SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number
001-12885 AVENUE
ENTERTAINMENT GROUP, INC.
(Name of Small Business Issuer in its charter)
Delaware 95-4622429
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
11755 Wilshire Blvd., Suite 2250, Los Angeles, CA 90025
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 996-6800
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of each exchange on which registered:
Common Stock, $.01 Par Value American Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
Check whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. / /
State issuer's revenues for its most recent fiscal year. $829,000
As of March 15, 1999, the aggregate market value of the voting and non-voting
common equity, held by non-affiliates (assuming for this calculation only that
all officers and directors are affiliates) was approximately $3,070,175 based on
the closing price of the Common Stock on the American Stock Exchange on March
15, 1999.
State the number of shares outstanding of each of the Registrant's classes of
common stock, as of the most recent practicable date.
Class Outstanding at March 15, 1999
- ----- -----------------------------
Common Stock, par value $.01 per share 4,108,838 shares
DOCUMENTS INCORPORATED BY REFERENCE: NONE
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TABLE OF CONTENTS
Page
PART I
Item 1. Description of Business.................................1
Item 2. Description of Property................................16
Item 3. Legal Proceedings......................................17
Item 4. Submission of Matters to a Vote of
Security Holders.......................................17
PART II
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters........................17
Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations..........19
Item 7. Financial Statements...................................24
Item 8. Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure.................43
PART III
Item 9. Directors, Executive Officers, Promoters
and Control Persons; Compliance with
Section 16(a) of the Exchange Act......................43
Item 10. Executive Compensation.................................45
Item 11. Security Ownership of Certain
Beneficial Owners and Management.......................49
Item 12. Certain Relationships and Related
Transactions...........................................52
Item 13. Exhibits and Reports on Form 8-K.......................53
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ITEM 1. DESCRIPTION OF BUSINESS
Organization
Avenue Entertainment Group, Inc. (the "Company") was founded in 1969 by
Gene Feldman and his wife, Suzette St. John Feldman. Pursuant to the Business
Combination described below, the Company acquired Avenue Pictures from Cary
Brokaw. Prior to the Business Combination, the Company's primary focus had been
the production of one-hour profiles of Hollywood Stars. The Company is an
independent entertainment company that produces feature films, television films,
series for televisions, made-for-television/cable movies and one-hour-profiles
of Hollywood stars both domestically and internationally.
Share Exchange and Reincorporation
Pursuant to a Share Exchange Agreement (the "Share Exchange
Agreement"), dated as of September 30, 1996, among Cary Brokaw, Avenue Pictures,
and The CineMasters Group, Inc. ("CineMasters"), CineMasters acquired all of the
outstanding capital stock of Avenue Pictures from Mr. Brokaw, then the sole
shareholder of Avenue Pictures, in exchange for 1,425,000 shares of CineMasters
common stock ("CineMasters Common Stock") (the "Business Combination").
Following the Business Combination, the Board of Directors and
shareholders of CineMasters approved a transaction pursuant to which (i) all of
the assets of the Wombat Productions division (the "Wombat Division") of
CineMasters were transferred, subject to all related liabilities and
obligations, to its newly-formed, wholly-owned Delaware subsidiary, Wombat, (ii)
CineMasters was merged with and into the Company (its newly-formed, wholly-owned
Delaware subsidiary) with the Company being the surviving corporation in the
merger (the "Reincorporation"), and (iii) each stockholder of CineMasters
received an equal number of shares of the Company in exchange for each share of
capital stock of CineMasters held by such stockholder immediately prior to the
effective time of the Reincorporation (the "Effective Time"). As a result of the
Reincorporation, Avenue Pictures became a wholly-owned subsidiary of the
Company.
General
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
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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. Mr. Brokaw
also 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 February 1998,
the Company completed Finding Graceland starring Harvey Keitel, Johnathan
Schaech, and Bridget Fonda based on an original screenplay developed by the
Company, which was fully financed by Largo Entertainment Corp., a wholly owned
subsidiary of JVC Entertainment, Inc. ("Largo"), being licensed internationally
by Largo Entertainment. All domestic rights to the picture were recently
licensed to the Columbia/TriStar Motion Picture Group.
The Company is in the business of producing feature films, television
films, series for television and one-hour-profiles of Hollywood Stars. As set
forth in greater detail below, Avenue Pictures is currently active in developing
and producing projects in each of its three areas of activity.
Feature Films
The Company is currently completing production of Wayward Son starring
Harry Connick, Jr., Pete Postlethwaite, Patricia Clarkson and Vinessa Shaw. The
film is an epic drama set in the depression era in the south, written and
directed by Randall Harris, produced by Cary Brokaw and executive produced by
Michael Hammer and Steve Tisch. The film is financed by way of an insurance
backed bank loan and third party equity investment. Subject to the bank's first
position lien, the Company holds the copyright to the film in perpetuity.
Currently, Mr. Brokaw serves as the producer or executive producer of
all the Company's feature films with overall responsibility for their
development, financing, and production arrangements. The Company is paid a
producing fee for both the services of Mr. Brokaw and for the Company's services
in connection with the development and production of each feature film, in
addition to a negotiated profit participation. The nature of the profit
participation is a function of Mr. Brokaw's standing as a producer and the
Company's relative bargaining position with respect to each project. As set
forth above, the Company's bargaining position is enhanced by the development
and "packaging" of a project to the fullest possible extent before seeking the
financial assistance of a studio or distributor.
Current feature film projects for the Company include the following
titles: The Courier, Angels in America, Easy Money Blues, Michigan at Madison,
The Moviegoer, Mindhunters and Stand by Your Man.
The Company is schedule to produce The Courier which would be
co-financed and licensed internationally by Intermedia (Sliding Doors, Hilary
and Jackie). Developed by the Company, the original screenplay by Michael Brandt
and Derek Haas, concerns a courier hired to make the ultimate drop to a
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mysterious and exceptionally powerful man who is considered `unfindable'. Brad
Pitt is attached to star subject to his approval of the film's director. Several
studios have expressed an interest in co-financing and distributing the motion
picture domestically. The Company hopes to start filming in September 1999.
The Company intends to produce the film Angels in America, based on the
Pulitzer Prize and Tony Award winning play by Tony Kushner. The Company is in
discussions with William Condon, the Academy Award winning writer and director
of Gods and Monsters, about his directing the film. Several major actors,
including Al Pacino have expressed ongoing interest to star in the motion
picture. Developed at New Line Cinema, the Company is now negotiating with
several companies with respect to financing the film.
The Company hopes to start filming in late 1999.
The Company has recently optioned the original screenplay Easy Money
Blues by John Cork, a provocative and sweeping drama set against the excesses of
the late 80's. Keith Gordon (Midnight Clear, Mother Night and the upcoming
Waking the Dead) is attached to direct. Casting efforts are underway and the
Company hopes to commence production in late 1999 or early 2000.
The Company has also recently optioned Michigan at Madison by John
Scott Shepard (Screenwriter of the upcoming Kill Martin Club to star Jim Carrey
and Henry's List of Wrongs). The original screenplay is a funny and moving
romantic comedy and the Company is currently in the process of attaching a star
and director before submitting the project to the major studios for financing.
TriStar Pictures has financed the development of a film based upon the
acclaimed Walker Percy novel, The Moviegoer. Terrence Malick, director of
Badlands, Days of Heaven and The Thin Red Line, has written the screenplay and
may direct. TriStar has placed this project in turnaround and the Company is in
discussions with several other studios to finance the film.
Mindhunters is a screenplay developed by the Company and sold to
Twentieth Century Fox. Written by Wayne Kramer, the story concerns a serial
killer amidst the most elite unit of the FBI. Fox has placed the project in
turnaround and the Company has reached an agreement with Intermedia to further
develop and co-finance the motion picture. The Company hopes to commence
production in late 1999 or early 2000.
The Company is also developing the original screenplay Stand By Your
Man by Andy Borowitz, creator of "The Fresh Prince of Bel Air". Alicia
Silverstone (Clueless, Blast From the Past) is attached to star and the Company
is in the process of selecting a director before securing the film's financing.
Although the Company 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.
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In addition to these projects, the Company is currently developing
approximately fifteen 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
The Company 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 in June 1997, and A
Stranger in Town, an adaptation of R.T. Marcus's play starring Jean Smart and
Gregory Hines, which aired on CBS in March of 1996. More recently, Avenue
Pictures produced The Almost Perfect Bank Robbery starring Brooke Shields and
Dylan Walsh for CBS, Two Mothers for Zachary for ABC starring Valerie Bertinelli
and Vanessa Redgrave, and Tell Me No Secrets starring Lori Loughlin and Bruce
Greenwood which aired on ABC in January 1997.
For cable television, the Company produced Amelia Earhart: The Final
Flight for Turner Network Television, starring Diane Keaton, Rutger Hauer, and
Bruce Dern, and directed by Yves Simoneau which aired in June 1994, and Path To
Paradise: The Untold Story of the World Trade Center Bombing for HBO, starring
Peter Gallagher, Marcia Gray Hardin, and Art Malik and directed by Leslie Libman
and Larry Williams. Path to Paradise aired in June 1997.
The Company is currently in final negotiations to produce the time
travel adventure Thrillseekers as an original two-hour movie for TBS
Superstation, Turner Broadcasting's flagship network seen in more than 76
million households. Casting and pre production are currently underway and
Thrillseekers is scheduled to premiere in October 1999. Avenue will own the
films copyright and license the film internationally through Pearson or another
third party distributor.
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 the
Company 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, the Company has historically entered into output
arrangements which provide it the ability to assemble financing more easily and
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enable it to move forward more efficiently with its television projects. The
Company had an output agreement which expired in October 1997 with RHI
Entertainment, Inc., a distribution company which is a wholly owned subsidiary
of Hallmark Entertainment, Inc. ("Hallmark"). The Company retains 100% ownership
in its made-for-television movies subject to the rights licensed to the initial
domestic network/cable broadcaster and Hallmark.
In March 1998, the Company concluded a new two year distribution
agreement with Pearson Television, a division of Pearson Plc. With vast
interests in publishing, media and television, Pearson is one of the world's
largest and most prestigious distributors of television programming. Like the
Hallmark agreement, the Company has granted Pearson the right to license Avenue
Pictures Television programs (i) internationally and (ii) in the domestic market
subsequent to the initial network license period. Like the previous arrangement
with Hallmark, the Company holds the copyright to its television programs and
Pearson will pay the Company a substantial predetermined advance against its
distribution rights to all such movies. In addition, Pearson provides the
Company a recoupable contribution to its operating overhead on a monthly basis
and a development fund on an annual basis.
