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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-25308
OVERSEAS FILMGROUP, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 13-3751702
(State or other (I.R.S. Employer
jurisdiction of incorporation or organization) Identification No.)
8800 SUNSET BLVD., THIRD FLOOR, LOS ANGELES, CA 90069
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (310) 855-1199
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
(title of class)
Warrants to Purchase Common Stock
(title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosures 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. / /
(Cover page of Form 10-K continued on next page)
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The aggregate market value of the voting stock held by non-affiliates of
the Registrant (assuming for these purposes, but without conceding, that all
executive officers and directors are "affiliates" of the Registrant) as of April
21, 1998, (based on the closing sale price on such date as reported on the OTC
Bulletin Board) was $3,762,500.
The number of shares of Common Stock outstanding as of April 21, 1998 was
5,732,778.
DOCUMENTS INCORPORATED BY REFERENCE
NO DOCUMENTS ARE INCORPORATED BY REFERENCE INTO PARTS I, II OR III
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PART I
THIS ANNUAL REPORT ON FORM 10-K (INCLUDING, WITHOUT LIMITATION, PARTS I, II AND
III) CONTAINS "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. SUCH STATEMENTS MAY CONSIST OF ANY
STATEMENT OTHER THAN A RECITATION OF HISTORICAL FACT AND CAN BE IDENTIFIED BY
THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "EXPECT," "ANTICIPATE,"
"ESTIMATE," "INTEND" OR "CONTINUE" OR THE NEGATIVE THEREOF OR OTHER VARIATIONS
THEREON OR COMPARABLE TERMINOLOGY. THE READER IS CAUTIONED THAT ALL
FORWARD-LOOKING STATEMENTS ARE NECESSARILY SPECULATIVE AND THERE ARE CERTAIN
RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL EVENTS OR RESULTS TO DIFFER
MATERIALLY FROM THOSE REFERRED TO IN SUCH FORWARD-LOOKING STATEMENTS. THESE
RISKS AND UNCERTAINTIES INCLUDE, AMONG OTHER THINGS, THE HIGHLY SPECULATIVE AND
INHERENTLY RISKY AND COMPETITIVE NATURE OF THE MOTION PICTURE INDUSTRY. THERE
CAN BE NO ASSURANCE OF THE ECONOMIC SUCCESS OF ANY MOTION PICTURE SINCE THE
REVENUES DERIVED FROM THE PRODUCTION AND DISTRIBUTION OF A MOTION PICTURE (WHICH
DO NOT NECESSARILY BEAR A DIRECT CORRELATION TO THE PRODUCTION OR DISTRIBUTION
COSTS INCURRED) DEPEND PRIMARILY UPON ITS ACCEPTANCE BY THE PUBLIC, WHICH CANNOT
BE PREDICTED. THE COMMERCIAL SUCCESS OF A MOTION PICTURE ALSO DEPENDS UPON THE
QUALITY AND ACCEPTANCE OF OTHER COMPETING FILMS RELEASED INTO THE MARKETPLACE AT
OR NEAR THE SAME TIME, THE AVAILABILITY OF ALTERNATIVE FORMS OF ENTERTAINMENT
AND LEISURE TIME ACTIVITIES, GENERAL ECONOMIC CONDITIONS AND OTHER TANGIBLE AND
INTANGIBLE FACTORS, ALL OF WHICH CAN CHANGE AND CANNOT BE PREDICTED WITH
CERTAINTY. THEREFORE, THERE IS A SUBSTANTIAL RISK THAT SOME OR ALL OF THE
MOTION PICTURES RELEASED, DISTRIBUTED, FINANCED OR PRODUCED BY THE REGISTRANT
WILL NOT BE COMMERCIALLY SUCCESSFUL, RESULTING IN COSTS NOT BEING RECOUPED OR
ANTICIPATED PROFITS NOT BEING REALIZED. THE REGISTRANT'S RESULTS OF OPERATIONS
FOR THE PERIOD ENDED DECEMBER 31, 1997 ARE NOT NECESSARILY INDICATIVE OF THE
RESULTS THAT MAY BE EXPECTED IN FUTURE PERIODS. DUE TO QUARTERLY FLUCTUATIONS
IN THE NUMBER OF MOTION PICTURES IN WHICH THE REGISTRANT CONTROLS THE
DISTRIBUTION RIGHTS AND WHICH BECOME AVAILABLE FOR DISTRIBUTION (AND THUS, FOR
WHICH REVENUE CAN FIRST BE RECOGNIZED) AND THE NUMBER OF MOTION PICTURES
DISTRIBUTED BY THE REGISTRANT, AS WELL AS THE UNPREDICTABLE NATURE OF AUDIENCE
AND SUBDISTRIBUTOR RESPONSE TO MOTION PICTURES DISTRIBUTED BY THE REGISTRANT,
THE REGISTRANT'S REVENUES, EXPENSES AND EARNINGS FLUCTUATE SIGNIFICANTLY FROM
QUARTER TO QUARTER AND FROM YEAR TO YEAR. IN ADDITION, FOR SEVERAL REASONS,
INCLUDING (I) THE LIKELIHOOD OF CONTINUED INDUSTRY-WIDE INCREASES IN
ACQUISITION, PRODUCTION AND MARKETING COSTS AND (II) THE REGISTRANT'S INTENT,
BASED UPON ITS ONGOING STRATEGY, TO ACQUIRE RIGHTS TO OR PRODUCE FILMS WHICH
HAVE GREATER PRODUCTION VALUES (OFTEN AS A RESULT OF LARGER BUDGETS), THE
REGISTRANT'S COSTS AND EXPENSES, AND THUS THE CAPITAL REQUIRED BY THE REGISTRANT
IN ITS OPERATIONS AND THE ASSOCIATED RISKS FACED BY THE REGISTRANT MAY INCREASE
IN THE FUTURE. ADDITIONAL RISKS AND UNCERTAINTIES ARE DISCUSSED ELSEWHERE IN
APPROPRIATE SECTIONS OF THIS REPORT AND IN OTHER FILINGS MADE BY THE REGISTRANT
WITH THE SECURITIES AND EXCHANGE COMMISSION. THE RISKS HIGHLIGHTED ABOVE AND
ELSEWHERE IN THIS REPORT SHOULD NOT BE ASSUMED TO BE THE ONLY THINGS THAT COULD
AFFECT FUTURE PERFORMANCE OF THE REGISTRANT. THE REGISTRANT DOES NOT HAVE A
POLICY OF UPDATING OR REVISING FORWARD-LOOKING STATEMENTS AND THUS IT SHOULD NOT
BE ASSUMED THAT SILENCE BY MANAGEMENT OF THE REGISTRANT OVER TIME MEANS THAT
ACTUAL EVENTS ARE BEARING OUT AS ESTIMATED IN SUCH FORWARD-LOOKING STATEMENTS.
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ITEM 1. BUSINESS
Overseas Filmgroup, Inc., a Delaware corporation, (the "Company") is an
independent film company which specializes in the acquisition and worldwide
license, sale or distribution of distribution rights to independently produced
feature films in a wide variety of genres (including action, "art-house,"
comedy, drama, foreign language, science fiction and thrillers). The Company's
executive offices are located at 8800 Sunset Boulevard, Third Floor, Los
Angeles, California 90069, and its telephone number is (310) 855-1199.
The Company was incorporated in December 1993 under the name
"Entertainment/Media Acquisition Corporation" as a Specified Purpose Acquisition
Company-Registered Trademark-* in order to acquire an operating business in the
entertainment and media industry by merger or other similar type of transaction.
From inception until the October 1996 merger hereafter described, its operations
were limited to organizational activities, completion of an initial public
offering in February 1995, and the evaluation and negotiation of possible
business combinations. On October 31, 1996, pursuant to an Agreement of Merger
dated as of July 2, 1996, as amended as of September 20, 1996, among the
Company, Overseas Filmgroup, Inc. - a privately-held Delaware corporation
("Pre-Merger Overseas"), and Ellen Dinerman Little and Robert B. Little (as
amended, the "Merger Agreement"), the Company merged with Pre-Merger Overseas
(the "Merger"), with the Company as the surviving corporation in the Merger.
Upon consummation of the Merger, the Company changed its name to "Overseas
Filmgroup, Inc.", and succeeded to the business and operations of Pre-Merger
Overseas which had been established in 1980. Unless otherwise specifically
indicated or the context otherwise requires, the term "Company," refers to the
Registrant, Overseas Filmgroup, Inc., and its wholly owned subsidiaries and
references to the operations of the Company are to the operations of Pre-Merger
Overseas through the date of the Merger and to the combined company following
the Merger. In addition, the term "EMAC" is sometimes used herein to refer to
the Registrant during the period from its inception as "Entertainment/Media
Acquisition Corporation" until the Merger.
RECENT DEVELOPMENTS
In mid-1997, in order to address an anticipated need for additional
liquidity occasioned by the disappointing worldwide performance of recent
films acquired by the Company and the maturity of various film facilities
under the Company's credit facility, the Company began discussions with the
lenders providing the Company's credit facility to make additional amounts
available under the operating facility portion of the credit facility and to
extend the commitment to lend under the credit facility. On April 14, 1998,
the Company and such lenders entered into an agreement pursuant to which they
amended the credit facility to extend the commitment to lend until April 9,
1999, subject to continued compliance by the Company with the terms of the
credit facility and establishment of the guarantee described below. The
Company and the lenders also agreed to make up to an additional $1,325,660
available under the operating portion of the Company's credit facility above
the $5,908,340 then outstanding and agreed to extend the maturity dates of
certain film facilities established under the film facilities portion of the
credit facility. However, the Company and the lenders also agreed that the
film facilities portion of the credit facility (a significant primary source
of funds for acquisition of distribution rights by the Company) will no
longer be a revolving credit line and that sums repaid by the Company cannot
be reborrowed. The Company also agreed to additional covenants and operating
restrictions, including obtaining written approval of the lenders prior to
entering into any new rights acquisitions or commitments or committing to
spend amounts in connection with distribution expenses or costs for prints
and advertising. In connection with the extension of the commitment to lend
and these changes to the credit facility, the Company's principal
stockholders and executive officers, Ellen Dinerman Little and Robert B.
Little, agreed to personally guarantee for the benefit of the lenders under
the credit facility amounts in excess of $6,000,000 outstanding under the
operating portion of the credit facility (up to a maximum guarantee amount of
$618,000) and to defer payments under the promissory note that they received
in connection with the Merger. See "Item 7--Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" for additional information regarding this agreement
between the Company and the lenders which provide its credit facility.
STRATEGIC OBJECTIVES
The Company has accumulated a library of distribution rights (including
sales agency rights) in various media and markets to approximately 220
feature films. See "The Company's Film Library of Distribution Rights" below.
Most of such motion pictures have had direct negative costs between
$1,000,000 and $6,000,000. This is substantially below the average direct
negative cost of films produced by the major studios, which was approximately
$53,400,000 million in 1997. The Company's primary focus has been the
licensing of distribution rights (such as theatrical, video, pay television,
free television, satellite and other rights) to foreign sub-distributors in
the major international territories or regions. These activities accounted
for approximately 77% of the Company's total revenues in 1997. In recent
years, the Company has been increasingly active in acquiring domestic
distribution rights. The Company has engaged directly in domestic theatrical
distribution (booking motion pictures with theatrical exhibitors, arranging
for the manufacture of release prints from the film negative, and promoting
such motion pictures with advertising and publicity campaigns) through the
Company's domestic theatrical releasing division, First Look Pictures. First
Look Pictures has released such films as MRS. DALLOWAY (starring Vanessa
Redgrave, Rupert Graves, and Natascha McElhone), ANTONIA'S LINE (winner of
the 1996 Academy Award for Best Foreign Language Film), THE DESIGNATED
MOURNER (starring Mike Nichols, Miranda Richardson and Daivd De Keyser),
INFINITY
- -------------------------
* "Specified Purpose Acquisition Company" is a registered servicemark of GKN
Securities Corp.
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(directed by Matthew Broderick, starring Matthew Broderick and Patricia
Arquette), THE SECRET OF ROAN INISH (the critically acclaimed film by the
noted director, John Sayles), THE SCENT OF GREEN PAPAYA (which was nominated
for the 1994 Academy Award for Best Foreign Language Film) and PARTY GIRL
(which the Company believes was the first theatrical motion picture broadcast
over the Internet).
The Company began its operations by acting primarily as a foreign sales
agent, licensing distribution rights in markets outside the United States to
independently produced films which were fully financed and continued to be owned
by others, in exchange for a sales agency fee. In addition, the Company now
acquires from independent producers the distribution rights in a film for a
specified term in one or more territories and media and receives a distribution
fee in connection with its licensing activities. Often the Company commits to
pay an independent producer a minimum guaranteed payment (a "minimum guarantee")
at or after delivery of the completed film to the Company, ranging from
approximately $100,000 to $5,000,000 or more and representing varying portions,
including at times all or substantially all of a film's production costs. These
minimum guarantees may enable the independent producer to obtain financing for
its project and often results in the Company controlling more of the
distribution rights in the film and receiving more favorable distribution terms.
The Company has also selectively produced certain of the motion pictures
distributed by it, generally acquiring fully developed projects ready for
pre-production and contracting out pre-production and production activities.
The films distributed by the Company in 1997 generally performed
disappointingly, in part due to (i) changes in the marketplace for
independent films including the reduced demand by retail video stores and
video subdistributors for films which have not had significant (or any)
theatrical release (none of the six films released theatrically in the United
States by the Company through First Look Pictures generated more than
$211,000 in United States box office receipts and seven films first available
for distribution by the Company in 1997 had no or are expected to have no
theatrical release) (ii) the failure of films released theatrically by the
Company in the U.S. to achieve significant audience and subdistributor
acceptance, and (iii) the weakened demand for film rights in Asia due to the
region's recent financial crisis. In order to seek to improve the Company's
cash flow and address the factors which led to the disappointing performance
of the Company's films in 1997, as well as in response to the operating
limitations imposed by the recent agreement between the Company and its
commercial lenders with respect to the Company's credit facility, the Company
has been implementing changes in its operational strategies. Currently, the
Company's primary strategies are to:
- -- SEEK TO LIMIT RISK BY CONTINUING TO BALANCE THE METHODS IT USES FOR
ACQUIRING DISTRIBUTION RIGHTS. The Company is altering the frequency in
which it engages in various acquisition, distribution and financing
arrangements. The Company presently intends to:
- Reduce the number of films for which the Company provides minimum
guarantees which represent the majority of the final production
costs of a film or for which the Company otherwise finances
all or substantially all of the film's production costs.
- Act as sales agent or engage in "straight distribution" (i.e.,
licensing distribution rights to a film from the rights owner for
exploitation by the Company for a given term in a given territory or
territories and media without a minimum guarantee commitment) more
frequently than in recent years (including under "gap financing"
arrangements where a lender lends a portion of the
acquisition or production funds based upon the Company's estimated
value of unsold distribution rights).
- Limit the instances in which the Company itself produces motion
picture projects. The Company does not presently have plans to
produce any motion picture projects itself in 1998.
- Reduce the number of films First Look Pictures releases annually.
From January 1, 1997 through April 15, 1998, First Look Pictures
released seven motion pictures. First Look Pictures may release up
to approximately three additional films in 1998 assuming the
availability of funding for print and advertising costs associated
therewith. The Company currently anticipates that, in most
circumstances, it will not proceed with a First Look Pictures release
unless outside sources of funds for print and advertising costs are
available to the Company in connection with such release.
- Increasingly participate in co-financing arrangements whereby the
Company, in combination with other equity providers (including
producers, distributors in various territories, various international
governmental programs designed to incentivize film production and
other equity providers), commits to fund a portion of a particular
film's production costs. For example, ALEGRIA and ILLUMINATA, two
films the Company currently anticipates that it will distribute in
1998, are co-production arrangements with The Cirque Du Soleil,
Mainstream S.A. and Egmond Film & Television BV; and with Victor
Company of Japan (JVC) and Sogepaq S.A. and Compagnia Distribuzione
Internazionale SRL respectively.
-- MAINTAIN A COST CONSCIOUSNESS IN ITS ACQUISITION, FINANCING AND
DISTRIBUTION ACTIVITIES. The Company currently intends to:
- Consider possible additional reductions in overhead. In the last
fiscal year, the Company reduced the number of its employees by 20%.
- Further develop relationships with major studios and expand the
Company's executive producing role in connection with motion
pictures produced and distributed by other companies. For example,
in May 1997, the Company concluded an executive producing arrangement
with The Walt Disney Company with respect to a project optioned by
the Company entitled "EMILY."
- Emphasize films with more recognizable cast, directors and
producers and greater production values (often through offering
greater creative opportunity to talent than major studios offer or
as a result of larger budgets) and which may accordingly have
broader appeal in the competitive theatrical market while
attempting to limit the Company's exposure with respect to
production and/or acquisition costs through "gap financing" and
co-production arrangements.
- Seek to develop relationships with emerging and established talent
and to maintain relationships with independent producers with
reputations for producing high quality films while also controlling
costs.
- EXPLORE OBTAINING ADDITIONAL SOURCES OF CAPITAL. The Company is
currently exploring obtaining additional sources of capital
(including equity and debt financing). There can be no assurance,
however, that such additional capital will be available or available on
terms advantageous to the Company.
For additional information on these operational strategies, See "Motion
Picture Distribution by the Company," and "Acquisition of Rights by the
Company, Production and Financing" below and "Item 7 -- Management's
Discussion and Analysis of Financial Condition and Results of
Operations." No assurances can be given that any or all of such strategies
will be fully or partially realized, as their successful implementation
depends upon, among other things, the ability of management of the
Company to implement such strategies and the availability of
sufficient capital.
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THE MOTION PICTURE INDUSTRY
The motion picture industry consists of two principal activities which
are described in greater detail below: production, which involves the
development, financing and production of motion pictures; and distribution,
which involves the promotion and exploitation of feature-length motion
pictures in a variety of media, including theatrical exhibition, home video,
television and other ancillary markets, both domestically and
internationally. The United States motion picture industry is dominated by
the "major studios," including The Walt Disney Company, Paramount Pictures
Corporation, Warner Brothers Inc., Universal Pictures, Twentieth Century Fox,
Columbia Pictures, and MGM/UA. The major studios, which have historically
produced and distributed the vast majority of high grossing theatrical motion
pictures released annually in the United States, are typically large
diversified corporations that have strong relationships with creative talent,
television broadcasters and channels, theatrical exhibitors and others
involved in the entertainment industry. The major studios also typically have
extensive national or worldwide distribution organizations and own extensive
motion picture libraries. Motion picture libraries, consisting of motion
picture copyrights and distribution rights owned or controlled by a film
company, can be valuable assets capable of generating revenues from worldwide
commercial exploitation in existing media and markets, and potentially in
future media and markets resulting from new technologies and applications.
The major studios also may own or are affiliated with companies that own
other entertainment related assets such as music and merchandising operations
and theme parks. The major studios' motion picture libraries and other
entertainment assets may provide a stable source of earnings which can offset
the variations in the financial performance of their new motion picture
releases and other aspects of their motion picture operations.
During the past 15 years, "independent" production and distribution
companies (many with financial and other ties to the major studios) have
played an important role in the production and distribution of motion
pictures for the worldwide feature film market, including Miramax Films
Corporation (GOOD WILL HUNTING, SCREAM, SLING BLADE, THE ENGLISH PATIENT,
PULP FICTION, IL POSTINO (the Postman) and LIKE WATER FOR CHOCOLATE), now
affiliated with The Walt Disney Company; New Line Cinema Corporation/Fine
Line Features (LOST IN SPACE, SHINE, THE MASK, TEENAGE MUTANT NINJA TURTLES
and the NIGHTMARE ON ELM STREET series), now affiliated with Time Warner
Entertainment Company, L.P.; October Films (SECRETS & LIES, BREAKING THE
WAVES) now affiliated with Universal Pictures; and Orion Pictures (THE
SILENCE OF THE LAMBS), now affiliated with MGM/UA. As a result of
consolidation in the domestic motion picture industry, a number of previously
independent producers and distributors have been acquired or are otherwise
affiliated with major studios. However, there are also a large number of
other production and distribution companies that produce or distribute motion
pictures which have not been acquired or become affiliated with the major
studios. In contrast to the major studios, the independent production and
distribution companies generally produce or distribute fewer motion pictures
and do not own production studios, national or worldwide distribution
organizations, or associated businesses or extensive film libraries which can
generate gross revenues sufficient to offset overhead, service debt or
generate significant cash flow.
The motion picture industry is a world-wide industry. In addition to the
production and distribution of motion pictures in the United States, motion
picture distributors generate substantial revenues from the exploitation of
motion pictures internationally. In recent years, there has been a substantial
increase in the amount of filmed entertainment revenue generated by U.S. motion
picture distributors from foreign sources. From 1989 to 1996, international
revenues of motion picture distributors from filmed entertainment grew from
approximately $4.7 billion in 1989 to approximately $8.7 billion in 1996. This
growth has been due to a number of factors, including, among other things, the
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general worldwide acceptance of and demand for motion pictures produced in the
United States, the privatization of many foreign television industries, growth
in the number of foreign households with videocassette players, and growth in
the number of foreign theater screens.
Many countries and territories, such as Australia, Canada, China,
France, Germany, Hong Kong, India, Italy, Russia, Japan, Spain, and the
United Kingdom have substantial indigenous film industries. In a number of
these countries, as in the United States, the film (and in some cases the
entertainment) industry is dominated by a small number of companies, often
large, diversified companies with production and distribution operations.
However, like in the United States, in most of such countries there are also
smaller, independent, motion picture production and distribution companies.
Foreign distribution companies not only distribute motion pictures produced
in their countries or regions but also films licensed or sub-licensed from
United States production companies and distributors. In addition, film
companies in many foreign countries produce films not only for local
distribution, but also for export to other countries, including the United
States. While some foreign language films, such as LIKE WATER FOR CHOCOLATE,
IL POSTINO (the Postman) and ANTONIA'S LINE, and foreign English-language
films, such as WINGS OF THE DOVE, THE ENGLISH PATIENT, SHINE, FOUR WEDDINGS
AND A FUNERAL, THE CRYING GAME and CROCODILE DUNDEE appeal to a wide U.S.
audience, most foreign language films distributed in the United States are
released on a limited basis as such films draw a specialized audience for
which the appeal of such films has decreased recently.
MOTION PICTURE PRODUCTION
The production of a motion picture begins with the screenplay adaptation of
a popular novel or other literary work acquired by the producer or the
development of an original screenplay having its genesis in a story line or
scenario conceived by a writer and acquired by the producer. In the development
phase, the producer typically seeks production financing and tentative
commitments from a director, the principal cast members and other creative
personnel. A proposed production schedule and budget are also prepared during
this phase. Upon completing the screenplay and arranging financing commitments,
pre-production of the motion picture begins. In this phase, the producer engages
creative personnel to the extent not previously committed; finalizes the filming
schedule and production budget; obtains insurance and secures completion
guaranties, if necessary; establishes filming locations and secures any
necessary studio facilities and stages; and prepares for the start of actual
filming. Principal photography (the actual filming of the screenplay) generally
extends from eight to sixteen weeks for a film produced by a major studio and
often for a significantly shorter period (sometimes as little as four to eight
weeks) for low budget films and films produced by independent production
companies, depending in each case upon such factors as budget, location, weather
and complications inherent in the screenplay. Following completion of principal
photography (the post-production phase), the motion picture is edited, opticals,
dialogue, music and any special effects are added, and voice, effects and music
sound tracks and pictures are synchronized. This results in the production of a
negative from which release prints of the motion picture are made.
Production costs consist primarily of acquiring or developing the
screenplay, compensation of creative and other production personnel, film studio
and location rentals, equipment rentals, film stock and other costs incurred in
principal photography, and post-production costs, including the creation of
special effects and music. Distribution expenses, which consist primarily of the
costs of advertising and preparing release prints, are not included in direct
production costs. The major studios generally fund production costs from cash
flow generated by motion pictures and related activities or, in some cases, from
unrelated businesses or through off-balance sheet methods. Substantial overhead
costs, consisting largely of salaries and related costs of the production staff
and physical facilities maintained by the major studios, also must
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be funded. Independent production companies generally avoid incurring
overhead costs as substantial as those incurred by the major studios by
hiring creative and other production personnel and retaining the other
elements required for pre-production, principal photography and
post-production activities on a picture-by-picture basis. As a result, these
companies do not own sound stages and related production facilities, and,
accordingly, do not have the fixed payroll, general administrative and other
expenses resulting from ownership and operation of a studio. Independent
production companies also may finance their production activities on a
picture-by-picture basis. Sources of funds for independent production
companies include bank loans, "pre-licensing" of distribution rights, foreign
government subsidies, equity offerings and joint ventures. Independent
production companies generally attempt to obtain all or a substantial portion
of their financing of a motion picture prior to commencement of principal
photography, at which point substantial production costs begin to be incurred
and require payment.
As part of obtaining financing for its films, the independent production
company is often required by its lenders and distributors who advance production
funds to obtain a completion bond or production completion insurance from an
acceptable completion guarantor which names the lenders and applicable
distributors as beneficiaries. The guarantor assures the completion of the
particular motion picture on a certain date, and if the motion picture cannot be
completed for the agreed upon budgeted cost, the completion guarantor is
obligated to pay the additional costs necessary to complete the picture by the
agreed upon delivery date. If the completion guarantor fails to timely complete
and deliver such motion picture on or before the agreed upon delivery date, the
completion guarantor is required to pay the lenders and distributor, if
applicable, an amount equal to the aggregate amount the lenders and distributor
have loaned or advanced to the independent producer.
In connection with the production and distribution of a motion picture,
major studios and independent production companies generally grant contractual
rights to actors, directors, screenwriters, owners of rights and other creative
and financial contributors to share in net revenues from a particular motion
picture. Except for the most sought-after talent, these third-party
participations are generally payable after all distribution fees, marketing
expenses, direct production costs and financing costs are recouped in full.
Major studios and independent film companies in the United States typically
incur obligations to pay residuals to various guilds and unions including the
Screen Actors Guild, the Directors Guild of America and the Writers Guild of
America. Residuals are payments required to be made by the motion picture
producer to the various guilds and unions (on a picture-by-picture basis)
arising from the exploitation of a motion picture in markets other than the
primary intended market for such picture. Residuals are calculated as a
percentage of the gross revenues derived from the exploitation of the picture in
these ancillary markets. The guilds and unions typically obtain a security
interest in all rights of the producer in the motion picture being exploited to
ensure satisfaction of the residuals obligation. This security interest is
usually subordinate to the security interest of the lenders financing the
production cost of the motion picture and the completion bond company
guaranteeing completion of the motion picture. Under a producer's agreement with
the guilds and unions, the producer of a motion picture may transfer the
obligation to pay the residuals to a distributor if the distributor assumes the
obligation to make the residual payment. If the distributor does not assume
those obligations, the producer is obligated to pay those residuals.
MOTION PICTURE DISTRIBUTION
GENERAL. Distribution of a motion picture involves domestic and
international licensing of the picture for (a) theatrical exhibition, (b)
videocassettes, laser discs and digital video discs, (c) presentation
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on television, including pay-per-view, basic and premium cable, network,
syndication, or satellite, (d) marketing of the other rights in the picture and
underlying literary property, which may include books, CD-ROM, merchandising and
soundtracks, and (e) non-theatrical exhibition, which includes airlines, hotels
and armed forces facilities. Although releases by the major studios typically
are licensed and fully exploited in all of the foregoing media, often films
produced or distributed by independent film companies are not exploited in all
such media. For example, certain films may not receive theatrical exhibition in
the United States or various other territories and may instead go straight to
home video release or instead first "premiere" or otherwise be exploited on a
pay television service (in certain limited circumstances followed by a
theatrical release).
Production companies with distribution divisions, such as the major
studios, typically distribute their motion pictures themselves. Production
companies without distribution divisions may retain the services of sales agents
or distributors to exploit the motion pictures produced by them in various media
and territories, or in all media and territories. Distribution companies may
directly exploit distribution rights licensed to, or otherwise acquired by them,
for example, by booking motion pictures with theatrical exhibitors or selling
videocassettes to video retailers. Alternatively, they may grant sub-licenses to
domestic or foreign sub-distributors to exploit completed motion pictures.
ACQUISITION OF DISTRIBUTION RIGHTS. A sales agent does not generally
acquire distribution rights from the producer or other owner of rights in the
motion picture, but instead acts as an agent on behalf of the producer or
rights owner to license distribution rights to such motion picture to
distributors on behalf of the producer or rights owner in exchange for a
sales agency fee, typically computed as a percentage of gross revenues from
licenses obtained by the sales agent. A distributor generally licenses and
takes a grant of distribution rights from the producer or other rights owner
of the motion picture for a specified term in a particular territory or
territories and media, generally in exchange for a distribution fee
calculated as a percentage of gross revenues generated by exploitation of the
motion picture by the distributor. The distributor often agrees to pay the
producer of the motion picture a certain advance or minimum guarantee upon
the delivery of the completed motion picture, which amount is to be recouped
by the distributor out of revenues generated from the exploitation of the
motion picture in particular media or territories. In general, after
receiving its ongoing distribution fee and recouping the advance or minimum
guarantee plus its distribution costs, the distributor pays the remainder of
revenues in excess of an ongoing distribution fee to the producer of such
motion picture. Obtaining license agreements with a distributor or
distributors prior to completion of a motion picture and which provide for
payment of a minimum guarantee (often referred to as the "pre-licensing" or
"pre-selling" of film rights), may enable the producer to obtain financing
for its project by using the contractual commitment of the distributor to pay
the advance or minimum guarantee as collateral to borrow production funding.
