SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended June 30, 1998
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _________ to _________
Commission file number 0-18954
Odyssey Pictures Corporation
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(Exact name of registrant as specified in its charter)
Nevada 95-4269048
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1601 Elm Street, Dallas, Texas 75201
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(Address of principal executive offices)
Registrant's telephone number, including area code: (214) 720-1622
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.01 par value
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 ____ No __x___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to this
Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of December 15, 1998 was approximately $3,490,447 (based on
the mean between the closing bid and asked prices of the Common Stock on such
date), which value, solely for the purposes of this calculation, excludes shares
held by Registrant's officers and directors. Such exclusion should not be deemed
a determination by Registrant that all such individuals are, in fact, affiliates
of the Registrant.
As of December 15, 1998 there were outstanding 6,974,340 shares of Odyssey
Pictures Corporation's common stock, par value $.01 per share (the "Common
Stock").
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ODYSSEY PICTURES CORPORATION
Form 10-K Report for the Fiscal Year
Ended June 30, 1998
TABLE OF CONTENTS
PART I
Page
Item 1. Business .................................................. 2
Item 2. Properties ................................................ 9
Item 3. Legal Proceedings ......................................... 10
Item 4. Submission of Matters to a Vote of Security Holders ....... 14
PART II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters ..................................... 15
Item 6. Selected Financial Data ................................... 16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ..................... 17
Item 8. Financial Statements and Supplementary Data ............... 19
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure................... 19
PART III
Item 10. Directors and Executive Officers of the Registrant ........ 19
Item 11. Executive Compensation .................................... 21
Item 12. Security Ownership of Certain Beneficial
Owners and Management .................................... 26
Item 13. Certain Relationships and Related Transactions ............ 28
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K ...................................... 30
1
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PART I
Item 1. Business
(a) General Development of Business
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Odyssey Pictures Corporation ("Odyssey" or the "Company"), formerly known
as Communications and Entertainment Corp., was formed in December 1989 as a
holding company. At such time, the Company had no material assets. In September
1990, Double Helix Films, Inc. ("Double Helix"), a producer of low budget films,
and Odyssey Entertainment Ltd. ("OEL"), an international film distribution
company, were merged with wholly-owned subsidiaries of the Company (the
"Mergers"). Subsequent to the Mergers, each of Double Helix and OEL became a
wholly-owned subsidiary of the Company. In June 1991, the Company sold Double
Helix and thereafter began to focus on the distribution of motion pictures in
overseas markets as its primary business.
A change in the entire Board of Directors of the Company (the "Board")
occurred on April 12, 1995 pursuant to the terms of a Settlement Agreement,
dated as of March 31, 1995 (the "Settlement Agreement"), by and among Robert
Hesse, Shane O'Neil, Lawrence I. Schneider, Henry N. Schneider, Robert E.
Miller, Jr., Russell T. Stern, Jr. (collectively, a group of shareholders
originally formed to effect a change in management control of the Company and
known as the "CECO Shareholders Committee"), the Company, OEL, Global
Intellicom, Inc., each of Jerry Silva, Robert Ferraro, N. Norman Muller, Thomas
W. Smith and David A. Mortman (constituting all the directors of the Company at
the time of the execution of the Settlement Agreement and hereinafter referred
to collectively as the "Former Directors"), and others.
As contemplated by the Settlement Agreement, on April 11, 1995, the Former
Directors increased the size of the Board from five to six directors and elected
Henry N. Schneider, a designee of the CECO Shareholders Committee, a new
director effective upon the closing of the Settlement Agreement. The closing of
the Settlement Agreement occurred on April 12, 1995 and, upon the closing, the
resignations of the Former Directors became effective. After the closing, Henry
N. Schneider, as sole remaining director of the Company, elected Lawrence I.
Schneider, Russell T. Stern, Jr., Patrick J. Haynes, III and Robert E. Miller,
Jr. as new directors of the Company. In addition to the change in the
composition of the Board, the Settlement Agreement provided for the settlement
of all outstanding litigation between the Company and the CECO Shareholders
Committee. The CECO Shareholders Committee disbanded upon the closing of the
Settlement Agreement. Effective September 8, 1995, each of Messrs. Haynes, Stern
and Henry N. Schneider resigned as directors of the Company and were replaced by
Stephen R. Greenwald and Ira N. Smith, each of whom was appointed to the Board
and, together with Lawrence Schneider, elected to executive management positions
to operate the business and affairs of the Company on a day-to-day basis.
On March 6, 1996, the Company declared a reverse one-for-six stock split of
its Common Stock (the "Reverse Split"), effective March 18, 1996. All share
amounts and per share prices reflected in this Report have been adjusted to give
effect to the Reverse Split.
Mr. Schneider resigned his executive position in September, 1997, and in
March, 1998, the Board of Directors appointed Mr. Johan Schotte as Chief
Executive Officer and Chairman of the Board of the Company. At the same time,
Mr. Pierre Koshakji was appointed to the Board and elected as President of the
Company. Mr. Johan Schotte expanded the Board to include additional independent
directors and Messrs. Greenwald and Smith agreed to terminate their existing
employment agreements in exchange for revised employment and consulting
agreements. In connection with the change in management, an affiliate of Mr.
Schotte purchased convertible deferred compensation notes from former management
and converted a portion of these notes into 667,648 shares of he Company's
common stock in April, 1998. The balance of these notes were converted into
176,050 shares of common stock in October, 1998.
2
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During the early 1990s, the Company developed an excellent reputation in
overseas markets for the distribution of quality motion picture entertainment, a
reputation which the Company's management believes it continues to enjoy despite
its recent difficulties. However, due to the changes in management control and
disruptions in the continuity of the Company's business following the change in
control in 1995, the Company has been unable to sustain any substantial
activities in the international distribution of motion pictures.
Under the leadership of Mr. Schotte, the Company will seek to re-establish
its position as a significant distributor of quality motion pictures by
establishing relationships and strategic alliances with major film studios and
successful writers, directors and producers. The Company also intends to
establish a permanent presence in Europe through select joint-venture partners.
In this connection, the Company purchased the assets of Sweden-based Kimon
Mediabright KB ("Kimon") in August, 1998, consisting of a film library with
worldwide and/or Scandanavian distribution rights and Scandanavian video
distribution rights to certain Hallmark Entertainment products. In December
1998, the Company hired Mr. Ian Jessel, who is past President of Miramax
International and who will join the Company's Board of Directors on January 1,
1999, to head up its film division.
While continuing to develop and re-establish the Company's film
distribution business, new management's objective going forward is to
aggresively build a diverse, global media company independent in ownership from
the major film and music companies. Management will seek to establish a group of
domestic and international companies providing both content and distribution in
film, music, publishing, sports, merchandising and other multimedia outlets. See
"Business - Narrative Description of Business - Business Strategy."
(b) Financial Information About Industry Segments
- --------------------------------------------------
Since the sale of its Double Helix subsidiary in 1991, the Company has been
engaged in only one industry segment and line of business, the international
distribution of motion pictures. See "Selected Financial Data."
(c) Narrative Description of Business
- --------------------------------------
Foreign Sales and Distribution Operations
General.
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The foreign distribution of films involves two principal activities - the
acquisition of rights from the licensor or the seller, usually the producer of
the film, and the licensing of the distribution rights to subdistributors in
foreign markets. In general, the rights obtained from the producer relate to all
media, including theatrical distribution, video and all forms of television.
However, the licensing of rights to subdistributors may exclude certain
territories and/or media.
It is unlikely that subdistributors would bypass the Company and deal
directly with the licensors of film rights. Historically, independent licensors
of film rights prefer to deal with a single sales agent/distributor rather than
deal with various subdistributors in foreign markets. Consequently, even if a
particular subdistributor attempted to perform the function of the Company, it
is unlikely that the film's licensor would be willing to deal with such
subdistributor. Furthermore, with respect to any particular film, the Company
would typically enter into an exclusive distributorship arrangement, thereby
precluding others from competing with the Company with respect to that film.
Moreover, in certain circumstances, the Company may also provide a financing
function for the production of a film which a subdistributor would generally be
unable to provide. See "Terms of Distribution Agreements."
3
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Terms of Distribution Agreements. Foreign distribution is generally handled
by a distributor such as the Company which coordinates worldwide sales in all
territories and media. Overseas film sales companies rely on local
subdistributors to physically deliver the motion picture and related marketing
materials and to collect revenues from local exhibitors and other local
distributors of the film. Typically, the territorial rights for a specific
medium such as television exhibition are sold for a "cycle" of approximately
seven years, after which the rights become available for license for additional
cycles.
The film distribution business breaks down into two broad categories:
o Sales Agency Representation. As a sales agent, the Company would
undertake to represent and license a motion picture in all markets and media on
a best-efforts basis, with no guarantees or advances, for a fee of 15-20%, and
typically for a term ranging from seven to fifteen years.
o Distribution. As a distributor, the Company may provide the producer of
the film a guarantee of a portion of the budget of the project. This guarantee
may be in the form of a bank commitment to the producer, secured by license
agreements with foreign licensees, which is used by the producer to finance the
production. Typically, a distributor would receive a distribution fee of 25-35%
over a term ranging from 15 years to perpetuity. In addition, the distributor
may acquire a profit participation in the film project.
Once the rights to a picture are obtained either as sales agent or
distributor with minimum guarantee, the Company would then seek to license its
rights to subdistributors in the territories for which it has acquired
distribution rights. In general, the grant of rights to the subdistributors
includes all media other than satellite, although satellite is included in some
subdistributors' territories. The subdistributor in each territory generally
pays for its distribution rights with a down payment at the time the contract is
executed with the balance due upon delivery of the picture to the
subdistributor. (Delivery occurs upon the Company's acceptance of the master
negative and its obtaining access to the interpositive and certain other items
necessary for the distribution of the film). In certain instances, the
subdistributors' obligations for the payment due on delivery are secured by a
letter of credit. Sales take place primarily at three film markets - Cannes,
France in May; MIFED in Milan, Italy in October; and the American Film Market
("AFM") in Los Angeles in February.
In general, after financing (if any) is repaid, the Company applies the
distribution receipts from its subdistributors first to the payment of
commissions due to the Company, then to the recovery of certain distribution
expenses advanced by the Company, and third, to the extent not recouped as part
of the repayment of the financing, to the reimbursement of the Company for its
guarantee, if any, paid to the producer. Additional distribution receipts, if
any, are shared by the Company and the producer according to the percentages
negotiated in the agreement between the Company and the producer.
4
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Independent Film Production and Product Acquisition
Overseas film distribution companies such as the Company primarily
represent independent producers of motion pictures (rather than motion picture
studios) in all overseas markets and all media, including theatrical release,
television and home video distribution, and cable or satellite-distributed
media.
Producers seek to be independent producers of motion pictures for a variety
of reasons, including greater creative control of a project and potentially a
greater profit participation through the retention of the copyright or the
ability to sell the film directly in particular markets. Often, young, new
directors and producers have no choice but to independently produce their
projects, and the motion picture industry has a long history of "breakthrough"
films produced at very low cost by first time producers and directors which
subsequently achieve considerable revenues. The Company has generally obtained
its product from among these independently produced films rather than from major
motion picture studios which typically have their own in-house distribution
networks. Nevertheless, from time to time, the Company has entered into "split
rights" arrangements with studios to represent a film in the overseas market.
The Company's management seeks to identify attractive projects very early
in their development, either through relationships with producers, directors and
agents or through industry announcements of new productions. In addition, the
Company's acquisitions personnel attends festivals and film markets, such as the
Sundance Film Festival and the Cannes Film Festival, in order to locate new
product.
Business Strategy
The Company's strategy is to capitalize on its reputation and the
experience of its management team to build a global media company independent in
ownership from the major film studios and music companies. The Company's new
Board of Directors and executive management intend to integrate the Company into
today's total entertainment and media environment. "Odyssey Media", or a name
more appropriate, will be established as the parent to a diversified group of
U.S. and international companies providing both content and distribution in
film, music, publishing, sports, merchandising and other multimedia outlets.
The value and growth of "Odyssey Media" is intended to be achieved
primarily through acquisition of, and joint ventures with, established private
and public media companies. Such companies may be attracted by the strategic
relations and access to business that the other Odyssey media companies may
provide; the international markets that Odyssey may participate in; and access
to the public markets for capital and exposure.
Such companies may be identified through the experience and the strong
international entertainment, sport, banking and private investment network
contacts that the executive management and Board of Directors possess. Targeted
companies would be acquired primarily through issuance of new equity capital,
stock swaps and other means.
The parent company will provide each company with strong corporate
governance policies, direction for its management, strategic planning guidance,
control and reporting systems, marketing assistance, cross promotion and other
promotional support, as well as with assistance with business and joint venture
development, merger and acquisition assistance, executive and management search
support, and other services. The emphasis will be to optimize each individual
company's success as well as the cross-success of the entire media company. The
proposed business strategy for each division of "Odyssey Media" is as follows:
Odyssey Pictures: The film production and distribution division will continue to
operate as Odyssey Pictures for the purpose of providing a presence in Hollywood
and New York and establishing a permanent presence in Europe through select
joint-venture partners. The foreign sales agency business unit of Odyssey will
be de-emphasized, since it would only be feasible as part of the Company's own
distribution network, which will be expanded as soon as new Odyssey properties
are ready for worldwide distribution. In order to insure a high quality regular
product flow, alliances will be sought with major film studios and successful
writers, directors and producers.
5
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Odyssey Music: The music unit of Odyssey will be initiated from Europe through
exploitation and music publishing of the Techno/Dance music genre due to its low
investment cost versus high return, and will serve as a basis to penetrate the
U.S. market. This base will allow the launch of new acts via movie sound tracks.
A U.S. operation will be set up as soon as practicable.
Odyssey Publishing: Publishing will encompass all print and electronic media
including multi-media and Internet services as well as the traditional products
and services associated with magazines and other publications. When finally
viable, Odyssey Publishing will leverage intellectual property from the other
media properties, for example, book and multi-media products derived from motion
pictures.
Odyssey Sports: Ownership and management of sport teams and entertainment events
will be pursued at the minor and major league levels as a means of providing
content and avenues of advertising, promotion, and access to business for the
entire media company and its clients. It will also be pursued as an opportunity
for ancillary revenues through venue management and merchandising. At present,
the Company owns a minority interest in the Albuquerque Geckos, a second
division professional soccer team in New Mexico.
Odyssey Merchandising: Manufacturing, sourcing, and distribution of merchandise
will be pursued and grown by Odyssey as a natural business complement to all
other media companies as well as a stand-alone business unit.
Strategic Objectives
To properly build Odyssey Media, the Company's Board and executive
management will seek to implement the following strategies:
- - Create and implement strong corporate governance policies and the most
effective corporate infrastructure;
- - Properly capitalize the Company and seek a NASDAQ listing;
- - Acquire profitable media-related operations that will contribute to the
Company's near-term and long term earnings;
- - Leverage connections between investors and projects in Europe and the United
States; identify talent and management that will augment the Company's
abilities;
- - Limit risk in the manner companies are acquired and investments are financed;
- - Maintain a cost consciousness in acquisition, financing, production and
distribution activities.
Recent Acquisitions
In August, 1998, the Company completed the acquisition of the assets of
Sweden-based Kimon Mediabright KB ("Kimon"), valued at $4,500,000, in exchange
for 4,500,000 shares of the Company's subordinated convertible Preferred Stock,
Series B, having a value for conversion purposes of $1.00 per share. Kimon will
have the right to convert to Odyssey common stock between June 30, 2000 and
December 31, 2000 on a dollar-for-dollar basis based on the price of the
Company's common stock at the time of conversion. Kimon assets purchased consist
of a film library with worldwide and/or Scandanavian distribution rights and
Scandanavian video distribution rights to certain Hallmark Entertainment
products.
In connection with the change of control in March, 1998, the Company
acquired an 18% equity interest in each of two corporations affiliated with Mr.
Schotte, one of which is the owner of the Albuquerque Geckos, a second division
professional soccer team in New Mexico, and the other of which is a media
production company in Luxembourg. The Company issued one-year notes in the
aggregate amount of $450,000 in consideration of the purchase of the equity
interests in these companies.
6
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Sales of Library Films
On January 2, 1996, the Company entered into an agreement with Regency
International Pictures, B.V. ("Regency"), the Company's joint venture partner,
to sell the Company's interest in the related joint ventures through which it
held approximately 50% ownership interests in four theatrical motion pictures,
entitled "Switch", "Q & A," "Guilty by Suspicion" and "This Boy's Life".
Pursuant to the agreement with Regency, the Company received $1,000,000 on
January 23, 1996 and $500,000 on February 14, 1996, in exchange for all of the
Company's interests in the joint ventures. In addition, the Company retained a
contingent interest in certain receivables, not to exceed $212,500, and a
contingent interest in future revenues from the pictures.
On August 29, 1996, the Company entered into an agreement with Kinnevik
Media Properties, Ltd. ("Kinnevik"), pursuant to which the Company agreed to
grant to Kinnevik subdistribution rights in, and to sell to Kinnevik other
distribution rights to, certain films in the Company's film library. In exchange
for these rights, the Company received a total cash consideration of $1,075,000,
payable $500,000 on closing, $275,000 six months after closing, and $300,000
eighteen months after closing. In addition, the Company retained a continuing
right to receive revenues from certain of the films, valued by management at a
minimum of approximately $150,000. As part of the transaction, the Company
granted 100,000 stock options to Kinnevik, exercisable over a three year period
at the bid price of the Company's common stock in effect on August 5, 1996
($.625). The transaction with Kinnevik closed on October 7, 1996.
Recent Financings
In August and October of 1995, the Company concluded a private placement
pursuant to which it issued unsecured promissory notes to unaffiliated investors
in the aggregate amount of $312,500. The notes had a maturity date of one year
and accrued interest at the rate of 12% per annum. A total of 6.25 units were
sold at a purchase price of $50,000 per unit. In addition, warrants were issued
to the purchasers at the rate of 4,167 warrants for each unit sold, or a total
of 26,042 warrants (on a post Reverse Split basis). Each warrant certificate
entitled the holder thereof to purchase one share of common stock at an exercise
price of either $2.83 per share (the August warrants) or $2.37 per share (the
October warrants) over a three year period commencing one year after the closing
of the private placement. After paying expenses and commissions of $42,500, the
Company received net proceeds of $270,000 from the private placement. The notes
issued in the private placement were due to be paid by the Company upon their
respective due dates on August 28 and October 3, 1996.
The Notes and interest were not repaid as scheduled. The Company proposed
that Noteholders either defer maturity of their notes and exchange existing
warrants for shares, or cancel the notes and warrants in their entirety in
exchange for a greater number of shares. The Company offered to register any
shares issued in exchange for the notes. On August 12, 1997, the date the
registration became effective, a total of $262,500 of notes were exchanged for
595,455 shares of registered stock. The remaining notes for $50,000 (held by a
single investor) have not been paid and are in default.
In September, 1996, the Company entered into an agreement with an
unaffiliated third party for the purchase of 1,000,000 shares of the Company's
common stock (and an additional 1,000,000 warrants) in consideration of
$750,000. Following a dispute between the parties concerning the satisfaction of
certain conditions to closing, the parties reached a settlement in June, 1997,
pursuant to which the investor purchased 66,667 shares of common stock of the
Company for $50,000, or $.75 per share.
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In September, 1996, the Company reached an agreement with Paramount
Pictures, pursuant to which Paramount would cancel the Company's contractual
guarantee of $2.7 million in full, in exchange for which the Company agreed to
(i) relinquish all further distribution rights to "Wuthering Heights"; (ii)
assign to Paramount all of its rights in any outstanding distribution agreements
for the film, and any receivables to be generated therefrom; (iii) guarantee
that Paramount would collect a total of $500,000 in sales revenue from existing
distribution agreements no later than January 15, 1997. Existing license
agreements yielded approximately $420,000 in net revenues prior to January 15,
1997 (of which the Company would have been entitled to retain approximately 20%
thereof in commissions). The Company paid $250,000 in net revenues to Paramount
and is currently in negotiations with Paramount regarding the timing of the
remaining $250,000 payment.
In January, 1997, prior counsel to the Company agreed to exchange a
promissory note in the face amount of $70,000 for 120,000 shares of the
Company's common stock.
In February, 1997, the Company completed the sale of 500,000 shares of
common stock and 500,000 common stock purchase warrants to four offshore
European investors for an aggregate consideration of $375,000. The warrants are
exercisable over a three year period (expiring February 25, 2000) at an exercise
price of $1.06 per share. One of the investors was Johan Schotte, who was
subsequently elected as CEO of the Company in March, 1998.
In April, 1997, Stephen R. Greenwald, Lawrence I. Schneider and Robert
Miller, Jr., all directors of the Company, made loans to the company in the
amounts of $50,000, $25,000 and $25,000, respectively. Each loan was payable on
demand and accrued interest at the rate of 2 points over prime per annum. The
notes were secured by a collateral assignment of the Company's 300,000 note
receivable from Kinnevik. In consideration of making the loans, the lenders
received five-year warrants to purchase shares of common stock of the Company,
exercisable at $1.00 per share. Messrs. Schneider and Miller each received
25,000 warrants and Mr. Greenwald received 50,000 warrants as consideration for
making the loans to the Company. In addition, two independent unaffiliated third
parties made additional $25,000 loans to the Company in June and August, 1997 on
the same terms and conditions as the loans made by Mr. Greenwald, Schneider and
Miller. In May, 1998, the loans of Mr. Schneider and one of the unaffiliated
parties were paid from the proceeds of the Kinnevik receivable. The remaining
lenders agreed to a rollover of their loans (aggregating $100,000) against a
second Kinnevik receivable and, in consideration, will receive an additional
50,000 warrants in the aggregate, exercisable at $1.00 per share over a three
year period. In September, 1998, all but $25,000 of these loans were repaid from
the proceeds of the Kinnevik receivable. The remaining lender, Robert E. Miller,
Jr., a director of the Company, agreed to a rollover of his $25,000 loan on an
unsecured basis for an additional six month period with interest at the rate of
10% per annum.