Neither the Hallmark nor Pearson agreements cover television movies
which Mr. Brokaw or other the Company executives produce pursuant to "for hire"
arrangements with programmers. In such producer-for-hire arrangements, Mr.
Brokaw and the Company 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.
The Company has approximately fifteen television movies in development,
including The Replacement Husband (NBC). In March 1998, the Company secured an
order from CBS to develop a script for a three night, six hour mini-series
entitled American Country. Based upon the upcoming book American Country by Bud
Schaetzle, the mini-series will be accompanied by a three compact disc release
featuring the program's exceptional country music soundtrack. The mini-series
tells the story of four generations of one extended musical family whose lives
are interwoven with the development of country music and the events of the
twentieth century. It is the story of the quintessential American family with
the rich backdrop of the evolution of country music from its pre-radio roots to
its phenomenal current popularity.
Other television movies in active development include Masters & Johnson
(Fox) which concerns the relation of the now legendary pioneer sex therapists,
Down River (Lifetime) about a harrowing and life altering rafting expedition in
Borneo, Second Coming (USA), and Greatest Hits (VH-1). Although the Company is
actively pursuing these projects, there can be no assurance that each or any
project will be produced due to the Company's reliance upon the network and
cable programmers who must approve and order the films in order to provide
adequate financing.
Series Television
Currently, the Company is in development with several television
series. In conjunction with New Line Television, Avenue Pictures has developed
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and produced a one-hour pilot for a television series based upon the movie, The
Player, for which Mr. Brokaw serves as Executive Producer. ABC has financed the
pilot with New Line Television. The pilot was delivered to ABC in late May 1997,
but ABC has thus far declined to produce a series based on the pilot. New Line
Television is currently exploring the interest at other networks.
The Company is also working on three other television series which are
in the developmental stage, including Weird Tales based on the acclaimed and
long running, science fiction and suspense magazine, Emily Undercover a
detective show conceived by Stanley Wilson, Morons and Sports Freaks.
One Hour-Profiles
The Hollywood Collection
The Company also produces one-hour profiles of Hollywood's most
important stars which have been aired by PBS and major cable networks. Gene
Feldman and Suzette Winter have produced films together for over twenty-five
years. The Company has produced the following hour-length programs since 1982.
With the exception of Vivien Leigh: Scarlett And Beyond, all programs are
copyrighted and owned by the Company and available for license to all media
world-wide and in perpetuity. These titles form The Hollywood Collection:
"Hollywood's Children" "Audrey Hepburn Remembered"
"The Horror Of It All" "Mae West. And The Men Who Knew Her"
"Ingrid" "The Story Of Lassie"
"Marilyn Monroe: Beyond The Legend" "Charlton Heston: For All Seasons"
"Steve McQueen: Man On The Edge" "Roger Moore: A Matter Of Class"
"Grace Kelly: The American Princess" "Yul Brynner: The Man Who Was King"
"Cary Grant: The Leading Man" "Ingrid Bergman Remembered"
"Gregory Peck: His Own Man" "Jack Lemmon: America's Everyman"
"Vivien Leigh: Scarlett And Beyond"* "Joan Crawford: Always The Star"
"Anthony Quinn: An Original" "Fred MacMurray: The Guy Next Door"
"Robert Mitchum: The Reluctant Star" "Shirley MacLaine: Kicking Up Her Heels"
"Michael Caine: Breaking The Mold" "Barbara Stanwyck: Straight Down The Line"
"Shirley Temple: America's Little "Gary Cooper: The Face Of A Hero"
Darling" "Walter Matthau: Diamond In The Rough"
"Clint Eastwood: the Man From "Alan Ladd: The True Quiet Man"
Malpaso"
* Copyright Owned by Turner Broadcasting System.
The Broadway Collection
In 1998, a new series of programs was begun by the Company called The
Broadway Collection. The divas, directors, composers, recording artists, actors
who make Broadway the center of show business -- these will be the subjects of
the profiles. Completed in 1998, Betty Buckley: In Performance & In Person is a
ninety-minute television Special licensed by the Art and Film Channel, Bravo, to
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be premiered in the fall of 1999. Also started in the same year is a program on
musician, composer, actor Harry Connick, Jr. for the on-going cable series,
Bravo Profiles. It is anticipated that the program will air in conjunction with
the theatrical release of Wayward Son, produced by the Company.
The Company hopes to maximize the potential to be derived from programs
it owns through its newly-formed Wombat Home Video division. The Company
anticipates bringing to home-video outlets its star profiles at the rate of two
every other month. Eighteen of these programs have never had a commercial
home-video release before. In addition to being sold through established
distributors to home-video stores nationwide, Wombat Home Video will also offer
its titles via the internet. The Company will seek to link its web site,
http://hollywood-collection.com to other web sites catering to movie fans and
other special-interest groups. Because the collection is composed primarily of
film stars from the 'fifties and 'sixties, older movie-goers are viewed as a
specially significant group to be reached. It is anticipated that as The
Hollywood Collection builds its client base via the internet, the Company's web
site will be able to interest potential buyers in related fan-oriented products
such as books, posters, stills that will be sold via another company web site,
http://hollywoodmall.com
Distribution Arrangement
Pursuant to a Distribution Agreement (the "Distribution Agreement"),
dated July 1, 1995 and amended on April 28, 1996, between the Company and Janson
Associates, Inc. ("Janson), Janson was granted the sole and exclusive right,
subject to the production arrangement, to license substantially all of the
Company's Hollywood Collection film library for all forms of television and
video worldwide for a period of ten years, subject to automatic renewals in
three-year increments. In consideration of Janson's services under the
Distribution Agreement, Janson is entitled to retain a distribution fee, ranging
from 10% to 35%, depending upon whether such distribution is via domestic
television network, syndication, international television, or home video, of the
gross receipts from the licensing of each program. In addition, Janson is
reimbursed for certain distribution expenses out of gross receipts with the
remaining balance remitted to the Company as program licensor.
Business Approach
As an independent producer of feature films and television programming,
the Company 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 the Company. 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
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television industry. The Company 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
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 the Company will have
maximum leverage in negotiating production and financing arrangements with a
distributor. Nevertheless, there are occasions when the Company 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, the Company 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.
The Company's primary goal with respect to its documentary films is
significant and sustained growth through production activity and greater
exploitation of its wholly owned programs. Further revenues and profitability
will depend on the Company's ability to secure financing for new programs
through its present relationship with Bravo or other cable or television entity.
Also Wombat Home Video, as a start-up division, will require investment before a
significant return can be anticipated. The Company also is exploring the
possibility of selling home-video cassettes via the Internet. However, an
effective web site requires investment capital, time and highly competent
personnel. No assurance can be given that additional funding, whether from
financial markets or other arrangements with corporate partners or from other
sources, will be available when needed or on terms acceptable to the Company.
Competition
The motion picture industry is extremely competitive. The competition
comes from both companies within the same business and companies in other
entertainment media which create alternative forms of leisure entertainment. The
Company competes with several "major" film studios which are dominant in the
motion picture industry, as well as with numerous independent motion picture and
television production companies, television networks, and pay television systems
for the acquisition of literary properties, the services of performing artists,
directors, producers, and other creative and technical personnel, and production
financing. Many of the organizations with which the Company competes have
significantly greater financial and other resources. In addition, the Company's
films compete for audience acceptance with motion pictures produced and
distributed by other companies. As a result, the success of the Company's
production is also heavily dependent on public taste, which is both
unpredictable and susceptible to change without warning.
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A limited number of independent production companies are as actively
involved in the production of both feature films and television movies.
Management 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 Company's competitive
edge.
The Company was one of the first production companies specializing in
the production of profiles of movie stars and for years had been an acknowledged
quality producer in this field. However, with the success of the biography
format on the cable outlet A&E, other cable companies have introduced similar
programs. Cable companies, often in association with major films studios, are
increasingly producing their own programs and securing ownership of each
program's copyright. Programs are being produced by staff producers or by
producers for hire for a specific project. Consequently, cable companies are
acquiring ownership of the back end (income deriving from the subsequent
licensing of programs) and are now licensing their programs to a world market.
Faced with these new circumstances, the Company has seen a significant drop in
sales to overseas buyers. However, because the profiles in the Company's library
deal with stars of special interest to older moviegoers and with new delivery
systems being created, it is hoped that niche interest will eventually enable
the Company to reestablish itself in the world market.
Major Customers
The Company's revenue has historically been derived from the production
of a relatively small number of programs and licensing revenues. Given this
fact, the limited number of outlets for the the Company's productions, and the
individually significant license fees generated from certain of its sales,
certain customers have historically accounted for a significant portion of the
Company's revenue. The Company derived approximately 39% of its total revenue
for the year ended December 31, 1998 from Janson Associates and 26% of its total
revenue for the year ended December 31, 1998 from producer fees related to the
feature film "Wayward Son".
Employees
The Company has 12 full time employees and one part time employee.
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 its own sales organization the Company believes it can optimize
revenues from programming both produced and acquired by the Company. The
practice of pre-selling films internationally significantly reduces financial
risk and increases both the cash flow and ability to finance this area of the
Company's business activity. Direct involvement in international sales also
provides favorable opportunities in the areas of co-production and co-financing
which can further benefit the Company. No assurance can be given that such
co-production and co-financing opportunities will be available to the Company.
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Through an international sales division, the Company will either act as
its own sales agent in international markets, sell foreign rights to third
parties in the international marketplace, or sell certain rights while retaining
others which the Company may exploit on its own. To the extent the Company
retains any of these foreign rights, the Company's financial commitment with
respect to a particular motion picture may be substantially increased. Although
the Company believes that its expansion into this area can provide opportunities
for future growth, foreign distribution creates certain additional risks,
including the necessity for additional capital, an increase in operating
overhead, fluctuation in currency exchange rates, and changes in foreign
exchange control laws. 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",
"Scream", and "The Full Monty". Indeed, given the relatively small financial
risk of producing and releasing such films, all of the major studios have
started or are studying the feasibility of production and distribution units
focusing on smaller, independent-type films.
