SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1994
Commission File No. 1-9264
CAROLCO PICTURES INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4046437
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
8800 Sunset Blvd., Los Angeles, CA
90069
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: (310) 859-
8800
Indicate by check mark 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 preceding 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
The number of shares outstanding of registrant's Common Stock,
$.01 par value, at November 14, 1994 was 140,015,109 shares,
including 2,373,756 shares of treasury stock.
<PAGE>
CAROLCO PICTURES INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - December 31, 1993
and September 30, 1994 (unaudited)
Condensed Consolidated Statements of Operations - Three and
nine months ended September 30, 1993
and 1994 (unaudited)
Condensed Consolidated Statements of Cash Flows - Nine
months ended September 30, 1993 and 1994 (unaudited)
Notes to Unaudited Condensed Consolidated Financial
Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and
Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 3. Defaults upon Senior Securities
Item 6. Exhibits and Reports on Form 8-K
<PAGE>
CAROLCO PICTURES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
A S S E T S
<TABLE>
December 31, September 30,
1993 1994
(Note) (Unaudited)
(In Thousands)
<S> <C> <C>
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 56,697 $ 10,150
Restricted cash (Note E) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,255 --
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,837 20,795
Accounts receivable, related parties . . . . . . . . . . . . . . . . . . . . . . 4,877 360
Film costs, less accumulated amortization (Note D) . . . . . . . . . . . . . . . 78,427 64,686
Property and equipment, at cost, less accumulated depreciation and amortization 19,925 19,090
Other assets (Note D). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,053 21,890
---------- ----------
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 188,071 $ 136,971
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
LIABILITIES:
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . .$ 24,216 $ 23,145
Accrued residuals and participations . . . . . . . . . . . . . . . . . . . . . 27,987 33,502
Income taxes, current and deferred . . . . . . . . . . . . . . . . . . . . . . 11,365 11,365
Debt (Note F). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94,580 93,734
Advance collections on contracts . . . . . . . . . . . . . . . . . . . . . . . 20,012 3,988
Notes and amounts payable, related parties (Note E). . . . . . . . . . . . . . 30,981 23,834
---------- ----------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . 209,141 189,568
COMMITMENTS AND CONTINGENCIES - (Note G)
STOCKHOLDERS' DEFICIENCY - (Note H)
Preferred stock - $1.00 par value, 10,000,000 shares authorized:
Series A Convertible Preferred Stock, 120,000 shares authorized, 82,500
shares issued and outstanding ($85,421,000 aggregate liquidation preference
at September 30, 1994) 83 86
Common Stock - $.01 par value, 650,000,000 shares authorized, 140,015,109
shares issued and outstanding, including 2,327,381 shares in treasury in
1993 and 2,373,756 shares in treasury in 1994. . . . . . . . . . . . . . . . 1,400 1,400
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . 297,931 301,096
Treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,920) (5,920)
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (314,564) (349,259)
---------- ----------
TOTAL STOCKHOLDERS' DEFICIENCY. . . . . . . . . . . . . . . . . . . . . (21,070) (52,597)
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY. . . . . . . . . . . . .$ 188,071 $ 136,971
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
Note: The amounts for December 31, 1993 have been derived from Carolco's
audited financial statements as of that date.
<PAGE>
CAROLCO PICTURES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
1993 1994 1993 1994
(Unaudited)
(In Thousands, Except per Share Data)
<S> <C> <C> <C> <C>
Revenues:
Feature films . . . . . . . . . . . . . . . . . . . . . . . . $ 24,955 $ 18,126 $ 85,676 $ 48,184
Other income (Note I). . . . . . . . . . . . . . . . . . . . . 1,178 1,102 4,160 5,082
-------- ----------- ------------ ------------
TOTAL REVENUES. . . . . . . . . . . . . . . . . . . . . 26,133 19,228 89,836 53,266
Costs and expenses:
Amortization of film costs, residuals and participations. . . . 24,756 17,188 80,138 58,816
Selling, general and administrative. . . . . . . . . . . . . . . 6,076 7,159 18,779 16,022
Interest, net. . . . . . . . . . . . . . . . . . . . . . . . . . 5,915 3,064 19,565 10,038
-------- ----------- ----------- ------------
TOTAL COSTS AND EXPENSES. . . . . . . . . . . . . . . . . 36,747 27,411 118,482 84,876
-------- ------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS BEFORE EQUITY IN LOSS
OF AFFILIATED COMPANY AND (PROVISION FOR) BENEFIT FROM
INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . (10,614) (8,183) (28,646) (31,610)
Equity in loss from continuing operations of affiliated company. (1,961) --- (2,809) ---
-------- ------------ ----------- ------------
LOSS FROM CONTINUING OPERATIONS BEFORE (PROVISION FOR)
BENEFIT FROM INCOME TAXES . . . . . . . . . . . . . . . (12,575) (8,183) (31,455) (31,610)
(Provision for) benefit from income taxes. . . . . . . . . . . . (194) (123) (373) 82
-------- ------------ ----------- ------------
LOSS FROM CONTINUING OPERATIONS . . . . . . . . . . . . . (12,769) (8,306) (31,828) (31,528)
Equity in loss from discontinued operations of affiliated company,
net of income taxes. . . . . . . . . . . . . . . . . . . . . . . (219) --- (1,398) ---
-------- ------------ ------------ ------------
LOSS BEFORE EXTRAORDINARY ITEM . . . . . . . . . . . . . (12,988) (8,306) (33,226) (31,528)
Extraordinary gain on early extinguishment of debt. . . . . . . . 1,799 --- 1,799 ---
-------- ------------ ----------- -----------
NET LOSS . . . . . . . . . . . . . . . . . . . . . . . .$ (11,189) $ (8,306) $ (31,427) $ (31,528)
========== ============ ============ ============
Per Common Share: Loss from continuing operations. . . . . . . .$ (0.45) $ (0.07) $ (1.09) $ (0.25)
Income from extraordinary item. . . . . . . . . . . . . . . . . 0.06 --- 0.06 ---
Loss from discontinued operations. . . . . . . . . . . . . . . --- --- (0.05) ---
---------- ----------- ------------ ------------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.39) $ (0.07) $ (1.08) $ (0.25)
========== =========== ============ ============
Weighted average shares outstanding. . . . . . . . . . . . . 28,596,188 137,641,353 29,093,169 137,672,270
========== ========== ============ ============
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
CAROLCO PICTURES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
Nine Months Ended
September 30,
1993 1994
(Unaudited)
(In Thousands)
<S> <C> <C>
Net cash flow from operating activities:
NET CASH PROVIDED BY (USED IN) OPERATIONS . . . . . . . . . . . . . . .$ 9,489 $ (45,286)
Cash flow from investing activities:
Purchase of property and equipment . . . . . . . . . . . . . . . . . . . . . . (845) (647)
Acquisition of common stock of LIVE Entertainment Inc. . . . . . . . . . . . . (1,266) ---
Decrease in cash as a result of deconsolidation of LIVE Entertainment Inc.. . (11,043) ---
Proceeds from sale of aircraft, net of costs . . . . . . . . . . . . . . . . . --- 1,782
-------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES . . . . . . . . . . (13,154) 1,135
Cash flow from financing activities:
Payments on debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (31,576) (1,730)
Increase(decrease) in notes and amounts payable to related parties. . . . . . 9,087 (1,549)
Decrease in receivables from related parties . . . . . . . . . . . . . . . . . 1,126 302
Increase in debt acquisition costs . . . . . . . . . . . . . . . . . . . . . . (8,972) ---
Decrease in restricted cash. . . . . . . . . . . . . . . . . . . . . . . . . . --- 1,255
Repurchase of Vista shares and Vista Partnership Units . . . . . . . . . . . . --- (674)
Repayment of Pioneer Bridge Loan . . . . . . . . . . . . . . . . . . . . . . . (3,681) ---
Showtime Receivable Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,896 ---
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 ---
-------- ---------
NET CASH USED IN FINANCING ACTIVITIES . . . . . . . . . . . . . . . . . (8,116) (2,396)
-------- ---------
DECREASE IN CASH. . . . . . . . . . . . . . . . . . . . . . . . . . . . (11,781) (46,547)
Cash and cash equivalents at beginning of period. . . . . . . . . . . . 24,202 56,697
-------- ---------
Cash and cash equivalents at end of period. . . . . . . . . . . . . . .$ 12,421 $ 10,150
======== =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest (net of amounts capitalized in 1994). . . . . . . . . . . . . . . .$ 2,644 $ 4,739
======== =========
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 280 $ 351
======== =========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
Note A - Basis of Presentation and Significant Account Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements include the accounts of Carolco Pictures Inc. and its
wholly-owned subsidiaries including Carolco International Inc.
("CII") and Carolco Television Inc.; The Vista Organization
Partnership, L.P.; The Vista Organization, Ltd. ("Vista"); and
Carolco Studios Inc. (Delaware) (collectively, "Carolco"), after
elimination of material intercompany accounts and transactions.
Prior to its domestication as a Delaware corporation in October
1993, CII was incorporated in the Netherlands Antilles as Carolco
International N.V. ("CINV"). Carolco is engaged in the
entertainment industry and its principal activities include the
production and distribution of feature films.
From January 1, 1993 through October 20, 1993, Carolco
accounted for its investment in LIVE Entertainment Inc. ("LIVE")
using the equity method. In connection with Carolco's October
20, 1993 financial restructuring (the "Carolco Restructuring"),
Carolco transferred all of its ownership interest in LIVE to
Pioneer LDCA, Inc. ("Pioneer"), Cinepole Productions B.V.
("Cinepole"), a wholly-owned subsidiary of Le Studio Canal+ S.A.
("Le Studio") and RCS International Communications N.V. ("RCS
Communications"), an affiliate of RCS Editori S.p.A. See Note
B for a description of more recent developments concerning
Carolco and LIVE.
The accompanying unaudited, condensed consolidated
financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all the
information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of Carolco's management, the accompanying unaudited
condensed consolidated financial statements contain all
adjustments (consisting of normal recurring accruals) considered
necessary to present fairly Carolco's financial position as of
September 30, 1994 and the results of its operations for the
three and nine months ended September 30, 1993 and 1994. The
results of operations for the period ended September 30, 1994
are not necessarily indicative of the results to be expected
for the year ending December 31, 1994. Certain
reclassifications have been made in the amounts for 1993 to
conform to the 1994 presentation.