In September, 1997, the Company and Kinnevik Media Properties, Ltd.
executed an agreement pursuant to which Kinnevik agreed to purchase 500,000
shares of convertible, redeemable preferred stock of the Company, par value
$1.00 per share, for an aggregate purchase price of $500,000. Kinnevik agreed to
purchase the first $250,000 of preferred stock at the closing, an additional
$125,000 of preferred stock 90 days after closing, and the final $125,000 of
preferred stock 270 days (subsequently extended to 360 days) after closing. The
preferred stock would bear interest at the rate of 10% per annum which would be
paid in kind semi-annually by the issuance of additional shares of preferred
stock at a par value of $1.00 per share. Kinnevik would have the right for a
five-year period to convert the preferred stock into common stock of the Company
on a share-for-share basis. The Company would have the right to redeem the
preferred stock for $1.25 per share in the event the Company's common stock
traded at a price of $2.00 per share or more for a period of 20 consecutive
trading days. The Company agreed to help secure television distribution rights
for Kinnevik from third parties, and introduce various projects to Kinnevik from
time to time which may be of interest to Kinnevik. In the event Kinnevik
acquires any rights as a result of any introductions made by the Company, the
parties agree to mutually determine the value of such services and to redeem
shares of the preferred stock at $1.00 per share based on the aggregate value of
the services so determined.
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The Company received $150,000 in funding from the Augustine Fund, L.P. in
July, 1998. In exchange for the financing, the Augustine Fund received a zero
coupon $150,000 convertible note as well as up to 150,000 transferable warrants,
exercisable at $1.60 per share for a three year period. Augustine can convert
into restricted shares of the Company's common stock at a discount to the market
price of Odyssey common stock at the time of conversion (i.e., at the lower of
the market price on the closing date, or 80% of the market price prior to
conversion). Augustine and certain Augustine associated parties were also issued
a total of 45,000 shares of restricted common stock in connection with the
transaction.
In August, 1998, three unaffiliated investors loaned 4,000,000 Belgian
Francs (approximately $100,000) and received one year convertible notes with
interest at 10% per annum (the notes are convertible at a 15% discount to the
market price).
In September 1998 an unaffiliated third party loaned $25,000 to the Company
and received a six-month note with interest at 10% per annum.
In November 1998, the Company issued 200,000 common shares to an
unaffiliated party in exchange for $88,000 of barter credits.
In December 1998, (i) an unaffiliated party purchased 625,000 common shares
at $.30 per share for a total purchase price of $187,500 (see "Certain
Relationships and Related Transactions"); and (ii) counsel to the Company
converted $40,000 of accrued legal fees into 100,000 shares of common stock of
the Company.
Competition
The entertainment industry generally, and the film industry in particular,
are highly competitive. The Company's competition includes the smaller
independent producers as well as major motion picture studios and music
companies. Many of the Company's competitors have financial and other resources
which are significantly greater than those available to the Company.
Operations
The Company's operations have been greatly reduced as a result of the
restructuring of the Company by new management. The Company's principal office
is located in Dallas, Texas (see "Properties") and, as of December 15, 1998, the
Company had four full-time employees, consisting of Mr. Schotte, Mr. Koshakji,
Mr. Jessel and Mr. Greenwald, the CEO, President, CEO of the film division and
Managing Director of the Company, respectively.
Tax Loss Carryforward
The Company is entitled to the benefits of certain net operating loss
carryforwards to reduce its tax liability. The utilization by the Company of
such tax loss carryforwards is limited under applicable provisions of the
Internal Revenue Code of 1986, as amended, and the applicable regulations
promulgated thereunder. As of June 30, 1998, there were approximately
$29,000,000 in net operating loss carryforwards remaining to be used to reduce
tax liability. The utilization of approximately $4.9 million of these losses in
future periods will be limited to approximately $350,000 per year.
Item 2. Properties
The Company presently conducts its operations out of leased premises at
1601 Elm Street, Dallas, Texas, consisting of approximately 2,500 square feet.
The premises are presently being made available to the Company as an
accommodation by a company affiliated with Mr. Johan Schotte, the CEO of the
Company. Rent expense for each of the fiscal years ended June 30, 1998, 1997,
and 1996 was $29,905, $69,002, and $38,772, respectively. In June, 1998, the
Company entered into a sublease for office space in Los Angeles, California with
an affiliate of the CEO of the Company. The sublease is on a month-to-month
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basis at the rate of $1,500 per month. The Company intends to utilize these
premises for the months of June thru December, 1998. Commencing January 1, 1999,
and continuing until May 29, 2000, the Company intends to sublease approximately
5,000 square feet from an unaffiliated party at the rate of $12,823 per month.
(The proposed sublease is contingent upon the Company's ability to post a letter
of credit equal to six months' rent under the sublease). The premises are
located at 2049 Century Park East, Suite 2750, in Los Angeles, California. The
Company intends to sublease such portions of the premises as may be appropriate
from time to time during the term of the sublease.
Item 3. Legal Proceedings
On December 20, 1990, Hibbard Brown & Company, Inc. ("Hibbard Brown") filed
a complaint entitled Hibbard Brown & Company, Inc. v. Double Helix Films, Inc.,
Odyssey Entertainment Ltd. and Communications and Entertainment Corp. in the
Supreme Court of the State of New York, County of New York. The Complaint sought
payment of $300,000 under an agreement with the Company, Odyssey, Double Helix
and Hibbard Brown dated December 21, 1989 for certain investment banking
services allegedly performed in introducing Odyssey and Double Helix and
assisting them in consummation of the Mergers by which they became wholly-owned
subsidiaries of the Company. A counterclaim seeking recovery of $50,000 paid to
Hibbard Brown upon execution of the Agreement was asserted.
Hibbard Brown's motion for summary judgment was granted in October, 1991.
On January 30, 1992, the Company moved, by order to show cause, to renew and
thereupon deny, dismiss or stay Hibbard Brown's previously granted motion for
summary judgment on the ground that Hibbard Brown had intentionally concealed
the fact that it was an unauthorized foreign corporation transacting business in
New York. By Order dated March 2, 1992, the court granted the Company's motion
in part by renewing the action and staying judgment pending Hibbard Brown's
qualification in New York. On October 29, 1992, Hibbard Brown moved for an order
vacating the stay of judgment, a declaration that it was now an authorized
foreign corporation and reinstatement of the summary judgment granted in
October, 1991 or, in the alternative, to rehear its motion for summary judgment
on the original papers and grant judgment in its favor.
On January 29, 1993, Double Helix, Odyssey and the Company cross-moved for
an order granting reargument and/or renewal of Hibbard Brown's motion for
summary judgment and consolidating the litigation with an action that the
Company had brought against Hibbard Brown (described below), or staying the
issuance, entry and execution of judgment pending the resolution and trial of
the Company's action against Hibbard Brown.
On March 26, 1993, the court issued a Decision and Order vacating the stay
of entry of the $300,000 judgment against the Company and granting the Company's
cross-motion for a stay of execution pending the determination of the Company's
action against Hibbard Brown. The Company's cross-motions for reargument and
renewal and consolidation were denied.
By Decision and Order dated June 18, 1993, the court affirmed the stay of
execution of the judgment, but required the Company to obtain a bond to secure
the stay. The Company obtained a non-collateral bond.
On March 5, 1992, the Company instituted an action entitled Communications
and Entertainment Corp. v. Hibbard Brown & Company in the Supreme Court, New
York County, for the return of 150,000 shares of Common Stock previously issued
on the ground that Hibbard Brown failed to perform the required services.
Hibbard Brown counterclaimed for breach of contract.
In July 1993, after considerable pre-trial discovery, the Company and
Hibbard Brown moved for summary judgment. By Decision and Order dated August 11,
1993, the court denied both motions. Both parties appealed. On March 3, 1994,
the appellate court affirmed the denial of summary judgment.
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On or about October 14, 1994, Hibbard Brown filed a voluntary petition for
relief under Chapter 11, Title 11 of the United States Code with the United
States Bankruptcy Court, Southern District of New York. Consequently, the
Company's action against Hibbard Brown has been automatically stayed. The
Company has filed a Proof of Claim. In January 1998 the U.S. Bankruptcy Court of
the Southern District of New York approved a final settlement of the bankruptcy
of Hibbard Brown.
On or about September 11, 1992, Joseph Duignan brought an action in the
Superior Court of New Jersey, Mercer County, entitled Joseph Duignan v. Double
Helix Films Limited Partnership No. 1, L.P., Double Helix Films, Inc., Cinecom
International Films, Film Gallery, Inc., Stan Wakefield, Jerry Silva, Arthur
Altarac and Anthony Tavone (MER-L-4262-92). Jerry Silva, the only defendant who
was served, is former Vice Chairman of the Board of Directors of the Company.
Mr. Silva has demanded that the Company indemnify him against any expenses,
judgments, and amounts paid in settlement of the action. The Company contends
that it is not required to indemnify Mr. Silva because he breached his fiduciary
duties to the Company.
Mr. Duignan claims that he invested $75,000 to acquire a partnership
interest in Double Helix Films Limited Partnership No. 1 and that Mr. Silva
forged or caused to be forged his signature on a Subscription Agreement dated
July 28, 1986. The Complaint alleges claims for rescission, unjust enrichment
(against Double Helix), conversion, fraud, breach of contract, breach of
fiduciary duty and breach of covenants of good faith and fair dealing (against
Mr. Silva and Double Helix). Mr. Duignan seeks to recover compensatory damages,
including but not limited to, his alleged $75,000 investment, punitive damages
and attorney's fees. Mr. Silva has answered the Complaint.
On or about December 30, 1994, Krishna Shah, who allegedly served as
President of Double Helix from about July 1991 until about March 1993, brought
an action in the Superior Court of California, Los Angeles County, entitled
Krishna Shah v. Norman Muller, Communications and Entertainment Corp., ATC II,
Carnegie Film Group, Inc., Jerry Minsky, Perry Scheer, Susan Bender, Larry
Myers, Robert Hesse, Double Helix Films, Inc. and Does 1-100, alleging claims
for breach of an oral agreement to pay Mr. Shah $152,000 (which he allegedly
advanced for the benefit of Double Helix) and to give him a 19.5% ownership
interest in its corporate successors. The Company's current management has paid
Mr. Shah the sum of $15,000 in July 1998 and in full settlement of all claims
against the Company.
In The Private Lessons Partnership v. Carnegie Film Group, Inc., Monogram
Pictures Corp., Filmways Entertainment Corp., ATC, Inc., Krishna Shah, Lonnie
Romati, Gerald Muller, Jerry Minsky and Does 1-100 (California Superior Court,
Los Angeles County, Case No. BC091840), the plaintiff asserted claims for breach
of oral contract, fraud in the inducement and fraudulent conveyance against Mr.
Shah, seeking damages in the amount of $315,000, plus further unspecified
compensatory damages and punitive damages. In August 1995, Mr. Shah filed a
cross-complaint against the Company, Double Helix Films and Norman Muller for
indemnification, apportionment of fault and declaratory relief. In addition to
compensatory damages, he seeks punitive and exemplary damages, emotional
distress damages and attorney's fees. The Company has answered the
cross-complaint.
On or about May 15, 1995, Credit Lyonnais Bank Nederland N.V. and Cinecom
Entertainment Group, Inc. filed a Complaint in the Superior Court for the State
of California, County of Los Angeles, captioned Credit Lyonnais Bank Nederland
N.V. and Cinecom Entertainment Group, Inc. v. Odyssey Distributors, Ltd. and
Does 1 through 100 (No. BC 127790). They allege that Odyssey Distributors, Ltd.
(a subsidiary of the Company) collected but failed to remit to them assigned
distribution proceeds in the amount of $566,283.33 from the foreign distribution
of "Aunt Julia and the Scriptwriter" and "The Handmaid's Tale." The Complaint
alleges claims for breach of contract and breach of fiduciary duty and demands
damages in excess of $566,283, attorney's fees, an accounting, a temporary
restraining order and a preliminary injunction. In June 1995, the Court denied
plaintiffs an attachment and stayed the action pending arbitration in New York.
In September, 1996, the Court dismissed the Complaint. In December, 1996, the
11
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Company settled the outstanding litigation with Generale Bank ("Generale")
(formerly known as Credit Lyonnais Bank Nederland N.V.) and Cinecom
Entertainment Group Inc. Pursuant to the settlement agreement, the Company
agreed to pay to Generale the sum of $275,000 in complete settlement of the
claim, payable $25,000 upon execution of the settlement agreement, $25,000 on
each of June 30 and December 31 in the years 1997, 1998 and 1999, and $100,000
on June 30, 2000. Interest on the installments (at the rate of LIBOR plus 1% per
annum) will be waived provided the Company remains in compliance with the agreed
upon payment schedule. The Company and Generale later agreed upon a new payment
schedule as follows: $25,000 on or before October 15, 1997 (payment was made);
$30,000 on each of April 15, 1998, June 30, 1998, December 31, 1998, June 30,
1999, and December 31, 1999; and $100,000 on June 30, 2000. The Company is in
receipt of a demand letter dated May 4, 1998. The letter demands that the
company Cure the non-payment of a $30,000 installment due April 15, 1998.
According to the agreement between the Company and Generale, the Company had ten
days after receipt of the letter to cure the default. The default has not yet
been cured. The consequences of not curing the default is the entry of a
confession of judgment already executed by the Company for the amount of
$275,000. This confession of Judgment is against Odyssey Distributors, Ltd., a
wholly owned but non-operating subsidiary of the Company.
In August 1995, G.P. Productions, Inc. ("GP") and Greenwich Subject Films,
Inc. ("Greenwich") commenced an action entitled G.P. Productions, Inc. and
Greenwich Studios, Inc. v. Double Helix Films, Inc., Communications and
Entertainment, Inc., Krishna Shaw, Gerald Muller and Norman Muller in the United
States District Court, Southern District of Florida (Case No. 95-1188). Mr.
Muller has demanded that the Company indemnify him against any expenses,
judgments and amounts paid in settlement of the action. The Company contends
that, by virtue of Mr. Muller's breaches of fiduciary duty and violation of his
obligations to the Company, it is not required to provide indemnification.
GP and Greenwich allege that they are the exclusive owners of the films
"The Gallery" and "South Beach". They assert claims for copyright infringement,
unfair competition, breach of contract, accounting, conversion, civil theft,
conspiracy and fraudulent conveyance. The Complaint demands a recall of the
films, an attachment, preliminary and permanent injunctive relief, an
accounting, and unspecified compensatory, punitive and treble damages. The
Company's motion to transfer venue of the action was granted in November, 1995,
and the case was transferred to the United States District Court for the
Southern District of New York. There has been no activity in this matter since
the transfer of venue in 1995.
In September, 1995, the agent for the landlord for the premises formerly
occupied by the Company at 800 Third Avenue, New York, New York, filed a Summons
and Verified Complaint against the Company in the Supreme Court of the State of
New York, County of New York, entitled Joseph P. Day Realty Corp. v.
Communications and Entertainment Corp. The plaintiff alleged that it was due
$66,694 from the Company (plus interest) for rent allegedly owed during the
period from April through September, 1995. The Company had vacated the premises
on April 12, 1995. Summary judgment was awarded to the plaintiff on May 22, 1996
and a judgment was entered for $74,142 on May 31, 1996. In July, 1996, the
landlord commenced a second action for $121,000 for rent allegedly owed during
the period from October 1995 through July 1996. The Company reached a settlement
in these cases, pursuant to which the Company delivered 177,500 registered
shares of the Company's common stock to each of the landlord and its agent in
full settlement of both actions.
In October, 1995, Canon Financial Services filed a Complaint in the
Superior Court of New Jersey entitled Canon Financial Services, Inc. v.
Communications and Entertainment Corp. The plaintiff is claiming that it is due
$47,499.83, plus damages, pursuant to a lease agreement. The Company has filed
an answer in this action and plaintiff's motion for summary judgment has been
denied by the Court. No trial date has yet been set in this matter.
In December, 1995, Robert F. Ferraro, a former director of the Company,
brought an action against the Company in the Supreme Court of the State of New
York, New York County. The action was brought on a promissory note in the amount
of $25,000 and plaintiff obtained a judgment on a summary judgment motion. The
plaintiff has not yet moved to enforce the judgment and the Company is
considering whether or not it has a claim for indemnification against prior
management in connection with the issuance of the note.
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In January, 1996, an action was filed against the Company in which the
plaintiff sought damages in the amount of $33,849 for legal services rendered to
the Company and its subsidiaries. In June, 1997, the parties reached a
settlement in the matter, pursuant to which the Company agreed to pay $7,000 to
plaintiff, deliver 40,000 freely tradeable shares of the Company's common stock,
and deliver an additional cash amount to the extent the aggregate market value
of the shares on the date of delivery was less than $40,000. Payment of the
additional cash amount of $13,000 was completed in December 1997.
In March, 1996, an action was filed against the Company in Los Angeles
Municipal Court by Judy Hart, in which the plaintiff claims that she is due
$17,920 pursuant to a promissory note. The Company has filed a cross-claim
seeking offsets against the amount due and other damages. On May 21, 1998, a
default judgment was entered on behalf of plaintiff in the amount of $22,261.
Subsequently, plaintiff filed a motion to include attorneys fees and costs in
the aggregate amount of approximately $17,000. The Company is attempting to
reach a settlement with plaintiff.
In March, 1996, a class action complaint was filed against the Company
entitled Dennis Blewitt v. Norman Muller, Jerry Minsky, Dorian Industries, Inc.
and Communications and Entertainment Corp. The complaint seeks damages in
connection with the Company's treatment in its financial statements of the
disposition of its subsidiary, Double Helix Films, Inc. in June, 1991. The
complaint seeks unspecified damages on behalf of all persons who purchased
shares of the Company's common stock from and after June, 1992. A second action,
alleging substantially similar grounds, was filed in December 1996 in Federal
Court in the United States District Court for the Southern District of
California under the caption heading "Diane Pfannebecker v. Norman Muller,
Communications and Entertainment Corp., Jay Behling, Jeffrey S. Konvitz, Tom
Smith, Jerry Silva, David Mortman, Price Waterhouse & Co., Todman & Co., and
Tenato Tomacruz." Following the filing of the second action, the first action
was dismissed by stipulation in May 1997. The Company filed a motion to dismiss
the complaint in the second action and after a hearing on the motion in July,
1997, the Court dismissed the federal securities law claims as being time-barred
by the applicable statute of limitations, and dismissed the state securities law
claims for lack of subject matter jurisdiction. The lower court's dismissal of
this action was upheld on appeal by the Ninth Circuit. Messrs. Muller, Smith and
Mortman, former directors of the Company, have asserted claims for
indemnification against the Company. The Company has advised the claimants that
it will not provide such indemnification based upon their wrongful actions and
failure to comply with various obligations to the Company. The case was refiled
in California state court in August 1998 and the Company has retained counsel to
represent itself.
In September, 1996, Film Bridge International, Inc. ("Film Bridge") filed a
complaint in Los Angeles County Superior Court, entitled Film Bridge
International v. Communications and Entertainment Corp., and Does 1 through 50,
Inclusive, contending that the Company had breached the terms of an alleged
joint venture agreement between the parties regarding the distribution rights to
certain films. On December 19, 1996, the Company filed a cross-claim against
Film Bridge alleging that, since the end of June, 1996, Film Bridge failed to
furnish the Company with a proper accounting of its revenues and expenses in
connection with the sale of foreign licenses of various films in which the
Company had an interest and had failed to make payment of at least $450,000 to
the Company for monies due and owing to the Company from the foreign sales of
such films. An agreement was reached between the parties in May, 1997, as a
result of which the Company received $336,000 of the monies being held by Film
Bridge, with the balance being retained by Film Bridge as sales commissions and
in full settlement of the litigation.
On November 21, 1996, the law firm of Halperin, Klein & Halperin (counsel
to Mr. Silva) commenced an action against the Company in the Civil Court of the
State of New York on a returned check in the amount of $5,000 for legal services
allegedly rendered to the Company. The check was originally issued to plaintiff
in April, 1995 in connection with the change of control of the Company at that
time. The Company has filed an Answer in the action and intends to defend the
matter on the basis of a failure of consideration.
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In December, 1997, the Directors Guild of America ("DGA") obtained an
arbitration award against Down Range Productions, Inc., a wholly owned
subsidiary of Odyssey, on behalf of Kahn Brothers Pictures fso Michael Kahn,
Charles Skouras, and Scott C. Harris. Down Range was ordered to pay Kahn
Brothers Pictures the total sum of $155,041; Charles Skouras the sum of $32,360;
and Scott C. Harris the total sum of $8,868; plus interest at 18% per annum on
each of these amounts from April 1, 1997. Down Range was also ordered to pay the
DGA $2,500. Down Range was also ordered to assign to the DGA all of Down Range's
right, title and interest in the motion picture "Down Range," including the
screenplay for the motion picture, and Down Range was enjoined from licensing
the motion picture or the screenplay to any third party other than the DGA. Down
Range was also ordered to pay the arbitrator $2,250.
Kahn Brothers Pictures fso Michael Kahn also filed a claim against Down
Range Productions, Inc. and the Company with the Writers Guild of America West
(WGA) for unpaid writing services on "Down Range." That claim has been settled
by the current management in July 1998 for the amount of $15,000.
The Screen Actors Guild (SAG) has also asserted that there are amounts
owing to four actors (Dale Dye, John Philbin, Tegan West, and Kiljoy Productions
fso Kathleen Wilhoite), arising out of "Down Range." The company believes that
SAG has never instigated any arbitration or other proceeding to try to collect
on these claims. Additionally, there were two actors, Corbin Bernsen and Jeff
Fahey, who had pay-or-play contracts. The outcome of these contracts and the
actors' claims have not been resolved.
