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, imply that there has been no change in the affairs of the
Company or that the information herein is correct as of any time subsequent
to the dates as of which such information is given.
TABLE OF CONTENTS
Page
Additional Information....................
Prospectus Summary........................
Risk Factors..............................
Use of Proceeds...........................
Market Price of Common Stock..............
Dividend Policy...........................
Capitalization............................
Dilution..................................
Management's Discussion and
Analysis of Financial Condition...........
and Results of Operations.................
Certain Relationships and Related
Party Transactions.......................
Principal Stockholders....................
Description of Securities.................
Shares Eligible for Future Sale...........
Plan of Distribution......................
Selling Stockholder.......................
Legal Matters.............................
Experts...................................
Avenue Entertainment Group, Inc.
300,000 Shares
of
Common Stock
PROSPECTUS
, 1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
The Company's Certificate of Incorporation limits the
liability of directors to the maximum extent permitted by Delaware law,
which specifies that a director of a company adopting such a provision
will not be personally liable for monetary damages for breach of
fiduciary duty as a director, except for the liability (i) for any
breach of the director's duty of loyalty to the Company or its
stockholders; (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law; (iii) for
unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General
Corporation Law; or (iv) for any transaction from which the director
derived an improper personal benefit.
The Company's Certificate of Incorporation provides for
mandatory indemnification of directors and authorizes indemnification
for officers (and others) in such manner, under such circumstances and
to the fullest extent permitted by the Delaware General Corporation
Law, which generally authorizes indemnification as to all expenses
incurred or imposed as a result of actions, suits or proceedings if the
indemnified parties act in good faith and in a manner they reasonably
believe to be in or not opposed to the best interests of the Company
and the Amended and Restated Certificate of Incorporation provides the
right to such expenses in advance of the final disposition of any such
action, suit or proceeding. The Company believes that these provisions
are necessary or useful to attract and retain qualified persons as
directors.
The Company maintains a directors' and officers' insurance
policy.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses (other than
underwriting discounts and commissions) in connection with this
Registration Statement. All expenses will be paid by the Company. All
such expenses are estimates, other than the filing and listing fees:
SEC registration fee $ 670.45
Accounting fees and expenses
AMEX Listing Fee $ 6,000.00
Legal fees and expenses
Miscellaneous
Total $______
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Pursuant to a private placement transaction, in August 1996
certain affiliates and employees of National Patent and CineMasters
contributed capital in the amount of $185,000 in exchange for 123,338
shares of CineMasters Common Stock. The Company claims an exemption
from the registration requirements of the Securities Act pursuant to
Rule 504 of Regulation D of same Act. The aggregate offering price in
this private placement transaction, less the aggregate offering price
for all securities sold within the previous twelve (12) months pursuant
to Regulation D, did not exceed $1,000,000.
On July 26, 1994, CineMasters acquired the net assets of
Kaufman Films, Inc., a media company specializing in the production of
corporate commercial films. The net assets were acquired in exchange
for 160,000 shares of the CineMasters Common Stock, valued at $0.25 per
share and an option for the seller to acquire an additional 200,000
shares at $0.25 per share which may be exercised no earlier than two
years from the closing nor more than five years from the closing. In
connection with the Kaufman Termination Agreement, such option was
declared null and void. In addition, CineMasters delivered to Kaufman
Films/Mr. Kaufman five replacement certificates for an aggregate of
80,000 shares (four for 18,000 and one for 8,000) of restricted
CineMasters Common Stock (in exchange for the 160,000 shares of
CineMasters Common Stock previously held by Kaufman Films) in the name
of Mr. Kaufman.
In connection with the Business Combination, CineMasters
acquired all of the outstanding capital stock of Avenue Pictures from
Mr. Brokaw, the sole shareholder of Avenue Pictures, in exchange for
1,425,000 shares of CineMasters Common Stock.
In connection with the Business Combination, National Patent
made a capital contribution valued at $815,000 to CineMasters in the
form of registered shares of National Patent common stock in exchange
for 407,500 shares of CineMasters Common Stock.
In connection with the Business Combination, as additional
consideration for legal services provided, CineMasters issued 25,000
shares of CineMasters Common Stock to the law firm of Pryor, Cashman,
Sherman & Flynn.
In April 1997, the Company issued 50,000 shares of its Common
Stock to an accredited investor pursuant to a private placement
transaction.
With respect to the private placement transactions described
in the five immediately preceding paragraphs, the Company claims an
exemption from the registration requirements of the Securities Act
pursuant to Section 4(2) of the Securities Act. These private placement
transactions were made to a limited number of accredited investors who
were given complete access to all material information about the
Company.
ITEM 27. EXHIBITS.
