U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
AMENDMENT NO. 2
TO
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS UNDER SECTION 12(b)
OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
AVENUE ENTERTAINMENT GROUP, INC.
(Name of Small Business Issuer in Its Charter)
Delaware 95-4622429
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
11111 Santa Monica Blvd., Suite 2110
Los Angeles, California 90025
(Address of Principal Offices) (Zip Code)
(310) 996-6800
(Issuer's Telephone Number)
Securities to be registered under Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which
to be so Registered Each Class is to be Registered
Common Stock, $0.01 par value American Stock Exchange
----------------------------- -------------------------
Securities to be registered under Section 12(g) of the Act:
(N/A)
(Title of Class)
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PART I
Item 1. Description of Business.
General
Avenue Entertainment Group, Inc., a holding company incorporated in the state of
Delaware on March 7, 1997 (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.
Share Exchange and Reincorporation
Pursuant to a Share Exchange Agreement (the "Share Exchange Agreement"), dated
as of September 30, 1996, among Mr. Cary Brokaw ("Mr. Brokaw"), Avenue Pictures,
Inc., a Delaware corporation ("Avenue Pictures"), and The CineMasters Group,
Inc., a New York corporation ("CineMasters"), 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 ("CineMasters Common Stock") (the "Business Combination"). In
connection with the Business Combination, National Patent Development
Corporation, a Delaware corporation and a significant shareholder of CineMasters
("National Patent"), 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
American Stock Exchange 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 as are more
fully described in "Item 6. Executive Compensation" and "Item 7. Certain
Relationships and Related Transactions" below.
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 Productions, Inc.
("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 Company intends to seek to list its shares of common stock on the American
Stock Exchange. There can be no assurance, however, that the Company's shares
will meet the eligibility requirements for listing on the American Stock
Exchange.
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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 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.
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 products 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 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
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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' 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' 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' relative bargaining
position with respect to each project. As set forth above, Avenue Pictures'
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.
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Avenue Pictures is negotiating an agreement with New Line Cinema to co-finance
the film Angels in America with the French based CIBY-2000. Director P.J. Hogan
of Muriel's Wedding and the upcoming My Best Friend's Wedding (Tri-Star),
starring Julia Roberts, has agreed to direct the picture. Because of the success
of the Pulitzer Prize and Tony Award winning play, several major actors have
expressed an interest in joining the cast. Avenue Pictures hopes to start
filming in early 1998.
Tri-Star Pictures has financed the development of a film based upon the Walker
Percy novel, The Moviegoer. Actors Julia Roberts and Tim Robbins are
contractually committed to the film subject to approval of the final script and
choice of director.
Paying Up is an original screenplay currently in development at Paramount
Pictures. Michael Hoffman, the director of 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 will begin production
in 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.
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' 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
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Dern, and directed by Yves Simoneau which aired in June 1994. Avenue Pictures
also completed the production of Path To 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 has entered into an output
agreement with RHI Entertainment, Inc., a distribution company which is a wholly
owned subsidiary of Hallmark Entertainment, Inc. ("Hallmark"). As a result,
Avenue Pictures has 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 has granted 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 is required to pay a
predetermined advance against its distribution rights for all such movies.
Avenue Pictures is not required to supply to Hallmark movies which it does not
fully own and control.
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 the Fall of 1997.
Avenue Pictures has approximately eight television movies in development,
including Don't Cry Now (ABC), based on Joy Fielding's best selling novel, and
Into the Light (CBS), which will star Jean Smart. Although Avenue Pictures is
actively pursuing these projects, there can be no assurance that each or any
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project will be produced due to Avenue Pictures' reliance upon the network and
cable programmers who must approve and order the films in order to provide
adequate financing.
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 series was the first pilot ordered by ABC for the Fall
1997 television season. Principal photography of the pilot began in March and
was delivered to ABC in late May 1997. However, there can be no assurance that
the pilot will result in a series. The decision to produce a series based on the
pilot is the exclusive decision of ABC.
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 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' films compete for audience acceptance with motion
pictures produced and distributed by other companies. As a result, the success
of Avenue Pictures' 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' 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' revenue.
Avenue Pictures derived approximately 79% and 15% of its total revenue from
Hallmark and Largo, respectively for the three months ended March 31, 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.
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Employees
Avenue Pictures has nine full time employees and two part time employees.
Wombat
Wombat Productions, Inc. 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
Line"
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*Turner Broadcasting System owns the copyright on "Vivien Leigh:
Scarlett and Beyond". All other copyrights are owned by Wombat.
Wombat's one-hour documentary concerning the life of actress Barbara Stanwyck
was aired on the A&E Cable Network on May 11, 1997. In addition, Wombat is in
the preliminary stages of putting together projects on Walter Matthau and Gary
Cooper. To date, Gene Feldman and Suzette St. John Feldman have produced 28 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
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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.
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 Television Networks ("A&E")
commissioned the production of seven (7) one-hour motion picture profiles by
Wombat. A&E pays an advance on each program for which it receives 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 has two (2) successive options, each
to order up to five (5) additional programs. Wombat receives an increased
advance on the additional option programs. A&E has exercised its first option
for three (3) additional programs. A&E also has two (2) 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 (4) 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 twenty percent (20%) of the net revenues (net of HBO's thirty-five
percent (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
Productions, Inc. ("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 (5) 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 (2) exclusive irrevocable
options to extend the exclusivity period for an additional two (2) 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.
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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 (6)
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 any period commencing within three
(3) 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.
Distribution Arrangements
Pursuant to a Distribution Agreement (the "Distribution Agreement"), dated July
1, 1995 and amended on April 28, 1996, between Wombat and Janson Associates,
Inc. ("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 (10) years, subject to automatic renewals in three (3) 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 "Item 7. Certain Relationships and Related Transactions" below.
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 26%, 41%, 12% and 13% of its total
revenues from A&E for the three months ended March 31, 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 74%, 32%, 40% and
27% of its total revenues from Janson for the three months ended March 31, 1997
and for the five months ended December 31, 1996 and the years ended July 31,
1996 and July 31, 1995, respectively.
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Employees
Wombat has four full time employees and one part time employee.
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 increasing demand
of A&E and the upcoming biography channel. 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 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
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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 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,
<PAGE>
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.
