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 June 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, $.01 par
value, at August 15, 1994 was 140,015,109 shares, including 2,327,381 shares of
treasury stock.
<PAGE>
CAROLCO PICTURES INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - December 31, 1993 and June 30,
1994 (unaudited)
Condensed Consolidated Statements of Operations - Three and six months
ended June 30, 1993 and 1994 (unaudited)
Condensed Consolidated Statements of Cash Flows - Six months ended
June 30, 1993 and 1994 (unaudited)
Notes to Unaudited Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 3. Defaults upon Senior Securities
Item 6. Exhibits and Reports on Form 8-K
<PAGE>
CAROLCO PICTURES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
A S S E T S
<TABLE>
December 31, June 30,
1993 1994
(Unaudited)
(In Thousands)
<S> <C> <C>
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 56,697 $ 35,923
Restricted cash (Note D) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,255 --
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,837 9,959
Accounts receivable, related parties . . . . . . . . . . . . . . . . . . . . . . 4,877 3,886
Film costs, less accumulated amortization (Note C) . . . . . . . . . . . . . . . 78,427 63,925
Property and equipment, at cost, less accumulated depreciation and amortization. 19,925 19,330
Other assets (Note C). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,053 13,518
--------- ---------
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 188,071 $ 146,541
========= =========
</TABLE>
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
<TABLE>
<S> <C> <C>
LIABILITIES:
Accounts payable, accrued liabilities and other liabilities. . . . . . . . .$ 24,216 $ 21,339
Accrued residuals and participations . . . . . . . . . . . . . . . . . . . . 27,987 30,439
Income taxes, current and deferred . . . . . . . . . . . . . . . . . . . . . 11,365 11,365
Debt (Note E). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94,580 93,630
Advance collections on contracts . . . . . . . . . . . . . . . . . . . . . . 20,012 3,484
Notes and amounts payable, related parties (Note D). . . . . . . . . . . . . 30,981 30,577
--------- ---------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . 209,141 190,834
COMMITMENTS AND CONTINGENCIES - (Note F)
STOCKHOLDERS' DEFICIENCY - (Note G)
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 ($84,360,000 aggregate
liquidation preference). . . . . . . . . . . . . . . . . . . . . . . . 83 85
Common stock - $.01 par value, 650,000,000 shares authorized,
140,015,109 shares issued and outstanding, including 2,327,381
shares in treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,400 1,400
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . 297,931 300,034
Treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,920) (5,920)
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (314,564) (339,892)
---------- ---------
TOTAL STOCKHOLDERS' DEFICIENCY. . . . . . . . . . . . . . . . . . . . . (21,070) (44,293)
---------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY. . . . . . . . . . . . .$ 188,071 $146,541
========== =========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
CAROLCO PICTURES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1993 1994 1993 1994
(Unaudited)
(In Thousands, Except per Share Data)
<S> <C> <C> <C> <C>
Revenues:
Feature films . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,607 $ 9,779 $ 60,721 $ 30,058
Other income (Note H). . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,484 1,255 2,982 3,979
------------ --------- ---------- ---------
TOTAL REVENUES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,091 11,034 63,703 34,037
Costs and expenses:
Amortization of film costs, residuals and participations . . . . . . . . . . 27,759 25,582 55,382 41,628
Selling, general and administrative. . . . . . . . . . . . . . . . . . . . . 5,957 3,603 12,704 8,863
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,988 2,993 13,648 6,974
----------- --------- ---------- ----------
TOTAL COSTS AND EXPENSES. . . . . . . . . . . . . . . . . . . . . . . . 39,704 32,178 81,734 57,465
----------- --------- ---------- ----------
LOSS FROM CONTINUING OPERATIONS BEFORE
EQUITY IN LOSS OF AFFILIATED COMPANY AND
(PROVISION FOR) BENEFIT FROM INCOME TAXES. . . . . . . . . . . . . . . (11,613) (21,144) (18,031) (23,428)
Equity in loss from continuing operations of affiliated company. . . . . . . . . (1,365) --- (1,255) ---