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The growth of this product and market segment should provide
opportunities for the Company 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 $40
million. Average independents are far lower and are often less than $10 million.
The major studios generally fund production costs from cash flow generated by
motion picture and related activities or, in some cases, from unrelated
businesses or through off-balance sheet methods. Substantial overhead costs,
consisting largely of salaries and related costs of the production staff and
physical facilities maintained by the major studios, also must be funded.
Independent production companies generally avoid incurring overhead costs as
substantial as those incurred by the major studios by hiring creative and other
production personnel and retaining the other elements required for
pre-production, principal photography, and post-production activities on a
picture-by-picture basis. Sources of funds for independent production companies
include bank loans, "pre-licensing" of distribution rights, equity offerings,
and joint ventures. Independent production companies generally attempt to obtain
all or a substantial portion of their financing of a motion picture prior to
commencement of principal photography, at which point substantial production
costs begin to be incurred and require payment.
<PAGE>
"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, the distributor generally agrees to pay to the producer a
certain minimum advance or guarantee upon the delivery of the completed motion
<PAGE>
picture, which amount is to be recouped by the distributor out of revenues
generated from the distribution of the motion picture in particular media or
territories. After the distributor's distribution fee is deducted from the gross
receipt of the picture, the distributor recoups the amount advanced (if any)
plus its distribution costs.
Motion pictures may continue to play in theaters for up to six months
following their initial release. Concurrently with their release in the United
States, motion pictures generally are released in Canada and may also be
released in one or more other international markets. A motion picture is
typically available for distribution during its initial distribution cycle as
follows:
Months After Initial Approximate
Marketplace Domestic 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.
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
<PAGE>
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.
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
<PAGE>
products such as video games, toys, T-shirts, posters, and other merchandise.
Rights may also be licensed to create novelizations of the screenplay and other
related book publications.
International Markets. Motion picture distributors and producers derive
revenue from international markets in the same media as domestic markets. The
growth of foreign revenues has been dramatic, now accounting for more than 50%
of the total revenues of many films. The increase in revenues is currently being
driven primarily from the growth of television abroad. The increase in foreign
television values and foreign revenues is likely to continue. Although the
increased level of foreign values affects the revenues of most films, the effect
is not uniform. Action films and films with major stars benefit most from
foreign revenues; films with uniquely American themes with unknown actors
benefit the least.
Regulation
Distribution rights to motion pictures are granted legal protection
under the copyright laws of the United States and most foreign countries, which
laws provide substantial civil and criminal sanctions for unauthorized
duplication and exhibition of motion pictures. Motion pictures, musical works,
sound recordings, art work, still photography, and motion picture properties are
separate works subject to copyright under most copyright laws, including the
United States Copyright Act of 1976, as amended. The Company plans to take
appropriate and reasonable measures to secure, protect, and maintain or obtain
agreements to secure, protect, and maintain copyright protection for all Company
pictures under the laws of applicable jurisdictions. Motion picture piracy is an
industry-wide problem. The MPAA operates a piracy hotline and investigates all
reports of such piracy. Depending upon the results of such investigations,
appropriate legal action may be brought by the owner of the rights. Depending
upon the extent of the piracy, the Federal Bureau of Investigation may assist in
these investigations and related criminal prosecutions.
Motion picture piracy is an international as well as a domestic
problem. Motion picture piracy is extensive in many parts of the world,
including South America, Asia (including Korea, China, and Taiwan), the
countries of the former Soviet Union, and other former Eastern bloc countries.
In addition to the MPAA, the Motion Picture Export Association, the American
Film Marketing Association, and the American Film Export Association monitor the
progress and efforts made by various countries to limit or prevent piracy. In
the past, these various trade associations have enacted voluntary embargoes of
motion picture exports to certain countries in order to pressure the governments
of those countries to become more aggressive in preventing motion picture
piracy. In addition, the United States government has publicly considered trade
sanctions against specific countries which do not prevent copyright infringement
of United States produced motion pictures. There can be no assurance that
voluntary industry embargoes or United States government trade sanctions will be
enacted. If enacted, such actions could impact the amount of revenue that the
Company realizes from the international exploitation of its motion 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.
<PAGE>
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.
<PAGE>
ITEM 2. 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 3,500 square feet of office space at its
corporate headquarters at 11755 Wilshire Boulevard, Suite 2200, Los Angeles,
California 90025. The rent for such space is approximately $8,000 per month.
Management believes the properties herein described are adequate to
handle current and short term projected business.
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
ITEM 5.MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET PRICE OF COMMON STOCK
The Company's Common Stock is traded on the American Stock Exchange,
Inc. ("AMEX") under the symbol "PIX". Prior to July 16, 1997, the Common Stock
was traded on the Over-The -Counter Bulletin Board under the symbol "FLIK." The
following table sets forth the high and low sales prices for the Common Stock on
the AMEX since July 16, 1997, and for the period prior thereto, the high and low
bid prices for the Common Stock. Quotations for periods prior to July 16, 1997
represent bid prices between dealers and do not include retail mark-up,
mark-down, or commissions, and do not represent actual transactions.
1998 High Sale Low Sale
---- --------- --------
1st Quarter $6 .44 $5.25
2nd Quarter $7.50 $4 32
3rd Quarter $5.00 $1.75
4th Quarter $2.75 $1.63
1997 High Bid Low Bid
1st Quarter $4.50 $2.75
2nd Quarter $6.00 $3.75
3rd Quarter (to July 15, 1997) $6.63 $6.63
High Sale Low Sale
3rd Quarter (from July 16, 1997
to September 30, 1997) $10.25 $5.50
4th Quarter $8.50 $5.06
As of March 15, 1999, there were 163 holders of record of Common Stock.
On March 15, 1999, the closing price of the Common Stock on the
American Stock Exchange was $2.125.
<PAGE>
DIVIDEND POLICY
The Company anticipates that, for the foreseeable future, earnings will
be retained for the development of its business. Accordingly, the Company does
not anticipate paying dividends on the Common Stock in the foreseeable future.
The payment of future dividends will be at the sole discretion of the Company's
Board of Directors and will depend on, among other things, future earnings,
capital requirements, the general financial condition of the Company, and
general business conditions. Payment of dividends may also be limited by the
terms of any Preferred Stock or debt the Company may issue or incur. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources".
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Company's consolidated financial statements and related notes thereto.
Liquidity and Capital Resources
At December 31, 1998, the Company had approximately $427,000 of cash
and approximately $340,000 of marketable securities. The accompanying financial
statements have been prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. However, revenues have been insufficient to cover costs of
operations for the year ended December 31, 1998. The Company has a working
capital deficiency and has an accumulated deficit of $3,385,000 through December
31, 1998. The Company's continuation as a going concern is dependent on its
ability to ultimately attain profitable operations and positive cash flows from
operations. The Company's management believes that it can satisfy its working
capital needs based on its estimates of revenues and expenses, together with
improved operating cash flows, as well as additional funding whether from
financial markets, other sources or other collaborative arrangements. The
Company believes it will have sufficient funds available to continue to exist
through the next year, although no assurance can be given in this regard.
Insufficient funds will require the Company to scale back its operations. The
Independent Auditor's Report dated April 14, l999 on the Company's consolidated
financial statements states that the Company has suffered losses from
operations, has a working capital deficiency and has an accumulated deficit that
raises substantial doubt about its ability to continue as a going concern. The
accompanying financial statements do not include any adjustments that may result
from the Company's inability to continue as a going concern.
Results of Operations
For the year ended December 31, 1998 the Company had a loss before
income taxes of $2,114,000 as compared to a loss of $1,760,000 for the year
ended December 31, 1997. The increased loss in 1998 was the result of reduced
revenue earned in 1998 and a $225,000 write down taken on certain films in the
"Hollywood Collection". The increased loss was partially offset by an unrealized
gain on trading securities, as well as a gain on the sale of investments, both
relating to the common stock of GP Strategies Corporation.
Revenues
Revenues for the year ended December 31, 1998 were $829,000 as compared
to $2,367,000 for the year ended December 31, 1997. The reduced revenues for the
year were the result of the lack of new television projects, the ending of the
Company's arrangement with A&E for additional features in the "Hollywood
Collection", and reduced licensing rights in secondary markets. In 1998, the
Company earned $212,000 in producer fees related to the feature film "Wayward
<PAGE>
Son", as well as $320,000 of revenue from the licensing of rights to its
programming in secondary markets through Janson Associates. In addition, the
Company received development fees during 1998 for various projects. Revenues for
the year ended December 31, 1997 were derived primarily from the completion and
delivery to Hallmark Entertainment of "Tell Me No Secrets" as well as $275,000
of producer fees generated from the production and delivery of the feature film
"Finding Graceland" and from the completion and delivery to A&E of three one
hour features which led to approximately $411,000 of revenue from A&E. In
addition, the Company earned $506,000 of revenue from licensing of rights to its
programming in secondary markets through Janson Associates. The reduced revenues
earned from Janson Associates was due to competitive pressures in foreign
markets. For the year ended December 31, 1998, approximately 39% of the
Company's revenue were earned through Janson Associates.
Film Production Costs
Film production costs for the year ended December 31, 1998 were
$718,000 as compared to $1,464,000 for the year ended December 31, 1997. The
reduced film production costs were the result of reduced revenue recognized
during the year. Included in film production costs for 1998, was a $225,000
write down taken on several film in the "Hollywood Collection", due to the
reduced revenue stream forecast in the future. Film production costs for the
year ended December 31, 1997 can be attributed to the film amortization related
to the Company's television product in the amount of $904,000 and approximately
$424,000 related to the Company's documentary films and licensing activities,
including a $70,000 write down taken on the one hour film, "The Story of
Lassie", due to the reduced revenue stream forecast in the future.
Selling, General, and Administrative
Selling, general and administrative expenses ("SG&A") for the twelve
months ended December 31, 1998 and 1997 were $2,425,000 and $2,718,000. Included
in SG&A for the period is approximately $280,000 of amortization of goodwill
related to the Avenue Pictures acquisition on September 30, 1996. In addition,
the Company incurred $37,500 of stock option compensation expense relating to
previously issued stock options in 1998 and 1997 and $100,000 of non-cash
compensation in 1997 recognized on stock (see Note 5 to the consolidated
financial statements). The remaining SG&A costs for 1998 and 1997 relate to
salaries, occupancy costs and professional fees. The reduced costs in 1998 were
primarily attributable to the efforts to reduce expenses and personnel costs due
to the reduced level of revenue.