For further information, refer to the Consolidated
Financial Statements and Notes thereto included in Carolco's
Annual Report on Form 10-K for the year ended December 31, 1993.
At September 30, 1994, Pioneer, Cinepole, and RCS
Communications owned approximately 33.7%, 19.0% and 11.6%,
respectively, of the issued and outstanding common stock of
Carolco. At September 30, 1994, New Carolco Investments B.V.
("New CIBV"), a corporation incorporated in The Netherlands,
owned approximately 5.8% of the issued and outstanding common
stock of Carolco. Mario F. Kassar, Chairman of the Board of
Directors and Chief Executive Officer of Carolco ("Mr. Kassar"),
may be deemed to own beneficially the shares of Carolco's common
stock owned by New CIBV. In addition, Pioneer, Cinepole and MGM
Holdings Corporation ("MGM Holdings") own 40,000, 12,500 and
30,000 shares, respectively, of Series A Convertible Preferred
Stock, not including accrued but unpaid "in-kind" dividends. MGM
Holdings also owns approximately $31,118,000 in aggregate
principal amount of 5% Payment-In-Kind Convertible Subordinated
Notes due 2002 (the "5% Notes"), not including accrued but unpaid
"in-kind" interest of $324,000 at September 30, 1994.
Significant Accounting Policies
Net Loss Per Common Share: Net loss per share is based on
the weighted average number of common and common equivalent
shares outstanding during the period, after appropriate inclusion
in net loss of payment-in-kind preferred dividends of $1,061,000
and $3,167,000 respectively, for the three and nine months ended
September 30, 1994. Common equivalent shares, consisting of
outstanding stock options and warrants, the Series A Convertible
Preferred Stock in 1994, and, in 1993, the Series B Convertible
Preferred Stock, Series C Convertible Exchangeable Preferred
Stock, Series D Convertible Exchangeable Preferred Stock and
Series E Convertible Preferred Stock, were excluded because the
effect of their inclusion would be antidilutive. Other
potentially dilutive securities, including the 10% Convertible
Subordinated Debentures due 2006 in 1993, and the 5% Notes in
1994, were excluded because the effect of their inclusion would
be antidilutive.
Income Taxes: Effective January 1, 1993, Carolco adopted
Statement of Financial Accounting Standard (SFAS) No. 109
"Accounting for Income Taxes". Previously, Carolco used SFAS
No. 96 "Accounting for Income Taxes". The adoption of SFAS
No. 109 had no material effect on Carolco's financial position
or results of operations for the year ended December 31, 1993.
Current and deferred federal income taxes are provided based on
Carolco and its U.S. subsidiaries owned 80% or more, filing a
consolidated tax return.
Deferred taxes, relating to the differences in accounting
for film rights and the related amortization for financial
statement and tax return purposes as well as from financial
statement reserves not currently deductible for tax purposes,
have historically been determined by applying the current tax
rate to the cumulative temporary differences between the recorded
carrying amounts and corresponding tax basis of assets and
liabilities at the respective dates. Due to the reversal of
prior book and tax differences, as of September 30, 1994,
Carolco's deferred tax liability has been virtually eliminated.
However, due to the potential liability arising from the ongoing
examination of Carolco's 1988, 1989, 1990, 1991, 1992 and 1993
federal income tax returns by the Internal Revenue Service
("IRS") and the 1988 and 1989 state income tax returns by the
California Franchise Tax Board ("FTB"), Carolco has not reduced
the amount of its current and deferred income tax liability. See
Note G for a further discussion of these examinations.
On October 18, 1993, Carolco's wholly-owned subsidiary,
CINV was domesticated as a Delaware corporation and its name was
changed to CII. Due to the domestication of CINV, in future
periods, foreign source income of Carolco will be subject to
United States income taxation which could result in a significant
increase in Carolco's effective tax rate.
Note B - Proposed Business Combination with LIVE
Carolco, LIVE and Carolco Acquisition Corp., a wholly
owned subsidiary of LIVE ("CAC"), entered into an Agreement and
Plan of Merger dated as of August 10, 1994 (the "Merger
Agreement") providing for a business combination of Carolco and
LIVE. The Merger Agreement provided, among other things, that
CAC would be merged with and into Carolco (the "Merger") with
Carolco as the surviving corporation continuing as a wholly-owned
subsidiary of LIVE. On October 13, 1994, LIVE, CAC and Carolco
entered into a Termination Agreement (the "Termination
Agreement") providing for the termination of the Merger Agreement
and the abandonment of the proposed Merger contemplated thereby.
The Termination Agreement also provides for the termination of
all rights and obligations of the parties under the Merger
Agreement and the mutual release by the parties of all claims of
any kind or nature, by reason of or with respect to the Merger
Agreement.
Note C - Interim Financing Arrangements and Going Concern Issues
In October 1994, Carolco consummated certain interim
financing arrangements which provided Carolco with additional
cash of approximately $18,500,000. The arrangements consist of
the following transactions:
1. Carolco Production Services Inc., an indirect
wholly-owned subsidiary of Carolco ("CPSI"), and Chargetex 6,
S.A., an affiliate of the French company Chargeurs ("Chargetex"),
entered into a Purchase and Sale Agreement dated as of October
18, 1994 whereby CPSI transferred to Chargetex all of its rights
in the motion picture Showgirls, which commenced principal
photography on October 23, 1994. The purchase price consisted
of (i) the reimbursement of CPSI's and/or Carolco's direct costs
incurred in connection with the development and production of the
motion picture through the date the rights in the picture were
transferred to Chargetex and (ii) the assumption by Chargetex of
all of CPSI's and/or Carolco's obligations relating to the
development and production of the motion picture. Approximately
$8,900,000 was paid to Carolco by Chargetex upon closing of the
transaction with additional amounts estimated to be less than
$1,000,000 to be paid as accountings are provided to Chargetex.
CPSI will be entitled to a percentage of the adjusted gross
receipts from the exploitation of the completed motion picture
after Chargetex has recouped certain costs and expenses incurred
in connection with the motion picture plus an additional
$10,000,000. Pursuant to a separate agreement between CPSI and
Chargetex dated as of October 18, 1994, CPSI was granted an
option to purchase, at any time until February 28, 1995, a 50%
interest in all adjusted gross revenues that may be derived by
Chargetex from the distribution and exploitation of the motion
picture and the related ancillary rights. CPSI may exercise such
option by paying Chargetex an amount equal to 50% of the direct
out-of-pocket expenses (plus interest thereon) incurred by
Chargetex in connection with Showgirls through the time CPSI
exercises such option. Upon exercise of such option, CPSI would
be required to assume an undivided 50% responsibility for all
Chargetex's executory obligations in connection with Showgirls
and would be required to assume and pay 50% of all subsequent
costs relating to the production of the motion picture as and
when due. In addition, as a condition to CPSI's right to
exercise such option, CPSI will be required to post security
reasonably adequate to Chargetex to secure CPSI's obligations.
2. Pioneer, Pioneer LDC, Inc., an affiliate of
Pioneer, and Carolco entered into an Agreement dated as of
October 14, 1994 pursuant to which Carolco received
approximately $6,700,000 from Pioneer arising from the video
distribution in Japan of Terminator 2: Judgment Day and
theatrical, video and pay television distribution in Japan of
Cliffhanger. The amounts from Cliffhanger were paid to Carolco
pursuant to an agreement entered into by and among the co-
producers of Cliffhanger.
3. Carolco and RCS Video International Services
B.V. ("RCS") entered into a Waiver, Assignment and Acknowledgment
Agreement dated as of October 14, 1994 (the "RCS Waiver
Agreement") whereby RCS waived certain conditions subject to
which RCS was required to purchase Carolco 7% Convertible
Subordinated Notes (the "7% Notes") on December 30, 1994 under
that certain Standby Agreement by and among Carolco, RCS,
Cinepole, Le Studio, Pioneer and Tele-Communications, Inc.
("TCI") (the "Standby Agreement"). In exchange for the
accommodations by RCS, the parties agreed to reduce the principal
amount of 7% Notes to be purchased by RCS under the Standby
Agreement from $2,500,000 to $1,000,000 and RCS agreed to
purchase on December 30, 1994, a portion of Carolco's interest
in the motion picture Cutthroat Island for $1,500,000 on terms
that are no less favorable than those applicable
to TCI and Le Studio in that certain Co-Production Financing
Commitment Agreement dated as of August 9, 1993 by and among
Carolco, Le Studio and TCI.
On October 14, 1994, Carolco received $987,690
representing the principal amount of a $1,000,000 bank loan from
Credit Lyonnais Bank Nederland N.V. ("CLBN"), net of imputed
interest at the rate of 5.4375% per annum. As security for such
loan, Carolco assigned to CLBN its right to receive RCS' payment
for 7% Notes due in December 1994. RCS delivered a letter of
credit to CLBN to secure its obligation to purchase 7% Notes.
4. Carolco and Le Studio Canal+ (U.S. ) ("Le
Studio U.S.") entered into an Amendment to the Exclusive Agency
Agreement dated as of October 14, 1994 whereby Le Studio U.S.
prepaid $2,000,000 of sales commissions that are anticipated to
be due to Carolco in late 1994 for serving as the foreign sales
agent for the motion picture Stargate. See Note E for more a
complete discussion of the arrangements with Le Studio U.S.
regarding Stargate.
A portion of the funds received from these interim
financing arrangements will be used to fund the motion picture
Cutthroat Island, starring Geena Davis and Matthew Modine and
directed by Renny Harlin, which commenced principal photography
in Malta at the end of October 1994. Carolco has received the
commitment of a group of banks, including CLBN, to provide an
individual production loan to finance a substantial portion of
the cost of Cutthroat Island (the "Cutthroat Production Loan").
