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, 1999
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
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
11111 Santa Monica Blvd., Suite 525, Los Angeles, CA 90025
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(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:
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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. $4,748,660
As of March 15, 2000, 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 $2,708,977 based on
the closing price of the Common Stock on the American Stock Exchange on March
15, 2000.
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, 2000
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Common Stock, par value $.01 per share 4,589,030 shares
DOCUMENTS INCORPORATED BY REFERENCE: NONE
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TABLE OF CONTENTS
Page
PART I
Item 1. Description of Business.............................2
Item 2. Description of Property............................17
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....................18
Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations......18
Item 7. Financial Statements...............................23
Item 8. Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure.............42
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...................48
Item 12. Certain Relationships and Related
Transactions.......................................51
Item 13. Exhibits and Reports on Form 8-K...................53
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PART I.
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
Productions ("Wombat Productions"), (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
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production and release of Gus Van Sant's Drug Store Cowboy, James Foley's After
Dark My Sweet, Michael Lindsay-Hogg's The Object of Beauty, Jane Campion's
Sweetie, and Jim Sheridan's The Field. Mr. Brokaw was the producer of Robert
Altman's The Player, the celebrated and successful comedy which was nominated
for five Academy awards, including Best Picture. Mr. Brokaw also produced Robert
Altman's Short Cuts, which was nominated for several Academy Awards. 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. In February 1998, the Company
completed Finding Graceland starring Harvey Keitel, Johnathan Schaech, and
Bridget Fonda which was fully financed by Largo Entertainment Corp., a wholly
owned subsidiary of JVC Entertainment, Inc. All domestic rights to the picture
were licensed to the Columbia/TriStar Motion Picture Group and Largo licensed
the picture internationally.
The Company has completed 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. Financed by way of an insurance backed bank loan, the Company
has no financial exposure with respect to the film's success. Subject to the
bank's first position lien, the Company holds the copyright to the film in
perpetuity. The Company is in the process of licensing the distribution rights
to the film.
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
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.
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The Company has recently concluded a three year non-exclusive multiple
co-financing agreement with Intermedia. Intermedia is one of the pre-eminent
foreign sales companies in the film industry. They have co-financed and licensed
such films as Sliding Doors, Hilary and Jackie, Playing by Heart, Woody Allen's
Sweet and Lowdown, and upcoming The Wedding Planner starring Jennifer Lopez and
Matthew McConaughey. The agreement provides Avenue with favorable distribution
terms for its films in the international market, co-financing for its feature
films providing for co-ownership of the copyright of most films, favorable
producing fees and funding for the film development expenses of projects
undertaken with Intermedia.
Current feature film projects for the Company include the following
titles: The Courier, Original Sin, Blessed Virgins, Easy Money Blues, Phobic,
and Mindhunters.
The Company is scheduled to produce The Courier which would be
co-financed and licensed internationally by Intermedia. Developed by the
Company, the original screenplay by Michael Brandt and Derek Haas, concerns a
courier hired to make the ultimate drop to a mysterious and exceptionally
powerful man who is considered `unfindable'. Brad Pitt has expressed interest 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 2000.
Original Sin is a highly suspenseful thriller written by William Brown
and Antonella Osborne about a celebrated defense attorney whose life is turned
upside down when he is perfectly framed for his ex-wife's murder. Stuart Baird
(Executive Decision, U.S. Marshalls) is attached to direct and Intermedia will
co-finance and license the film internationally. Intermedia is currently in
negotiation with a major studio for the film's domestic distribution rights. The
Company hopes to commence production in October 2000.
Blessed Virgins is a highly original teen comedy with strong dramatic
underpinnings written by Sarah Kelly (Full Tilt Boogie) who will also direct.
The Company has concluded an agreement with Capitol Films, a well respected
London based film sales company who will co-finance or fully finance the film
and license the film internationally subject to cast. Casting efforts are
underway and the Company hopes to commence production late summer 2000.
The Company has optioned the original screenplay Easy Money Blues by
John Cork, a provocative and sweeping serio-comic 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 2000.
Phobic is a highly charged and terrifying thriller written by Chris
Bertolet about a former New York homicide detective drawn back into the search
for a serial killer who kills his victims based on their worst feat. Intermedia
will co-finance the film (and license it internationally) and the Company is in
negotiation with a potential director. The Company hopes to commence production
in early 2001.
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The Company is also developing The Judge, an original screenplay by
Gustave Reiniger, about a New Orleans attorney recruited to a Federal judgeship
only to find himself a target in the massive corruption surrounding a gaming
empire. Intermedia is funding development and will co-finance (and license
internationally) subject to cast. The Company hopes to commence production in
early 2001.
Mindhunters is a screenplay developed by the Company and sold to
Twentieth Century Fox. Written by Wayne Kramer and Kevin Brodbin, 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 August 2000.
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.
TriStar has placed this project in turnaround and the Company is in discussions
with several potential directors and two other studios to finance the film.
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.
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.
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The Company has completed production of the time travel adventure The
Timeshifters as an original two-hour movie for TBS Superstation, Turner
Broadcasting's flagship network seen in more than 76 million households. The
movie premiered in October 1999. Avenue owns the film copyright and has licensed
the film internationally through Carlton International.