Although pre-sales had provided a means for financing film production in the
past, no assurance can be given that certain territories and/or regions will
continue to acquire films on such basis. The producer may also at times be
able to acquire additional production funds through "gap financing", whereby
a lender loans a portion of the production funds based on a distributor's
estimate of the value of world distribution rights. Although "gap financing"
is currently being made available by multiple lenders, there can be no
assurance such lenders will continue to make funds available on this basis.
Recently the Company has had indications that certain gap financiers may be
altering the frequency and manner of providing such funds. In some
circumstances, the distributor is entitled to recoup any unrecouped costs and
advances from a film licensed to such distributor from the revenues from
another film or films also licensed to the distributor, commonly known as
"cross collateralizing."
In addition to obtaining distribution rights in a motion picture for a
limited duration, a distributor may also acquire all or a portion of the
copyright in such motion picture or license certain distribution rights in
perpetuity. Both major studios and independent film companies often acquire
motion pictures for distribution through a customary industry arrangement known
as a "negative pickup," under which the studio or independent film company
agrees to pay a specified minimum guaranteed amount to an independent production
company in exchange for all rights to the film upon completion of production and
delivery of the film. The independent production company normally finances
production of the motion picture pursuant to financing arrangements with banks
and other lenders in which the lender receives an assignment of the production
company's right to payment of the minimum guarantee and is granted a
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security interest in the film and in the production company's rights under its
arrangement with the studio or independent film company. When the major studio
or independent film company "picks up" the completed motion picture, it pays the
minimum guarantee or assumes the production financing indebtedness incurred by
the production company in connection with the film. In addition, the independent
production company is paid a production fee and generally is granted a
participation in net revenues from distribution of the motion picture.
THE DISTRIBUTION CYCLE. Concurrently with their release in the United
States, motion pictures generally are released in Canada and may also be
released in one or more other international markets. As a general matter, a
motion picture which is released theatrically is typically available for
distribution in other media during its initial distribution cycle as follows:
<TABLE>
<CAPTION>
MARKETPLACE (MEDIA) NUMBER OF MONTHS FOLLOWING INITIAL DOMESTIC
THEATRICAL RELEASE
<S> <C>
Domestic theatrical --
International theatrical --
Domestic home video (initial release) 4-6 months
Domestic pay-per-view 6-9 months
International video (initial release) 6-12 months
Domestic pay television 9-10 months
International television (pay or free) 18-24 months
Domestic free television* 30-33 months
</TABLE>
- ------------------------------------------
* Includes network, barter syndication, syndication and basic cable.
Films often remain in distribution for varying periods of time. For
example, motion pictures which are released theatrically can play in theaters
for several weeks following their initial release (for major studios) or, at
times, including for instance in the case of certain successful "art-house"
films which are released on a limited basis, for several months. Unsuccessful
films, on the other hand, may play in theaters for only a short period of time.
Once released on videocassette, a motion picture may remain available on
videocassette for many years. Similarly a motion picture can be licensed to
various forms of television for many years after its first release. The release
periods set forth above represent standard "holdback periods". A holdback
period with respect to a certain media in which the motion picture is being
released represents a stipulated period of time during which release of the
motion picture in other media is prevented to allow the motion picture to
maximize its value in the media in which it is currently being released.
Holdback periods are often specifically negotiated with various distributors on
a media-by-media basis; however the periods set forth above represent the
Company's estimate of typical current holdback periods in the motion picture
industry.
In general, if a film is not released theatrically in the United States and
instead is released straight to domestic home video, television exploitation
generally does not commence until four to eight months after such video release.
Thereafter, the same general release patterns indicated in the table above
typically apply. If a film "premieres" on United States pay television (which
generally means that no other
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distribution of the film in the United States has occurred), the pay
television service typically is licensed a four to six week exclusive airing
period. The license will generally provide for limited airings (defined as
five to eight "exhibition days" with multiple airings permitted on each
"exhibition day"). The provisions of such license also usually provide for
the pay television service to receive subsequent airing periods following a
period in which the film can be released on video (or sometimes even
theatrically) and a period when the film may be broadcast on free television.
A substantial portion of a film's ultimate revenues are generated in a
film's initial distribution cycle (generally the first five years after the
film's initial domestic release), which typically includes theatrical, video,
and pay and free television. Commercially successful motion pictures,
however, may continue to generate revenues after the film's initial
distribution cycle from the relicensing of distribution rights in certain
media, including television and home video, and from the licensing of
distribution rights with respect to new media and technologies and in
emerging markets. Although there has been a substantial increase over the
past fifteen years in the revenues generated from the licensing of rights in
ancillary (other than domestic theatrical) media, such as home video, cable
and pay-per-view, the theatrical success of a motion picture remains a
significant factor in generating revenues in foreign markets and in other
media such as television and videocassettes. For example, retail video stores
have been increasingly purchasing fewer copies of videocassettes of motion
pictures which have not been theatrically released, and purchasing more
copies of major studio theatrical hits. Industry-wide purchases of
homevideos in 1997 decreased by 10% over 1996 while homevideo rentals in 1997
decreased by 3% as compared to 1996.
THEATRICAL. The theatrical distribution of a motion picture, whether in the
United States or internationally, involves the licensing and booking of the
motion picture to theatrical exhibitors (movie theatres), the promotion of the
picture through advertising and publicity campaigns and the manufacture of
release prints from the film negative. Expenditures on these activities,
particularly on promotion and advertising, are often substantial and may have a
significant impact on the ultimate success of the film's theatrical release. In
addition, such expenditures can vary significantly, depending upon the markets
and regions where the film is distributed, the media used to promote the film
(newspaper, television and radio), the number of screens on which the motion
picture is to be exhibited and the ability to exhibit motion pictures during
peak exhibition seasons. With a release by a major studio, the vast majority of
these costs (primarily advertising costs) are incurred prior to the first
weekend of the film's domestic theatrical release, so there is not necessarily a
correlation between these costs and the film's ultimate box office performance.
In addition, the ability to distribute a picture during peak exhibition seasons,
including the summer months and the Christmas holidays, and in the most popular
theaters may affect the theatrical success of a picture. Films distributed
theatrically by an independent film company are sometimes released on a more
limited basis which in some circumstances allows the distributor to defer
certain marketing costs until it is able to assess the initial public acceptance
of the film.
While arrangements for the exhibition of a film vary greatly, there are
certain economic relationships generally applicable to theatrical distribution.
Theater owners (the "exhibitors") retain a portion of the admissions paid at the
box office ("gross box office receipts"). The share of the gross box office
receipts retained by an exhibitor generally includes a fixed amount per week (in
part to cover overhead), plus a percentage of receipts that generally escalates
over time. Although these percentages vary widely, in the Company's general
experience, an exhibitor's share of a particular film's revenues will generally
be approximately 60% to 65% of gross box office receipts. The balance ("gross
film rentals") is remitted to the distributor. The distributor then retains a
distribution fee (typically 30-35%) from the gross film rentals and recoups the
costs incurred in distributing the film, which consist primarily of the cost of
marketing and advertising and the cost of release prints for exhibition. The
balance of gross film rentals, after deducting distribution fees and
distribution costs recouped by the distributors ("net film
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rentals"), is then applied against the recoupment of any advance paid for the
distribution rights (with interest thereon) and the balance is remitted to the
producer or other rights owner of the film.
HOME VIDEO. A motion picture released theatrically typically becomes
available for videocassette distribution within four to six months after its
initial domestic theatrical release. As indicated above, certain films are
not initially released theatrically but may instead be initially released to
home video. Given the increasing preference of retail video stores for
successful theatrical releases, it has become increasingly difficult to
secure the initial release of a film directly to home video, and the economic
opportunity for such films where such a release is obtained has greatly
diminished.
Home video distribution consists of the promotion and sale of
videocassettes to local, regional and national video retailers which rent or
sell videocassettes to consumers primarily for home viewing. Most films are
initially made available in videocassette form at a wholesale price of
approximately $50 to $75 per videocassette and are sold at that price
primarily to wholesalers who then sell to video rental stores at a price of
approximately $75 to $105 per videocassette, which rent the cassettes to
consumers. Following the initial marketing period, selected films may be
remarketed at a wholesale price of $10 to $15 or less for sale to consumers.
These "sell-through" arrangements are used most often with films that will
appeal to a broad marketplace or to children. A few major releases with broad
appeal may be initially offered by a film company at a price designed for
sell-through rather than rental when it is believed that the ownership demand
by consumers will result in a sufficient level of sales to justify the
reduced margin on each cassette sold. Typically, owners of films do not share
in rental income; however, video distributors are beginning to enter into
revenue sharing arrangements with certain retail stores in some
circumstances. Under such arrangements, videocassettes are sold at a reduced
price to video rental stores (usually $8 to $10 per videocassette) and a
percentage of the rental revenue is then shared with the owners (or
licensors) of the films. Home video arrangements in international territories
are similar to those in domestic territories except that the wholesale prices
may differ.
TELEVISION. Television rights for films initially released theatrically
are, if such films have broad appeal, generally licensed first to pay-per-view
for an exhibition period within six to nine months following initial domestic
theatrical release, then to pay television approximately 12 to 15 months after
initial domestic theatrical release, thereafter in certain cases to network
television for an exhibition period, and then to pay television again. These
films are then syndicated to either independent stations or basic cable outlets.
Pay-per-view allows subscribers to pay for individual programs. Pay television
allows cable television subscribers to view such services as HBO/Cinemax,
Showtime/The Movie Channel, Encore Media Services or others offered by their
cable system operators for a monthly subscription fee. Pay-per-view and pay
television is now delivered not only by cable, but also by satellite
transmission, and films are generally licensed in both such media. Certain films
which are not initially released in the domestic theatrical market may
"premiere" instead on pay television followed in some limited circumstances by
theatrical release. Groups of motion pictures are often packaged and licensed as
a group for exhibition on television over a period of time and, therefore,
revenues from these television licensing "packages" may be received over a
period that extends beyond five years from the initial domestic theatrical
release of a particular film. Motion pictures are also licensed and "packaged"
by producers and distributors for television broadcast in international markets
by government owned or privately owned television studios and networks. Pay
television is less developed outside the United States, but is experiencing
significant international growth. The prominent foreign pay television services
include Canal+, Premiere, STAR TV, British Sky Broadcasting and the
international operations of several U.S. cable services including HBO, the
Disney Channel and Turner Broadcasting.
NON-THEATRICAL AND OTHER RIGHTS. Films may be licensed for use by airlines,
schools, public libraries, community groups, the military, correctional
facilities, ships at sea and others. Music contained in a film may be licensed
for sound recording, public performance and sheet music publication. Rights in
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<PAGE>
motion pictures may be licensed to merchandisers for the manufacture of products
such as toys, T-shirts, posters and other merchandise. Rights may also be
licensed to create novels from a screenplay and to generate other related book
publications, as well as interactive games on such platforms as CD-ROM, CD-I or
other proprietary platforms.
MOTION PICTURE DISTRIBUTION BY THE COMPANY
INTERNATIONAL DISTRIBUTION. Management of the Company has considerable
expertise in international distribution. Ellen Dinerman Little and Robert B.
Little, the senior executive officers of the Company and founders of its
operations, have substantial experience in the business of licensing motion
pictures for distribution outside the United States and have been active in
international motion picture sales since 1975. Over the past 23 years, they have
developed, through their foreign sales activities, relationships with
distributors in most significant territories. In addition, the Company is a
founding member of the American Film Marketing Association which sponsors the
American Film Market, one of the three major annual international film markets
attended by significant international and regional distributors. The Company
generally participates annually with a sales office at all three major film
markets (the American Film Market, the Cannes Film Festival and MIFED), as well
as the major television (NATPE, MIP, MIPCOM) and video (VSDA) markets. The
Company, may also, from time to time, engage independent representatives to
assist the Company in acquiring and/or licensing motion picture rights.
With respect to international territories, the Company licenses
distribution rights in various media (such as theatrical, video, pay
television, free television, satellite and other rights) to foreign
sub-distributors on either an individual rights basis or grouped in various
combinations of rights (which sometimes includes rights in all media). These
rights are licensed by the Company to numerous sub-distributors in
international territories or regions either on a picture-by-picture basis or,
in certain circumstances, with respect to a number of motion pictures
pursuant to output arrangements. Currently, the most important international
territories for the Company are Australia, the Benelux countries, Brazil,
Canada, France, Germany, Italy, Japan, Scandinavia, Spain and the United
Kingdom. South Korea has also been an important territory to the Company in
the past; however, the economic crisis in Asia has resulted in significantly
decreased demand in Korea (as well as other Southeast Asian territories)
resulting in fewer sales and licensing transactions with respect to those
territories than in recent years and, significantly less advantageous terms
to the Company when deals are concluded, compared to recent years. As a
result the Company is generally unable to depend on such Southeast Asian
territories (especially South Korea) for any significant pre-sales (or other
collateral value) for use in arranging financing for production of motion
pictures. In addition certain contracts the Company had with subdistributors
for these territories have been re-negotiated or cancelled. See Note 11 of
Notes to the Company's Consolidated Financial Statements for certain
geographic information regarding the Company's foreign distribution
activities.
The terms of the Company's license agreements with foreign sub-distributors
vary depending upon the territory and media involved and whether the agreement
relates to a single motion picture or multiple motion pictures. Most of the
Company's license agreements provide that the Company will receive a minimum
guarantee from the foreign sub-distributor with all or a majority of such
minimum guarantee paid prior to, or upon delivery of, the film to the
sub-distributor for release in the particular territory. The remainder of any
unpaid minimum guarantee is generally payable at specified intervals after
delivery of the film to the sub-distributor. The minimum guarantee is recouped
by the sub-distributor out of the revenues generated from exploitation of the
picture in such territory. The foreign sub-distributor retains a negotiated
distribution fee (generally measured as a percentage of the gross revenues
generated from its distribution of the motion picture), recoups its distribution
expenses and the minimum guarantee and ultimately (after recoupment by the
sub-distributor of the minimum guarantee and recovery of its
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<PAGE>
distribution expenses) remits to the Company the remainder of any receipts in
excess of the distributor's ongoing distribution fee. The Company must rely on
the foreign sub-distributor's ability to successfully exploit the film in order
to receive any proceeds in excess of the minimum guarantee.
In certain situations, the Company does not receive a minimum guarantee
from the foreign sub-distributor and instead negotiates terms which usually
result, in effect, in an allocation of gross revenues between the
sub-distributor and the Company. Typically the terms of such an arrangement
provide for the sub-distributor to retain an ongoing distribution fee
(calculated as a percentage of gross receipts of the sub-distributor in the
territory), recoup its expenses and pay remaining receipts in excess of the
ongoing distribution fee to the Company. Alternatively, such as often with
respect to video rights, the terms may provide for a royalty to be paid to the
Company calculated as a percentage of the gross receipts of the sub-distributor
from exploitation of the video rights (without deduction for the
sub-distributor's distribution expenses).
At times, the Company enters into output arrangements with local foreign
distributors whereby the foreign sub-distributor receives the right,
typically for a specified period and/or specified number of motion pictures,
to distribute in a particular territory, in designated media, motion pictures
released by the Company. In some circumstances, a minimum guarantee is paid
by the foreign sub-distributor to the Company; generally on a
picture-by-picture basis with each minimum guarantee having been either
pre-negotiated or computed as a stipulated percentage of the production cost
or acquisition cost of each picture. The Company is currently a party to an
output arrangement with Polygram Pictures Limited. Under such arrangement,
Polygram Pictures Limited receives the right to distribute the Company's
motion pictures in all media in Australia and New Zealand for a twelve year
term and, in certain circumstances, is obligated to pay a minimum guarantee
for a particular picture. The Company's previous output arrangements with
respect to the United Kingdom and Ireland, South Africa and certain adjoining
territories, Canada, and Belgium, the Netherlands, Luxembourg and certain
ex-colonies of Belgium and the Netherlands, have expired. The Company is
currently exploring obtaining output arrangements with respect to certain of
these territories, although there can be no assurance that the Company will
obtain such arrangements or that such arrangements will be on terms as
advantageous as the prior arrangements. If output arrangements are not
obtained for such territories, the Company intends to seek agreements with
respect to such territories on a film-by-film basis. The Company enters into
output arrangements with foreign sub-distributors which the Company believes
have the ability to make the recurring payments. Nevertheless, in certain
instances foreign sub-distributors encounter financial difficulties that may
preclude timely payment, and as a result the Company may be forced to
terminate or renegotiate output agreements. See also "Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Exchange Rate Considerations" for certain additional considerations regarding
the Company's international distribution activities.
DOMESTIC DISTRIBUTION. In addition to obtaining foreign distribution
rights, the Company has in recent years been increasingly active in acquiring
domestic distribution rights. During 1997, various distribution rights to
approximately sixteen films, including various domestic distribution rights
in thirteen films, became available for the first time to the Company for
licensing or distribution. The Company exploits its domestic distribution
rights in a variety of ways. In 1993, the Company's domestic theatrical
releasing operation, First Look Pictures, was established. Not all of the
films distributed by the Company, however, receive domestic theatrical
release by First Look Pictures or otherwise. Some films are licensed by the
Company to domestic sub-distributors for release initially on video or, in
certain circumstances, the Company licenses initially to the pay television
services for "premiere" on pay television (cable and/or satellite). Of the
thirteen films which first became available to the Company in 1997 for
licensing or distribution and in which the Company controls various domestic
distribution rights, eight were (or are currently intended to be) released
theatrically by First Look Pictures and five were (or are intended to be)
released directly to video.
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The Company's previous domestic video output arrangement with BMG Video
has expired, however, three films the Company has released (including MRS.
DALLOWAY) or currently anticipates releasing will be distributed on video in
the United States and certain related territories by BMG Video under the
prior arrangement with BMG Video. In addition, BMG Video's domestic video
distribution rights to films released by it under such arrangement
(approximately ten films through April 15, 1998) continue for a five year
period following initial video release. The Company is currently licensing
domestic video rights to films not covered by the BMG Video output
arrangement on a film-by-film basis or in small groupings of films to various
subdistributors, including BMG Video, Fox-Lorber Associates and Unapix
Entertainment, Inc. Although the Company has explored (and may explore in the
future) the possibility of obtaining a new domestic video output arrangement,
given the recent changes in the market for domestic video distribution rights
(including the decreased demand for films which have not achieved significant
theatrical success), the Company believes it unlikely that it can obtain a
multi-picture output arrangement with a domestic video subdistributor which
would provide for significant minimum guarantees to be paid to the Company.
As part of the strategic changes in its operations, the Company is
seeking to expand its sales and licensing of television distribution rights
and, in connection therewith, has recently hired an additional sales person
to focus on exploiting the Company's library of motion picture distribution
rights in television, as well as newly acquired distribution rights. The
Company licenses distribution rights directly to pay television services
including HBO, Showtime and Encore, as well as smaller services, including
pay-per-view services. Although the Company has not engaged in significant
licensing or syndication of domestic free television rights except as part of
a license of rights in multiple media, it controls these rights to a
significant portion of the films in its library.
In some cases, the Company will license the right to distribute a film
domestically in multiple media to a major studio, a division of a major studio,
or an independent distributor. Although the terms of such licenses vary,
typically the Company will be paid a minimum guarantee. The sub-distributor then
retains a distribution fee (measured as a percentage of the gross receipts
received by the sub-distributor from exploitation of the film), recoups its
distribution costs and the advance paid to the Company, and ultimately remits to
the Company the remainder of any receipts in excess of an ongoing distribution
fee.
The Company does not always receive a minimum guarantee from the
licensing of distribution rights to foreign and domestic sub-distributors,
thus increasing the Company's reliance on the actual financial performance of
the film being distributed. In some circumstances, whether the Company
receives a minimum guarantee depends upon the media. For example, the
Company is increasingly (particularly with respect to motion pictures which
have not been theatrically released) entering into video distribution
arrangements with sub-distributors where no minimum guarantee is paid to the
Company or where the minimum guarantee paid to the Company is significantly
smaller than those paid to the Company for similar films in the recent past.
In addition, even if the Company does obtain minimum guarantees from its
sub-distributors, such minimum guarantees do not assure the profitability of
the Company's motion pictures or the Company's operations. Additional
revenues may be necessary from distribution of a motion picture in order to
enable the Company to recoup any investment in such motion picture in excess
of the aggregate minimum guarantees obtained from such sub-distributors, pay
for distribution costs, pay for ongoing acquisition and development of other
motion pictures by the Company and cover general overhead. While the
pre-licensing of distribution rights to sub-distributors in exchange for
minimum guarantees may reduce some of the risk to the Company from
unsuccessful films, it may also result in the Company receiving lower
revenues with respect to highly successful films than if such licensing of
distribution rights were made upon different terms that, for example, might
have provided lower minimum guarantees to the Company but also provided a
lower distribution fee (i.e., a lower percentage of gross revenues) to the
sub-distributor.
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FIRST LOOK PICTURES. The Company, from its Los Angeles offices, has
directly distributed some of the motion pictures for which it controls
domestic rights to theaters throughout the United States under the name First
Look Pictures. Through April 15, 1998, eighteen films have been released
through First Look Pictures (including six in 1997). Although some of First
Look Pictures' future releases may appeal to a wide audience, many of the
eighteen First Look Pictures releases to date have been specialized motion
pictures generally characterized by underlying literary and artistic elements
intended to appeal primarily to sophisticated audiences including foreign
language films and so called "art-house" films.
Management of the Company believes that the Company can benefit in
several ways by theatrically distributing films in the United States directly
through First Look Pictures. The domestic theatrical success of a motion
picture can be a significant factor in generating revenues from distribution
of the motion picture in ancillary media and foreign markets. For example,
retail video stores have been increasingly purchasing significantly fewer
copies of videocassettes of motion pictures that have not been theatrically
released. In addition, the Company believes it is generally able to obtain
more favorable distribution terms in its agreements with foreign
sub-distributors and domestic sub-distributors in other media (for example,
pay television) with respect to motion pictures that have been theatrically
released in the United States. Management of the Company also believes that,
in some cases, its First Look Pictures operations enable the Company to
achieve domestic theatrical release for films that might not otherwise be
released in U.S. theaters. In addition, management of the Company believes
that its ability to release a film theatrically in the U.S. enables the
Company to attract more recognizable talent, higher profile producers and
more promising motion picture projects to the Company generally (for both
domestic and foreign distribution) and that by theatrically releasing films
itself in the United States, the Company can retain a significantly greater
share of the revenue from domestic media in the event of a highly successful
theatrical release.
Despite the significant potential advantages to distributing motion
pictures directly in the domestic theatrical market, given the disappointing
results of the six 1997 First Look Pictures releases (none of which generated
more than $211,000 in domestic box office receipts), the increased
industry-wide cost of prints and advertising, the restrictions imposed by the
recent changes to the Company's credit facility (which do not permit
borrowing under the credit facility for prints and advertising costs and
which require the consent of the Company's lenders before print and
advertising commitments can be made), and the desire of the Company to
improve cash flows, the Company currently intends to reduce the number of
First Look Pictures films released annually as part of the changes in its
operational strategies. The Company currently anticipates that, in most
circumstances, it will not proceed with a First Look Pictures release unless
outside sources of funds for print and advertising costs are available to the
Company in connection with such release. Assuming such funds become available
to the Company, the Company presently anticipates a total of three 1998 First
Look Picture releases compared to the six in 1997. As described in "Item
7--Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources," the funds for the print and
advertising costs of First Look Pictures' one 1998 release to date (through
April 15, 1998), "MRS. DALLOWAY", were provided by pre-selling United States
video rights and a loan from the Company's principal stockholders, Ellen
Dinerman Little and Robert B. Little. See Item 13, "Certain Relationships and
Related Transactions" below. The Company is currently in discussions with
various third parties to obtain other possible sources of funds for print and
advertising expenses, however, there can be no assurance that any such
sources will be available to the Company.
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Films distributed theatrically in the United States by First Look Pictures
have been typically released on a limited basis (initially less than 100
screens) and in selected cities, expanding to new cities or regions based upon
the performance of the film. In some circumstances, films are released in new
cities as prints become available from cities where the engagement has closed,
reducing the number of prints needed and the aggregate cost of such prints. In
select circumstances, the Company may release appropriate films with more mass
market appeal on a wide release basis either through First Look Pictures or,
more likely, by licensing such film to a domestic distributor with more
significant financial and distribution resources.
The cost to First Look Pictures to distribute a specialized motion
picture or "art-house" film on a limited-release basis has in the past
typically ranged from approximately $100,000 to $2,000,000, although in the
future these costs may exceed such range. Expenditures for prints, marketing
and advertising represent a substantial portion of the costs of releasing a
film. Costs for prints, marketing and advertising for the six films initially
released by First Look Pictures during 1997 ranged from approximately
$382,000 to approximately $780,000. In connection with the acquisition of
domestic theatrical rights to a film, the Company sometimes commits to spend
no less than a specified minimum amount for prints and advertising costs.
These costs are in addition to the direct production or acquisition costs and
other distribution expenses of such films. Generally, in addition to
receiving a distribution fee, the Company is entitled to recoup its prints
and advertising expenditures. Although First Look Pictures may at times
utilize standard broadcast television advertising, First Look Pictures
typically supports its limited releases with local newspaper and, in certain
instances, some cable television advertising. First Look Pictures also relies
on local and national publicity, such as reviews or articles in local and
national publications and appearances of the film's principal artists on
radio and television talk shows. In contrast, distributors of national, wide
release films must rely primarily on national advertising campaigns,
including substantial television advertising, to attract theatergoers.
The success of a domestic theatrical release by First Look Pictures can
be affected by a number of factors outside of its control, including audience
and critical acceptance, availability of motion picture screens and the
success of competing films in release (see "Competition" below), awards won
by First Look Pictures' releases or that of its competition, inclement
weather, and competing televised events (such as sporting and news events).
As a result of the foregoing, and depending upon audience acceptance of the
films distributed through First Look Pictures, the Company expects that, in
many cases, it will not recoup all of its distribution expenses or derive any
profit solely from domestic theatrical distribution of First Look Pictures'
releases. In addition, there can be no assurance that total revenues from any
First Look Pictures' release, including revenues derived from such film in
ancillary media and international markets, will be sufficient to allow the
Company to recoup all of its costs or to realize a profit on such film. For
example, of the six motion pictures released by the Company in 1997 four
(JERUSALEM, THE DESIGNATED MOURNER, JOHNS and ALIVE & KICKING) resulted in
write downs to net realizable values (after taking into account total
anticipated revenue including revenue from ancillary media).
15
<PAGE>
From January 1, 1997 through April 15, 1998, First Look Pictures
released the seven motion pictures listed in the following chart. First Look
Pictures may release up to approximately three additional films in 1998
(consisting of those listed below under "Anticipated Releases") assuming the
availability of funding for the print and advertising costs associated
therewith.
RELEASED
<TABLE>
<CAPTION>
TITLE MAJOR CREATIVE ELEMENTS STORYLINE RELEASE DATE AND
- ----- ----------------------- --------- DOMESTIC BOX OFFICE
RECEIPTS
--------
<S> <C> <C> <C>
JOHNS Writer/Director: Scott Silver A dark comic drama about two hustlers Released in January 1997
Cast: Lukas Haas (MARS ATTACKS!, EVERYONE SAYS working the dirty, sun-scorched with domestic box office
I LOVE YOU, WITNESS) and David Arquette (SCREAM, pavement of Hollywood's Santa Monica receipts of $202,596.
BEAUTIFUL GIRLS, WILD BILL, BUFFY THE VAMPIRE Boulevard.
SLAYER)
JERUSALEM Director: Bille August When a charismatic and messianic Released in March 1997,
Cast: Maria Bonnevie, Ulf Friberg, Olympia preacher arrives in a small Swedish with domestic box office
Dukakis (MIGHTY APHRODITE, STEEL MAGNOLIAS) and village, the lives of two young lovers receipts of $92,089.
Max von Sydow (PELLE THE CONQUEROR) are torn apart. Based on the novel by
Nobel Prize winner, Selma Lagerlof.
A BROTHER'S Writer/Director: Seth Zvi Rosenfeld Headstrong and hot-tempered, a man Released in April 1997 with
KISS Cast: Nick Chinlund (ERASER), Michael Raynor down on his luck falls in with the domestic box office
(FEDERAL HILL), Michael Rapaport (METRO, wrong people. His brother, an NYPD receipts of $65,674.
BEAUTIFUL GIRLS) John Leguizamo (EXECUTIVE officer, is torn between loyalty to
DECISION, TO WONG FOO-THANKS FOR EVERYTHING- his uniform and the person who
JULIE NEWMAR), Cathy Moriarty (CASPER, RAGING protected him as a kid on the tough
BULL), Rosie Perez (WHITE MEN CAN'T JUMP), streets of NY.
Marisa Tomei (UNHOOK THE STARS, MY COUSIN VINNY)
THE DESIGNATED Writer: Wallace Shawn (VANYA ON 42ND STREET, Straight from the National Theatre in Released in May 1997 with
MOURNER MY DINNER WITH ANDRE) London and told completely in direct domestic box office
Director: David Hare (STRAPLESS, PARIS BY NIGHT) address to the camera, the film receipts of $210,082.