In April, 1998, the Company reached a settlement with Mr. Jerry Silva ( a
former director of the Company), regarding his actions against the Company in
the Civil Court and Supreme Court of the State of New York. In the Supreme Court
action, Mr. Silva was seeking money damages based on his claim that the Company
interfered with his right to sell his shares in the Company. The Civil Court
matter is an action to collect on a promissory note in the amount of $22,500.
Mr. Silva will discontinue both actions and the Company will authorize the sale
of Mr. Silva's shares in the Company under Rule 144, up to a maximum of 30,000
shares per month.
In April, 1998, an action was commenced against the Company by Siegel &
Gale, a provider of brochure materials for the Company. The lawsuit seeks
payment of $48,695, plus costs, related to work done by Siegel & Gale for the
Company. The Company has not yet filed an Answer in this action and is in the
process of consulting with its counsel on the best course of resolving this
matter.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this Report.
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PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters.
The following table sets forth the range of high and low bid information
for the Common Stock of the Company as reported by the Nasdaq Stock Market, Inc.
("Nasdaq") on a quarterly basis for each of the two preceding fiscal years. On
May 1, 1996, Nasdaq notified the Company that its shares of Common Stock were
being deleted from Nasdaq's SmallCap Market, effective May 2, 1996, because the
Company did not maintain a combined capital and surplus of $1,000,000, as
required by Section 1(c)(3) of Schedule D of the NASD By-Laws. Since May 2,
1996, the Company's shares have traded in the over-the-counter market on the OTC
Bulletin Board. The Company's Common Stock trades under the symbol OPIX.
No dividends have been declared or paid with respect to the Common Stock.
On March 6, 1996, the Company declared a reverse one-for-six stock split
(the "Reverse Split") of its Common Stock, effective on March 18, 1996. The
share prices reflected below for all periods prior to the Reverse Split have
been adjusted upward (by a multiple of six) to give effect to the Reverse Split
for such prior periods on a pro forma basis.
The bid quotations represent inter-dealer prices and do not include retail
mark-ups, mark-downs or commissions and may not necessarily represent actual
transactions.
Common Stock
Fiscal 1997 High Low
- ----------- ---- ---
First Quarter $ .87 $ .50
Second Quarter 1.37 .43
Third Quarter 1.07 .62
Fourth Quarter .81 .37
Fiscal 1998
First Quarter $.44 $.19
Second Quarter .22 .08
Third Quarter .88 .06
Fourth Quarter .82 .19
As of December 15, 1998, there were approximately 4576 record holders of
the Company's Common Stock.
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Item 6. Selected Financial Data (in thousands, except per share data).
The following table sets forth the selected financial data for the Company
and should be read in conjunction with the Consolidated Financial Statements and
Notes thereto, and with Management's Discussion and Analysis of Financial
Condition and Results of Operations which appear elsewhere in this report.
For the Years Ended June 30,
1998 1997 1996 1995 1994
Income Statement Data
Revenues............................. $41 $141 $1,011 $1,521 $14,797
Income(loss) from continuing
operations......................(1,119) 69 (4,960) (6,852) (7,607)
Income(loss) from discontinued
operations...................... -- -- -- (458) (766)
Net income (loss)....................(1,119) 69 (4,960) (7,310) (8,373)
Per Share Data*
Income(loss) from continuing
operations...................... (.25) .02 (2.17) (2.94) (3.18)
Income(loss) from discontinued
operations...................... -- -- -- (0.20) (0.32)
Net income (loss).................... (.25) .02 (2.17) (3.14) (3.50)
Cash dividends....................... -- -- -- -- --
Weighted average shares.............. 4,403 2,294 2,284 2,332 2,392
Balance Sheet Data
Film costs........................... 110 120 1,001 10,656 13,127
Total assets......................... 675 740 2,448 15,078 27,949
Indebtedness......................... 1,079 962 562 249 179
Shareholders' equity.................(2,083) (2,226) (2,749) 1,979 9,796
- ------------------------------------
* Per share data and weighted average shares for all periods have been restated
to reflect the effect of a one-for-six reverse stock split in March 1996.
16
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Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation.
Results of Operations
Years Ended June 30, 1998 and 1997
Net loss for the year ended June 30, 1998 was due to the fact that the
Company did not release any new films and did not enter into any new agreements
for the release of existing rights in films. Revenues for the twelve months
ended June 30, 1998 decreased to $42,630 compared to $141,202 for the twelve
months ended June 30, 1997. No new films became available for delivery during
either period.
Costs related to revenues decreased to $19,519 for the twelve months ended
June 30, 1998 as compared to $565,610 for the twelve months ended June 30, 1997.
The decrease is primarily related to the fact that there were lower film
revenues in the current year. Additionally, during the twelve months ended June
30, 1997, development and festival costs in the amount of $249,544 were written
off, litigation and settlement costs related to the Film Bridge settlement in
the amount of $148,174 were expensed, and $435,102 in inventory costs related to
the picture Downrange were written off. This was primarily offset by a write-off
of $449,163 in participation liabilities related to the Kinnevik library which
were settled subsequent to the Kinnevik sale.
Selling, general and administrative expense decreased by $613,316 to
$1,065,134 for the twelve month period ended June 30, 1998 from $1,678,450 for
the comparable period ending June 30, 1997. The decrease is primarily due to
decreases in personnel and related expenses.
There was no other income recognized in the twelve month period ended June
30, 1998. Other income for the twelve months ended June 30, 1997 consisted of a
$818,776 gain from the sale of certain distribution and subdistribution rights
in certain films to a third party, recognition of a $1,245,758 gain from the
cancellation of a contractual obligation related to the Company's distribution
rights in "Wuthering Heights," and recognition of gain in the amount of $198,567
from the settlement of an outstanding litigation with Generale Bank (formerly
known as Credit Lyonnais Bank Nederland N.V) and Cinecom Entertainment Group
Inc.
Since the change in management control in March 1998, new management has
embarked on a program to reverse the unfavorable results by significantly
reducing overhead, taking steps to recapitalize the Company, acquiring interests
in new pictures in development or pre-production, and by acquiring equity
interests in two corporations, one of which is the owner of a professional
soccer team, and the other of which is a media production company.
Years Ended June 30, 1997 and 1996
Operations for the fiscal year ended June 30, 1997 ("fiscal 1997") resulted
in net income of $68,808, compared with a net loss of $4,959,716 for the fiscal
year ended June 30, 1996 ("fiscal 1996"). The net income for fiscal 1997 is
primarily due to a gain of $818,776 from the sale of certain distribution and
subdistribution rights in certain films to a third party and recognition of a
$1,245,758 gain from cancellation of a contractual obligation related to the
Company's distribution rights in a motion picture which was partially offset by
a write-off of festival costs in the amount of $249,544, litigation and
settlement costs of $148,174 and a write-down in inventory costs of $435,102
relating to one motion picture. These write-offs were partially offset by a
write-off of $449,163 in participation liabilities related to a library that was
sold. The loss for fiscal 1996 is primarily the result of a $3,262,4798 loss on
the sale of interests in joint ventures relating to four theatrical films, and
from the continued decline in film distribution revenue.
Revenues declined to $141,202 for fiscal 1997 compared to $1,010,826 for
fiscal 1996. There were no new films which became available for delivery to the
Company in either period.
Costs related to revenues decreased to $565,610 for fiscal 1997 as compared
to $1,046,299 for fiscal 1996. The decrease is primarily related to the fact
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that there were lower film revenues in the current year and from the write-offs
explained above.
Selling, general and administration expenses increased to $1,678,450 for
fiscal 1997 from $1,565,307 for fiscal 1996. The increase is primarily related
to higher salaries and professional fees during fiscal 1997.
As of June 30, 1997, the Company had a federal net operating loss
carryforward, for tax purposes, of approximately $27,000,000 expiring through
2011, available to be used to reduce future tax liability. Due to limitations
imposed by the Internal Revenue Service, the utilization of approximately
$4,900,000 of these operating losses will be limited to approximately $350,000
per year.
Liquidity and Capital Resources
The Company's continued existence is dependent upon its ability to resolve
its liquidity problems. The company must achieve and sustain a profitable level
of operations with positive cash flows and must continue to obtain financing
adequate to meet its ongoing operation requirements. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
At June 30, 1998, the Company held approximately $4,331 of cash.
New management has taken significant steps to recapitalize and fund the
Company's operations.
The company signed an agreement with Kimon on July 14, 1998 to purchase the
assets of Kimon, valued at $4,500,000, in exchange for 4,500,000 Odyssey shares
of subordinated convertible preferred stock, Series B, having a value of $1.00
per share for conversion purposes. Kimon shall be able to convert to Odyssey
common stock between June 30, 2000 and December 31, 2000 on a dollar-for-dollar
basis based on the price of the Company's common stock at the time of
conversion. Kimon assets purchased consist of a film library with worldwide
and/or Scandanavian distribution rights and Scandanavian video distribution
rights to certain Hallmark Entertainment products.
In June, 1998, the company applied for, and was accepted for, trading on
the Berlin Stock Exchange, under the symbol "ODY." The German company Berliner
Freiverkehr (Atkien) assisted the Company in the application and signed an
agreement with the Company to serve as a market maker/coordinator in exchange
for 200,000 warrants having an exercise price of $1.55 per share, exercisable
during the two-year period commencing June 23, 1998.
The Company received $150,000 in funding from the Augustine Fund L.P. in
July 1998. In exchange for the financing, the Augustine Fund received a $150,000
convertible note as well as up to 150,000 transferable warrants, exercisable at
$1.60 per share for a three year period. Augustine can convert into restricted
shares of the Company's common stock at a discount to the market price of the
common stock at the time of the conversion (i.e., at the lower of the market
price on the closing date, or 80% of the market price prior to conversion).
Augustine and certain Augustine associated parties were also issued a total of
45,000 shares of restricted common stock in connection with the transaction.
In August, 1998, three unaffiliated investors loaned 4,000,000 Belgian
Francs (approximately $100,000) and received one year convertible notes with
interest at 10% per annum (the notes are convertible at a 15% discount to the
market price).
In September 1998 an unaffiliated third party loaned $25,000 to the Company
and received a six-month note
with interest at 10% per annum.
In November 1998, the Company issued 200,000 common shares to an
unaffiliated party in exchange for $88,000 of barter credits.
In December 1998, (i) an unaffiliated party purchased 625,000 common shares
at $.30 per share for a total purchase price of $187,500 (see "Certain
Relationships and Related Transactions"); and (ii) counsel to the Company
converted $40,000 of accrued legal fees into 100,000 shares of common stock of
the Company.
18
<PAGE>
Item 8. Financial Statements and Supplementary Data.
The response to this Item is submitted as a separate section of this report
commencing on page F-1.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
Reference is made to the Company's Reports on Form 8-K, dated September 24,
1997, and February 13, 1998, with respect to a change in accountants for the
Company.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The directors and executive officers of the Company are as follows:
Name Age Position
Johan Schotte 37 Chairman of the Board
& Chief Executive Officer
Pierre Koshakji 36 President & Director
Stephen R. Greenwald 58 Managing Director &
Director
Robert E. Miller, Jr. 51 Director
Ian Jessel 53 Director
(As of January 1, 1999)
Set forth below is information regarding the business experience of the
current Directors and executive officers of the Company.
Johan Schotte is Founder and Chairman of Media Trust S.A. and Entertainment
Education Enterprises Corporation. Mr. Schotte has an extensive background in
banking and management, and holds an M.B.A. degree from the University of Dallas
in Irving, Texas. Before joining Odyssey in 1998, he served as Managing Director
of Rocket Pictures, an international film production and distribution company,
for whom he produced the satirical comedy "Cannes Man" in 1996.
19
<PAGE>
Pierre R. Koshakji is co-founder, and was President and director of,
Entertainment Education Enterprises Corporation (E3 Corporation), an
international sports, entertainment, and investment group. E3 Corporation has
offices in Dallas, Luxembourg and Los Angeles and has a professional affiliation
with the Lamar Hunt group of companies, Unity Hunt. Prior to E3 Corporation, Mr.
Koshakji served as Director of Business Development with Unity Hunt/Hunt Sports
Enterprises where he evaluated, negotiated, and implemented targeted
acquisitions and projects. He played a development role in establishing major
league soccer (MLS) and in establishing the two Hunt MLS teams in Columbus, Ohio
and in Kansas City, Missouri, and served as Senior Vice-President of Marketing
on the Las Vegas domed Stadium project as well as marketing consultant to the
San Francisco Giants new ball park at China Basin. Other positions and titles
Mr. Koshakji has held during his professional career include Deputy Executive
Director of the 1994 World Cup, Dallas Venue, including the responsibility of
liaison with the European Broadcast Union and International Broadcast Center,
the position of Director at KMPG Management Consulting in the country of Kuwait,
and electrical engineer at Chrysler Technologies Airborne Systems. Mr. Koshakji
graduated from Vanderbilt University BSEE with honors and received his Masters
of Business Administration at Southern Methodist University.
Stephen R. Greenwald served as Chief Executive officer and Co-Chairman in the
Office of the Chairman of Odyssey from September, 1995 through March, 1998.
Since 1990, Mr. Greenwald has been a consultant to banks and other clients in
the media and film business, most recently having served as chief executive
officer of Vision International, an international film distribution company
based in Los Angeles, from February,1994 through June,1996. Mr. Greenwald has
also been involved in financing and distributing independently produced motion
pictures including, among others, "Blue Velvet," "Dune," "King of Comedy,"
"Ragtime," "Crimes of the Heart," and "Manhunter." Mr. Greenwald also
co-produced the film "Amityville II: the Possession."
Robert E. Miller, Jr. is a private investor and principal shareholder of Word
Power Incorporated d/b/a Hollywood North Productions, a privately-held
development company for feature films and movies-of-the-week. Mr. Miller is also
Associate Director of Trade Task Group, Inc., a strategic planning consulting
firm where he has served as manager of client development since 1984. He is also
a board member emeritus of the International Standards Institute and a member of
the board of advisors of the World Film Institute, sponsors of "The Family Film
Awards."
Ian Jessel is an experienced film and television executive who served as
President of Miramax International during the period from 1992 to 1995, and as
President of Spelling Films International for the two-year period prior thereto.
During the 1980's, Mr. Jessel also held top executive positions at CBS
Theatrical Films, I.T.C. International, and Nelson Entertainment. Films released
during his presidency at Miramax International include Robert Altman's
"Pret-A-Porter," Chen Kaige's "Farewell My Concubine," Quentin Tarantino's "Pulp
Fiction," and Woody Allen's "Bullets Over Broadway." Mr. Jessel currently serves
as President and CEO of Condor Communications LLC, a company he founded in 1995
to co-finance, co-produce, and supervise the international distribution of,
quality motion pictures. (Mr. Jessel will join the Board of Directors on January
1, 1999).
Meetings and Committees of the Board of Directors
For the fiscal year ended June 30, 1998, there were 12 meetings and/or
written consents in lieu of meetings of the Board of Directors. All Directors
attended or consented to each of the meetings (and consents in lieu of meetings)
of the Board of directors during said fiscal year. The Board of Directors does
not presently have any standing nominating, audit or compensation committees,
the customary functions of such committees being performed by the entire Board
of Directors. The Board of Directors intends to form such committees in the near
future.
20
<PAGE>
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's officers and directors, and persons who own more than 10% of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
(the "Commission"). Officers, directors and greater than 10% stockholders are
required by the Commission's regulations to furnish the Company with copies of
all section 16(a) forms they file. To the Company's knowledge, based solely on a
review of the copies of reports furnished to the company during the fiscal year
ended June 30, 1998, the Company's officers, directors and greater than 10%
stockholders complied with all filing requirements under section 16(a) except
that (i) Messrs. Schotte and Koshakji each filed a Form 3 in October, 1998
reflecting their appointments to the Board of Directors in March 1998, and (ii)
Mr. Schotte filed a Form 4 in October, 1998 reflecting the conversion of a note
into shares of common stock of the Company, and the acquisition of shares and
warrants of the Company, in each case by an affiliate of Mr. Schotte in April,
1998.
Item 11. Executive Compensation.
The following table sets forth, for the fiscal years indicated, all
compensation awarded to, earned by or paid to the chief executive officer of the
Company and the four most highly compensated executive officers who were
executive officers as of June 30, 1998.
<TABLE>
<CAPTION>
Summary Compensation Table
<S> <C> <C> <C> <C> <C> <C>
Annual Compensation Long-Term
Securities
Name and Fiscal Other Annual Underlying All Other
Position Year Salary Bonus Compensation Options Compensation
- -------- ---- ------ ----- ------------ ------- ------------
Johan Schotte 1998 5,000 -- -- -- 43,000(3)
Chief Executive
Officer; Chairman
Pierre Koshakji 1998 5,000 -- -- -- 43,000(3)
President
Stephen Greenwald 1998 83,000 -- -- -- 96,000(1)(2)
Chief Executive 1997 127,500 -- -- 100,000(2) 97,500(1)(2)
Officer; Co-Chairman 1996 60,000 -- -- 216,667(2) 75,000(1)(2)
Ira N. Smith 1998 79,626 -- -- -- 111,374(1)
President 1997 130,875 -- -- 100,000 94,125(1)
Co-Chairman 1996 60,000 -- -- 216,667 75,000(1)
Lawrence Schneider 1998 -- -- -- -- --
Co-Chairman 1997 89,167 -- -- 100,000 135,833(1)
1996 60,000 -- -- 216,667 75,000(1)
</TABLE>
21
<PAGE>
(1) Messrs. Greenwald, Smith and Schneider each deferred $75,000 of their
annual compensation during the fiscal year ended June 30, 1996 pursuant to the
terms of their respective compensation agreements with the Company. During the
fiscal year ended June 30, 1997, Messrs. Greenwald, Smith and Schneider deferred
$97,500, $94,125, and $135,833, respectively, of their annual compensation
pursuant to their compensation agreements. During the fiscal year ended June 30,
1998, Messrs. Greenwald, Smith and Schneider deferred an additional $96,000 and
$111,374, respectively, of their annual compensation. (Mr. Schneider did not
receive any compensation during the 1998 fiscal year). Pursuant to such
agreements, Messrs. Greenwald, Smith and Schneider were issued convertible
promissory notes for the amount of such deferred compensation, payable in full
within twelve months from the date of issue with interest at 2% over prime. Such
notes were converted into shares of common stock of the Company on June 10 and
June 30, 1996 at the average closing bid price in effect for the common stock
for the 10-day trading period immediately preceding the date of each respective
election. On June 10, $60,000 of each note (plus accrued interest) was converted
into 83,120 shares of common stock at a price of $.75 per share, and on June 30,
$15,000 of each note was converted into 19,231 shares of common stock at a price
of $.78 per share. On September 30, 1996, they each converted deferred
compensation notes of $15,000 for the quarter then ended into a total of 26,316
shares of common stock at a conversion price of $.57 per share. See
"Compensation Arrangements, Termination of Employment and Change-in-Control
Arrangements" for a more detailed explanation of the terms of the compensation
agreements between the Company and each of Messrs. Greenwald, Smith and
Schneider, and for a discussion of the conversion of deferred compensation notes
by Mr. Greenwald and Mr. Schneider in November, 1998. Such compensation
agreements became effective on October 1, 1995, but were terminated in March,
1998 in connection with a change in control of the Company.
(2) The cash compensation and stock options reflected as being paid to or
received by Mr. Greenwald in the foregoing table were actually paid to or
received by G & H Media, Ltd., a consulting firm of which Mr. Greenwald is
a principal and controlling party. The compensation to Mr. Greenwald does
not include compensation paid to a law firm of which Mr. Greenwald is a
member.
See "Certain Relationships and Related Transactions."
(3) Represent deferred compensation which accrued during the fiscal year ended
June 30, 1998.
22
<PAGE>
Options/Stock Appreciation Rights
No stock options or stock appreciation rights ("SARs") were granted to the
named executive officers during the fiscal year ended June 30, 1998.
Aggregated Option/SAR Exercises and Fiscal Year-End Options/SAR Value Table
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at Year End In-the-Money Options
<S> <C> <C> <C> <C> <C> <C>
Shares
Acquired Value
Name On Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
Johan Schotte __ __ 125,000 __ 0 __
Pierre Koshakji __ __ __ __ __ __
Stephen Greenwald(1) __ __ 366,667 __ 0 __
Ira Smith __ __ __ __ __ __
Lawrence Schneider(1) __ __ 350,000 __ 0 __
</TABLE>
(1) The chart includes 50,000 stock options for Mr. Greenwald, and 25,000
stock options for Mr.Schneider, in each case issued in connection with
short term loans made to the Company. See "Certain Relationships and
Related Transactions." For the fiscal year ending June 30, 1999 (through
December 15, 1998), Mr. Greenwald was issued an additional 25,000 stock
options in consideration of a rollover of his short term loans to the
Company, and Messrs. Schotte and Koshakji were each issued 103,385 stock
options as additional incentive compensation.
Repricing of Options
On December 2, 1996, the Board of Directors voted to lower the exercise
price of the following warrants to $1.00 per share to create further incentives
for management of the Company and to bring the warrant exercise price into line
with warrants granted to other parties performing services for the Company: With
respect to Lawrence Schneider, 8,333 warrants granted in April, 1995 at an
exercise price of $3.91 per share; 16,667 warrants granted in October, 1995 at
an exercise price of $2.83 per share; and 200,000 warrants granted in March,
1996 at an exercise price of $1.87 per share; with respect to Robert Miller,
8,333 warrants granted in April, 1995 at an exercise price of $3.91 per share;
33,333 warrants granted in October, 1995 at an exercise price of $2.83 per
share; and 25,000 warrants granted in March, 1996 at an exercise price of $1.87
per share; with respect to each of Ira Smith and G & H Media., Ltd. (an
affiliate of Stephen R. Greenwald), 16,667 warrants granted in October, 1995 at
an exercise price of $2.83 per share; and 200,000 warrants granted in March,
1996 at an exercise price of $1.87 per share. The closing bid price of the
Company's common stock on December 2, 1996 was $.69 per share.