Carolco will be unable to access the Cutthroat
Production Loan until a number of conditions are met including
(i) entering into distribution agreements for a substantial
portion of the distribution rights for Cutthroat Island, (ii)
obtaining a completion bond (also known as an "over-budget"
guarantee) and (iii) execution of final loan documentation. Such
distribution agreements and completion bond must be pledged as
collateral to secure the Cutthroat Production Loan. Although
agreements in principle have been reached between Carolco and
various distributors with regard to the pre-sale of a substantial
portion of the distribution rights for Cutthroat Island, due to
production and casting delays, the documentation of these pre-
sales has not yet been completed. In addition, due to such
delays, Carolco has not yet obtained the completion bond for the
film. Therefore, as of November 14, 1994, Carolco has been
unable to access the Cutthroat Production Loan. In addition to
its ongoing overhead expenses, Carolco continues to fund the
production expenses of Cutthroat Island from its current cash
balances and continues to face extreme cash shortages. Although
management of Carolco believes it is likely that Carolco will be
able to satisfy all of the conditions required to access the
Cutthroat Production Loan, there can be no assurance that this
will be the case. In the event Carolco is unable to successfully
consummate the Cutthroat Production Loan, it will be required to
procure financing from alternative sources in order to complete
the production of Cutthroat Island. No assurance can be given
that such financing can be obtained on a timely basis or obtained
on terms acceptable to Carolco. In the event Carolco is unable
to consummate the Cutthroat Production Loan or procure
alternative production financing on a timely basis, Carolco may
be forced to cease production of Cutthroat Island and may be
unable to meet its other obligations and may be unable to
continue to operate as a going concern.
As a result of its anticipated production schedule,
Carolco will not generate revenues from new production in 1994
and currently anticipates that it will continue to experience
losses through 1994 and much of 1995. Moreover, because of the
substantial capital requirements involved in the pre-production
and principal photography stages of Cutthroat Island (the direct
negative cost of Cutthroat Island is estimated to be
approximately $75,000,000), Carolco expects it will continue to
experience significant liquidity constraints throughout the
fourth quarter of 1994 prior to the anticipated December 30, 1994
funding of the Standby Agreement. After adjusting the Standby
Agreement for the RCS transaction described in Item 3 above,
Carolco anticipates that it will receive $17,500,000 from the
purchase by Pioneer and Cinepole of 7% Notes, $6,000,000 in
immediately available co-productions investments by Le Studio and
TCI, and $1,500,000 from the purchase by RCS of a portion of
Carolco's interest in Cutthroat Island. Carolco believes that
only through a combination of the Cutthroat Production Loan and
the funding of the co-production investments and 7% Notes will
Carolco have sufficient resources to continue financing the
production of Cutthroat Island and meet its other obligations as
they come due.
Note D - Film Costs
<TABLE>
December 31, September 30,
1993 1994
(Unaudited)
(In Thousands)
<S> <C> <C>
Film costs are comprised of the following:
Released, less amortization. . . . . . . . . $ 57,696 $ 22,892
In process and development . . . . . . . . . 20,731 41,794
-------- --------
Total film costs . . . . . . . . . . . . . $ 78,427 $ 64,686
======== ========
</TABLE>
Interest and production overhead capitalized to film
costs during the nine months ended September 30, 1994 totaled
approximately $894,000 and $3,143,000, respectively. No interest
or production overhead was capitalized to film costs during the
year ended December 31, 1993.
In December 1993, an affiliate of Carolco commenced
principal photography of Wagons East, starring John Candy and
Richard Lewis. As a result of the untimely death of Mr. Candy,
Carolco entered into an arrangement with the insurance carrier
providing principal elements insurance for the film and an
affiliate of LIVE pursuant to which Carolco will recover
substantially all of the costs incurred by Carolco on the film.
In exchange for certain rights in the film, LIVE agreed to fund
completion of the film and engaged Carolco to complete production
and to service certain pre-existing distribution agreements. In
April 1994, Carolco received approximately $13,876,000
representing partial payments under this multi-party arrangement.
The balance will be paid to Carolco upon completion of the final
audit of the applicable production costs. The remaining amount
of costs to be reimbursed is included in Other Assets.
At September 30, 1994, Carolco had incurred approximately
$6,853,000 in Film Costs relating to the motion picture
Showgirls. As a result of the October 1994 sale of Showgirls to
Chargetex (see Note C - Item 1), these costs have been included
in Other Assets at September 30, 1994.
In mid-May 1994, Carolco determined that the potential
costs of the motion picture Crusade, starring Arnold
Schwarzenegger, were significantly greater than originally
budgeted and that the film would have to perform exceptionally
well in the marketplace to generate a gross margin acceptable for
the required level of investment. As a result, Carolco made the
decision to postpone indefinitely the start of principal
photography (which had been scheduled to begin in August 1994)
while Carolco evaluated alternative approaches to the project.
As a result of Carolco's decision not to make Crusade when
scheduled, an affiliate of Arnold Schwarzenegger made a claim for
payment of the full fee that would have been payable for the
acting services of Mr. Schwarzenegger. Carolco and the affiliate
of Mr. Schwarzenegger have agreed to settle this claim and are
in the process of documenting such agreement. Pursuant to the
settlement agreement, Carolco has paid certain amounts to the
affiliate of Mr. Schwarzenegger and assigned to Mr.
Schwarzenegger all rights, title and interest in Crusade. If,
during an approximately three-year period, Mr. Schwarzenegger
obtains a commitment for production of the film, Carolco will
receive reimbursement of a portion of its pre-production
expenditures on the film and will participate in any future net
profits of the film (as defined in the agreement). In the event
Mr. Schwarzenegger is unable to obtain a production commitment
during such period, Carolco will have the right to reacquire all
rights, title and interest in Crusade.
As of September 30, 1994, Carolco had paid a total of
$13,300,000 in pre-production expenses for Crusade including
capitalized interest and production overhead and amounts paid to
the affiliate of Mr. Schwarzenegger. These amounts have been
included in Amortization of Film Costs for the nine months
ended September 30, 1994.
Note E - Related Party Transactions
In September 1992, Carolco and CII entered into an
agreement with a predecessor of Le Studio U.S. whereby Carolco
furnished the non-exclusive executive producer services of Mario
Kassar to Le Studio U.S. for the production of the motion picture
Stargate. In exchange for such services, Le Studio U.S. agreed
to pay Carolco a producing fee plus a contingent fee based on the
performance of the film. In addition, CII agreed to serve as the
exclusive sales agent for the foreign distribution of Stargate.
In exchange for such services, CII will receive a distribution
fee of up to 15% of foreign sales made by CII. Stargate was
released theatrically in October 1994. As of November 14, 1994,
Carolco estimates that distribution fees of $2,739,000 have been
earned. Of this amount, $2,000,000 was paid by Le Studio as part
of the interim financing arrangements. (See Note C-Item 4.)
Pursuant to the Carolco Restructuring, MGM Holdings
purchased from Carolco $30,000,000 in aggregate principal amount
of 5% Payment-In-Kind Convertible Subordinated Notes due 2002
(the "5% Notes") in exchange for $30,000,000. The $30,000,000 in
principal amount of 5% Notes will mature in October 2002 and
bears interest at 5% per annum, payable quarterly. Consistent
with the treatment of MGM Holdings as a "principal shareholder,"
Carolco recorded the 5% Notes in Notes and Amounts Payable,
Related Parties, at its present value of $21,361,000 to yield a
fair market interest rate of 10%. The discount of $8,639,000 was
recorded as an increase to equity. Carolco will recognize
additional interest expense of approximately $960,000 per year
related to the amortization of this discount. Interest accruing
on or prior to the fifth anniversary of the date of issuance may
be paid in cash or by payment in-kind of additional 5% Notes with
a principal amount equal to the amount of such interest, or a
combination thereof, at the election of Carolco. Thereafter,
interest shall be paid in cash. Through September 30, 1994,
interest of approximately $1,118,000 has been paid in additional
5% Notes and additional interest of approximately $324,000 has
been accrued. The 5% Notes, and any accrued and unpaid interest
thereon, will automatically be converted into Common Stock of
Carolco on the 20th business day following the date on which
Metro-Goldwyn-Mayer, Inc., an affiliate of MGM Holdings ("MGM"),
shall have received an aggregate of $100,000,000 in distribution
fees under the distribution agreements between Carolco and MGM.
This conversion rate will be equal to 1,667 shares of Common
Stock for each $1,000 principal amount of 5% Notes and each
$1,000 of accrued and unpaid interest, subject to certain
adjustments. Alternatively, the 5% Notes may be converted into
Common Stock of Carolco at the aforementioned conversion rate
(subject to certain adjustments), effective on the maturity date
(October 2002); or in the event that Carolco (i) declares a
dividend on its Common Stock in excess of $.05 per share, (ii)
offers to redeem or repurchase Common Stock, (iii) merges or
consolidates, unless Carolco is the surviving corporation or (iv)
undertakes to sell all or substantially all its assets. As of
September 30, 1994, approximately 52,414,000 shares of Common
Stock of Carolco would be issued upon conversion of the 5% Notes
and accrued interest.
At December 31, 1993, Carolco had $1,255,000 of restricted
cash. This amount was due to Mr. Kassar in connection with the
Carolco Restructuring. During the quarter ended March 31, 1994,
such amount, including accrued interest, was paid to Mr. Kassar.
In January 1992, a partnership between Carolco and Le
Studio entered into a co-financing arrangement with Le Studio and
RCS Video International Services B.V., an affiliate of RCS
Editori S.p.A. ("RCS BV"), pursuant to which CINV, Le Studio and
RCS BV each made co-financing payments equal to one-third of the
total production cost of the motion picture Chaplin. The co-
financing payments earn interest at 3-month LIBOR plus 2% per
annum. CINV, Le Studio and RCS BV each contributed $13,337,000
to the production costs of Chaplin. In exchange for their co-
financing payments, Le Studio and RCS BV are each entitled to
one-third of the net receipts from Chaplin, reduced to one-sixth
of the net receipts after they have each recouped their initial
co-financing payments, plus interest. CINV is entitled to one-
third of net receipts (less a third party participation
interest), which amount will increase at such time as the shares
of Le Studio and RCS BV are reduced. At December 31, 1993 and
September 30, 1994, respectively, CINV had recorded an obligation
of $3,521,000 and $5,466,000 collectively to Le Studio and RCS
BV. In 1993, Carolco paid $6,313,000 and $6,442,000,
respectively, to Le Studio and RCS BV, representing their share
of the net receipts of Chaplin.
RCS BV has asserted a claim of approximately $4,700,000
against Carolco alleging that Carolco guaranteed certain levels
of performance and agreed to reimburse a portion of RCS BV's
unrecouped investment in the motion picture Chaplin. Carolco
believes that the alleged guarantees have been relinquished.