Income Taxes
For the years ended December 31, 1998 and 1997, the Company had an
income tax benefit of $57,000 and $208,000, respectively. The benefit was
derived from the carry back of the current years loss, as well as an offset of
the balance of the income tax payable at December 31, 1996.
<PAGE>
Recent Accounting Developments
The Financial Accounting Standards Board issued Accounting Standards
(SFAS 130), "Reporting Comprehensive Income", in June 1997 which requires a
statement of comprehensive income to be included in the financial statements for
fiscal years beginning after December 15, 1997. The Company has included the
required information in Note 12 to the Consolidated Financial Statements.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. This Statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. The Company will adopt SFAS No. 133 by
January 1, 2000. The Company is currently evaluating the impact the adoption of
SFAS No. 133 will have on the consolidated financial statements.
Year 2000
The Company is aware of the issues associated with the programming code
in existing computer systems as the millennium (year 2000) approaches. The "year
2000" problem is pervasive and complex as virtually every computer operation
will be affected in some way by the rollover of the two digit year value to 00.
The issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail.
The Company is utilizing both internal and external resources to
identify, correct or reprogram and test systems for year 2000 compliance. The
Company operates its financial reporting systems through a personal computer
based accounting and general ledger package. The Company is in the process of
installing the required updates to the system to make the system year 2000
compliant. The Company believes that these updates will cost approximately
$5,000 and be complete by the end of the second quarter of 1999.
The Company has also identified various ancillary programs that need to
be updated and has contracted with third parties for this work to be completed
within the next six months. It is expected that the cost of these modifications
will be approximately $5,000.
In addition, the Company is examining their exposure to the year 2000
in other areas of technology. These areas include telephone and E-mail systems,
operating systems and applications in free standing personal computers, local
area networks and other areas of communication. A failure of these systems,
which may impact the ability of the Company to service their customers which
could have a material effect on their results of operations. These issues are
being handled by the finance team at the Company by identifying the problems and
2
<PAGE>
obtaining from service providers either the necessary modifications to the
software or assurances that the systems will not be disrupted. The Company
believes that the cost of the programming and equipment upgraded will not be in
excess of $7,500. In addition, certain personnel computers and other equipment
that is not year 2000 compliant will be upgraded through the Company's normal
process of equipment upgrades. The Company believes that the evaluation and
implementation process will be complete no later than the second quarter of
1999. Over the next year, the Company plans to continue to develop and implement
other information technology projects needed in the ordinary course of business.
The Company expects to finance these expenditures from working capital.
Therefore, the Company does not expect the year 2000 issue to have a material
adverse impact on its financial position or results of operations.
Like other companies, the Company relies on its customers for revenues
and on its vendors for products and services of all kinds; these third parties
all face the year 2000 issue. An interruption in the ability of any of them to
provide goods or services, or to pay for goods or services provided to them, or
an interruption in the business operations of our customers causing a decline in
demand for services, could have a material adverse effect on the Company in
turn.
In addition, there is a risk, the probability of which the Company is
not in a position to estimate, that the transition to the year 2000 will cause
wholesale, perhaps prolonged, failures of electrical generation, banking,
telecommunications or transportation systems in the United States or abroad,
disrupting the general infrastructure of business and the economy at large.
The effect of such disruptions on the Company could be material.
The Company's various departments will communicate with their principal
customers and vendors about their year 2000 readiness, and expect this process
to be completed no later than the third quarter of 1999. None of the responses
received to date suggests that any significant customer or vendor expects the
year 2000 issue to cause an interruption in its operations which would have a
material adverse impact on the Company. However, because so many firms are
exposed to the risk of failure not only of their own systems, but of the systems
of other firms, the ultimate effect of the year 2000 issue is subject to a very
high degree of uncertainty.
The Company believes that its preparations currently under way are
adequate to assess and manage the risks presented by the year 2000 issue, and
does not have a formal contingency plan at this time.
The statements in this section regarding the effect of the year 2000
and the Company's responses to it are forward-looking statements. They are based
on assumptions that the Company believes to be reasonable in light of its
current knowledge and experience. A number of contingencies could cause actual
results to differ materially from those described in forward-looking statements
made by or on behalf of the Company.
<PAGE>
Forward-Looking Statements
This report contains certain forward-looking statements reflecting
management's current views with respect to future events and financial
performance. These forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those in
the forward-looking statements, including, but not limited to, the ability of
the Company to reverse its history of operating losses; the ability to obtain
additional financing and improved cash flow in order to meet its obligations and
continue to exist as a going concern; production risks; dependence on contracts
with certain customers; future foreign distribution arrangements; the risk that
the Company's preparations with respect to the risks presented by the year 2000
issue will not be adequate; and dependence on certain key management personnel.
All of these above factors are difficult to predict, and many are beyond the
control of the Company.
Market Risk Exposure
The financial position of the Company is subject to market risk associated with
interest rate movements on outstanding debt. The Company has debt obligations
with variable terms. The carrying value of the Company's variable rate debt
obligation approximates fair value as the market rate is based on prime (see
Note 8 to the Consolidated Financial Statements).
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
Page
Avenue Entertainment Group, Inc.
Independent Auditors' Report 25
Consolidated Balance Sheet as of December 31, 1998 26
Consolidated Statements of Operations for the years ended
December 31, 1998 and 1997 27
Consolidated Statement of Stockholders' Equity for the years ended
December 31, 1998 and 1997 28
Consolidated Statement of Cash Flows for the years ended
December 31, 1998 and 1997 29
Notes to Consolidated Financial Statements 31
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Avenue Entertainment Group, Inc.:
We have audited the accompanying consolidated balance sheet of Avenue
Entertainment Group, Inc. as of December 31, 1998 and the related
consolidated statements of operations, stockholders' equity and cash
flows for each of the years in two-year period ended December 31, 1998.
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 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Avenue Entertainment Group, Inc. as of December 31, 1998 and the
results of its operations and its cash flows for each of the years in
the two-year period ended December 31, 1998 in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that Avenue Entertainment Group, Inc. will continue as a going
concern. As discussed in Note 1 to the consolidated financial
statements, the Company has suffered net losses from operations, has a
working capital deficiency and has incurred accumulated losses through
December 31, 1998. These factors raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 1. The accompanying
consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
KPMG LLP
New York, New York
April 14, 1999
<PAGE>
AVENUE ENTERTAINMENT GROUP, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
Assets
Cash $ 427,240
Marketable securities 339,716
Accounts receivable 108,515
Income tax receivable 55,000
Film costs, net 1,091,646
Property and equipment, net 87,272
Goodwill 2,174,029
Other assets 29,766
-----------
Total assets $ 4,313,184
===========
Liabilities and Stockholders' Equity
Accounts payable and accrued expenses $ 1,024,862
Loan payable 127,500
Deferred compensation 145,006
Due to related party 94,481
-----------
Total liabilities 1,391,849
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.01 per share. Authorized
2,000,000 shares, none issued
Common stock, par value $.01 per share. Authorized
15,000,000 shares; issued and outstanding, 4,108,838 shares 41,088
Class B common stock, no par value. Authorized
1,000,000 shares; none issued
Additional paid-in capital 6,415,196
Accumulated deficit (3,384,949)
Note receivable for common stock (150,000)
Total stockholders' equity 2,921,335
Total liabilities and stockholders' equity $ 4,313,184
===========
See accompanying notes to consolidated financial statements.
<PAGE>
AVENUE ENTERTAINMENT GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
1998 1997
---- ----
Operating revenues $ 828,732 $ 2,367,215
------------ ------------
Costs and expenses:
Film production costs 717,915 1,463,822
Selling, general and
administrative expenses 2,425,597 2,718,028
------------ -------------
Total costs and expenses 3,143,512 4,181,850
------------ -------------
Unrealized gain on trading securities 135,888
Gain on sale of investments 65,070 55,000
------------ --------------
Loss before income taxes (2,113,822) (1,759,635)
Income tax benefit 56,691 207,816
------------ ----------------
Net loss $ (2,057,131) $ (1,551,819)
============ ============
Basic and diluted loss
per common share $ (.50) $ (.41)
----------- ----------------
See accompanying notes to consolidated financial statements.
<PAGE>
AVENUE ENTERTAINMENT GROUP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Retained other Compre- Stock
Number of paid-in earnings comprehensive hensive subscription
Shares Amount capital (deficit) income income receivable Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 3,697,838 $ 36,978 $4,631,252 $ 224,001 $(118,850) $ $ $ 4,773,381
- -----------------------------------------------------------------------------------------------------------------------------------
Net loss (1,551,819) (1,551,819) (1,551,819)
Issuance of common stock 225,000 2,250 1,122,750 1,125,000
Other comprehensive income 316,561 316,561 316,561
----------
Total comprehensive income (1,235,258)
----------
Stock option compensation
expense 37,500 37,500
Proceeds from previously
issued stock 92,254 92,254
Non cash compensation 100,000 100,000
Exercise of warrants 100,000 1,000 99,000 100,000
Stock subscription
receivable 50,000 500 149,500 (150,000)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 4,072,838 40,728 6,232,256 (1,327,818) 197,711 (150,000) 4,992,877
- -----------------------------------------------------------------------------------------------------------------------------------
Net loss (2,057,131) (2,057,131) (2,057,131)
Issuance of common stock 36,000 360 145,440 145,800
Other comprehensive income (197,711) (197,711) (197,711)
----------
Total comprehensive income (2,254,842)
----------
Stock option compensation
expense 37,500 37,500
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 4,108,838 $41,088 $ 6,415,196 $(3,384,949) $ $ $(150,000) $2,921,335
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
AVENUE ENTERTAINMENT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
1998 1997
---- ----
Cash flows from operating activities:
Net loss $ (2,057,131) $ (1,551,819)
Adjustments to reconcile net income to
net cash provided by (used for)
operating activities:
Depreciation 23,859 32,499
Amortization - film production costs 702,172 1,276,629
Amortization - goodwill 280,520 280,520
Gain on sale of investments (65,070) (55,000)
Unrealized gain on trading securities (135,888)
Proceeds from sale of marketable securities 228,048
Stock compensation 37,500 137,500
Deferred compensation 145,006
Changes in assets and liabilities which
affect net income:
Accounts receivable 17,367 22,991
Film costs (312,247) (759,874)
Other assets (11,057)
Accounts payable and accrued expenses 271,638 174,209
Due to GP Strategies 94,480
Income taxes receivable 15,000 (235,000)
Income taxes payable (330,891)
Advances from customers (577,730)
Other 62,354
------------ --------------
Net cash used for
operating activities (859,673) (1,429,132)
---------- ------------
Cash flows from investing activities:
Purchase of equipment (8,775) (17,363)
Proceeds from sale of short-term
investments 505,000
------------ -------------
Net cash provided by (used for)
investing activities (8,775) 487,637
------------ ---------------
(Continued)
<PAGE>
AVENUE ENTERTAINMENT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31,
1998 1997
---- ----
Cash flows from financing activities:
Proceeds from short-term borrowings $ 127,500
Proceeds from the issuance of
common stock 145,800 $ 1,217,254
Exercise of warrants 100,000
Principal payments of capital
lease obligation (8,459) (31,992)
------------ --------------
Net cash provided by
financing activities 137,341 1,412,762
---------- -------------
Net (decrease) increase in cash (731,107) 471,267
Cash at beginning of year 1,158,347 687,080
------------ -------------
Cash at end of year $ 427,240 $ 1,158,347
============= ============
Supplemental cash flow information:
Cash paid during the year for:
Interest $ 12,701 $ 46,061
Income taxes 10,222 201,694
See accompanying notes to consolidated financial statements.