23
<PAGE>
Director Compensation
The Company does not have any standard arrangements pursuant to which
directors of the Company are compensated for services provided as a director.
All directors are entitled to reimbursement for expenses reasonably incurred in
attending Board of Directors' meetings.
Compensation Agreements, Termination of Employment and Change-in-Control
Arrangements
On October 1, 1995, Messrs. Greenwald, Smith and Schneider executed
compensation agreements with the Company (the "Agreements"), pursuant to which
the named parties agreed to render management services to the company for a
three year period ending October 1, 1998. Pursuant to these Agreements, each of
the parties agreed to serve as a Co-Chairman in the Office of the Chairman of
the Company and, in addition, Mr.Greenwald agreed to serve as Chief Executive
Officer. (In March, 1996, Mr. Smith also agreed to serve as President of the
Company). The Agreements were superseded by agreements executed on March 6,
1996. The subsequent agreements (also defined as the "Agreements") were
substantially identical to the original Agreements in all material respects with
respect to cash compensation but modified the provisions regarding the issuance
of stock options. (In the subsequent Agreement with Mr. Greenwald, the named
party is G & H Media, Ltd., rather than Mr. Greenwald individually; G & H Media,
Ltd. is a consulting firm of which Mr. Greenwald is a principal and controlling
party).
The Agreements provided for compensation at a the rate of $15,000 per
month, $20,000 per month and $25,000 per month during the first, second and
third years of the respective terms of the Agreements. In September, 1997, the
terms of the Agreements were extended for an additional two-year period.
Each of Messrs. Greenwald, Smith and Schneider agreed that with respect to
each calendar quarter during the term of his respective Agreement, the following
percentage of his compensation would be paid: (i) no payment if the current
assets of the Company as of the end of the previous calendar quarter are less
than $500,000; (ii) one-third if the current assets of the Company as of the end
of the previous calendar quarter are more than $500,000 but less than
$1,000,000; (iii) two-thirds if the current assets as of the end of the previous
calendar quarter are more than $1,000,000 but less than $1,500,000; and (iv)
full payment if the current assets as of the end of the previous calendar
quarter are more than $1,500,000. Any portion of the compensation not paid would
be deferred and would be paid in twelve months with interest pursuant to a
promissory note issued by the Company, provided that the note could be converted
into common stock of the Company at any time prior to payment in full at the
average closing bid price in effect for the common stock for the 10-day trading
period immediately preceding the date of the conversion election.
During the quarter ended December 31, 1995, each of Messrs. Greenwald,
Smith and Schneider deferred 100% of their compensation for the quarter, or
$45,000 each. During each of the next two quarters, they deferred one-third of
their compensation, or a total of $30,000 each. On June 10 and June 30, 1996,
each of Messrs. Greenwald, Smith and Schneider converted their deferred
compensation notes of $75,000 (plus accrued interest) into a total of 102,351
shares of common stock at prices of $.75 and $.789 per share, respectively. On
September 30, 1996, they each converted deferred compensation notes of $15,000
for the quarter then ended into a total of 26,316 shares of common stock at a
conversion price of $.57 per share. In November, 1998, Mr. Greenwald converted
$44,968 of deferred compensation notes into 145,058 shares of common stock at a
conversion price of $.31 per share, and Mr. Schneider converted $157,774 of
deferred compensation notes into 508,947 shares of common stock at a conversion
price of $.31 per share
The Agreements also provided for the issuance of 200,000 stock options to
each of Messrs. Greenwald, Smith and Schneider, exercisable during the five-year
period commencing March 6, 1996 at an exercise price of $1.87 per share
(subsequently lowered to $1.00 per share by action of the Board of Directors in
December 1996). See "Options/Stock Appreciation Rights."
24
<PAGE>
On December 2, 1996, the Board of Directors granted 100,000 common stock
purchase warrants to each of Stephen R. Greenwald, Ira Smith and Lawrence
Schneider in consideration of services rendered to the Company. The warrants
were granted for a five-year period and are exercisable at a purchase price of
$1.00 per share.
In April, 1997, the Company granted additional common stock purchase
warrants to Stephen R. Greenwald (or his designee), Lawrence Schneider and
Robert Miller, Jr. in consideration of providing certain interim financing to
the Company. See "Certain Relationships and Related Transactions."
Lawrence Schneider resigned his executive position in September 1997. In
March, 1998, Messrs. Greenwald and Smith stepped down as CEO and President of
the Company, and Messrs. Johan Schotte and Pierre Koshakji were elected as CEO
and President in their stead.
In connection with the change of management in March, 1998, Messrs.
Greenwald and Smith terminated their existing employment agreements and entered
into new compensation arrangements with the Company. Mr. Greenwald agreed to
serve as managing director of the Company through December 31, 1999, and is
entitled to receive the sum of $130,000 during such period in varying monthly
payments. In addition, in consideration of terminating his existing employment
agreement, Mr. Greenwald is entitled to receive an additional $130,000, also
payable in varying monthly amounts during the two-year period ending December
31, 1999. The Company is currently in default under Mr. Greenwald's agreement,
entitling Mr. Greenwald to re-instate his former employment agreement.
Mr. Smith (through S.F.H. Associates, Inc.) agreed to serve in a consulting
capacity to the Company through December 31, 1999, and is entitled to receive
the sum of $160,000 during such period, payable at the rate of $8,000 per month,
commencing May, 1998. In adition, in consideration of terminating his existing
employment agreement, Mr. Smith is entitled to receive an additional $100,000,
payable in varying monthly amounts during the two-year period ending December
31, 1999. The Company is in default under the agreements with S.F.H Associates,
Inc. and Mr. Smith, as a result of which such parties have exercised their
contractual rights to double the payments due to them under such agreements.
Mr. Ian Jessel entered into a three year employment agreement with the
Company, commencing November 9, 1998 and continuing through November 9, 2001. Mr
Jessel's compensation is set at a rate equal to $300,000 per annum for the first
year, $350,000 per annum for the second year, and $400,000 per annum for the
third year. Jessel shall be entitled yearly to a 10% bonus of the net profits of
the film division and to a 5% bonus, paid in the Company's stock, of the net
profits of the Company provided that the film division is responsible for one
half of such net profits or Jessel's bonus shall be proportionately reduced down
to a floor of 1% of 100% of the Company's net profits.
Johan Schotte entered into a two-year employment agreement with the
Company, commencing as of January 1, 1998 and continuing through December 31,
1999. Mr. Schotte's compensation is set at $150,000 per year during such period.
Mr. Koshakji also entered into a two-year employment agreement with the Company
at the rate of $150,000 per annum. As of September 30, 1998, a substantial
portion of the compensation due to Messrs. Smith and Koshakji under their
respective agreements is past due.
In connection with the change of management, an affiliate of Mr. Schotte
purchased a total of $230,000 of deferred compensation notes from Messrs.
Greenwald and Smith, and converted approximately 75% of these notes into 667,648
shares of the Company's common stock in April, 1998. The balance of these notes
were converted into 176,050 shares of common stock in October, 1998.
25
<PAGE>
In November, 1998, the Board of Directors of the Company authorized the
following bonus incentive compensation package for each of Messrs. Schotte and
Koshakji:
I) Warrants: 2% of the Company's total outstanding stock each
year, beginning with the fiscal year commencing July 1, 1998,
and each year thereafter. Warrants shall be priced at the
average bid price for the 10 consecutive trading days
preceding the issue date each year, and exercisable at any
time following the issue date. (Messrs. Schotte and Koshakji
were each issued 103,385 warrants as of July 1, 1998 at an
exercise price of $.74 per share).
II) Performance Bonus: Each year beginning with the fiscal year
ending June 30, 1999, and each year thereafter, if the
Company's gross revenues increase by 20% or more over the
gross revenues of the preceding year, the performance bonus
shall be the greater of either 1% of the revenue differential
or 2.5% of the EBITDA.
III) Market Cap Bonus: At the end of each fiscal year, beginning
with the fiscal year ending June 30, 1999, if the Company's
market capitalization increases from the preceding year based
on the average closing price for the 30 previous consecutive
trading days, the market capitalization bonus shall equal 1%
of the differential.
Compensation Committee Report and Compensation Committee Interlocks and Insider
Participation
Executive officer compensation is determined by the entire Board of
Directors. The Board has not appointed or designated a separate compensation
committee to determine or set executive compensation. The Board's executive
compensation policy is intended to attract and retain key executives, compensate
them at appropriate levels and provide them with both cash and equity incentives
to enhance the Company's value for all of its stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth information concerning ownership of common
stock, as of December 15, 1998, by each person known by the Company to be the
beneficial owner of more than 5% of the common stock, each director and
executive officer, and by all directors and executive officers of the Company as
a group.
26
<PAGE>
Name & Address of Shares Percentage of
Beneficial Owner Status Beneficially Owned Class
Lawrence Schneider __ 944,631(1) 12.9%
116 E. 30th Street
New York, NY
Robert Miller, Jr. Director 214,833(2) 3.0%
900 4th Avenue
Seattle, WA
S.F.H. Associates Inc. __ 428,564(3) 5.9%
49 Woodland Drive
Oyster Bay, NY
Stephen R. Greenwald Managing 648,622(4) 8.8%
380 Lexington Avenue Director;
New York, NY Director
Johan Schotte CEO and 353,385(5) 4.9%
1601 Elm Street Chairman
Dallas, TX
Pierre Koshakji President & 103,385(6) 1.5%
1601 Elm Street Director
Dallas, TX
Ian Jessel Director 50,000 .7%
1601 Elm Street (As of 1/1/1999)
Dallas, TX
Lecoutere Finance S.A. __ 1,870,298(7) 25.3%
39 route de Remich
L-5650 Mondorf-les-Bains
Grand Duchy of Luxembourg
All Executive
Officers & __
Directors As
A Group (6 Persons) 1,370,225(8) 17.5%
(1) Includes presently exercisable options to purchase 333,333 shares of
common stock.
(2) Includes presently exercisable options to purchase 144,166 shares of
common stock; also includes 61,167 shares held jointly with Mr. Miller's
wife, and 9,500 shares held in an individual retirement account for Mr.
Miller's wife, as to which latter shares Mr. Miller disclaims beneficial
ownership.
(3) Includes presently exercisable options to purchase 300,000 shares of
common stock.
(4) Includes presently exercisable options to purchase 375,000 shares of
common stock.
(5) Includes presently exercisable options to purchase 228,385 shares of
common stock; does not include 1,468,698 shares of common stock and
401,600 common stock purchase warrants held by a corporate affiliate of
Mr. Schotte, Lecoutere Finance S.A.; also does not include 2660 common
stock purchase warrants held by E3 Capital, and 29,537 common stock
purchase warrants held by Media Trust S.A., both corporate affiliates of
Mr. Schotte. (Mr. Schotte disclaims beneficial ownership of all shares and
warrants held by affiliated entities, although based on Mr.Schotte's close
business relationship with the other principal shareholders of these
entities, there exists the possibility that these shareholders may act in
concert with Mr. Schotte with respect to the voting of these shares in the
Company).
(6) Includes presently exercisable options to purchase 103,385 shares of
common stock.
(7) Includes presently exercisable options to purchase 401,600 shares of
common stock. See note (5).
(8) Includes presently exercisable options to purchase 850,936 shares of
common stock.
27
<PAGE>
Item 13. Certain Relationships and Related Transactions.
On August 1, 1996, the Board of Directors of the Company offered to
reimburse members of the CECO Shareholders Committee in kind for all expenses
incurred by such members in connection with the change of management control of
the Company effected in April, 1995. (See "Change of Control"). The Board
offered to reimburse such expenses by issuing stock options to the committee
members in an amount equal to one and one-third times the amount of such
expenses. Robert Miller, a director of the Company, agreed to accept options to
purchase 40,000 shares of the Company's common stock, exercisable over a
five-year period at an exercise price of $.75 per share, representing the then
current market price of the Company's common stock on the date of grant. In
exchange, Mr. Miller agreed to release his claim for reimbursement of
approximately $30,000 of expenses incurred by Mr. Miller in connection with the
change of control. Lawrence Schneider, then a director of the Company and also a
member of the CECO Shareholders Committee, did not agree to accept options in
lieu of his claim for reimbursement of expenses in connection with the change of
control.
During the fiscal years ended June 30, 1997 and 1998, the law firm of
Herbst & Greenwald, of which Mr. Greenwald, a director of the Company, is a
member, received fees for legal services rendered to the Company in the amounts
of $21,563 and $5,000, respectively.
In April, 1997, Stephen R. Greenwald, Lawrence Schneider (then a director
of the Company), and Robert E. Miller, Jr. made loans to the Company in the
amounts of $50,000, $25,000 and $25,000, respectively. Each loan was payable on
demand, accrued interest at the rate of 9.25% per annum, and was secured by a
collateral assignment of the Company's $300,000 receivable due from Kinnevik.
See "Business-Sales of Distribution Rights." In consideration of making such
loans, the lenders received five-year warrants to purchase shares of common
stock of the Company, exercisable at $1.00 per share. Messrs. Schneider and
Miller each received 25,000 warrants in consideration of their respective
$25,000 loans to the Company, and Mr. Greenwald (or his designee) received
50,000 warrants in consideration of his $50,000 loan to the Company. Mr.
Schneider's loan was repaid in April, 1998 from the Kinnevik receivable.
However, Messrs. Greenwald and Miller agreed to a rollover of their loans to be
paid from the proceeds of a second Kinnevik receivable due in September, 1998.
In consideration of the rollover, Mr. Greenwald will receive 25,000 warrants and
Mr. Miller will receive 12,500 warrants, in each case exercisable over a
five-year period at $1.00 per share. Mr. Greenwald's loan was repaid in
September, 1998; Mr. Miller's loan was rolled over for a six month period on an
unsecured basis with interest at the rate of 10% per annum.
In March, 1998, Ira Smith and Stephen Greenwald stepped down as Co-Chairmen
in the Office of the Chairman of the Company, and Johan Schotte was appointed as
Chairman and CEO of the Company. In connection with the change in management, an
affiliate of Mr. Schotte purchased $230,000 face value of deferred compensation
notes from Messrs. Smith and Greenwald, and in April, 1998, converted
approximately 75% of those notes into 667,648 shares of the Company's common
stock. The balance of these notes were converted into 176,050 shares of common
stock in October, 1998. In addition, at the time of the change in management,
the Company purchased an 18% equity interest in each of two corporations
affiliated with Mr. Schotte, one of which is the owner of a second division
professional soccer team in New Mexico, and the other of which is a media
production company in Luxembourg. The Company issued one-year notes in the
aggregate amount of $450,000 in consideration of the purchase of the equity
interests in these companies.
28
<PAGE>
In connection with Mr.Schotte's appointment as CEO and Chairman of the
Board, Mr. Greenwald agreed to terminate his existing employment agreement with
the Company and to enter into a new, two-year employment agreement, effective as
of January 1, 1998. Mr. Smith also agreed to terminate his existing employment
agreement. The Company entered into a new, two-year consulting agreement with
S.F.H. Associates, Inc., pursuant to which the consultant would provide the
consulting services of Mr. Smith for the two year period commencing as of
January 1, 1998. The Company also entered into a two-year contract with each of
Mr. Schotte and Mr. Koshakji, effective as of January 1, 1998, at the rate of
$150,000 per annum. (See "Executive Compensation").
In June, 1998, the Company entered into a sublease for office space in Los
Angeles with an affiliate of the CEO of the Company. The sublease is on a
month-to-month basis at the rate of $1,500 per month. The Company intends to
utilize the premises for the months of June thru December, 1998.
In November, 1998, the Company entered into the following related party
transactions with E3 Sports New Mexico, Inc., a company which is an affiliate of
Mr. Schotte and Mr. Koshakji (the CEO and President of the Company,
respectively) and in which the Company holds a minority interest: (i) the
Company purchased a $25,000 sponsorship from the Albuquerque Geckos, the
professional soccer team owned by the affiliate; and (ii) the Board authorized
the Company to loan up to $100,000 to the affiliate, payable no later than July
15, 1999 with interest at 15% per annum (the loan is secured by 10,000 shares of
E3 Sports new Mexico, Inc.).
In July, 1998, the Company entered into the following related party
transactions with Media Trust S.A., a company which is an affiliate of Mr.
Schotte and in which the Company holds a minority interest: (i) the Company has
agreed to make a $2,500 loan to the affiliate, payable in one year with interest
at 15% per annum; (ii) the Company engaged the affiliate to introduce
prospective investors to the company, in exchange for which the affiliate will
receive 10% of any investments made in the Company by persons or entities
introduced by the affiliate, together with five-year warrants (100 warrants per
$1,000 invested) at an exercise price equal to the market price of the Company's
stock on the date of the investment. In connection with convertible loans made
to the Company in 1998 by Belgian investors in the aggregate amount of
approximately $100,000, and the purchase of 625,000 shares of common stock of
the Company by Lecoutere Finance, S.A. in December, 1998 (see below), a total of
29,537 five-year warrants will be issued to Media Trust, S.A. with exercise
prices ranging from $.38 per share to $.98 per share.
In December, 1998, Lecoutere Finance, S.A., an affiliate of the CEO of
the Company, purchased 625,000 shares of common stock from the Company for an
aggregate consideration of $187,500 ($.30 per share). The price was based on the
average price of the Company's common stock for the 30 day period preceding the
date of purchase (i.e., $.37 per share), less a 20% discount due to the
restricted nature of the shares purchased. (See "Security Ownership of Certain
Beneficial Owners and Management").
29
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a)(1) The response to this portion of Item 14 is submitted as a separate
section of this report commencing on page F-1.
(a)(2) See (a)(1) above.
(a)(3) Exhibits
3.1 Articles of Incorporation, as amended through June 30, 1995(1)
3.2 Amendments to Articles of Incorporation filed in March and June,1996(8)
3.3 Amendment to Articles of Incorporation filed in January, 1997 (9)
3.4 By-laws(1)
4.1 Indenture between Odyssey and Continental Stock Transfer and Trust
Company ("Continental") dated as of July 15, 1987(1)
4.2 Form of Supplemental Indenture between Continental and the Company(1)
4.3 Form of Common Stock Certificate(1)
4.4 Form of options granted of officers, directors and 5% stockholders(2)
4.5 Form of Warrant issued to purchasers parties to the 1995 Private
Placement completed September 30, 1995(5)
4.6 Form of 12% Unsecured Promissory Note issued to purchasers parties
to the 1995 Private Placement completed September 30, 1995(5)
4.7 Form of Stock Option Agreement by and between the Company and
officers and directors of the Company, for stock options issued
in April 1995(5)
4.8 Form of Common Stock Purchase Warrant by and between the Company and
officers, directors, employees and consultants of the Company for
warrants issued during the fiscal year ended June 30, 1996(8)
4.9 Common Stock Purchase Warrant, dated March 6, 1996, between the
Company and G & H Media, Ltd. (assignee of Stephen R. Greenwald)(7)
4.10 Common Stock Purchase Warrant, dated March 6, 1996, between the
Company and Lawrence I. Schneider(7)
4.11 Common Stock Purchase Warrant, dated March 6, 1996, between the
Company and Ira N. Smith(7)
4.12 Form of Common Stock Purchase Warrant by and between the Company
and officers, directors, employees and consultants of the Company
for warrants issued during the fiscal year ended June 30, 1997 (9)
4.13 Preferred Stock Certificate, Series A, issued to Kinnevik Media
Properties, Ltd. in September, 1997 (10)
4.14 Convertible Note issued to Augustine Fund L.P. in July, 1998 (12)
4.15 Preferred Stock Certificate, Series B, issued to Kimon, Inc. in
September, 1998 (10)
10.1 1989 Long Term Incentive Plan(1)
10.2 Agreement of Settlement and Release, dated October 2, 1995, by
and between Home Box Office, Inc. and Odyssey(5)
30
<PAGE>
10.3 Private Placement Memorandum used in connection with 1995 Private
Placement (the "1995 Private Placement Memorandum")(5)
10.4 Supplement to the 1995 Private Placement Memorandum(5)
10.5 Supplement No. 2 to the 1995 Private Placement Memorandum(5)
10.6 Supplement No. 3 to the 1995 Private Placement Memorandum(5)
10.7 Settlement Agreement, dated as of March 31, 1995, by and
between the Company, Odyssey, Global Intellicom, Inc., N.
Norman Muller, Thomas W. Smith, David Mortman, Robert Ferraro,
the CECO Shareholders Committee, Lawrence Schneider, Robert E.