Cast: Mike Nichols (acclaimed director of THE captures a three way conversation in
GRADUATE, THE BIRDCAGE and POSTCARDS FROM THE which the characters (a snobbish
EDGE), Miranda Richardson (ENCHANTED APRIL, THE father, pretentious daughter and her
CRYING GAME, DAMAGE). middlebrow husband) debate the
emotional and intellectual bankruptcy
of high culture in the modern world.
ALIVE AND Director: Nancy Meckler (SISTER MY SISTER) A tender, funny and passionate love Released in August 1997
KICKING (a/k/a Cast: Jason Flemyng (STEALING BEAUTY, ROB ROY), story of a talented young dancer with domestic box office
INDIAN SUMMER) Antony Sher (Broadway's "Stanley") living positively with AIDS. receipts of $199,220.
DIFFERENT FOR Director: Richard Spence (YOU, ME AND MARLEY); A romantic gender-bender about two Released in September 1997
GIRLS Cast: Rupert Graves (THE MADNESS OF KING GEORGE, young school boys, Karl and Paul, who with domestic box office
DAMAGE, A ROOM WITH A VIEW) and Steven meet again, accidentally, twenty years receipts of $154,753.
Mackintosh (GENTLEMEN DON'T EAT POETS, MEMPHIS later. Paul does not recognize Karl
BELLE). who is now an attractive transsexual
named Kim.
MRS. DALLOWAY Director: Marleen Gorris (ANTONIA'S LINE) On one summer's day in London, in Released on February 20,
Cast: Vanessa Redgrave (MISSION IMPOSSIBLE, 1923, Clarissa Dalloway remembers that 1998 with domestic box
SMILLA'S SENSE OF SNOW), Rupert Graves (THE summer in the country, in 1890, when office receipts of
MADNESS OF KING GEORGE, A ROOM WITH A VIEW), she was young and beautiful and very approximately $1,578,981
Natascha McElhone (THE DEVIL'S OWN, SURVIVING much courted. through April 14, 1998.
PICASSO)
</TABLE>
16
<PAGE>
ANTICIPATED RELEASES
<TABLE>
<CAPTION>
TITLE MAJOR CREATIVE ELEMENTS STORYLINE ESTIMATED DOMESTIC
- ----- ----------------------- ---------
<S> <C> <C> <C>
THEATRICAL RELEASE DATE
THE MERRY WAR Director: Bob Bierman (VAMPIRE'S KISS) In this touching romantic comedy, the Spring 1998
F/K/A KEEP THE beautiful and charming Rosemary tries
ASPIDISTRA Cast: Helena Bonham Carter (WINGS OF THE desperately to maintain appearances
FLYING DOVE), Richard E. Grant (TWELFTH NIGHT, and avoid scandal, but she is
MIGHTY APHRODITE, PORTRAIT OF A LADY, constantly frustrated by her
THE AGE OF INNOCENSE) eccentric and rebellious boyfriend,
Gordon, who flaunts his outrageous
behavior in the face of stuffy
British middle-class hypocrisy.
THE OTHER SIDE Director: Berit Nesheim (BEYOND THE SKY, A story of a young woman coming of Spring 1998
OF SUNDAY FRIDA-STRAIGHT FROM THE HEART) age in the parochial oppression of a
small Norwegian town where almost
Cast: Marie Theisen (BLESSED ARE THOSE WHO everything is forbidden- especially
THIRST), Bjorn Sundquist (BLESSED ARE THOSE the lure of sex, boys and
WHO THIRST, BLIND GODDESS), Hildegun Riise rock'n'roll.
(FOR THE DAYS ARE EVIL)
MARCELLO Director: Anna Maria Tato A documentary about Marcello Summer 1998
MASTROIANNI: Mastroianni's memories, joy of
I REMEMBER living, and love of cinema recorded
by his companion during the shooting
of his last movie VOYAGE AU DEBUT DU
MONDE.
</TABLE>
There can be no assurance that any of the pictures scheduled for release by
First Look Pictures in 1998 or thereafter will actually be released or
released in accordance with the anticipated schedule set forth above. The
motion picture business is subject to numerous uncertainties, including
financing requirements, personnel availability and the release schedule of
competing films. As indicated above, the Company currently anticipates
releasing films through First Look Pictures, in most situations, only if
outside sources of funds are available for print and advertising expenses.
ACQUISITION OF RIGHTS BY THE COMPANY, PRODUCTION AND FINANCING
The Company acquires distribution rights from a large variety of
independent production companies and producers. The Company generally acquires
distribution rights to single films, as compared to acquiring films pursuant to
multi-picture acquisition agreements with independent film companies or
producers. The Company commits to acquire rights to motion pictures at various
stages in the completion of a film, from films completed and ready for release
to developed (or undeveloped) film projects for which the Company may arrange
financing and/or production services to complete. In acquiring rights, the
Company generally seeks to obtain rights to commercially appealing motion
pictures with substantially lower direct negative costs than motion pictures
released by the major studios.
In order to fund the acquisition costs of the films for which it
acquires rights, the Company, in the past, has relied primarily on: (i) the
film facilities provided under the Company's credit facility with Coutts &
Co. and Berliner Bank A.G.; (ii) other lenders willing to finance the
contractual minimum guarantee obligations of the Company to the films'
producers or rights owners; (iii) working capital; (iv) pre-sales (minimum
guarantees obtained from subdistributors who have licensed rights to the film
from the Company); and (v) "gap financing" (where a lender is willing to
finance the production and/or acquisition costs of the motion picture based
on the Company's estimate of the value of unsold distribution rights to the
motion picture). The lenders under the credit facility have the right to
approve each acquisition by the Company. In addition, the Company and the
lenders have agreed that the film facilities portion of the credit facility
(a significant primary source of funds for acquisition of distribution rights
by the Company in the past) will no longer be a revolving credit line and
that sums repaid by the Company cannot be re-borrowed (provided, however,
that one pending film facility with respect to the motion picture ILLUMINATA
will still be funded by the lenders). These provisions could substantially
limit the Company's acquisition activities, unless the Company is able to
exploit its other sources of rights acquisition funding to a greater extent
including "gap financing", pre-sales and/or obtain additional sources of
capital. As described below, the Company also intends, as part of the changes
in its operational strategy, to alter the frequency in which it engages in
various acquisition and distribution arrangements. The Company is also
exploring obtaining additional sources of capital, although there can be no
assurance that such additional capital will be available or available on
terms advantageous to the Company.
The films distributed by the Company have generally had direct negative
costs ranging from $1,000,000 to $6,000,000. However, from time to time, the
Company may acquire rights to, finance or produce, motion pictures with
direct negative costs (as well as marketing costs) below or substantially in
excess of the average direct negative costs (as well as marketing costs) of
the films historically distributed by the Company. For instance, an upcoming
film expected to be distributed by the Company is anticipated to have a
direct negative cost of between $10,000,000 and $15,000,000 (the production
funds for which are currently expected to be provided by third party equity
providers and pre-sales). In addition, as part of the Company's overall
business strategy it intends to emphasize films with more recognizable cast,
directors and producers and greater production values and which may
accordingly have broader appeal in the competitive theatrical market while
attempting to limit the Company's exposure with respect to production and
acquisition costs through gap financing and co-production arrangements as
described below.
In certain circumstances, the Company acquires limited distribution or
sales rights and, in other circumstances, acquires worldwide rights (sometimes
including the copyright) to such films. Generally, this depends upon whether the
Company agrees to pay the producer or other owner of rights in the film (the
"rights owner") a substantial minimum guarantee. As part of its acquisition of
theatrical, video and/or television distribution rights, the Company may obtain
rights to exploit ancillary rights, such as music or sound track rights,
merchandising rights, or rights to produce CD-ROMs or other interactive media
17
<PAGE>
products. Although the Company may license such rights to sub-distributors,
historically the Company has not derived any significant revenues from these
ancillary rights.
The Company is sometimes appointed as the sales agent for a particular
motion picture to license, on behalf of the rights owner, distribution rights
in the film to various distributors for exploitation on a
territory-by-territory basis. This often occurs in many gap financing
arrangements, where a lender lends a portion of the production and/or
acquisition funds based upon the Company's estimated value of unsold
distribution rights. When the Company acts as a sales agent, in exchange for
its services as sales agent, the Company is generally entitled to a sales
agency fee which typically ranges from approximately 10% to 20% of the gross
revenues from resulting licenses or sales. In such circumstances, the Company
generally advances limited funds toward the marketing and distribution of the
film (generally ranging from approximately $50,000 to $150,000). In gap
financing arrangements a portion, or sometimes all, of the sales agency fee
(and some or all of the distribution expenses) may be deferred as part of the
sales agency arrangement until a specified level of revenues from sale and/or
licensing of the particular distribution rights is achieved.
In some circumstances, the Company acts in much the same manner as a
sales agent but, rather than licensing or selling the distribution rights of
a particular film to a third party on behalf of the rights owner, the Company
itself licenses the distribution rights in the film from the rights owner for
exploitation by the Company for a given term in a given territory (or
territories) and media. The remainder of this arrangement (the fee structure
and funds provided for marketing and distribution) remains similar to that of
a sales agency. As part of the changes in its operational strategy, the
Company currently intends to act in this manner, or as a sales agent, more
frequently than in recent years.
In both a sales agency arrangement and the distribution arrangement
described above, the amounts payable by the Company to the rights owner
depend upon the success of the Company in distributing the film and the
financial performance of the film itself. In acquiring distribution rights to
a completed or incomplete film, however, the Company will sometimes agree to
pay the rights owner a minimum guarantee that is independent of the financial
performance of the film. Historically, these minimum guarantees paid by the
Company have ranged from approximately $100,000 to $5,000,000, although in
some circumstances they may exceed such amounts. A minimum guarantee may be
payable in full at the time of delivery of the completed film to the Company,
as in a typical negative pickup arrangement, or in installments following
complete delivery of the film to the Company, depending upon the particular
arrangement. The rights owner may also receive additional payments as a
result of the Company's exploitation of the distribution rights to the film.
After receiving a distribution fee (generally a percentage of gross receipts
from exploitation of the distribution rights) and recovering its distribution
expenses and minimum guarantee, the Company pays the remainder of revenues in
excess of an ongoing distribution fee to the rights owner. The Company
typically receives a larger share of gross receipts from the distribution of
motion pictures for which it has provided a minimum guarantee than when it
does not. In addition, at times the minimum guarantee paid by the Company may
represent, in amount, all or a substantial portion of the film's production
costs. In those circumstances, such as a typical negative pickup entered into
by the Company, the Company generally receives worldwide distribution rights
in all media and generally will also obtain ownership of the copyright to the
film, with the production company from which the Company acquired the rights
receiving a production fee and generally a participation in net revenues from
distribution of the motion picture. As part of the changes in its operational
strategy, the Company presently intends to reduce the number of films for
which the Company provides minimum guarantees which represent the majority of
the final production costs of a film or for which the Company otherwise
finances all or substantially all of the films' production costs.
The Company's commitment to pay a minimum guarantee with respect to
films that have not begun production often enables the production company or
producer to obtain financing for its project, if needed. In some cases, the
Company's contractual commitment to pay a minimum guarantee upon delivery of
a film serves as sufficient collateral for a bank to lend production funds.
The bank will typically insure delivery of the film to the Company by
requiring the producer to purchase a completion guaranty. In order to enable
the production company or producer to borrow production funding, or to borrow
at preferential bank fees and interest rates, it may also be necessary for
the Company to secure its purchase or acquisition commitment, which, in the
past, it has generally done by obtaining the issuance of a letter of credit
from the Company's primary lenders, Coutts & Co., a subsidiary of National
Westminster Bank plc., and Berliner
18
<PAGE>
Bank A.G. However, as part of the recent change to the Company's credit
facility, such lenders will no longer make such letters of credit available,
which may limit this practice unless the Company can locate other lenders
willing to provide such letters of credit. See "Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources." In certain situations, the production
company or producer of a film may initially obtain certain funds from other
distribution companies which obtain distribution rights in certain media or
territories (for example, the domestic distribution rights or distribution
rights in Japan), from accessing foreign governmental film industry incentive
programs (such as programs offered in the past by England, Canada, Australia
and New Zealand) or by using its own resources or other resources available
to it, and then subsequently approach the Company to supply the remaining
funds necessary to complete or co-finance the film in exchange for the
Company's obtaining the remaining distribution rights to the motion picture.
As part of the changes in the Company's operational strategy, the Company
presently intends to seek to increasingly participate in co-financing
arrangements whereby the Company, in combination with other equity providers
(including producers, distributors in various territories, various
international governmental programs designed to incentivize film production
and other equity providers) commit to fund a portion of a particular film's
production costs. For example, ALEGRIA and ILLUMINATA, two films currently
slated for distribution by the Company in 1998, were co-production
arrangements of The Cirque de Soleil, Mainstream S.A. and Egmond Film &
Television BV; and of Victor Company of Japan (JVC), sogePaq S.A., and
Compagnia Distribuzione Internazionale SRL respectively. In addition, the
Company also intends to seek to further develop relationships with major
studios and expand the Company's executive producing role in connection with
motion pictures produced and distributed by other companies. For example in
May 1997, the Company concluded an executive producing arrangement with The
Walt Disney Company with respect to a project optioned by the Company
entitled "EMILY," whereby the Company will provide the services of Ellen
Little, its Co-Chairman, Co-Chief Executive Officer and President, in
exchange for an executive producer fee.
Of the 16 completed films which first became available to the Company
for distribution in 1997, only one film, MRS. DALLOWAY, was produced by the
Company (through a production company controlled by the Company). The Company
does not presently have plans to produce motion pictures itself in 1998. In
those circumstances where the Company produces a film, the Company's
production subsidiaries typically obtain production financing by obtaining
production loans using the Company's minimum guarantee commitment as
collateral, at times secured by a letter of credit issued under the Company's
credit facility. However, with respect to MRS. DALLOWAY, the Company provided
an unsecured minimum guarantee ($500,000 for domestic distribution rights to
both MRS. DALLOWAY and DIFFERENT FOR GIRLS) and substantially all of the
remaining production funds were provided by pre-sales and gap financing
provided by an unaffiliated motion picture financier. The Company attempts
to minimize the risks associated with any development and production
activities that it conducts, in a variety of ways. The Company does not
maintain a substantial staff of creative or technical personnel. The Company
also does not own or operate sound stage and related production facilities
generally referred to as a "studio" and does not have the fixed payroll,
general and administrative and other expenses resulting from ownership of a
studio. In addition, in those circumstances where the Company produces a
film, the Company generally attempts to acquire fully developed projects
ready for pre-production with, when feasible, completed scripts and directors
and/or cast members who are committed to or are interested in the project.
Many projects also have a producer involved or committed. However, if at the
time of acquisition by the Company of rights in a project, a producer is not
formally or informally committed to a project, the Company also may engage a
production services company or a producer to supervise and arrange all
pre-production, production and post-production activities in exchange for a
production fee and a participation in net revenues from the film.
19
<PAGE>
The following chart provides certain information regarding completed motion
pictures first made available to the Company for distribution during 1997. For
purposes of the chart, "Sales Agency" refers to those situations where the
Company licenses distribution rights to third parties on behalf of the rights
owner; "Straight Distribution" refers to those situations where the Company
itself licenses distribution rights to a film from the rights owner for
exploitation by the Company for a given term in a given territory (or
territories) and media; "Minimum Guarantee" refers to those situations where the
Company acquires rights to a film in exchange for an agreement by the Company to
pay a minimum guaranteed amount upon (or after) delivery of the film to the
Company for exploitation; "Negative Pickup" refers to those situations where,
upon payment of the minimum guarantee, the Company acquires worldwide rights in
all media, including copyright ownership; "Gap Financed" refers to those
situations where a lender has lent a portion of the production funds based upon
the Company's estimated value of unsold distribution rights; and "Minimum P&A
Commitment" refers to those situations where, as part of its acquisition of
rights, the Company commits to spend a minimum amount on prints and advertising
in connection with domestic theatrical release of the film. The chart includes
acquisitions of rights from unaffiliated production companies or other rights
owners, as well as from production companies owned or controlled by the Company.
<TABLE>
<CAPTION>
MOTION PICTURE GENRE TYPE OF ACQUISITION TERRITORIES ACQUIRED SELECTED CAST
TITLE ----- ------------------- -------------------- -------------
- -----
<S> <C> <C> <C> <C>
ALIVE AND KICKING Drama Minimum Guarantee The United States Jason Flemyng (STEALING BEAUTY, ROB ROY),
A/K/A INDIAN Antony Sher
SUMMER
THE DESIGNATED Drama Minimum Guarantee The United States Mike Nichols (director of THE GRADUATE, THE
MOURNER BIRDCAGE and POSTCARDS FROM THE EDGE),
Miranda Richardson
</TABLE>
20
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
(ENCHANTED APRIL, THE
CRYING GAME, DAMAGE)
DIFFERENT FOR Romantic Minimum Guarantee The United States Rupert Graves (THE MADNESS OF KING GEORGE,
GIRLS Comedy DAMAGE, A ROOM WITH A VIEW), Steven
Mackintosh (GENTLEMEN DON'T EAT POETS,
MEMPHIS BELLE)
EAT YOUR HEART Comedy Straight Distribution/Gap Universe, excluding all Linda Hunt (YEAR OF LIVING DANGEROUSLY),
OUT Financed rights in the following Christian Oliver, Laura San Giacomo (PRETTY
German-speaking countries: WOMAN), Pamela Segall
Austria, Germany,
Liechtenstein, Luxembourg
and Switzerland and the
television rights to the
German dubbed version for
Europe, including the
former Soviet Union
GODS AND MONSTERS Drama Sales Agency/Gap Financed World, excluding the Ian McKellen (BENT, RICHARD III, SIX DEGREES
(A.K.A FATHER OF United States and Canada OF SEPARATION), Brendan Fraser (GEORGE OF THE
FRANKENSTEIN) JUNGLE, MRS. WINTERBOURNE, AIRHEADS), Lolita
Davidovich (JUNGLE TO JUNGLE, NOW AND THEN,
INTERSECTION, COBB, RAISING CAIN, BLAZE,
ADVENTURES IN BABYSITTING), Lynn Redgrave
(SHINE, MIDNIGHT)
FIRST TO GO Comedy Minimum Guarantee World, excluding the Mark Harmon (THE LAST SUPPER, WYATT EARP),
United States and English- Zach Galligan (CUPID, ICE), Laurel Hollomon,
speaking Canada Corin Nemec (THE WAR AT HOME)
GODMONEY Drama Minimum Guarantee World Christi Allen (QUIZ SHOW, CLOCKERS, BOXED
MOONLIGHT), Rick Rodney, Bobby Field
JERUSALEM Drama Straight Distribution United States and Canada Marie Bonnerie, Vif Friberg, Lena Endre,
Pernilla August, Olympia Dukakis (MIGHTY
APHRODITE, MR. HOLLAND'S OPUS, STEEL
MAGNOLIAS, MOONSTRUCK), Max Von Sydow (A
KISS BEFORE DYING, AWAKENING, HANNAH AND HER
SISTERS)
LIFEBREATH Drama Minimum Guarantee World Luke Perry (BUFFY THE VAMPIRE SLAYER, THE
FIFTH ELEMENT), Francie Swift (THE SCARLET
LETTER), Gia Carides (PRIMARY COLORS)
MARCELLO
MASTROIANNI: I Documentary Straight Distribution The United States Documentary on Marcello Mastroianni
REMEMBER
A MERRY WAR A/K/A Romantic Minimum Guarantee World excluding the UK Helena Bonham Carter (WINGS OF THE DOVE),
KEEP THE Comedy Richard E. Grant (TWELFTH NIGHT, MIGHTY
ASPIDISTRA FLYING APHRODITE, PORTRAIT OF A LADY, AGE OF
INNOCENCE)
MRS. DALLOWAY Drama Minimum Guarantee/Gap World excluding The Vanessa Redgrave (MISSION IMPOSSIBLE,
Financed Netherlands and certain SMILLA'S SENSE OF SNOW), Rupert Graves (THE
rights in the UK MADNESS OF KING GEORGE, A ROOM WITH A VIEW),
Natascha McElhone (THE DEVIL'S OWN, SURVIVING
PICASSO)
QUIET DAYS IN Drama Straight Distribution World, excluding German- Peter Dobson (THE FRIGHTENERS, BIG SQUEEZE,
HOLLYWOOD speaking Europe FORREST GUMP), Chad Lowe (FLOATING, DO ME A
FAVOR), Daryl Mitchell (WHITE LIES, SGT.
BILKO), Meta Golding (KISS THE GIRLS),
Natasha Gregson Wagner (TWO GIRLS AND A GUY,
LOST HIGHWAY), Bill Cusack (CON AIR, ED WOOD,
THE FUGITIVE), Stephen Mailer (A LEAUGE OF
THEIR OWN, REVERSAL OF FORTUNE)
SIX-STRING Action Sales Agency/Gap Financed World, excluding United Justin McGuire, Jeffrey Falcon
SAMURAI States and English-
speaking Canada
STAND-INS Drama Negative Pick-Up World Daphne Zuniga (CITY SCRAPES, NAKED IN THE
COLD SUN, MAD AT THE MOON), Costas Mandylor
(JUST WRITE, VIRTUOSITY, THE DOORS, TRIUMPH
OF THE SPIRIT), Jordan Ladd (NETNAPPED,
NOWHERE, EMBRACE OF THE VAMPIRE), Sammi Davis
(FOUR ROOMS, HOPE AND GLORY, A PRAYER FOR THE
DYING, MONA LISA), Missy Crider (BUGBUST),
Katherine Heigl (WISH UPON A STAR, UNDER
SEIGE 2, KING OF THE HILL), Charlotte Chatton
(TITANIC, HELLRAISER -BLOODLINE, DAKOTA
ROAD).
</TABLE>
21
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
THE TIC CODE Drama Straight Distribution/Gap World Gregory Hines (THE PREACHER'S WIFE, WAITING
Financed TO EXHALE, RENAISSANCE MAN, THE COTTON CLUB),
Polly Draper (HUDSON RIVER BLUES, THE PICK-UP
ARTIST, MAKING MR.RIGHT) Christopher George
Marquette (ALWAYS SAY GOODBYE)
</TABLE>
THE COMPANY'S FILM LIBRARY OF DISTRIBUTION RIGHTS
The Company's film library consists of rights to a broad range of films,
most of which were produced since 1980. As of April 15, 1998, the Company
had various distribution rights to approximately 220 motion pictures
(including approximately 77 motion pictures in which the Company owns an
interest in the copyright and approximately 58 motion pictures for which the
Company acts as sales agent on behalf of the producer or other owner of
rights in the film). The Company's distribution rights generally range from
12 to 25 years or more from the date of acquisition, and typically extend to
many, if not all, media of exhibition worldwide or in specified territories.
In addition to exploitation of distribution rights to motion pictures in
its library in the major media (theatrical, video and television), in certain
situations the Company is able to exploit various ancillary rights in such
films. For example, in September 1997 the Company sold the rights to produce
a second sequel and a television series of The Prophecy for $750,000. The
Company has also arranged for the music in several motion pictures it has
distributed to be released as soundtrack recordings (including KEEP THE
ASPIDISTRA FLYING, MRS. DALLOWAY, THE SECRET OF ROAN INISH, PARTY GIRL, THE
BIG SQUEEZE, and INFINITY). Although exploitation of these soundtrack and
other ancillary rights has not generated significant revenues for the Company
to date, the Company's ownership or control of ancillary rights to motion
pictures in its library (including interactive rights, remake rights and
merchandising rights, among others) may provide future sources of additional
revenues.
MAJOR CUSTOMERS
Since January 1, 1995, only three customers have accounted for more than
10% of the Company's revenues (including for this purpose revenues of Pre-Merger
Overseas) in any full fiscal year: none in 1997, three in 1996 (BMG Video with
$3,068,000 or 10.7%, Helkon Media Filmvertrieb gmbH with $3,490,000 or 12.2% and
Columbia TriStar and its affiliates with $2,940,000 or 10.3%); and one in 1995
(Columbia TriStar and its affiliates with $4,366,000 or 20.1%).
EMPLOYEES
At April 15, 1998, the Company employed a total of 28 full-time
employees. Certain subsidiaries of the Company are, for certain films,
subject to the terms in effect from time to time of various industry-wide
collective bargaining agreements, including the Writers Guild of America, the
Directors Guild of America, the Screen Actors Guild and the International
Alliance of Theatrical Stage Employees. In certain circumstances, the Company
assumes a production company's obligation to pay residuals to these various
entertainment guilds and unions. A new industry-wide collective bargaining
agreement with the Screen Actors Guild is scheduled for a ratification vote
by the board of the Guild and, assuming board passage, by the members of the
Guild. A strike, job action or labor disturbance by the members of any of
these entertainment guilds and unions (including potentially by the members
of the Screen Actors Guild in the event the proposed agreement is not
ratified) could have a material adverse effect on the production of a motion
picture within the United States, and, consequently, on the business,
operations and results of operations of the Company. These organizations have
all engaged in strikes and similar activities. The Company believes that its
current relationship with its employees is satisfactory.
COMPETITION
22
<PAGE>
Motion picture distribution, finance and production are highly
competitive businesses. The competition comes both from companies within the
same business and from companies in other entertainment media which create
alternative forms of leisure entertainment. The Company competes with major
film studios (including The Walt Disney Company, Paramount Pictures
Corporation, Universal Pictures, Columbia Pictures, Twentieth Century Fox,
Warner Brothers Inc. and MGM/UA) and their affiliates (including such
previously independent companies as Miramax, October, and New Line Cinema)
which are dominant in the motion picture industry. The Company also competes
with numerous independent motion picture production and distribution
companies, as well as numerous foreign motion picture production and
distribution companies. Many of the organizations with which the Company
competes have significantly greater financial and other resources than does
the Company. The Company's ability to compete successfully depends upon the
continued availability of independently produced, domestic and foreign motion
pictures and the Company's ability to identify and acquire distribution
rights and to distribute motion pictures successfully. A number of formerly
independent motion picture companies have been acquired in recent years by
major entertainment companies. These transactions have significantly
increased competition for the acquisition of distribution rights to
independently produced motion pictures by eliminating some available sources
of independently produced films and providing greater financial resources to
other previously independent companies engaged in the business of acquiring
distribution rights to independently produced films and distributing such
films.
Films distributed or financed by the Company also compete for audience
acceptance and exhibition outlets with motion pictures distributed and
produced by other companies. As a result, the success of any of the films
distributed or financed by the Company is dependent not only on the quality
and acceptance of that particular film, but also on the quality and
acceptance of other competing films released into the marketplace at or near
the same time. With respect to the Company's domestic theatrical releasing
operations, a substantial majority of the motion picture screens in the
United States are typically committed at any one time to films distributed
nationally by the major film studios, which generally buy large amounts of
advertising on television and radio and in newspapers and can command greater
access to available screens. Although some exhibitors specialize in the
exhibition of independent, specialized motion pictures and "art-house" films,
there is intense competition for screen availability for these films as well.
Given the substantial number of motion pictures released theatrically in the
United States each year, competition for exhibition outlets and audiences is
intense. In addition, there have also been rapid technological changes over
the past fifteen years. Although technological developments have resulted in
the creation of additional revenue sources from the licensing of rights with
respect to such new media, such developments have also resulted in the
popularity and availability of alternative and competing forms of leisure
time entertainment, including pay/cable programming, and home entertainment
equipment such as videocassettes, interactive games and computers.
REGULATION
In 1994, the United States was unable to reach agreement with its major
international trading partners to include audio-visual works, such as television
programs and motion pictures, under the terms of the General Agreement on Trade
and Tariffs Treaty ("GATT"). The failure to include audiovisual works under GATT
allows many countries (including members of the European Union, which consists
of Belgium, Denmark, Germany, Greece, Spain, France, Ireland, Italy, Luxembourg,
The Netherlands, Portugal and the United Kingdom) to continue enforcing quotas
that restrict the amount of United States produced television programming which
may be aired on television in such countries. The Council of Europe has adopted
a directive requiring all member states of the European Union to enact laws
specifying that broadcasters must reserve a majority of their transmission time
(exclusive of news, sports,
23
<PAGE>
game shows and advertising) for European works. The directive does not itself
constitute law, but must be implemented by appropriate legislation in each
member country. In addition, France requires that original French programming
constitute a required portion of all programming aired on French television.
These quotas generally apply only to television programming and not to
theatrical exhibition of motion pictures, but quotas on the theatrical
exhibition of motion pictures could also be enacted in the future. There can be
no assurance that additional or more restrictive theatrical or television quotas
will not be enacted or that countries with existing quotas will not more
strictly enforce such quotas. Additional or more restrictive quotas or more
stringent enforcement of existing quotas could materially and adversely affect
the business of the Company by limiting the ability of the Company to exploit
fully its rights in motion pictures internationally and, consequently, to assist
or participate in the financing of such motion pictures.
Distribution rights to motion pictures are granted legal protection under
the copyright laws of the United States and most foreign countries, which laws
provide substantial civil and criminal sanctions for unauthorized duplication
and exhibition of motion pictures. Motion pictures, musical works, sound
recordings, art work, still photography and motion picture properties are
separate works subject to copyright under most copyright laws, including the
United States Copyright Act of 1976, as amended. Management of the Company is
aware of reports of extensive unauthorized misappropriation of videocassette
rights to motion pictures, which may include motion pictures distributed by the
Company. Motion picture piracy is an industry-wide problem. The Motion Picture
Association of America ("MPAA"), an industry trade association, operates a
piracy hotline and investigates all reports of such piracy. Depending upon the
results of such investigations, appropriate legal action may be brought by the
owner of the rights. Depending upon the extent of the piracy, the Federal Bureau
of Investigation may assist in these investigations and related criminal
prosecutions.