------------ --------- ---------- ----------
LOSS FROM CONTINUING OPERATIONS BEFORE
(PROVISION FOR) BENEFIT FROM INCOME TAXES. . . . . . . . . . . . . . . (12,978) (21,144) (19,286) (23,428)
(Provision for) benefit from income taxes. . . . . . . . . . . . . . . . . . . . (180) (47) (180) 206
------------ --------- ---------- ----------
LOSS FROM CONTINUING OPERATIONS . . . . . . . . . . . . . . . . . . . . (13,158) (21,191) (19,466) (23,222)
Equity in loss from discontinued operations of affiliated company, net
of income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (299) --- (772) ---
------------ --------- ---------- ----------
NET LOSS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ (13,457) $ (21,191) $ (20,238) $ (23,222)
============ ========= ========== ==========
Per Common Share:
Loss from continuing operations. . . . . . . . . . . . . . . . . . . . . . .$ (0.46) $ (0.16) $ (0.66) $ (0.18)
Loss from discontinued operations. . . . . . . . . . . . . . . . . . . . . . (0.01) --- (0.03) ---
----------- ---------- ---------- ----------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ (0.47) $ (0.16) $ (0.69) $ (0.18)
=========== ========== ========== ==========
Weighted average shares outstanding. . . . . . . . . . . . . . . . . . . . . 28,596,188 137,687,728 29,341,659 137,687,728
=========== =========== ========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
CAROLCO PICTURES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
Six Months Ended
June 30,
1993 1994
(Unaudited)
(In Thousands)
<S> <C> <C>
Net cash flow from operating activities:
NET CASH PROVIDED BY (USED IN) OPERATIONS . . . . . . . . . . . . . . .$ 4,073 $ (21,876)
Cash flow from investing activities:
Purchase of property and equipment . . . . . . . . . . . . . . . . . . . . . (489) (346)
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 . . . . . . . . . . . . . . . . --- 1,775
---------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES . . . . . . . . . . (12,798) 1,429
Cash flow from financing activities:
Payments on debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (28,861) (1,543)
Increase(decrease) in notes payable to related parties. . . . . . . . . . . 9,969 (403)
Decrease in receivables from related parties . . . . . . . . . . . . . . . . 2,379 991
Increase in debt acquisition costs . . . . . . . . . . . . . . . . . . . . . (6,701) ---
Decrease in restricted cash. . . . . . . . . . . . . . . . . . . . . . . . . --- 1,255
Repurchase of Vista shares and Vista Partnership Units . . . . . . . . . . . --- (625)
Repayment of Pioneer Bridge Loan . . . . . . . . . . . . . . . . . . . . . . (3,681) ---
Showtime Receivable Sale . . . . . . . . . . . . . . . . . . . . . . . . . . 25,896 ---
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 (2)
--------- ----------
NET CASH USED IN FINANCING ACTIVITIES . . . . . . . . . . . . . . . . . (963) (327)
--------- ----------
DECREASE IN CASH . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,688) (20,774)
Cash and cash equivalents at beginning of period. . . . . . . . . . . . 24,202 56,697
--------- ---------
Cash and cash equivalents at end of period. . . . . . . . . . . . . . .$ 14,514 $ 35,923
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest (net of amounts capitalized in 1994). . . . . . . . . . . . . . . .$ 1,789 $ 1,181
========= =========
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 216 $ 154
========= =========
</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 June 30, 1994 and the results
of its operations for the three
and six months ended June 30, 1993 and 1994. The results of operations for
the period ended June 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 June 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 June 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, as a result of the
consummation of the Carolco Restructuring, 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 $30,734,000
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.
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
preferred dividends of $1,061,000 and $2,106,000 respectively, for the three
and six months ended June 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 June
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 and 1990
federal income tax returns by the
Internal Revenue Service ("IRS") and the 1988 an 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 F
for a further discussion of these examinations.