<PAGE>
AVENUE ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
Description of Business
Avenue Entertainment Group, Inc. (the "Company") is an independent
entertainment company, that produces feature films, television films,
series for television made-for-televison/cable movies and
one-hour-profiles of Hollywood Stars. The Company develops and produces
motion pictures for theatrical exhibition, television, and other
ancillary markets, both domestically and internationally.
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. Revenues
have been insufficient to cover costs of operations for the year ended
December 31, 1998. The Company has a working capital deficiency and has
an accumulated deficit of $3,385,000 through December 31, 1998. The
Company's continuation as a going concern is dependent on its ability to
ultimately attain profitable operations and positive cash flows from
operations. The Company's management believes that it can satisfy its
working capital needs based on its estimates of revenues and expenses,
together with improved operating cash flows, as well as additional
funding whether from financial markets, other sources. The Company
believes it will have sufficient funds available to continue to exist
through the next year, although no assurance can be given in this regard.
The accompanying financial statements do not include any adjustments that
may result from the Company's inability to continue as a going concern.
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.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments with
original maturities, to the Company, of three months or less.
Marketable Securities
At December 31, 1998, marketable securities are comprised of registered
shares of GP Strategies Corporation (GP Strategies), a stockholder of the
Company. The Company has classified these shares as trading securities,
which are principally held for the purpose of selling them in the near
term to assist in funding its working capital needs. Unrealized holding
gains and losses on trading securities are included in earnings. Prior to
June 1998, the Company had classified the marketable securities as
available for sale (see Note 11).
<PAGE>
AVENUE ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
periodically and adjusted where appropriate and the impact of such
adjustments could be material.
Film property costs are stated at the lower of unamortized cost or
estimated net realizable value. Losses which may arise because
unamortized costs of individual films exceed anticipated revenues are
charged to operations through additional amortization.
Property, Equipment and Depreciation
Property and equipment are stated at cost. Major expenditures for
property and those which substantially increase useful lives are
capitalized. Maintenance, repairs and minor renewals are expensed as
incurred. When assets are retired or otherwise disposed of, their costs
and related accumulated depreciation are removed from the accounts and
resulting gains or losses are included in income. Depreciation is
provided by the straight-line method 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 on a straight line basis. Accumulated amortization at December 31,
1998 and 1997 was $631,170 and $350,650.
The carrying value of intangible assets is periodically reviewed by the
Company based on the expected future undiscounted operating cash flows of
the related business unit. Based upon its most recent analysis, the
Company believes that no material impairment of intangible assets exists.
Fair Value of Financial Instruments
The Company's carrying value of cash, accounts receivable and accounts
payable and accrued expenses and due to related party approximate fair
value because of the short-term maturity of these instruments.
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
<PAGE>
AVENUE ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
licensee and certain other conditions of sale have been met pursuant to
criteria specified by Statement of Financial Accounting Standards (SFAS)
No. 53, "Financial Reporting by Producers and Distributors of Motion
Picture Films."
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 or shorter based upon most recent revenue forecasts.
The market trend of each film is regularly examined to determine the
estimated future revenues and corresponding lives. Due to the nature of
the industry, management's estimates of future revenues may change within
the next year and the change could be material.
Revenues from producer-for-hire contracts are recognized on a
percentage-of-completion method, measured by the percentage of costs
completed to date to estimated total cost for each contract. Provisions
for estimated losses on uncompleted contracts are made in the period in
which such losses are determined.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Significant estimates include those related to valuation of accounts
receivable and inventories of released productions. It is at least
reasonably possible that the significant estimates used will change
within the next year.
Comprehensive Income
On January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes standards for reporting
and presentation of comprehensive income and its components in a full set
of financial statements. Comprehensive income consists of net income, net
unrealized gains (losses) on securities and foreign currency translation
adjustment and is presented in the consolidated statements of
stockholders' equity as well as Note 11 which presents comprehensive
income. The Statement requires only additional disclosures in the
consolidated financial statements; it does not affect the Company's
financial position or results of operations. Prior year financial
statements have been reclassified to conform to the requirements of SFAS
No. 130.
<PAGE>
AVENUE ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Loss per Common Share
The Company has adopted Statement of Financial Accounting Standards
(SFAS) No. 128, "Earnings per Share", which established standards for
computing and presenting earnings per share (EPS). The statement
simplifies the standards for computing EPS, replaces the presentation of
primary EPS with a presentation of basic EPS and requires a dual
presentation of basic and diluted EPS on the face of the income
statement. Basic EPS are based upon the weighted average number of common
shares outstanding during the period. Diluted EPS are based upon the
weighted average number of common shares for all dilutive potential
common shares outstanding. At December 31, 1998 and 1997, the Company did
not include any potential common stock in its calculation of diluted EPS,
because all options and warrants are anti-dilutive.
Concentration of Credit Risk
The Company's accounts receivable are due from companies in the
entertainment industry (see Note 10).
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.
(2) Film Costs
Film costs consist of the following:
December 31,
1998
In process or development $ 2,076
Released, net of accumulated amortization of $12,455,246 1,089,570
---------
$1,091,646
5
<PAGE>
AVENUE ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Based upon the Company's present estimates of anticipated future revenues
at December 31, 1998, approximately 75% of the net film costs related to
released product will be amortized during the five-year period ending
December 31, 2003.
(3) Property and Equipment
The major classes of property and equipment consist of the following:
Useful December 31,
life 1998
Machinery and equipment 4 to 5 years $ 228,744
Furniture and fixtures 10 years 21,470
--------
250,214
Less accumulated depreciation (162,942)
$ 87,272
Depreciation expense was $23,859 and $32,499 for the year ended December
31, 1998 and 1997.
(4) Commitments and Contingencies
Leases
The Company is obligated under a lease for office space, expiring
September 30, 1999, which requires minimum annual rentals, plus increases
based on real estate taxes and operating costs.
Rent expense was $156,166 and $143,782 for the years ended December 31,
1998 and 1997, respectively.
Minimum annual rental commitments at December 31, 1998 under the
noncancelable operating leases are as follows:
1999 $ 85,904
2000 6,119
----------
Total minimum obligations $ 92,023
=========
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 and $150,000, plus benefits,
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. In 1998, the President and Chairman
deferred $97,000 and $48,000 of their compensation, respectively.
<PAGE>
AVENUE ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) Common Stock and Stock Option Plan
(a) In March 1997, the Company adopted The Avenue Entertainment Group, Inc.
Stock Option and Long Term Incentive Compensation Plan which provides for
the grant of an aggregate of 1,750,000 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, 1998,
815,000 options are exercisable.
Option activity was as follows:
<TABLE>
<CAPTION>
Weighted
average
Number of Exercise exercisable
shares price price
<S> <C> <C> <C>
Outstanding at January 1, 1997 891,500 $ .32 - 1.70 $ 1.29
--------- ------------ --------
Options granted 573,000 3.00 - 6.31 3.05
Options exercised (100,000) 1.00 1.00
---------- --------------- --------
Outstanding at December 31, 1997 1,364,500 .32 - 6.31 1.97
--------- -------------- -------
Options cancelled (623,000) 3.00 - 6.31 3.23
Options granted 670,000 1.81 - 5.63 2.08
--------- ------------- --------
Outstanding at December 31, 1998 1,411,500 .31 - 1.81 1.50
--------- ------------- --------
</TABLE>
The Company recorded compensation expense related to stock options
granted at prices less than market value totaling $37,500 and $37,500 for
the years ended December 31, 1998 and 1997.
At December 31, 1998, the weighted average remaining contractual life of
all outstanding options was 6.5 years.
<PAGE>
AVENUE ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about the Plan's options
outstanding at December 31, 1998:
Weighted
Weighted average
Number Range of average years Number
Outstanding exercise prices exercise price remaining exercisable
1,120,000 $1.70 - 1.81 $1.76 7.72 538,000
291,500 .32 .32 1.7 277,000
-------------------------------------------------------------------------------
1,411,500 .32 - 1.81 1.46 6.5 815,000
------------------------------------------------------------------------------
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.
In 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," which permits entities to recognize as expense over the
vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to
apply the provisions of APB Opinion No. 25 and provide pro forma net
income and pro forma earnings per share disclosures for employee stock
option grants made in 1995 and future years as if the fair-value-based
method defined in SFAS No. 123 had been applied. The Company has elected
to continue to apply the provisions of APB Opinion No. 25 in accounting
for its Plan, and accordingly, no compensation cost has been recognized
for its stock options granted at fair market value in the consolidated
financial statements. Compensation cost will continue to be recorded for
options granted below fair market value.