Miller, Henry Schneider, Robert Hesse, Shane O'Neil, Patrick
Haynes, Russell T. Stern, Jr., Thurston Group, Inc., The
Insight Fund, L.P. and Lois Muller(3)
10.8 Memorandum of Agreement, dated as of August 24, 1995 between the
Company and Multipix Communications, Inc.(4)
10.9 Termination Agreement, dated as of January 2, 1996, between Regency
International Pictures, B.V. and Odyssey Distributors B.V.(6)
10.10 Employment Agreement dated October 1, 1995, between the Company
and Stephen R. Greenwald(6)
10.11 Employment Agreement dated October 1, 1995, between the Company
and Lawrence I. Schneider(6)
10.12 Employment Agreement dated October 1, 1995, between the Company
and Ira N. Smith (6)
10.13 Agreement, dated March 6, 1996, between Communications and
Entertainment Corp. and its wholly-owned subsidiary, Odyssey
Distributors, Ltd.(7)
10.14 Severance and Consulting Agreement, dated March 26, 1996, between
the Company and Shane O'Neil, and related modifying agreement
dated March 28, 1996(7)
10.15 Management Agreement between the Company and Stephen R. Greenwald,
dated March 6, 1996, superseding the Employment Agreement dated
October 1, 1995(8)
10.16 Management Agreement between the Company and Lawrence I. Schneider,
dated March 6, 1996, superseding the Employment Agreement dated
October 1, 1995(8)
10.17 Management Agreement between the Company and Ira N. Smith, dated
March 6, 1996, superseding the Employment Agreement dated
October 1, 1995(8)
10.18 Addendum to Management Agreements of Messrs. Schneider, Greenwald
and Smith(8)
10.19 Joint Venture Letter between the Company and Film Bridge
International, Inc., dated March 11, 1996(8)
10.20 Lease for office premises at 1875 Century Park East, Suite 2130,
Los Angeles, California, dated May 9, 1996(8)
10.21 Agreement dated August 29, 1996, between the Company and Kinnevik
Media Properties, Ltd.(8)
10.22 Agreement dated September 6, 1996 between the Company and Mr. David
Somerstein(8)
10.23 Settlement Agreement and Release between Paramount Pictures Corporation
and Odyssey Distributors , Ltd. (a wholly owned subsidiary of the
Company), and Guarantee agreement of the Company, each dated as of
September 26, 1996 (9)
31
<PAGE>
10.24 Form of Settlement Agreement with Generale bank Nederland, N.V.,
dated as of December 18, 1996 (9)
10.25 Stock Purchase Agreement between the Company and Kinnevik Media
Properties, Ltd., dated September 1997 (10)
10.26 Stock Purchase Agreement between the Company and Flanders Film S.A.
relating to purchase of minority stock interest in E3 Sports New
Mexico, Inc. and Media Trust S.A., and related promissory notes for
$135,000 and $315,000, dated March 2, 1998 (10)
10.27 Termination /Employment Agreement with Stephen R. Greenwald, dated
March 2, 1998 (10)
10.28 Termination Agreement with Ira Smith dated March 2, 1998 (10)
10.29 Consulting Agreement with S.F.H. Associates, Inc. for the services
of Ira Smith, dated March 2, 1998 (10)
10.30 Employment Agreement with Johan Schotte, dated March 2, 1998 (10)
10.31 Convertible Note issued to Augustine Fund, L.P. in July, 1998 (12)
10.32 Asset Purchase Agreement between the Company and Kimon Mediabright
KB, a Swedish limited partnership, dated July 14, 1998 (10)
10.33 Employment Agreement with Pierre Koshakji, dated March 2, 1998 (11)
21.1 Subsidiaries of the Registrant(3)
(1) Incorporated herein by reference to the Company's Registration Statement
on Form S-4, File No. 33-34627.
(2) Incorporated herein by reference to the Company's Registration Statement on
Form S-1, File No. 33-43371.
(3) Incorporated herein by reference to the Company's Current Report on Form
8-K filed April 12, 1995, File No. 0-18954.
(4) Incorporated herein by reference to the Company's Current Report on Form
8-K filed August 30, 1995, File No. 0-18954.
(5) Incorporated herein by reference to the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1995, File No. 0-18954.
(6) Incorporated herein by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1995, File No. 0-18954.
(7) Incorporated herein by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1996, File No. 0-18954.
(8) Incorporated herein by reference to the Company's Annual Report on Form
10-K for the Fiscal Year Ended June 30, 1996, File No. 0-18954.
(9) Incorporated herein by reference to the Company's Registration Statement
on Form S-1, File No. 333-20701.
(10)Incorporated herein by reference to the Company's Annual Report on Form
10-K for the Fiscal Year Ended June 30, 1997, File No. 0-18954
(11)Incorporated herein by reference to Amendment No. 1 to the Company's Annual
Report on Form 10-K for the Fiscal Year Ended June 30, 1997,
File No. 0-18954
(12)Filed herewith.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed by the Company during the last
quarter of the period covered by this Report.
(c) See (a)(3) above.
(d) None.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ODYSSEY PICTURES CORPORATION
Dated: December 30, 1998 By: /s/ Johan Schotte
-------------------
Johan Schotte,
CEO and Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Johan Schotte CEO and Chairman 12/30/98
Johan Schotte (Principal Executive & Financial Officer)
/s/ Pierre Koshakji President; Director 12/30/98
Pierre Koshakji
/s/ Stephen R. Greenwald Managing Director; 12/30/98
Stephen R. Greenwald Director
/s/ Robert E. Miller, Jr. Director 12/30/98
Robert E. Miller, Jr.
33
<PAGE>
ODYSSEY PICTURES CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Accountants F-2
Financial Statements:
Consolidated Balance Sheets
as of June 30, 1998 and 1997 F-3
Consolidated Statements of Operations for the
Years Ended June 30, 1998, 1997 and 1996 F-4
Consolidated Statements of Changes in Shareholders'
Equity (Deficit) for the Years Ended June 30,
1998, 1997 and 1996 F-5
Consolidated Statements of Cash Flows for the
Years Ended June 30, 1998, 1997 and 1996 F-6 - F-7
Notes to Consolidated Financial Statements F-8 - F-22
All schedules have been omitted because the requested information is not
required, or, because the information required is included in the financial
statements or notes thereto.
F-1
<PAGE>
WANT & ENDER, CPA, P.C.
386 PARK AVENUE SOUTH, SUITE 1618
NEW YORK, NY 10016
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Odyssey Pictures Corporation
In our opinion, the accompanying consolidated balance sheets and related
consolidated statement of operations, shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Odyssey
Pictures Corporation and its subsidiaries at June 30, 1998 and 1997 and the
results of their operations and their cash flows for the period ended June 30,
1998 and 1997 in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
As discussed in Note 7 to the financial statement, the Company defaulted on
payments due August and October 1996 relating to notes payable. The Company
proposed to the noteholders to defer maturity of the notes and exchange existing
warrants for shares, or cancel the notes and existing warrants in their entirety
in exchange for shares. The Company offered to register any shares issued in
exchange for the notes as of August 12, 1997 the date the registration becomes
effective, and all but one of the noteholders agreed to exchange their notes for
registered stock. The remaining notes for $50,000 (held by a single investor)
have not been paid and are in default. Additionally, an unsecured note of
$179,000 is also in default. At this time, the ultimate outcome of this matter
cannot be determined.
As discussed in Note 8, the Company is a defendant in various lawsuits. The
Company has filed counteractions and preliminary hearings and discovery
proceedings on several actions are in progress. The ultimate outcome of the
litigation cannot be determined at present. Not all liabilities that may result
upon adjudication have been accrued in the accompanying financial statements.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has suffered recurring losses from operations,
has a net capital deficiency and has insufficient working capital to meet its
current obligations and liquidity needs. These factors raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 3. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/Want & Ender, CPA, P.C.
- --------------------------
Want & Ender, CPA, P.C.
New York City, New York
December 22, 1998
F-2
<PAGE>
Price Waterhouse LLP
1880 Century Park East
Century City
West Los Angeles, CA 90067
(310) 553-6030
To the Board of Directors and
Shareholders of
Communication and Entertainment Corp.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of
Communications and Entertainment Corp. and its subsidiaries at June 30, 1996 and
1995, and the results of their operations and their cash flows for each of the
three years in the period ended June 30, 1996 in conformity with generally
accepted accounting procedures. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and preform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 10 to the financial statements, the Company has defaulted
on payments due in August and October 1996 relating to notes payable. The
Company has proposed to the noteholders to defer the maturity of the notes and
exchange existing warrants for shares, or to cancel the notes in their entirety
in exchange for shares. Both proposals are subject to registration statements
becoming effective. As of October 6, 1996 several noteholders had accepted the
first proposal and one noteholder had accepted the second proposal; however as
some noteholders have not accepted either of the proposals, the ultimate outcome
of this matter cannot be determined at present.
As discussed in Note 11, the Company is a defendant in various lawsuits. The
Company has filed several counteractions and preliminary hearings and discovery
proceedings on several actions are in progress. The ultimate outcome of the
litigation cannot be determined at present. Not all liabilities that may result
upon adjudication have been accrued in the accompanying financial statements.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has suffered recurring losses from operations,
has a net capital deficiency and has insufficient working capital to meet its
current obligations and liquidity needs. These factors raise substantial doubt
about the Company's ability to continue as a going concern. Management's plan is
regard to these matters are also described in Note 3. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/S/ Price Waterhouse LLP
- -------------------------
Los Angeles, CA
October 14, 1996
<PAGE>
<TABLE>
<CAPTION>
ODYSSEY PICTURES CORPORATION
Consolidated Balance Sheets
------------------------------------
<S> <C> <C>
JUNE 30, JUNE 30,
1998 1997
------------------ ------------------
ASSETS:
Cash $4,331 $8,790
Accounts receivable, net of allowances
of $0 and $0 9,500 292,251
Note receivable 100,000 300,000
Film costs, net 110,422 120,472
Other assets 451,200 17,998
------------------ ------------------
$675,453 $739,511
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT):
Liabilities:
Accounts payable and accrued expenses $865,923 $874,020
Accrued wages 457,794 335,996
Accrued interest 77,168 64,601
Accrued rent 0 149,000
Due to producers and participants 250,000 560,499
Deferred revenues 29,000 19,800
Notes and loans payable 1,079,000 961,500
------------------ ------------------
2,758,885 2,965,416
------------------ ------------------
Commitments and contingencies
Shareholders' Equity (Deficit):
Preferred stock, par value $.10;
Authorized - 10,000,000 shares
Issued - 500,000 shares 50,000
Class A stock, par value $.01;
Authorized - 10,000,000 shares
Issued - none
Common stock, par value $.01;
Authorized - 40,000,000 shares
Issued and outstanding -
5,029,285 and 3,279,515 shares 50,293 32,796
Capital in excess of par value 27,552,973 26,358,583
Accumulated deficit (29,736,698) (28,617,284)
------------------ ------------------
Total shareholders' deficit (2,083,432) (2,225,905)
------------------ ------------------
$675,453 $739,511
================== ==================
The accompanying notes are an integral part of these statements.
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
ODYSSEY PICTURES CORPORATION
Consolidated Statements Of Operations
For the Years
Ended June 30,
----------------------------------------------------
<S> <C> <C> <C>
1998 1997 1996
REVENUES: $42,630 $141,202 $1,010,826
--------------- ---------------- ----------------
EXPENSES:
Costs related to revenues 20,019 565,610 1,046,299
Selling, general and
administrative expenses 1,073,134 1,678,450 1,565,307
--------------- ---------------- ----------------
1,093,153 2,244,060 2,611,606
--------------- ---------------- ----------------
Operating income (loss) (1,050,523) (2,102,858) (1,600,780)
OTHER INCOME (EXPENSES):
Other income
Interest income 1,243
Interest expense (68,891) (91,435) (97,701)
Loss on sale of joint venture interests (3,262,478)
Other Income 2,263,101
--------------- ---------------- ----------------
Income (loss) from continuing operations
before provision for income taxes (1,119,414) 68,808 (4,959,716)
Benefit for income taxes
--------------- ---------------- ----------------
Income (loss) from continuing operations (1,119,414) 68,808 (4,959,716)
Loss from discontinued
operations
--------------- ---------------- ----------------
Net income (loss) ($1,119,414) $68,808 ($4,959,716)
=============== ================ ================
Income (loss) per share:
Income (loss) from continuing operations ($0.25) $0.02 ($2.17)
Loss from discontinued
operations
--------------- ---------------- ----------------
Net income (loss) ($0.25) $0.02 ($2.17)
=============== ================ ================
Weighted average common
shares outstanding* 4,403,435 2,993,809 2,283,611
=============== ================ ================
Fully diluted income (loss) per share:
Income (loss) from continuing operations ($0.25) $0.02 ($2.17)
Loss from discontinued
operations
--------------- ---------------- ----------------
Net income (loss) ($0.25) $0.02 ($2.17)
=============== ================ ================
Weighted average common
shares outstanding* 4,403,435 2,993,809 2,283,611
=============== ================ ================
The accompanying notes are an integral part of these statements.
F-4
</TABLE>
<PAGE>
<TABLE>
ODYSSEY PICTURES CORPORATION
Consolidated Statements Of Changes in Shareholders' Equity (Deficit)
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Preferred Stock Common Stock Total
Amount Amount Capital in Shareholders'
($.10 Par ($.01 Par Excess of Accumulated Equity
Shares Value) Shares Value) Par Value Deficit (Deficit)
Balances - June 30, 1995 2,284,189 $22,842 $25,682,817 ($23,726,376) $1,979,283
Issuance of shares to officers
in payment of notes 307,053 3,071 228,949 232,020
Cash payments in lieu of
fractional shares on
conversion of Class A stock (400) (400)
Net loss (4,959,716) (4,959,716)
------------ --------- ------------ ----------- ------------- ------------- ------------
Balances - June 30, 1996 - - 2,591,242 25,913 25,911,366 (28,686,092) (2,748,813)
Issuance of shares to officers
in payment of notes 78,948 789 44,211 45,000
Re-issue of unexchanged shares
shares previously cancelled 65,825 659 (659) 0
Issuance of shares in consideration
for services rendered 43,500 435 33,665 34,100
Sale of shares to equity
investors 500,000 5,000 370,000 375,000
Net income 68,808 68,808
------------ --------- ------------ ----------- ------------ ------------- ------------
Balances - June 30, 1997 - - 3,279,515 $32,796 $26,358,583 ($28,617,284) ($2,225,905)
Issuance of shares of preferred
stock to equity investors 500,000 50,000 450,000 500,000
Issuance of shares of common stock
in exchange for cancellation
notes payable and other
liabilities 1,010,455 10,104 529,235 539,339
Issuance of shares of common stock
to equity investors 66,667 667 49,333 50,000
Issuance of shares of stock in
exchange for cancellation of
deferred compensation notes 667,648 6,676 165,823 172,499
Issuance of shares of common stock
in consideration for service
rendered 5,000 50 50
Net loss (1,119,414) (1,119,414)
------------ --------- ------------ ----------- ------------ ------------- ------------
Balances - June 30, 1998 500,000 $50,000 5,029,285 $50,293 $27,552,973 ($29,736,698) ($2,083,432)
============ ========= ============ =========== ============ ============= ============
The accompanying notes are an integral part of these statements.
F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ODYSSEY PICTURES CORPORATION
Consolidated Statements Of Cash Flows
For the Years
Ended June 30,
---------------------------------------------------------
<S> <C> <C> <C>>
1998 1997 1996
Cash Flows from Operating Activities:
Net loss from continuing operations ($1,119,414) $68,808 ($4,959,716)
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Loss on sale of joint venture interest 3,262,478
Amortization of film costs 36,976 1,660,440 634,179
Additions to film costs (26,926) (779,944) (185,401)
Other depreciation and amortization 10,961 18,963 44,307
Issuance of shares of preferred stock to
equity investors 500,000
Issuance of shares of common stock in exchange for
cancellation notes payable and other liabilities 539,338
Issuance of shares of common stock to 50,000
equity investors
Issuance of shares of stock in exchange for
cancellation of deferred compensation notes 172,499
Issuance of shares of common stock in consideration
for services rendered 50 34,100
Issuance of shares of common stock in consideration
Issuance of shares of common stock to officers
in payment of deferred compensation 45,000 232,020
Cash payments in lieu of fractional shares (400)
Funds held in joint venture accounts 352,723
Accounts receivable, net 282,751 704,323 (406,331)
Note receivable 200,000 (300,000)
Other 5,837 (536) (5,500)
(Decrease) increase in liabilities net of
Accounts payable and accrued expenses (22,732) 510,988 (199,628)
Due to producers and participants (310,499) (3,199,643) (115,701)
Deferred revenues 9,200 16,800 3,000
------------------ ----------------- -----------------
Net cash used in continuing operations 328,041 (1,220,701) (1,343,970)
------------------ ----------------- -----------------
Cash Flows from Investing Activities:
Purchase of stock in E-3 Sports New Mexico, Inc. (135,000)
Purchase of stock in Media Trust S.A. (315,000)
Acquisition of fixed assets (8,480) (6,550)
Proceeds on sale of joint venture interest 1,500,000
Net cash provided by (used in)
------------------ ----------------- -----------------
investing activities (450,000) (8,480) 1,493,450
------------------ ----------------- -----------------
The accompanying notes are an integral part of these statements.
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
ODYSSEY PICTURES CORPORATION
Consolidated Statements Of Cash Flows (Continued)
-------------------------------------------------
For the Years
Ended June 30,
---------------------------------------------------------
<S> <C> <C> <C>
1998 1997 1996
Cash Flows from Financing Activities:
Note payable in settlement of Generale Bank
complaint (25,000) 275,000
Net proceeds from the sale of
Senior Notes 270,000
Net proceeds from private placement
sale of common stock 375,000
Net proceeds from interim financing 26,173 125,000
Repayment on interim financing notes (51,173)
Notes payable exchanged for common stock (282,500)
Note payable-investment in E-3 Sports New Mexico, Inc. 135,000
Note payable-investment in Media Trust S.A. 315,000
------------------ ----------------- -----------------
Net cash provided by (used in) financing activities 117,500 775,000 270,000
------------------ ----------------- -----------------
Net increase (decrease) in cash (4,459) (454,181) 419,480
Cash at beginning of period 8,790 462,971 43,491
------------------ ----------------- -----------------
Cash at end of period $4,331 $8,790 $462,971
================== ================= =================
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for-
Interest $18,476 $48,240 $10,778
================== ================= =================
Income taxes $0 $0 $0
================== ================= =================
The accompanying notes are an integral part of these statements.
F-7
</TABLE>
<PAGE>
ODYSSEY PICTURES CORPORATION
(FORMERLY KNOWN AS)
COMMUNICATIONS AND ENTERTAINMENT CORP.
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies:
a) Principles of Consolidation:
The consolidated financial statements include the accounts of the Company,
its wholly-owned subsidiaries and majority owned or controlled joint ventures.
All significant intercompany accounts have been eliminated.
In March 1989, the Company entered into a joint venture pursuant to which
the Company and a non-affiliated entity co-financed and co-produced a theatrical
motion picture entitled "Q&A", in which the Company had a 50.01% ownership
interest. In March 1990, the Company entered into two 50% joint ventures (in
which the Company exercised contractual control) with the same entity to acquire
the foreign distribution rights of and distribute two motion pictures, "Switch"
and "Guilty By Suspicion". In December 1991, the Company entered into a 50%
joint venture (in which the Company exercised control) with the same entity to
acquire the foreign distribution rights of and to distribute the motion picture
"This Boy's Life". The assets, liabilities, revenues and expenses of the joint
ventures have been included in the consolidated financial statements of the
Company. Minority interests in operations and in net assets in these joint
ventures have been included in film costs and due to producers and participants
in the consolidated statements of operations and of financial condition,
respectively. In January 1996, the Company sold its interests in the joint
ventures (See Note 4).
Certain reclassifications have been made to prior year amounts to conform
to the current year presentation.
b) Revenue Recognition:
Revenues from foreign theatrical, home video, television and pay television
licensing contracts are recognized when the film is available for exhibition by
the licensee and when certain other conditions are met. Revenues from domestic
theatrical distribution of films are recognized as the films are exhibited.
Virtually all of the Company's revenues for the fiscal year ended June 30,
1997 and 1996 and approximately 62% of the revenues for the fiscal year ended
June 30, 1995, were from foreign distribution rights. For fiscal 1996,
approximately 50.2% of revenues were derived from one picture. One picture
accounted for approximately 28.3 % of revenues for the year ended June 30, 1995.
c) Film Costs:
Film costs include (1) cost of production, (2) investment in distribution
rights, (3) marketing and distribution expenses, and (4) development costs. Film
costs are amortized, and estimated residual and participation costs are accrued,
on an individual film basis in the ratio that the current year's gross film
revenues bear to management's estimate of total ultimate gross film revenues
from all sources.
Film costs are stated at the lower of cost or estimated net realizable
value on an individual film basis. Ultimate revenue and cost forecasts for films
are periodically reviewed by management and revised when warranted by changing
conditions. When estimates of total revenues and costs indicate that a film will
result in an ultimate loss, additional amortization is provided to fully
recognize such loss.
e) Property and Equipment:
Depreciation of property and equipment is provided by the straight-line
method over their estimated useful lives of up to eight years.
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<PAGE>
Maintenance and repairs are expensed as incurred. The cost of renewals and
betterments are capitalized. When assets are sold or otherwise disposed of, the
cost and related accumulated depreciation are removed from the accounts, and any
resultant gain or loss is included in current year operations.
f) Earnings (Loss) Per Share:
Earnings (loss) per share are computed using the weighted average number of
common shares outstanding during the respective periods, adjusted for the
dilutive effect, if any, of outstanding stock options and warrants. On March 6,
1996, the Board of Directors announced a one-for-six reverse stock split (the
"Reverse Stock Split") which became effective on March 18, 1996. For comparative
purposes, the number of weighted average common shares outstanding and loss per
share reported in the accompanying consolidated statements of operations, and
share data included in the notes to the consolidated financial statements, have
been adjusted to reflect the effect of the Reverse Stock Split for all periods
presented.
g) Use of Estimates:
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in financial
statements. Actual results could differ from those estimates.
h) Fair Value of Financial Instruments:
The carrying value of cash, notes receivable and notes and loans payable
approximates fair value because of the short-term maturity of these instruments.
i) Impact of Recently Issued Accounting Standards:
In March 1995, the Financial Accounting Standards Board released Statement
of Financial Accounting Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("FAS 121"). This
Statement establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles to be disposed of and goodwill related
to those assets to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed of. FAS 121 is effective for financial
statements for fiscal years beginning after December 15, 1995. The Company will
apply this Statement beginning in fiscal 1997. The adoption of FAS 121 is not
expected to have a material effect on the financial statements of the Company.