(3) (i) Restated Certificate of Incorporation.*
(ii) By-Laws.*
(5) Opinion of Andrea D. Kantor, Esq. re legality **
(10) (a)(i) Share Exchange Agreement, dated as of September
30, 1996, among Cary Brokaw, Avenue Pictures,
Inc. and The CineMasters Group, Inc. *
(a)(ii) Stockholders Agreement, dated as of September
30, 1996, among Cary Brokaw, The CineMasters
Group, Inc., National Patent Development
Corporation, Gene Feldman, Jerome Feldman, Suzette
St. John Feldman and Michael Feldman. *
<PAGE>
(a)(iii) Exit Option Agreement, dated as of September 30, 1996, between
The CineMasters Group, Inc. and Gene Feldman. *
(b)(ii)(1) Distribution Agreement, dated April 28, 1996, between Janson
Associates, Inc. and The CineMasters, Group, Inc. *
(b)(ii)(2) Agreement, dated as of December 5, 1994, amended as of June
27, 1995 and as of October 1, 1996, between The CineMasters
Group, Inc. and A&E Television Networks. *
(b)(ii)(3) Agreement, dated as of March 26, 1996, between Wombat
Productions, a division of The CineMasters Group, Inc.,
and Lifetime Productions, Inc. *
(b)(ii)(4) Production and License Agreement, dated as of November 17,
1989, between Wombat Productions, a division of The
CineMasters Group, Inc., and Home Box Office, Inc. *
(b)(ii)(5) Production and Distribution Agreement, dated as of June 3,
1993, between Wombat Productions, a division of The
CineMasters Group, Inc., and the Public Broadcasting
Service. *
(b)(ii)(6) Output Agreement, dated October 1, 1994 between Avenue
Pictures, Inc. and RHI Entertainment, Inc. *
(b)(ii)(7) Promissory Note between Avenue Entertainment Group, Inc. and
Fleet Bank, National Association.*
(c)(i) Avenue Entertainment Group, Inc. Stock Option and Long Term
Incentive Compensation Plan. *
(c)(ii) Employment Agreement, dated as of September 30, 1996, among
The CineMasters Group, Inc., Avenue Pictures, Inc. and Cary
Brokaw. *
(c)(iii) Employment Agreement, dated as of September 30, 1996, among
The CineMasters Group, Inc., Avenue Pictures, Inc. and
Gene Feldman. *
(c)(iv) Option Agreement, dated as of September 30, 1996, between The
CineMasters Group, Inc. and Cary Brokaw. *
(c)(v) Form of Option Grant Agreement, dated as of September 30, 1996,
between Avenue Entertainment Group, Inc. and the Optionee.*
(c)(vi) Form of Option Grant Agreement, dated as of March 10, 1997,
between Avenue Entertainment Group, Inc. and the Optionee. *
(c)(vii) Termination Agreement, With Accounts Receivable, dated
July 3, 1996 among The CineMasters Group, Inc., Kaufman
Films, Inc. and Kevin Kaufman. *
(c)(viii) Letter Agreement, dated November 27, 1995, between CineMasters
Group, Inc. and Ehrenkrantz, King, Nussbaum, Inc.
(c)(ix) Warrant, dated October 1, 1995, issued by CineMasters Group,
Inc. to Ehrenkrantz, King, Nussbaum, Inc.
(21) Subsidiaries of the Company
(23) (a) Consent of KPMG Peat Marwick LLP
(b) Consent of Israeloff, Trattner & Co., CPAs, P.C.
(24) Powers of Attorney (included on Page II-6)
(27) Financial Data Schedule.
------------------
* Incorporated by reference to such exhibit as filed with the Company's
Registration Statement on Form 10-SB, as amended.
** To be filed by Amendment
ITEM 28. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under
the Securities Act of 1933 (the "Act") may be permitted to directors,
officers and controlling persons of the small business issuer pursuant
to the foregoing provisions, or otherwise, the small business issuer
has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by
the small business issuer of expenses incurred or paid by a director,
officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the small business issuer will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of
such issue.
(b) The undersigned small business issuer will:
(1) For purposes of determining any liability under
the Act, treat the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of prospectus
filed by the small business issuer under Rule 424(b)(1) or (4)
or 497(h) under the Securities Act as part of this
registration statement as of the time the Commission declared
it effective.
(2) For determining any liability under the Act,
treat each post-effective amendment that contains a form of
prospectus as a new registration statement for the securities
offered in the registration statement, and that the offering
of such securities at that time shall be deemed to be the
initial bona fide offering those securities.
(c) The undersigned small business issuer will:
(1) File, during any period in which it offers or
sells securities, a post-effective amendment to
this registration statement to:
(i) Include any prospectus required by
section 10(a)(3) of the Act;
(ii) Reflect in the prospectus any facts or
events which, individually or together,
represent a fundamental change in the
information in the registration statement;
and
(iii) Include any additional or changed
material information on the plan of
distribution.