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 loss would have been or increased to the pro forma amounts indicated
below:
December 31, December 31,
1998 1997
---- ----
Net loss As reported $(2,057,131) $(1,551,819)
Pro forma (2,623,651) (2,090,005)
Basic and diluted
loss per share As reported (.50) (.41)
Pro forma (.64) (.55)
Pro forma net loss reflects only options granted in the years ended
December 31, 1998, 1997 and 1996. Therefore, the full impact of
calculating compensation cost for stock options under SFAS No. 123 is not
<PAGE>
AVENUE ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
reflected in the pro forma net loss 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, 1998 and 1997, the per share weighted-average fair value
of stock options granted was $1.53 and $2.75, respectively, on the date
of grant using the modified Black-Scholes option-pricing model with the
following weighted-average assumptions: December 31, 1998 - expected
dividend yield 0%, risk-free interest rate of 4.5%, expected volatility
of 84.95%, and an expected life of 7 years, December 31, 1997- expected
dividend yield 0%, risk-free interest rate of 6.3%, expected volatility
of 87.4% and an expected life of 8 years.
(b) 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. The
options were immediately exercisable and were exercised in October 1997.
(c) In April 1997, the Company issued 50,000 shares of restricted common
stock to a consultant pursuant to a private placement transaction in
exchange for a promissory note in the principal amount of $150,000 due on
demand but in no event later than December 31, 1999. The Company recorded
$100,000 as deferred compensation expense, based upon the calculated
value of the restricted common stock issued in 1997.
(d) In the fourth quarter of 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 128, "Earning per Share".
(SFAS 128), as required, and restated the previously reported earnings
per share in conforming with SFAS 128. The new standard specifies the
computation, presentation and disclosure requirements for earnings per
share.
Loss per share for the years ended December 31, 1998 and 1997 are as
follows (in thousands, except per share amounts):
December 31, December 31,
1998 1997
---- ----
Basic and diluted loss per share
Net loss $(2,057,131) $ (1,551,819)
Weighted average shares outstanding 4,094,992 3,790,146
Basic and diluted loss per share $ (.50) $ (.41)
Basic earnings per share are based upon the weighted average number of
common shares outstanding during the period. Diluted earnings per share
are based upon the weighted average number of common shares outstanding
during the period, assuming the issuance of common shares for all
dilutive potential common shares outstanding. The options outstanding are
not dilutive.
(e) In May 1998, the Company sold 36,000 restricted shares of common stock to
certain investors pursuant to a private placement transaction and
realized net proceeds of approximately $146,000 The shares of common
<PAGE>
AVENUE ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
stock cannot be sold, transferred or assigned for a one-year period. The
Company claimed an exemption from the registration requirements of the
Securities Act of 1933 (the "Act") pursuant to Rule 506 of Registration D
of the Act.
(6) Income Taxes
Components of income tax (benefit) are as follows:
December 31, December 31,
1998 1997
---- ----
Federal $ 56,691 $ 146,698
State and local 61,118
----------- ----------
$ 56,691 $207,816
========= ========
Reconciliation of the statutory Federal income tax rate to the Company's
effective tax rate is as follows:
December 31, December 31,
1998 1997
---- ----
Tax (benefit)
at Federal statutory rate of 34% $ (718,699) $ (598,276)
Increase (decrease) in taxes resulting from:
State and local income taxes, net of
federal income tax benefit (56,822) (35,377)
Nondeductible goodwill amortization 95,377 95,377
Other 2,282 3,400
Change in valuation allowance 621,171 327,060
---------- ---------
Total $ (56,691) $ (207,816)
========== ==========
<PAGE>
AVENUE ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The tax effects of temporary differences between the financial reporting
and tax bases of assets and liabilities are as follows:
December 31,
1998
Deferred tax assets
Accrued expenses $ 41,710
Stock options 79,281
Film cost write-down 67,940
NOLs 982,150
1,171,081
Valuation allowance (1,052,090)
Net assets 118,991
Deferred tax liabilities
Unrealized gains (58,432)
State liabilities (60,559)
-----------
Net liabilities (118,991)
----------
Net tax assets $
================
For Federal income tax purposes, the Company has unused net operating
loss carryforwards of approximately $2,470,000 expiring through 2018.
(7) Related Party Transactions
Transactions with GP Strategies
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 GP Strategies. At July 31, 1996, 23,334 shares were
paid. The remaining subscribed shares were paid for in September 1997.
At December 31, 1998, the Company owed GP Strategies $94,481 related to
the payment of certain expenses of the Company by GP Strategies.
<PAGE>
AVENUE ENTERTAINMENT 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 "Hollywood Collection" for all forms of television and video
worldwide. The Hollywood Collection is a series of one-hour motion
picture profiles of Hollywood's biggest star, which are aired by a major
cable network. The distributor also gained the exclusive right to execute
all contracts for the exploitation of these rights. Revenues earned for
the years ended December 31, 1998 and 1997 were $320,000 and $506,000,
respectively. Included in operating expenses was $112,000 and $217,000,
of commissions to Janson Associates incurred in the years ended December
31, 1998 and 1997, respectively. The President of Janson Associates is
related to the Company's Chairman through marriage.
(8) Loan Payable
On May 27, 1997, the Company entered into an unsecured demand note (the
"Note") which provides the Company with borrowings in the principal
amount of $150,000, at prime plus 1%, with Fleet Bank, National
Association. The Note is payable on demand, but in any event not later
than May 27, 1999. As of December 31, 1998, $127,500 had been borrowed
under the Note. The Company believes that it will be able to extend the
note for an additional period on similar terms and conditions.
(9) Postretirement Benefit
Pursuant to an agreement dated September 30, 1996, the Company is
obligated to pay its Chairman, his spouse, or estate, as the case may be,
commencing upon the termination of his employment, monthly payments of
$8,333, for the greater of five years or the remainder of his life. Under
certain circumstances, a reduced benefit may be payable to the Chairman's
wife for a period not to exceed five years from the date of his death.
The Company is accruing $640,000, the 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.
<PAGE>
AVENUE ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) Significant Customers
Significant customers, exceeding 10% of revenue, were as follows (in
percents):
Year ended Year ended
December 31, December 31,
1998 1997
---- ----
A&E Television Networks 17
Janson Associates 39 24
Wayward Son Productions 26
Hallmark Entertainment 40
Largo Entertainment Corp. 15
(11) Comprehensive Income
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 130. "Reporting Comprehensive Income", which establishes standards
for the reporting and display of comprehensive income and its components in
general purpose financial statements for the year ended December 31, 1998. The
following are the components of comprehensive income:
Year ended
December 31, December 31,
1998 1997
--------- -----------
Net loss $ (2,111,826) $ (1,551,819)
Other comprehensive income:
Unrealized gains (losses) on
marketable securities (197,711) 316,561
-------------- ------------
Comprehensive income $ (2,309,537) $ (1,235,258)
============= =============
The components of accumulated comprehensive income, net of related tax
are as follows:
December 31, December 31,
1998 1997
Unrealized gains on
marketable securities $ $ 197,711
----------------- ----------
Accumulated other comprehensive income $ $ 197,711
================= ==========
In June 1998, the Company made the decision to sell in the short-term
its shares of GP Strategies common stock, which are classified on the
Consolidated Balance Sheet as a Marketable security, in order to assist in
funding its working capital needs. The effect of reclassifying these shares as
trading securities from available for sale was a $197,711 decrease in
Accumulated other comprehensive income on the Consolidated Balance Sheet at
December 31, 1998.
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Directors and Executive Officers
The following table sets forth certain information concerning the
directors and officers of the Company:
Name Age Position
Gene Feldman 72 Chairman of the Board, President of Wombat
Cary Brokaw 47 President, Chief Executive Officer and Director
Michael Feldman 31 Executive Vice President and Director
Sheri L. Halfon 42 Senior Vice President, Chief Financial Officer,
and Director
Doug Rowan 60 Director
James A. Janowitz 52 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 GP Strategies since 1995. Michael Feldman
is a Class II Director whose term expires at the 1999 annual meeting of the
Company.
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
<PAGE>
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 2001 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 2001 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.
Section 16(a) Beneficial Ownership Reporting Compliance
The Company believes that during the most recent fiscal year, all
filing requirements applicable to its officers, directors and greater than 10%
beneficial owners were complied with, except that Michael Feldman filed an
untimely report on Form 4.
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
Executive Compensation
The following table sets forth the aggregate compensation paid or
accrued to the Company's executive officers for the services rendered in 1998,
1997 and 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
Awards
Annual Compensation Stock All Other
Salary Bonus Options Compensation
Name and Principal Position Year ($) ($) (#) ($)
- --------------------------- ---- ------- ------ --------- ---------------
<S> <C> <C> <C> <C> <C>
Cary Brokaw 1998 450,000(1) -0- 100,000(2)(3) --
President, Chief Executive 1997 450,000 -0- (3) --
Officer and Director 1996 450,000(4) -0- 300,000(2) --
Gene Feldman 1998 150,000(5) -0- 75,000(3)(6) --
Chairman of the Board, 1997 150,000 -0- (3) --
President of Wombat 1996 150,000 -0- -0- --
Division of the Corporation
Sheri Halfon 1998 104,500(7) -0- 75,000(3)(8) --
Senior Vice President, 1997 120,000(7) -0- (3) --
Chief Financial Officer 1996 95,000(4)(7) -0- -0- --
- -------------------
</TABLE>
(1) Mr. Brokaw's salary for the year pursuant to his employment agreement
was $450,000, of which $97,000 has been deferred by Mr. Brokaw.
(2) Of the 100,000 stock options granted to Mr. Brokaw in 1998, only
40,000 are currently vested and of the 300,000 stock options granted to
Mr. Brokaw in 1996, only 180,000 are currently vested.
(3) On December 10, 1998, the Board of Directors of the Company
determined to cancel certain options which had an exercise price of $3.00
per share, previously granted to the named executive officers in 1997 and
to grant new options at the exercise price of $1.8125 per share, which
was the market price on December 10, 1998. The vesting schedule and
expiration date remained the same.
(4) Prior to completion of the Business Combination on September 30,
1996, Mr. Brokaw's and Ms. Halfon's compensation was paid directly by
Avenue Pictures.
<PAGE>
(5) Mr. Feldman's salary for the year was $150,000, of which $48,000 has
been deferred by Mr. Feldman.
(6) Of the 75,000 stock options granted to Mr. Feldman in 1998, only
30,000 are currently vested.