The Company is in negotiation with HBO to produce a cable television
movie based on this year's Pulitzer Prize winning play Wit written by Margaret
Edson. With HBO, the Company is in negotiation with a major actress and major
director in connection with their involvement in the film. The Company hopes to
commence production by September 2000.
The Company intends to produce a six hour cable mini-series Angels in
America, based on the Pulitzer Prize and Tony Award winning play by Tony
Kushner. The Company is in discussions with a potential director and 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 mini-series. The Company
hopes to start filming in fall 2000.
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
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 retained 100%
ownership in its made-for-television movies subject to the rights licensed to
the initial domestic network/cable broadcaster and Hallmark.
Avenue Pictures had an output agreement which expired in January 2000
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. The Company 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 and
Avenue Pictures retains 100% ownership of the copyright to its television
programs. Pearson pays the Company a substantial predetermined advance against
its distribution rights to all such movies. Pearson also provided the Company a
recoupable contribution to its operating overhead on a monthly basis and a
development fund on an annual basis.
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The Pearson agreement does not 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 will provide
such services to HBO as a producer-for-hire on Wit.
The Company has approximately eleven television movies in development,
including a four hour CBS 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. Written by Ronni Kerns, 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 The Chimes of
Christmas (CBS) based on Charles Dicken's other Christmas story and written by
Mark Medoff (Children of a Lesser God), Special Occasions (CBS) written by
Bernard Slade (Tribute, Same Time, Next Year), The Replacement Husband (NBC),
The Second Coming (USA), Checking Out (VH1) and a mini-series based on the
stories of the Brothers Grimm titled Enchanted Kingdom. 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
The Company is currently in development with several television series.
These series include Emily Undercover a detective show conceived by Stanley
Wilson, Dylan written by Michael Brandt and Derek Haas (The Courier) about a
female bounty hunter and Gotham created by Gerald and Bridget Dobson (General
Hospital, Santa Barbara) which is a contemporary Dickenesque one hour drama.
One Hour-Profiles
The Hollywood Collection
Through its subsidiary, Wombat Productions, 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 programs have been aired by PBS
and major cable networks in the United States and by television stations around
the world. 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:
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"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"
"Alan Ladd: The True Quiet Man" "Clint Eastwood: the Man From Malpaso"**
* Copyright Owned by Turner Broadcasting System.
** Licensed to Warner Home Video
Other Entertainment Profiles
In 1998, a new series of programs was begun by Wombat Productions for
the Art and Film Channel, Bravo, profiling entertainment figures outside the
motion-picture industry. The first of these productions was a
performance/profile of the Broadway diva, Betty Buckley: In Performance & In
Person, and presented on the series Bravo Profiles in the fall of 1999. Also
produced and presented the same year on Bravo Profiles was The Worlds of Harry
Connick, Jr., an hour-length profile on the gifted musician, composer, actor
Harry Connick, Jr.
Currently, Wombat is in production on a program for Bravo Profiles on
the master magician David Copperfield, with Mr. Copperfield's full cooperation.
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.
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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
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.
In order to provide maximum exposure of the twenty-eight titles of The Hollywood
Collection available in the home-video market in the United States and Canada,
Wombat entered into an agreement with MPI, one of the premiere home-video
companies for documentary and performance programs. In June of 2000, the entire
available collection will be offered to the vast special-interest market via
home-video stores, MPI's 800 number provided on its web sites, www.mpimedia.com
and www.hollywoodcollection.com, which are also connected through the Yahoo! and
Amazon web sites. Having successfully exploited programming opportunities
deriving from the world of entertainment, Wombat is currently exploring other
subject areas for programs. Following up its license agreement with MPI Home
Video, Wombat is currently in discussions that could lead to joint ventures in
programming with WPA Film Library, one of the worlds largest archives of stock
footage and a wholly owned subsidiary of MPI Media Group.
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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.
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 had seen a significant drop in
sales to overseas buyers. This trend now seems to be reversing. Part of the
reason for this reversal may be that The Hollywood Collection profiles deal with
stars of special interest to older moviegoers and frequently involve on-camera
participation of the profiled star. Also, the development of digital video and
the increasing number of new delivery systems in new areas of the world are
creating a renewed hunger for this programming.
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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 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 58% of its total revenue
for the year ended December 31, 1999 from TBS Superstation ("TBS") and 27% of
its total revenue for the year ended December 31, 1999 from Carlton
International ("Carlton") both related to the television movie The Timeshifters.
Employees
The Company has 9 full time employees.
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, The Full Monty and The Blair Witch Project. Indeed, given the relatively
small financial risk of producing and releasing such films, all of the major
studios have started or are studying the feasibility of production and
distribution units focusing on smaller, independent-type films.
The growth of this product and market segment should provide
opportunities for the Company which is one of the pioneers in this area.
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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
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.
<PAGE>
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:
<TABLE>
Months After Initial Approximate
<CAPTION>
Marketplace Domestic Theatrical Release Release Period
- ------------------- --------------------------- --------------
<S> <C>
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.
</TABLE>
A substantial portion of a film's ultimate revenues are generated in a
film's initial distribution cycle (generally the first five years after the
film's initial domestic theatrical release). Commercially successful motion
pictures, however, may continue to generate revenues after the film's initial
distribution cycle from the relicensing of distribution rights in certain media,
including television and home video, and from the licensing of distribution
rights with respect to new media and technologies.