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
- --------
(1) The films nominated for Best Picture are "Jerry Maguire" (Tri-Star), "The
English Patient" (Miramax), "Shine" (FineLine), "Fargo" (Gramercy) and "Secrets
and Lies" (October).
<PAGE>
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) 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,
<PAGE>
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:
Marketplace Months After
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.
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.
<PAGE>
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 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.
<PAGE>
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
<PAGE>
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 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.
Item 2. Management's Discussion and Analysis or Plan of Operation.
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.
Pursuant to the Share Exchange Agreement, 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 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 American Stock Exchange
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.
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.
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 Division of CineMasters were transferred, subject to all related
<PAGE>
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 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. As a result of the Reincorporation,
Avenue Pictures became a wholly-owned subsidiary of the Company.
Three Months Ended March 31, 1997
Revenues
Revenues for the three months ended March 31, 1997 were $1,774,000 compared to
$380,000 for the three months ended March 31, 1996. The revenues for the three
months ended March 31, 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 three months ended March
31, 1997 amounted to approximately $1,273,000 and were primarily derived from
the delivery to Hallmark of the made-for-television movie "Tell Me No Secrets",
which accounted for approximately 56% of the consolidated revenues for the three
months ended March 31, 1997. Revenues from Wombat operations for the three
months ended March 31, 1997 were approximately $501,000, an increase of $121,000
from the comparable period of the prior year. Of the revenues earned by Wombat
during the three months ended March 31, 1997, approximately $130,000 was derived
from the completion and availability of a one-hour motion picture profile to
A&E. The remaining revenue was derived from licensing of rights to Wombat
programming in secondary markets (Janson Associates), which accounted for 22% of
revenues in 1997, as compared to 50% of revenues in 1996.
Cost of Revenues
Cost of Revenues for the three months ended March 31, 1997 was $1,053,000
compared to $110,000 for the three months ended March 31, 1996. The increase can
be primarily attributed to the film amortization relating to Avenue Pictures'
television product in the amount of $891,000. At March 31, 1997, the Company had
deferred film costs of $1,435,000, which included over 20 projects, with no
project greater than $110,000 or 8%.
<PAGE>
Selling, General and Administrative
Selling, general and administrative (S,G&A) expenses for the three months ended
March 31, 1997 were $706,000 compared to $339,000 for the three months ended
March 31, 1996. Included in the three months ended March 31, 1997 expenses are
$304,000 of S,G&A expenses relating to Avenue Pictures' operations and were
principally salaries and related benefits and occupancy expenses. In addition,
the Company recognized approximately $70,000 of amortization of goodwill related
to the Avenue acquisition on September 30, 1996. The total goodwill related to
the acquisition was $2,805,000, and will be amortized over a ten year period.
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. 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 (Kaufman) during the five month period
ended December 31, 1996 due to the Kaufman termination (as more fully described
in Item 6- Employment Agreements and Arrangements).
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, a $130,000
increase from the licensing of rights in secondary markets, offset by an
approximately $92,000 decrease in revenues derived form the Kaufman 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 Associates
accounted for approximately 40% and 27% of total revenues, respectively.
<PAGE>
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 (S,G&A) 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 S,G&A expenses related to Avenue Pictures
operations and were principally salaries and related benefits and occupancy
expenses. S,G&A expenses, exclusive of Avenue Pictures, for the five months
ended December 31, 1996 was approximately $400,000 and was primarily salary and
related benefits, occupancy costs and professional fees.
S,G&A expenses increased $135,000 or 23% for fiscal 1996 compared to fiscal
1995. The increase can be attributed to increases in S,G&A expenses related to
the Kaufman operations of approximately $65,000 and increases in various other
miscellaneous expenses aggregating approximately $70,000.
Other Income
Liquidity and Capital Resources
During the five months ended December 31, 1996 the Company increased its cash by
$646,000. In addition short term investments increased by $696,000. This
resulted primarily from $621,000 of cash acquired in the acquisition of Avenue
Pictures and $966,000 relating to the issuance of common stock for cash and
marketable securities.
At March 31, 1997, the Company had approximately $673,000 of cash and
approximately $566,000 of short term investments.
During the three months ended March 31, 1997 the Company's cash decreased by
$14,000. 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 20,
1997, $140,000 had been borrowed under the Note.
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
<PAGE>
issuance of debt, to expand the Company's business at a greater rate. However,
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.
Forward Looking Statements
This Registration Statement on Form 10-SB ("Registration Statement") contains
forward-looking statements. Discussions containing such forward-looking
statements may be found in material set forth under "Item 1. Description of
Business", "Item 2. Management's Discussion and Analysis or Plan of Operation",
as well as the Registration Statement 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 Registration Statement 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.
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.
Item 3. Description of Property.
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 3700 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.
<PAGE>
Item 4. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth information (on a pro forma basis, assuming
completion of the Reincorporation) as of March 31, 1997, with respect to the
beneficial ownership of the common stock of the Company, par value $0.01 per
share, (the "Common Stock") by (a) each person known by the Company to be the
beneficial owner of more than 5% of the Company's outstanding Common Stock, (b)
the directors and executive officers of the Company, individually, and (c)
directors and executive officers of the Company as a group.
Name and Address Amount and Nature
of Beneficial Owner of Beneficial Ownership* Percent of Class
Cary Brokaw 1,505,000(1) 39.8%
c/o Avenue Pictures, Inc.
11111 Santa Monica Boulevard
Suite 2110
Los Angeles, CA 90025
National Patent 1,060,500 28.7%
Development Corporation
9 West 57th Street
New York, New York 10019
Gene Feldman 385,000 (2) 9.8%
c/o Wombat Productions, Inc.
250 West 57th Street
Suite 2421
New York, New York 10019
Michael Feldman 62,300 (3),(4) 1.2%
c/o Wombat Productions, Inc.
250 West 57th Street
Suite 2421
New York, New York 10019
Suzette St. John Feldman 37,500 (5),(6) 1.0%
c/o Wombat Productions, Inc.
250 West 57th Street
Suite 2421
New York, New York 10019
Sheri L. Halfon 15,100 (7) **
c/o Avenue Pictures, Inc.