On October 18, 1993, Carolco's wholly-owned subsidiary, Carolco
International N.V. ("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
provides, among other things, that
CAC will be merged with and into Carolco (the "Merger") with Carolco as
the surviving corporation
continuing as a wholly owned subsidiary of LIVE. The Merger has been
structured as a tax free exchange
whereby each Carolco stockholder will receive one share of newly issued
LIVE common stock for each 5.5
shares of Carolco common stock held. The exchange ratio will be adjusted
based on the market price of
Carolco common stock prior to the consummation of the Merger subject to
two limitations designed to limit
the effect of market fluctuations on both Carolco and LIVE stockholders. The
number of Carolco shares to
be exchanged for each share of LIVE will be adjusted upward, if necessary,
so that the market value of
Carolco shares to be exchanged for one share of LIVE is at least $3.00, but in
no event will more than 6.5
shares of Carolco be exchanged for each share of LIVE. Likewise, the
number will be adjusted downward,
if necessary, so that the market value of Carolco shares to be exchanged is no
more than $4.00, but in no
event will fewer than 4.5 shares of Carolco be exchanged for each share of
LIVE. In addition, each
outstanding share of Carolco Series A Convertible Preferred Stock will be
converted into one share of a new
series of preferred stock to be authorized by LIVE. As a result, the current
LIVE stockholders will own
between approximately 21% and 28% of the surviving corporation and the
remainder will be owned by the
current Carolco stockholders. Therefore, the Merger, if consummated, will be
treated as a reverse acquisition
of LIVE by Carolco for accounting and financial reporting purposes and the
purchase method of accounting
will be applied to a portion of the historical values of LIVE's assets and
liabilities. Additionally, to the extent
of common ownership between LIVE and Carolco, (54.6% of LIVE's
common stock is owned by significant
shareholders of Carolco), a portion of the transaction will be treated as a
combination of companies under
common control, similar to a pooling. At the effective date of the Merger,
LIVE will be renamed Carolco
Entertainment Inc.
Consummation of the Merger is subject to a number of conditions,
including the redemption of LIVE's
Series B Cumulative Convertible Preferred Stock, certain amendments to
various public and private securities
of LIVE and the availability of certain ongoing financing commitments. The
Merger is also subject to the
approval of the non-affiliated common stockholders of both companies and
other customary conditions to
closing. On June 30, 1994, The Seidler Companies Incorporated delivered
its written opinion to the Carolco
Board of Directors that, based on the conditions and assumptions contained
therein, the financial terms of the
Merger are fair to the unaffiliated stockholders of Carolco. On July 1, 1994,
Chemical Securities Inc., an
affiliate of Chemical Bank, delivered its written opinion to the LIVE Board
of Directors that, based on the
conditions and assumptions contained therein, the financial terms of the
Merger are fair to the unaffiliated
stockholders of LIVE. There can be no assurances that the Merger will be
consummated, or, if consummated,
will be consummated on the terms set forth above.
Note C - Film Costs
<TABLE>
December 31, June 30,
1993 1994
(Unaudited)
(In Thousands)
<S> <C> <C>
Film costs are comprised of the following:
Released, less amortization . . . . . . . . . . . . . . . . . . . . . . . . .$ 57,696 $ 30,160
In process and development. . . . . . . . . . . . . . . . . . . . . . . . . . 20,731 33,765
--------- ---------
Total film costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 78,427 $ 63,925
========= =========
Interest and production overhead capitalized to film costs during the six
months ended June 30, 1994
totaled $612,000 and $2,590,000, 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 which provided 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 total 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, then in
active pre-production, 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 the start of
principal photography (which had
been scheduled to begin in August 1994) indefinitely while Carolco evaluates
alternative approaches to the
project. There can be no assurances that Crusade eventually will be
produced. As of June 30, 1994, Carolco
had already funded approximately $10,000,000 in pre-production expenses
for Crusade, not including
capitalized interest and production overhead. Carolco currently believes that
approximately $3,500,000 of
these costs may be recovered. In addition, Carolco may be obligated to pay
as much as an additional
$12,000,000 in connection with certain asserted contractual commitments
relating to the project. Carolco
believes that any such potential obligations may be eliminated or reduced as a
result of negotiations with the
parties to such contracts and/or mitigation. However, there can be no
assurance of this. As a result, in the
quarter ended June 30, 1994, Carolco recorded additional amortization of
film costs related to Crusade of
$13,000,000, including interest and production overhead which had been
capitalized to the project during the
pre-production period and Carolco's estimate of its obligations under the
contractual commitments discussed
above.