Motion picture piracy is an international as well as a domestic problem.
Motion picture piracy is extensive in many parts of the world, including South
America, Asia (including Korea, China and Taiwan), the countries of the former
Soviet Union and other former Eastern bloc countries. In addition to the MPAA,
the Motion Picture Export Association, the American Film Marketing Association
and the American Film Export Association monitor the progress and efforts made
by various countries to limit or prevent piracy. In the past, these various
trade associations have enacted voluntary embargoes of motion picture exports to
certain countries in order to pressure the governments of those countries to
become more aggressive in preventing motion picture piracy. In addition, the
United States government has publicly considered trade sanctions against
specific countries which do not prevent copyright infringement of United States
produced motion pictures. There can be no assurance that voluntary industry
embargoes or United States government trade sanctions will be enacted. If
enacted, such actions could impact the amount of revenue that the Company
realizes from the international exploitation of motion pictures depending upon
the countries subject to such action and the duration of such action. If not
enacted or if other measures are not taken, the motion picture industry
(including the Company) may continue to lose an indeterminate amount of revenues
as a result of motion picture piracy.
The Code and Ratings Administration of the MPAA assigns ratings indicating
age-group suitability for theatrical distribution of motion pictures. The
Company sometimes, although not always, submits its motion pictures for such
ratings. In certain circumstances, motion pictures that the Company does not
submit for rating to the Code and Ratings Administration of the MPAA might have
received restrictive ratings had such motion pictures been submitted for rating,
including, in some circumstances, the most restrictive rating, which prohibits
theatrical attendance by persons below the age of seventeen. Unrated motion
pictures (or motion pictures receiving the most restrictive rating) may not be
exhibited by certain theatrical exhibitors or in certain locales, thereby
potentially reducing the total revenues generated by such films. United States
television stations and networks, as well as foreign governments, impose
24
<PAGE>
additional restrictions on the content of motion pictures which may restrict
in whole or in part theatrical or television exhibition in particular
territories. In 1997, the major broadcast networks and the major television
production companies (which consist primarily of the "major" films studios
referred to in "Competition" above) implemented a system to rate television
programs. At this time such television rating system has not had a material
adverse effect on the motion pictures distributed by the Company. However,
the possibility exists that the sale of theatrical motion pictures for
broadcast on domestic free television may become more difficult because of
potential advertiser unwillingness to purchase advertising time on television
programs that are rated for limited audiences. There can be no assurance
that current and future restrictions on the content of motion pictures may
not limit or adversely affect the Company's ability to exploit certain motion
pictures in certain territories and media.
ITEM 2. PROPERTIES.
The Company's principal executive offices are located at 8800 Sunset
Boulevard, Third Floor, Los Angeles, California 90069 and consist of
approximately 10,000 square feet leased by the Company, the lease for which
expires on September 30, 2002. Currently the monthly lease rate is $2.00 per
square foot. Under the terms of the lease, the Company will also pay a
percentage of operating costs, above a base year calculation, beginning in
October 1999. The Company does not maintain any studio facilities or own any
real estate, and its lease is with an unaffiliated party.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not, as of April 15, 1998, a party to any litigation.
25
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
26
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET PRICE
The Company's Common Stock is quoted on the OTC Bulletin Board under the
symbol "OSFG." The Company's 4,500,000 Warrants to Purchase Common Stock (each
warrant entitling the registered holder to purchase one share of Common Stock at
an exercise price of $5.00 per share, subject to adjustment, until 5:00 p.m. New
York City time on February 16, 2002) (the "Warrants") are also quoted on the OTC
Bulletin Board under the Symbol "OSFGW." The following table sets forth the
high and low closing bid quotations for the periods indicated. The quotations
represent prices between dealers and do not include retail markups or markdowns
or commissions. They may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
COMMON STOCK WARRANTS
FISCAL 1996 HIGH LOW HIGH LOW
<S> <C> <C> <C> <C>
First Quarter $4-3/4 $4-3/5 $1 $5/8
Second Quarter 5-5/16 4-5/8 1-3/8 11/16
Third Quarter 5-5/16 5-1/8 1-3/8 7/8
Fourth quarter 5-3/8 4-5/8 1-3/8 1/2
FISCAL 1997 HIGH LOW HIGH LOW
First Quarter 4-5/8 3-1/2 1 19/64
Second Quarter 3-9/32 1-3/8 1/2 1/8
Third Quarter 2-13/16 1-13/16 3/8 1/4
Fourth Quarter 2-3/8 2 3/8 1/4
FISCAL 1998
First Quarter 2-1/2 1-13/16 5/16 1/8
Second Quarter (through April 2-1/8 1-21/32 3/16 3/16
23, 1998)
</TABLE>
HOLDERS
As of April 21, 1998, there were approximately fourteen holders of
record of the Company's Common Stock, and there were 5,732,778 shares of
Common Stock issued and outstanding of the 25,000,000 shares authorized. As
of April 21, 1998, there were approximately six holders of record of the
Company's Warrants. See note 8 of the notes to the Company's Consolidated
Financial Statements for information regarding certain additional securities
which have been issued by the Company.
DIVIDENDS
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<PAGE>
The Company has not paid cash dividends on its Common Stock (other than S
Corporation distributions made by Pre-Merger Overseas to its stockholders) and
the Company presently intends to retain future earnings to finance the expansion
and development of its business and not pay dividends on its Common Stock. Any
determination to pay cash dividends in the future would be at the discretion of
the Company's Board of Directors and would be dependent upon the Company's
results of operations, financial condition, contractual restrictions and other
factors deemed relevant at that time by the Company's Board of Directors. In
addition, certain covenants in the Company's credit facility substantially
restrict payment of cash dividends.
ITEM 6. SELECTED FINANCIAL DATA.
The following tables set forth selected financial data for the Company
which has been derived from the Company's financial statements as of and for
each of the five years ended December 31, 1997 which have been audited by Price
Waterhouse LLP, independent accountants. The selected financial data set forth
below should be read in conjunction with the Consolidated Financial Statements
of the Company, together with the related notes thereto included elsewhere
herein, and "Item 7 - Management's Discussion and Analysis of Financial
Condition And Results Of Operations."
28
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues $17,951,977 $20,734,094 $21,672,510 $28,677,571 $22,494,256
Film costs 13,962,255 16,395,902 16,320,694 23,058,000 19,152,847
Selling, general and administrative 2,401,509 2,151,214 2,721,745 3,595,660 3,509,122
Income (loss) from operations 1,588,213 2,186,978 2,630,071 2,023,910 (167,713)
Income (loss) before income taxes 1,997,872 2,441,960 2,894,066 1,665,269 (837,277)
Income taxes(1) 300,628 296,487 432,905 3,131,367 (293,357)
Net income (loss) 1,697,244 2,145,473 2,461,161 (1,466,098) (543,920)
Basic and diluted net income (loss) per share .53 .68 .77 (.41) (.09)
Weighted average number of shares outstanding 3,177,778 3,177,778 3,177,778 3,611,111 5,747,778
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Film costs, net of accumulated
amortization $10,808,032 $12,377,123 $17,349,071 $28,358,324 $29,740,567
Total assets 20,311,146 24,684,518 28,954,796 40,803,685 46,560,320
Notes payable, banks 3,700,000 6,058,279 7,421,893 16,607,137 23,142,184
Total liabilities 11,993,609 14,874,057 17,506,422 28,611,919 34,999,208
Total equity 8,317,537 9,810,461 11,448,374 12,191,766 11,561,112
</TABLE>
NOTES TO SELECTED FINANCIAL DATA
(1) From January 1, 1989 to October 31, 1996, Pre-Merger Overseas
operated as an S Corporation under Subchapter S of the Internal Revenue Code.
During the year ended December 31, 1996, the Company recorded a one-time,
non-recurring deferred federal income tax charge of $2,600,000 relating to
the termination of Pre-Merger Overseas' S corporation status which occurred
upon the date of the Merger, October 31, 1996.
29
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company specializes in the acquisition and worldwide license or sale
of distribution rights to independently-produced feature films in a wide
variety of genres. The Company obtains rights to motion pictures at various
stages of completion (either completed, in production or in development) and
licenses distribution rights (including theatrical, video, pay television,
free television, satellite and other ancillary rights) of such motion
pictures to various sub-distributors in the United States and in foreign
markets, as well as directly distributing certain motion pictures in the
domestic theatrical market under the name "First Look Pictures." The
licensing of distribution rights to foreign distributors and sub-distributors
in the major international territories or regions has historically been the
Company's primary focus, accounting for a substantial portion of the
Company's total revenues. In fiscal 1995, 1996 and 1997, approximately 66%,
72% and 77% of the Company's revenues were derived from such activities.
The films distributed by the Company in 1997 generally performed
disappointingly, in part due to (i) changes in the marketplace for
independent films including the reduced demand by retail video stores and
video subdistributors for films which have not had significant theatrical
release (none of the six films released theatrically in the United States by
the Company through First Look Pictures in 1997 generated more than $211,000
in United States box office receipts and nine films first available for
distribution by the Company in 1997 had no theatrical release), (ii) the
failure of films released theatrically by the Company in the U.S. to achieve
significant audience and subdistributor acceptance, and (iii) the weakened
demand for film rights in Asia due to the region's recent financial crisis.
In order to seek to improve the Company's cash flow and address the factors
which led to the disappointing performance of the Company's films in 1997, as
well as in response to the operating limitations imposed by the recent
agreement between the Company and its commercial lenders with respect to the
Company's credit facility, the Company has been implementing changes in its
operational strategies.
The Company presently intends to alter the frequency in which it engages
in various acquisition, distribution and financing arrangements by (i)
reducing the number of films for which the Company provides minimum
guarantees which represent the majority of the final production costs of a
film or for which the Company otherwise finances all or substantially all of
the film's production costs; (ii) acting as sales agent or engaging in
"straight distribution" more frequently than in recent years (including under
"gap financing" arrangements); (iii) limiting the instances in which the
Company itself produces motion picture projects; and (iv) reducing the number
of films First Look Pictures releases annually. The Company currently
anticipates that, in most circumstances, it will not proceed with a First
Look Pictures release unless outside sources of funds for print and
advertising costs are available to the Company in connection with such
release. In addition, the Company presently intends to increasingly
participate in co-financing arrangements, further develop relationships with
major studios and expand the Company's executive producing role in connection
with motion pictures produced and distributed by other companies, emphasize
films with more recognizable cast, directors and producers and greater
production values (often through offering greater creative opportunity to
talent than major studios offer or as a result of larger budgets) and which
may accordingly have broader appeal in the competitive theatrical market--and
seek to develop relationships with emerging and established talent and to
maintain relationships with independent producers with reputations for
producing high quality films while also controlling costs. The Company is
currently exploring obtaining additional sources of capital (including equity
and debt financing). There can be no assurance, however, that such additional
capital will be available or available on terms advantageous to the Company.
For additional information on these operational strategies, See "Item
1--Strategic Objectives," "Motion Picture Distribution by the Company," and
"Acquisition of Rights by the Company, Production and Financing" below. No
assurances can be given that any or all of such strategies will be fully or
partially realized, as their successful implementation depends upon, among
other things, the ability of management of the Company to implement such
strategies and the availability of sufficient capital. In addition, for
several reasons, including (i) the likelihood of continued industry-wide
increases in acquisition, production and marketing costs and (ii) the
Company's intent, based upon its ongoing strategy, to acquire rights to or
produce films which have greater production values (often as a result of
larger budgets), the Company's costs and expenses, and thus the capital
required by the Company in its operations and the associated risks faced by
the Company may increase in the future.
GENERAL
In situations where, prior to the availability of a motion picture, the
Company is paid a minimum guarantee or other payment from the licensing of
distribution rights to foreign or domestic sub-distributors, the minimum
guarantee or other payment is recorded as deferred revenue and is recognized
at such time as the motion picture is available for release by the
sub-distributor. In most other cases, revenue is recognized at such time as
the motion picture is available for release by the sub-distributor and
revenues are earned pursuant to the terms of the Company's agreement with the
sub-distributor. The timing of actual cash payments by sub-distributors to
the Company of minimum guarantees and other amounts earned by the Company
varies in accordance with the contractual terms of each agreement. Certain
payments to the Company are made prior to the recognition of income while
other payments to the Company are made after revenue is recognized. When the
Company distributes a motion picture directly to the domestic theatrical
market, revenue is recognized over the period of exhibition of the motion
picture. However, cash payments to the Company by a theatrical exhibitor
typically are not made until the close of the film's engagement in the
exhibitor's theaters or chain of theaters. Since the Company's specialized or
"art-house" releases can at times have extended runs and are often exhibited
by a substantial number of independent theatre owners for which it can be
comparatively more difficult to monitor and enforce timely payment than with
national theatre chains, payment to the Company by theatre chains is often
not made for four to nine months from initial release for successful
releases, or longer. Revenues from the direct license by the Company of
distribution rights to a pay television service are generally recognized at
such time as the motion picture is available for telecast by such service and
the license agreement begins. Cash payments to the Company from such services
are generally made from between 60 and 90 days after the initial airing of
the film on the pay television service.
Film costs represent a major component of the Company's assets. Film costs
represent those costs incurred in the acquisition and distribution of motion
pictures or in the acquisition of distribution rights to motion pictures. This
includes minimum guarantees paid to producers or other owners of film rights,
recoupable distribution and production costs, and capitalized interest and
overhead. The Company amortizes film costs using the individual film forecast
method under which film costs are amortized for each film in the ratio that
revenue earned in the current period for such film bears to management's
estimate of the total revenue to be realized from all media and markets for such
film. Management of the
30
<PAGE>
Company regularly reviews its revenue and cost forecasts and revises such
estimates for each film, as necessary, when warranted by management's appraisal
of current market conditions. This may result in a change in the rate of
amortization and write-downs to net realizable value. Net income in future years
is in part dependent upon the Company's amortization of its film costs and may
be significantly affected by periodic adjustments in such amortization.
The following table sets forth the Company's unamortized film costs as of
December 31, 1995, 1996 and 1997:
<TABLE>
<CAPTION>
As of December 31,
------------------
1995 1996 1997
<S> <C> <C> <C>
Films in release,
net of accumulated amortization $12,162,975 $25,838,106 $26,781,682
Films not yet available for release 5,186,096 2,520,218 2,958,885
----------- ----------- -----------
$17,349,071 $28,358,324 $29,740,567
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The increases in unamortized film costs from fiscal 1995 to 1996 and from
fiscal 1996 to 1997 generally reflect expansion of the Company's operations,
including increased acquisition of motion picture rights, and financing of
motion picture production. Based upon the Company's estimate as of December
31, 1997 of projected gross revenues, approximately 75% of unamortized film
costs applicable to films released as of such date are currently expected by
the Company to be amortized over the three-year period ending December 31,
2000.
The Company typically acquires distribution rights in a motion picture
for a specified term in one or more territories and media. See "Item 1 -
Business -Acquisition of Rights by the Company, Production and Financing."
In some circumstances, the Company also acquires the copyright to the motion
picture. The arrangements the Company enters into to acquire rights may
include the Company agreeing to pay an advance or minimum guarantee for the
rights acquired and/or agreeing to advance print and advertising costs,
obligations which are independent of the actual financial performance of the
motion picture being distributed. The risks incurred by the Company
dramatically increase to the extent the Company takes such actions. The
Company committed to pay an advance or minimum guarantee or advance print and
advertising costs with respect to approximately nine films initially released
in 1997 (for an aggregate commitment in excess of the aggregate "pre-sale" or
"pre-license" commitments obtained from sub-distributors with respect to such
films of approximately $5,854,750). The Company also incurs significant risk
to the extent it engages in development or production activities itself
(although the Company does not currently have any plans to produce any motion
picture projects in 1998). While the Company may, in certain circumstances,
reduce some of the foregoing risks by sub-licensing certain distribution
rights in exchange for minimum
31
<PAGE>
guarantees from sub-licensees such as foreign sub-distributors, the risks
incurred by the Company are generally greater the greater the "investment" by
the Company in a motion picture. This "investment" by the Company in a motion
picture includes the cost of acquisition of the distribution rights (including
any advance or minimum guarantee paid to the producer), the amount of the
production financed, and the marketing and distribution costs borne.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
(SFAS No. 128). SFAS No. 128, effective for periods ending after December 15,
1997, revises the computation, presentation, and disclosure requirements of
earnings per share. Principal among computation revisions is the replacement
of primary earnings per share with basic earnings per share, which does not
consider common stock equivalents. In addition, SFAS No. 128 modifies
certain dilutive computations and replaces fully diluted earnings per share
with diluted earnings per share. Options and warrants representing common
shares of 7,402,500 and 7,382,500 were excluded from the average number of
common and common equivalent shares outstanding in the diluted earnings per
share calculation for the years ended December 31, 1997 and 1996,
respectively, because they were anti-dilutive. The Company has adopted SFAS
No. 128 for the year ended December 31, 1997 and has restated prior periods
presented to conform to SFAS No. 128.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues decreased by $6,183,315 (21.6%) to $22,494,256 for the year
ended December 31, 1997 from $28,677,571 for the year ended December 31,
1996. The decrease in revenues was due in part to the timing of revenue
recognition under applicable accounting standards and the nature of the films
first available for distribution in the year ended December 31, 1997 compared
to films first available for distribution in the year ended December 31,
1996. In situations where the Company licenses distribution rights of a
particular film to subdistributors prior to the availability of the motion
picture in exchange for a minimum guaranteed payment ("pre-sales"), the
pre-sales are not recognized. Instead, the pre-sales are recognized at such
time as the motion picture is available for release by the sub-distributor
and revenues are earned pursuant to the terms of the Company's agreement with
the sub-distributor. For the year ended December 31, 1996, of the films
first available for distribution, four films had pre-sales in excess of
$2,000,000 each. By comparison, for the year ended December 31, 1997 one
film became available with pre-sales in excess of $2,000,000. The decrease
in revenues also resulted from an increasing preference of retail video
stores and video subdistributors in the United States and internationally for
films which have achieved significant theatrical box-office success, and
decreased revenues generated by the Company's domestic theatrical releasing
operation, First Look Pictures (approximately $358,081 for the year ended
December 31, 1997 compared to approximately $1,490,882 for the year ended
December 31, 1996). Additionally, included in the revenues for the year ended
December 31, 1997 were approximately $1,448,000 of revenues from sales and
licenses of distribution rights to subdistributors relating to the
territories of Asia, a reduction of 54% from approximately $3,122,000 in
1996. The decrease is partly due to the general economic difficulties the
region is currently experiencing which may impact revenues in future periods.
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<PAGE>
Film costs as a percentage of revenues increased to 85.1% for the year
ended December 31, 1997 from 80.4% (after certain reclassifications for the
year ended December 31, 1996. This increase was primarily due to increased
write downs to net realizable value of various film costs including JERUSALEM
($212,711), THE DESIGNATED MOURNER ($895,428), JOHNS ($270,000) and ALIVE AND
KICKING a.k.a. INDIAN SUMMER ($121,586). Additionally, although the Company
recognized approximately $2,439,112 in gross revenues relating to these four
films as well as two films written down in 1996 (INFINITY and THE BIG
SQUEEZE), no gross margin resulted from these revenues. Gross margins vary
from film to film based upon many factors including the amount of the
Company's investment in a particular film. In some cases, the Company is
entitled to only a distribution fee based upon a percentage of the film's
gross revenues in a particular territory or territories and media. In other
circumstances, the Company may have a substantial investment in the film (for
example, as a result of minimum guarantee commitments, rights acquisition
costs, or print and advertising commitments) and is dependent upon the film's
actual performance in order to generate a positive gross margin. Other
factors that impact gross margins include market acceptance of a film, the
budget of the film, and management's analysis of the motion picture's
prospects (which under the individual film forecast method impacts the rate
of amortization).
Selling, general and administrative expenses, net of amounts capitalized
to film costs, decreased by $86,538 (2.4%) to $3,509,122 for the year ended
December 31, 1997 from $3,595,660 for the year ended December 31, 1996. The
Company capitalizes certain overhead costs incurred in connection with its
acquisition of rights to a motion picture and creation of marketing materials
for a motion picture by adding such costs to the capitalized film costs of
the motion picture. The decrease in selling, general and administrative
expenses, net of amounts capitalized to film costs, was primarily due to
decreased bad debt expense as well as a reduced bad debt reserve
(approximately $269,550), reduced compensation as a result of fewer personnel
(approximately $105,369), the reduction of reimbursed overhead inccurred by a
sales representative located in the U.K. (approximately $79,696) and general
cutbacks in various additional operational areas. The savings were partially
offset by increased costs in the administrative areas related to compliance
with SEC reporting requirements as well as other costs associated with the
Company being a publicly traded corporation, including accounting fees
(approximately $122,784), legal expenses (approximately $132,570), directors
and officers insurance (approximately $80,017), corporate publicity
(approximately $105,014) and other related expenses.
Net other expense increased by $310,922 (87%) to $669,564 for the year
ended December 31, 1997 from $358,642 (after certain reclassifications) for
the year ended December 31, 1996. The increase resulted from increased
interest expense, net of capitalized interest, of $284,483 over the prior
year primarily relating to debt associated with film facilities. The Company
capitalizes interest associated with its acquisition of motion pictures to
the applicable motion picture's film costs during the film's acquisition
period which includes creation of marketing materials, until such pictures
are fully delivered and available.
As a result of the above, the Company, incurred a loss before income
taxes for the year ended December 31, 1997 of $837,277 compared to income
before income taxes of $1,665,269 for the year ended December 31, 1996.
The Company's tax provision for 1997 includes a federal income tax
benefit of $505,800 relating to the pre-tax loss recognized in 1997. The
balance of the income tax provision includes a state income tax benefit for
1997 of approximately $18,800 and foreign tax withholdings of approximately
$231,243 on revenues generated in certain countries during 1997 that are
required to withhold taxes on film royalties paid to a U.S. company.
33
<PAGE>
Pre-Merger Overseas was an S-Corporation for federal income tax purposes and,
accordingly, was not subject to federal income taxes for periods from 1989
through the date of the Merger. See "Certain Tax Related Matters" below.
The Company's tax provision for 1996 includes a one-time, non-recurring
deferred federal income tax charge of approximately $2,600,000 relating to
the termination of Pre-Merger Overseas' S corporation status which occurred
immediately upon the Merger (October 31, 1996). The balance of the income tax
provision for the year ended December 31, 1996 represents federal income tax
of approximately $190,000 on income of the Company for the two months
following the Merger, state income taxes for the year of approximately
$110,000 and foreign tax withholdings of approximately $231,367. The
Company's effective tax rate decreased to approximately 35% for the year
ended December 31, 1997 to approximately 188% for the year ended December 31,
1996 primarily as a result of the non-recurring deferred federal income tax
charges occurring in 1996.
As a result of the foregoing the Company had a net loss for the year
ended December 31, 1997 of $543,920 compared to a net loss for the year ended
December 31, 1996 of $1,466,098.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues increased by $7,005,061 (32.3%) to $28,677,571 for the year ended
December 31, 1996 from $21,672,510 for the year ended December 31, 1995. The
increase was primarily due to a greater number of larger budget films (generally
reflecting higher production values) becoming available for distribution and
generating relatively greater revenues than some of the Company's smaller budget
films, generally reflecting a marketplace preference during such period for
films with greater production values. During the year ended December 31, 1996,
21 motion pictures each generated in excess of $200,000 in revenues, with an
aggregate of $24,426,627, or 85.2%, of total revenues for such year attributable
to those films. For the year ended December 31, 1995, 20 motion pictures each
generated in excess of $200,000 in revenues, with an aggregate of $16,584,445,
or 76%, of total revenues, for such year attributable to those films.
Film costs as a percentage of revenues increased to 80.4% (after certain
reclassifications) for the year ended December 31, 1996 from 75.3% for the
year ended December 31, 1995. This increase was primarily due to a write down
of approximately $674,000 on the film "Infinity" and approximately $88,000 on
the film "The Big Squeeze." Additionally, although the Company recognized
$4,568,774 in gross revenues relating to these two films, no gross margin
resulted from either film.
Selling, general and administrative expenses, net of amounts capitalized
to film costs, increased by $873,915 (32.1%) to $3,595,660 for the year ended
December 31, 1996 from $2,721,745 for the year ended December 31, 1995. The
increase in selling, general and administrative expenses, net of amounts
capitalized to film costs, was primarily due to generally greater numbers of
personnel in the year ended December 31, 1996 over that of the prior year,
increased personnel costs related thereto, and bonuses of approximately
$175,000 paid to the Company's executive officers (other than Ellen Dinerman
Little and Robert B. Little) relating to the Merger. Additionally, bad debt
expense reflecting subdistributor cancellations for the year ended December
31, 1996 was approximately $100,000 greater than the year ended December 31,
1995.
Other income (expense) decreased by $622,637 (236%) to ($358,642) for the
year ended December 31, 1996 from $263,995 for the year ended December 31, 1995.
The decrease was primarily the result of increased interest expense, net of
capitalized interest, of $479,546 over the prior year, as well
34
<PAGE>
as decreased discounts from suppliers of approximately $85,000 in the year ended
December 31, 1996 compared to December 31, 1995 and approximately $44,000 less
income from the rental of certain editing equipment that was sold in 1995.
As a result of the above, the Company, had income before taxes for the year
ended December 31, 1996 of $1,665,269 compared to income before taxes of
$2,894,066 for the year ended December 31, 1995.
Pre-Merger Overseas was an S-Corporation for federal income tax purposes
and, accordingly, was not subject to federal income taxes for periods from 1989
through the date of the Merger. See "Certain Tax Related Matters" below. The
Company's tax provision for 1996 includes a one-time, non-recurring deferred
federal income tax charge of approximately $2,600,000 relating to the
termination of Pre-Merger Overseas' S corporation status which occurred
immediately upon the Merger. The balance of the income tax provision for the
year ended December 31, 1996 represents federal income tax of approximately
$190,000 on income of the Company for the two months following the Merger, state
income taxes for the year of approximately $110,000 and foreign tax withholdings
of approximately $231,000 on revenues generated in certain countries during the
year that are required to withhold taxes on film royalties paid to a U.S.
company. As a result of the federal income taxes for the two months following
the merger, the Company's effective tax rate, exclusive of the one-time, non
recurring deferred federal income tax charge, increased to approximately 32% for
the year ended December 31, 1996 compared to 15% for the year ended December 31,
1995.
As a result of the foregoing including the one time, non-recurring deferred
federal income tax charge, the Company had a net loss for the year ended
December 31, 1996 of $1,466,098. This is in comparison to net income of
$2,461,161 for the year ended December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires substantial capital for the acquisition of film
rights, the funding of distribution costs and expenses, the payment of
ongoing overhead costs and the repayment of debt. Apart from the funds
provided as a result of the Merger of Pre-Merger Overseas with EMAC, the
principal sources of funds for the Company's operations in the past have been
cash flow from operations and bank borrowings, primarily through the
Company's credit facility described below.
The Company's cash flows provided by/(used in) operating, investing and
financing activities in 1995, 1996 and 1997 were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1996 1997
<S> <C> <C> <C>
Operating...... $21,352,387 $18,276,355 $14,517,735
Investing...... (21,376,982) (33,923,848) (20,090,234)
Financing...... 540,366 13,480,620 6,524,404
</TABLE>
35
<PAGE>
Cash flow from operating activities consists primarily of cash collections
generated by the sale, license or other exploitation of distribution and
other film rights by the Company. The reduction in cash flows provided by
operating activities from 1995 to 1996 and from 1996 to 1997 generally
represents decreased cash flows provided by sales and licensing of
distribution rights by the Company due to general market conditions for video
rights, as well as an increase in accounts receivable balances. As part of
the changes in its operational strategy and in order to improve cash flow,
the Company has also implemented certain reductions in overhead including
reductions in personnel (the Company had 28 full time employees at April 15,
1998, a reduction of 12 full time employees from April 15, 1997). The Company
is also currently considering additional reductions in overhead. Investing
activities consist primarily of additions to film costs (primarily
production, acquisition and distribution costs), but also include
expenditures on property and equipment and other activities that utilize
cash. The changes in cash flows used in investing activities from 1995 to
1996 and from 1996 to 1997 generally represent varying investment in film
costs relating to availability of funds for such purpose. Financing
activities include the funds provided by the Merger in 1996, as well as bank
or other borrowings, and other activities that give rise to additional cash
to the Company decreased for periods prior to the Merger by distributions to
the stockholders of Pre-Merger Overseas and decreased for periods after the
Merger by payments made on the $2,000,000 Merger Note issued to the Company's
principal stockholders and executive officers, Ellen Dinerman Little and
Robert B. Little, as part of the consideration to them in the Merger. The
Merger Note provides that it is payable in monthly installments of principal
and interest of $41,517 over a five year period ending October 1, 2001, bears
interest at the rate of 9% per annum, and is secured by a security interest
(subordinate to the security interest of the lenders under the Company's
credit facility) in substantially all of the Company's assets. As described
below, payments on the Merger Note are currently being deferred.