Theatrical. The theatrical distribution of a motion picture involves
the licensing and booking of the motion picture to theatrical exhibitors, the
promotion of the picture through advertising and publicity campaigns, and the
manufacture of release prints from the film negative. The size and success of
the promotional advertising campaign can materially affect the financial
performance of the film. Moreover, as the vast majority of these costs
(primarily advertising costs) are incurred prior to the first weekend of the
film's domestic theatrical release, there is not necessarily a correlation
between these costs and the film's ultimate box office performance. In addition,
the ability to distribute a picture during peak exhibition seasons, including
the summer months and the Christmas holidays, may affect the theatrical success
of the picture.
<PAGE>
The distributor and theatrical exhibitor generally enter into license
agreements providing for the exhibitor's payment to the distributor of a
percentage of box office receipts after deducting the exhibitor's overhead or a
flat working amount. The percentage generally ranges from 45-60% and may change
for each week the film plays in a specific theatre, depending on the success of
the picture at the box office and other factors. The balance ("gross film
rentals") is remitted to the distributor. The distributor then retains a
distribution fee from the gross film rentals and recoups the costs of
distributing the film, which consist primarily of advertising, marketing, and
production cost, and the cost of manufacturing release prints. The balance of
film rentals, if any, after recouping any advance or minimum guarantee
previously paid to producer and interest thereon is then paid to the producer
based on a predetermined split between the producer and distributor.
Home Video. A motion picture typically becomes available for
videocassette distribution within four to six months after its initial domestic
theatrical release. Home video distribution consists of the promotion and sale
of videocassettes to local, regional and national video retailers which rent or
sell videocassettes to consumers primarily for home viewing. The market for
videocassettes for home use has expanded rapidly over the past ten years,
although the rate of growth in this market has slowed in recent years. Most
films are initially made available in videocassette form at a wholesale price of
$55 to $60 and are sold at that price primarily to video rental stores, which
rent the cassettes to consumers. Owners of films generally do not share in
rental income. Following the initial marketing period, selected films are
remarketed at a wholesale price of $10 to $15 or less for sale to consumers.
These "sell-through" arrangements are used most often with films that will
appeal to a broad marketplace or to children. Some films are initially offered
at a price designed for sell-through rather than rental when it is believed that
the ownership demand by consumers will result in a sufficient level of sales to
justify the reduced margin on each cassette sold. Home video arrangements in
international territories are similar to those in domestic territories except
that the wholesale prices may differ.
Television. Television rights are generally licensed first to
pay-per-view for an exhibition period within six to nine months following
initial domestic theatrical release, then to pay television approximately twelve
to fifteen months after initial domestic theatrical release, thereafter in
certain cases to free television for an exhibition period, and then to pay
television again. These films are then syndicated to either independent stations
or basic cable outlets. Pay-per-view television allows subscribers to pay for
individual programs, including recently released movies and live sporting, music
and other events on a per use basis. Pay television allows cable television
subscribers to view such services as HBO/Cinemax, Showtime/The Movie Channel,
Starz, or Encore Media Services offered by their cable system operators for a
monthly subscription fee. Since groups of motion pictures are typically packaged
and licensed for exhibition on television over a period of time, revenues from
these television licensing "packages" may be received over a period that extends
beyond five years from the initial domestic theatrical release of a particular
film. Motion pictures are also "packaged" and licensed for television broadcast
in international markets.
Non-Theatrical and Other Rights. Films may be licensed for use by
airlines, schools, public libraries, community groups, the military,
correctional facilities, ships at sea, and others. Musical compositions
contained in a film which have been commissioned for that film may be licensed
for sound recording, public performances, and sheet music publication. A
soundtrack album may be released including music contained in a film. Rights in
motion pictures may be licensed to merchandisers for the manufacturer of
products such as video games, toys, T-shirts, posters, and other merchandise.
Rights may also be licensed to create novelizations of the screenplay and other
related book publications.
<PAGE>
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.
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 leases for itself and Avenue Pictures
approximately 4,000 square feet of office space at its corporate headquarters at
11111 Santa Monica Boulevard, Suite 525, Los Angeles, California 90025 pursuant
to a lease that expires October 18, 2004. The rent for such space is
approximately $11,000 per month.
Management believes the properties herein described are adequate to
handle current and short term projected business.
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.
<PAGE>
PART II
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". The following table sets forth the high
and low sales prices for the Common Stock on the AMEX for the years ended
December 31, 1999 and 1998.
1999 High Sale Low Sale
---- --------- --------
1st Quarter $3.75 $1.94
2nd Quarter $2.38 $1.00
3rd Quarter $2.12 $1.00
4th Quarter $1.75 $.375
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
As of March 15, 2000, there were 158 holders of record of Common Stock.
On March 15, 2000, the closing price of the Common Stock on the
American Stock Exchange was $1.875.
DIVIDEND POLICY
The Company anticipates that, for the foreseeable future, earnings, if
any, 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".
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.
<PAGE>
Liquidity and Capital Resources
At December 31, 1999, the Company had approximately $476,000 of cash.
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 in the past three years. The Company
has a working capital deficiency and has an accumulated deficit of $4,755,000
through December 31, 1999. 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 12, 2000 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, 1999 the Company had a loss before
income taxes of $1,369,000 as compared to a loss of $2,114,000 for the year
ended December 31, 1998. The decreased loss in 1999 was primarily the result of
increased revenue earned in 1999 and reduced selling, general and administrative
expenses.