(7) Includes $51,500, $65,539 and $8,400 for 1998, 1997 and 1996,
respectively, paid to Ms. Halfon by certain companies whose shows were in
production or post-production by the Company.
(8) Of the 75,000 stock options granted to Ms. Halfon in 1998, only
30,000 are currently vested.
<PAGE>
Option Grants in 1998
The following table and notes contain information concerning the grant
of non-qualified stock options in 1998 to the named executive officers pursuant
to the 1997 Plan.
<TABLE>
STOCK OPTION GRANTS IN LAST FISCAL YEAR
<CAPTION>
% of Total Market Price
Number of Options of Underlying
Securities Granted to Exercise Security on
Underlying Employees Price Date of
Options in Fiscal ($ per Grant ($ per Expiration
Name Granted (1) Year share) share) Date
- ---- ----------- ---- ------ ------ ----
<S> <C> <C> <C> <C> <C> <C>
Gene Feldman 75,000 11 1.8125 2.00 2/19/07
Cary Brokaw 100,000 15 1.8125 2.00 2/19/07
Sheri Halfon 75,000 11 1.8125 2.00 2/19/07
- -------------
</TABLE>
(1) On December 10, 1998, the Board of Directors of the Company determined to
cancel certain options which had an exercise price of $3.00 per share,
previously granted to the named executive officers and to grant new options at
the exercise price of $1.8125 per share, which was the market price on December
10, 1998. The vesting schedule (20% per annum) and expiration date remained the
same.
The following table sets forth information concerning the value of
unexercised options as of December 31, 1998 held by the executives named in the
Summary Compensation Table above. No options were exercised during 1998.
<TABLE>
AGGREGATED OPTION EXERCISES AT DECEMBER 31, 1998
AND YEAR-END OPTION VALUES
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options at
Options at Fiscal Year End Fiscal Year End
Name Exercisable (E)/ Unexercisable (U) Exercisable (E)/ Unexercisable (U)(1)
<S> <C> <C> <C> <C>
Gene Feldman 230,000(E) 45,000(U) $370,375(E) $14,063(U)
Cary Brokaw 220,000(E) 180,000(U) 89,000(E) 69,750(U)
Sheri Halfon 30,000(E) 45,000(U) 9,375(E) 14,063(U)
- ----------
(1) Calculated based on the closing price of the Common Stock $2.125 as reported
by the American Stock Exchange on December 31, 1998.
</TABLE>
<PAGE>
Employment Contracts and Termination of Employment and Change in Control
Arrangements
Brokaw Employment Agreement. In connection with the Business
Combination, Mr. Brokaw entered into a five-year employment agreement (the
"Brokaw Employment Agreement") with the Company pursuant to which, among other
things, Mr. Brokaw became the President and Chief Executive Officer of the
Company. The Brokaw Employment Agreement provides Mr. Brokaw with an annual base
salary of $450,000 (which base salary may be paid from any Company source other
than net cash flow generated by Wombat), subject to such increases as may be
made by the Compensation Committee of the Board of Directors. Mr. Brokaw is also
eligible for annual bonuses based upon the performance of Mr. Brokaw and the
Company during the previous fiscal year. Such annual bonuses will be determined
in the discretion of the Compensation Committee. The dollar amount of the annual
bonus will not exceed two times the annual base salary. The Brokaw Employment
Agreement provides that the Company may only terminate Mr. Brokaw's employment
with the Company for "cause." If Mr. Brokaw's employment is terminated due to
death or disability, he will receive his base salary through the date of
termination of employment. Any vested options not exercised prior to the
termination of employment for this reason will remain exercisable for the six
month period beginning on the date of termination. If his employment is
terminated for "Cause" as defined in the Brokaw Employment Agreement, he will be
entitled to the base salary and any accrued annual bonus that has been
determined and awarded, but not paid, through the date of termination of his
employment. Any vested options not exercised prior to the termination of
employment for Cause will remain exercisable until the end of the ninetieth day
following the date of termination. If Mr. Brokaw terminates his employment
following a "Change of Control" as defined in the Brokaw Employment Agreement,
he will receive (i) his earned but unpaid compensation as of the date of the
Change of Control; (ii) continued benefits for the remaining unexpired
employment term; (iii) a lump sum payment on the date of the Change of Control
equal to the future base salary that he would have earned if he had continued
working for the remaining unexpired employment term; and (iv) bonus payments
that would have been made to Mr. Brokaw if he had continued working for the
Company during the remaining unexpired employment term. The Company is entitled
to seek to obtain, and has obtained, $2,000,000 in "key-man" life insurance on
his life. Pursuant to the Brokaw Employment Agreement, Mr. Brokaw was granted
options to purchase up to 300,000 shares of Common Stock for an exercise price
of $1.70 per share. Such stock options will vest in equal installments over the
first five years of Mr. Brokaw's employment with the Company and will be
exercisable for a period of ten years from the date of grant. The Brokaw
Employment Agreement provides for accelerated vesting of all of Mr. Brokaw's
stock options upon a "change of control" of the Company or upon a material
breach of the Brokaw Employment Agreement by the Company. As President and Chief
Executive Officer of the Company, Mr. Brokaw is entitled to certain customary
perquisites, including, without limitation, a car allowance, term life
insurance, and reimbursement of all reasonable travel and entertainment
expenses. In addition, Mr. Brokaw is entitled to participate in all employee
benefit plans offered to executive officers of the Company.
Gene Feldman Employment Agreement. In connection with the Business
Combination, Gene Feldman entered into a five-year employment agreement (the
"Feldman Employment Agreement") with CineMasters pursuant to which, among other
<PAGE>
things, Gene Feldman became the Chairman of CineMasters and President of its
Wombat Division. The Feldman Employment Agreement provides Gene Feldman with an
annual base salary of $150,000 (provided that such base salary is funded solely
out of net cash flow generated by the Wombat Division of CineMasters), subject
to such increases as may be made by the Compensation Committee of the Board of
Directors. Gene Feldman is also eligible for annual bonuses based upon the
performance of Gene Feldman and CineMasters during the previous fiscal year.
Such annual bonuses will be determined in the discretion of the Compensation
Committee. The dollar amount of the annual bonus will not exceed two times the
annual base salary. The Feldman Employment Agreement provides that CineMasters
may only terminate Gene Feldman's employment with CineMasters for "cause." If
Mr. Feldman's employment is terminated due to death or disability, he will
receive his base salary through the date of termination of employment. Any
vested options not exercised prior to the termination of employment for this
reason will remain exercisable for the six month period beginning on the date of
termination. If his employment is terminated for "Cause" as defined in the
Feldman Employment Agreement, he will be entitled to the base salary and any
accrued annual bonus that has been determined and awarded, but not paid, through
the date of termination of his employment. Any vested options not exercised
prior to the termination of employment will remain exercisable until the end of
the ninetieth day following the date of termination. If Mr. Feldman terminates
his employment following a "Change of Control" as defined in the Feldman
Employment Agreement, he will receive (i) his earned but unpaid compensation as
of the date of the Change of Control; (ii) continued benefits for the remaining
unexpired employment term; (iii) a lump sum payment on the date of the Change of
Control equal to the future base salary that he would have earned if he had
continued working for the remaining unexpired employment term; and (iv) bonus
payments that would have been made to Mr. Feldman if he had continued working
for the Company during the remaining unexpired employment term. As chairman of
CineMasters and President of the Wombat Division, Gene Feldman is entitled to
certain customary perquisites, including, without limitation, a car allowance,
term life insurance, and reimbursement of all reasonable travel and
entertainment expenses. In addition, Gene Feldman is entitled to participate in
all employee benefit plans offered to executive officers of CineMasters. In
connection with the Reincorporation, the Gene Feldman Employment Agreement was
amended to indicate that Gene Feldman is the Chairman of the Board of the
Company and the President of Wombat.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL STOCKHOLDERS
The only persons known by the Board of Directors to be the beneficial
owner of more than five percent of the outstanding shares of Common Stock of the
Corporation, as of March 15, 1999, are indicated below:
Name and Address Amount and Nature Percent
of Beneficial Owner of Beneficial Ownership* of Class
Cary Brokaw 1,651,350(1) 38%
c/o Avenue Pictures, Inc.
11755 Wilshire Boulevard
Suite 2250
Los Angeles, CA 90025
GP Strategies Corporation 1,067,900 26%
9 West 57th Street
New York, New York 10019
Gene Feldman 411,700(2) 9%
c/o Avenue Entertainment Group, Inc.
9 West 57th Street
Suite 4170
New York, New York 10019
- ---------------------
* As used in this Proxy Statement, "beneficial ownership" means the sole or
shared power to vote, or to direct the voting of the Corporation's Common Stock
of the sole or shared investment power with respect to such Common Stock.
(1) Includes vested options to purchase up to 180,000 shares of Common Stock of
the Corporation at a price of $1.70 per share, exercisable until September 30,
2006 and vested options to purchase up to 40,000 shares of Common Stock of the
Corporation at a price of $1.8125 per share, exercisable until February 19,
2007. Does not include unvested options to purchase up to 120,000 shares of
Common Stock of the Corporation 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 Corporation at a price of $1.8125 per share, exercisable
until February 19, 2007.
(2) Does not include 17,500 shares of Common Stock of the Corporation and 40,000
vested stock options which are owned by Mr. Feldman's wife, Suzette St. John
Feldman, as to which Mr. Feldman disclaims beneficial ownership. Includes vested
options to purchase up to 200,000 shares of Common Stock of the Corporation at a
price of $0.32 per share, exercisable until August 11, 2000 and vested options
to purchase up to 30,000 shares of Common Stock of the Corporation at a price of
$1.8125 per share, exercisable until February 19, 2007. Does not include
unvested options to purchase up to 45,000 shares of the Common Stock of the
Corporation at a price of $1.8125 per share, exercisable until February 19,
2007.
<PAGE>
SECURITY OWNERSHIP OF DIRECTORS AND NAMED EXECUTIVE OFFICERS
The following table sets forth, as of March 15, 1999, beneficial
ownership of shares of Common Stock of the Company by each director, each of the
named executive officers and all directors and executive officers as a group:
Total Number of Shares Percent of
of Common Stock Common
Name Beneficially Owned Stock(1)
Gene Feldman 397,700(2) 9
Cary Brokaw 1,631,350(3) 38
Michael Feldman 137,000(4)(5) 3
Sheri L. Halfon 30,100(6) 1
Doug Rowan 5,000(7) *
James A. Janowitz -0-(8) *
Directors and Executive 2,210,150(9) 7
Officers as a Group
(7 persons)
- ----------
* The number of shares owned is less than one percent of the outstanding shares.