Although Carolco and RCS BV have entered into discussions with
respect to this claim, Carolco is unable to predict the outcome
of this dispute.
Le Studio has asserted a claim against Carolco alleging
that Carolco guaranteed certain levels of performance and agreed
to reimburse a portion of Le Studio's unrecouped investment in
the motion picture Chaplin. Le Studio has not specified the
amount of its claim. Carolco believes that the alleged
guarantees have been relinquished. Le Studio has also claimed
that Carolco is obligated to pay $500,000 as reimbursement for
expenses incurred by Le Studio in connection with the financial
restructuring of Carolco
consummated in March 1992. Carolco believes that Le Studio
relinquished its claim for reimbursement as
part of the Carolco Restructuring. Although Carolco and Le
Studio have entered into discussions with respect to these
claims, Carolco is unable to predict the outcome of these
disputes.
See Note C for a discussion of additional related party
transactions arising as a result of certain interim financing
arrangements.
Note F - Debt
CII, with Carolco as principal guarantor, has a credit
facility with CLBN acting as agent and lender (the "Existing
Carolco Credit Facility") under which $14,000,000 in principal
amount is outstanding as of September 30, 1994. The maturity
date of the loan under the Existing Carolco Credit Facility,
which is secured by substantially all of Carolco's assets, has
been extended to September 29, 1995. CLBN has agreed to remit
to CII all collections from accounts receivable pledged to CLBN,
so long as certain defaults do not occur. The loan bears
interest at 3-month LIBOR plus 2.5% and no additional amounts are
available to be drawn thereunder.
See Note C for a discussion of additional borrowings from
CLBN in connection with the consummation of interim financing
arrangements.
In August 1992, Carolco entered into an agreement with the
Screen Actors Guild, the Directors' Guild of America, the
Writers' Guild of America and the Motion Picture Industry Pension
and Health Plan (collectively, the "Guilds") with respect to
amounts owed to the Guilds under certain collective bargaining
agreements. As of September 30, 1994, the balance due the Guilds
pursuant to a promissory note made in favor of the Guilds (the
"Guild Note") was $9,707,000, including accrued interest at 3-
month LIBOR, plus 1% per annum. The installment payment of
$3,000,000, due on October 1, 1994, was not paid by Carolco. If
the payment is not paid within the 120-day grace period as
provided in the Guild Note, the Guilds may accelerate payment of
the entire remaining balance due, plus accrued interest thereon.
The Guild Note is secured by a lien on substantially all of the
Company's assets, which lien is subordinated to the Existing
Carolco Credit Facility.
Pursuant to the 13% Note Indenture, since Carolco's
consolidated net worth was less than $33,334,000 on September
30,1993, Carolco was obligated to offer to purchase $5,000,000
in aggregate principal amount of its 13% Notes on March 31, 1994.
Pursuant to the terms of the 13% Note Indenture, Carolco credited
a portion of the 13% Notes acquired as part of the Restructuring
against this obligation and was therefore not required to
purchase any additional 13% Notes. As a result of certain
amendments to the 13% Note Indenture resulting from the Carolco
Restructuring, Carolco has no further obligation to purchase the
balance of the 13% Notes prior to maturity in 1996.
In September 1988, Carolco entered into a 10.75% term loan
agreement with John Hancock Leasing. The purpose of the loan was
for the purchase of an aircraft and its refurbishment and was
secured by the aircraft. Interest and principal of approximately
$141,000 were payable monthly for five years. In 1993, Carolco
negotiated a reduction of the monthly payment, pending the sale
of the aircraft. On February 3, 1994, Carolco sold the aircraft
for $1,925,000 and the remaining loan balance of $900,000,
including accrued interest, was paid in full. Carolco recognized
a gain of $1,275,000 in 1994 related to the sale of the aircraft.
Note G - Commitments and Contingencies
As of September 30, 1994, Carolco has received
approximately $1,873,000 in deposits on cancelled licensing
agreements and on certain films which Carolco may not produce.
Traditionally, Carolco has been able to allocate advances of this
nature to other pictures being produced by Carolco which contain
elements similar to the original film. However, as a result of
reduced production activity, Carolco may be required to return
these deposits.
In June 1993, Carolco entered into a non-exclusive
consulting agreement with Anthony J. Scotti, the Chairman of the
Board of LIVE, for the period commencing immediately after the
Carolco Restructuring and ending twelve months thereafter.
Pursuant to the agreement, Mr. Scotti has agreed to consult with
management of Carolco with respect to the operation of Carolco's
business and such other matters as may be agreed upon between
Carolco and Mr. Scotti. In consideration for the services to be
provided by Mr. Scotti, Carolco will pay Mr. Scotti $40,000 per
month plus reimbursement of all expenses incurred by Mr. Scotti
in connection with the services to be provided by him under the
agreement. Mr. Scotti will be entitled to participate in any and
all of Carolco's employee stock option plans during the term of
the agreement, and will be granted options to purchase shares of
Carolco's Common Stock (the terms and number of options to be
negotiated in the future) at an exercise price per share equal
to the market price of the Common Stock at the date of
commencement of the consulting period. In addition, Mr. Scotti
will be indemnified against certain liabilities in connection
with the performance of his duties under the agreement. In the
nine months ended September 30, 1994, Carolco paid approximately
$372,000 in fees and expenses to Mr. Scotti pursuant to this
agreement. The consulting agreement with Mr. Scotti expired in
October 1994. Carolco is currently negotiating with Mr. Scotti
for an extension of the agreement.
Tax Matters:
The Internal Revenue Service ("IRS") is conducting an
ongoing examination of Carolco's 1988, 1989 and 1990 federal
income tax returns and has begun an examination of Carolco's
1991, 1992 and 1993 federal income tax returns. In addition, the
California Franchise Tax Board ("FTB") is conducting an
examination of Carolco's 1988 and 1989 state income tax returns.
Carolco has received notices from the IRS regarding proposed
adjustments to Carolco's 1988, 1989 and 1990 federal income tax
returns. As of November 14, 1994, Carolco has responded or is
in the process of preparing responses to all of the proposed
adjustments by supplying the IRS with additional facts and legal
analyses which will be considered by the IRS before it makes a
decision whether to propose to assess deficiencies attributable
to the proposed adjustments. Moreover, it is anticipated that
the IRS will issue additional proposed adjustments. At the
current stage of the audit, Carolco does not believe it possible
to predict, with any reasonable degree of accuracy, the actual
tax liabilities that may ultimately result from the IRS and FTB
examinations. However, Carolco believes, although no assurances
can be given, that as of September 30, 1994, an adequate
provision has been established with respect to any potential tax
liability arising from such examinations.
Spiderman Litigation:
On April 20, 1993, 21st-Century Film Corporation ("21st")
and Menahem Golan ("Golan") filed an action against Carolco,
CINV and Spiderman Productions Ltd. ("SPL") in Los Angeles County
Superior Court alleging claims for breach of contract,
anticipatory breach of contract and fraud relating to the motion
picture project Spiderman. Plaintiffs allege that on or about May
19, 1990, 21st entered into an agreement with Carolco (the
"Carolco/21st Agreement") whereby 21st transferred to Carolco
rights relating to the comic book character Spiderman, and
Carolco agreed, among other things, to accord credit to Golan as
a producer of the motion picture to be produced by defendants.
Plaintiffs further allege that on or about June 19, 1992, the
parties entered into a second agreement settling certain other
litigation and wherein it was agreed that Carolco and CII could
assign the Carolco/21st Agreement to RCS NV and provided that
Carolco and CII remain jointly and severally liable with RCS NV
under the Carolco/21st Agreement. Plaintiffs alleged that Carolco
and the other defendants breached the foregoing agreements by
denying any obligation to accord producer credit to Golan, by
assigning the Carolco/21st Agreement to a party other than RCS
NV, and by failing to provide plaintiffs with a written document
showing that Carolco and the other defendants have assumed the
obligations of the Carolco/21st Agreement. Finally, plaintiffs
allege that Carolco and the other defendants entered into the
foregoing agreements fraudulently in that they did not intend to
perform their alleged promises at the time they entered into the
agreements.
Based on the foregoing allegations, plaintiffs sought
compensatory damages in excess of $5,000,000, unspecified
punitive damages, attorneys' fees, rescission of the Carolco/21st
Agreement, a declaration as to the plaintiffs' alleged rights and
a preliminary and permanent injunction preventing Carolco and the
other defendants from distributing Spiderman upon completion
without according producer screen credit to Golan and from
issuing press releases or other information to the media without
according producer credit to Golan.
On October 22, 1993, the plaintiffs, following several
successful demurrers by the defendants to the plaintiffs'
previous complaints, filed a Third Amended Complaint against
Carolco, CII, SPL and RCS NV. On November 19, 1993, all four
defendants filed an answer to the Third Amended Complaint in
which they agreed that the Carolco/21st Agreement had been
rescinded, thereby accepting the demand and offer of rescission
contained in the Third Amended Complaint. The defendants also
filed a cross-complaint seeking restitution of the more than
$5,000,000 that plaintiffs were paid under the rescinded
agreement. The plaintiffs contend that assuming they make such
restitution to Carolco and its co-defendants and
co-cross-complainants, the plaintiffs would be entitled to
recover the rights, or the monetary value of the rights, that
were transferred under the Carolco/21st Agreement.
On December 14, 1993, 21st became a debtor under Chapter 7
of the United States Bankruptcy Code as a result of petitions for
involuntary bankruptcy that were filed by various creditors of
21st (other than the parties to the above-described litigation).
On December 15, 1993, such bankruptcy proceedings were converted
to voluntary reorganization proceedings under Chapter 11 of the
Bankruptcy Code. These bankruptcy filings resulted in an
automatic stay of the Los Angeles Superior Court litigation. On
July 21, 1994, the Chapter 11 Trustee for 21st and the defendants
in this action stipulated to relief from the automatic stay as
a result of which the litigation resumed.
On February 3, 1994, Carolco, CII, SPL and RCS NV filed
declaratory relief actions against Viacom International Inc., its
division, Viacom Enterprises, and various Doe defendants
(collectively "Viacom"), and against CPT Holdings, Inc. and
Columbia Pictures Home Video, Inc. jointly doing business as
Columbia Tri-Star Home Video, and various Doe defendants
(collectively "Columbia Tri-Star"), seeking declarations that
such defendants do not have certain motion picture distribution
rights in Spiderman. Both Viacom and Columbia Tri-Star contend
that they acquired certain distribution rights from 21st prior
to Carolco's and 21st's entering into the Carolco/21st Agreement,
and allegedly continue to hold such rights.