Revenues
Revenues for the year ended December 31, 1999 were approximately
$4,749,000 as compared to $829,000 for the year ended December 31, 1998. The
increased revenues for the year were primarily the result of license fees
related to the production of The Timeshifters. In 1999, the Company earned
$95,000 in additional producer fees related to the feature film Wayward Son, as
well as $332,000 of revenue from the licensing of rights to its programming in
secondary markets through Janson Associates and Bravo. In addition, the Company
received development fees during 1999 for various projects. Revenues for the
year ended December 31, 1998 were derived primarily from the production of
Wayward Son. In addition, the Company earned $320,000 of revenue from licensing
of rights to its programming in secondary markets through Janson Associates. For
the year ended December 31, 1999, approximately 58% of the Company's revenues
were earned from TBS and 27% from Hamdon, both related to The Timeshifters.
<PAGE>
Film Production Costs
Film production costs for the year ended December 31, 1999 were
$4,033,000 as compared to $718,000 for the year ended December 31, 1998. The
increased film production costs were the result of increased revenue recognized
during the year. Included in film production costs for 1999, is $3,700,000
related to amortization of The Timeshifters. Film production costs for the year
ended December 31, 1998 can be attributed to the film amortization of
approximately $628,000 related to the Company's documentary films and licensing
activities, including a $225,000 write down taken on several films in the
Hollywood Collection, 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, 1999 and 1998 were $2,057,000 and $2,425,000,
respectively. 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 1999 and 1998. The
remaining SG&A costs for 1999 and 1998 relate to salaries, occupancy costs and
professional fees. The reduced costs in 1999 were primarily attributable to the
efforts to reduce expenses and personnel costs.
Income Taxes
For the years ended December 31, 1999 and 1998, the Company had an
income tax expense (benefit) of $1,700 and ($57,000), 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, 1997.
Recent Developments
The Company received a letter from the American Stock Exchange ("AMEX")
notifying the Company that it has fallen below certain of AMEX's continued
listing guidelines because of the Company's recurring losses. The Company
attended a meeting with AMEX on November 16, 1999 to discuss its listing
eligibility. As a result of this meeting AMEX informed the Company that they
would be granted an extension until after the filing of the Company's year- end
financial statements to enable the Company to satisfy the listing criteria. The
Company is currently preparing a package for presentation to the AMEX. However,
there can be no assurance that the Common Stock will not be delisted in the
future.
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 11 to the Consolidated Financial Statements.
<PAGE>
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
During 1999, the Company completed any required modifications to its
critical systems and applications relating to year 2000 issues. The Company also
completed a survey of its significant suppliers to assess their vulnerability if
these companies were to fail to remediate their year 2000 issues. The responses
received indicated that the Company's suppliers were aware of the year 2000
issue and were implementing all necessary changes prior to the end of calendar
year 1999. The Company also formulated contingency plans to ensure that
business-critical processes were protected from disruption and will continue to
function during and after the year 2000. During 1999, the Company did not incur
any material costs in connection with identifying, evaluating or remediating
year 2000 issues.
The Company's business and operations experienced no material adverse
effects from the calendar change to the year 2000 or from the leap year that
occurred in 2000, and we have not been notified of any disruptions to or
failures in the systems of any of our suppliers.
The Company will continue to monitor our information technology and
non-information technology systems and those of third parties with whom we
conduct business throughout the year 2000 to ensure that any latent year 2000
issues that may arise are addressed promptly. Although we do not anticipate any
additional expenditures relating to year 2000 compliance, we cannot provide any
assurance as to the magnitude of any future costs until significant time has
passed.
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; 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.
<PAGE>
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 24
Consolidated Balance Sheet as of December 31, 1999 25
Consolidated Statements of Operations for the years ended
December 31, 1999 and 1998 26
Consolidated Statement of Stockholders' Equity for the
years ended December 31, 1999 and 1998 27
Consolidated Statement of Cash Flows for the years ended
December 31, 1999 and 1998 28
Notes to Consolidated Financial Statements 30
<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, 1999 and the related
consolidated statements of operations, stockholders' equity and cash
flows for each of the years in two-year period ended December 31, 1999.
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, 1999 and the
results of its operations and its cash flows for each of the years in
the two-year period ended December 31, 1999 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, 1999. 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.
/s/ KPMG LLP
New York, New York
April 12, 2000
<PAGE>
AVENUE ENTERTAINMENT GROUP, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
Assets
Cash $ 476,198
Accounts receivable 652,429
Income tax receivable 29,703
Film costs, net 959,850
Property and equipment, net 72,664
Goodwill 1,893,509
Other assets 18,169
-----------
Total assets $ 4,102,522
===========
Liabilities and Stockholders' Equity
Accounts payable and accrued expenses $ 1,151,045
Deferred Income 149,128
Loan payable 277,500
Deferred compensation 340,783
Due to related party 99,172
-----------
Total liabilities 2,017,628
-----------
Commitments and contingencies
Stockholders' Equity:
Common stock, par value $.01 per share 45,890
Additional paid-in capital 6,947,894
Deficit (4,755,203)
Treasury Stock (3,687)
Note receivable for common stock (150,000)
------------
Total stockholders' equity 2,084,894
-----------
Total liabilities and stockholders' equity $ 4,102,522
===========
See accompanying notes to consolidated financial statements.