11111 Santa Monica Boulevard
Suite 2110
Los Angeles, CA 90025
Doug Rowan 1,000 -0-
c/o Corbis Corporation
15395 SE 30th Place
Suite 300
Bellevue, WA 98007
<PAGE>
James A. Janowitz -0- (8) -0-
c/o Pryor, Cashman, Sherman & Flynn
410 Park Avenue
New York, New York
Directors and officers 2,005,900 49.1%
as a group (7 persons)
- ------------------
* As used in this Registration Statement, "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 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 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 240,000 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 20,000
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 50,000 shares of Common Stock of the Company at a
price of $3.00 per share, exercisable until February 19, 2007. 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 25,000 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 30,000 shares of the Company's
Common Stock at a price of $1.70 per share, which option is 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 120,000 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.
<PAGE>
(4) Michael Feldman is Gene Feldman's nephew.
(5) Includes vested options to purchase up to 20,000 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) 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. The Company believes the beneficial holders
listed above have sole voting and investment power regarding the shares shown as
being beneficially owned by them.
<PAGE>
Item 5. Directors, Executive Officers, Promoters and Control Persons.
The following table sets forth the directors and officers of the Company:
Name Age Position
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.
<PAGE>
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 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.
<PAGE>
Item 6. 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
Awards
Annual Compensation Securities Underlying
Name and Principal Position Year Salary Bonus Options/SARs
Cary Brokaw 1996(1) 450,000 -0- 300,000(2)
President & Chief 1995(1) 391,000 -0- -0-
Executive Officer 1994(1) 415,000 -0- -0-
Gene Feldman 1996 150,000 -0- -0-
Chairman of the Board, 1995 101,115 4,225 200,000(3)
President of Wombat 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 Avenue Entertainment Group, Inc. Stock Option and Long Term
Incentive Compensation 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 in Fiscal ($ per Grant ($ per Expiration
Name Granted Year share) 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 Value of Unexercised
Underlying Unexercised In-the-Money Options at
Options at Fiscal Year End Fiscal Year End
Exercisable (E)/ Exercisable (E)/
Name Unexercisable (U)_ Unexercisable (U)1
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.
<PAGE>
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 Avenue
Entertainment Group, Inc. Stock Option and Long Term Incentive Compensation Plan
(the "1997 Plan" or the "New 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 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.
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 one hundred (100%) percent of the fair market value of
shares of Common Stock on the date of grant (one hundred and ten (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 one hundred
(100%) percent of the fair market value of shares of Common Stock on the date of
grant.
<PAGE>
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 (10%) 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 and Arrangements
Brokaw Employment Agreement. In connection with the Business Combination, Mr.
Brokaw entered into a five-year employment agreement ("Brokaw Employment
Agreement") with the Company pursuant to which, among other things, Mr. Brokaw
became the President and Chief Executive 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 annual increases equal to the then annual rate
of inflation. 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 (6) 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 agreed to seek to obtain "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
(5) years of Mr. Brokaw's employment with the Company and will be exercisable
for a period of ten (10) 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.
<PAGE>
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
annual increases equal to the then annual rate of inflation. 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 (6) 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 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. CineMasters agreed to obtain "key-man" life
insurance on his life. 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.
Kaufman Termination Agreement. Pursuant to a Termination Agreement (the "Kaufman
Termination Agreement"), dated July 3, 1996 among CineMasters, Kaufman Films,
Inc. ("Kaufman Films") and Kevin Kaufman ("Mr. Kaufman"), CineMasters terminated
an employment agreement with Mr. Kaufman. In connection with the termination, an
option for 200,000 shares of CineMasters common stock granted to Kaufman Films
and an option for 250,000 shares of CineMasters common stock granted to Mr.
Kaufman were declared null and void. CineMasters delivered to Kaufman
Films/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 Kaufman ("Kaufman Stock"). Kaufman agreed not to
sell more than 18,000 shares of the Kaufman Stock in any one calendar quarter.
Kaufman continued to receive salary and benefits through July 31, 1996. Kaufman
has agreed to pay to CineMasters one-half of all net proceeds from sale by
Kaufman of second group of 18,000 shares of CineMasters Common Stock which is to
be sold within six (6) months after closing. CineMasters agreed that, through
<PAGE>
September 30, 1997 or until such time earlier as Kaufman has sold all of the
Kaufman Stock, none of Gene Feldman, Jerome Feldman (the brother of Gene
Feldman) nor any affiliate or relative of either will, in the public market,
sell, transfer or assign any shares of CineMasters Common Stock.
Item 7. Certain Relationships and Related 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) twenty-five percent (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 (5) years following the date of such exercise. If Gene Feldman shall die
after the exercise of such option but prior to the fifth (5th) 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
(5) 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 (5th) 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 (5) 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
things, the Board of Directors of CineMasters was reconstituted such that Mr.
Brokaw and the Feldman Group each have three (3) 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
<PAGE>
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 Development Corporation. 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) is
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.
Item 8. Description of Securities.
Common Stock
The Company's certificate of incorporation provides for the authorization of
15,000,000 shares of Common Stock, $.01 par value per share. As of March 31,
1997, 3,697,838 shares of CineMasters 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
<PAGE>
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 Company's certificate of incorporation provides for the authorization of
1,000,000 shares of Class B Common Stock, $.01 par value per share. As of March
31, 1997, no shares of Class B Common Stock were outstanding. The holders of
Class B Common Stock are entitled to ten (10) 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 Company's certificate of incorporation provides for the authorization of
2,000,000 shares of Preferred Stock, $.01 par value per share. As of March 31,
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.
<PAGE>
PART II
Item 1. Market Price of and Dividends on the Registrant's Common Equity and
Other Shareholder Matters.
The Company's shares of Common Stock were approved for listing on the American
Stock Exchange ("AMEX"), and will commence trading on 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, based on information provided by market makers in the Common Stock,
the high and low bid prices for the Common Stock for the quarters indicated as
reported by NASDAQ. The quotations 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 1 1/4
2nd Quarter 3/8 1 1/4
3rd Quarter 1/4 1
4th Quarter 1/4 2
1996 Low Bid High Bid
1st Quarter 1 3/4 2 1/2
2nd Quarter 2 1/4 3 3/4
3rd Quarter 2 1/4 3 1/2
4th Quarter 1 3/4 3 1/2
1997 Low Bid High Bid
1st Quarter 2 3/4 4 1/2
As of March 7, 1997, there were 183 holders of record of Common Stock.