Viacom and Columbia Tri-Star each have answered Carolco's
complaints against them, denying the material allegations of the
complaints. In addition, on April 8, 1994, Columbia Tri-Star
served a cross-complaint on Carolco and its co-plaintiffs for
anticipatory repudiation of contract, specific performance,
breach of the implied covenant of good faith and fair dealing,
and declaratory relief. Columbia Tri-Star is seeking a judicial
declaration that Carolco and its co-plaintiffs are contractually
obligated to accord to Columbia Tri-Star the distribution rights
in Spiderman that Columbia Tri-Star alleges it has, an order
commanding the performance of those alleged obligations, and,
alternatively, damages "in a sum not less than $5,000,000" if
those alleged obligations are not performed.
On May 18, 1994, Viacom International Inc. ("Viacom") filed
an action in the Superior Court of the State of California for
the County of Los Angeles against Carolco, CII, SPL and RCS NV
alleging, among other things, that Viacom is contractually
entitled to all rights to produce and exploit the motion picture
Spiderman. Based on this claim, Viacom is seeking damages for
breach of contract, specific performance, declaratory relief,
interference with contractual relations and interference with
prospective economic advantage. The Court has ordered this
action consolidated with the action brought by 21st and Golan and
with the actions brought by Carolco, CII, SPL and RCS NV against
Viacom and Columbia Tri-Star. Carolco is unable to place a
monetary value on the television rights claimed by Viacom. Viacom
asserts that the television distribution rights in Spiderman
could potentially generate distribution fees to Viacom in excess
of $2,000,000. Discovery has commenced in all related cases.
Purported Class Action Litigation:
On March 24, 1994, a complaint was filed the same day that
Carolco and LIVE had signed a Letter of Intent with respect to
the proposed merger of the two companies. This purported class
action lawsuit was filed in the Court of Chancery of the State
of Delaware in and for New Castle County, by an alleged
stockholder of LIVE against LIVE, Carolco, certain of Carolco's
and LIVE's past and present executive officers and directors,
Pioneer and Cinepole. The complaint alleges, among other things,
that the defendants violated their fiduciary duties owed to LIVE
stockholders in connection with the proposed merger. Plaintiff
sought a preliminary and permanent injunction enjoining the
merger under its then current financial terms; an open market
auction of LIVE; to the extent the merger was consummated prior
to the entry of a final judgement in the action, rescission of
the merger; repayment of profits and benefits obtained as a
result of defendant's alleged conduct; and attorney's fees and
expenses. Since the merger agreement between Carolco and LIVE has
been terminated, this action was dismissed on October 28, 1994.
Class Action Litigation:
On January 9, 1992, a purported class action lawsuit was
filed in the U.S. District Court, Central District of California,
by alleged stockholders of LIVE against Carolco, LIVE and certain
of Carolco's and LIVE's past and present executive officers and
directors. The complaint alleges, among other things, that the
defendants violated Section 10(b) of the Securities and Exchange
Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated
thereunder (i) by concealing the true value of certain of
Carolco's and LIVE's assets, and overstating goodwill,
stockholders' equity, operating profits and net income in
Carolco's and LIVE's Forms 10-K for the year ended December 31,
1990, in their 1990 Annual Reports and in their Forms 10-Q for
the quarters ended March 31, 1991 and June 30, 1991, and (ii) by
materially understating the true extent of the write-off of
goodwill in connection with the sale of Lieberman Enterprises
Incorporated to Handleman Company in July 1991. In addition, the
complaint alleges that certain of the defendants are liable as
controlling persons under Section 20 of the Exchange Act and
alleges that certain other defendants are liable for aiding and
abetting the primary violations. Subsequently, two additional
lawsuits were filed in the U.S. District Court, Central District
of California, by alleged stockholders of LIVE against the same
persons and entities who were defendants in the original action,
making substantially the same allegations as were made in the
first lawsuit. On March 30, 1992, these lawsuits were
consolidated. Further in April 1992, an amended complaint was
filed in the consolidated action, (the "Amended Complaint"). The
Amended Complaint contains substantially the same allegations as
the three original complaints. In addition, the Amended Complaint
lengthened the alleged class period and added as defendants
certain substantial shareholders (New CIBV, Pioneer and Le
Studio), directors and former directors of Carolco
(Messrs. Afman, Bonnell, Matsumoto, and Noda) and a lender to
Carolco. In addition to the claims asserted in the individual
actions, a claim for respondeat superior liability was added. On
June 17, 1992, the U.S. District Court, Central District of
California, entered an order conditionally certifying the class,
subject to possible decertification after discovery is completed.
On or about January 27, 1993, a second amended complaint was
filed in the consolidated action
expanding the allegations against certain directors, a lender to
Carolco and Pioneer. On April 19, 1993, the Court granted
Pioneer's Motion to Dismiss the second amended complaint as
against Pioneer.
In February 1992, a purported class action lawsuit was
filed in the U.S. District Court, District of Delaware, by an
alleged holder of Carolco's public debt, against Carolco, LIVE
and certain executive officers and directors of Carolco and LIVE.
The Delaware complaint alleges, among other things, that the
defendants violated Section 10(b) of the Exchange Act and
Rule 10b-5 promulgated thereunder by concealing the true value
of certain of LIVE's assets, and overstating goodwill,
stockholders' equity, operating profits and net income in LIVE's
Form 10-K for the year ended December 31, 1990 and in its Forms
10-Q for the quarters ended March 31, 1991 and June 30, 1991. In
April 1992, this lawsuit was transferred to the U.S. District
Court, Central District of California. The proceedings are being
coordinated with the consolidated action described in the
preceding paragraph. On June 17, 1992, the U.S. District Court,
Central District of California, entered an order conditionally
certifying the class, subject to possible decertification after
discovery is completed. The purported class action complaints do
not contain a damage claim of any specific dollar amount.
Discovery has commenced, including the taking of depositions.
Other Litigation:
On December 1, 1992, Parafrance Communication, S.A. and
Paravision International S.A. filed identical lawsuits in Los
Angeles County Superior Court and the United States Bankruptcy
Court, Central District of California, against Carolco and
certain of its affiliates for (i) breach of contract, (ii) fraud
and (iii) unjust enrichment with respect to the motion pictures
The Producers, Darling and Bill and Ted's Excellent Adventure as
a result of the alleged failure by De Laurentiis Entertainment
Group Inc.(" DEG") to deliver certain rights in such pictures to
the plaintiffs under a 1990 Asset Purchase Agreement. In
connection with its acquisition of DEG as part of the DEG Plan
of Reorganization of DEG, Carolco became a party to the 1990
Asset Purchase Agreement pursuant to which DEG sold its feature
film library to Parafrance. The State Court action was removed
to the Bankruptcy Court and consolidated with the other action.
Plaintiffs allege damages in excess of $3,000,000. Carolco
believes that it is secondarily liable to the liquidation estate
created upon confirmation of the Plan of Reorganization of DEG
(the "DEG Liquidation Estate") in this action and that any
judgment against it in this action will be satisfied from a
reserve fund of the DEG Liquidation Estate set aside for such
claims, which is also named as a defendant in this action. The
parties have reached a tentative settlement in this action which
requires no cash payment on the part of Carolco.
On December 10, 1992, Lang Elliott Entertainment Inc.
("Lang Elliott") filed a lawsuit in Los Angeles County Superior
Court against Carolco, CTI, Vista and certain affiliates of
Carolco for breach of contract and an accounting relating to
amounts allegedly owed by Vista to Lang Elliott with respect to
the motion picture Cage. In addition, the complaint alleges
claims for conversion, constructive trust, intentional
misrepresentation, breach of the covenant of good faith and fair
dealing, interference with prospective business advantage, unfair
competition and anti-trust violations. In addition to monetary
damages, the suit also seeks rescission and restitution. The suit
arises out of a 1989 distribution agreement under which the Vista
Partnership, of which an affiliate of Carolco is the general
partner, acquired all distribution rights to the picture. The
complaint seeks damages of $1,350,000 (which claim includes
$1,000,000 of punitive damages) for (i) license fees allegedly
due to Lang Elliott under a rescinded agreement between a Carolco
affiliate and CTI and (ii) alleged damage to the home video and
free television value of Cage due to a nine month extension by
the Vista Partnership of the pay television rights of HBO and
Showtime to the film for which the Vista Partnership received no
fee. Carolco has successfully demurred to parts of Lang Elliott's
complaint resulting in dismissal of the antitrust and breach of
covenant of good faith and fair dealing causes of action. The
Vista Partnership previously defended itself successfully against
Lang Elliott in a recent arbitration which raised some of the
same issues. Carolco and the other defendants have filed an
answer denying the allegations in Lang Elliott's complaint and
both sides are engaging in discovery.
Management and counsel to Carolco are unable to predict the
ultimate outcome of these actions at this time. However, Carolco
and the other defendants believe that these lawsuits are without
merit and are defending them vigorously. Accordingly, no
provision for any liability which may result has been made in
Carolco's consolidated financial statements. In the opinion of
management, these actions, when finally concluded and determined,
will not have a material adverse effect upon Carolco's financial
position or results of operations.
For additional information regarding other material legal
proceedings to which Carolco or any of its subsidiaries are a
party, see Carolco's Annual Report on Form 10-K for the year
ended December 31, 1993.
Note H - Stockholders' Deficiency
Pursuant to the terms of the Carolco Restructuring,
Pioneer, Cinepole and MGM Holdings purchased from Carolco 40,000,
12,500 and 30,000 shares, respectively, of Series A Convertible
Preferred Stock ("New Preferred"), in exchange for cash payments
of $40,000,000, $12,500,000 and $30,000,000, respectively. The
New Preferred bears an annual dividend rate of 5%. Dividends are
payable when, as and if declared by Carolco's Board of Directors,
either (a) out of any funds legally available therefor, or (b)
for the first five years after issuance, to the extent legally
available therefor, in additional shares of New Preferred equal
to 1.25% multiplied by the liquidation preference of the New
Preferred for each quarterly dividend period, at the Company's
election. All dividends shall accrue from the beginning of each
quarterly dividend period and shall be payable on the first day
of the next succeeding quarterly dividend period. Accrued but
unpaid dividends will be added to the liquidation preference of
the New Preferred on the first day of the next succeeding
quarterly dividend period. On September 30, 1994, unpaid
dividends totalling $2,921,000 from January 1, 1994, April 1,
1994 and July 1, 1994 had been added to the liquidation
preference, resulting in a total liquidation preference of
$85,421,000. In addition, dividends of $1,061,000 payable on
October 1, 1994, were accrued at September 30, 1994. However,
since Carolco did not have sufficient "surplus" as defined in the
provisions of the General Corporation Law of the State of
Delaware, Carolco was unable to pay such dividends. Each share
of New Preferred is convertible at the option of the holder into
Common Stock of Carolco at $.60 per share. As of September 30,
1994, approximately 142,368,000 shares of Common Stock of Carolco
would be issuable upon conversion of the New Preferred.