Note D - Related Party Transactions
Pursuant to the 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 June 30, 1994, interest of
approximately $734,000 has
been paid in additional 5% Notes and additional interest of approximately
$320,000 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 June 30, 1994,
approximately 51,767,000 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, 1992 and 1993 and June 30, 1994,
respectively, CINV had recorded
an obligation of $15,778,000, $3,521,000 and $5,323,000 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 are discussing 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 are
discussing these claims, Carolco is
unable to predict the outcome of these disputes.
Note E - Debt
CII, with Carolco as principal guarantor, has a credit facility with Credit
Lyonnais Bank Nederland
("CLBN") acting as agent and lender (the "Existing Carolco Credit Facility")
under which $14,000,000 in
principal amount is outstanding as of June 30, 1994. The maturity date of the
loan under the Existing Carolco
Credit Facility, which is secured by substantially all of Carolco's assets, is
September 29, 1995 provided
certain events of default do not occur. CLBN has agreed to remit to CII all
collections from accounts
receivable pledged to CLBN, so long as certain defaults do not occur.
Prior to the commencement of Merger discussions, Carolco was in
negotiations with potential agent
banks (including CLBN) to organize a syndicate of lenders to provide a
three-year $50,000,000 revolving
corporate credit facility and separate production credit facilitates
(collectively, the "New Carolco Credit
Facility"). Once the Merger is consummated, Carolco intends to resume
those discussions. It is Carolco's
intention to refinance the $14,000,000 balance of the Existing Carolco Credit
Facility with proceeds provided
by the New Carolco Credit Facility. Repayment of the Existing Carolco Credit
Facility without a replacement facility would have a severe adverse effect on
the operations of Carolco (which could include a cutback on motion picture
production activities) and ultimately on the long-term viability of Carolco.
Management of Carolco believes that the successful negotiation of such
a new facility will likely require the infusion of additional equity into
Carolco.
In addition, Carolco is currently negotiating with CLBN with regard to the
terms of individual
production loans to finance a substantial portion of the cost of each of
Carolco's future motion pictures.
Although Carolco believes such production loans will be successfully
negotiated with CLBN on terms
satisfactory to Carolco, there can be no assurance that this will be the case. In
the event Carolco is unable
to successfully negotiate such production loans during the fourth quarter of
1994, it will be required to procure
financing from alternative sources in order to complete the production of
Showgirls and Cutthroat Island
(although no assurance can be given that such financing can be obtained, or
obtained on terms acceptable to
Carolco). Showgirls, directed by Paul Verhoeven and Cutthroat Island,
starring Geena Davis and directed
by Renny Harlin, are scheduled to commence principal photography in the
third quarter of 1994.
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 F - Commitments and Contingencies
As of June 30, 1994, Carolco has received approximately $1,930,000 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 shall
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
six months ended June 30, 1994,
Carolco paid approximately $252,000 in fees and expenses to Mr. Scotti
pursuant to this agreement.
Tax Matters:
The Internal Revenue Service ("IRS") is conducting an ongoing
examination of Carolco's 1988, 1989
and 1990 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 income tax returns for the
taxable years under audit. As of
July 31, 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 June 30, 1994, adequate
reserves have 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, CII and Spiderman Productions Ltd. in Los Angeles
County Superior Court purporting
to allege 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
literary rights relating to
Spiderman, and Carolco agreed, among other things, to accord credit to
Golan as a producer of the picture
both on screen and in paid advertisements, with the obligations to 21st to be
guaranteed by Carolco and by
CII. 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 Video Services Antilles N.V., an affiliate of RCS Editori
S.p.A. ("RCS NV"), provided
that RCS NV assume in writing the obligations thereunder 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 without according producer screen
credit to Golan or 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, Spiderman Productions
Ltd. 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 was
rescinded, thereby accepting the
demand and offer of rescission contained in the Third Amended Complaint,
and 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
bankruptcy laws 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, the bankruptcy
proceedings were converted to voluntary
reorganization proceedings under Chapter 11 of the bankruptcy laws. The
bankruptcy filings have 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. While various motions are pending, there have been no
significant rulings affecting this
case or the cases described below subsequent to the entering into of the
stipulation for the Relief of the Automatic
Stay.