As of March 31, 1997, (i) 1,351,500 shares of Common Stock were subject to
outstanding options, (ii) 100,000 shares of Common Stock were subject to
outstanding warrants, (iii) 831,500 shares of Common Stock were eligible for
sale pursuant to Rule 144 under the Securities Act and (iv) the Company has
agreed to register under the Securities Act 1,425,000 shares of Common Stock for
resale by security holders.
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
<PAGE>
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.
Item 2. Legal Proceedings.
None.
Item 3. Changes in and Disagreements With Accountants.
The Board of Directors recommended and approved, effective January 1, 1997, the
selection of KPMG Peat Marwick LLP to audit the accounts of the Company for the
five months ending December 31, 1996 and the fiscal year ended December
31(PI)1997. KPMG Peat Marwick LLP has no financial interest in the Company or
any of its subsidiaries, and neither it nor any member or employee of the firm
has had any connection with the Company or any of its subsidiaries in the
capacity of promoter, underwriter, voting trustee, director, officer or
employee. The decision to engage KPMG Peat Marwick LLP did not result from
disagreements with the Company's prior accountants, Israeloff, Trattner & Co.,
who were dismissed effective January 1, 1997. The accountant's reports of
Israeloff, Trattner & Co. on the financial statements of the Company for the
years ended July 31, 1996 and 1995 were unqualified and no disagreements or
reportable events occurred during such period and the subsequent interim period.
Item 4. 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.
<PAGE>
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 5. Indemnification of Directors and Officers.
Limitations on Directors and Officers Liability
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.
<PAGE>
PART F/S
THE CINEMASTERS GROUP, INC.
Consolidated Financial Statements
December 31, 1996, July 31, 1996 and 1995
(With Independent Auditors' Report Thereon)
<PAGE>
THE CINEMASTERS GROUP, INC.
Table of Contents
Page
INDEPENDENT AUDITORS' REPORT 40
FINANCIAL STATEMENTS
Consolidated Balance Sheet 42
Consolidated Statements of Operations 43
Consolidated Statements of Stockholders' Equity 44
Consolidated Statements of Cash Flows 45
Notes to Consolidated Financial Statements 47
<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
<TABLE>
Five months ended
December 31,
Years ended July 31
------------------------------
<CAPTION>
1996 1996 1995
-------------- ------------ -----------
<S> <C> <C> <C>
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.
</TABLE>
<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
========= ====== ========= ======= ========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
THE CINEMASTERS GROUP, INC.
Consolidated Statements of Cash Flows
<TABLE>
Five Months ended Years ended July 31,
<CAPTION>
December 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
-------------------- ------------------- -------------------
(Continued)
<PAGE>
THE CINEMASTERS GROUP, INC.
Consolidated Statements of Cash Flows, Continued
</TABLE>
<TABLE>
Five months ended Years ended July 31,
<CAPTION>
December 31, ---------------------------------------
1996 1996 1995
-------------------- ------------------- -------------------
Cash flows from financing activities:
<S> <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
====================
See accompanying notes to consolidated financial statements.
</TABLE>
<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 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.
<PAGE>
THE CINEMASTERS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
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.
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.
<PAGE>
THE CINEMASTERS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
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 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.
<PAGE>
THE CINEMASTERS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
(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.
(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.
<PAGE>
THE CINEMASTERS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
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.
<PAGE>
THE CINEMASTERS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
(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 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:
Number of Exercise Weighted average
shares 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
<PAGE>
THE CINEMASTERS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
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
graned below fair market
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, July 31,
1996 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).
<PAGE>
THE CINEMASTERS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
(6) Income Taxes
Components of income taxes are as follows:
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:
<TABLE>
December 31, July 31
<CAPTION>
-----------------------------
1996 1996 1995
---------------- ------------ -------------
<S> <C> <C> <C>
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
================ ============ =============
</TABLE>
(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.
<PAGE>
THE CINEMASTERS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
(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. 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 Year ended
December 31, 1996 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.
<PAGE>
THE CINEMASTERS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
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.
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.
Table of Contents
Page
UNAUDITED FINANCIAL STATEMENTS
Consolidated Balance Sheet - March 31, 1997 and
December 31, 1996 59
Consolidated Statement of Operations - Three Months ended
March 31, 1997 and 1996 60
Consolidated Statement of Cash Flows - Three Months ended
March 31, 1997 and 1996 61
Notes to Consolidated Financial Statements 63
<PAGE>
AVENUE ENTERTAINMENT GROUP, INC.
Consolidated Balance Sheet
March 31, December 31,
1997 1996
(unaudited)
Assets
Cash $ 673,005 $ 687,080
Short-term investment 565,971 696,150
Accounts receivable 599,056 149,483
Film costs, net 1,434,642 1,998,326
Property and equipment, net 106,439 117,492
Other assets 53,070 81,063
Goodwill 2,664,939 2,735,069
--------- ---------
Total assets $6,097,122 $6,464,663
========= =========
Liabilities and
Stockholder's Equity
Accounts payable $ 427,776 $ 284,784
Accrued expenses 590,628 457,426
Capitalized lease obligations 31,699 40,451
Income taxes payable 300,576 330,891
Advances from customers 90,000 577,730
----------- ----------
Total liabilities 1,440,679 1,691,282
--------- ---------
Stockholder's equity:
Common stock, par value $.01 per share.
Authorized 15,000,000 shares; issued and
outstanding, 3,697,838 shares 36,978 36,978
Class B common stock, no par value.
Authorized 1,000,000 shares; none issued --
Additional paid-in capital 4,640,627 4,631,252
Retained earnings 227,867 224,001
Unrealized loss on marketable securities (249,029) (118,850)
----------- -----------
Total stockholders' equity 4,656,443 4,773,381
--------- ---------
Total liabilities and stockholders' equity $6,097,122 $6,464,663
========= =========
<PAGE>
AVENUE ENTERTAINMENT GROUP, INC.