The Company has a credit facility (the "Credit Facility") under an
agreement (the "Syndication Agreement") with Coutts & Co. ("Coutts"), as an
agent and lender, and Berliner Bank A.G. London Branch ("Berliner"), as a
lender (collectively, the "Lenders"). Prior to the recent amendment of the
Syndication Agreement, described below which among other things, altered
availability under the Credit Facility, the Syndication Agreement provided for
total borrowings of $27,000,000, of which up to $5,000,000 could be borrowed
on a revolving basis for the Company's working capital needs (the "Operating
Facility"), up to $1,000,000 (the "Local Facility") is available to be issued
as letters of credit to secure a local bank line of credit (the "Local
Line"), and up to $21,000,000 could be borrowed to fund the acquisition of
motion pictures or to fund distribution costs, including print and
advertising costs, associated with motion pictures acquired by the Company
(the "Film Facilities"). The interest rate payable on borrowings under the
Syndication Agreement is 3% above the London Inter-Bank Offered Rate
("LIBOR") in effect from time to time for one, three or six months, as
requested by the Company. In addition to an annual management fee, there is a
commitment fee on the daily unused portion of the Operating Facility of 1%
per annum, and fees with respect to the Local Facility of 2% of the face
amount of issued letters of credit. Fees on the Film Facilities include 2%
of the amount of cash advances or, in most circumstances, 2% of the face
amount of each letter of credit issued under the Film Facilities, as well as
a percentage of gross receipts of the film acquired or financed payable from
the Company's net earnings from the film, which percentage fee in 1997
amounted to an aggregate of approximately $10,000.
36
<PAGE>
The Company borrowed funds under Film Facilities' on a film-by-film
basis, with each such Film Facility treated as a separate loan, generally
maturing 12 months after the first drawdown. The Syndication Agreement
required Coutts and Berliner to approve each separate Film Facility, such
approval to be granted in their sole discretion. Amounts available under the
Film Facilities were also available to be issued as letters of credit or bank
guarantees. As of December 31, 1997, an aggregate of approximately
$16,233,844 was outstanding under the Film Facilities (including an aggregate
of approximately $3,874,702 in principal and accrued interest under three
Film Facilities which had matured and were under review by the lenders and
$10,592,508 in principal and accrued interest under ten Film Facilities
scheduled to mature during 1998) and $5,908,340 was outstanding under the
Operating Facility, at an average interest rate on all such outstanding
amounts of approximately 8.72% per annum. As of December 31, 1997, $1,000,000
in face amount of letters of credit had also been issued under the Local
Facility to secure a line of credit that the Company has received from City
National Bank (under which $1,000,000 was outstanding as of December 31, 1997
bearing interest at 7.250% per annum). If the letters of credit are drawn
upon, the Company must repay the amounts advanced by the banks upon demand.
The Syndication Agreement which is secured by substantially all of the
assets of the Company and its subsidiaries, contains a number of covenants
and other requirements, including requirements that the Company maintain a
certain consolidated net worth and that 30% of the amount outstanding under
the Film Facilities (including issued but unexercised letters of credit) be
collateralized by cash or receivables acceptable to the banks; requirements
that may substantially restrict the payment of dividends by the Company. The
Syndication Agreement also, among other things, restricts the creation or
incurrence of indebtedness and the issuance of additional securities and
requires aggregate key man life insurance on Ms. Little, Mr. Little and Mr.
Lischak of $6,750,000. Events of Default under the Syndication Agreement
include, among other things, a change of control of the Company, the failure,
in certain circumstances, of Ellen Dinerman Little or Robert B. Little to
serve as a director or be employed in the capacity set out in their
respective employment agreements, the failure of the Littles, together with
their director nominees (See "Item 10 - Directors and Executive Officers of
the Registrant - Management Arrangements"), to constitute a majority of the
Board of Directors of the Company, or a decrease in the Little's ownership in
the Company below certain levels.
The Syndication Agreement requires that amounts outstanding under the
Operating Facility be repaid on the date that the commitment to lend under
the Syndication Agreement expires. The commitment to lend under the
Syndication Agreement was originally scheduled to expire on May 9, 1997, the
date of the annual review. The Company and the Lenders extended the date of
the annual review and the expiration of the commitment to lend under the
Syndication Agreement to November 30, 1997. In addition, in mid-1997, in
order to address what the Company anticipated as a need for additional
liquidity occasioned by the disappointing worldwide performance of recent
films acquired by the Company and the maturity of various Film Facilities
under the Credit Facility, the Company began discussions with the Lenders for
the Lenders to make additional amounts available to the Company under the
Operating Facility and to further extend the commitment to lend. As part of
the discussions, Ms. Little and Mr. Little agreed to defer payments to them
under the Merger Note. During 1997, an aggregate of approximately $207,584
in principal and interest was paid to the Littles under the Merger Note and
approximately $290,616 was deferred.
37
<PAGE>
The Company's discussions with the Lenders continued through 1997 and
the first quarter of 1998. During such period, the Lenders permitted
additional borrowing under the Operating Facility of $908,340 with a
corresponding reduction in aggregate borrowing availability under the Film
Facilities. On April 14, 1998, the Company and the Lenders entered into an
agreement (the "Facility Amendment") pursuant to which they amended the
Syndication Agreement to extend the date of the annual review and the
expiration of the commitment to lend under the Syndication Agreement to April
9, 1999, subject to continued compliance by the Company with the Syndication
Agreement and the terms of the Facility Amendment, as well as to Berliner
Board approval (which was subsequently obtained), and establishment of the
guarantee detailed below.
As of the date of the Facility Amendment, an aggregate of approximately
$15,261,851 was outstanding under the Film Facilities, an aggregate of
approximately $5,908,340 was outstanding under the Operating Facility, and
$1,000,000 in face amounts of letters of credit had been issued under the
Local Facility to secure the City National Bank credit line (under which
approximately $520,000 was then outstanding). Pursuant to the Facility
Amendment, the Company and the Lenders also agreed to make up to an
additional $1,325,660 available under the Operating Facility (above the
$5,908,340 then outstanding) to a total of $7,234,000 ($50,000 of such amount
being available to pay the fee to the Lenders in connection with the Facility
Amendment) with the timing of the availability to be substantially in
accordance with agreed cash flow schedules. Pursuant to the Facility
Amendment, the Company and the Lenders also agreed that the Film Facilities
would no longer be a revolving credit line and sums repaid cannot be
reborrowed. The Lenders agreed, however, that in addition to the amounts then
outstanding under the Film Facilities, the Company can borrow an additional
$1,850,000 to pay a minimum guarantee with respect to the film ILLUMINATA
which has been co-financed by the Company and for which production costs were
funded by Coutts.
As part of the Facility Amendment, the Company and the Lenders agreed to
extend the maturity of nine Film Facilities (under which an aggregate of
$10,553,465 in principal and accrued interest was then outstanding) which
have matured or would otherwise mature in 1998. As a result, the Company
currently anticipates that during the next twelve months, four Film
Facilities (under which an aggregate of approximately $2,963,806 in principal
and accrued interest was outstanding as of the date of the Facility
Amendment) will mature. Additionally, the Company and the Lenders agreed that
net receipts from films financed under repaid Film Facilities will be used to
reduce other Film Facilities after the particular Film Facility has been
repaid. As part of the Facility Amendment, the Company also agreed to
additional covenants and requirements, including: (i) providing a series of
additional monthly financial reports to the Lenders, (ii) obtaining written
approval of the Lenders prior to entering into any new rights acquisitions or
commitments and (iii) obtaining written approval of the Lenders prior to
committing to spend amounts in connection with distribution expenses and
costs for prints and advertising. The Credit Facility generally requires the
Company to maintain a net worth of at least $12,000,000. At December 31,
1997, the Company's net worth calculated in accordance with such provision
was $11,561,112. As part of the Facility Amendment, the Lenders reduced the
minimum net worth required to $11,000,000 subject to further review on April
14, 1999 and waived any prior non-compliance with such covenant. The Lenders
also waived certain covenant provisions relating to ordinary course
liabilities.
As part of the Facility Amendment, Ms. Little and Mr. Little agreed to
continue deferral of payments under the Merger Note. Payments under the
Merger Note will accrue but payment shall be deferred until outstanding
borrowings under the Operating Facility are reduced to at least $5,000,000,
the Company and the Lenders view such reduction as permanent, and not before
May 1999. The Merger Note will be extended for the period of time payments
are deferred, the deferred payments will continue to bear interest, and the
monthly payments will be adjusted to compensate for additional interest
accrued pursuant to the deferral of payments. The rights of Ms. Little and
Mr. Little under the Merger Note and related security agreement are not
otherwise affected. At April 15, 1998, an aggregate of approximately
$1,940,097 in principal and interest was outstanding under the Merger Note
(including an aggregate of approximately $456,684 in previously deferred
payments of principal and interest).
As part of Facility Amendment, Ms. Little and Mr. Little have also
agreed to personally guarantee for the benefit of the Lenders all amounts in
excess of $6,000,000 (up to a maximum guarantee amount of $618,000) drawn
under the Operating Facility; provided that the guarantee will be
extinguished when the amounts outstanding under the Operating Facility are
permanently reduced to less than $6,000,000.
38
<PAGE>
In connection with the Merger, the Littles also received an unsecured
promissory note (the "Life Insurance Note") of the Company in the principal
amount of $137,061 representing the cash value on the date of the Merger of
certain life insurance policies under which the Company was named as the
beneficiary. The promissory note bears interest at the rate of 9% per annum,
matured on October 31, 1997, and is currently due and payable. At April 15,
1998, the aggregate amount outstanding (including accrued interest) under
such promissory note was approximately $155,455. In addition to the amounts
payable to the Littles under the Insurance Note, certain other amounts are
currently due to the Littles currently estimated to be, including an
aggregate of $100,000 in bonuses to the Littles earned by them in 1996 and
1997, and reimbursement of approximately $30,845 in expenses as provided in
their employment agreements with the Company. Additionally, the Company and
the Littles are discussing the amount of payments due to the Littles under
the provisions of a tax reimbursement agreement (the "Tax Reimbursement
Agreement"). The Company currently estimates that $200,000 will be payable to
the Littles.
In December 1997 and February 1998, the Littles loaned the Company an
aggregate of $400,000 in order to provide a portion of the funds required by
the Company for the print and advertising costs associated with the domestic
theatrical release by the Company of MRS. DALLOWAY as the Lenders declined to
loan such funds. The loan is secured by an assignment of domestic revenues
of MRS. DALLOWAY (currently subordinate to the security interest of the
Company's commercial lenders), bears interest at the rate of 9% per annum,
and is to be repaid as and when revenues from MRS. DALLOWAY, and the
Company's release, DIFFERENT FOR GIRLS, are received by the Company (after
repayment of a Film Facility related to the acquisition of domestic rights to
both DIFFERENT FOR GIRLS and MRS. DALLOWAY and print and advertising costs
lent by the Lenders with respect to DIFFERENT FOR GIRLS or at such time as
the Company's primary Lenders allow repayment from other sources). At April
15, 1998, the aggregate amount outstanding (including accrued interest)
pursuant to such loan was approximately $407,500. Other than the guarantee
provided by the Littles in connection with the Facility Amendment and the
foregoing loan with respect to MRS. DALLOWAY, the Littles are not obligated
to provide any funds to the Company or to guarantee or secure the Credit
Facility or any borrowings of the Company in the future.
As of December 31, 1997, the Company had cash and cash equivalents of
$1,179,133 compared to cash and cash equivalents of $353,689 as of December 31,
1996. The difference relates primarily to collections of various substantial
license fees near the end of the year ended December 31, 1997. Additionally, at
December 31, 1997, the Company had restricted cash of $172,498 held by the
Company's primary lender, to be applied against various Film Facilities. The
restricted cash balance as of December 31, 1996 was $46,037.
In addition to the Company's obligations reflected on the balance sheet as
of December 31, 1997, as of such date the Company had contractual obligations
for advances and minimum guarantee payments of $6,437,500 contingent upon
completion and delivery of certain motion pictures.
39
<PAGE>
As of December 31, 1997, the Company also had deferred revenue relating to
distribution commitments and guarantees from sub-distributors of
approximately $800,250.
The Company has guaranteed a loan from a bank to Neo Motion Pictures due
on September 8, 1998, the principal balance of which at April 15, 1998 was
approximately $186,613 in principal and accrued interest.
During the next twelve months, the Company currently intends to acquire
rights to and distribute or act as sales agent with respect to approximately
10 to 12 films, including up to approximately three First Look Pictures
releases (but exclusive of films where the Company acquires primarily
re-issue rights). As the Facility Amendment provides that no new Film
Facilities will be established (except with respect to one designated film)
and requires the consent of the Lenders prior to the Company entering into
any new rights acquisitions or commitments to spend amounts in connection
with distribution expenses and costs for prints and advertising, the ability
of the Company to achieve such goals will depend on the willingness of the
Lenders to permit the Company to enter into new rights acquisitions and
commitments, as well as commitments for distribution expenses and prints and
advertising, and the ability of the Company to obtain other sources of funds
for its operational activities, including obtaining pre-sale commitments and
funds from gap financing. However, there can be no assurance as to the future
availability of pre-sales and gap financing. In addition, the Company
currently anticipates releasing films through First Look Pictures, in most
situations, only if outside sources of funds are available for print and
advertising expenses. As a result of the foregoing, and because the motion
picture business and the Company's operations are subject to numerous
additional uncertainties, including among other things, the specific
financing requirements of various film projects, the audience response to
completed films, competition from companies within the motion picture
industry and in other entertainment media (many of which have significantly
greater financial and other resources than the Company) and the release
schedules of competing films, no assurance can be given that the Company's
acquisition, financing and distribution goals will be met (or that such goals
will not be exceeded).
The Company believes that its existing capital, funds from operations,
and other available sources of capital (including funds obtained through
pre-sales and gap financing) will be sufficient to enable the Company to fund
its presently planned acquisition, distribution and overhead expenditures for
the next twelve months. In the event that the motion pictures released or
distributed by the Company during such period do not meet with sufficiently
positive distributor and audience response, sales and licensing of
distribution rights to films in the Company's film library and films which
the Company plans to release or make available to subdistributors during such
period are less than anticipated or the Company is not able to exploit
various sources of capital (such as pre-sales and gap financing) to the
extent anticipated, the Company will likely need to significantly reduce its
currently planned level of acquisitions and distribution activities and
overhead and will likely need to obtain additional sources of capital. The
Company is currently exploring obtaining additional sources of capital
(including equity and debt financing). There can be no assurance, however,
that such additional capital will be available or available on terms
advantageous to the Company.
INFLATION AND RELATED CONSIDERATIONS
Management of Overseas Filmgroup believes that neither the Company's
operating revenues nor costs materially increased in the last fiscal year due
to general economic inflation or general price changes. In particular,
management believes that no material increases in revenue were attributable to
increases in ticket prices for admission to motion picture theaters. The
costs associated with the production (such as the salaries of recognizable
cast) and distribution and marketing (such as print and advertising costs) of
motion pictures have increased dramatically in recent years. These costs will
likely continue to increase in the future, thereby increasing the capital
required for the operations of motion picture producers and distributors,
including the Company, and the risk borne by such parties.
IMPACT OF YEAR 2000
The Company has assessed its computer systems in order to determine whether
such systems recognize the year 2000. All of the Company's systems are year
2000 compliant except for the Company's accounting system. As a result of such
assessment, the Company intends to upgrade its accounting system. The upgrade is
intended to expand the capabilities of the system and resolve the year 2000
issues associated with the current system. The Company currently plans to
complete the upgrade of the accounting system by October 1998 at an anticipated
cost to the Company of approximately $10,000. The Company does not currently
have a basis upon which to estimate the impact on the Company of year 2000
non-compliance by the Company's major licensees and subdistributors. It is
possible that non-compliance to year 2000 concerns by the Company's major
licensees and subdistributors could have a material adverse effect on the
Company, by, for example, delaying payments by such parties. At this time, the
Company does not have plans to institute a program to review year 2000
compliance by its major licensees and subdistributors in order to determine
exposure to year 2000 issues.
EXCHANGE RATE CONSIDERATIONS
A significant portion of the Company's revenue (approximately 77% in
1997) is from the distribution of motion pictures and the licensing of
distribution rights in territories outside the United States. The Company's
financial results and results of operations could be negatively affected by
such factors as changes in foreign currency exchange rates and currency
controls, as well as trade protection measures, motion picture piracy,
content regulation, longer accounts receivable collection patterns, changes
in regional or worldwide economic or political conditions or natural
disasters. See Item 1. "Motion Picture Distribution by the Company." Because
the Company's contracts are typically denominated in U.S. dollars, advances
and minimum guarantees of sublicense fees payable to the Company by foreign
sub-distributors, and advances and minimum guarantees to be paid by the
Company to foreign producers in connection with the acquisition of
distribution rights, are generally unaffected by exchange rate fluctuations.
However, to the extent the Company's agreements with foreign sub-distributors
require such sub-distributors to pay the Company a percentage of revenues in
excess of any advance or minimum guarantee, fluctuations in the currencies in
which such revenues are received by the sub-distributor may affect the amount
of U.S. dollars received by the Company in excess of any minimum guarantee.
Exchange rate fluctuations could also affect the ability of sub-distributors
to bid for and acquire rights to motion pictures distributed by the Company.
Exchange rate fluctuations have had an impact on the Company's results of
operations in the past year. See Item 1. "Motion Picture Distribution by the
Company."
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<PAGE>
CERTAIN TAX RELATED MATTERS
The Company is subject to federal and state corporate income tax. In
addition, certain foreign jurisdictions require tax withholding on revenues
payable to the Company by foreign sub-distributors in such territories. From
January 1989 until October 31, 1996, Pre-Merger Overseas was treated for
federal (but not state) income tax purposes as an S Corporation. As a
result, Pre-Merger Overseas' taxable income during this period was taxed for
federal purposes directly to the Pre-Merger Overseas stockholders (Ellen
Dinerman Little, Robert B. Little and William F. Lischak), rather than to
Pre-Merger Overseas. Pursuant to the Merger Agreement, the Company entered
into a Tax Reimbursement Agreement, dated October 31, 1996, with Ms. Little,
Mr. Little and Mr. Lischak. Under the Tax Reimbursement Agreement, the
Company agreed to reimburse these individuals for up to $400,000 of federal
income taxes payable for the short 1996 S corporation taxable year of
Pre-Merger Overseas ending at the time of the Merger (the "1996 Reimbursement
Amount"). As Pre-Merger Overseas reported a taxable loss for the short 1996
S corporation taxable year, no amounts are currently payable to the
stockholders of Pre-Merger Overseas under this provision in the Tax
Reimbursement Agreement.
The corporate income tax returns of Overseas Filmgroup for its 1992 and
1993 fiscal years were recently audited by the Internal Revenue Service
("IRS") and returns for the 1994, 1995, 1996 and 1997 fiscal years, (the
latter of which is currently on extension for filing) remain open to audit.
As a result of the IRS audit of the 1992 and 1993 fiscal years returns,
certain foreign tax credits reported by the Company and claimed by Ms. Little
and Mr. Little, as S corporation shareholders, were denied, and assessment of
additional federal income tax was made against Ms. Little and Mr. Little in
the amount of approximately $275,000. In the absence of the Tax
Reimbursement Agreement, the stockholders of Pre-Merger Overseas during such
periods, and not the Company, would be responsible for any tax liability
assessed as a result of any federal income tax audits of pre-Merger periods
because of the S corporation status for such periods. Under the Tax
Reimbursement Agreement, the Company agreed to indemnify the three
stockholders of Pre-Merger Overseas for any federal income tax liabilities of
theirs (including penalties and interest) arising from any adjustment to the
income, deductions or credits of Pre-Merger Overseas for periods prior to the
Merger, together with any federal and state income tax arising from such
indemnity payments. The Company's reimbursement obligations are limited to
$150,000 (plus any of the $400,000 1996 Reimbursement Amount not used to
reimburse such individuals for their federal income taxes for the short 1996
S Corporation taxable year), except with respect to adjustments to the
Company's income, deductions or credits which are reasonably expected to
result in decreases to the Company's income or increases in its deductions or
credits after the Merger. The Company and the Littles are discussing the
amount of payments due to the Littles under the provisions of the Tax
Reimbursement Agreement. The Company currently estimates $200,000 will be
payable to the Littles. For purposes of the Consolidated Financial Statements
of the Company, accrued expenses as of December 31, 1997 include a $200,000
estimate of the aggregate payments to be made to the shareholders of
Pre-Merger Overseas pursuant to the Tax Reimbursement Agreement. No payments
have been made under the Tax Reimbursement Agreement through April 15, 1998.
For federal income tax purposes, the company has available tax loss
carryforwards of approximately $1,812,000 which expire in 2011 and foreign
tax credits of approximately $336,000 which expire between 2001 and 2002.
41
<PAGE>
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISLCOSURES ABOUT MARKET RISK.
Not applicable, as the Securities and Exchange Commission phase-in date for
this Item has not yet occurred.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Report of Independent Accountants, Consolidated Financial Statements
and Notes to the Company's Consolidated Financial Statements appear in a
separate section of this Report (beginning on page F-1) following Part IV. See
the Index to Financial Statements under "Item 14 - Exhibits, Financial Statement
Schedules, and Reports on Form 8-K."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
42
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth information with respect to the current
directors and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE CURRENT POSITION WITH THE COMPANY
---- --- ---------------------------------
<S> <C> <C>
Robert B. Little 53 Co-Chairman of the Board and Co-Chief Executive Officer
Ellen Dinerman Little 56 Co-Chairman of the Board, Co-Chief Executive Officer and President
Stephen K. Bannon 44 Vice Chairman of the Board, Chairman of the Executive Committee
of the Board
William F. Lischak 40 Chief Operating Officer, Chief Financial Officer, Secretary and
Director
MJ Peckos 43 Senior Vice President, Domestic Distribution and Marketing
Christopher Trunkey 31 Senior Vice President, Finance and Accounting
Alessandro Fracassi 46 Director
Jeffrey A. Rochlis 52 Director
Scot K. Vorse 37 Director
</TABLE>
The directors of the Company are divided into three classes having terms
expiring at the annual meeting of the Company's stockholders in 1998 (Ellen
Dinerman Little and Scot K. Vorse), 1999 (William F. Lischak, Jeffrey A. Rochlis
and Alessandro Fracassi) and in 2000 (Robert B. Little and Stephen K. Bannon),
or such later dates as their successors are elected and have qualified. At each
annual meeting of stockholders, successors to the class of directors whose terms
expire at such meeting will be elected to serve for three-year terms and until
their successors are elected and have qualified. All officers serve at the
discretion of the Board of Directors, subject to any applicable employment
agreements. See "Employment Agreements" below. See also "Management
Arrangements" below for a description of certain arrangements regarding the
election of directors. Ellen Dinerman Little and Robert B. Little are married
to each other.
CURRENT DIRECTORS AND EXECUTIVE OFFICERS.
ROBERT B. LITTLE became Co-Chairman of the Board of Directors and Co-Chief
Executive Officer of the Company upon consummation of the Merger on October 31,
1996. Mr. Little co-founded the predecessor of Pre-Merger Overseas in February
1980 and served as Chairman of the Board of Pre-Merger Overseas from February
1987 until the Merger and its Chief Executive Officer from February 1990 until
the Merger. Mr. Little was a founding member of the American Film Marketing
Association, the organization which established the American Film Market, and
served multiple terms on its Board of Directors. In 1993, Mr. Little served on
the City of Los Angeles Entertainment Industry Task Force, a task force composed
of industry leaders focused on maintaining and enhancing Los Angeles's
reputation as the entertainment capital of the world. Mr. Little is also a
founding member of The Archive Council, an industry support group for the
University of California at Los Angeles (UCLA) Archive Film
43
<PAGE>
Preservation Program, and a member of the Board of Directors of the Antonio
David Blanco Scholarship Fund, an endowment fund that annually benefits
deserving students in the UCLA Department of Film and Television.
ELLEN DINERMAN LITTLE became Co-Chairman of the Board of Directors,
Co-Chief Executive Officer and President of the Company upon consummation of the
Merger. Ms. Little co-founded the predecessor of Pre-Merger Overseas in February
1980 and served as its President and Director, as well as the President and a
Director of Pre-Merger Overseas since its incorporation in January 1984 until
the Merger. Ms. Little is a founding member of The Archive Council, serves on
the Board of Directors of the Antonio David Blanco Scholarship Fund, and has
been an active participant in the American Film Marketing Association, having
served on various of its committees. Ms. Little is Executive Producer of Richard
III, which was nominated for two Academy Awards.
STEPHEN K. BANNON has been a director of the Company since its
incorporation as EMAC in December 1993. Since the Merger, he has served as Vice
Chairman of the Board of Directors of the Company and Chairman of its Executive
Committee. Previously, from the incorporation of EMAC until the Merger, he
served as Chairman of the Board of Directors of EMAC. Since June 1991, Mr.
Bannon has been the Chief Executive Officer of Bannon & Co., an investment
banking firm that specializes in the entertainment, media and communications
industries. In October 1996, Bannon & Co. entered into an alliance agreement
with Societe Generale, a private French bank, and, since April 1, 1997, the
company has been operating as Societe Generale Bannon, LLC. As part of an
investment banking assignment, from April 1, 1994 to December 31, 1995, Mr.
Bannon served as acting Chief Executive Officer of SBV, a division of Decisions
Investment Corp., which operates the Biosphere 2 project near Oracle, Arizona.
Societe Generale Bannon, LLC is a registered broker-dealer under the Securities
Exchange Act of 1934, as amended, and Mr. Bannon is a registered principal with
the National Association of Securities Dealers, Inc. ("NASD"). Bannon & Co.
succeeded to the business of Talbott, Bannon & Co., of which Mr. Bannon was a
general partner from January 1990 to June 1991. From 1985 to 1990, Mr. Bannon
was employed in various capacities by Goldman, Sachs & Co., most recently as
Vice President, Investment Banking, where his responsibilities included advising
clients on mergers and acquisitions and corporate finance in the entertainment
and media industry.
WILLIAM F. LISCHAK became Chief Operating Officer, Chief Financial Officer,
Secretary and a Director of the Company upon consummation of the Merger. Mr.
Lischak served as Pre-Merger Overseas' Chief Operating Officer from September
1990 until the Merger and its Chief Financial Officer from September 1988 until
the Merger. Mr. Lischak, a certified public accountant, previously had worked in
public accounting, including from 1982 to 1988 with the accounting firm of
Laventhol & Horwath. Mr. Lischak has a Masters Degree in Taxation and has taught
courses in the extension program at UCLA in accounting, finance and taxation for
motion pictures and television.
CHRISTOPHER TRUNKEY joined the Company as Senior Vice President, Finance
and Accounting, in September 1997. From May 1994 to August 1997, Mr. Trunkey
served as Vice President, Chief financial and Administrative Officer and
Secretary of Kings Road Entertainment, a film production and distriution
company. prior thereto, Mr. Trunkey served asController for Ulysee
Entertainment, a film distribution company, from October 1993 to May 1994.
From May 1990 through September 1993, Mr. Trunkey served as Director of
Financial Planning at Reeves Entertainment, a television production and
distribution companyu. Prior to that, Mr. Trunkey as a Staff Accountant for
Telautograph Corporation, a manufacturing company, from August 1988 through
May 1990. Mr. Trunkey resigned from the Company effective May 1, 1998.
44
<PAGE>
MJ PECKOS became Senior Vice President, Domestic Distribution and
Marketing, of the Company upon consummation of the Merger, having served since
May 1995 in the same position with Pre-Merger Overseas. From January 1995
through April 1995, Ms. Peckos served as Vice President of Advertising for Dazu
Advertising, a graphic design firm which is active in the entertainment
industry. Prior to that, she served from January 1992 to November 1994 as Senior
Vice President of Marketing & Distribution for Academy Entertainment, an
independent film company, and from July 1991 to December 1992 as Co-Managing
Director of CLG Films, also an independent film company. Ms. Peckos also
previously served with several other companies in the motion picture industry
including The Samuel Goldwyn Company, MGM and Warner Bros.
ALESSANDRO FRACASSI, became a Director of the Company upon consummation of
the Merger. Mr. Fracassi founded Racing Pictures s.r.l. (an Italian motion
picture production and distribution company) in 1976 and has served as its
President since such date. Mr. Fracassi has extensive experience in the field of
Pan-European motion picture and television production. He has served as a Vice
President of the Italian Producers Association, an Italian entertainment
industry trade group. Additionally, Mr. Fracassi and his family are active
investors in various privately held businesses in Italy.
JEFFREY A. ROCHLIS has been a Director of the Company since its
incorporation as EMAC in December 1993 and also served from such date until the
Merger as President and Chief Executive Officer of EMAC. Mr. Rochlis is the
founding principal of Rochlis & Associates, a firm established in 1989 which
specializes in new product/business development in the entertainment and media
industry. From 1987 through 1989, Mr. Rochlis served as the Executive Vice
President of Walt Disney Imagineering, responsible for the development of new
Disney theme parks and attractions around the world. From 1985 through 1987, he
served as Executive Vice President of The Walt Disney Studios, responsible for
finance, administration, operations and new business development for Walt
Disney, Touchstone and Buena Vista motion picture, television and home video
divisions worldwide. From 1983 through 1985, Mr. Rochlis was the President and
Chief Operating Officer of the video game company, Sega Enterprises, Inc. Mr.
Rochlis served as a Director of Paramount Pictures Corporation from 1983 through
1985.