<PAGE>
AVENUE ENTERTAINMENT GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
1999 1998
---- ----
Operating revenues 4,748,660 $ 828,732
------------ -----------
Costs and expenses:
Film production costs 4,033,211 717,915
Selling, general and
administrative expenses 2,056,838 2,425,597
------------ ------------
Total costs and expenses 6,090,049 3,143,512
------------ ------------
Operating loss (1,341,389) (2,314,780)
Unrealized gain on trading securities 0 135,888
Gain (loss) on sale of investments (27,198) 65,070
------------- ------------
Loss before income taxes (1,368,587) (2,113,822)
Income tax expense (benefit) 1,667 (56,691)
------------ --------------
Net loss $ (1,370,254) $ (2,057,131)
============ =============
Basic and diluted loss
per common share $ (.32) $ (.50)
------------ ----------------
See accompanying notes to consolidated financial statements.
<PAGE>
AVENUE ENTERTAINMENT GROUP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Retained other Stock
Number of Treasury Paid-in earnings comprehensive subscription
Shares Amount Stock capital (deficit) income receivable Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 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)
Other comprehensive income (197,711) (197,711)
Total comprehensive income (2,254,842)
Issuance of common stock 36,000 360 145,440 145,800
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
- ------------------------------------------------------------------------------------------------------------------------
Net loss and total comprehensive
loss (1,370,254) (1,370,254)
Stock option compensation expense 37,500 37,500
Issuance of Common Stock 480,192 4,802 495,198 500,000
Purchase of Treasury Stock (3,687) (3,687)
Balance, December 31, 1999 4,589,030 $45,890 $(3,687) $6,947,894 $(4,755,203) $ 0 $(150,000) $2,084,894
- ------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
AVENUE ENTERTAINMENT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
1999 1998
---- ----
Cash flows from operating activities
<S> <C> <C>
Net loss $ (1,370,254) (2,057,131)
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities:
Depreciation 23,864 23,859
Amortization - film production costs 3,886,231 702,172
Amortization - goodwill 280,520 280,520
Loss on disposal of fixed assets 465
(Gain) loss on sale of investments 27,198 (65,070)
Unrealized (gain) loss on trading securities 0 (135,888)
Proceeds from sale of marketable securities 312,518 228,048
Stock compensation 37,500 37,500
Changes in assets and liabilities affecting net income:
Accounts receivable (518,617) 17,977
Film costs (3,754,435) (312,247)
Other assets 11,597 (11,057)
Accounts payable and accrued expenses 126,183 271,638
Deferred compensation 195,777 145,006
Deferred Income 149,128
Income taxes receivable 15,000
Due to related party 4,691 __________
--------------
Net cash used in operating
expenses (587,634) (859,673)
Cash flows from investing activities:
Proceeds from disposal of fixed assets 1,360
Purchase of equipment (11,081) (8,775)
- ----- -------- ---------------
Net cash used in investing activities (9,721) (8,775)
------------------------------------
(Continued)
</TABLE>
<PAGE>
AVENUE ENTERTAINMENT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
Years ended December 31,
1999 1998
---- ----
Cash flows from financing activities:
Proceeds from the issuance of
<S> <C> <C>
common stock $ 500,000 $ 145,800
Treasury stock (3,687)
Proceeds from issuance of short term
debt, net 150,000
Principal payments of capital
lease obligations ________ (8,459)
-------------
Net cash provided by financing activities 646,313 137,341
---------- -----------
Net increase (decrease) in cash 48,958 (731,107)
Cash at beginning of year 427,240 1,158,347
---------- ------------
Cash at end of year $ 476,198 $ 427,240
============= ============
Supplemental cash flow information: Cash paid during the year for:
Interest expense $ 10,335 $ 12,701
Income taxes $ 1,667 $ 10,222
See accompanying notes to consolidated financial statements.
</TABLE>
<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, 1999. The Company has a working capital deficiency and has
an accumulated deficit of $4,755,000 through December 31, 1999. 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.
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.
<PAGE>
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,
1999 and 1998 was $911,690 and $631,170.
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
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.
<PAGE>
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.
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, 1999 and 1998, 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.
<PAGE>
(2) Film Costs
Film costs consist of the following:
December 31,
1999
In process or development $ 267,404
Released, net of accumulated amortization of $16,341,477 692,446
$ 959,850
Based upon the Company's present estimates of anticipated future revenues
at December 31, 1999, approximately 75% of the net film costs related to
released product will be amortized during the five-year period ending
December 31, 2004.
(3) Property and Equipment
The major classes of property and equipment consist of the following:
Useful December 31,
life 1999
Machinery and equipment 4 to 5 years $ 229,368
Furniture and fixtures 10 years 29,495
258,863
Less accumulated depreciation (186,199)
----------
$ 72,664
Depreciation expense was $23,864 and $23,859 for the year ended December
31, 1999 and 1998.
(4) Commitments and Contingencies
Leases
The Company is obligated under a lease for office space, which requires
minimum annual rentals, plus increases based on real estate taxes and
operating costs. In addition to a security deposit of $12,061, the
Company delivered a letter of credit in the amount of $82,000 issued by
City National Bank.
<PAGE>
Rent expense was $116,793 and $156,166 for the years ended December 31,
1999 and 1998, respectively.