Consolidated Statement of Operations
(unaudited)
Three months Three months
ended ended
March 31, March 31,
1997 1996
Operating revenues $1,774,161 $ 380,418
--------- ----------
Costs and expenses:
Film production costs 1,052,627 109,840
Selling, general and administrative expenses 705,504 338,881
---------- -----------
Total costs and expenses 1,758,131 448,721
--------- -----------
Income (loss) before income tax 16,030 (68,307)
Income tax expense 12,164 470
----------- -------------
Net income (loss) $ 3,866 $ (68,777)
============ ============
Earnings (loss) per common share $ -- $ (.04)
========= ==========
Weighted average shares outstanding 3,697,838 1,795,000
========= =========
<PAGE>
AVENUE ENTERTAINMENT GROUP, INC.
Consolidated Statement of Cash Flows
(unaudited)
Three months Three months
ended ended
March 31, March 31,
1997 1996
Cash flows from operating activities:
Net income (loss) $ 3,866 $ (68,777)
------------ -----------
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation 12,113 10,820
Amortization - film production costs 1,036,265 75,000
Amortization - goodwill 70,130
Stock option compensation 9,375
Changes in assets and liabilities which
affect net income:
Accounts receivable (449,573) 161,364
Film costs (472,581) (51,094)
Other assets 27,993 393
Accounts payable and accrued expenses 276,194 (246,074)
Income taxes payable (30,315) 144,180
Advances from customers (487,730) 90,000
Other assets -- 10,000
--------- -----------
Total adjustments (8,129) 194,589
------------ ----------
Net cash (used in) provided
by operating activities (4,263) 125,812
------- ----------
Cash flows from investing activities:
Purchase of equipment (1,060) (4,973)
------ -------
Net cash used in investing
activities (1,060) (4,973)
------------ -------------
(Continued)
<PAGE>
AVENUE ENTERTAINMENT GROUP, INC.
Consolidated Statement of Cash Flows, Continued
(unaudited)
Three months Three months
ended ended
March 31, March 31,
1997 1996
Cash flows from financing activities:
Principal payments of capital
lease obligations $ (8,752) $ (9,532)
----------- ------------
Net cash provided by
(used in) financing activities (8,752) (9,532)
------ ------------
Net (decrease) increase in cash (14,075) 111,487
Cash at beginning of year 687,080 9,277
---------- ------------
Cash at end of period $ 673,005 $ 120,764
========== ==========
Supplemental cash flow information:
Cash paid during the year for:
Interest $ $ 3,228
Income taxes $ 32,164 $
===========
See accompanying notes to consolidated financial statements.
<PAGE>
AVENUE ENTERTAINMENT GROUP, INC.
Notes to Consolidated Financial Statements
(1) Reincorporation.
Following the acquisition of Avenue Pictures, Inc., the Board of Directors and
shareholders of The CineMasters Group, Inc. ("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 Productions, Inc. ("Wombat"), (ii) CineMasters was merged
with and into Avenue Entertainment Group, Inc. (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.
(2) Basis of Presentation.
The accompanying 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, the accompanying consolidated unaudited
financial statements include all adjustments which are necessary for a fair
presentation. The results of operations for the three month period ended March
31, 1997 are not necessarily indicative of results to be expected for the full
fiscal year.
(3) Film costs.
Film costs consist of the following:
March 31, December 31,
1997 1996
In process or development $ 249,424 $ 224,452
Released, net of accumulated amortization of
$7,894,441 and $6,862,176, respectively
1,185,218 1,773,874
--------- ---------
$ 1,434,642 $ 1,998,326
========= =========
<PAGE>
AVENUE ENTERTAINMENT GROUP, INC.
Notes to Consolidated Financial Statements, Continued
(4) Subsequent Event
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 20,
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
<CAPTION>
Group, Inc. Avenue Pictures,
Inc. (1)
------------------- -----------------------
Five months ended Two months ended
December 31, 1996 September 30, 1996
Pro forma Pro forma
adjustments combined
------------------- ------------------- --------------------- -----------------
<S> <C> <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
=================== =================
See accompanying notes to unaudited condensed consolidated statements of
operations.
</TABLE>
<PAGE>
THE CINEMASTERS GROUP, INC.
Unaudited Pro forma Condensed Consolidated Statement of Operations
Year ended July 31, 1996
<TABLE>
<CAPTION>
The CineMasters
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
=================== =================
See accompanying notes to unaudited condensed consolidated statements of
operations.
</TABLE>
<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>
AVENUE PICTURES, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
Nine-month period ended September 30, 1996
and year ended December 31, 1995
(With Independent Auditors' Report Thereon)
<PAGE>
AVENUE PICTURES, INC. AND SUBSIDIARIES
Table of Contents
Page
INDEPENDENT AUDITORS' REPORT 71
FINANCIAL STATEMENTS
Consolidated Statements of Earnings 72
Consolidated Statements of Cash Flows 73
Notes to Consolidated Financial Statements 74
<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
Nine-month period
ended Year ended
September 30, 199 December 31, 1995
---------------- -------------
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)
================ =============
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
==================== ===================
See accompanying notes to consolidated financial statements.
</TABLE>
<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.
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
<PAGE>
AVENUE PICTURES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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
============ =============== =============
Reconciliation of the Federal income tax rate to the Company's
affiliation tax rate is as follows:
Nine-month
period ended Year ended
September 30, 1996 December 31, 1995
---------------- --------------
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 --
================ ==============
<PAGE>
AVENUE PICTURES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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
============ ==============
(5) Acquisition
Effective September 30, 1996, 100% of the Company's outstanding common
stock was acquired by The CineMasters Group, Inc.
<PAGE>
PART III
Item 1. Index to Exhibits
(2) Charter and By-Laws
(a) Restated Certificate of Incorporation. *
(b) By-Laws. *
(6) Material Contracts (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. *
(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. *
----------------
* Previously filed
** Filed herewith
(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)(v) Option Agreement, dated as of September 30, 1996, between The
CineMasters Group, Inc. and Cary Brokaw. *
(c)(vi) Form of Option Grant Agreement, dated as of September 30, 1996,
between Avenue Entertainment Group, Inc. and the Optionee. *
(c)(vii) Form of Option Grant Agreement, dated as of March 10, 1997,
between Avenue Entertainment Group, Inc. and the Optionee. *
(c)(viii) Termination Agreement, With Accounts Receivable, dated July
3, 1996 among The CineMasters Group, Inc., Kaufman Films, Inc. and Kevin
Kaufman. *
(16) Letter from Israeloff, Trattner & Co., CPAs, P.C., dated July 14,
1997. **
(27) Financial Data Schedule. **
- ------------------
* Previously filed
** Filed herewith
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant cause Amendment No. 1 to this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
AVENUE ENTERTAINMENT GROUP, INC.