SCOT K. VORSE became a Director of EMAC in January 1995 and continued to
serve as a Director of the Company following the Merger. From January 1995
until the Merger, he served as Treasurer, Secretary and Vice President of
EMAC. Since June 1991, Mr. Vorse has been an Executive Vice President,
Managing Director and the Chief Financial Officer of Bannon & Co., now
operating as Societe Generale Bannon, LLC. Mr. Vorse is a registered
principal with the NASD. From 1985 to May 1991, Mr. Vorse was employed in
various capacities by Goldman, Sachs & Co., most recently as Vice President
- -- Corporate Finance, where his responsibilities included advising clients on
mergers and acquisitions and private and public financings.
EXECUTIVE COMMITTEE
Ellen Dinerman Little, Robert B. Little and Stephen K. Bannon currently
serve on the Executive Committee, with Mr. Bannon serving as Chairman of such
committee. During intervals between the meetings of the Board of Directors of
the Company, the Executive Committee exercises all powers of the Board of
Directors (except those powers specifically reserved by Delaware law or the
Company's Bylaws to the full Board of Directors) in the management and direction
of the business and conduct of the affairs of the Company in all cases in which
specific directions have not been given by the Board of Directors.
45
<PAGE>
COMPENSATION COMMITTEE
Messrs. Bannon and Vorse currently serve on the Compensation Committee. The
Compensation Committee administers the Company's stock option plans to the
extent contemplated thereby and reviews, approves, and makes recommendations
with respect to compensation of officers, consultants and key employees. See
"Stock Option Plans" under "Item 11 - Executive Compensation" below.
AUDIT COMMITTEE
The Audit Committee of the Company currently consists of Messrs. Bannon and
Vorse. The function of the Audit Committee is, among other things, to review
and approve the selection of, and all services performed by, the Company's
independent auditors; to meet and consult with and to receive reports from, the
Company's independent auditors and the Company's financial and accounting staff;
and to review and act with respect to the scope of audit procedures, accounting
practices and internal accounting and financial controls of the Company.
MANAGEMENT ARRANGEMENTS
The Company is a party to a Stockholders' Voting Agreement, dated as of
October 31, 1996, with Ellen Dinerman Little, Robert B. Little, William F.
Lischak, and certain persons who were stockholders of the Company prior to
consummation of the Company's initial public offering (Jeffrey A. Rochlis,
Barbara Boyle, the Hoberman Family Trust, Stephen K. Bannon, Scot K. Vorse and
Gary M. Stein - collectively, the "Initial Stockholders"). The parties to the
Stockholders' Voting Agreement have agreed to use their best efforts to cause
the Board of Directors of the Company to consist of seven members during the
term of such agreement, including four individuals designated by Ms. Little and
Mr. Little (currently Ellen Dinerman Little, Robert B. Little, William F.
Lischak, and Alessandro Fracassi) and three individuals designated by the
Initial Stockholders (currently Stephen K. Bannon, Jeffrey A. Rochlis and Scot
K. Vorse). Each party to the Stockholders' Voting Agreement also agreed that
the following actions shall require the affirmative vote of at least
seventy-five percent of the authorized number of directors of the Company: (i)
any amendment to the Restated Certificate of Incorporation of the Company or the
Company's Bylaws that would change the voting rights of stockholders, the number
or classes of directors, or the notice and quorum requirements for meetings of
the Board of Directors, its committees or the shareholders; (ii) a merger or
sale of all or substantially all of the assets of the Company; (iii) the
designation or issuance of any preferred stock and (iv) any amendments to the
operating guidelines described below (collectively, the "Supermajority
Provisions"). The Stockholders' Voting Agreement terminates May 1, 2004 or
sooner if the employment of Ms. Little, Mr. Little and Mr. Lischak is
terminated. In addition, the right of Ms. Little and Mr. Little, and of the
Initial Stockholders, to designate directors (but not the obligation to vote for
the designees of others) will terminate (i) as to Ms. Little and Mr. Little, (A)
if they (and Mr. Lischak) own less than 794,444 shares of the Company's Common
Stock, they will be entitled to designate only two directors, and (B) if they
(and Mr. Lischak) own less than 20,000 shares, they will not be entitled to
designate any director; or (ii) as to the Initial Stockholders, (A) if they own
less than 175,000 shares of the Company's Common Stock, they will be entitled to
designate only two directors, (B) if they own less than 125,000 shares, they
will be entitled to designate only one director, and (C) if they own less than
20,000 shares, they will not be entitled to designate any director. In October
1996, operating guidelines for the Board of Directors and management of the
Company were established setting forth certain general guidelines with respect
to the authority and responsibilities of officers of the Company, the structure
and responsibilities of the Board of Directors and the Executive Committee of
the Company, and certain other general business matters. The Board of Directors
has also adopted operating resolutions implementing the Supermajority
Provisions.
46
<PAGE>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires the Company's directors and executive officers and
persons who own more than 10% of the Company's Common Stock ("10%
Stockholders") to file with the Securities and Exchange Commission (the
"Commission") initial reports of ownership and reports of changes in
ownership of Common Stock and other equity securities of the Company.
Executive officers, directors and 10% Stockholders of the Company are
required by Commission regulations to furnish the Company with copies of
Section 16(a) forms they file. To the Company's knowledge based solely upon a
review of the Forms 3 and 4 and amendments thereto furnished to the Company
during its most recent fiscal year, the Forms 5 furnished to the Company with
respect to its most recent fiscal year, and written representations of the
Company's directors, executive officers and 10% Stockholders, during the
fiscal year ended December 31, 1997, all Section 16(a) filing requirements
applicable to the Company's executive officers, directors and 10%
Stockholders were complied with except: (i) the Form 3 for Christopher
Trunkey, who became an executive officer on September 2, 1997 was not filed
with the Commission until October 1, 1997, and (ii) the Form 5 for William
Lischak with respect to the Company's last fiscal year failed to reflect a
gift by Mr. Lischak to a third party of 1,000 shares of Common Stock.
ITEM 11. EXECUTIVE COMPENSATION
The following "Summary Compensation Table" sets forth individual
compensation information with respect to the Company's Co-Chief Executive
Officers (Ellen Dinerman Little and Robert B. Little), and two other executive
officers of the Company during the fiscal year ended December 31, 1997 whose
total salary and bonus compensation during fiscal 1997 from the Company was in
excess of $100,000 (William F. Lischak and M.J. Peckos). Such four executives
are referred to herein as the "Named Executives." With respect to the four
Named Executives, the Summary Compensation Table provides compensation
information for services rendered to the Company during the fiscal years ended
December 31, 1995, 1996 and 1997 respectively. The Summary Compensation Table
does not include distributions made to the stockholders of Pre-Merger Overseas.
Following the Summary Compensation Table is a table that indicates whether
any of the Named Executives exercised options in fiscal 1997 and includes the
number and value of unexercised options held by the Named Executives at December
31, 1997. No stock options or stock appreciation rights were granted to the
Named Executives in 1997.
SUMMARY COMPENSATION TABLE*
47
<PAGE>
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------------------------- ------
OTHER ANNUAL SECURITIES
COMPENSATION UNDERLYING
NAME AND OPTIONS/ ALL OTHER
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($) SARS(#) COMPENSATION($)
- ------------------ ----- ---------- --------- --- ------- ---------------
<S> <C> <C> <C> <C> <C> <C>
ROBERT B. LITTLE 1997 $125,000 $27,404(13) $40,511(9) 0 $16,695(11)
CO-CHAIRMAN OF THE BOARD 1996 110,158 25,000(14) -- (1) 1,100,000 18,858(2)
AND CO- CHIEF EXECUTIVE OFFICER 1995 90,000 0 37,709(3) 0 16,455(4)
ELLEN DINERMAN LITTLE 1997 125,000 27,404(13) 27,184(10) 0 23,892(12)
CO-CHAIRMAN OF THE BOARD, CO-CHIEF 1996 110,457 25,000(14) -- (1) 1,100,000 24,812(5)
EXECUTIVE OFFICER AND PRESIDENT 1995 90,000 0 38,720(6) 0 30,134(4)
WILLIAM F. LISCHAK 1997 175,000 53,365 -- (1) 0 9,410(8)
CHIEF OPERATING OFFICER, CHIEF 1996 137,198 212,500 -- (1) 0 2,994(7)
FINANCIAL OFFICER AND SECRETARY 1995 118,933 75,090 -- (1) 0 519(7)
MJ PECKOS 1997 156,483 20,000 -- (1) 0 2,923(7)
SENIOR VICE PRESIDENT 1996 126,100 40,000 -- (1) 0 2,922(7)
1995 67,976 0 -- (1) 0 434(7)
</TABLE>
- --------
(1) Perquisites with respect to such Named Executive did not exceed the
lesser of $50,000 or 10% of such executive officer's salary and bonus.
(2) Represents $2,049 for the Company's contributions on behalf of such
Named Executive pursuant to the Company's 401(k) Plan and $16,809 for life
insurance premiums paid by the Company for the benefit of such Named Executive.
(3) Includes $13,959 for automobile lease payments and maintenance
expenses and $23,750 representing one-half the cost of a home sound system.
(4) Represents life insurance premiums paid by the Company for the benefit
of such Named Executive.
(5) Represents $2,049 for the Company's contribution on behalf of such
Named Executive pursuant to the Company's 401(k) Plan and $22,763 for life
insurance premiums paid by the Company for the benefit of such Named Executive.
(6) Includes $14,970 for automobile payments and $23,750 representing
one-half the cost of a home sound system.
(7) Represents the Company's contributions on behalf of such Named
Executive pursuant to the Company's 401(k) Plan.
(8) Represents $3,256 in contributions made by the Company on behalf of
such Named Executive pursuant to the Company's 401(k) Plan, $4,622 for life
insurance premiums paid by the Company for the benefit of such Named
Executive, and $1,532 for disability insurance premiums paid by the Company
for the benefit of such Named Executive.
48
<PAGE>
(9) Includes $13,499 for automobile lease payments, $25,301 of business
management and accounting fees paid on behalf of such Named Executive by the
Company.
(10) Includes $25,301 of business management and accounting fees paid on
behalf of such Named Executive by the Company.
(11) Represents $2,625 in contributions made by the Company on behalf of
such Named Executive pursuant to the Company's 401(k) Plan, $2,131
representing reimbursement of disability insurance premiums paid by the
Company for the benefit of such Named Executive and $11,939 in life insurance
premiums for which the Named Executive is entitled to reimbursement by the
Company.
(12) Represents $2,633 in contributions made by the Company on behalf of
such Named Executive pursuant to the Company's 401(k) Plan, $2,353
representing reimbursement of disability insurance premiums paid by the
Company for the benefit of such Named Executive and $18,906 in life insurance
premiums for which the Named Executive is entitled to reimbursement by the
Company.
(13) Includes bonuses of $25,000 earned by each of such Named Executives
in 1997 but which have not been paid to the Named Executive as of the date of
the filing of this Report with the Securities and Exchange Commission.
(14) Represents bonuses earned by each of such Named Executives in 1996
but which have not been paid to the Named Executive as of the date of the
filing of this report with the Securities and Exchange Commission.
* AGGREGATED OPTION/SAR EXERCISES IN LAST
FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES(1)
<TABLE>
<CAPTION>
NAME SHARES VALUE NUMBER OF SECURITIES VALUE OF UNEXERCISED
ACQUIRED ON REALIZED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SARS
EXERCISE ($) OPTIONS/SARS AT AT DECEMBER 31, 1997
(#) DECEMBER 31, 1997 EXERCISABLE
EXERCISABLE/UNEXERCISABLE /UNEXERCISABLE
(#) ($)
<S> <C> <C> <C> <C>
Ellen Dinerman Little 0 $ 0 300,000/800,000 $0/0
Robert B. Little 0 0 300,000/800,000 0/0
William F. Lischak 0 0 0 (2) 0
MJ Peckos 0 0 0 (2) 0
</TABLE>
(1) Although the Company's 1996 Basic Stock Option and Stock Appreciation
Rights Plan provides for the granting of stock appreciation rights, no
grant of such rights has been made by the Company.
(2) The Named Executive did not hold any options at December 31, 1997.
BOARD FEES
Pursuant to the Automatic Option Grant Program under the Company's 1996
Basic Stock Option and Stock Appreciation Rights Plan, each individual serving
as a non-employee Board member on October 31, 1996 (Messrs. Bannon, Fracassi,
Rochlis and Vorse) was automatically granted a non-qualified option to purchase
5,000 shares of the Company's Common Stock. In addition, each member of the
Board of Directors who is not employed by the Company receives an automatic
grant of a non-qualified option to purchase 5,000 shares of the Company's Common
Stock (i) upon becoming a Board member, whether through election at a meeting of
the Company's stockholders or through appointment by the Board of Directors, and
(ii) on the date of each annual meeting of stockholders, if such individual is
to continue to serve as a Board member after such meeting. Each such automatic
option grant is, among other things, exercisable at the fair market value of the
Common Stock on the date of the automatic grant and is generally exercisable
after completion of one year of service to the Board of Directors measured from
the automatic grant date. In addition, the Company reimburses all directors for
travel and related expenses incurred in connection with their activities on
behalf of the Company. Directors of the Company are not otherwise compensated
for serving on the Board of Directors.
Please see "Item 13 - Certain Relationships and Related Transactions" for a
description of certain transactions involving certain directors and their
affiliates and the Company and its affiliates.
49
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee was established in October 1996 and
currently consists of Messrs. Bannon and Vorse. Mr. Bannon was Chairman of
the Board of Directors of EMAC during 1996 until consummation of the Merger
and currently serves as Vice Chairman of the Company's Board of Directors and
Chairman of its Executive Committee. Mr. Vorse served as Vice President,
Treasurer, and Secretary of EMAC during 1996 through consummation of the
Merger. The Compensation Committee currently administers both of the
Company's stock option plans to the extent contemplated thereby.
INDEMNIFICATION
The Company has entered into indemnification agreements with its
directors (including those who are also executive officers) providing for
indemnification by the Company, including in circumstances in which
indemnification is otherwise discretionary under Delaware law. These
agreements constitute binding agreements between the Company and each of the
parties thereto, thus preventing the Company from modifying its
indemnification policy in a way that is adverse to any person who is a party
to such an agreement.
EMPLOYMENT AND RELATED AGREEMENTS
ELLEN DINERMAN LITTLE AND ROBERT B. LITTLE. Virtually all decisions
concerning the conduct of the business of the Company, including the motion
picture properties and rights to be acquired by the Company and the
arrangements to be made for the distribution, production and financing of
motion pictures by the Company, are made or are significantly influenced by
the Company's senior executive officers, Ellen Dinerman Little and Robert B.
Little. The loss of either of their services for any reason would have a
material adverse effect on the Company's business and operations and its
prospects for the future. In addition, the Company's credit facility
contains covenants and similar provisions, generally requiring Ms. Little and
Mr. Little's continued involvement with, and control of, the Company. Ms.
Little and Mr. Little each have an employment agreement with the Company with
a five year term which commenced on October 31, 1996 and ends on October 30,
2001. Ms. Little's and Mr. Little's employment agreements provide for them
to serve as Co-Chairs of the Board of Directors, members of the Executive
Committee of the Board of Directors, and Co-Chief Executive Officers of the
Company. Under Ms. Little's employment agreement, she also serves as
President of the Company. Pursuant to these employment agreements, they each
receive fixed annual compensation of $125,000 and are entitled to an annual
bonus of $25,000, plus such additional bonus, if any, as may be awarded to
them by the Company's Board of Directors or compensation or similar
committee, with Ms. Little and Mr. Little abstaining from any vote thereon.
The employment agreements also provide for certain benefits including, among
other things, life, disability and health insurance, and an automobile
allowance. In the event that the relevant employment agreement is terminated
by Ms. Little or Mr. Little for Good Reason (as defined in the employment
agreements and which includes certain changes in control of the Company), or
by the Company other than for Cause (as defined in the employment
agreements), she or he will receive (a) a lump-sum payment equal to 250% of
the greater of (i) the aggregate of all fixed annual compensation to which
she or he would otherwise have been entitled through the balance of the term
or (ii) an amount equal to the fixed annual compensation and annual bonus for
one full year; (b) a lump-sum payment equal to 250% of the aggregate of all
annual bonuses to which she or he would otherwise have been entitled through
the balance of the term; (c) such additional payments as may be necessary to
take into account and reimburse her or him for certain excise taxes which may
be applicable to payments and benefits relating to such termination; (d) for
the remainder of the term, life, disability and health insurance and
50
<PAGE>
other benefits substantially similar to those received prior to termination;
and (e) automatic vesting of any stock options held. Such termination of the
relevant employment agreement would also constitute an event of default under
a $2,000,000, five-year, secured promissory note issued by the Company to Ms.
Little and Mr. Little as part of their consideration in the Merger (the
"Merger Note"). In the event of the death or permanent disability of Ms.
Little or Mr. Little, she or he will be entitled to a disability benefit or
death benefit to the deceased's estate equal to the product of two times (i)
the aggregate fixed annual compensation that they were entitled to receive
for the full employment year in which the disability or death occurs, plus
(ii) an amount equal to the annual bonus.
In addition to their employment agreements, each of Ellen Dinerman
Little and Robert B. Little have entered into a Non-Competition Agreement,
pursuant to which she or he have agreed, for a period of five years ending
October 31, 2001, not to (i) own, manage, operate or control any business
that competes with the business of the Company (other than motion picture
production activities and activities that are specifically permitted under
their employment agreements, and other than the right to hold de minimis
investments in publicly-held companies) or (ii) solicit any Company employee
or interfere with the relationship of the Company with any employee,
customer, supplier or lessee. The non-competition obligations terminate
earlier than October 31, 2001 if the individual party's employment is
terminated by him or her for Good Reason or by the Company other than for
Cause (as such terms are defined in their employment agreements), or if the
Company fails to pay any amount due under the Merger Note at a time when Ms.
Little and Mr. Little do not control a majority of the Board of Directors of
the Company.
WILLIAM F. LISCHAK. William F. Lischak has an employment agreement with
the Company with a five year term which commenced on October 31, 1996 and ends
on October 30, 2001 and which provides for his services as Chief Operating
Officer and Chief Financial Officer of the Company. Under the agreement, Mr.
Lischak receives an annual base salary of $175,000 for each of the first two
years of the term, $200,000 for the third and fourth years of the term and
$225,000 in the final year of the term. In addition, Mr. Lischak is entitled to
a guaranteed bonus of $50,000 per year payable in quarterly installments, plus
such additional bonus, if any, as may be awarded to Mr. Lischak by the Company's
Board of Directors or compensation or similar committee. Mr. Lischak also is
entitled to certain benefits including, among other things, certain health, life
and disability insurance benefits, and an automobile allowance. In the event of
a material uncured breach by the Company of his employment agreement, Mr.
Lischak is entitled to terminate the employment agreement and to receive his
base salary, fixed annual bonus, health, life and disability insurance benefits
due under the agreement through the remainder of the five-year term, and any
stock options held by Mr. Lischak will vest on the date of termination.
CERTAIN INFORMATION CONCERNING STOCK OPTION PLANS
The Company has two stock-based incentive compensation plans for the
Company's employees, directors and certain other persons providing services to
the Company: the 1996 Special Stock Option Plan and Agreement (the "Management
Option Plan") and the 1996 Basic Stock Option and Stock Appreciation Rights Plan
(the "Basic Plan") (collectively, the "Plans"). The Management Option Plan is a
primary vehicle for providing equity incentives to the Company's two principal
executive officers, Ellen Dinerman Little and Robert B. Little. Under the
Management Option Plan, on October 31, 1996, each of Ms. Little and Mr. Little
was granted two non-qualified options for a total of 1,100,000 shares each of
Common Stock: one option for 537,500 shares of Common Stock at an exercise price
of $5.00 per share (exercisable on October 31, 1996 for 100,000 shares with the
balance vesting in five equal annual installments beginning on October 30, 1997)
and one option for 562,500 shares at an exercise price of $8.50 per share
(vesting in five equal annual installments beginning on October 30, 1997). All
2,200,000 shares of Common Stock initially reserved for issuance under the
Management Option Plan were subject
51
<PAGE>
to the options granted to Ms. Little and Mr. Little. Regular full-time
employees of the Company, non-employee members of the Company's Board of
Directors, and independent consultants and other persons who provide services
on a regular or substantial basis to the Company are generally eligible to
participate in the Basic Plan (under which 550,000 shares of Common Stock are
reserved for issuance). As of April 15, 1998, options to purchase an
aggregate of 40,000 shares of Common Stock were outstanding under the Basic
Plan, of which options to purchase 20,000 shares of Common Stock have an
exercise price of $5.25 per share and options to purchase 20,000 shares of
Common Stock have an exercise price of $2.375 per share. The Plans are
currently administered by the Compensation Committee to the extent
contemplated by the respective Plans.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of April 15, 1998 by
(i) each person known to the Company to be the beneficial owner of more than
5% of the Company's Common Stock, (ii) each current director of the Company,
(iii) each of the Named Executives listed in the Summary Compensation Table
under "Item 11- Executive Compensation" above, and (iv) all current executive
officers and directors of the Company as a group. The number of shares and
percentages in the table and accompanying footnotes are based upon 5,732,778
shares of Common Stock outstanding as of April 15, 1998. The shares of
Common Stock underlying immediately exercisable options, warrants or rights,
or immediately convertible securities, or shares of Common Stock underlying
options, warrants, rights or convertible securities that become exercisable
or convertible within 60 days of April 15, 1998, are deemed to be outstanding
for the purpose of calculating the number and percentage beneficially owned
by the holder of such options, warrants, rights or convertible securities,
but are not deemed to be outstanding for the purpose of computing the
percentage beneficially owned by any other person. Unless otherwise
indicated in the footnotes following the table, the person as to whom the
information is given had, based upon information furnished by such persons,
sole voting and investment power over the shares of Common Stock shown as
beneficially owned by them, subject to community property laws where
applicable.
52
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF SHARES COMMON STOCK
OF COMMON STOCK BENEFICIALLY
NAME BENEFICIALLY OWNED OWNED
- ---- ------------------ -----
<S> <C> <C>
Ellen Dinerman Little (1). . . . . . . . . . . . . 3,802,778 (2) 60%
Robert B. Little (1) . . . . . . . . . . . . . . . 3,802,778 (2) 60%
Stephen K. Bannon . . . . . . . . . . . . . . . . 126,324 (3) 2.2%
William F. Lischak . . . . . . . . . . . . . . . . 249,560 (4) 4.4%
MJ Peckos. . . . . . . . . . . . . . . . . . . . . 0 0%
Christopher Trunkey. . . . . . . . . . . . . . . . 0 0%
Alessandro Fracassi. . . . . . . . . . . . . . . . 5,000 (3) *
Jeffrey A. Rochlis . . . . . . . . . . . . . . . . 137,353 (3)(5) 2.5%
Scot K. Vorse. . . . . . . . . . . . . . . . . . . 131,323 (3) 2.4%
Kingdon Capital Management Corporation (6) . . . . 747,000 (7) 12%
Dolphin Offshore Partners, L.P. (8). . . . . . . . 1,067,000 (9) 17.6%
All current executive officers
and directors as a
group (9 persons). . . . . . . . . . . . . . . . 4,201,778 (10) 66.1%
</TABLE>
- ---------------------
* less than one percent
(1) Such person's business address is in care of the Company, 8800 Sunset
Boulevard, Third Floor, Los Angeles, California 90069.
(2) Includes (i) 2,953,218 shares of Common Stock held by Ellen Dinerman Little
and Robert B. Little as community property in a revocable living trust,
(ii) the right to vote 249,560 shares of Common Stock pursuant to an
irrevocable proxy granted to Ms. Little and Mr. Little by Mr. Lischak,
(iii) 300,000 shares of Common Stock subject to immediately exercicsable
options granted to such person under the Management Option Plan, and (iv)
300,000 shares of Common Stock subject to immediately exercisable options
granted to such person's spouse under the Management Option Plan which
generally may only be exercised by such person's spouse (although such
person disclaims beneficial ownership of the shares subject to his or her
spouse's options). Does not include (a) 800,000 shares of Common Stock
subject to options granted to such person under the Management Option Plan
or 800,000 shares of Common Stock subject to options granted to such
person's spouse under the Management Option Plan, the exercisability of
which, in each case, is subject to certain vesting requirements, or (b)
132,353 shares of Common Stock pledged to Ms. Little and Mr. Little by
Jeffrey A. Rochlis to secure a loan from the Littles to Mr. Rochlis. Mr.
Rochlis has retained the voting rights with respect to the pledged shares.
See footnote (5) below. The proxy granted to Ms. Little and Mr. Little by
Mr. Lischak will continue during Mr. Lischak's ownership of the shares,
until the October 30, 2001 (the "Expiration Date"); provided, however, that
such proxy terminates earlier if the Littles own or control less than five
percent of the outstanding voting power of the Company, or if the shares to
which the proxy relates are sold in the public market. In addition until
the Expiration Date, Ms. Little and Mr. Little also have, under certain
circumstances, certain rights to acquire (while the
53
<PAGE>
shares are held by Mr. Lischak) the 249,560 shares of Common Stock held by
Mr. Lischak. See footnote (4) below.
(3) Includes 5,000 shares of Common Stock subject to immediately exercisable
option granted pursuant to the Basic Plan.
(4) All the shares indicated are subject in the event of transfer (including
voluntary and certain involuntary transfers) to a right of first refusal or
option to purchase at the then current market price (and a right of
repurchase at $2.00 per share in the event Mr. Lischak's employment with
the Company terminates for a reason other than death, disability or the
Company's material breach of Mr. Lischak's employment agreement) in favor
of Ellen Dinerman Little and Robert B. Little during Mr. Lischak's
ownership of such shares until the Expiration Date. In addition, Mr.
Lischak has granted the right to vote all such shares to the Littles
pursuant to an irrevocable proxy which continues during Mr. Lischak's
ownership of the shares until the Expiration Date, subject to earlier
termination in certain circumstances. See footnote (2) above.
(5) Of the shares indicated, 132,353 shares have been pledged to Ms. Little and
Mr. Little to secure a $50,000 loan from the Littles to Mr. Rochlis, due
May 31, 1998 and bearing interest at the rate of 10% per annum. Mr.
Rochlis has retained the voting rights with respect to the pledged shares.
(6) The address of Kingdon Capital Management Corporation is 152 West 57th
Street, New York, New York 10019.
(7) Includes 498,000 shares of Common Stock issuable upon exercise of Warrants.
Information provided herein was obtained from a Schedule a 13D filed with
the Securities and Exchange Commission in March 1995 by Kingdon Capital
Management Corporation.
(8) The General Partner of Dolphin Offshore Partners is Peter E. Salas, and the
address of Mr. Salas and Dolphin Offshore Partners, L.P. is c/o Dolphin
Management, 129 East 17th Street, New York, New York 10003.
(9) Includes 328,000 shares of Common Stock issuable upon exercise of Warrants.
Information provided herein was obtained from the General Partner of
Dolphin Offshore Partners, L.P.
(10) Includes 300,000 shares of Common Stock subject to immediately exercisable
options granted to Ellen Dinerman Little under the Management Option Plan,
300,000 shares of Common Stock subject to immediately exercisable options
granted to Robert B. Little under the Management Option Plan, and an
aggregate of 20,000 shares of Common Stock subject to immediately
exercisable option granted to Messrs. Bannon, Fracassi, Rochlis and Vorse
under the Basic Plan.
Pursuant to a Lock-Up and Registration Rights Agreement, dated October 31,
1996, by and among the Company, Ms. Little, Mr. Little and Mr. Lischak, each
such person has agreed not to sell, or otherwise dispose of (except for estate
planning purposes and other limited exceptions), any shares received by them in
the Merger (2,928,218 shares held by the Littles and 249,560 shares held by Mr.
Lischak) (the "Merger Shares") for a period which commenced on October 31, 1996
and ends in three equal installments on February 16, 1998, February 16, 1999 and
February 16, 2000. The lock-up will terminate earlier (i) with respect to an
individual, if such person's employment with the Company is terminated Without
Cause by the Company or for Good Reason by such person (as such terms are
defined in their respective employment agreements with the Company); (ii) with
respect to 10% of the Merger
54
<PAGE>
Shares subject to the Lock-Up and Registration Rights Agreement if both Littles
are deceased; (iii) with respect to any Merger Shares held by Mr. Lischak that
are purchased by Ms. Little or Mr. Little or their designees pursuant to any
right of first refusal or repurchase agreement; (iv) with respect to any Merger
Shares surrendered in satisfaction of any indemnification obligation under the
Merger Agreement; and (v) with respect to a number of Merger Shares equal in
value to the outstanding principal balance (plus interest) of the Merger Note,
if the Company fails to pay any amount due under such note.