(2) For determining liability under the Act, treat
each post-effective amendment as a new registration
statement of the securities offered, and the offering
of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from
registration any of the securities that remain unsold at the end of the
offering.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of
1933, the Registrant certifies that it has reasonable grounds to
believe that it meets all of the requirements of filing on Form SB-2
and authorized this Amendment to the Registration Statement to be
signed on its behalf by the undersigned, in the Los Angeles, State of
California, on October 7, 1997.
AVENUE ENTERTAINMENT GROUP, INC.
By: /s/ Cary Brokaw
Cary Brokaw, President and Chief
Executive Officer
In accordance with the requirements of the Securities Act of
1933, this Registration Statement was signed by the following
persons in the capacities and on the dates stated.
KNOW ALL MEN BY THESE PRESENTS that each person whose
signature appears below constitutes and appoints Cary Brokaw and Gene
Feldman, and each of them, his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, to act,
without the other, for him and in his name, place, and stead, in any
and all capacities, to sign any or all amendments (including
post-effective amendments) to the Registration Statement on Form SB-2
of Avenue Entertainment Group, Inc. relating to the offering of shares
of its Common Stock, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as full
to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or
any of them, their substitute or substitutes may lawfully do or cause
to be done by virtue hereof.
Date: October 7, 1997 /s/ Cary Brokaw
Cary Brokaw
President and Chief Executive
Officer, Director
Date: October 7, 1997 /s/ Sheri L. Halfon
-------------------
Sheri L. Halfon
Senior Vice President and Chief
Financial Officer (Principal
Financial and Accounting Officer),
Director
Date: October 7, 1997 /s/ Gene Feldman
Gene Feldman
Chairman of the Board
Date: October 7, 1997 /s/ Michael Feldman
Michael Feldman
Executive Vice President, Director
<PAGE>
Date: October 7, 1997 /s/ Doug Rowan
Doug Rowan
Director
Date: October 7, 1997 /s/ James A. Janowitz
James A. Janowitz
Director
EXHIBIT 5
Avenue Entertainment Group, Inc. [LOGO] [LETTERHEAD]
October 7, 1997
Avenue Entertainment Group, Inc.
Suite 2110, 11111 Santa Monica Blvd.
Los Angeles, California 90025
Gentlemen:
Reference is made to the Registration Statement on Form SB-2 of Avenue
Entertainment Group, Inc. (the "Company") relating to the registration of
shares of the Company's common stock, par value $.01 per share (the
"Common Stock").
I am General Counsel of the Company, and have examined such
corporate records and other documents as I have deemed relevant. Based
upon the above, and assuming no change between the date hereof and the
date of any issuance of shares of Common Stock in the relevant law or
facts, I am of the opinion that (i) the shares of Common Stock to be sold
by the Company pursuant to the Registration Statement have been authorized
and, when issued and paid for in accordance with the terms described
therein, will be validly issued, fully paid, and non-assessable, and (ii)
the shares of Common Stock to be sold by the Selling Stockholder have been
authorized and are validly issued, fully paid, and non-assessable.
I hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and the use of my name in the Prospectus.
Very truly yours,
Andrea D. Kantor
EXHIBIT 21
Subsidiaries of the Registrant
Avenue Pictures, Inc. Delaware
Wombat Productions, Inc. Delaware
EXHIBIT 23(b)
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Avenue Entertainment Group, Inc.
We consent to the use of our report incorporated herein by reference and to
the reference to our firm under the heading "Experts" in the prospectus.
ISRAELOFF, TRATTNER & CO., CPAS
New York, New York
October 6, 1997
<PAGE>
EXHIBIT 23(a)
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Avenue Entertainment Group, Inc.
We consent to the use of our report incorporated herein by reference and to
the reference to our firm under the heading "Experts" in the prospectus.
KPMG PEAT MARWICK LLP
New York, New York
October 6, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001023298
<NAME> Avenue Entertainment Group, Inc.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> JUN-30-1997
<CASH> 390,678
<SECURITIES> 707,419
<RECEIVABLES> 444,039
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,867,467
<PP&E> 264,517
<DEPRECIATION> 143,745
<TOTAL-ASSETS> 5,867,467
<CURRENT-LIABILITIES> 1,356,031
<BONDS> 0
0
0
<COMMON> 37,478
<OTHER-SE> 4,473,958
<TOTAL-LIABILITY-AND-EQUITY> 5,867,467
<SALES> 2,126,312
<TOTAL-REVENUES> 2,126,312
<CGS> 1,150,828
<TOTAL-COSTS> 2,490,643
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35,344
<INCOME-PRETAX> (3,643,331)
<INCOME-TAX> (72,367)
<INCOME-CONTINUING> (291,964)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (291,964)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> 0
</TABLE>