On February 3, 1994, Carolco, CII, Spiderman Productions Ltd. 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
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 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,
Spiderman Productions Ltd. and RCS
NV alleging, among other things, that Viacom is contractually entitled to all
rights to produce and exploit
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. Spiderman is to be produced by Spiderman Productions Ltd., a
company half owned by Carolco.
Carolco accepted service of the complaint in this action on July 1, 1994 and
Spiderman Productions Ltd.
accepted service on July 20, 1994.
Purported Class Action Litigation:
On March 24, 1994, the same day the proposed business combination with
LIVE was announced, a
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 Carolco, LIVE,
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 have violated their fiduciary duties owed to LIVE
stockholders in connection with
the Merger. Plaintiff seeks a preliminary and permanent injunction enjoining
the Merger under its current
financial terms; an open market auction of LIVE; to the extent the Merger is
consummated prior to the entry
of a final judgment in the action, rescission of the Merger; repayment of
profits and benefits obtained as a
result of defendants' alleged conduct, and attorney's fees and expenses. LIVE
and Carolco believe that this
lawsuit is without merit and intend to defend against it vigorously.
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. To date, there has been only preliminary discovery in these actions.
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.
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 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 Company 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 this action at this
time. However, Carolco and the other defendants believe that this lawsuit is
without merit and are defending
it vigorously. Accordingly, no provision for any liability which may result
has been made in Carolco's
consolidated financial statements. In the opinion of management, this action,
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 G - 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 June 30, 1994, unpaid dividends
totalling $1,860,000 from January
1, 1994 and April 1, 1994 had been added to the liquidation preference,
resulting in a total liquidation
preference of $84,360,000. In addition, dividends of $1,061,000 payable on
July 1, 1994, were accrued at
June 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, when issued, will be convertible at the option of the holder
into Common Stock of Carolco
at $.60 per share. As of June 30, 1994, approximately 140,600,000 shares of
Common Stock of Carolco
would be issuable upon conversion of the New Preferred.
Note H - 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 E). Other
income in 1994 also includes
producers fees of approximately $417,000 related to the motion picture
Stargate, paid to Carolco pursuant to
an agreement entered into with Hexagon Films (U.S.), an indirect,
wholly-owned subsidiary of Le Studio and
producers fees of approximately $305,000 related to the motion picture Last
of the Dogmen, paid to Carolco
pursuant to an agreement entered into with Last of the Dogmen, Inc.
<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
Six Months Ended June 30, 1993 as Compared to Six Months Ended June 30,
1994
Feature film revenues decreased from $60,721,000 for the six months
ended June 30, 1993 to
$30,058,000 for the six months ended June 30, 1994. This represents a
decrease of $30,663,000, or
approximately 50.5%. Carolco had no theatrical releases during the first six
months of 1993 or the first six
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 six months ended June
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 six months ended
June 30, 1993 include approximately $12,528,000 from the domestic pay
television availability and
$7,620,000 in theatrical overages on Basic Instinct, released theatrically in
1992; approximately $10,550,000
from the foreign pay television availability of Terminator 2: Judgment Day,
released theatrically in 1991;
$6,000,000 from the domestic network television availability of Total Recall,
released theatrically in 1990;
$3,400,000 from the foreign pay television availability of Oscar and Hamlet,
for which Carolco had certain
foreign distribution rights; $1,520,000 from the foreign pay television
availability of Jacob's Ladder, which
was released theatrically in 1990; and $4,084,000 from the foreign television
availability of Rambo III, Air
America, and Narrow Margin, released theatrically in 1988 and 1989.
Feature film revenues for the six
months ended June 30, 1994 include approximately $8,250,000 from the
domestic network television
availability and $5,233,000 from foreign theatrical and video overages from
Terminator 2: Judgment Day,
released theatrically in 1991; $2,984,000 from the domestic syndication
television availability of Rambo III,
released theatrically in 1988; $1,274,000 from the domestic and foreign pay
television availability of Chaplin,
released theatrically in 1992; $901,000 from the foreign free television
availability of Total Recall, released
theatrically in 1990; $512,000 and $930,000, respectively, from the foreign
pay television availability and
foreign theatrical overages related to the motion picture Universal Soldier,
released theatrically in 1992; and
$1,871,000 in foreign theatrical and video overages related to the 1992
theatrical release of Basic Instinct.