Pursuant to the Lock-Up and Registration Rights Agreement, the Littles and
Mr. Lischak have the right on three occasions (but not more than once in any
18-month period) to require the Company, at its expense, to file a registration
statement under the Securities Act for the registration of a minimum of 250,000
of the Merger Shares released to them from the lock-up. These demand rights
terminate, as to one demand, on October 30, 2004; as to the second demand, on
October 30, 2008; and as to the third demand, on October 30, 2011. In addition,
the Littles and Mr. Lischak have unlimited "piggyback" rights in connection with
registration statements filed by the Company under the Securities Act until
October 30, 2004.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On October 31, 1996, as part of the consideration to them in the Merger,
Ellen Dinerman Little (Co-Chairman of the Board, Co-Chief Executive Officer
and President of the Company) and Robert B. Little (Co-Chairman of the Board
and Co-Chief Executive Officer of the Company) received the Merger Note, a
$2,000,000 secured promissory note of the Company, bearing interest at the
rate of 9% per annum, with principal and interest payable in monthly
installments of $41,517 over a five year period ending October 1, 2001. The
Merger Note is secured by a security interest (subordinate to the security
interest of the Company's commercial lenders) in substantially all of the
Company's assets. In connection with the Facility Amendment and the
negotiations for such amendment, Ms. Little and Mr. Little agreed to defer
receipt of payments under the Merger Note. See Item 7, "Managements
Discussions and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources". Payments under the Merger Note
accrue, but payment is deferred until outstanding borrowings under the
Operating Facility portion of the Credit Facility are reduced to at least
$5,000,000, the Company and the Lenders view such reduction as permanent, and
not before May 1999. The Merger Note will be extended for the period of time
payments are deferred, the deferred payments will continue to bear interest,
and the monthly payments will be adjusted to compensate for additional
interest acrued pursuant to the deferral of payments. The rights of Ms.
Little and Mr. Little under the Merger Note and related security agreement
are not otherwise affected. During 1997, an aggregate of approximately
$207,583 in principal and interest was paid to the Littles under the Merger
Note and an aggregate of approximately $290,616 was deferred. At April 15,
1998, the aggregate amount outstanding (including accrued interest) under
such promissory note was approximately $1,940,097 (including an aggregate of
approximately $456,684 in previously deferred payments of principal and
interest).
Pursuant to the Merger, on October 31, 1996, the Littles also received
an unsecured promissory note of the Company in the principal amount of
$137,061 representing the cash value on such date of certain life insurance
policies the ownership of which was transferred to the Company on Merger, and
under which the Company was named as the beneficiary. This promissory note
bears interest at the rate of 9% per annum, with principal and accrued
interest payable on October 31, 1997. The promissory note matured on October
31, 1997 and is currently due and payable to the Littles. At April 15, 1998,
the aggregate amount outstanding (including accrued interest) under such
promissory note was approximately $155,455.
In December 1997 and February 1998, Ms. Little and Mr. Little loaned the
Company an aggregate of $400,000 in order to provide a portion of the funds
required by Company for the print and advertising costs associated with the
domestic theatrical release by the Company of "MRS. DALLOWAY." The loan is
secured by a security interest in domestic revenues from "MRS. DALLOWAY"
(currently subordinate to the security interest of the Company's commercial
lenders), bears interest at the rate of 9% per annum, and is to be repaid as
and when revenues from "MRS. DALLOWAY" and "DIFFERENT FOR GIRLS" are received
by the Company (after repayment of a Film Facility related to the acquisition
of domestic rights to both DIFFERENT FOR GIRLS and MRS. DALLOWAY and print
and advertising costs lent by the lenders with respect to DIFFERENT FOR
GIRLS). At April 15, 1998, the aggregate amount outstanding (including
accrued interest) pursuant to such loan was approximately $407,500.
Neo Motion Pictures, Inc., a California corporation ("Neo") involved in
the production of motion pictures, provided (on a non-exclusive basis)
production services with respect to approximately 12 motion pictures for
Pre-Merger Overseas from 1989 through the date of Merger and
55
<PAGE>
may provide production services to motion pictures for Company in the future.
As permitted by his employment agreement with the Company, Mr. Little
performs consulting services for Neo. During 1997, no consulting fees were
paid by Neo to Mr. Little, although, at April 15, 1998, Neo owed Mr. Little
$269,121 in accrued but unpaid consulting fees. Mr. Little and the Company
co-own an option to acquire a fifty percent interest in Neo for a purchase
price of less than $60,000. The Company has guaranteed payment by Neo of a
promissory note payable to a third party on September 1998 (extended from May
9, 1997), under which an aggregate of approximately $223,939 in principal and
accrued interest was outstanding as of April 15, 1998.
Alessandro Fracassi, a Director of the Company, is the sole owner of
Original Film Company, an Italian corporation ("Original"), which owns or
controls, together with certain of its affiliates, distribution rights to 13
motion pictures for which the Company acts as sales agent pursuant to various
agreements. In exchange for licensing distribution rights to such films on
behalf of Original and its affiliates, the Company receives a sales agency fee
generally ranging from 5% to 15% of the revenues generated by such licensing,
depending on the film. During 1997, sales or licenses of distribution rights to
such films by the Company generated less than $5,000 of gross revenues to the
Company.
Mr. Fracassi is also the President and owner of Racing Pictures s.r.l.,
an Italian corporation ("Racing Pictures") which is engaged in the production
and distribution of motion pictures. In 1990 and 1991, Pre-Merger Overseas
licensed to Racing Pictures various distribution rights (primarily Italian
television and video distribution rights) to approximately 86 motion pictures
which the Company owns or for which the Company controls various distribution
or sales agency rights. The licenses, which generally have terms of six to
twelve years, obligated Racing Pictures to pay aggregate minimum guarantees
of approximately $2,900,000 to Pre-Merger Overseas. With respect to video
distribution rights granted to Racing Pictures pursuant to such licenses, the
Company is generally entitled to a 25% royalty on all gross receipts of
Racing Pictures relating to Racing Pictures' exploitation of such video
distribution rights. With respect to television rights granted to Racing
Pictures pursuant to such licenses, Racing Pictures is generally entitled to
a distribution fee of 25% of gross receipts from exploitation of such
television rights and recoupment of all Racing Pictures' distribution
expenses. The Company is entitled to the balance of the gross receipts of
Racing Pictures from exploitation of the television rights. Both the video
royalty payable to the Company and the Company's share of the gross receipts
from Racing Pictures' exploitation of the television rights are applied first
to Racing Pictures' recoupment of the minimum guarantees. In September 1996,
the Company and Racing Pictures agreed that $413,000 in then past due minimum
guarantees owed by Racing Pictures to the Company were to be paid to the
Company, without interest, by September 30, 1998. In 1997, $132,000 of such
amount was paid by Racing Pictures to the Company, all with respect to films
for which the Company owns the copyright. Upon payment by Racing Pictures of
the remaining $281,000 of such minimum guarantees to the Company, the Company
would be entitled to retain approximately $48,575 of the total amount as
distribution fees, with the remainder of such amount to be paid to the
various parties from which distribution rights to the films licensed to
Racing Pictures were acquired.
Racing Pictures also owns or controls distribution rights to three
motion pictures for which the Company acts as sales agent or distributor
pursuant to various agreements. In exchange for licensing distribution rights
in such films, the Company receives a fee generally ranging from 10% to 20%
of the revenues generated by such licensing, depending on the film. During
1997, sales or licenses of distribution rights to such films by the Company
generated $258,800 in total revenues, of which, the Company retained $165,000
($33,000 as fees and $132,000 as an offset against the minimum guarantees due
from Racing Pictures as described above).
In connection with the Merger, the Company entered into the Tax
Reimbursement Agreement with Ellen Dinerman Little, Robert B. Little and
William F. Lischak (Chief Operating
56
<PAGE>
Officer, Chief Financial Officer, Secretary and a Director of the Company).
During 1997, no payments were made pursuant to the Tax Reimbursement
Agreement, although the Company and the Littles are discussing the amount of
payments due the Littles under the provisions of the Tax Reimbursement
Agreement. The Company currently estimates $200,000 will be payable to the
Littles. See "Item 7 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Certain Tax Related Matters" for
additional information regarding the Tax Reimbursement Agreement and the
payment due to the Littles.
Mr. Lischak and his spouse own BLAH, Inc. which, until March 1, 1998
provided the production executive services of Mr. Lischak's spouse to the
Company in accordance with a Loan-Out Agreement dated as of March 11, 1996,
(the "Loan-Out Agreement"). Pursuant to the Loan-Out Agreement, BLAH, Inc.
received an aggregate of $73,200 in 1997. By agreement of BLAH, Inc. and the
Company, an additional $6,400 payable to BLAH, Inc. with respect to 1997 was
deferred without interest, until January 7, 1998 when it was paid in full.
57
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)1. INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page(s) in
Form 10-k
---------
<S> <C>
Report of Independent Accountants . . . . . . . . . F-1
Consolidated Financial Statements:
Consolidated Balance Sheets - December 31, 1996
and 1997. . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Statements of Operations - Years Ended
December 31, 1995, 1996 and 1997. . . . . . . . . F-3
Consolidated Statements of Shareholders' Equity -
Years Ended December 31, 1995, 1996 and 1997. . . F-4
Consolidated Statements of Cash Flows - Years
Ended December 31, 1995, 1996 and 1997. . . . . . F-5
Notes to Consolidated Financial Statements. . . . . F-6
</TABLE>
(a)2. INDEX TO FINANCIAL STATEMENTS SCHEDULES
The schedules for which provision is made in the
applicable accounting regulations of the Securities
and Exchange Commission (the "Commission") are included
in the respective financial statements or notes thereto
or are not required under the related instructions or
are inapplicable, and therefore have been omitted.
(a)3. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
3.1 Restated Certificate of Incorporation.
Incorporated by reference to Exhibit 3.1 to the
Company's Current Report on Form 8-K, dated
October 25, 1996, filed with the Commission on
November 12, 1996.
3.2 Bylaws. Incorporated by reference to Exhibit 3.2
to the
58
<PAGE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
Company's Current Report on Form 8-K, dated
October 25, 1996, filed with the Commission on
November 12, 1996.
4.1 Form of Common Stock Certificate. Incorporated by
reference to Exhibit 4.1 to the Company's Current
Report on Form 8-K, dated October 25, 1996, filed
with the Commission on November 12, 1996.
4.2 Form of Warrant Certificate. Incorporated by
reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-1, Registration
No. 33-83624.
4.3 Form of Unit Purchase Option. Incorporated by
reference to Exhibit 4.3 to the Company's
Registration Statement on Form S-1, Registration
No. 33-83624.
4.4 Warrant Agreement between Continental Stock
Transfer & Trust Company and the Company.
Incorporated by reference to Exhibit 4.4 to the
Company's Registration Statement on Form S-1,
Registration No. 33-83624.
4.5 Letter agreement, dated October 28, 1996, amending
the Unit Purchase Options. Incorporated by
reference to Exhibit 4.5 to the Company's Current
Report on Form 8-K, dated October 25, 1996, filed
with the Commission on November 12, 1996.
4.6 Form of Warrant issued in the Company's bridge
financing. Incorporated by reference to Exhibit
10.4 to the Company's Registration Statement on
Form S-1, Registration No. 33-83624.
4.7 Warrant, dated October 31, 1996, for Jefferson
Capital Group, Ltd. to purchase shares of Common
Stock of the Company. Incorporated by reference
to Exhibit 4.6 to the Company's Current Report on
Form 8-K, dated October 25, 1996, filed with the
Commission on November 12, 1996.
10.1 Secured Promissory Note of the Company, dated
October 31, 1996, payable to Robert B. Little and
Ellen Dinerman Little. Incorporated by reference
to Exhibit 10.1 to the Company's Current Report on
Form 8-K, dated October 25, 1996, filed with the
Commission on November 12, 1996.
10.2 Indemnity Agreement, dated October 31, 1996,
between the Company and Ellen Dinerman Little.
Incorporated by
59
<PAGE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
reference to Exhibit 10.2 to the Company's
Current Report on Form 8-K, dated October 25,
1996, filed with the Commission on November 12,
1996.
10.3 Indemnity Agreement, dated October 31, 1996,
between the Company and Robert B. Little.
Incorporated by reference to Exhibit 10.3 to the
Company's Current Report on Form 8-K, dated
October 25, 1996, filed with the Commission on
November 12, 1996.
10.4 Indemnity Agreement, dated October 31, 1996,
between the Company and William F. Lischak.
Incorporated by reference to Exhibit 10.4 to the
Company's Current Report on Form 8-K, dated
October 25, 1996, filed with the Commission on
November 12, 1996.
10.5 Indemnity Agreement, dated October 31, 1996,
between the Company and Stephen K. Bannon.
Incorporated by reference to Exhibit 10.5 to the
Company's Current Report on Form 8-K, dated
October 25, 1996, filed with the Commission on
November 12, 1996.
10.6 Indemnity Agreement, dated October 31, 1996,
between the Company and Scot K. Vorse.
Incorporated by reference to Exhibit 10.6 to the
Company's Current Report on Form 8-K, dated
October 25, 1996, filed with the Commission on
November 12, 1996.
10.7 Indemnity Agreement, dated October 31, 1996,
between the Company and Jeffrey A. Rochlis.
Incorporated by reference to Exhibit 10.7 to the
Company's Current Report on Form 8-K, dated
October 25, 1996, filed with the Commission on
November 12, 1996.
10.8 Indemnity Agreement, dated October 31, 1996,
between the Company and Alessandro Fracassi.
Incorporated by reference to Exhibit 10.8 to the
Company's Current Report on Form 8-K, dated
October 25, 1996, filed with the Commission on
November 12, 1996.
10.9 Employment Agreement, dated as of October 31,
1996, between the Company and Ellen Dinerman
Little. Incorporated by reference to Exhibit
10.9 to the Company's Current Report on Form 8-K,
dated October 25, 1996, filed with the Commission
on November 12, 1996.
60
<PAGE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.10 Employment Agreement, dated as of October 31,
1996, between the Company and Robert B. Little.
Incorporated by reference to Exhibit 10.10 to the
Company's Current Report on Form 8-K, dated
October 25, 1996, filed with the Commission on
November 12, 1996.
10.11 Employment Agreement, dated as of October 31,
1996, between the Company and William F. Lischak.
Incorporated by reference to Exhibit 10.11 to the
Company's Current Report on Form 8-K, dated
October 25, 1996, filed with the Commission on
November 12, 1996.
10.12 Security Agreement, dated as of October 31, 1996,
between the Company and Ellen Dinerman Little and
Robert B. Little. Incorporated by reference to
Exhibit 10.12 to the Company's Current Report on
Form 8-K, dated October 25, 1996, filed with the
Commission on November 12, 1996.
10.13 Tax Reimbursement Agreement, dated as of October
31, 1996, between the Company, Ellen Dinerman
Little, Robert B. Little and William F. Lischak.
Incorporated by reference to Exhibit 10.13 to the
Company's Current Report on Form 8-K, dated
October 25, 1996, filed with the Commission on
November 12, 1996.
10.14 Promissory Note (the "Insurance Note"), dated
October 31, 1996, payable to Ellen Dinerman
Little and Robert B. Little. Incorporated by
reference to Exhibit 10.14 to the Company's
Current Report on Form 8-K, dated October 25,
1996, filed with the Commission on November 12,
1996.
61
<PAGE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.15 Stockholders' Voting Agreement, dated as of
October 31, 1996, by and among the Company, Ellen
Dinerman Little, Robert B. Little, William F.
Lischak, Jeffrey A. Rochlis, Barbara Boyle, the
Hoberman Family Trust, John Hyde, Sparta Partners
III, Stephen K. Bannon, Scot K. Vorse and Gary M.
Stein. Incorporated by reference to Exhibit
10.15 to the Company's Current Report on Form
8-K, dated October 25, 1996, filed with the
Commission on November 12, 1996.
10.16 Lock-Up and Registration Rights Agreement, dated
as of October 31, 1996, between the Company and
Ellen Dinerman Little, Robert B. Little and
William F. Lischak. Incorporated by reference to
Exhibit 10.16 to the Company's Current Report on
Form 8-K, dated October 25, 1996, filed with the
Commission on November 12, 1996.
10.17 Non-Competition Agreement, dated as of October 31,
1996, between the Company and Ellen Dinerman
Little. Incorporated by reference to Exhibit
10.17 to the Company's Current Report on Form
8-K, dated October 25, 1996, filed with the
Commission on November 12, 1996.
10.18 Non-Competition Agreement, dated as of October 31,
1996, between the Company and Robert B. Little.
Incorporated by reference to Exhibit 10.18 to the
Company's Current Report on Form 8-K, dated
October 25, 1996, filed with the Commission on
November 12, 1996.
10.19 Overseas Filmgroup, Inc. 1996 Special Stock Option
Plan and Agreement. Incorporated by reference to
Exhibit 99.1 to the Company's Current Report on
Form 8-K, dated October 25, 1996, filed with the
Commission on November 12, 1996.
10.20 Overseas Filmgroup, Inc. 1996 Basic Stock Option
and Stock Appreciation Rights Plan. Incorporated
by reference to Exhibit 10.20 to the Company's
Annual Report on Form 10-K for the fiscal year
ended December 31, 1996.
10.21 Agency Agreement, dated as of December 10, 1993,
between the Company and GKN Securities Corp., and
amendments thereto (without schedules).
Incorporated by reference to Exhibit 10.1 to the
Company's Registration Statement on Form S-1,
Registration No. 33-83624.
62
<PAGE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.22 Letter Agreement among certain stockholders of the
Company, the Company and GKN Securities Corp.
(without schedules). Incorporated by reference
to Exhibit 10.2 to the Company's Registration
Statement on Form S-1, Registration No. 33-83624.
10.23 Restated and Amended Syndication Agreement dated
as of October 31, 1996, among Coutts & Co.,
Berliner Bank A.G. London Branch, Overseas
Filmgroup, Inc. and Entertainment Media
Acquisition Corporation. Incorporated by
reference to Exhibit 10.25 to the Company's
Annual Report on Form 10-K for the fiscal year
ended December 31, 1996.+
10.24 Amendment dated as of April 14, 1998 to
Restated and Amended Syndication Agreement
among Coults & Co., Berliner Bank A.G. London
Branch and Overseas Filmgroup, Inc. Filed
herewith.
10.25 Loan Out Agreement dated as of March 11, 1996
between the Company and BLAH, Inc. Incorporated
by reference to Exhibit 10.27 to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1996.
10.26 Restated Loan Out Agreement dated as of March 11,
1996 between the Company and BLAH, Inc. Filed
herewith.
10.27 Agreement dated as of September 12, 1996, between
the Company and Racing Pictures s.r.l.
Incorporated by reference to Exhibit 10.28 to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1996.
10.28 Option Agreement dated as of September 13, 1996,
between Robert B. Little and the Company.
Incorporated by reference to Exhibit 10.29 to the
company's Annual Report on Form 10-K for the year
ended December 31, 1996.
10.29 Overseas' Filmgroup Lease Agreement dated April
21, 1987, as amended. Incorporated by reference
to Exhibit 10.30 of the Company's Annual Report
on Form 10-K for the year ended December 31,
1996.
10.30 Amendment, dated April 1, 1997 to Overseas Filmgroup
Lease Agreement. Filed herewith.
10.31 Loan Agreement dated as of February 15, 1998 between
the Company and Ellen Dinerman Little and Robert B.
Little. Filed herewith.
21 Subsidiaries of the Registrant. Filed herewith.
23 Consent of Price Waterhouse LLP. Filed herewith.
27.1 Financial Data Schedule 1997. Filed herewith
(Filed electronically only)
27.2 Restated Financial Data Schedule 1996. Filed
herewith (Filed electronically only)
</TABLE>
63
<PAGE>
- --------------------------
+ Confidential treatment has been granted for portions of such exhibit.
(b) No reports on Form 8-K were filed by the Company during the last
quarter of the period covered by this Report.
(c) See Item 14(a)3 above.
(d) Not applicable.
64
<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.
OVERSEAS FILMGROUP, INC.
By: /s/ Ellen Dinerman Little
--------------------------
Ellen Dinerman Little,
Co-Chairman of the Board of Directors,
Co-Chief Executive Officer, and President
Dated: April 27, 1998
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/ Ellen Dinerman Little
-------------------------
Ellen Dinerman Little Co-Chairman of the Board April 27 , 1998
of Directors, Co-Chief
Executive Officer, and
President (Co-Principal
Executive Officer)
/s/ Robert B. Little
--------------------
Robert B. Little Co-Chairman of the Board of April 27, 1998
Directors and Co-Chief
Executive Officer (Co-
Principal Executive Officer)
/s/ William F. Lischak
----------------------
William F. Lischak Chief Operating Officer, April 27, 1998
Chief Financial Officer,
Secretary, and Director
(Principal Financial and
Accounting Officer)
65
<PAGE>
/s/ Stephen K. Bannon
---------------------
Stephen K. Bannon Director April 27, 1998
/s/ Alessandro Fracassi
-----------------------
Alessandro Fracassi Director April 27, 1998
/s/ Jeffrey A. Rochlis
----------------------
Jeffrey A. Rochlis Director April 27, 1998
/s/ Scot K. Vorse
-----------------
Scot K. Vorse Director April 27, 1998
66
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Overseas Filmgroup, Inc.
In our opinion, the financial statements listed in the index on page 58
present fairly, in all material respects, the financial position of Overseas
Filmgroup, Inc. and its subsidiaries (the "Company") at December 31, 1997 and
1996, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 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 audits. We conducted our
audits 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 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 described in Notes 6 and 12 to the consolidated financial statements, the
Company amended its Credit Facility on April 14, 1998. Management's
commitments to the lending banks with respect to the amended Credit Facility
are also described in Note 6.
PRICE WATERHOUSE LLP
Los Angeles, California
April 21, 1998
F-1
<PAGE>
OVERSEAS FILMGROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------- -------------
ASSETS:
-------
<S> <C> <C>
Cash and cash equivalents $ 1,179,133 $ 353,689
Restricted cash 172,498 46,037
Accounts receivable, net of allowance for doubtful
accounts of $750,000 in 1997 and $1,000,000 in 1996 14,416,540 10,728,239
Related party receivable 281,000 413,000
Film costs, net of accumulated amortization 29,740,567 28,358,324
Fixed assets, net of accumulated depreciation 408,685 557,127
Other assets 361,897 347,269
------------- -------------
Total assets $ 46,560,320 $ 40,803,685
------------- -------------
------------- -------------
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY:
-------------------------------------
<S> <C> <C>
Accounts payable and accrued expenses $ 1,939,576 $ 2,623,084
Payable to producers 4,453,021 3,712,812
Notes payable to related parties 2,161,977 2,085,886
Notes payable 23,142,184 16,607,137
Deferred income taxes 2,502,200 3,030,000
Deferred revenue 800,250 553,000
------------- -------------
Total liabilities 34,999,208 28,611,919
------------- -------------
Shareholders' equity:
Preferred stock, $.001 par value, 2,000,000 shares
Authorized, 0 shares outstanding -- --
Common stock, $.001 par value, 25,000,000 shares authorized;
5,777,778 shares issued; 5,732,778 shares outstanding 5,778 5,778
Additional paid-in capital 10,652,731 10,652,731
Retained earnings 989,337 1,533,257
Treasury stock at cost, 45,000 shares (86,734) -
------------- -------------
Total shareholders' equity 11,561,112 12,191,766
------------- -------------
Total liabilities and shareholders' equity $ 46,560,320 $ 40,803,685
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
OVERSEAS FILMGROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues $ 22,494,256 $ 28,677,571 $ 21,672,510
Expenses:
Film costs 19,152,847 23,058,000 16,320,694
Selling, general and administrative 3,509,122 3,595,660 2,721,745
------------- ------------- -------------
Total expenses 22,661,969 26,653,660 19,042,439
------------- ------------- -------------
(Loss)/Income from operations (167,713) 2,023,911 2,630,071
------------- ------------- -------------
Other income/(expense):
Interest income 4,923 32,831 35,715
Interest expense (853,666) (569,183) (89,637)
Other income 179,179 177,710 317,917
------------- ------------- -------------
Total other (expense)/income (669,564) (358,642) 263,995
------------- ------------- -------------
(Loss)/Income before income taxes (837,277) 1,665,269 2,894,066
Income tax (benefit) provision (293,357) 3,131,367 432,905
------------- ------------- -------------
Net (loss) income $ (543,920) $ (1,466,098) $ 2,461,161
------------- ------------- -------------
------------- ------------- -------------
Basic and diluted net (loss)/income per share $ (0.09) $ (0.41) $ 0.77
------------- ------------- -------------
------------- ------------- -------------
Weighted average number of common
shares outstanding 5,747,778 3,611,111 3,177,778
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The Accompanying Notes Are An Integral Part Of These Statements.
F-3
<PAGE>
OVERSEAS FILMGROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (543,920) $ (1,466,098) $ 2,461,161
Adjustments to reconcile net (loss) income to net
cash provided by operating activities -
Amortization of film costs 18,696,333 22,586,373 16,115,927
Depreciation of fixed assets 160,099 155,415 122,776
Change in assets and liabilities -
(Increase) decrease in accounts receivable (3,688,301) (2,536,687) 926,669
Decrease (increase) in related party receivables 132,000 (413,000) 435,088
Decrease (increase) in other receivables - 314,000 (24,000)
(Increase) decrease in other assets (14,628) (198,015) 46,015
(Decrease) increase in accounts payable
and accrued expenses (683,508) 1,826,176 (278,783)
Increase (decrease) in payable to producers 740,210 (3,263,809) 1,121,294
(Decrease) increase in deferred income taxes (527,800) 2,900,000 10,000
Increase (decrease) in deferred revenue 247,250 (1,628,000) 416,240
------------- ------------- -------------
Net cash provided by operating activities 14,517,735 18,276,355 21,352,387
------------- ------------- -------------
Cash flows from investing activities:
Additions to film costs (20,078,577) (33,595,627) (21,087,875)
Purchase of fixed assets (11,657) (328,221) (289,107)
------------- ------------- -------------
Net cash used in investing activities (20,090,234) (33,923,848) (21,376,982)
------------- ------------- -------------
Cash flows from financing activities:
Net borrowings under credit facilities 6,535,047 9,185,244 1,363,614
Payments on notes payable to related party (123,909) (43,073) -
Issuance of note payable to related party 200,000 - -
Merger cash, net of acquisition costs - 8,791,440 -
Purchase of treasury stock (86,734) - -
Distributions to shareholders - (4,452,991) (832,248)
------------- ------------- -------------
Net cash provided by financing activities 6,524,404 13,480,620 540,366
------------- ------------- -------------
Net increase (decrease) in cash, cash equivalents and restricted cash 951,905 (2,166,873) 515,771
Cash, cash equivalents and restricted cash
at beginning of period 399,726 2,566,599 2,050,828
------------- ------------- -------------
Cash, cash equivalents and restricted cash
at end of period $ 1,351,631 $ 399,726 $ 2,566,599
------------- ------------- -------------
------------- ------------- -------------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 2,185,532 $ 1,321,178 $ 849,632
------------- ------------- -------------
------------- ------------- -------------
Income taxes $ 4,800 $ 55,608 $ 30,130
------------- ------------- -------------
------------- ------------- -------------
Foreign withholding taxes $ 231,243 $ 231,367 $ 352,905
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
OVERSEAS FILMGROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
------------ Additional Retained Treasury
Shares Amount Paid-In Capital Earnings Stock Total
------ ------ --------------- -------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 3,177,778 $3,178 $167,322 $9,639,961 -- $9,810,461
Net Income -- -- -- 2,461,161 -- 2,461,161
Distributions to shareholders -- -- -- (823,248) -- (823,248)
------------ -------- ------------- ----------- ---------- --------------
Balance at December 31, 1995 3,177,778 3,178 167,322 11,277,874 -- 11,448,374
Pre-Merger distributions to shareholders -- -- -- (4,452,991) -- (4,452,991)
Reclassification of earnings due to
termination of S corporation status -- -- 3,825,528 (3,825,528) -- --
Merger transaction 2,600,000 2,600 7,703,682 -- -- 7,706,282
Merger costs charged to capital -- -- (1,043,801) -- -- (1,043,801)
Net loss -- -- -- (1,466,098) -- (1,466,098)
------------ -------- ------------- ----------- ---------- --------------
Balance at December 31, 1996 5,777,778 5,778 10,652,731 1,533,257 -- 12,191,766
Purchase of treasury stock (45,000) -- -- -- (86,734) (86,734)
Net loss -- -- -- (543,920) -- (543,920)
------------ -------- ------------- ----------- ---------- --------------
Balance at December 31, 1997 5,732,778 $5,778 $10,652,731 $989,337 ($86,734) $11,561,112
------------ -------- ------------- ----------- ---------- --------------
------------ -------- ------------- ----------- ---------- --------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
OVERSEAS FILMGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS:
Overseas Filmgroup, Inc. ("Overseas" or the "Company") was formed on February
11, 1980, and operated as a privately held company through October 30, 1996.
As discussed in Note 3, on October 31, 1996 the Company was acquired, through
merger, by Entertainment/Media Acquisition Corporation ("EMAC"), a publicly
traded company. Concurrent with the merger, EMAC changed its name to
Overseas Filmgroup, Inc.
The Company is principally involved in the acquisition and worldwide license or
sale of distribution rights to independently produced motion pictures. Certain
motion pictures are directly distributed by the Company in the domestic
theatrical market under the name First Look Pictures ("First Look").
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include the accounts of
Overseas and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated.
REVENUES
Revenues from nonrefundable guarantees payable by subdistributors are recognized
when the film becomes available for release and certain other conditions are met
in accordance with Statement of Financial Accounting Standards No. 53 ("SFAS
53"), "Financial Reporting by Producers and Distributors of Motion Picture
Films". Amounts received in advance of the film being available are recorded as
deferred revenue. Revenues from direct theatrical distribution of films are
recognized on the dates of exhibition.
FILM COSTS AND AMORTIZATION
Film costs represent those costs incurred in the acquisition and distribution of
motion pictures or in the acquisition of distribution rights to motion pictures
which include advances, minimum guarantees paid to producers, recoupable
distribution and production costs, legal expenses, interest and overhead costs.