Minimum annual rental commitments at December 31, 1999 under the
noncancelable operating leases are as follows:
2000 $ 131,568
2001 131,568
2002 131,568
2003 131,568
2004 98,676
------
Total minimum obligations $ 624,948
==========
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 1999, the President and Chairman
deferred $100,000 and $105,000 of their compensation, respectively.
(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, 1999,
1,028,500 options are exercisable.
<PAGE>
Option activity was as follows:
<TABLE>
<CAPTION>
Weighted
average
Number of Price range exercisable
shares per share price
<S> <C> <C> <C> <C> <C>
Outstanding at January 1, 1998 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
--------- -------------- --------
Options Cancelled (55,000) .32 - 1.81 1.67
-------- -------------- --------
Outstanding at December 31, 1999 1,356,500 .32 - 1.81 1.45
------------ -------------- --------
</TABLE>
The Company recorded compensation expense related to stock option granted
at prices less than market value totaling $37,500 and $37,500 for the years
ended December 31, 1999 and 1998.
At December 31, 1999, the weighted average remaining contractual life of
all outstanding options was 5.4 years.
<PAGE>
The following table summarizes information about the Plan's options
outstanding at December 31, 1999:
Weighted
Weighted average
Number Range of average years Number
Outstanding exercise prices exercise price remaining exercisable
------------------------------------------------------------------------------
1,070,000 $1.70 - 1.81 $1.76 4.12 742,000
286,500 .32 .32 .7 286,500
-----------------------------------------------------------------------------
1,356,500 .32 - 1.81 1.45 5.4 1,028,500
----------------------------------------------------------------------------
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,
1999 1998
---- ----
Net loss As reported $(1,370,254) $(2,057,131)
Pro forma (1,515,283) (2,315,464)
Basic and diluted
loss per share As reported (.32) (.50)
Pro forma (.35) (.57)
Pro forma net loss reflects only options granted in the years ended
December 31, 1999 and 1998. Therefore, the full impact of calculating
compensation cost for stock options under SFAS No. 123 is not 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.
<PAGE>
At December 31, 1998, the per share weighted-average fair value of stock
options granted was $1.53, 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.
(b) 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, 1999 and 1998 are as
follows (in thousands, except per share amounts):
December 31, December 31,
1999 1998
---- ----
Basic and diluted loss per share
Net loss $(1,370,254) $ (2,057,131)
Weighted average shares outstanding 4,298,284 4,094,992
Basic and diluted loss per share $ (.32) $ (.50)
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.
<PAGE>
(c) 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
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.
(d) In August 1999, the Company sold 480,192 shares of Common Stock and a
Warrant to purchase 500,000 shares of Common Stock which expires August
2002 (the "Warrant") to certain investors pursuant to a private placement
transaction. The Warrant is exercisable at an exercise price of $2.00 per
share. The shares of Common Stock and the shares of Common Stock issuable
upon exercise of the Warrant cannot be sold, transferred, pledged or
assigned for a one-year period. The Company claimed exemption from the
registration requirements of the Securities Act of 1933 (the "Act")
pursuant to Rule 506 of Regulation D. of the Act.
(6) Income Taxes
Components of income tax expense (benefit) are as follows:
December 31, December 31,
1999 1998
---- ----
Federal $ (56,691)
State and local $ 1,667
---------
$ 1,667 $(56,691)
========== =========
Reconciliation of the statutory Federal income tax rate to the Company's
effective tax rate is as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
---- ----
Tax (benefit)
<S> <C> <C> <C> <C>
at Federal statutory rate of 34% $ ( 465,320) $ (718,699)
Increase (decrease) in taxes resulting from:
State and local income taxes, net of
federal income tax benefit ( 50,023) (56,822)
Nondeductible goodwill amortization 95,377 95,377
Other 1,266 2,282
Change in valuation allowance 420,367 621,171
------------- ---------
Total $ 1,667 $ (56,691)
============== =========
</TABLE>
<PAGE>
The tax effects of temporary differences between the financial reporting
and tax bases of assets and liabilities are as follows:
1999
----
Deferred tax assets
Accrued expenses $ 308,025
Stock options 95,407
Film cost write-down 37,840
NOLs 1,072,429
---------
1,513,701
Valuation allowance (1,427,848)
----------
Net assets 85,853
------------
Deferred tax liabilities
Unrealized gains
State liabilities (85,853)
----------
Net liabilities (85,853)
----------
Net tax assets $
===============
For Federal and State income tax purposes, the Company has unused net
operating loss carryforwards of approximately $2,600,000 and 1,800,000,
respectively expiring through 2018.
(7) Related Party Transactions
Transactions with GP Strategies
At December 31, 1999, the Company owed GP Strategies, an affiliated
company and major stockholder, $99,172 related to the payment of certain
expenses of the Company by GP Strategies.
Transaction with Michael Hammer
In August 1999, the Company sold 480,192 shares of Common Stock and a
Warrant to purchase 500,000 shares of Common Stock which expires August
2002 (the "Warrant") to Hammer International Foundation. Pursuant to a
private placement transaction Michael Hammer is the President and CEO of
the Hammer International Foundation and is a Director of the Company. The
Warrant is exercisable at an exercise price of $2.00 per share. The
shares of Common Stock and the shares of Common Stock issuable upon
exercise of the Warrant cannot be sold, transferred, pledged or assigned
for a one-year period. The Company claimed exemption from the
registration requirements of the Securities Act of 1933 (the "Act")
pursuant to Rule 506 of Regulation D. of the Act.