(Registrant)
Date: July 15, 1997 By: Cary Brokaw
---------------------
Name: Cary Brokaw
Title: President and Chief Executive
Officer, Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this registration statement has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
Date: July 15, 1997 By: Cary Brokaw
---------------------
Name: Cary Brokaw
Title: President and Chief Executive
Officer, Director
Date: July 15, 1997 By: Sheri L. Halfon
-------------------------
Name: Sheri L. Halfon
Title: Senior Vice President and
Chief Financial Officer, Director
Date: July 15, 1997 By: Gene Feldman
----------------------
Name: Gene Feldman
Title: Chairman of the Board
Date: July 15, 1997 By: Michael Feldman
-------------------------
Name: Michael Feldman
Title: Executive Vice President, Director
Date: July 15, 1997 By: Doug Rowan
--------------------
Name: Doug Rowan
Title: Director
Date: July 15, 1997 By: James A. Janowitz
---------------------------
Name: James A. Janowitz
Title: Director
3
Interest Bearing Grid Note
$ 250,000
Office Address: 1185 Avenue of the Americas, New York, NY 10036
May 27, 1997
On demand, but in any event not later than May 27, 1998 for value received, the
undersigned jointly and severally promise(s) to pay to the order of Fleet Bank,
National Association (hereinafter called the "Bank") at its Office in the place
first above stated, or if no place is stated, at 10 Exchange Place, Jersey City,
New Jersey, in immediately available funds, the sum of Two Hundred Fifty
Thousand ($250,000.00) Dollars, or if less than such principal sum, the
aggregate unpaid principal amount of all loans made by the Bank to the
undersigned hereunder as indicated on the schedule on the reverse side hereof.
The undersigned also promises to pay interest at said office in like money on
the unpaid principal amount hereof from time to time outstanding prior to
maturity at an annual rate equal to the Bank's Prime Rate of interest (the rate
of interest established from time to time by the Bank as its "prime rate") plus
one %, which interest rate shall change when and as the "Prime Rate" changes.
Interest shall be payable on the first day of each month commencing the first
such day to occur after the date hereof and on the maturity hereof. Upon and
following an Event of Default (as defined below) and/or after maturity, whether
after stated maturity, acceleration or otherwise, this note, and, to the extent
not specifically provided elsewhere to the contrary and to the extent permitted
by applicable law, any interest, fee or other amount due in connection with the
Liabilities (as hereinafter defined), shall bear interest at a per annum rate
determined daily and payable on demand which shall be the higher of 2% in excess
of the rate hereinbefore provided, or 4% in excess of the Bank's Prime Rate, but
in no event in excess of the maximum rate of interest permitted under applicable
law. The Bank shall have no obligation to make any loan hereunder.
The undersigned hereby expressly authorizes the Bank to record on the schedule
on the reverse hereof the amount and date of each loan made hereunder and the
date and amount of each payment of principal thereon. All such notations shall
be presumptive as to the correctness thereof and the aggregate unpaid amount of
loans set forth on such schedule shall be presumed to be the unpaid principal
amount hereof.
Any loan may be prepaid in whole or in part at any time and from time to time
without premium or penalty together with interest accrued on the amount prepaid
to the date of any such prepayment.
As collateral security for the payment of this note and for all other notes
and/or obligations or Liabilities (as hereinafter defined) of the Obligors
(which term as used herein shall be deemed to include each and all of the
undersigned and each and every endorser and guarantor hereof), or any one or
more of them, now or hereafter owed to, or held by, the Bank (and/or any entity
controlling, controlled by or under common control with the bank, each such
entry referred to herein as an "Affiliate"), the undersigned hereby grants to
the Bank a security interest in and transfers and assigns to the Bank the
following property (i) any and all monies and/or other property now or hereafter
held by the Bank and/or any Affiliate on deposit, in safekeeping, or otherwise,
for the account of or to the credit of or belonging to any Obligor or in which
any Obligor shall have any interest and (ii) any and all property described on
the "Schedule of Specific Possessory Collateral" on the reverse side hereof,
together with any additions and accessions thereto and substitutions therefore
and the products and proceeds thereof. This note and all of the aforementioned
obligations and Liabilities are also secured by (a) any and all property of any
Obligor now or hereafter subject to a security agreement, mortgage, pledge
agreement, assignment, hypothecation or other document granting the Bank or any
Affiliate a security interest or other lien or encumbrance and (b) any and all
collateral described in any and all credit accommodations, notes, loan
agreements, and any other agreements and documents, now or hereafter existing,
creating, evidencing, guaranteeing, securing or relating to any or all of the
Liabilities, together will all amendments, modifications, renewals, or
extensions thereof. All of the property described in clauses (i), (ii), (a) and
(b) shall be collectively referred to herein as the "Collateral". The Bank at
any time, before or after and Event of Default (as hereinafter defined), may,
but shall not be obligated to, transfer into or out of its own name or that of
its nominee all or any of the Collateral, including stocks, bonds and other
securities, and the Bank or its nominee may demand, sue for, collect, receive
and hold as like Collateral any or all interests, dividends and income thereon
and if any securities are held in the name of the Bank or its nominee, the Bank
may, after an Event of Default exercise all voting and other rights pertaining
thereto as if the Bank were the absolute owner thereof; but the Bank shall not
be obligated to demand payment of, protest, or take any steps necessary to
preserve any rights in the Collateral against prior parties, or to take any
action whatsoever in regard to the Collateral or any part thereof, all of which
the Obligor assumes and agrees to do. Without limiting the generality of the
foregoing, the Bank shall not be obligated to take any action in connection with
any conversion, call, redemption, retirement or any other event relating to any
Collateral, unless the Obligor gives written notice to the Bank that such action
shall be taken not more than thirty (30) days prior to the time such action may
first be taken and not less than ten (10) days prior to the expiration of the
time during which such action may be taken. The term "Liabilities" shall include
this note and all other indebtedness and obligations and liabilities of any kind
of any Obligor to the Bank, now or hereafter existing arising directly between
any Obligor and the Bank or acquired by assignment, conditionally or as
collateral security by the Bank, absolute or contingent, joint and/or several,
secured or unsecured, due or not due, contractual or tortious, liquidated or
unliquidated, arising by operation of law or otherwise, direct or indirect,
including, without limitation, but without limiting the generality of the
foregoing, indebtedness, obligations or liabilities to the Bank or any Obligor
as a member of any partnership, syndicate, association or other group, and
whether incurred by any Obligor as principal, surety, endorser, guarantor,
accommodation party or otherwise. Each Obligor (if more than one, jointly and
severally) hereby agrees that on demand at any time and from time to time they
will deposit and pledge with the Bank additional collateral of a kind and of a
market value required by it further to secure any indebtedness or liabilities
aforesaid.