Note I - Other Income
Other income in 1993 consists primarily of revenues from
the operations of Carolco's film studio in North Carolina
("Carolco Studios"), rental income and foreign currency exchange
gains. Other income in 1994 includes revenues from the
operations of Carolco Studios, interest income, rental income and
a gain of $1,275,000 recognized upon the sale of Carolco's
aircraft (see Note F). Other income in 1994 also includes
producers fees of approximately $449,000 related to the motion
picture Stargate, paid to Carolco pursuant to the agreement
entered into with Hexagon (see Note E.)
In November 1992, Carolco entered into an agreement with
Last of the Dogmen, Inc. ("Dogmen") whereby Carolco furnished the
executive producer services of Mr. Kassar to Dogmen for the
production of the motion picture Last of the Dogmen. In exchange
for such services, Dogmen agreed to pay Carolco a producing fee
and an overhead fee. As of September 30, 1994, Carolco has
recorded producers fees of approximately $475,000 related to the
motion picture Last of the Dogmen.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Carolco is an entertainment company which finances,
produces and leases motion pictures for exhibition in domestic
and foreign theatrical markets and for later worldwide release
in all media including home video and pay and free television.
Carolco anticipates that it will produce a limited number of
"event" motion pictures per year, with commercial subject matter
and well-known creative elements, provided that Carolco is able
to obtain sufficient funds to enable it to do so. In 1993,
Carolco produced and released one film, Cliffhanger, which was
financed through a co-production arrangement with Pioneer,
Cinepole and RCS. Feature film revenues are derived primarily
from the distribution of feature films in both domestic and
foreign markets. Carolco recognizes minimum guaranteed amounts
from theatrical exhibition and revenues from home video and pay
television license agreements when the license period begins for
each motion picture and such motion pictures are available
pursuant to the terms of the license agreement. Revenues from
theatrical exhibition in excess of minimum guaranteed amounts
("overages") are recognized ratably during the period of
exhibition.
Results of Operation
Nine Months Ended September 30, 1993 as Compared to Nine Months
Ended September 30, 1994
Feature film revenues decreased from $85,676,000 for the
nine months ended September 30, 1993 to $48,184,000 for the nine
months ended September 30, 1994. This represents a decrease of
$37,492,000, or approximately 43.8%. Carolco had no theatrical
releases during the first nine months of 1993 or the first nine
months of 1994. Cliffhanger was produced by a joint venture in
which Carolco owned less than 50%. Therefore, the revenues
associated with the May 1993 theatrical release of Cliffhanger
are not included in the feature film revenues of Carolco.
Revenues for the nine months ended September 30, 1993 and 1994
represent theatrical overages and license fees from exploitation
in secondary markets (i.e. pay television, video, free
television, etc.) of films released theatrically in prior years.
Feature film revenues for the nine months ended September 30,
1993 include approximately $6,732,000, $1,250,000, $1,085,000 and
$2,254,000 related to the domestic television, foreign video and
foreign television availabilities and foreign overages,
respectively, of Universal Soldier, released theatrically in
1992; approximately $12,241,000 from overages from the theatrical
release and approximately $10,870,000 from the domestic pay
television availability of Basic Instinct, released theatrically
in 1992; approximately $2,137,000 from the foreign pay television
availability of Iron Eagle III, released theatrically in 1992;
approximately $11,265,000 from the foreign pay television
availability and $3,320,000 from domestic video overages of
Terminator 2: Judgment Day, released theatrically in 1991;
$6,000,000 from the domestic network television availability and
$1,314,000 of foreign theatrical overages on Total Recall,
released theatrically in 1990; $4,050,000 from the foreign pay
television availability of Oscar and Hamlet, for which Carolco
had certain foreign distribution rights; $1,724,000 from the
foreign television availability of Jacob's Ladder, which was
released theatrically in 1990; $2,227,000 related to the domestic
television availability of LA Story, released theatrically in
1991; $3,075,000 from the domestic video availability and
$1,504,000 from the foreign video availability of Chaplin,
released theatrically in 1992; and $1,175,000, $1,721,000 and
$1,831,000 from the foreign television availability of Rambo III,
Air America, and Narrow Margin, respectively, released
theatrically in 1988 and 1990. Feature film revenues for the
nine months ended September 30, 1994 include approximately
$8,250,000 from the domestic network television availability,
$8,642,000 from foreign theatrical and video overages and
$2,150,000 from the foreign pay television availability of
Terminator 2: Judgment Day; $400,000 and $772,000, respectively,
from the foreign pay television availability and foreign
theatrical overages of Iron Eagle III; $2,984,000 from the
domestic syndication television availability of Rambo III;
$1,262,000 from the domestic and foreign pay television
availability of Chaplin; $901,000 from the foreign free
television availability of Total Recall; $1,569,000 and $969,000,
respectively, from the foreign television availability and
foreign theatrical overages related to the motion picture
Universal Soldier; and $4,658,000 in foreign theatrical and video
overages and $398,000 from the foreign pay television
availability of Basic Instinct.
Amortization of film costs, residuals and participations
decreased by $21,322,000 or 26.6%, from $80,138,000 for the nine
months ended September 30, 1993 to $58,816,000 for the comparable
period in 1994. Amortization of film costs, as a percentage of
Carolco's feature film revenues increased from 93.5% for the
nine months ended September 30, 1993 to 122.1% for the nine
months ended September 30, 1994. This increase is the result
of additional amortization of film costs of approximately
$13,300,000 recorded in connection with the development of the
motion picture Crusade. (See Note D of the Notes to Condensed
Consolidated Financial Statements.) In addition, Carolco
recorded additional amortization of film costs of approximately
$2,980,000 as a result of the abandonment of other development
projects. In the nine months ended September 30, 1993, Carolco
recorded additional amortization of film costs of $1,745,000 and
$2,965,000, respectively, related to the write-off of development
costs and a reduction in the estimated net realizable value of
its film library.
Selling, general and administrative ("SG&A") expenses
(which caption also includes production overhead costs),
decreased by $2,757,000 or 14.7%, from $18,779,000 during the
first nine months of 1993 to $16,022,000 during the first nine
months of 1994. In 1993, Carolco had no films in production and
was, therefore, unable to capitalize any production overhead to
film costs. In 1994, Carolco capitalized approximately
$3,143,000 of production overhead to film costs. In addition,
a decrease of SG&A expenses of approximately $2,714,000 was the
result of reductions in Carolco's work force and the downsizing
of the operations of Carolco. These savings were offset by
$1,300,000 in costs associated with the Merger (see Note B of the
Notes to the Condensed Consolidated Financial Statements) and
with a $1,800,000 increase in Carolco's allowance for doubtful
accounts receivable.
Interest expense decreased by $9,527,000 or 48.7%, from
$19,565,000 during the first nine months of 1993 to $10,038,000
during the first nine months of 1994. This decrease is the
result of lower debt levels and reduced interest rates.
Additionally, Carolco capitalized $894,000 of its interest costs
to film costs in the first nine months of 1994. Carolco had no
films in production in the first nine months of 1993 and,
therefore, was unable to capitalize any of its interest costs to
film costs.
On February 3, 1994, Carolco sold its aircraft for
$1,925,000 and the remaining loan balance of $900,000, including
accrued interest, was paid in full. (See Note F of the Notes to
Condensed Consolidated Financial Statements.) Carolco recognized
a gain of $1,275,000 in 1994 as a result of the sale of the
aircraft.
Carolco incurred a consolidated net loss for the nine
months ended September 30, 1993 of $31,427,000, including
$4,207,000 attributable to its ownership interest in LIVE.
Carolco incurred a consolidated net loss for the nine months
ended September 30, 1994 of $31,528,000. At September 30, 1994,
Carolco had a deficiency in assets of $52,597,000.
Three Months Ended September 30, 1993 as Compared to Three Months
Ended September 30, 1994
Feature film revenues decreased from $24,955,000 for the
three months ended September 30, 1993 to $18,126,000 for the
three months ended September 30, 1994. This represents a decrease
of $6,829,000, or approximately 27.4%. Carolco had no theatrical
releases during the three months ended September 30, 1993 or the
three months ended September 30, 1994. Revenues for the three
months ended September 30, 1993 and 1994 represent theatrical
overages and license fees from exploitation in secondary markets
(i.e. pay television, video, free television, etc.) of films
released theatrically in prior years. Feature film revenues for
the three months ended September 30, 1993 include approximately
$3,006,000 from foreign theatrical overages related to the motion
picture Basic Instinct; approximately $2,227,000 from the
domestic free television availability of L A Story; $3,075,000
from the domestic video availability and $1,504,000 from the
foreign video availability of Chaplin; $625,000 and $573,000,
respectively, from the foreign pay television availability and
domestic video availability of Dark Wind; $1,837,000 from the
foreign pay television availability of Iron Eagle III; $665,000
from the foreign television availability of Narrow Margin; and
$6,105,000, $1,050,000 and $2,036,000 from the domestic pay
television availability, foreign television availability and
foreign theatrical overages of Universal Soldier. Feature film
revenues for the three months ended September 30, 1994 include
approximately $2,817,000 in foreign and domestic theatrical
overages related to Basic Instinct; $934,000 from foreign
theatrical overages of Universal Soldier; and $6,155,000 from
foreign theatrical overages of Terminator 2: Judgment Day.
Amortization of film costs, residuals and participations
decreased by $7,568,000, or 30.6%, from $24,756,000 for the three
months ended September 30, 1993 to $17,188,000 for the comparable
period in 1994. Amortization of film costs, as a percentage of
Carolco's feature film revenues decreased from 99.2% for the
three months ended September 30, 1993 to 94.8% for the three
months ended September 30, 1994.