In October 1995, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards No. 123 "Accounting for Stock Based
Compensation ("FAS 123"). This statement establishes methods of accounting for
stock-based compensation plans. FAS 123 is effective for fiscal years beginning
after December 15, 1995. The Company expects to continue to apply Accounting
Principles Board Opinion 25 for measurement of stock compensation and will
provide the disclosure required by FAS 123 beginning in fiscal 1997. The
adoption of FAS 123 is not expected to have a material effect on the financial
statements of the Company.
2. Change in Management Control:
In January 1995, a group of shareholders of the Company (the "CECO
Shareholders Committee") launched an effort to change the senior management and
Board of Directors of the Company.
Pursuant to a settlement agreement (the "Settlement Agreement") dated as of
March 31, 1995, among the members of the CECO Shareholders Committee, the
Company, the Company's subsidiary, Odyssey Entertainment Ltd. ("Odyssey"),
Global Intellicom, Inc. and each of the directors of the Company at the time of
signing, a change in the entire Board of Directors occurred on April 12, 1995.
F-9
<PAGE>
In March, 1998, the Board of Directors appointed Mr. Johan Schotte as Chief
Executive Officer and Chairman of the Board of the Company, and Mr. Pierre
Koshakji as President and Director of the Company. Former management agreed to
terminate their existing employment agreement in exchange for revised employment
and consulting agreements. An affiliate of Mr. Schotte purchased convertible
deferred compensation notes from former management and converted a portion of
those notes into 667,648 shares of the Company's common stock in April 1998.
In connection with the change in management, the Company acquired an 18%
equity interest in two corporations affiliated with Mr. Schotte, one of which is
the owner of a professional soccer team in New Mexico, and the other of which is
a media production company in Luxembourg. The Company issued one-year notes in
the aggregate amount of $450,000 in consideration of the purchase of the equity
interests in these companies.
3. Results of Operations and Management's Plans:
The Company's continued existence is dependent upon its ability to resolve
its liquidity problems. The Company must achieve and sustain a profitable level
of operations with positive cash flows and must continue to obtain financing
adequate to meet its ongoing operation requirements.
Net income for the year ended June 30, 1997 was due primarily from various
transactions which are explained in the category of "Other Income" below. Net
loss for the year ended June 30, 1996 is primarily due to a loss of
approximately $3.3 million on the sale of the Company's interest in joint
ventures relating to four theatrical motion pictures, and due to insufficient
revenues to offset normal expenses.
Revenues for the twelve months ended June 30, 1997 decreased to $141,202
compared to $1,010,826 for the twelve months ended June 30, 1996. No new films
became available for delivery during either period.
Costs related to revenues decreased to $565,610 for the twelve months ended
June 30, 1997 as compared to $1,046,299 for the twelve months ended June 30,
1996. The decrease is primarily related to the fact that there was lower film
revenues in the current year. Additionally, development and festival costs in
the amount of $249,544 were written off, litigation and settlement costs
relating to the Film Bridge settlement in the amount of $148,174 were expensed
and $435,102 in inventory costs related to the picture Downrange were written
off. This was partially offset by a write-off of $449,163 in participation
liabilities related to the Kinnevik Library which were settled subsequent to the
Kinnevik sale.
Selling, general and administrative expense increased by $113,143 (7.2%) to
$1,678,450 for the twelve month period ended June 30, 1997 from $1,565,307 for
the comparable period ending June 30, 1996. The increase is primarily related to
higher salaries and professional fees.
Other income for the twelve months ended June 30, 1997 consisted of a
$818,776 gain from the sale of certain distribution and subdistribution rights
in certain films to a third party, recognition of a $1,245,758 gain from the
cancellation of a contractual obligation related to the Company's distribution
rights in "Wuthering Heights" and recognition of a gain in the amount of
$198,567 from the settlement of an outstanding litigation with Generale Bank
(formerly known as Credit Lyonnais Bank Nederland N.V.) and Conecom
Entertainment Group Inc. There was no other income recognized in the respective
twelve months ended June 30, 1996.
Since the change in management control in April 1995, new management has
embarked on a program to reverse the unfavorable results by significantly
reducing overhead, taking steps to recapitalize the Company, and acquiring
rights to existing film libraries and new pictures in development or
pre-production.
In August and October 1995, the Company received net proceeds of $219,250
and $50,750, respectively, from the private placement of an aggregate of
$312,500 principal amount of 12% Senior Unsecured Promissory Notes (See Note
10).
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<PAGE>
In January 1996, the Company entered into an agreement to sell its interest
in joint ventures relating to four theatrical motion pictures pursuant to which
it received net proceeds of $1,500,000 (See Note 4).
In August 1996, the Company entered into an agreement, pursuant to which
the Company agreed to grant subdistribution rights in, and to sell other
distribution rights to, certain films in the Company's film library. In exchange
for these rights, the Company will receive a total cash consideration of
$1,075,000, payable $500,000 on closing, $275,000 six months after closing, and
$300,000 eighteen months after the closing. In addition, the Company will retain
a continuing right to receive revenues from certain of the films, valued by
management at a minimum of approximately $150,000. Additionally, the purchaser
will provide the Company with a $500,000 revolving line of credit to be secured
by accounts receivable and other contractual rights acquired by the Company. As
part of the transaction, the Company will grant 100,000 stock options,
exercisable over a three year period at the bid price of the Company's common
stock in effect on August 5, 1996 ($.625). The transaction closed on October 7,
1996
In September 1996, the Company entered into an agreement with an
unaffiliated third party for the purchase of 1 million shares of the Company's
common stock in consideration for $750,000 cash and warrants to purchase up to 2
million shares of common stock. Following a dispute between the parties
concerning the satisfaction of certain conditions to closing and the investor's
indication of an unwillingness to consummate the transaction, the parties
reached a settlement in June 1997, pursuant to which the investor would purchase
66,667 shares of Common Stock of the Company for $50,000, or $ .75 per share.
The proceeds will be used the pay legal costs related to the transaction.
In September, 1996, the Company reached an agreement with Paramount,
pursuant to which Paramount would cancel the Company's contractual guarantee of
$2.7 million in full, in exchange for which the Company agreed to (i) relinquish
all further distribution rights to "Wuthering Heights"; (ii) assign to Paramount
all of its rights in any outstanding distribution agreements for the film, and
any receivables to be generated therefrom; and (iii) guarantee that Paramount
will collect a total of $500,000 in sales revenue from existing distribution
agreements no later than January 15, 1997. Existing license agreements yielded
approximately $420,000 in net revenues prior to January 15, 1997 (of which the
Company would have been entitled to retain approximately 20% thereof in
commissions). The Company has paid over $250,000 in net revenues and is
currently in negotiations with Paramount regarding the timing of the remaining
$250,000 payment.
In December, 1996, the Company settled the outstanding litigation with
Generale Bank ("Generale") (formerly known as Credit Lyonnais Bank Nederland
N.V.) and Cinecom Entertainment Group Inc. Pursuant to the settlement agreement
with Generale, the Company agreed to pay to Generale the sum of $275,000 in
complete satisfaction of the claim, payable $25,000 upon execution of the
settlement agreement, $25,000 on each of June 30, and December 31 in the years
1997, 1998 and 1999, and $100,000 on June 30, 2000. Interest on the installments
(at the rate of LIBOR plus 1% per annum) will be waived provided the Company
remains in compliance with the agreed upon payment schedule. The Company has
only made one payment to Generale Bank in the amount of $25,000. In October,
1997, the Company entered into a revised payment schedule with Generale Bank.
The Company is in receipt of a demand letter dated May 4, 1998. The letter
demands that the Company cure the non-payment of a $30,000 installment due April
15, 1998. According to the agreement between the Company and Generale Bank, the
Company had ten business days after receipt of this letter to cure this default.
The consequences of not clearing this default is the entry of a confession of
judgement already executed by the Company for an amount of $275,000. This
confession of judgement is against Odyssey Distributors Limited, a wholly owned
subsidiary of the Company. (see litigation)
In February, 1997, the Company completed a sale of 500,000 shares of Common
Stock and 500,000 Common Stock Warrants to four (4) offshore European investors
for an aggregate consideration of $375,000. The warrants are exercisable over a
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<PAGE>
three year period (expiring February 25, 2000) at an exercise price of $1.06 per
share. One of the investors, Johan Schotte, was retained by the Company as a
financial consultant for a period of one year from the date of closing at the
rate of $2,500 per month. The investors were also given the right to designate
one of the investors (or another third party), to serve as a member of the Board
of Directors of the Company.
In April, 1997, Stephen Greenwald, Lawrence I. Schneider and Robert Miller,
Jr., all directors of the Company, made loans to the Company in the amounts of
$50,000, $25,000 and $25,000, respectively. Each loan is payable on demand and
bears interest at the rate of 2 points over prime per annum. The note is secured
by a collateral assignment of the Company's $300,000 note receivable from
Kinnevik. In consideration of making the loans, the lenders received five-year
warrants to purchase shares of Common Stock of the Company, exercisable at $1.00
per share. Messrs. Schneider and Miller each received 25,000 warrants and Mr.
Greenwald received 50,000 warrants as additional consideration for making the
loans to the Company. In addition, an independent unaffiliated third party made
a $25,000 loan to the Company in June, 1997 on the same terms and conditions as
the loans made by Mr. Greenwald, Schneider and Miller.
In September, 1997, the Company and Kinnevik Media Properties, Ltd.
executed a letter agreement pursuant to which Kinnevik agreed, subject to
completion of due diligence and the approval of Kinnevik's Board, to purchase
500,000 shares of convertible, redeemable preferred stock of the Company, par
value $1.00 per share, for an aggregate purchase price of $500,000. Kinnevik
would purchase the first $250,000 of preferred stock at the closing, an
additional $125,000 of preferred stock 90 days after closing, and the final
$125,000 of preferred stock 270 days after closing. The preferred stock would
bear interest at the rate of 10% per annum which would be paid in kind
semi-annually by the issuance of additional shares of preferred stock at a par
value of $1.00 per share. Kinnevik would have the right for a five year period
to convert the preferred stock into common stock of the Company on a
share-for-share basis. The Company would have the right to redeem the preferred
stock for $1.25 per share in the event the Company's common stock trades at a
price of $2.00 per share or more for a period of 20 consecutive trading days.
The Company agreed to help secure television distribution rights for Kinnevik
from third parties, and introduce various projects to Kinnevik from time to time
which may be of interest to Kinnevik. In the event Kinnevik acquires any rights
as a result of any introductions made by the Company, the parties agree to
mutually determine the value of such services and to redeem shares of the
preferred stock at $1.00 per share based on the aggregate value of the services
so determined.
In January, 1997, prior counsel to the Company agreed to exchange a
promissory note in the face amount of $70,000 in exchange for 120,000 Shares of
the Company's Common Stock.
4. Sale of Joint Venture Assets:
As of January 2, 1996, the Company entered into an agreement (the
"Agreement") with Regency International Pictures, B.V., its joint venture
partner, to sell its interest in the related joint ventures through which it
held approximately 50% ownership interests in four theatrical motion pictures,
entitled "Q&A," "Switch,"Guilty By Suspicion" and "This Boy's Life." The joint
venture is defined as the distribution agreements related to the aforementioned
four motion pictures. Individual agreements were created to finance, produce and
distribute each picture and to share in revenues generated from the exploitation
of them. Joint venture pictures were accounted for in the same manner as any
other picture that the Company distributed. Pursuant to the Agreement, the
Company received $1,500,000 in exchange for all of its interest in the net
assets and obligations of the joint ventures. In addition, the Company retained
a contingent interest in certain receivables, not to exceed $212,500, and a
contingent interest in future revenues from the pictures.
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<PAGE>
5. Investment in Global Intellicom, Inc.:
On December 8, 1994, the Company acquired 3,300,000 shares of Global
Intellicom, Inc. ("Global") and subsidiaries, a Nevada corporation, for
$1,000,000, representing 66% of Global's 5,000,000 outstanding shares of common
stock. Simultaneously and pursuant to a contract of sale entered into by Tech
Acquisition Corp. ("Tech") (a wholly-owned subsidiary of Global) on October 28,
1994, Global purchased certain net assets of AMCOM Business Centers
Corp.("AMCOM") (a Pennsylvania corporation) subject to certain liabilities and
obligations. On December 8, 1994 Tech changed its name to AMCOM Business Centers
Corp.
AMCOM is a wholesale distributor of computer hardware and related products
and serves customers throughout the United States.
The total purchase price of the net assets of AMCOM was $5,280,000,
$2,224,000 of which was paid to the sellers at closing. The balance of the
purchase price of $3,056,000 is payable by Global in installments equal to 1% of
gross sales effective January 1, 1994 (as defined by agreement) in quarterly
installments through December 1995 and monthly thereafter until the obligation
is satisfied. In addition, Global agreed to reimburse AMCOM stockholders for all
income taxes incurred by them with respect to their distributive share of
AMCOM's taxable income for the period January 1, 1994 through the closing date.
During the quarter ended March 31, 1995, the then Board of Directors of the
Company declared a dividend to its shareholders consisting of 1,700,000 shares
of the common stock of Global, and also delivered 522,641 shares of Global
common stock to its former outside counsel in payment of outstanding legal fees.
Further, as of March 31, 1995 the then Board of Directors entered into the
Settlement Agreement with the CECO Shareholder Committee which, among other
things, provided for the sale of the Company's remaining interests in Global to
persons affiliated with the prior Board. The sale closed on April 12, 1995.
6. Film costs:
Film costs are comprised of the following:
June 30,
----------------------------
Component 1998 1997
Films released, at cost $ 0 $ 0
Less accumulated amortization 0 0
-------- --------
Projects in development 110,422 120,472
-------- --------
Total film costs $110,422 $120,472
7. Income Taxes:
At June 30, 1997, the Company had a federal net operating loss carry
forward, for tax purposes, of approximately $27,000,000, expiring through 2011.
The utilization of approximately $4,900,000 of these losses in future periods is
estimated by the Company to be limited to approximately $350,000 per year (the
"annual earnout limitation").
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes, which establishes accounting and reporting standards for the effects of
income taxes that result from an enterprise's activities during the current and
preceding years became effective for the Company for its fiscal year ended June
30, 1994. The cumulative effect of adopting SFAS 109 was immaterial and was
recorded in the first quarter of fiscal 1994.
8. Notes and Loans Payable:
Notes and loans payable as of June 30, 1997 and 1996 include $179,000
principal amount of 6% Convertible Subordinated Debentures, due July, 1997.
F-13
<PAGE>
In April 1995, the Company issued a note in the principal amount of $70,000
to its outside legal counsel for legal services performed. The note was
repayable in October 1995, together with interest at the rate of 7%. In February
1996 the note holder agreed to extend the due date to December 31, 1996. In
connection with the extension, the Company granted warrants to purchase 16,667
shares of the Company's common stock at an exercise price of $1.88 per share,
exercisable over a three year period. The amount of the note will be reduced, as
of December 31, 1996, by one-half of the amount by which the average closing
price of the stock, for the ten most recent trading days, exceeds the exercise
price of the warrants. In January, 1997, the Company agreed to exchange the
promissory note in the face amount of $70,000 in exchange for 120,000 shares of
the Company's Common Stock.
In August and October 1995, the Company received net proceeds of $219,250
and $50,750, respectively, from the private placement of an aggregate of
$312,500 principal amount of 12% Senior Unsecured Promissory Notes (the
"Notes"). The Notes are repayable with interest on the earlier of (a) the
closing of a public offering of the Company's equity securities from which the
Company receives gross proceeds of at least $10,000,000, or (b) one year from
the issuance date. The Company also granted to the purchasers of the Notes an
aggregate of 26,042 warrants (the "Warrants"), 20,833 of which are exercisable
at $2.83 per share and 5,209 of which are exercisable at $2.37 per share. Each
of the Warrants is exercisable at any time beginning one year after the date of
issuance and expiring four years after the date of issuance.
The Notes and interest were not repaid as scheduled. The Company proposed
that Noteholders either defer maturity of their notes and exchange existing
warrants for shares, or cancel the notes and warrants in their entirety in
exchange for a greater number of shares. The Company offered to register any
shares issued in exchange for the notes. As of August 12, 1997, the date the
registration became effective, a total of $262,500 of notes were exchanged for
595,455 shares of registered stock. The remaining notes for $50,000 (held by a
single investor) have not been paid and are in default.
On July 17, 1997, unsecured long term notes of the Company in the aggregate
amount of $179,000 matured. Such notes were not paid on the maturity date. The
Company entered into an installment payment plan extending over a 15 month
period through March, 1999, and made the first installment payment of $17,900 in
January 1998. The company did not make the March 1998 payment of $17,900 and is
presently in default of the payment schedule.
In April, 1997, Stephen Greenwald, Lawrence I. Schneider and Robert Miller,
Jr., all directors of the Company, made loans to the Company in the amounts of
$50,000, $25,000 and $25,000, respectively. Each loan is payable on demand and
bears interest at the rate of 2 points over prime per annum. The note is secured
by a collateral assignment of the Company's $300,000 note receivable from
Kinnevik. In consideration of making the loans, the lenders received five-year
warrants to purchase shares of Common Stock of the Company, exercisable at $1.00
per share. Messrs. Schneider and Miller each received 25,000 warrants and Mr.
Greenwald received 50,000 warrants as additional consideration for making the
loans to the Company. In addition, two independent unaffiliated third parties
made additional $25,000 loans to the Company in June and August, 1997 on the
same terms and conditions as the loans made by Mr. Greenwald, Schneider and
Miller. In May, 1998, the loans of Mr. Schneider and one of the unaffiliated
parties were paid from the proceeds of the Kinnevik receivable. The remaining
lenders agreed to a rollover of their loans (aggregating $100,000) against a
second Kinnevik receivable and, in consideration, received an additional 50,000
warrants in the aggregate, exercisable for the extension at $1.00 per share over
a three year period.
9. Commitments and Contingencies:
Lease Commitments:
The Company leased office space in Los Angeles pursuant to an operating
lease which expired in May 1998, providing for monthly rental payments of
$5,301. Minimum payments under the lease aggregated $63,612 and $58,311 for the
fiscal years ending June 30, 1997 and 1998, respectively.
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<PAGE>
The Company was party to a lease at 800 Third Avenue, New York, New York
10022, which terminated in 1997. The Company vacated such office space during
the year ended June 30, 1995. In September 1995 the landlord filed an action
against the Company. The Company reached a settlement with the landlord. (see
Litigation). Rent expense for the years ended June 30, 1997, 1996 and 1995 was
$0, $38,772 and $297,287, respectively.
Litigation:
On December 20, 1990, a suit was filed against the Company seeking the
payment of $300,000 for certain investment banking services allegedly provided.
In October 1991, the Court granted a judgment in favor of the plaintiff. The
judgment is stayed pending the determination of an action brought by the Company
against the plaintiff described below. The Company has posted a
non-collateralized bond pending the results of an appeal. In a separate action,
the Company filed a complaint against the plaintiff claiming that services
alleged to have been performed were never performed and demanding the return of
funds and securities paid by the Company. In October 1994, the plaintiff filed a
voluntary bankruptcy petition under Chapter 11 of the United States Code.
Consequently, the Company's action has been automatically stayed. The Company
has filed a proof of claim.
On December 30, 1994, Krisna Shah, who allegedly served as President of
Double Helix Films from about July 1991 until about March 1993, filed action
against the Company, Norman Muller, a former Chairman and CEO of the Company,
and others in which he alleged among other things breach of an oral agreement to
pay him $152,000 (which he allegedly advanced for the benefit of Double Helix)
and to give him 19.5% ownership interest in its corporate successors. The
Company reached a settlement with Mr. Shah in which the Company has paid $15,000
and quitclaimed any and all rights, title, and interest it has to the film
library known as the "Double Helix Film Library.
On or about May 15, 1995, Credit Lyonnais Bank Nederland N.V. and Cinecom
Entertainment Group, Inc. filed a complaint against the Company's subsidiary,
Odyssey Distributors, Ltd. They allege that Odyssey collected but failed to
remit to them assigned distribution proceeds in the amount of $566,283.33 from
the foreign distribution of two pictures. The complaint alleges claims for
breach of contract and breach of fiduciary duty and seeks damages in excess of
$566,283, attorney's fees, an accounting, a temporary restraining order and a
preliminary injunction. In June 1995, the Court denied plaintiffs an attachment
and stayed the action pending arbitration in New York. In September, 1996 the
Court dismissed the Complaint. In December, 1996, the Company settled the
outstanding litigation with Generale Bank ("Generale") (formerly known as Credit
Lyonnais Bank Nederland N.V.) and Cinecom Entertainment Group Inc. Pursuant to
the settlement agreement with Generale, the Company agreed to pay to Generale
the sum of $275,000 in complete satisfaction of the claim, payable $25,000 upon
execution of the settlement agreement, $25,000 on each of June 30, and December
31 in the years 1997, 1998 and 1999, and $100,000 on June 30, 2000. Interest on
the installments (at the rate of LIBOR plus 1% per annum) will be waived
provided the Company remains in compliance with the agreed upon payment
schedule. The Company and General Bank later agreed upon a new payment schedule
as follows: $25,000 on or before October 15, 1997 (payment was made); $30,000 on
each of April 15, 1998, June 30, 1998, December 31, 1998, June 30, 1999 and
December 31, 1999; and $100,000 on June 30, 2000. The Company is in receipt of a
demand letter dated May 4, 1998. The letter demands that the Company cure the
non-payment of a $30,000 installment due April 15, 1998. According to the
agreement between the Company and Generale Bank, the Company had ten business
days after receipt of this letter to cure this default. The consequences of not
clearing this default is the entry of a confession of judgement already executed
by the Company for an amount of $275,000. This confession of judgement is
against Odyssey Distributors Limited, a wholly owned subsidiary of the Company.