If any of the following events shall occur with respect to any Obligor (each an
"Event of Default"): failure to comply forthwith with any such demand for
additional collateral; default in payment of any liability to the holder hereof
(however acquired); default in the due payment of any other indebtedness for
borrowed money or default in the observance or performance of any covenant or
condition in any agreement or instrument evidencing, securing or relating to any
such indebtedness which causes or permits the acceleration of the maturity
thereof; suspension or liquidation of usual business; calling of a meeting of
creditors; assignments for the benefit of creditors; dissolution, bulk sale or
notice thereof; mortgage or pledge of, creation of a security interest in, any
assets without consent of the holder of this note; insolvency of any kind,
attachment, distraint, garnishment, levy, execution, judgment, death,
application for or appointment of a receiver, filing of a voluntary or
involuntary petition or entry of any order for relief under any provision of the
Federal Bankruptcy Code as now or hereafter in effect; failure to pay its debts
as they become due; failure to comply with the terms of any agreement with the
Bank; failure on request of any Obligor or any Obligor's accountant, to furnish
any financial information, or to permit inspection of any books or records; any
change in, or discovery with regard to, the condition or affairs which, in the
Bank's opinion, increases its credit risk; or if the Bank for any other reason
deems itself insecure; the Liabilities shall become absolute, due and payable
without demand or notice to any Obligor. Upon default in the due payment of this
note or any other Event of Default, or whenever this note or any payment of
principal or interest hereof shall become due in accordance with any of the
provisions hereof, the Bank may, but shall not be required to (1) proceed to
apply to the payment hereof the balance to the credit of any account or accounts
maintained with the Bank or any Affiliate by any Obligor and (2) sell (without
demand of performance, advertisement, notice of intention to sell, notice of
time or place of sale, notice to redeem or other notice whatsoever, all of which
are hereby waived) all or any part of the Collateral (on all of which the
Obligor does hereby give to the Bank a continuing lien, security interest and/or
right of set-off) at public or private sale or sales, or at any exchange or
broker's board, or at the Bank's office, at such prices as it shall deem best,
for cash or credit, with the right of the Bank as such sale to purchase all or
any part thereof, free from any right or equity of redemption, applying the net
proceeds of such sale to the payment of this note and of any other liabilities,
claims or obligations to the Bank of any of the Obligors, or of any partnership
in which any of the Obligors is a partner, all of whom together with any
endorser or guarantor hereby expressly agree to remain jointly and severally
liable for any deficiency. The Bank may exercise any other right or remedy
hereby granted or allowed to it by law, including by not limited to, the rights
and remedies of a Secured Party under the Uniform Commercial Code of the
Governing State (which term as used in this Note shall mean the state in which
the office indicated above opposite "Office Address" is located; provided, that,
if no such office is so indicated then Governing State shall mean the state
where the Bank's office that originated the loan evidenced by this note is
located), and each and every right and remedy hereby granted to the Bank or
allowed to it by law shall be cumulative and not exclusive of one of the other
rights or remedies, and may be exercised by the Bank from time to time and as
often as may be necessary. The Bank shall have at any time in its discretion the
right to enforce collection and payment or liquidation of any of the collateral
by appropriate action or proceedings, and the net amounts received therefrom,
after deducting all costs and expenses incurred in connection therewith, shall
be applied on account of this note and any other indebtedness or liabilities of
the Obligor aforesaid, all without notice to any Obligor. Any demand or notice,
if made or given, shall be sufficiently made upon or given to any Obligor if
left at or mailed to the last address of such Obligor known to the Bank or if
made or given in any other manner reasonably calculated to come to the attention
of such Obligor or the personal representatives, successors or assigns of such
Obligor, whether or not in fact received by them respectively. Unless the
Collateral is perishable or threatens to decline speedily in value or is a type
customarily sold on a recognized market, the Bank will give the undersigned
reasonable notice of the time and place of any public sale thereof or of the
time after which any private sale or other intended disposition is to be made.
Five (5) days prior notice shall be deemed reasonable notice. The Bank may
assign and repledge the Collateral or any part thereof to the assignee or
transferee of this note, who shall thereupon become vested with all the powers
and rights above given to the Bank in respect thereof, and the Bank shall
thereafter be forever released and discharged of and from all responsibility or
liability to the Obligor for or on account of the Collateral so delivered. If an
attorney is used to enforce or collect this note, the Obligor agrees to pay
attorneys fees in the amount of 20% of the unpaid principal and interest due,
which the Obligor agrees to be reasonable. The Obligor jointly and severally
promises to pay all expenses of any nature as soon as incurred whether in or out
of court and whether incurred before or after this note shall become due at its
maturity date or otherwise and costs which the Bank may deem necessary or proper
in supervision, preservation, protection (including but not limited to
maintenance of adequate insurance) or of the realization upon the Collateral.