<PAGE>
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, 1999 and 1998 were $162,000 and $320,000,
respectively. Included in operating expenses was $60,400 and $112,000, of
commissions to Janson Associates incurred in the years ended December 31,
1999 and 1998, 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 provided 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, 2000. As of December 31, 1999, $47,500 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, however
there can be no assurance that such loan will be extended.
On June 3, 1999, the Company entered into an unsecured loan for
$1,000,000 at prime plus 1% with City National Bank which matured on
October 1, 1999. As of December 31, 1999, $230,000 had been borrowed
under the loan and the loan has been extended through June 1, 2000.
(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>
(10) Significant Customers
Significant customers, exceeding 10% of revenue, were as follows (in
percents):
Year ended Year ended
December 31, December 31,
1999 1998
---- ----
Janson Associates 39
Wayward Son Productions 26
TBS 58
Carlton 27
As of December 31, 1999, 2 customers represented 55% and 19% of gross accounts
receivable.
(11) Recent Development
The Company received a letter from the American Stock Exchange ("AMEX")
notifying the Company that it has fallen below certain of AMEX's continued
listing guidelines because of the Company's recurring losses. The Company
attended a meeting with AMEX on November 16, 1999 to discuss its listing
eligibility. As a result of this meeting AMEX informed the Company that they
would be granted an extension until after the filing of the Company's year- end
financial statements to enable the Company to satisfy the listing criteria. The
Company is currently preparing a package for presentation to the AMEX. However,
there can be no assurance that the Common Stock will not be delisted in the
future.
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
<PAGE>
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 73 Chairman of the Board, President of Wombat
Cary Brokaw 48 President, Chief Executive Officer and Director
Michael Feldman 32 Executive Vice President and Director
Sheri L. Halfon 43 Senior Vice President, Chief Financial
Officer, and Director
Doug Rowan 61 Director
Michael Hammer 44 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.
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.
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.
Sheri L. Halfon has served as Senior Vice President, Chief Financial
Officer and Director of the Company since its formation on March 7, 1997. Prior
to the Reincorporation, Ms. Halfon served as Senior Vice President, Chief
Financial Officer and Director of CineMasters from September 30, 1996 and Senior
Vice President and Chief Financial Officer of Avenue Pictures since its
formation in 1991. Ms. Halfon is a Class II Director.
<PAGE>
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.
Michael Armand Hammer is Chairman and CEO of The Armand Hammer
Foundation and President and CEO of the Hammer International Foundation. Mr.
Hammer is Chairman of the Board and President of Hammer Galleries and Knoedler
Galleries in New York City. In Los Angeles, he is a director of the Armand
Hammer Museum of Art and Cultural Center and a Director of The Armand Hammer
United World College of the American West in Montezuma, New Mexico. Mr. Hammer
joined Occidental Petroleum Corporation in 1982 and served in various positions
in the company's foreign and domestic oil and gas subsidiaries. Prior to joining
Occidental, Mr. Hammer worked in the Corporate Finance Department of Kidder
Peabody, an investment banking firm in New York. Mr. Hammer is a Class I
Director.
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 Hammer filed an
untimely report on Form 3.
<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 1999,
1998, and 1997.
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>
Cary Brokaw 1999 450,000(1)
President, Chief Executive 1998 450,000 -0- 100,000(2)(3) --
Officer and Director 1997 450,000 -0- --
Gene Feldman 1999 150,000
Chairman of the Board, 1998 150,000(4) -0- 75,000(3)(5) --
President of Wombat 1997 150,000 -0- --
</TABLE>
- -------------------
(1) Mr. Brokaw's salary for the year pursuant to his employment agreement
was $450,000, of which $100,000 has been deferred by Mr. Brokaw.
(2) Of the 100,000 stock options granted to Mr. Brokaw in 1998, only 80,000
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) Mr. Feldman's salary for the year was $150,000, of which $105,000 has been
deferred by Mr. Feldman.
(5) Of the 75,000 stock options granted to Mr. Feldman in 1998, only 60,000 are
currently vested.
Option Grants in 1999
No options were granted in 1999 to the named executive officers.
<PAGE>
The following table sets forth information concerning the value of
unexercised options as of December 31, 1999 held by the executives named in the
Summary Compensation Table above. No options were exercised during 1999.
<TABLE>
AGGREGATED OPTION EXERCISES AT DECEMBER 31, 1999
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 245,000(E) 30,000(U) $61,000(E) $0(U)
Cary Brokaw 300,000(E) 100,000(U) 0(E) 0(U)
Sheri Halfon 60,000(E) 15,000(U) 0(E) 0(U)
- ----------
</TABLE>
(1) Calculated based on the closing price of the Common Stock $.625 as reported
by the American Stock Exchange on December 31, 1999.