Amortization of film costs, residuals and participations decreased by
$13,754,000 or 24.8%, from
$55,382,000 for the six months ended June 30, 1993 to $41,628,000 for the
comparable period in 1994.
Amortization of film costs, as a percentage of Carolco's feature film revenues
increased from 91.2% for the
six months ended June 30, 1993 to 138.5% for the six months ended June 30,
1994. This increase is the result
of additional amortization of film costs of $13,000,000 recorded in
connection with the development of the
motion picture Crusade. (See Note C of the Notes to Condensed
Consolidated Financial Statements.) In the
six months ended June 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 $3,841,000 or 30.2%, from $12,704,000 during
the first six months of 1993
to $8,863,000 during the first six months of 1994. Of this decrease,
$1,251,000 is the result of reductions
in Carolco's work force and the downsizing of the operations of Carolco. In
addition, in 1994, Carolco
capitalized approximately $2,590,000 of production overhead to film costs.
In 1993, Carolco had no films
in production and was, therefore, unable to capitalize any production
overhead to film costs.
Interest expense decreased by $6,674,000 or 48.9%, from $13,648,000
during the first six months
of 1993 to $6,974,000 during the first six months of 1994. This decrease is
the result of lower debt levels and
reduced interest rates. Carolco capitalized $612,000 of its interest costs to
film costs in the first six months
of 1994. Carolco had no films in productions in the first six 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 E 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 six months ended June 30,
1993 of $20,238,000,
including $2,027,000 attributable to its ownership interest in LIVE. Carolco
incurred a consolidated net loss
for the six months ended June 30, 1994 of $23,222,000. At June 30, 1994,
Carolco had a deficiency in assets
of $44,293,000.
Three Months Ended June 30, 1993 as Compared to Three Months Ended
June 30, 1994
Feature film revenues decreased from $26,607,000 for the three months
ended June 30, 1993 to
$9,779,000 for the three months ended June 30, 1994. This represents a
decrease of $16,828,000, or
approximately 63.2%. Carolco had no theatrical releases during the three
months ended June 30, 1993 or the
three months ended June 30, 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 three
months ended June 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 June 30, 1993 include approximately $1,658,000 from the
domestic pay television availability
and $6,822,000 of foreign theatrical overages related to the motion picture
Basic Instinct, released theatrically
in 1992; approximately $2,866,000 from the foreign pay television
availability of Terminator 2: Judgment
Day, released theatrically in 1991; $6,000,000 from the domestic network
television availability of Total
Recall, released theatrically in 1990; and $3,400,000 from the foreign pay
television availability of Oscar and
Hamlet for which Carolco had certain foreign distribution rights. Feature
film revenues for the three months
ended June 30, 1994 include approximately $5,233,000 in foreign theatrical
overages related to Terminator
2: Judgment Day, released theatrically in 1991; $607,000 from the foreign
pay television availability of
Chaplin, released theatrically in 1992; $726,000 from the foreign free
television availability of Total Recall,
released theatrically in 1990; and $736,000 from foreign theatrical overages
and the foreign pay television
availability of Universal Soldier, released theatrically in 1992.
Amortization of film costs, residuals and participations decreased by
$2,177,000, or 7.8%, from
$27,759,000 for the three months ended June 30, 1993 to $25,582,000 for the
comparable period in 1994.
Amortization of film costs, as a percentage of Carolco's feature film revenues
increased from 104.3% for the
three months ended June 30, 1993 to 261.6% for the three months ended June
30, 1994. This increase is the
result of additional amortization of film costs of $13,000,000 recorded in
connection with the development
of the motion picture Crusade. (See Note C of the Notes to Condensed
Consolidated Financial Statements.)