EACH OBLIGOR ABSOLUTELY, UNCONDITIONALLY AND IRREVOCABLY WAIVES (A) THE RIGHT TO
A TRIAL BY JURY IN ANY LITIGATION WITH THE BANK (WHETHER OR NOT ARISING OUT OF
OR RELATING TO THIS NOTE) AND (B) ALL RIGHT TO ASSERT ANY DEFENSE, SET-OFF,
COUNTERCLAIM OR CROSS-CLAIM OF ANY NATURE WHATSOEVER WITH RESPECT TO THIS NOTE
OR OTHERWISE WITH RESPECT TO THE LIABILITIES IN ANY ACTION OR PROCEEDING BROUGHT
BY THE HOLDER HEREOF TO ENFORCE ITS RIGHTS AND REMEDIES WITH RESPECT TO THIS
NOTE, THE LIABILITIES OR ANY PORTION THEREOF. The note shall be deemed to have
been made and delivered in the Governing State, the Obligor consents to the
jurisdiction of the state and federal courts of the Governing State in any
action brought to enforce any rights of the Bank under this note and the Bank
and the Obligor shall be determined in accordance with the laws of the Governing
State. Interest shall be calculated on the basis of a 360-day year and actual
days elapsed, provided that any interest so calculated hereunder shall in no
event be in excess of the maximum permitted under applicable law. This note and
any other agreements, documents and instruments executed and delivered pursuant
to or in connection with the Liabilities contain the entire agreement between
the parties relating the subject matter hereof and thereof. The undersigned
expressly acknowledges that the Bank has not made and the undersigned is not
relying on any oral representations, agreements or commitments of the Bank or of
any officer, employee, agent or representative thereof. No change, modification,
termination, waiver or discharge, in whole or in part, of this agreement shall
be effective unless in writing and signed by the party against whom such charge,
modification, termination, waiver or discharge is sought to be enforced.
NO CLAIM MAY BE MADE BY THE UNDERSIGNED, ANY OBLIGOR OR ANY OTHER PERSON,
AGAINST THE BANK OF THE AFFILIATES, DIRECTORS, OFFICERS, EMPLOYEES, ATTORNEYS OR
AGENTS OF THE BANK FOR ANY SPECIAL, INDIRECT OR CONSEQUENTIAL DAMAGE OR, TO THE
FULLEST EXTENT PERMITTED BY LAW, FOR ANY PUNITIVE DAMAGES IN RESPECT OF ANY
CLAIM OR CAUSE OF ACTION (WHETHER BASED ON CONTRACT, TORT, STATUTORY LIABILITY,
OR ANY OTHER GROUND) BASED ON, ARISING OUT OF OR RELATED TO THIS NOTE OR THE
TRANSACTIONS CONTEMPLATED HEREBY OR ANY ACT, OMISSION OR EVENT OCCURRING IN
CONNECTION THEREWITH, AND THE UNDERSIGNED (FOR ITSELF AND ON BEHALF OF EACH
OBLIGOR) HEREBY WAIVE, RELEASE AND AGREE NEVER TO SUE UPON ANY CLAIM FOR ANY
SUCH DAMAGES, WHETHER SUCH CLAIM NOW EXISTS OR HEREAFTER ARISES AND WHETHER OR
NOT IT IS NOW KNOWN OR SUSPECTED TO EXIST IN ITS FAVOR. The Obligors, and each
of them hereby waive presentment, demand for payment, protest, notice of
protest, notice of dishonor, and any and all other notices or demands in
connection with the delivery, acceptance, performance, default, or enforcement
of this note, consents to any and all delays, extensions of time, renewals,
releases of any Obligor and any available security, waivers or modifications
that may be granted or consented to by the Bank with regard to the time of
payment or with respect to any other provisions of this note and agrees that no
such action or failure to act on the part of the Bank shall in any way affect or
impair the obligations of any Obligor or be construed as a waiver by the Bank of
or otherwise affect its right to avail itself of any remedy hereunder with the
same force and effect as if each Obligor had expressly consented to such action
or inaction upon the part of the Bank. Each Obligor hereby authorizes the Bank
to request his accountant or accountants to furnish such financial information
relating to such Obligor as the Bank shall from time to time desire; each such
accountant is hereby authorized to deliver such financial information to the
Bank. The invalidity or unenforceability of any other person of this note shall
in no way affect the validity or enforceability of any portion of this note. The
Obligors hereby authorize the Bank to date this note as of the day when the
first loan evidenced hereby is made and to complete and fill in any blank spaces
in this note in order to conform to the terms upon which any loan is granted.
Each Obligor further authorizes the Bank to execute and file one or more
financing statements covering the Collateral or any part thereof and the
Obligors agree to bear the cost of such filing(s). The term "Bank" as used
herein shall be deemed to include the Bank and its successors, endorsees and
assigns.
<PAGE>
Special provisions_____________________________________________________________
Schedule of Specific Promissory Collateral_____________________________________
Corporation, Partnership, or Limited Liability Company Signors:
Avenue Entertainment group, Inc.
Name of Corporation, Partnership or Limited Liability Company
By: Scott N. Greenberg
Name: Scott N. Greenberg
Title:
Andrea D. Kantor
General Counsel
Schedule of Loans and Payments
Amount of Amount of Balance
Date Loan Principal Paid Remaining Unpaid Notation made by
Exhibit 16
July 14, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Judiciary Plaza
Washington, D.C. 20549
Dear Sir/Madam:
We have read and agree with the disclosures in Item 3 of Amendment No. 2 to
Form 10-SB of Avenue Entertainment Group, Inc. regarding the change in certified
public accountants.
Sincerely,
Israeloff, Trattner & Co., CPAs, P.C.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001023298
<NAME> AVENUE ENTERTAINMENT GROUP, INC.
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-END> DEC-31-1996 MAR-31-1997
<CASH> 687,080 673,005
<SECURITIES> 696,150 565,971
<RECEIVABLES> 149,483 599,056
<ALLOWANCES> 0 0
<INVENTORY> 1,998,326 1,434,642
<CURRENT-ASSETS> 0 0
<PP&E> 248,062 249,122
<DEPRECIATION> 130,570 142,683
<TOTAL-ASSETS> 6,464,663 6,097,122
<CURRENT-LIABILITIES> 1,691,282 1,440,679
<BONDS> 0 0
0 0
0 0
<COMMON> 36,978 36,978
<OTHER-SE> 4,736,403 4,619,465
<TOTAL-LIABILITY-AND-EQUITY> 6,464,663 6,097,122
<SALES> 3,508,967 1,774,161
<TOTAL-REVENUES> 3,508,967 1,774,161
<CGS> 2,752,307 1,052,627
<TOTAL-COSTS> 3,414,073 1,758,131
<OTHER-EXPENSES> 661,766 705,504
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 94,894 16,030
<INCOME-TAX> 74,945 12,164
<INCOME-CONTINUING> 19,949 3,866
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 94,949 3,866
<EPS-PRIMARY> .01 0
<EPS-DILUTED> .01 0
</TABLE>