Selling, general and administrative ("SG&A") expenses
(which caption also includes production overhead costs),
increased by $1,083,000 or 17.8%, from $6,076,000 during the
three months ended September 30, 1993 to $7,159,000 during the
three months ended September 30, 1994. In 1993, Carolco had no
films in production and was, therefore, unable to capitalize any
production overhead to film costs. In 1994, Carolco capitalized
approximately $553,000 of production overhead to film costs.
In addition, as a result of reductions in Carolco's work force
and the downsizing of the operations of Carolco, a savings of
$1,464,000 in SG&A expenses was achieved. However, these
savings were offset by an increase in Carolco's allowance for
doubtful accounts receivable of $1,800,000 and by costs
associated with the Merger totaling $1,300,000.
Interest expense decreased by $2,851,000, or 48.2%, from
$5,915,000 during the three months ended September 30, 1993 to
$3,064,000 during the three months ended September 30, 1994.
This decrease is the result of lower debt levels and reduced
interest rates. Carolco capitalized $282,000 of its interest
costs to film costs in the three months ended September 30, 1994.
Carolco had no films in production in the first quarter of 1993
and, therefore, was unable to capitalize any of its interest
costs to film costs.
Carolco incurred a consolidated net loss for the three
months ended September 30, 1993 of $11,189,000, including
$2,180,000 attributable to its ownership interest in LIVE .
Carolco incurred a consolidated net loss for the three months
ended September 30, 1994 of $8,306,000. At September 30, 1994,
Carolco had a deficiency in assets of $52,597,000.
Liquidity and Capital Resources
CII, with Carolco as principal guarantor, has a credit
facility with CLBN acting as agent and lender (the "Existing
Carolco Credit Facility") under which $14,000,000 in principal
amount is outstanding as of September 30, 1994. The maturity
date of the loan under the Existing Carolco Credit Facility,
which is secured by substantially all of Carolco's assets, has
been extended to September 29, 1995. CLBN has agreed to remit
to CII all collections from accounts receivable pledged to CLBN,
so long as certain defaults do not occur. The loan bears
interest at 3-month LIBOR plus 2.5% and no additional amounts are
available to be drawn thereunder.
See below for a discussion of additional borrowings from
CLBN in connection with the consummation of interim financing
arrangements.
In August 1992, Carolco entered into an agreement with the
Screen Actors Guild, the Directors' Guild of America, the
Writers' Guild of America and the Motion Picture Industry Pension
and Health Plan (collectively, the "Guilds") with respect to
amounts owed to the Guilds under certain collective bargaining
agreements. As of September 30, 1994, the balance due the Guilds
pursuant to a promissory note made in favor of the Guilds (the
"Guild Note") was $9,707,000, including accrued interest at 3-
month LIBOR, plus 1% per annum. The installment payment of
$3,000,000, due on October 1, 1994, was not paid by Carolco. If
the payment is not paid within the 120-day grace period as
provided in the Guild Note, the Guilds may accelerate payment of
the entire remaining balance due, plus accrued interest thereon.
The Guild Note is secured by a lien on substantially all of the
Company's assets, which lien is subordinated to the Existing
Carolco Credit Facility.
Pursuant to the 13% Note Indenture, since Carolco's
consolidated net worth was less than $33,334,000 on September
30,1993, Carolco was obligated to offer to purchase $5,000,000
in aggregate principal amount of its 13% Notes on March 31, 1994.
Pursuant to the terms of the 13% Note Indenture, Carolco credited
a portion of the 13% Notes acquired as part of the Restructuring
against this obligation and was therefore not required to
purchase any additional 13% Notes. As a result of certain
amendments to the 13% Note Indenture resulting from the Carolco
Restructuring, Carolco has no further obligation to purchase the
balance of the 13% Notes prior to maturity in 1996.
In September 1988, Carolco entered into a 10.75% term loan
agreement with John Hancock Leasing. The purpose of the loan was
for the purchase of an aircraft and its refurbishment and was
secured by the aircraft. Interest and principal of approximately
$141,000 were payable monthly for five years. In 1993, Carolco
negotiated a reduction of the monthly payment, pending the sale
of the aircraft. On February 3, 1994, Carolco sold the aircraft
for $1,925,000 and the remaining loan balance of $900,000,
including accrued interest, was paid in full. Carolco recognized
a gain of $1,275,000 in 1994 related to the sale of the aircraft.
In December 1993, an affiliate of Carolco commenced
principal photography of Wagons East, starring John Candy and
Richard Lewis. As a result of the untimely death of Mr. Candy,
Carolco entered into an arrangement with the insurance carrier
providing principal elements insurance for the film and an
affiliate of LIVE pursuant to which Carolco will recover
substantially all of the costs incurred by Carolco on the film.
In exchange for certain rights in the film, LIVE agreed to fund
completion of the film and engaged Carolco to complete production
and to service certain pre-existing distribution agreements. In
April 1994, Carolco received approximately $13,876,000
representing partial payments under this multi-party arrangement.
The balance will be paid to Carolco upon completion of the final
audit of the applicable production costs. The remaining amount
of costs to be reimbursed is included in Other Assets.
In mid-May 1994, Carolco determined that the potential
costs of the motion picture Crusade, starring Arnold
Schwarzenegger, were significantly greater than originally
budgeted and that the film would have to perform exceptionally
well in the marketplace to generate a gross margin acceptable for
the required level of investment. As a result, Carolco made the
decision to postpone indefinitely the start of principal
photography (which had been scheduled to begin in August 1994)
while Carolco evaluated alternative approaches to the project.
As a result of Carolco's decision not to make Crusade when
scheduled, an affiliate of Arnold Schwarzenegger made a claim for
payment of the full fee that would have been payable for the
acting services of Mr. Schwarzenegger. Carolco and the affiliate
of Mr. Schwarzenegger have agreed to settle this claim and are
in the process of documenting such agreement. Pursuant to the
settlement agreement, Carolco has paid certain amounts to the
affiliate of Mr. Schwarzenegger and assigned to Mr.
Schwarzenegger all rights, title and interest in Crusade. If,
during an approximately three-year period, Mr. Schwarzenegger
obtains a commitment for production of the film, Carolco will
receive reimbursement of a portion of its pre-production
expenditures on the film and will participate in any future net
profits of the film (as defined in the agreement). In the event
Mr. Schwarzenegger is unable to obtain a production commitment
during such period, Carolco will have the right to reacquire all
rights, title and interest in Crusade.
As of September 30, 1994, Carolco had paid a total of
$13,300,000 in pre-production expenses for Crusade including
captitalized interest and production overhead and amounts
paid to the affiliate of Mr.
Schwarzenegger. These amounts have been included in
Amortization of Film Costs for the nine months ended September
30, 1994.
In October 1994, Carolco consummated certain interim
financing arrangements which provided Carolco with additional
cash of approximately $18,500,000. The arrangements consist of
the following transactions:
1. Carolco Production Services Inc., an indirect wholly-
owned subsidiary of Carolco ("CPSI"), and Chargetex 6, S.A., an
affiliate of the French company Chargeurs ("Chargetex"), entered
into a Purchase and Sale Agreement dated as of October 18, 1994
whereby CPSI transferred to Chargetex all of its rights in the
motion picture Showgirls, which commenced principal photography
on October 23, 1994. The purchase price consisted of (i) the
reimbursement of CPSI's and/or Carolco's direct costs incurred
in connection with the development and production of the motion
picture through the date the rights in the picture were
transferred to Chargetex and (ii) the assumption by Chargetex of
all of CPSI's and/or Carolco's obligations relating to the
development and production of the motion picture. Approximately
$8,900,000 was paid to Carolco by Chargetex upon closing of the
transaction with additional amounts estimated to be less than
$1,000,000 to be paid as accountings are provided to Chargetex.
CPSI will be entitled to a percentage of the adjusted gross
receipts from the exploitation of the completed motion picture
after Chargetex has recouped certain costs and expenses incurred
in connection with the motion picture plus an additional
$10,000,000. Pursuant to a separate agreement between CPSI and
Chargetex dated as of October 18, 1994, CPSI was granted an
option to purchase, at any time until February 28, 1995, a 50%
interest in all adjusted gross revenues that may be derived by
Chargetex from the distribution and exploitation of the motion
picture and the related ancillary rights. CPSI may exercise such
option by paying Chargetex an amount equal to 50% of the direct
out-of-pocket expenses (plus interest thereon) incurred by
Chargetex in connection with Showgirls through the time CPSI
exercises such option. Upon exercise of such option, CPSI would
be required to assume an undivided 50% responsibility for all
Chargetex's executory obligations in connection with Showgirls
and would be required to assume and pay 50% of all subsequent
costs relating to the production of the motion picture as and
when due. In addition, as a condition to CPSI's right to
exercise such option, CPSI will be required to post security
reasonably adequate to Chargetex to secure CPSI's obligations.
2. Pioneer, Pioneer LDC, Inc., an affiliate of Pioneer,
and Carolco entered into an Agreement dated as of October 14,
1994 pursuant to which Carolco received approximately $6,700,000
from Pioneer arising from the video distribution in Japan of
Terminator 2: Judgment Day and theatrical, video and pay
television distribution in Japan of Cliffhanger. The amounts
from Cliffhanger were paid to Carolco pursuant to an agreement
entered into by and among the co-producers of Cliffhanger.
3. Carolco and RCS Video International Services B.V.
("RCS") entered into a Waiver, Assignment and Acknowledgment
Agreement dated as of October 14, 1994 (the "RCS Waiver
Agreement") whereby RCS waived certain conditions subject to
which RCS was required to purchase Carolco 7% Convertible
Subordinated Notes (the "7% Notes") on December 30, 1994 under
that certain Standby Agreement by and among Carolco, RCS,
Cinepole, Le Studio, Pioneer and Tele-Communications, Inc.
("TCI") (the "Standby Agreement"). In exchange for the
accommodations by RCS, the parties agreed to reduce the principal
amount of 7% Notes to be purchased by RCS under the Standby
Agreement from $2,500,000 to $1,000,000 and RCS agreed to
purchase on December 30, 1994, a portion of Carolco's interest
in the motion picture Cutthroat Island for $1,500,000 on terms
that are no less favorable than those applicable
to TCI and Le Studio in that certain Co-Production Financing
Commitment Agreement dated as of August 9, 1993 by and among
Carolco, Le Studio and TCI.