In the three months ended June 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 $2,354,000 or 39.5%, from $5,957,000 during
the three months ended June
30, 1993 to $3,603,000 during the three months ended June 30, 1994. Of this
decrease, $597,000 is the result
of reductions in Carolco's work force and the downsizing of the operations of
Carolco. In addition, in 1994,
Carolco capitalized approximately $1,757,000 of production overhead to film
costs. In 1993, Carolco had
no films in production and was, therefore, unable to capitalize any production
overhead to film costs.
Interest expense decreased by $2,995,000, or 50.0%, from $5,988,000
during the three months ended
June 30, 1993 to $2,993,000 during the three months ended June 30, 1994.
This decrease is the result of
lower debt levels and reduced interest rates. Carolco capitalized $456,000 of
its interest costs to film costs
in the three months ended June 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 June
30, 1993 of $13,457,000,
including $1,664,000 attributable to its ownership interest in LIVE . Carolco
incurred a consolidated net loss
for the three months ended June 30, 1994 of $21,191,000. At June 30, 1994,
Carolco had a deficiency in
assets of $44,293,000.
Liquidity and Capital Resources
CII, with Carolco as principal guarantor, has a credit facility with Credit
Lyonnais Bank Nederland
("CLBN") acting as agent and lender (the "Existing Carolco Credit Facility")
under which $14,000,000 in
principal amount is outstanding as of June 30, 1994. The maturity date of the
loan under the Existing Carolco
Credit Facility, which is secured by substantially all of Carolco's assets, is
September 29, 1995, provided
certain events of default do not occur. CLBN has agreed to remit to CII all
collections from accounts
receivable pledged to CLBN, so long as certain defaults do not occur.
Prior to the commencement of merger discussions (see Note B of the Notes
to Condensed Consolidated
Financial Statements), Carolco was in negotiations with potential agent banks
(including CLBN) to organize
a syndicate of lenders to provide a three-year $50,000,000 revolving
corporate credit facility and separate
production credit facilitates (collectively, the "New Carolco Credit Facility").
Once the Merger is
consummated, Carolco intends to resume those discussions. It is Carolco's
intention to refinance the
$14,000,000 balance of the Existing Carolco Credit Facility with proceeds
provided by the New Carolco
Credit Facility. However, there can be no assurance that the New Carolco
Credit Facility will be
consummated. Repayment of the Existing Carolco Credit Facility without a
replacement facility would have a severe effect on the operations of Carolco
(which could include a cutback on motion picture production activities) and
ultimately on the long-term viability of Carolco. Management of Carolco
believes that the successful
negotiation of such a new facility will
likely require the infusion of additional equity into Carolco.
Shortly after the consummation of the Carolco Restructuring, Carolco
began the process of preparing
certain of its motion picture projects for eventual production, including the
contracting of artists, directors
and other production executives with respect to an anticipated production
slate for calendar year 1994. 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 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 servicing of 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.
In mid-May 1994, Carolco determined that the potential costs of the motion
picture Crusade, then in
active pre-production, 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 level of
investment. As a result, Carolco made the decision to postpone the start of
principal photography (which had
been scheduled to begin in August 1994) indefinitely while Carolco evaluates
alternative approaches to the
project. Carolco hopes that it will be able to restart pre-production of
Crusade in 1995. There can be no
assurances that Crusade eventually will be produced. As of June 30, 1994,
Carolco had already funded
approximately $10,000,000 in pre-production expenses for Crusade, not
including capitalized interest and
production overhead. Carolco currently believes that approximately
$3,500,000 of these costs can be
recovered. In addition, Carolco may be obligated to pay as much as an
additional $12,000,000 in connection
with certain asserted contractual commitments relating to the film. Carolco
believes that any such potential
obligations may be eliminated or reduced as a result of negotiation with the
parties to such contracts and/or
mitigation. However, there can be no assurances of this. As a result, in the
quarter ended June 30, 1994,
Carolco recorded additional amortization of film costs related to Crusade of
$13,000,000, including interest
and production overhead which had been capitalized to the project during the
pre-production period, and
Carolco's estimate of its obligation under the contractual commitments
discussed above.
Carolco currently has two motion pictures in pre-production: Showgirls,
directed by Paul Verhoeven;
and Cutthroat Island, starring Geena Davis and directed by Renny Harlin.