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
<PAGE>
working for the remaining unexpired employment term; and (iv) bonus payments
that would have been made to Mr. Brokaw if he had continued working for the
Company during the remaining unexpired employment term. The Company is entitled
to seek to obtain, and has obtained, $2,000,000 in "key-man" life insurance on
his life. Pursuant to the Brokaw Employment Agreement, Mr. Brokaw was granted
options to purchase up to 300,000 shares of Common Stock for an exercise price
of $1.70 per share. Such stock options will vest in equal installments over the
first five years of Mr. Brokaw's employment with the Company and will be
exercisable for a period of ten years from the date of grant. The Brokaw
Employment Agreement provides for accelerated vesting of all of Mr. Brokaw's
stock options upon a "change of control" of the Company or upon a material
breach of the Brokaw Employment Agreement by the Company. As President and Chief
Executive Officer of the Company, Mr. Brokaw is entitled to certain customary
perquisites, including, without limitation, a car allowance, term life
insurance, and reimbursement of all reasonable travel and entertainment
expenses. In addition, Mr. Brokaw is entitled to participate in all employee
benefit plans offered to executive officers of the Company.
Gene Feldman Employment Agreement. In connection with the Business
Combination, Gene Feldman entered into a five-year employment agreement (the
"Feldman Employment Agreement") with CineMasters pursuant to which, among other
things, Gene Feldman became the Chairman of CineMasters and President of its
Wombat Division. The Feldman Employment Agreement provides Gene Feldman with an
annual base salary of $150,000 (provided that such base salary is funded solely
out of net cash flow generated by the Wombat Division of CineMasters), subject
to such increases as may be made by the Compensation Committee of the Board of
Directors. Gene Feldman is also eligible for annual bonuses based upon the
performance of Gene Feldman and CineMasters during the previous fiscal year.
Such annual bonuses will be determined in the discretion of the Compensation
Committee. The dollar amount of the annual bonus will not exceed two times the
annual base salary. The Feldman Employment Agreement provides that CineMasters
may only terminate Gene Feldman's employment with CineMasters for "cause." If
Mr. Feldman's employment is terminated due to death or disability, he will
receive his base salary through the date of termination of employment.
Any vested options not exercised prior to the termination of employment for this
reason will remain exercisable for the six month period beginning on the date of
termination. If his employment is terminated for "Cause" as defined in the
Feldman Employment Agreement, he will be entitled to the base salary and any
accrued annual bonus that has been determined and awarded, but not paid, through
the date of 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
<PAGE>
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, 2000, are indicated below:
Name and Address Amount and Nature Percent
of Beneficial Owner of Beneficial Ownership* of Class
- ------------------- ----------------------- --------
Cary Brokaw 1,731,350(1) 35%
c/o Avenue Pictures, Inc.
11111 Santa Monica Boulevard
Suite 525
Los Angeles, CA 90025
GP Strategies Corporation 1,067,900 23%
9 West 57th Street
New York, New York 10019
Gene Feldman 426,700(2) 9%
c/o Avenue Entertainment Group, Inc.
9 West 57th Street
Suite 4170
New York, New York 10019
Hammer International Foundation 980,192(3) 19%
2425 Olympic Blvd., Suite140E
Santa Monica, CA 90404
- ---------------------
* As used in this Proxy Statement, "beneficial ownership" means the sole
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 240,000 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 80,000 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 20,000 shares of
Common Stock of the Corporation at a price of $1.8125 per share, exercisable
until February 19, 2007.
<PAGE>
(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 60,000 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 15,000 shares of the Common Stock of the
Corporation at a price of $1.8125 per share, exercisable until February 19,
2007.
(3) Includes Warrants to purchase 500,000 shares of Common Stock of the
Corporation at an exercise price of $2.00 per share until August 9, 2002. Mr.
Hammer, a director of the Company, disclaims beneficial ownership of these
shares, except to the extent of his pecuniary interest in these shares.
<PAGE>
SECURITY OWNERSHIP OF DIRECTORS AND NAMED EXECUTIVE OFFICERS
The following table sets forth, as of March 15, 2000, 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 426,700(2) 9
Cary Brokaw 1,731,350(3) 35
Michael Feldman 197,000(4)(5) 4
Sheri L. Halfon 60,100(6) 1
Doug Rowan 7,000(7) *
Michael Hammer 980,192 (8) 9
Directors and Executive 3,402,342(9) 58
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 120,000 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 60,000 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 30,000
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
15,000 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 60,000 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 15,000 shares of
Common Stock of the Corporation at a price of $1.8125 per share, exercisable
until February 19, 2007.
(7) Includes vested 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.
Does not include unvested 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.
(8) See footnote 3 to Principal Stockholders table.
(9) Includes 826,000 shares of Common Stock issuable upon exercise of currently
exercisable stock options, and a warrant to purchase 500,000 shares of Common
Stock.
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
Transaction With Michael Hammer. In August 1999, the Company sold
480,192 shares of Common Stock and a Warrant to purchase 500,000 shares of
Common Stock which expires August 2002 (the "Warrant") to Hammer International
Foundation pursuant to a private placement transaction. Michael Hammer is
President and CEO of the Hammer International Foundation. The Warrant is
exercisable at an exercise price of $2.00 per share. The shares of Common Stock
and the shares of Common Stock issuable upon exercise of the Warrant cannot be
sold, transferred, pledged or assigned for a one-year period.
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
<PAGE>
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.
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.
<PAGE>
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 14, 2000
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
Michael Hammer Director
Dated: April 14, 2000
<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.
<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
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001023298
<NAME> AVENUE ENTERTAINMENT GROUP, INC.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
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<RECEIVABLES> 652,429
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0
0
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