(1) The percentage of class calculation assumes for each beneficial owner that
all of the options are deemed to be exercised in full only by the named
beneficial owner and that no other options are deemed to be exercised by any
other stockholder.
(2) See footnote 2 to Principal Stockholders table.
(3) See footnote 1 to Principal Stockholders table.
(4) Includes vested options to purchase up to 90,000 shares of Common Stock of
the Corporation at a price of $1.70 per share, which option is exercisable until
September 30, 2006 and vested options to purchase up to 30,000 shares of Common
Stock of the Corporation at a price of $1.8125 per share, exercisable until
February 19, 2007. Does not include unvested options to purchase up to 60,000
shares of Common Stock of the Corporation at a price of $1.70 per share,
exercisable until September 30, 2006 and unvested options to purchase up to
45,000 shares of Common Stock of the Corporation at a price of $1.8125 per
share, exercisable until February 19, 2007.
(5) Michael Feldman is Gene Feldman's nephew.
(6) Includes vested options to purchase up to 30,000 shares of Common Stock of
the Corporation at a price of $1.8125 per share, exercisable until February 19,
2007. Does not include unvested options to purchase up to 45,000 shares of
Common Stock of the Corporation at a price of $1.8125 per share, exercisable
until March 10, 2007.
(7) Includes vested options to purchase up to 4,000 shares of Common Stock of
the Corporation at a price of $1.8125 per share, exercisable until July 1, 2007.
Does not include unvested options to purchase up to 6,000 shares of Common Stock
of the Corporation at a price of $1.8125 per share, exercisable until July 1,
2007.
<PAGE>
(8) Does not include 25,000 shares of Common Stock of the Corporation 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.
(9) Includes 614,000 shares of Common Stock issuable upon exercise of currently
exercisable stock options.
Except for the shares of Avenue Common Stock subject to the options described in
footnotes 1 through 4, and 6 and 7 above, none of such shares is known by the
Corporation to be shares with respect to which such beneficial owner has the
right to acquire beneficial ownership. The Corporation believes the beneficial
holders listed above have sole voting and investment power regarding the shares
shown as being beneficially owned by them.
ITEM 12. 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) 25% of the annual net income (which shall be determined
without deduction for general and administrative expenses) derived by
CineMasters from the original CineMasters library and (ii) $100,000 annually. If
Gene Feldman shall die prior to the exercise of such option, Gene Feldman's
wife, Suzette St. John Feldman, shall following Gene Feldman's death have the
right to exercise such option and to receive such annual payments for a period
of five years following the date of such exercise. If Gene Feldman shall die
after the exercise of such option but prior to the fifth anniversary of the date
of such exercise, Suzette St. John Feldman shall following Gene Feldman's death
be entitled to receive such annual payments for a period of five years following
the date of Gene Feldman's death; provided, however, that such annual payments
shall be reduced from $100,000 to $75,000 following the fifth anniversary of the
date of Gene Feldman's exercise of such option. In addition, if CineMasters
shall determine to sell its library during the first five years following the
exercise of such option by Gene Feldman, CineMasters shall first offer to sell
its library to Gene Feldman based upon a specific price and upon specific terms.
If Gene Feldman does not accept such offer within a reasonable period of time,
CineMasters will then have a limited period of time in which to sell its library
to a third party for a price and upon terms no less favorable to CineMasters
than those offered to Gene Feldman. In connection with the Reincorporation, the
Gene Feldman Exit Option Agreement was amended to replace CineMasters with the
Company.
<PAGE>
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 GP
Strategies Corporation, 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 designees on a six-person
Board of Directors and, except as may be mutually agreed upon, equal
representation on any committee of the Board of Directors. The Stockholders
Agreement provides that all extraordinary transactions (i.e., any merger or
consolidation involving CineMasters or any subsidiary, any public offering, any
sale or other disposition of a material portion of the assets of CineMasters
and/or its subsidiaries, any acquisition or investment in excess of $250,000,
etc.) shall require the prior approval of the Board of Directors of CineMasters.
In addition, the Stockholders Agreement provides that, except for ordinary
course (i) expenditures for office rent, (ii) expenditures for selling, general,
and administrative expenses, and (iii) out-of-pocket development expenditures
not in excess of $500,000 during each of the first two fiscal years following
consummation of the Business Combination, aggregate expenditures in excess of
$250,000 in any fiscal year will require the prior approval of the Board of
Directors of CineMasters. The Stockholders Agreement also provides each of Mr.
Brokaw and the members of the Feldman Group with reciprocal rights of first
negotiation and refusal and tag-along rights in the event that either party
wishes to dispose of some or all of his, her, or its shares of Common Stock in a
privately-negotiated transaction. In connection with the Reincorporation, the
Stockholders Agreement was amended to replace CineMasters with the Company.
Distribution Agreement. On March 1, July 1, 1995 and April 28, 1996,
the Company entered into an agreement with Janson whereby Janson (the
distributor) was granted sole and exclusive rights to license essentially all
the programs of the Company's documentary film library 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 the Company's Chairman, Gene Feldman,
through marriage.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The Exhibits listed on the accompanying Index to Exhibits are filed as part
of this Annual Report.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
AVENUE ENTERTAINMENT GROUP, INC.
Cary Brokaw
President and Chief Executive Officer
Dated: April 15, 1999
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
Signature Title
Gene Feldman Chairman of the Board
Cary Brokaw President and Chief Executive Officer and
Director
Sheri L. Halfon Senior Vice President, Chief Financial Officer
and Director
Michael D. Feldman Executive Vice President and Director
Doug Rowan Director
Ira J. Sobotko Principal Financial and Accounting Officer
Dated: April 15, 1999
<PAGE>
(a) INDEX TO EXHIBITS
3 Restated Certificate of Incorporation.
Incorporated herein by reference to
Exhibit 3 (I) of the Company's Registration
Statement on Form 10-SB, as amended,
filed on April 9, 1997.
3.1 By-Laws. Incorporated herein by reference to
Exhibit 3(ii) of the Company's Registration
Statement on Form 10-SB, as amended, filed
on April 9, 1997.
10 Share Exchange Agreement, dated as of
September 30, 1996, among Cary Brokaw,
Avenue Pictures, Inc. and The CineMasters
Group, Inc. Incorporated herein by reference
to Exhibit 10(a)(i) of the Company's
Registration Statement on Form 10-SB, as
amended, filed on April 9, 1997.
10.1 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. Incorporated herein by
reference to Exhibit 10(a) (ii) of the
Company's Registration Statement on Form
10-SB, as amended, filed on April 9, 1997.
10.2 Exit Option Agreement, dated as of September
30, 1996, between The CineMasters Group,
Inc. and Gene Feldman. Incorporated herein
by reference to Exhibit 10(a)(iii) of the
Company's Registration Statement on Form
10-SB, as amended, filed on April 9, 1997.
10.3 Distribution Agreement, dated April 28,
1996, between Janson Associates, Inc. and
The CineMasters, Group, Inc. Incorporated
herein by reference to Exhibit 10(b)(ii)(1)
of the Company's Registration Statement on
Form 10-SB, as amended, filed on April 9,
1997.
15
<PAGE>
10.4 Output Agreement, dated October 1, 1994
between Avenue Pictures, Inc. and RHI
Entertainment, Inc. Incorporated herein by
reference to Exhibit 10(b)(ii)(6) of the
Company's Registration Statement on Form
10-SB, as amended, filed on April 9, 1997.
10.5 Promissory Note between Avenue Entertainment
Group, Inc. and Fleet Bank, National
Association. Incorporated herein by
reference to Exhibit 10(b)(ii)(7) of the
Company's Registration Statement on Form
10-SB, as amended, filed on April 9, 1997.
10.6 Avenue Entertainment Group, Inc. Stock
Option and Long Term Incentive
Compensation Plan. Incorporated herein by
reference to Exhibit 10(c)(i) of the
Company's Registration Statement on Form
10-SB, as amended, filed on April 9, 1997.
10.7 Employment Agreement, dated as of September
30, 1996, among The CineMasters Group, Inc.,
Avenue Pictures, Inc. and Cary Brokaw.
Incorporated herein by reference to Exhibit
10(c)(ii) of the Company's Registration
Statement on Form 10-SB, as amended, filed
on April 9, 1997.
10.8 Employment Agreement, dated as of September
30, 1996, among The CineMasters Group, Inc.,
Avenue Pictures, Inc. and Gene Feldman.
Incorporated herein by reference to Exhibit
10.(c)(iii) of the Company's Registration
Statement on Form 10-SB, as amended, filed
on April 9, 1997.
10.9 Option Agreement, dated as of September 30,
1996, between The CineMasters Group, Inc.
and Cary Brokaw. Incorporated herein by
reference to Exhibit 10(c)(iv) of the
Company's Registration Statement on Form
10-SB, as amended, filed on April 9, 1997.
<PAGE>
10.10 Form of Option Grant Agreement, dated as of
September 30, 1996, between Avenue
Entertainment Group, Inc. and the Optionee.
Incorporated herein by reference to Exhibit
10(c)(v) of the Company's Registration
Statement on Form 10-SB, as amended, filed
on April 9, 1997.
10.11 Form of Option Grant Agreement, dated as of
March 10, 1997 between Avenue Entertainment
Group, Inc. and the Optionee. Incorporated
herein by reference to Exhibit 10(c)(vi) of
the Company's Registration Statement on Form
10-SB, as amended, filed on April 9, 1997.
21 Subsidiaries of the Company *
27 Financial Data Schedule *
- --------------
* Filed herewith.
(b) There were no Reports on Form 8-K filed by the Registrant during the last
quarter of the period covered by this report.
Exhibit 21
Subsidiaries of the Registrant
Jurisdiction
Of
Incorporation
Avenue Pictures, Inc.* Delaware
Wombat Productions, Inc.* Delaware
- -------
*100% owned
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<NAME> AVENUE ENTERTAINMENT GROUP, INC.
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