Both pictures are currently
scheduled to commence principal photography in the third quarter of 1994,
and be completed and available
for release in mid-1995. Carolco is currently negotiating with CLBN with
regard to the terms of individual
production loans to finance a substantial portion of the cost of both motion
pictures. Although Carolco
believes such production loans will be successfully negotiated with CLBN on
terms satisfactory to Carolco,
there can be no assurance that this will be the case. In the event Carolco is
unable to successfully negotiate
such production loans, it will be required to procure financing from
alternative sources in order to complete
the production of Showgirls and Cutthroat Island (although no assurances can
be given that such financing can
be obtained, or obtained on terms acceptable to Carolco). The receipt of a
commitment for financing for
Cutthroat Island is a condition to the Merger. There can be no assurances that
both films will begin principal
photography, be completed or be released according to this schedule.
As a result of Carolco's 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 Showgirls and Cutthroat Island (the
combined direct negative costs of
Showgirls and Cutthroat Island is estimated to be approximately
$130,000,000), Carolco expects it will
experience significant liquidity constraints in the third and fourth quarters of
1994 prior to the anticipated
January 1, 1995 funding of up to $47,500,000 in co-production investments
and 7% Convertible Subordinated
Notes due 2006 (the "7% Notes") arranged pursuant to the Carolco
Restructuring. Carolco believes that only
through a combination of the planned bank financing based on presales of
foreign distribution rights and the
funding of the co-production investments and 7% Notes will Carolco have
sufficient resources to continue
financing the production of Showgirls and Cutthroat Island and meet its other
obligations as they come due
during the next 12 months.
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 the
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.
As indicated by the foregoing, Carolco is highly leveraged and management
believes that Carolco will
require additional financing in order to achieve its production goals and fund
its operations on a long-term
basis. No assurances can be given, however, that such funding will be
available, or available on terms
acceptable to Carolco. Management of Carolco believes that it will be
substantially more difficult to raise such
additional financing on favorable terms if the Merger is not consummated.
<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: August 15, 1994
/s/ William A. Shpall
William A. Shpall,
Executive Vice President and
Chief Financial Officer
<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 F -
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 and $1,042,000 due April 1,
1994, on its Series A Convertible
Preferred Stock. As a result, as of June 30, 1994, approximately $1,860,000
in unpaid dividends had been
added to the liquidation preference of the Series A Convertible Preferred
Stock.
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
11.1 Computation of Loss per 25
Common Share
(b) No Reports on Form 8-K were filed during the six months ended
June 30, 1994.
</TABLE>
[DESCRIPTION] EXHIBIT
<TABLE>
EXHIBIT 11.1
CAROLCO PICTURES INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
Three Months Ended Six Months Ended
March 31, June 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) (2,327,381) (1,281,910) (2,327,381)
------------ ----------- ----------- ------------
Total 28,596,188 137,687,728 29,341,659 137,687,728
============ ============ =========== ============
Loss from continuing operations ($13,158,000) ($21,191,000) ($19,466,000) ($23,222,000)
Preferred Dividends 0 (1,061,000) 0 (2,106,000)
------------ ------------ ------------- ------------
Loss from continuing operations
attributable to common shares ($13,158,000) ($22,252,000) ($19,466,000) ($25,328,000)
============= ============= ============= =============
Loss from continuing operations
per common share $(0.46) ($0.16) ($0.66) ($0.18)
============= ============= ============= =============
Equity in loss from discontinued operations of
affiliatd company ($299,000) $0 ($772,000) $0 0
============= ============= ============= =============
Loss from discontinued operations per common share ($0.01) $0.00 ($0.03) $0.00
============= ============= ============= =============
Net loss ($13,457,000) ($21,191,000) ($20,238,000) ($23,222,000)
Preferred Dividends 0 (1,161,000) 0 (2,106,000)
------------- ------------- ------------- -------------
Net loss attributable to common shares ($13,457,000) ($22,252,000) ($20,238,000) ($25,328,000)
============= ============ ============= =============
Net loss per common share ($0.47) ($0.16) ($0.69) ($0.18)
============= ============ ============= =============
</TABLE>