In August 1995, G.P. Productions, Inc. ("GP") and Greenwich Subject Films,
Inc. ("Greenwich") commenced an action entitled G.P. Productions, Inc., and
Greenwich Studios, Inc. v. Double Helix Films, Inc., Communications and
Entertainment, Inc., Krishna Shaw, Gerald Muller and Norman Muller in the United
States District Court, Southern District of Florida (Case No. 95-1188). Mr.
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<PAGE>
Muller has demanded that the Company indemnify him against any expenses,
judgements and amounts paid in settlement of the action. The Company contends
that, by virtue of Mr. Muller's breaches of fiduciary duty and violation of his
obligations to the Company, it is not required to provide indemnification.
GP and Greenwich allege that they are the exclusive owners of the films
"The Gallery" and "South Beach". They assert claims for copyright infringement,
unfair competition, breach of contract, accounting, conversion, civil theft,
conspiracy and fraudulent conveyance. The Complaint demands a recall of the
films, an attachment, preliminary and permanent injunctive relief, an
accounting, and unspecified compensatory, punitive and treble damages. The
Company's motion to transfer venue of the action was granted in November, 1995,
and the case was transferred to the United States District Court of the Southern
District of New York. There has been no activity in this matter since the
transfer of venue in 1995.
In September 1995, the agent for the landlord for the premises in New York
City previously occupied by the Company filed a Summons and Verified Complaint
against the Company. The plaintiff alleged that it was due $66,694 from the
Company (plus interest) for rent allegedly owed during the period from April
through September, 1995. The Company vacated the premises on April 12, 1995.
Summary judgment was awarded to the plaintiff and a judgment was entered for
$74,142 in May, 1996. In July, 1996, the landlord commenced a second action for
$121,000 for rent allegedly owed during the period from October 1995 through
July 1996. The Company reached a settlement in this case, pursuant which the
Company delivered 177,500 registered shares of the Company's Common Stock to
each of the landlord and its agent in full settlement of the actions.
In October 1995 Canon Financial Services filed a complaint, in which it
claims that it is due $47,499.83, plus damages, pursuant to a lease agreement.
The Company has filed an Answer in this action and plaintiff's motion for
summary judgement has been denied by the Court. No trial date has yet been set
in this matter.
In January 1996, a former director brought an action against the Company on
a promissory note in the amount of $25,000. The plaintiff obtained a summary
judgment. The Company is considering whether or not it has a claim for
indemnification against former management in connection with the issuance of the
note.
In January 1996, an action was filed against the Company in which the
plaintiff sought damages in the amount of $33,849.98 for legal services rendered
to the Company and its subsidiaries. In June, 1997, the parties reached a
settlement in the matter, pursuant to which the Company agreed to pay $7,000 to
plaintiff, deliver 40,000 freely tradeable shares of the Company's Common Stock
to plaintiff, and deliver an additional cash amount to the extent that the
aggregate market value of the shares on the date of delivery was less than
$40,000. Payment of the additional cash amount of $13,000 was completed in
December, 1997.
In March 1996, an action was filed against the Company in which the
plaintiff claims that she is due $17,920.49 pursuant to a promissory note
previously issued to her. The Company has filed a cross-claim seeking offsets
against the amount due and other damages. On May 21, 1998, a default judgement
was entered on behalf of plaintiff in the amount of $22,261.23. Subsequently,
plaintiff filed a motion to include attorney fees and costs in the amount of
$39,121.95. The Company is attempting to reach a settlement with plaintiff.
On or about March 25, 1996, a class action complaint was filed against the
Company entitled "Dennis Blewitt v. Norman Muller, Jerry Minsky, Dorian
Industries, Inc. and Communications and Entertainment Corp." The complaint seeks
damages in connection with the Company's treatment in its financial statements
of the disposition of its subsidiary, Double Helix Films, Inc., in June 1991.
The complaint seeks unspecified damages on behalf of all persons who purchased
shares of the Company's common stock from and after June 1992. A second action,
alleging substantially similar grounds, was filed in December 1996 in Federal
F-16
<PAGE>
court in the United States District Court for the Southern District of
California under the caption heading "Diana Pfannebecker v. N. Muller,
Communications and Entertainment Corp., Jay Behling, Jeffrey S. Konvitz, Tom
Smith, Jerry Silva, David Mortman, Price Waterhouse & Co., Todman & Co., and
Tenato Tomacruz." Following the filing of the second action, the first action
was dismissed by stipulation in May 1997. The Company filed a motion to dismiss
the complaint in the second action and after a hearing on the motion in July,
1997, the Court dismissed the federal securities law claims as being time-barred
by the applicable statute of limitations, and dismissed the state securities law
claims for lack of subject matter jurisdiction. The lower court's dismissal of
this action was upheld on appeal by the Ninth Circuit. Messrs. Muller, Smith and
Mortman, former directors of the Company, have asserted claims for
indemnification against the Company. The Company has advised the claimants that
it will not provide such indemnification, based on their wrongful actions and
failure to comply with various obligations to the Company.
On September 18, 1996, Film Bridge International, Inc. ("Film Bridge")
filed a complaint in Los Angeles County Superior Court, entitled "Film Bridge
International v. Communications and Entertainment Corp., and Does 1 through 50,
Inclusive," contending that the Company had breached the terms of an alleged
joint venture agreement between the parties regarding the distribution rights to
certain films. On December 19, 1996, the Company filed a cross-complaint against
Film Bridge alleging that, since the end of June, 1996, Film Bridge had failed
to furnish the Company with a proper accounting of its revenues and expenses in
connection with the sale of foreign licensees of various films in which the
Company had an interest and had failed to make payment of at least $450,000 to
the Company for monies due and owing to the Company from the foreign sales of
such films. An agreement was reached between the parties in May, 1997, as a
result of which the Company received $336,000 of the monies being held by Film
Bridge, with the balance being retained by Film Bridge as sales commissions and
in full settlement of the litigation.
On December 2, 1997, the Directors Guild of America ("DGA") obtained an
arbitration award against Down Range Productions, Inc., a wholly owned
subsidiary of Odyssey Pictures Corporation, on behalf of Kahn Brothers Pictures
fso Michael Kahn, Charles Skouras, and Scott C. Harris. Down Range was ordered
to pay: Kahn Brothers Pictures the total sum of $155,041; Charles Skouras the
total sum of $32,360; and Scott C. Harris the total sum of $8,868; plus interest
at 18% per annum on each of these amounts from April 1, 1997. Down Range was
also ordered to pay the DGA $2,500. Down Range was also ordered to assign to the
DGA all of Down Range's right, title and interest in the motion picture "Down
Range", including the screenplay for the motion picture, and Down Range was
enjoined from licensing the motion picture or the screenplay to any third party
other than the DGA. Down Range was also ordered to pay the arbitrator $2,250.
Kahn Brothers Pictures fso Michael Kahn also filed a claim against Down
Range Productions, Inc. and the Company with the Writers Guild of America West
(WGA) for unpaid writing services on "Down Range". That claim was settled by
current management for the amount of $15,000 in July 1998.
The Screen Actors Guild (SAG) has also asserted that there are amounts
owing to four actors (Dale Dye, John Philbin, Tegan West, and Kiljoy Productions
fso Kathleen Wilhoite), arising out of "Down Range". The Company believes that
SAG has never instigated any arbitration or other proceeding to try to collect
on these claims. Additionally, there were two actors, Corbin Bernsen and Jeff
Fehey who had pay-or-play contracts. The outcome of these contracts and the
actors claims have not been resolved.
In April, 1998, the Company reached a settlement with Mr. Silva regarding
his action against the Company in the Supreme Court of the State of New York.
Mr. Silva will discontinue the matter and the Company will authorize the sale of
Mr. Silva's shares in the Company under Rule 144, up to a maximum of 25,000
shares per month.
In April, 1998, an action was commenced against the Company by Siegel &
Gale, a provider of brochure material for the Company. The lawsuit seeks payment
of $48,695, plus costs, related to work done by Siegel & Gale for the Company.
The Company has not yet filed an Answer in this action and is in the process of
consulting with its counsel on the best course of resolving this matter.
F-17
<PAGE>
On November 21, 1996, the law form of Halperin, Klein & Halperin (counsel
to Mr. Silva) commenced an action against the Company in the Civil Court of the
State of New York on a returned check in the amount of $5,000 for legal services
allegedly rendered to the Company. The check was originally issued to plaintiff
in April, 1995 in connection with the change of control of the Company at that
time. The Company has filed an Answer in the action and intends to defend the
matter on the basis of a failure of consideration.
10. Shareholders' Equity:
On March 6, 1996 the Board of Directors of the Company approved a
one-for-six reverse stock split of the outstanding shares of the Company's
Common Stock (the "Common Stock"). The Reverse Stock Split was effective as of
March 18, 1996 (the "Record Date"). On the Record Date, each six shares of the
Company's then outstanding Common Stock (the "Old Common Stock") were
automatically converted into one share of the new Common Stock, par value $.01
per share (the "New Common Stock").
No fractional shares of New Common Stock were issued. Rather, holders of
Old Common Stock who are entitled to receive fractional shares of New Common
Stock will be rounded up to the nearest whole share of New Common Stock.
The Reverse Stock Split resulted in a net reduction of 11,408,973 in the
number on Common Shares outstanding, including 1,995 shares issuable due to the
rounding up of fractional shares.
Except for the number of shares of Common Stock outstanding after the
Reverse Stock Split, the Old Common Stock and the New Common Stock are
identical.
On February 14, 1995, the then Board of Directors of the Company declared a
dividend payable to holders of record on February 24, 1995 ("the Dividend Record
Date") of the Company's common stock and Class A stock. The dividend consisted
of 1,700,000 shares of common stock, $.01 par value per share, of Global
Intellicom, Inc. that were owned by the Company. Holders of the Company's common
stock and Class A stock received .1233 and .0786 shares, respectively, of Global
common stock for each share of the Company's stock. The dividend was recorded as
a reduction of capital in excess of par value.
The shares of Global common stock were distributed to an escrow agent on
the Dividend Record Date pending registration of the shares. The Securities and
Exchange Commission declared Global's registration statement effective as of
September 1, 1995 and, accordingly, the escrow agent was authorized to
distribute the dividend shares.
Communications and Entertainment Corp. was originally formed to consummate
the mergers of Double Helix Films, Inc. ("Double Helix") and Odyssey
Entertainment Ltd. pursuant to the Agreement and Plan of Merger dated September
22, 1989 ("the Merger Agreement"). On September 6, 1990 the shareholders of
Double Helix and Odyssey approved the Merger Agreement. Pursuant to the terms of
the Merger Agreement, each share of common stock of Odyssey was convertible into
one share of Class A stock of the Company and each share of Double Helix common
stock was convertible into one share of the Company's common stock. Prior
management's instructions to the transfer agent required that any shares of
Odyssey or Double Helix outstanding at the time of the Merger not tendered to
the Company's transfer agent for exchange by March 31, 1995 should be canceled.
Accordingly, 86,790 shares of the Class A stock and 10,496 shares of the common
stock reserved for exchange were canceled. The par value of the shares canceled,
of $5,837, was transferred to capital in excess of par. Upon further research by
counsel to the Company, the instructions of prior management were reversed, and
all cancelled shares were reinstated, with the result that $5,837 was
transferred back to stated capital.
F-18
<PAGE>
Additionally, in accordance with the Company's charter, all outstanding
shares of the Company's Class A stock, automatically converted, on March 31,
1995, into shares of the Company's common stock at a rate of .6375 shares of
common stock for each share of Class A stock.
11. Stock Options and Warrants:
The number of options and warrants, and exercise prices in the following
paragraphs have been restated to give effect to a 1 for 6 Reverse Stock Split in
March 1996.
The Company has an Incentive Stock Option Plan (The "Option Plan") for its
key employees providing for the granting of options to acquire common stock. The
maximum number of shares of common stock subject to the Option Plan is 75,000,
plus 5% of any increase in the number of issued shares after the effective date
of the Merger, excluding any increase due to stock awards to key employees or as
result of the conversion of Class A stock. The price for the shares covered by
each option will not be less than 100% of the fair market value at the date of
grant (110% for holders of more than 10% of the company's common stock). Options
granted expire ten years from the date of grant (five years for holders of more
than 10% of the Company's common stock).
A summary of options under the plan is as follows:
Shares Exercise Price
Outstanding, June 30, 1993 63,250 $5.04 - $15.54
Granted 19,167 $9.00 - $13.86
Canceled (22,917) $9.00 - $15.36
--------
Outstanding, June 30, 1994 59,500 $5.04 - $15.54
Canceled (59,500) $5.04 - $15.54
--------
Outstanding, June 30, 1995 -0-
Outstanding, June 30, 1996 -0-
Outstanding, June 30, 1997 -0-
The Company issued an aggregate of 134,854 warrants to the purchasers of
common stock of the Company sold in private placements during fiscal 1992. The
exercise prices range from $18.00 to $25.50 per share. 21,024 of such warrants
were exercised during 1992 at $18.00 per share. During the years ended June 30,
1995, 1994 and 1993, 58,652, 53,500 and 608 warrants, exercisable at $25.50,
$18.00 and 18.00 per share, respectively, expired, unexercised. The balance of
the warrants, exercisable at $18.00 per share, expired unexercised in July 1996.
An additional 70,833 warrants and options were granted during the year
ended June 30, 1992 to outside consultants for services in connection with
private placements. The exercise prices range from $12.00 to $25.50 per share.
8,333 of such options were exercised in 1992 at $12.00 per share. 4,167 options,
exercisable at $16.50 per share, expired, unexercised, during fiscal 1993. The
balance expired, unexercised, during fiscal 1995.
In fiscal 1992, the Board of Directors approved the grant of options, to
purchase 6,000 shares to the outside directors of the Company, for their
services as directors, at an exercise price of $18.96 per share. An additional
6,000 options were granted during fiscal 1993 to the outside directors, at an
exercise price of $10.08. The options to the directors have not yet been issued.
F-19
<PAGE>
During the year ended June 30, 1993, 8,333 options were granted outside of
the plan, at an exercise price of $9.00, to an officer in connection with an
employment agreement. Such options expired during fiscal 1995. Additionally,
1,667 options were granted, at an exercise price of $9.00, to a director of the
Company for services rendered. Such options expired, unexercised, during fiscal
1997.
During fiscal 1993, warrants to purchase 12,500 shares were also granted to
outside consultants, for services rendered, at an exercise price of $13.14 per
share. Such options expired, unexercised, during fiscal 1998. Warrants to
purchase 70,833 shares were granted to outside consultants for services rendered
during fiscal 1994, at exercise prices ranging from $7.50 to $21.00. 66,667 of
such warrants, exercisable at $9.00 to $21.00 per share, expired unexercised
during fiscal 1996. The balance of the warrants expired, unexercised, during
fiscal 1997.
In April 1995, following the change in management control, the Board of
Directors authorized the issuance of 8,333 options to each of five new Directors
and 16,667 options to the president of the Company. The Board also authorized
the issuance of a total of 10,000 options to two outside consultants for
services in connection with the proxy contest. All such warrants are exercisable
for a four year period commencing October 13, 1995 at $3.92 per share.
In August and October 1995, the Company issued an aggregate of 26,041
warrants to purchasers of 12% Senior Unsecured Notes sold in private placement.
The exercises prices ranged from $2.37 to $2.83 per share. With the exception of
4,167 warrants, which are exercisable through August 1999 at $2.83 per share,
all of the warrants issued in connection with the private placement were
exchanged by the warrant holders for registered shares of common stock of the
Company. In connection with the private placement, the Company also issued
33,333 warrants to its outside counsel in consideration for legal services
performed, exercisable during the three year period commencing one year from the
date of issuance, at a price per share of $2.83.
During the year ended June 30, 1996, 769,167 warrants were granted outside
of the Plan to officers and directors, at exercise prices ranging from $1.50 to
$2.83. All such warrants were exercisable as of June 30, 1998.
During fiscal 1996, the Company also granted 16,667 warrants, at an
exercise price of $1.88 per share, to its outside counsel in connection with the
extension of a note. Additionally, warrants to purchase 167,500 shares were
granted to consultants for services rendered during fiscal 1996, at exercise
prices ranging from $.76 to $1.88 per share. All such warrants were exercisable
as of June 30, 1998.
During the fiscal year ended June 30, 1997, a total of 1,153,333 warrants
were issued to officers, directors, employees, consultants and third parties,
exercisable at prices ranging from $ .625 per share to $1.06 per share. The
warrants are exercisable for periods ranging from three to five years. None of
such warrants was exercised during fiscal 1997 or fiscal 1998.
During the fiscal year ended June 30, 1998, a total of 254,260 warrants
were issued to third parties, exercisable at prices ranging from $1.00 per share
to $1.65 per share. The warrants are exercisable for periods ranging from two to
five years. None of such warrants was exercised during fiscal 1997 and 1998.
On July 1, 1998, a third party investor in the Company was granted the
right to acquire up to 150,000 transferable warrants having an exercise price of
$1.60 per share.
12. Related Party Transactions:
The firm of Goodkind, Labaton, Rudoff & Sucharow, of which David A.
Mortman, a former Director of the Company was a member, received legal fees from
the Company of $195,000 for the fiscal year ended June 30, 1995. Additionally,
it received an aggregate of 522,641 shares of common stock of Global Intellicom,
Inc., a subsidiary of the Company, valued at $155,905, in consideration of the
cancellation of outstanding legal fees.
F-20
<PAGE>
The firm of David A. Mortman, P.C. and its predecessor firm, of which David
A. Mortman, a Director of the Company was a member, received legal fees from the
Company of $16,585 and $387,987 during the fiscal years ended June 30, 1995 and
1994, respectively.
Lawrence I. Schneider, a former member of the Board of Directors of the
Company and one of three former Co-Chairman in the Office of the Chairman of the
Company during the fiscal year ended June 30, 1996, was also a principal of
Global Capital Resources, Inc. during that period, a New York based financial
consulting services firm ("Global Capital"). During the 11 month period from
May, 1995 through March, 1996, Global Capital rendered financial consulting
services to the Company in connection with the change of management control of
the Company. Such services were rendered to the Company at the agreed upon rate
of $15,000 per month. However, in order to conserve the cash resources of the
Company, Global Capital agreed to accept stock options from the Company in lieu
of a cash payment. On March 6, 1996, the Board of Directors of the Company (with
Mr. Schneider abstaining from the voting) authorized the issuance to Global
Capital of stock options to purchase 83,333 shares of Common Stock of the
Company, exercisable over a five-year period at the exercise price of $1.875 per
share (after adjustment for the Reverse Split).
During the fiscal years ended June 30, 1997 and 1996, the law firm of
Herbst & Greenwald, of which Mr. Greenwald, a director of the Company, is a
member, received fees for legal services rendered to the Company in the amount
of $21,564 and $9,075.
On August 1, 1996, the Board of Directors of the Company offered to
reimburse the members of the CECO Shareholders Committee in kind for all
expenses incurred by such members in connection with the change of management
control of the Company effected in April, 1995. The Board offered to reimburse
such expenses by issuing stock options to the committee members in an amount
equal to one and one-third times the amount of such expenses. Robert Miller, a
director of the Company, agreed to accept options to purchase 40,000 shares of
the Company's Common Stock, exercisable over a five-year period at an exercise
price of $ .75 per share, representing the then current market price of the
Company's Common Stock on the date of grant. In exchange, Mr. Miller released
his claim for reimbursement of approximately $30,000 of expenses incurred by Mr.
Miller in connection with the change of control. Lawrence I. Schneider, a former
director of the Company and also a member of the CECO Shareholders Committee,
has not agreed to accept options in lieu of his claim for reimbursement of
expenses in connection with the change in control.
The Company has entered into a "first look" agreement with Presto
Productions, a production company in which Stephen R. Greenwald, a Director of
the Company, has an interest. Mr. Greenwald's interest in Presto varies on a
film-by-film basis. The Company believes that the terms of its arrangement with
Presto are no less favorable than could be arranged with other independent third
party producers.
In April, 1997, Stephen R. Greenwald, Lawrence I. Schneider and Robert E.
Miller, Jr. made loans to the Company in the amounts of $50,000, $25,000 and
$25,000 respectively. Each loan was payable on demand bearing interest at the
rate of 9.25% per annum and was secured by a collateral assignment of the
Company's $300,000 receivable due from Kinnevik. In consideration of making such
loans, the lenders received five-year warrants to purchase shares of Common
Stock of the Company, exercisable at $1.00 per share. Messrs. Schneider and
Miller each received 25,000 warrants in consideration of their respective
$25,000 loans to the Company, and Mr. Greenwald (or his designee) received
50,000 warrants in consideration of his $50,000 loan to the Company. In March,
1998, the loan of Mr. Schneider was repaid in full from the proceeds of the
Kinnevik receivable. However, Messrs. Greenwald and Miller agreed to a roll-over
of their loans against a second Kinnevik receivable due in September, 1998. In
consideration of the roll-over, Messrs. Greenwald and Miller will receive an
additional 25,000 warrants and 12,500 warrants, respectively, exercisable at
$1.00 per share over a three year period.
F-21
<PAGE>
13. Subsequent Events:
The Company signed an agreement with Kimon Mediaright KB ("Kimon") on July
14, 1998 to purchase the assets of Kimon, valued at $4,500,000, in exchange for
4,500,000 Odyssey shares of subordinated convertible preferred stock, Series B,
having a value of $1.00 per share for conversion purposes. Kimon shall be able
to convert to Odyssey common stock between June 30, 2000 and December 31, 2000
on a dollar-for-dollar basis based on the price of the Company's common stock at
the time of conversion. Kimon assets purchased consist of a film library with
worldwide and/or Scandinavian distribution rights and Scandinavian video
distribution rights to Hallmark Entertainment products.