On October 14, 1994, Carolco received $987,690 representing
the principal amount of a $1,000,000 bank loan from Credit
Lyonnais Bank Nederland N.V. ("CLBN"), net of imputed interest
at the rate of 5.4375% per annum. As security for such loan,
Carolco assigned to CLBN its right to receive RCS' payment for
7% Notes due in December 1994. RCS delivered a letter of credit
to CLBN to secure its obligation to purchase 7% Notes.
4. Carolco and Le Studio Canal+ (U.S. ) ("Le Studio
U.S.") entered into an Amendment to the Exclusive Agency
Agreement dated as of October 14, 1994 whereby Le Studio U.S.
prepaid $2,000,000 of sales commissions that are anticipated to
be due to Carolco in late 1994 for serving as the foreign sales
agent for the motion picture Stargate. See Note E for more a
complete discussion of the arrangements with Le Studio U.S.
regarding Stargate.
A portion of the funds received from these interim
financing arrangements will be used to fund the motion picture
Cutthroat Island, starring Geena Davis and Matthew Modine and
directed by Renny Harlin, which commenced principal photography
in Malta at the end of October 1994. Carolco has received the
commitment of a group of banks, including CLBN, to provide an
individual production loan to finance a substantial portion of
the cost of Cutthroat Island (the "Cutthroat Production Loan").
Carolco will be unable to access the Cutthroat Production
Loan until a number of conditions are met including (i) entering
into distribution agreements for a substantial portion of the
distribution rights for Cutthroat Island, (ii) obtaining a
completion bond (also known as an "over-budget" guarantee) and
(iii) execution of final loan documentation. Such distribution
agreements and completion bond must be pledged as collateral to
secure the Cutthroat Production Loan. Although agreements in
principle have been reached between Carolco and various
distributors with regard to the pre-sale of a substantial portion
of the distribution rights for Cutthroat Island, due to
production and casting delays, the documentation of these pre-
sales has not yet been completed. In addition, due to such
delays, Carolco has not yet obtained the completion bond for the
film. Therefore, as of November 14, 1994, Carolco has been
unable to access the Cutthroat Production Loan. In addition to
its ongoing overhead expenses, Carolco continues to fund the
production expenses of Cutthroat Island from its current cash
balances and continues to face extreme cash shortages. Although
management of Carolco believes it is likely that Carolco will be
able to satisfy all of the conditions required to access the
Cutthroat Production Loan, there can be no assurance that this
will be the case. In the event Carolco is unable to successfully
consummate the Cutthroat Production Loan, it will be required to
procure financing from alternative sources in order to complete
the production of Cutthroat Island. No assurance can be given
that such financing can be obtained on a timely basis or obtained
on terms acceptable to Carolco. In the event Carolco is unable
to consummate the Cutthroat Production Loan or procure
alternative production financing on a timely basis, Carolco may
be forced to cease production of Cutthroat Island and may be
unable to meet its other obligations and may be unable to
continue to operate as a going concern.
As a result of its anticipated production schedule, Carolco
will not generate revenues from new production in 1994 and
currently anticipates that it will continue to experience losses
through 1994 and much of 1995. Moreover, because of the
substantial capital requirements involved in the pre-production
and principal photography stages of Cutthroat Island (the direct
negative cost of Cutthroat Island is estimated to be
approximately $75,000,000), Carolco expects it will continue to
experience significant liquidity constraints throughout the
fourth quarter of 1994 prior to the anticipated December 30, 1994
funding of the Standby Agreement. After adjusting the Standby
Agreement for the RCS transaction described in Item 3 above,
Carolco anticipates that it will receive $17,500,000 from the
purchase by Pioneer and Cinepole of 7% Notes, $6,000,000 in
immediately available co-productions investments by Le Studio and
TCI, and $1,500,000 from the purchase by RCS of a portion of
Carolco's interest in Cutthroat Island. Carolco believes that
only through a combination of the Cutthroat Production Loan and
the funding of the co-production investments and 7% Notes will
Carolco have sufficient resources to continue financing the
production of Cutthroat Island and meet its other obligations as
they come due.
<PAGE>
CAROLCO PICTURES INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to PART I - FINANCIAL INFORMATION, Item 1. Financial
Statements, Note G - Commitments and Contingencies which is incorporated herein
by reference.
Item 3. Defaults Upon Senior Securities
Because Carolco did not have sufficient "surplus" as
defined in and computed in accordance with the provisions of the
General Corporation Law of the State of Delaware, Carolco was
unable to pay the dividends in the amount of $818,000 due January
1, 1994, $1,042,000 due April 1, 1994, $1,061,000 due July 1,
1994, and $1,061,000 due October 1, 1994 on its Series A
Convertible Preferred Stock. As a result, as of September 30,
1994, approximately $2,921,000 in unpaid dividends had been added
to the liquidation preference of the Series A Convertible
Preferred Stock and an additional $1,061,000 in accrued dividends
payable had been recorded.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
The Exhibits listed below are filed as part of this Report.
Sequentially
Exhibit No. Description of Exhibit Numbered Page
2.1 Agreement and Plan of Merger dated as of
August 10, 1994 among Carolco Pictures
Inc., LIVE Entertainment Inc. and Carolco
Acquisition Corp. (including certain exhibits
thereto).
Incorporated by reference to Exhibit 2.1
to Carolco's current report on Form 8-K
under the Securities Exchange Act of 1934
dated August 10, 1994.
10.1 Termination Agreement dated as of
October 13, 1994
by and among LIVE Entertainment Inc.,
Carolco
Acquisition Corp. and Carolco Pictures
Inc.
Incorporated by reference to Exhibit
10.1 to Carolco's
current report on Form 8-K dated October
13, 1994.
10.2 Waiver, Assignment and Acknowledgment
Agreement
dated as of October 14, 1994 by and
between Carolco
Pictures Inc. and RCS Video
International Services B.V.
Incorporated by reference to Exhibit
10.2 to Carolco's
current report on Form 8-K dated October
13, 1994.
10.7 Employment Agreement between Carolco
Pictures Inc. and Mario F. Kassar for
the services
of Mario F. Kassar, dated as of August
10, 1994.
Incorporated by reference to Exhibit 5
to Mario F.
Kassar and New Carolco Investments
B.V.'s
Schedule 13D (Amendment No. 14) under
the Securities Exchange Act of 1934 filed
with the Commission on August 16, 1994.
10.8 Stock Option Agreement of Mario F.
Kassar dated
as of August 10, 1994. Incorporated by
reference to
Exhibit 8 to Mario F. Kassar and New
Carolco
Investments B.V.'s Schedule 13D
(Amendment
No. 14) under the Securities Exchange
Act of 1934
filed with the Commission on August 16,
1994.
11.1 Computation of Loss per Common
Share 29
27 Financial Data Schedule 30
(b) Reports on Form 8-K:
Current Report on Form 8-K dated August 10,
1994 reporting events under
Items 5 and 7.
Current Report on Form 8-K dated October 13,
1994 reporting events under
Items 5 and 7.
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
CAROLCO PICTURES INC.
Registrant
Date: November 14, 1994
William A. Shpall,
Executive Vice
President and
Chief Financial
Officer
<TABLE>
EXHIBIT 11.1
CAROLCO PICTURES INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
Three Months Ended Nine Months Ended
September 30, September 30,
1993 1994 1993 1994
-------------------- -------------------
<S> <C> <C> <C> <C>
Weighted average shares outstanding 30,623,569 140,015,109 30,623,569 140,015,109
Less Treasury shares (2,027,381) (2,373,756) (1,530,400) (2,342,839)
------------ ----------- ----------- ------------
Total 28,596,188 137,641,353 29,093,169 137,672,270
============ ============ =========== ============
Loss from continuing operations ($12,769,000) ($8,306,000) ($31,828,000) ($31,528,000)
Preferred Dividends 0 (1,061,000) 0 (3,167,000)
------------ ------------ ------------- ------------
Loss from continuing operations
attributable to common shares ($12,769,000) ($9,367,000) ($31,828,000) ($34,695,000)
============= ============= ============= =============
Loss from continuing operations
per common share $(0.45) ($0.07) ($1.09) ($0.25)
============= ============= ============= =============
Equity in loss from discontinued operations of
affiliated company ($219,000) $0 ($1,398,000) $0
============= ============= ============= =============
Loss from discontinued operations per common share ($0.00) $0.00 ($0.05) $0.00
============= ============= ============= =============
Extrordinary gain on early extinguishment of debt $1,799,000 $0 $1,799,000 $0
============= ============= ============= =============
Income per share from extraordinary gain $0.06 $0.00 $0.06 $0.00
============= ============= ============= =============
Net loss ($11,189,000) ($8,306,000) ($31,427,000) ($31,528,000)
Preferred Dividends 0 (1,061,000) 0 (3,167,000)
------------- ------------- ------------- -------------
Net loss attributable to common shares ($11,189,000) ($9,367,000) ($31,427,000) ($34,695,000)
============= ============= ============= =============
Net loss per common share ($0.39) ($0.07) ($1.08) ($0.25)
============= ============ ============= =============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> SEP-30-1994
<CASH> 10,150
<SECURITIES> 0
<RECEIVABLES> 24,373
<ALLOWANCES> (3,218)
<INVENTORY> 64,686
<CURRENT-ASSETS> 0
<PP&E> 32,194
<DEPRECIATION> (13,104)
<TOTAL-ASSETS> 136,971
<CURRENT-LIABILITIES> 0
<BONDS> 93,734
<COMMON> 1,400
0
86
<OTHER-SE> (54,083)
<TOTAL-LIABILITY-AND-EQUITY> 136,971
<SALES> 48,184
<TOTAL-REVENUES> 53,266
<CGS> 58,816
<TOTAL-COSTS> 58,816
<OTHER-EXPENSES> 16,022
<LOSS-PROVISION> 1,827
<INTEREST-EXPENSE> 10,038
<INCOME-PRETAX> (31,610)
<INCOME-TAX> (82)
<INCOME-CONTINUING> (31,528)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (31,528)
<EPS-PRIMARY> (.25)
<EPS-DILUTED> (.25)
</TABLE>