In June, 1998, the Company applied for, and was accepted for, trading on
the Berlin Stock Exchange under the symbol "ODY". The German company Berliner
Freiverkehr (Aktien) assisted the Company in the application and signed an
agreement with the Company to serve as a market maker/coordinator in exchange
for 200,000 warrants having an exercise price of $1.55 per share, exercisable
during the two-year period commencing June 23, 1998.
The Company received $150,000 in funding from the Augustine Fund L.P. in
July, 1998. In exchange for the financing, the Augustine Fund received a
$150,000 convertible note as well as up to 150,000 transferrable warrants,
exercisable at $1.60 per share for a three year period. Augustine can convert
into restricted shares of the Company's common stock at a discount to the market
price of the common stock at the time of the conversion (i.e., at the lower of
the market price on the closing date, or 80% of the market price prior to
conversion). Augustine and certain Augustine associated parties were also issued
a total of 45,000 shares of restricted common stock in connection with the
transaction.
Mr. Ira Smith, one of Odyssey's Directors on the Board, resigned as a
Director on July 2, 1998 to pursue other business interests.
F-22
<PAGE>
$10,000 NOTE ____
CONVERTIBLE NOTE
DATED JUNE 29, 1998
THIS NOTE is one of the duly authorized issue of Convertible Notes of
Odysssey Pictures Corporation, a Nevada corporation, (the "Company") in an
aggregate principal amount of up to $150,000 (the "Notes").
FOR VALUE RECEIVED, the Company promises to pay to Augustine Fund, L.P.
or the permitted registered holder hereof (the "Holder"), the principal sum of
US$10,000 (Ten Thousand United States Dollars) (the "Initial Principal Amount")
or such lesser principal amount following the conversion or conversions of this
Note in accordance with Paragraph 4 (the "Outstanding Principal Amount") on June
28, 1999 (the "Maturity Date").
The principal of this Note is payable in such coin or currency of the
United States as at the time of payment is legal tender for payment of public
and private debts, at the address last appearing on the Note Register of the
Company as designated in writing by the Holder from time to time.
The Company will pay the principal of this Note on the Maturity date,
free of any withholding or deduction of any kind (subject to the provision of
paragraph 2 below), to the Holder as of the due date and addressed to the Holder
at the address appearing on the Note Register.
The forwarding of such check and/or Shares of the company's common
stock ("Shares") shall constitute a payment of principal hereunder and shall
satisfy and discharge the liability for principal on this Note to the extent of
the sum represented by such check and/or Shares.
This Note is subject to the following additional provisions:
1. These Notes are originally issuable in amounts of not less than
$10,000.
2. All payments on account of the principal of this Note (whether made
by the Company or any other person) to or for the account of the Holder
hereunder shall be made free and clear of and without reduction by reason of any
present and future income, stamp, registration and other taxes, levies, duties,
cost, and charges whatsoever imposed, assessed, levied or collected by the
United States or any political subdivision or taxing authority thereof or
therein, together with interest thereon and penalties with respect thereto, if
any, on or in respect of this Note (such taxes, levies, duties, costs and
charges being herein collectively called "US Taxes").
3. If at any time there occurs a transaction in which in excess of 50%
of the Company's voting power is transferred (excluding any public or private
offering of Company equity securities) on any consolidation or merger of the
Company into any other or other entity or person (whether of not the Company is
the surviving Corporation) or any other corporate reorganization or transaction
or series of related transactions, the Holder of this Note then outstanding may
participate in any such transaction as a class with common stockholders on the
same basis as if this Note had been converted one day prior to the effective
date of such transaction; provided, however that at the option of the Holder of
this Note, such Holder may treat the effective date of any transaction that
occurs prior to Maturity Date as a redemption date and shall be entitled to have
the Company redeem this Note at a price equal to 125% of the Outstanding
Principal Amount of this Note. The Holder shall be entitled to make such
election at any time up to ten (10) days prior to the effective date of the
transaction. The Company shall not effect any stock split, subdivision or
combination with an effective date within three (3) trading days preceding the
effective date of a merger or consolidation. The Company shall not make, fix a
record date for the determination of holders of Common Stock entitled to
receive, a dividend or other distribution payable in additional Shares, within
an effective date within (3) trading days prior to the effective date of a
merger or consolidation.
EXHIBIT 10 - PAGE 1
<PAGE>
Notwithstanding the transfer of 50% of the Company's voting power, the
Company shall have the unequivocal right to redeem this Note at any time prior
to its Maturity Date at a price equal to 125% of the Outstanding Principal
Amount of this Note, provided that the Company shall give to the Holder five (5)
days written notice of its intention to do so and the Holder has not faxed a
Notice of Conversion. In the event a Notice of Conversion has been faxed, the
Company shall have one (1) business day to elect redemption in writing. Upon
notice of its right to redeem the Note, the Company shall immediately transfer
the appropriate amount of funds to Holder. If after one (1) business day from
the date of the notice of redemption is received by the Holder the funds have
not been received by the Holder, then the Holder's conversion that had
previously been sent shall be deemed restored and the time period for conversion
shall run from the date of the conversion (the "Conversion Date").
4. The Holder of this Note is entitled, at its option, at any time
after the Note Date to convert all of any lesser portion of Initial Principal
Amount into Shares at a conversion price (the "Conversion Price") for each Share
equal to the lesser average closing bid of the Common Stock for the five (5)
trading days immediately prior to the Note Date or eighty percent (80%) of the
average closing bid of the Common Stock for the five (5) trading days
immediately prior to the Conversion Date. Provided, however, that in no event
shall the Holder be entitled to convert any portion of this Note in excess of
that portion of this Note upon conversion of which the sum of (1) the number of
Shares beneficially owned by the Holder and its affiliate (other than Shares
which may be deemed beneficially owned through the ownership of the unconverted
portion of this Note), and (2) the number of shares issuable upon the conversion
of the portion of this Note with respect to which the determination of this
proviso is being made, would result in beneficial ownership by the Holder and
its affiliates of more than 4.9% of the outstanding Shares. For purpose of the
proviso to the immediately preceding sentence, beneficial ownership shall be
determined in accordance with Section13(d) of the Securities Exchange Act of
1934, as amended, and Regulation 13 D thereunder, except as otherwise provided
in clause (1) of such proviso. In the event of any stock split, dividend,
combination or similar event occurring after the Conversion Date and prior to
the issuance of the respective stock certificates, the Conversion Price will be
subject to appropriate adjustment. For purpose of this section, the closing bid
price of Common Stock shall be the closing bid price as reported by the Nasdaq
Stock Market, or the closing bid price in the over-the-counter market or, if the
Common Stock is listed on a stock exchange, the closing bid price on such
exchange as reported in the Wall Street Journal. Such conversion shall be
effectuated by surrendering the Notes to be converted to the Company, with the
form of conversion notice attached to the Note as Exhibit A, executed by the
Holder of the Note evidencing such Holder's intention to convert the Note.
Interest accrued or accruing from the date of issuance to the Conversion Date in
an amount so converted shall be paid in Shares of the Company, calculated at the
same Conversion Price (as determined above), as would apply on the Conversion
Date of the principal amount being converted but using the discount percentage
applicable as of such date and shall constitute payment in full of any such
interest on the same terms as would otherwise apply to the conversion of the
principal amount hereof.
No fractional Shares or scrip representing fractions of Shares will be
issued on conversion, but the number of Shares issuable shall be rounded to the
nearest whole Share. The date on which Notice of Conversion is given shall be
deemed to be the date on which the Holder notifies the Company of its intention
to convert by delivery, by facsimile transmission or otherwise, of a copy of the
Notice of Conversion. Notice of Conversion may be given by facsimile to the
Company at 214-720-1617. This Note, together with original executed copy of the
Notice of Conversion, shall be delivered to the Company within three (3)
business days following the date on which Notice of Conversion is given as
described above. Any unconverted principal amount shall at the Maturity Date be
paid, at the option of the Company, in either (a) cash or (b) Shares valued at a
price equal to the average closing bid price of the Common Stock for the five
(5) trading days immediately preceding the Maturity Date.
EXHIBIT 10 - PAGE 2
<PAGE>
Upon the surrender of this Note, accompanied by a Notice of Conversion
in the form attached hereto as Exhibit A, properly completed and duly executed
by the Holder (a "Conversion Notice"), the Company shall issue and, within five
(5) business days (the "Deadline") after actual delivery of this Note with the
Notice of Conversion, deliver to or upon the order of the Holder (1) that number
of Shares for the portion of the Note converted as shall be determined in
accordance herewith, and (2) this Note with appropriate notation by an
authorized officer of the Company to account for the remaining balance of the
principal amount hereof following conversion, if any. Without in any way
limiting the Holder's right to pursue other remedies, including actual damages
and/or equitable relief, the parties agree that if delivery of the Shares
issuable upon conversion of this Note is more than one (1) day after the
Deadline, the Company shall pay to the Holder $20 per each $10,000 principal
amount per day in cash, for the first day beyond the deadline and $20 per each
$10,000 principal amount per day for each day thereafter that the Company fails
to deliver the Shares. Such cash amount shall be paid to the Holder by the fifth
day of the month following the month in which it has accrued, at the option of
the Holder (by written notice to the Company by the first day of the month
following the month in which it accrued), and shall be added to the principal
amount of this Note, in which event interest shall accrue thereon in accordance
with the terms of this Note and such additional principal amount shall be
convertible into Shares in accordance with the terms of this note.
The number of Shares to be issued upon each conversion of this Note
shall be determined by dividing that portion of the principal amount of the Note
to be converted by the Conversion Price in effect on the date the Conversion
Notice is delivered to the Company by the Holder.
5. No provision of this Note shall alter or impair the obligation of
the Company, which is absolute and unconditional, to the payment of the
principal of this Note at the time, place and rate, and in the coin or currency
herein prescribed. This Note and all other Notes now or hereafter issued on
similar terms are direct obligations of the Company. This Note ranks equally
with all other Notes now or hereafter issued under the terms set forth herein.
In the event of any liquidation, reorganization, winding up or dissolution,
repayment of this Note shall be subordinate in all respects to any other
indebtedness for borrowed money of the Company, whether outstanding as of the
date of this Note or hereafter incurred.
Such subordination shall extend without limiting the generality of the
foregoing, to all indebtedness of the Company to banks, financial institutions,
other secured lenders, equipment lessors and equipment finance companies, but
shall exclude trade debts; and any warrants, options or other securities
convertible into stock of the Company shall rank pari passu with the Notes in
all respects.
6. The Company hereby expressly waives demand and presentment for
payment, notice of nonpayment, protest, notice of dishonor, notice of
acceleration of intent to accelerate, bringing of suit and diligence in taking
any action to collect amounts called for hereunder and shall be directly and
primarily liable for the payment of all sums owing and to be owing hereon,
regardless of and without notice, diligence, act or omission as or with respect
to the collection of any amount called hereunder.
7. If the Company at any time of from time to time after the Note Date
makes a dividend or other distribution to holders of Common Stock payable in
securities of the Company other than the Shares, then in each such event
provision shall be made so that the Holder shall receive upon conversion of this
Note pursuant to Paragraph 4 hereof, in addition to the number of Shares
receivable thereupon, the amount of such other securities of the Company to
which the Holder on the relevant record of payment date, as applicable, of the
number of Shares so receivable upon conversion would have been entitled, plus
any dividends or other distributions would have been received with respect to
such securities had the Holder thereafter, during the period from the date of
the such event to and including the Conversion Date retained such securities,
subject to all other adjustments called for during such period under this Note
with respect to the rights of the Holder.
EXHIBIT 10 - PAGE 3
<PAGE>
8. If at any time of from time to time after the Note Date, the Common
Stock issuable upon the conversion of the Note is changed into the same or
different numbers of shares of any class or classes of stock, whether by
recapitalization or otherwise (other than subdivision or combination of shares
of stock dividend or reorganization provided for elsewhere in this Note or a
merger or consolidation, provided for in Paragraph 3), then in each such event
the Holder shall have the right thereafter to convert the Note into the kind of
stock receivable in such recapitalization, reclassification or other changes by
holders of Shares, all subject to further adjustment as provided herein. In such
event, the formulae set forth herein for conversion and redemption shall be
equitably adjusted to reflect such change in number of shares, or, if shares of
a new class of stock are issued, to reflect the market price of the class or
classes of stock issued in connection with the above described transaction.
9. If at any time of from time to time after the Note Date there is a
capital reorganization of the Common Stock (other than a recapitalization,
subdivision, combination, reclassification, or exchange of shares provided for
elsewhere in this Note) then, as a part of such reorganization, provision shall
be made so that the Holder shall thereafter to be entitled to receive upon
conversion of this Note the number of shares of stock or other securities or
property to which a holder of the number of Shares deliverable upon conversion
would have been entitled on such capital reorganization. In any such case,
appropriate adjustment shall be made in the application of the provisions of
this Note with respect to the rights of the Holder after the reorganization to
the end that the provisions of this Note shall be applicable after that event
and be as nearly equivalent as may be practicable, including, by way of
illustration and not limitation, by equitably adjusting the formulae set forth
herein for conversion and redemption to reflect the market price of the
securities or property issued in connection with the above described
transaction.
10. If one or more of the "Events of Default" as described in Paragraph
11 shall occur, the Company agrees to pay all costs and expenses, including
reasonable attorney's fees, which may be incurred by the Holder in collecting
any amount due under this Note.
11. If more than one of the following described "Events of Default"
shall occur:
(a) The Company shall default in the payment of principal;
(b) Any of the representations or warranties made by the Company herein
between the Company and Holder or in any certificate or financial or other
document heretofore or hereafter furnished by or on behalf of the Company in
connection with the execution and delivery of this Note shall be false or
misleading any material respect at the time made; or
(c) The Company shall fail to perform or observe any other covenant,
provision, condition, agreement or obligation of the Company under this Note
such failure shall continue uncured for a period of thirty (30) days after
notice from the Holder of such failure; or
(d) The Company shall (1) become insolvent; (2) admit in writing its
inability to pay its debts as they mature; (3) make an assignment for the
benefit of creditors or commence proceedings for its dissolution; or (4) apply
for or consent to the appointment of a trustee, liquidator or receiver for it or
for a substantial part of its property or business; or
(e) A trustee, liquidator or receiver shall be appointed for the
Company or for a substantial part of it property or business without its consent
and shall not be discharged within thirty (30) days after such appointment; or
(f) Any governmental agency or any court of competent jurisdiction at
the instance of any governmental agency shall assume custody or control of the
whole or any substantial portion of the properties or assets of the Company and
shall not be dismissed within thirty (30) days thereafter; or
EXHIBIT 10 - PAGE 4
<PAGE>
(g) Any money judgment, writ or warrant of attachment, or similar
process except mechanics and materialmen's liens incurred in the ordinary course
of business in excess of Two Hundred Thousand ($200,000) Dollars in the
aggregate shall be entered or filed against the Company or any of its properties
or other assets and shall remain unsatisfied, unvacated, unbounded or unstayed
for a period of thirty (30) days (unless such order provided for delayed
payment) or in any event later than five (5) days prior to the date of any
proposed sale thereunder, or
(h) Bankruptcy, reorganization, insolvency or liquidation proceedings
or other proceedings for relief under any bankruptcy law or any law for the
relief of debtors shall be instituted by or against the Company and if
instituted against the Company, shall not be dismissed, stayed or bonded within
sixty (60) days after such institution or the Company shall by any action or
answer approve of, consent to, or acquiesce in any such proceedings or admit the
material allegations of, or default in answering a petition filed in any such
proceeding; or
Then, or at any time thereafter, and on each and in every such case,
unless such Event of Default shall have been waived in writing by the holders of
a majority of all Notes outstanding (which waiver shall not be deemed to be a
waiver of any subsequent default) at the option of the holders of a majority of
Notes outstanding and in their discretion, the Holder may consider this Note
immediately due or payable, without presentment, demand, protest or notice of
any kind, all of which are expressly waived, anything herein or in any note or
other instruments contained to the contrary notwithstanding, and the Holder may
immediately demand without expiration of any period of grace, enforce any and
all of the Holder's rights and remedies provided herein or any other rights or
remedies afforded by law. In such event, this Note shall be redeemed by the
Company at a redemption price per Note equal to 125% of the Outstanding
Principal Amount due hereunder.
12. Notwithstanding anything to the contrary contained herein, each
Conversion Notice shall contain a representation that, after giving effect to
the Shares to be issued pursuant to such Conversion Notice, the total number of
Shares deemed beneficially owned by the Holder, together with all Shares deemed
beneficially owned by the Holder's "affiliates" as defined in Rule 144 of the
Act, will not exceed 4.9% of the total issued and outstanding Shares.
13. The Holder may, subject to compliance with the Subscription
Agreement and the provision of Rule 504 of Regulation D under the Securities Act
of 1933, as amended, (the 1933 Act) without notice, transfer, assign, mortgage
or encumber this Note, any interest herein or any part hereof in integral
multiples of $10,000 of the entire outstanding balance to an "accredited
investor" as defined in the 1933 Act that will be acquiring the Note of interest
herein for its account for the purpose of investment and not with a view to or
for sale in connection with any distribution hereof and, each assignee,
transferee or mortgage (which may include any affiliate of the Holder) shall
have the right to transfer or assign its interest subject to the same
limitations. Each such assignee, transferee and mortgage shall have all of the
rights of the Holder, under this Note. The Company may condition registrations
of transfers on the receipt of a certificate from the assignee, transferee of
mortgage in a form acceptable to the Company that contains representations and
warranties similar to those of the Holder contained in Section Three of the
Subscription Agreement, and IRS Form W-9 or an equivalent certification under
penalty of perjury in compliance with Internal Revenue Code of 1986.
14. The Company covenants that until all amounts due under this Note
have been paid in full, by conversion or otherwise, unless the Holder or
subsequent Holder waives compliance in writing, the Company;
(a) gives prompt written notice to the Holder of any Event of Default
or of any other matter which has resulted in, or could reasonably be expected to
result in a materially adverse change in its financial condition or operations;
EXHIBIT 10 - PAGE 5
<PAGE>
(b) gives prompt notice to the Holder of any claim, action or
proceeding which, in the event of any unfavorable outcome, would or could
reasonably be expected to have a Material Adverse Effect (as defined In the
Subscription Agreement) on the financial condition of the Company;
(c) at all times reserves and keeps available out of its authorized
unissued stock, for the purpose of effecting the conversion of this Note such
number of its duly authorized Shares as shall from time to time be sufficient to
effect the conversion of the outstanding principal balance of this Note into
Shares. If the Company does not have a sufficient number of Shares available to
satisfy the Company's obligations to the Holder upon receipt of a Conversion
Notice or is otherwise unable to issue such Shares in accordance with the terms
of this Note (a "Conversion Default"), from and after the tenth day following a
Conversion Default (which for all purposes shall be deemed to have occurred upon
the Company's receipt of the applicable Conversion Notice), the Holder shall
have the right to demand from the Company the immediate redemption of this Note
in cash at a redemption price equal to 125% of the Outstanding Principal Amount;
provided, however, that no Redemption Notice may be delivered by the Holder
subsequent to the Holder's receipt of notice from the Company (sent by overnight
or 2-day courier with a copy sent be facsimile) of availability of sufficient
Shares to permit conversion (a "Post-Default Conversion") of the Note; provided
further that such right shall be reinstated if the Company shall thereafter fail
to perfect such Post-Default Conversion by delivery of Common Stock certificates
in accordance with applicable provision of Paragraph 4 hereof with respect
thereto within ten (10) business days of delivery of Post-Default Conversion. In
addition to the foregoing, upon the Conversion Default, the rate of interest on
the Note shall to the maximum extent of the lay, be increased by two percent
(2%) commencing on the first day of the thirty (30) day period (or part thereof)
following a Conversion Default; an additional two percent (2%) commencing on the
first day of each second such (30) day periods (or part thereof); and additional
one percent (1%) on the first day of each consecutive thirty (30) day period (or
part thereof) thereafter until such securities have been duly converted or
redeemed as herein provided. Any such interest which is not paid when due shall,
to the maximum extent permitted by law, accrue interest until paid at the rate
from time to time applicable to interest on the Note as to which the Conversion
Default has occurred.
(d) Upon receipt by the Company of evidence reasonably satisfactory to
it of the loss, theft, destruction or mutilation of this Note and
(i) in the case of loss, theft or destruction, upon provision of
indemnity reasonably satisfactory to it and/or its transfer agent or
(ii) in the case of mutilation, upon surrender and cancellation of this
Note, the Company at its expense will execute and deliver a new Note, dated the
date of the lost, stolen, destroyed or mutilated Note.
15. The Holder, by acceptance hereof, acknowledges that this Note is
being acquired for investment and that the Holder will not offer, sell or
otherwise dispose of this Note or the Shares issuable upon exercise thereof
except under circumstances which will not result in a violation of the 1933 Act
or any applicable state securities laws.
16. In the case any provision of this Note is held by a court of
competent jurisdiction to be excessive in scope or otherwise invalid or
unenforceable, such provision shall be adjusted rather than voided, if possible,
so that its enforceable to the maximum extent possible, and the validity and
enforceability of the remaining provisions of this Note will not in any way be
affected impaired thereby.
17. The Note and Subscription Agreement between the Company and the
Holder constitute the full and entire understanding and agreement between the
Company and the Holder with respect to the subject hereof. Neither this Note nor
any term hereof may be amended, waived, discharged or terminated other than by a
written instrument signed by the Company and the Holder.
18. This Note shall be governed by and construed in accordance with the
internal laws of the State of Illinois.
EXHIBIT 10 - PAGE 6
<PAGE>
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed by an officer thereunto duly authorized.
Dated:
Odyssey Pictures Corporation
By:/s/Odyssey Pictures Corporation
-------------------------------
The "Holder"
By:/s/ Augustine Fund L.P.
-----------------------
EXHIBIT 10 - PAGE 7
<PAGE>
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