These costs have been capitalized in accordance with SFAS 53. Film costs are
amortized using the individual film forecast method whereby expense is
recognized in the proportion that current year revenues bear to management's
estimate of ultimate revenue from all markets.
F-6
<PAGE>
NOTE 2: (Continued)
Film costs are valued at the lower of unamortized cost or estimated net
realizable value. Revenue and cost forecasts for films are regularly 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.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments purchased with a maturity of
less than three months to be cash equivalents. The carrying value of the
Company's cash and cash equivalents approximate fair value due to their
short-term nature.
RESTRICTED CASH
Restricted cash consists of cash held in a collection account which is
restricted for the payment of film facilities in compliance with the Credit
Facility (Note 6).
ACCOUNTS RECEIVABLE
Accounts receivable are stated net of an allowance for doubtful accounts of
$750,000, $1,000,000 and $1,000,000 for the years ended December 31, 1997,
1996 and 1995, respectively. During the year ended December 31, 1997, the
Company reduced its allowance for doubtful accounts by $250,000. Of this
amount, $62,500 was recorded as a credit to bad debt expense and $187,500 was
recorded as an increase in the payable to producers. These amounts represent
the respective shares of the Company and of producers of the increase in
anticipated collections of accounts receivable.
FIXED ASSETS
Fixed assets are recorded at cost and include improvements that significantly
add to the productive capacity or extend the useful life of the asset. Costs of
maintenance and repairs are charged to expense. Depreciation is provided over
the estimated useful lives of the assets which range from 5 to 7 years using
methods which approximate straight line.
PAYABLE TO PRODUCERS
Payable to producers represents an accrual on a film-by-film basis of the
producers' share of revenues recognized by the Company net of the recoupable
costs incurred by Overseas. The producers' share of revenue is expensed in
conjunction with the amortization of film costs. Payments to producers are
typically made on a quarterly basis based on actual cash collections.
INCOME TAXES
The Company records income taxes in accordance with the provisions of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes". The
standard requires, among other provisions, an asset and liability approach to
recognize deferred tax liabilities and assets for the expected future tax
consequences of temporary differences between the carrying amounts and tax bases
of assets and liabilities.
F-7
<PAGE>
NOTE 2: (Continued)
Effective January 1, 1989 (and terminating October 31, 1996 as described
below) the Company elected to be treated as an S Corporation for federal
income tax purposes. Accordingly, subject to the Tax Reimbursement Agreement,
all federal income tax liability was the responsibility of the shareholders.
The Company remained subject to income tax in the state of California, the
principal state of operation for the Company. As a result of the merger
described in Note 3, the Company's S Corporation status was terminated
effective October 31, 1996. The Company is liable for federal and state
income taxes from that date forward (Note 7).
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed using the weighted average number of
shares of common stock outstanding. Common equivalent shares from stock options
and warrants (using the treasury stock method) have been included in the
computation when dilutive.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS No.
128"). SFAS No. 128, effective for periods ending after December 15, 1997,
revises the computation, presentation, and disclosure requirements of
earnings per share. Principal among computation revisions is the replacement
of primary earnings per share with basic earnings per share, which does not
consider common stock equivalents. In addition, SFAS No. 128 modifies
certain dilutive computations and replaces fully diluted earnings per share
with diluted earnings per share. Options and warrants representing common
shares of 7,402,500 and 7,382,500 were excluded from the average number of
common and common equivalent shares outstanding in the diluted EPS
calculation for the years ended December 31, 1997 and 1996, respectively,
because they were anti-dilutive. The Company has adopted SFAS No. 128 for
the year ended December 31, 1997 and has restated prior periods presented to
conform to SFAS No. 128.
ACCOUNTING FOR STOCK-BASED COMPENSATION
As permitted under Statement of Financial Accounting Standards No. 123 ("SFAS
123"), "Accounting for Stock Based Compensation", the Company has elected to use
the intrinsic value method prescribed by APB Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees" to account for compensation expense
for its stock-based employee compensation plans.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to credit risk
consist primarily of cash and accounts receivable. The Company places its cash
with a financial institution and, at times, such amounts may be in excess of the
FDIC insurance limits. Concentration of credit risk with respect to accounts
receivable is limited due to the large number and general dispersion of trade
accounts which constitute the Company's customer base. The Company performs
credit evaluations of its customers and generally does not require collateral.
At December 31, 1997 the Company has a trade receivable from one customer which
represents approximately 12% of the Company's accounts receivable.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Management estimates ultimate revenues and costs for motion pictures for each
market based on public acceptance and historical results for similar products.
Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to amounts reported in prior periods to
conform with the current year presentation.
F-8
<PAGE>
NOTE 3 - MERGERS AND ACQUISITIONS
On October 31, 1996 Entertainment/Media Acquisition Corporation ("EMAC"), a
public company formed for the sole purpose of acquiring an operating company
in the entertainment and media industry, acquired all of the outstanding
common stock of Overseas (the "Overseas Shares"). The shareholders of the
Overseas Shares received 3,177,778 shares of EMAC Common Stock, $1,500,000 in
cash and a $2,000,000 5-year secured promissory note which is payable
monthly, subject to the deferment described in Note 6, and bears interest at
the rate of 9% per year. EMAC also agreed to indemnify the shareholders of
the Overseas Shares from any potential losses with respect to additional
taxes (including interest and penalties) resulting from the Company's
operations during periods in which it was an S corporation, up to a
specified limit. The Company has estimated a liability of $200,000 with
respect to its indemnity obligation, which is included in accrued expenses as
of December 31, 1997. The issuance of the $2,000,000 secured promissory note
was a non-cash item and therefore was not reflected in the Consolidated
Statement of Cash Flows.
For accounting purposes Overseas was considered the acquirer (reverse
acquisition). The acquisition has been treated as a recapitalization of
Overseas reflecting the issuance of Overseas common stock for the net assets of
EMAC, which consisted primarily of cash. Pro forma information reflecting the
combined companies had they merged on January 1, 1995, is not presented as the
combination is not considered a business combination for accounting purposes.
Historical shareholders' equity has been retroactively restated to reflect the
F-9
<PAGE>
NOTE 3: (Continued)
equivalent number of shares received in the merger. The historical financial
statements prior to October 31, 1996 are those of Overseas.
Concurrent with the acquisition, EMAC changed its name to Overseas Filmgroup,
Inc. and changed its fiscal year-end from November 30 to December 31. All
direct costs of the acquisition, consisting primarily of legal, accounting,
consulting and certain other fees have been charged to paid-in capital.
NOTE 4 - FILM COSTS:
Film costs consist of the following:
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Films in release, net of accumulated amortization $26,781,682 $25,838,106
Films not yet available for release 2,958,885 2,520,218
----------- -----------
$29,740,567 $28,358,324
----------- -----------
----------- -----------
</TABLE>
Interest costs capitalized to films were $1,211,831, $767,067 and $744,176
during the years ended December 31, 1997, 1996 and 1995, respectively. Based on
the Company's estimates of projected gross revenues as of December 31, 1997,
approximately 75% of unamortized film costs applicable to films in release are
expected to be amortized during the next three years.
NOTE 5 - FIXED ASSETS:
Fixed assets consist of the following:
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Furniture and fixtures $ 255,497 $ 243,520
Office equipment 201,417 191,023
Computer equipment 643,760 657,487
Leasehold improvements 176,337 173,324
Automobiles 14,970 14,970
----------- -----------
1,291,981 1,280,324
Less accumulated depreciation (883,296) (723,197)
----------- -----------
Net fixed assets $ 408,685 $ 557,127
----------- -----------
----------- -----------
</TABLE>
F-10
<PAGE>
NOTE 6 - NOTES PAYABLE:
The Company has a credit facility (the "Credit Facility") with a two bank
syndicate (the "Banks"). The Credit Facility originally provided for up to
$27,000,000 of credit, however, it was amended and extended (as provided below)
on April 14, 1998 (the "Facility Amendment") such that several levels of
credit are provided, including approximately $17,863,716 of film financing
(the "Film Facilities"), up to $7,234,000 of working capital (the "Operating
Facility") and a $1,000,000 guarantee facility (the "Local Facility"). The
terms of the Facility Amendment provide that additional funds may be drawn
under the Operating Facility so long as such amounts do not exceed
$7,234,000. The Facility Amendment provides for availability under the
Operating Facility and the Local Facility until April 9, 1999, however, apart
from a Film Facility needed to acquire the rights to one film which is
currently in post production, no additional Film Facilities will be provided
and amounts repaid cannot be reborrowed until such time as the two-bank
syndicate determines, in its sole discretion. The Company maintains a
$1,000,000 working capital credit line (the "Local Line") with another bank,
which is guaranteed by letters of credit issued under the Local Facility.
These letters of credit, as well as the Local Line, have been extended until
April 9, 1999 under the terms of the Facility Amendment. Outstanding balances
are summarized as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
---- ----
<S> <C> <C>
Credit Facility:
Film Facilities $16,233,844 $14,529,137
Operating Facility 5,908,340 1,850,000
Local Facility - -
Local Line 1,000,000 228,000
----------- -----------
$23,142,184 $16,607,137
----------- -----------
----------- -----------
</TABLE>
Borrowings under the Film Facilities are secured by rights to the individual
film financed by the related Film Facility, cash proceeds and accounts
receivable related to the distribution of such related film as well as all
assets of the Company generally. Repayments under each Film Facility and are
made first from collections on sales related to the specific film and,
pursuant to the terms of the Facility Amendment, from collections on sales of
films financed under Film Facilities which have been repaid. Pursuant to the
terms of the Facility Amendment, the maturities of certain Film Facilities
are extended until dates the Company has projected full repayment to occur
based upon projected sales and collections with respect to the respective
film. Film Facilities not projected to be repaid by October 1999 shall be
subject to review by the two-bank syndicate on such date.
Borrowings under the Operating Facility are provided as revolving overdraft
facilities. Outstanding amounts are due on April 9, 1999 subject to the
review of the two-bank syndicate with a view to determining whether the
Credit Facility will be available after that date.
Interest on the Credit Facility is payable monthly at the London Interbank
Offering Rate ("LIBOR") plus 3% (5.72%, 5.75%, and 5.81% for one, three and
six month LIBOR, respectively at December 31, 1997). The interest rate is set
at the commencement of each drawdown and is revised each one, three or six
months as requested by the Company at the date of the drawdown. Interest on
the Local Line is payable monthly at the bank's prime rate less 1.25% (prime
rate was 8.5% at December 31, 1997). The Credit Facility also requires the
Company to pay closing fees on each Film Facility drawdown, a commitment fee
for unused portions of the Operating Facility, a fee measured by a portion of
the Company's distribution fee earned on financed films, and an annual
management fee.
The Credit Facility is collateralized by a security interest in substantially
all of the Company's assets and contains various covenants including, among
other provisions, restrictions on the payment of dividends and the
maintenance of a minimum consolidated net worth and certain financial ratios.
For the year ended December 31, 1997 the Company was in violation of certain
of these covenants, however the Banks granted a waiver of these violations
and amended the net worth covenant for a period of one year. The amendment to
the Credit Facility included certain additional covenants including certain
reporting requirements and written approval by the Banks for any new
acquisitions and planned distribution expenses prior to the Company's
commitment.
In order to effectuate the Facility Amendment, the Company's Co-Chairmen and
Co-Chief Executive Officers (and majority owners of the Company) were
required to provide a joint and several personal guarantee, in the amount of
$618,000 for the benefit of the Banks. The guarantee shall automatically be
released and extinguished when amounts outstanding under the Operating
Facility are reduced, permanently, to $6,000,000. Additionally, the Company's
Co-Chairmen and Co-Chief Executive Officers agreed to defer receipt of
payment pursuant to the Merger Note (see Note 3) until amounts outstanding
under the Operating Facility are reduced, permanently, to $5,000,000,
however, in no case will such deferment expire prior to May 1999. Interest on
the Merger Note will continue to accrue during the deferment period.
The carrying value of the Company's notes payable approximates their fair
value due to the fact that the interest rate is reset periodically and the
lack of a specified maturity.
The Company's ability to maintain availability under its Operating Facility
and Local Facility and to pay down the Film Facilities prior to maturity is
primarily dependent upon the timing of collections on existing sales during
the next twelve months and the amount and timing of collection on anticipated
sales of the Company's current library and films which the Company plans to
release or make available to subdistributors over the next twelve months.
Management believes that existing capital, cash flow from operations and
availability under the Company's amended Credit Facility and Local Facility
will be sufficient to enable the Company to fund its planned acquisition,
distribution and overhead expenditures for a reasonable period of time. In
the event that the Company's sales and collections during the next twelve
months are less than currently anticipated, the Company will need to either
alter planned acquisition and distribution activities, seek additional
availability under its current Credit Facility or seek alternate sources of
financing.
F-11
<PAGE>
NOTE 7 - INCOME TAXES:
As discussed in Note 2, on October 31, 1996 the Company changed its tax
reporting status from S corporation to C corporation for federal income tax
purposes as a result of the merger with EMAC. As a result, the Company
recorded a non-recurring net charge to earnings of $2,600,000 in the fourth
quarter of fiscal 1996 for additional federal income tax expense related to
the net charge required to adjust the deferred tax assets and liabilities to
their appropriate value utilizing C corporation rates. The deferred taxes
relate primarily to differences arising from the amortization of film costs
for book and tax purposes and the benefits associated with tax loss and
foreign withholding tax credit carryforwards. The foreign withholding taxes
are substantially recouped from the producers share of revenue.
The historical provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current
State $ 3,200 $ -- $ 70,000
Foreign withholding 231,243 231,367 352,905
----------- ----------- -----------
234,443 231,367 422,905
----------- ----------- -----------
Deferred
State (22,000) 110,000 10,000
Federal (505,800) 190,000 -
Deferred tax provision resulting
from the termination of S corporation
status - 2,600,000 -
----------- ----------- -----------
(527,800) 2,900,000 10,000
----------- ----------- -----------
$ (293,357) $3,131,367 $ 432,905
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The provision for income taxes differs from the amount of income tax determined
by applying the applicable U.S. statutory income tax rates to income before
taxes as a result of the following differences:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate (34%) 34% --
State taxes, net of federal benefit and income not subject to tax (3%) 2% 3%
Foreign taxes, net of federal benefit -- 12% 12%
Deferred tax provision resulting from
the termination of S Corporation status -- 156% --
Income not subject to federal tax -- (21%) --
Other 2% 5% --
---- ----- ----
Effective tax rate (35%) 188% 15%
---- ----- ----
---- ----- ----
</TABLE>
For federal income tax purposes, the Company has available tax loss carry
forwards of approximately $1,812,000 which expire in 2011 and foreign tax
credits of approximately $336,000 which expire between 2001 and 2002.
F-12
<PAGE>
NOTE 8 - SHAREHOLDERS' EQUITY
The Company is authorized to issue 2,000,000 shares of preferred stock with such
designations, voting and other rights and preferences as may be determined by
the Board of Directors.
On October 31, 1996 the Company created a stock option plan under which
incentive and nonqualified stock options and stock appreciation rights may be
granted to certain employees and directors to purchase up to a maximum of
550,000 shares of common stock. The grant of options and option price shall
be determined by the Company's Board of Directors or applicable committee
thereof in accordance with the plan. In the case of an incentive stock
option the option price shall not be less than 100% of the fair market value
of the common stock on the date the incentive stock option is granted. Each
option may be granted subject to various terms and conditions established on
the date of grant including exercise and expiration provided, however, that
all options will expire no later than 10 years from their date of grant. The
plan calls for annual grants to non-employee directors of 5,000 shares at an
exercise price equal to the fair market value of the common stock on the date
of grant, which is the date of the Annual Stockholders meeting. These
options are exercisable one year after the date of grant and expire on the
earlier of ten years from the date of grant or three years from the date on
which the Director ceases to be a director of the Company. On September 25,
1997, and October 31, 1996, 5,000 non-qualified stock options were granted
to each of four non-employee directors. The 1997 and 1996 grants have an
exercise price of $2.38 and $5.25, respectively.
During 1996, the Company granted options to purchase 1,075,000 shares of
common stock at $5.00 per share ("$5.00 Options") and 1,125,000 shares of
common stock at $8.50 per share, ("$8.50 Options") to the majority owners of
the Overseas Shares, all of which expire on October 31, 2003. The $5.00
Options vest 200,000 on October 31,1996 and 175,000 on each anniversary date
thereafter through 2001. The $8.50 Options vest in equal increments of
225,000 beginning on October 31, 1997 and each anniversary date thereafter
through 2001.
As discussed in Note 2 the Company uses the intrinsic value method prescribed by
APB 25 to account for compensation expense for its stock-based employee
compensation plans. Had compensation cost for the Company's stock-based
employee compensation plans been determined based on the fair value at the grant
date for options under those plans as consistent with SFAS 123, the Company's
net loss and net loss per share would have been increased to $1,091,399 and
$0.19, respectively for the year ended December 31, 1997 and $1,769,286 and
$0.49, respectively for the year ended December 31, 1996. For purposes of pro
forma disclosures, the estimated value of the options is amortized over the
options' vesting period. The fair value of each option grant was estimated on
the date of grant using the Black-Scholes option-pricing model with the
following assumptions:
Risk Free interest rate: 6.03%
Expected life: 4 years
Volatility: 57%
F-13
<PAGE>
NOTE 8: (Continued)
Warrants to purchase 4,500,000 shares of Common Stock are outstanding at
December 31, 1997. These warrants have an exercise price of $5.00 per share and
expire on February 16, 2002. The warrants are callable by the Company at $.01
per warrant if certain market price and other criteria are met. Options to
purchase 200,000 Overseas (formerly EMAC) Units (each unit consists of 1 share
of common stock and 2 warrants, described below) at an exercise price of $9.90
per unit are outstanding at December 31, 1997. The warrants attached to these
units are identical to the warrants described above except that they are
execisable at $5.85 per share and expire on February 16, 2000. These options
and warrants were issued in connection with the initial capitalization of EMAC.
Overseas also issued a warrant to purchase 62,500 shares of common stock to
its financial advisor in the Merger described in Note 3. The warrant has an
exercise price of $5.00 per share and expires on October 30, 2003.
The exercise of outstanding options and warrants was not assumed in the
calculation of earnings per share because the effect would have been anti-
dilutive.
During 1997, the Company adopted a share repurchase program pursuant to which
the repurchase of up to 75,000 shares, at management's discretion, was
authorized through July 31, 1997. During the year ended December 31, 1997,
the Company repurchased 45,000 shares of its outstanding common stock
pursuant to this program for $86,734.
NOTE 9 - RELATED PARTY TRANSACTIONS
In December 1997 the majority shareholders and Co-Chief Executive Officers
and Co-Chairman loaned the Company $200,000 (and an additional $200,000 in
January 1998) to provide funds for a portion of the print and advertising
costs associated with a feature film which was scheduled for release by First
Look Pictures in February 1998. The loan is secured by an assignment of
domestic revenues from the film and bears interest at the rate of 9% per
annum and is to be repaid after repayment of a Film Facility related to the
acquisition of domestic rights for both DIFFERENT FOR GIRLS and MRS. DALLOWAY
and print and advertising costs lent by the Lenders with respect to DIFFERENT
FOR GIRLS, or at such time as the Company's primary lenders allow repayment
from other sources.
The Company has a receivable of $281,000 from a subdistributor which is owned
by a member of the Company's Board of Directors. Pursuant to an executed
agreement this amount is required to be paid on September 30, 1998 and does
not bear interest. The Company will be entitled to retain $48,575 of this
receivable upon collection with the balance payable to producers. The
Company recognized approximately $259,000 in revenue on films licensed to the
Company by this subdistributor (as rights owner) during 1997.
During 1997 the Company paid $73,200 to a corporation owned by a member of
the Company's management and his spouse for production executive services of
such spouse. By agreement of BLAH, Inc. and the Company, an additional
$6,400 payable to BLAH, Inc. was deferred without interest, until January 7,
1998.
NOTE 10 - COMMITMENTS AND CONTINGENCIES:
The Company is committed under various acquisition agreements to pay minimum
guarantees of $6,437,500 contingent upon delivery of the respective films to
the Company.
The Company has guaranteed payment by an independent motion picture production
company of a promissory note in the aggregate principal amount of $223,939,
payable on September 8, 1998.
F-14
<PAGE>
NOTE 10: (Continued)
Total rental expense under various leases for the years ended December 31, 1997,
1996 and 1995 amounted to $268,259, $293,279 and $228,053, respectively.
Minimum annual rental payments under noncancelable leases are as follows:
<TABLE>
<S> <C>
1998 277,495
1999 262,776
2000 251,789
2001 247,074
2002 185,704
</TABLE>
NOTE 11 - FOREIGN SALES AND SIGNIFICANT CUSTOMERS:
The Company's foreign export revenues are summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Western Europe $ 10,408,980 $ 9,581,698 $ 7,475,888
Asia 1,447,790 4,936,735 2,411,261
Latin America 1,687,295 1,839,129 1,446,968
Eastern Europe 539,065 708,600 1,094,053
Other 3,150,462 2,850,896 1,792,603
------------ ------------ ------------
$ 17,233,592 $ 19,917,058 $ 14,220,773
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Customers representing 10% or more of the Company's revenue accounted for
$9,498,000 (three customers), and $4,366,246 (one customer) for the years ended
December 31, 1996 and 1995, respectively. No customer accounted for more than
10% of the Company's revenue during the year ended December 31, 1997.
NOTE 12 - SUBSEQUENT EVENT
As more fully described in Note 6, the Company amended the terms of its
Credit Facility on April 14, 1998.
F-15
<PAGE>
EXHIBIT 10.24
April 14, 1998
From: Coutts & Co.
440 Strand
London WC2R OQS
Berliner Bank A.G. London Branch
No. 1 Crown Court
Cheapside
London EC2V 6JP
To: Overseas Filmgroup, Inc.
8800 Sunset Boulevard
Los Angeles, California 90069
Re: Restated and Amended Syndication Agreement dated as of October 31, 1996
(the "Syndication Agreement") among Coutts & Co. ("Coutts"), Berliner Bank
A.G. London Branch ("Berliner") (Coutts and Berliner collectively referred
to herein as the "Banks"), Overseas Filmgroup, Inc. and Entertainment/Media
Acquisition Corporation (the "Company") as amended and extended.
Dear Sirs:
This letter (the "Amendment") constitutes an amendment to the Syndication
Agreement on the terms set forth below. Capitalized terms used but not
defined herein shall have the meaning set forth in the Syndication Agreement.
1. EXTENSION: Subject to the Company's continued compliance with the terms of
the Syndication Agreement, the Company's compliance with the additional
financial information requirements (the "Additional Financial Information
Requirements") as provided in paragraph 4 below, the additional financial
obligations (the "Additional Financial Obligations") as provided in paragraph
5 below, Ellen and Robert Little (the "Littles"), co-Chairmen and co-CEO's of
the Company, providing a guarantee as more fully described in paragraph 7
below, and agreement of the Littles to defer payment under the Merger Note as
more fully described in paragraph 8 below, we hereby agree that all
references to 9th May (and such later dates as
<PAGE>
Overseas Filmgroup, Inc.
April 15, 1998
Page 2
provided by earlier amendment) in clauses 2.8 and 17 of the Syndication
Agreement shall be deemed to be references to April 9, 1999.
2. BORROWING LIMITS: Effective as of April 9, 1998 subject
to Robert Little and Ellen Little's execution of guarantees in a form
acceptable to the Banks pursuant to paragraph 7 below, the borrowing limit
under the Operating Facility shall be increased as and when needed to a
maximum of US$7,234,000 ($50,000 of such amount being available to pay a fee
to the Banks in exchange for their agreement to extend further borrowing
under this Amendment); provided always that the increases and decreases shall
be substantially in line with the projected cash flow schedule provided to
Coutts during its most recent review of the Company for the period April 1998
through October 1999 (the "Cash Flow Schedule"). Further the Company
acknowledges that under the Syndication Agreement, Coutts and Berliner have
absolute discretion with respect to the approval of each new Film Facility.
With effect from the date hereof, the Film Facilities are no longer a
revolving credit line and sums repaid may not be reborrowed. We confirm that
as at today's date the maximum amount available as Film Facilities is
$17,863,716.
3. EXTENSION OF INDIVIDUAL FILM FACILITIES: With respect to the following
Film Facilities, notwithstanding the maturity date set forth in each of the
Film Facilities, Coutts and Berliner agree to waive such maturity dates and
agree that the maturity date for each individual Film Facility named herein
shall be the last day of the month reflected in the Cash Flow Schedule in
which the individual Film Facility is projected to be fully repaid: (i)
"INFINITY", (ii) "ONE GOOD TURN", (iii) "BODY OF A WOMAN", (iv) "THIS IS THE
SEA", (v) "ROAD TO RUIN" a/k/a "DRIVE", (vi) "COUNTDOWN", (vii) "JOHNS",
(viii) "DESIGNATED MOURNER", (ix) "KEEP THE ASPIDISTRA FLYING", (x)
"A BROTHER'S KISS", (xi) "SLAVES TO THE UNDERGROUND", (xii) "LIFEBREATH",
(iix) "STAND-INS", (ix) "ALIVE AND KICKING", (x) "GOD MONEY", (xi) "FIRST TO
GO" and (xii) "DIFFERENT FOR GIRLS". The maturity dates for those Film
Facilities not projected to be fully repaid during the term of the Cash Flow
Schedule shall be subject to review in October 1999.
4. ADDITIONAL FINANCIAL INFORMATION: Paragraph 10 of the Syndication
Agreement shall be amended to include an obligation of the Company to provide
the following financial information on a monthly basis: (i) Doubtful Debt
Report, (ii) Receivable Due Date Report, (iii) New Sales Report, (iv) Sales
Exception Report, (v) Actual vs. Budget Operating Expense Report, (vi)
Existing Films Distribution Expense Variance Report, and (vii) the additional
information required pursuant to the letter from Coutts dated 6 August 1997.
The information to be included in such reports identified here shall be in
accordance with discussions held during the last review conducted by Coutts,
such discussions to be confirmed by Coutts and Berliner in writing as soon as
practicable after execution hereof.
<PAGE>
Overseas Filmgroup, Inc.
April 15, 1998
Page 3
5. ADDITIONAL FINANCIAL OBLIGATIONS: Paragraph 11 of the Syndication
Agreement shall be amended to include an obligation of the Company to seek
written approval of Coutts, as agent, prior to entering into any new
acquisitions or commitments, which approval shall specifically provide the
amount the Company may expend in connection with such acquisition as well as
the amount of distribution expenses and/or print and advertising costs
expected to be incurred in connection with the distribution of such picture
proposed to be acquired. Additionally, the Company hereby reaffirms and
undertakes the following obligations:
(a) The Company is reminded that clause 2.5 of the Restated and Amended
Syndication Agreement states that "the purpose of the Operating
Facility is to meet the Borrower's working capital requirements".
This does not allow the Company to advance monies to producers on
"any basis", including but not limited to enhancements, as the risk
on the commerciality of the film should be borne by distributors.
Any loan requests of this nature are to be made to the Banks for
assessment; if agreed, such loans will have to be bonded and
documented as usual.
(b) The Company will not be permitted, except with the prior approval of
the Banks, to supplement any letters of credit or advances drawn
under the Project Line with drawings under the Operating Line.
(c) The Company is not to acquire any more copyrights under the
Operating Line, except with prior approval of the Banks which will
in any event requires specific estimate cover.
6. FILM FACILITY CROSSING: The Company agrees that gross receipts collected
on any film financed under a Film Facility after such Film Facility has been
repaid (exclusive of all amounts payable to a third party rights owner or
producer and receipts related to the motion pictures, "MRS. DALLOWAY" and
"DIFFERENT FOR GIRLS"), shall be available to Coutts and Berliner for
purposes of reducing other outstanding Film Facilities as determined by
Coutts and Berliner in their sole discretion.
7. GUARANTEES OF ELLEN AND ROBERT LITTLE: The Littles, in their capacities as
individuals and not as directors or officers of the Company, will give joint
and several personal guarantees (the "Guarantees"), for the benefit of Coutts
and Berliner, for all amounts in excess of $6,000,000 outstanding under the
Operating Facility only, up to an aggregate guarantee amount of $618,000 (the
"Guarantee Limit"), callable only as and when monies are payable in
accordance with the terms of the Syndication Agreement. At such time as the
amount outstanding under the Operating Facility has been permanently reduced
to less than $6,000,000, in the Banks' sole opinion, the Guarantees shall be
automatically released and extinguished. The Littles obligations under the
Guarantees shall survive any enforcement by Coutts and Berliner of their
security interests in the Company.
8. MERGER NOTE: The Littles agree that payments by the Company pursuant to
the $2,000,000 note received by them in the October 1996 merger of Overseas
Filmgroup, Inc. and Entertainment/Media Acquisition Corporation (the "Merger
Note") shall continue to accrue, but payments shall be deferred, until the
Operating Facility returns to the pre-existing limit of $5,000,000 which
Coutts and Berliner, in their sole opinion, view as permanent and not before
May 1999 except with the prior written approval of Coutts and Berliner. The
Merger Note shall be extended for a period of time equal to the period
payments are deferred pursuant to the foregoing, the deferred payments will
continue to bear interest and such payment amounts shall be adjusted to
compensate for additional interest accrued pursuant to the deferral of
payments. The rights of Robert B. Little and Ellen Little under the Merger
Note and related security agreement will not otherwise be affected.
<PAGE>
Overseas Filmgroup, Inc.
April 15, 1998
Page 4
9. CERTAIN WAIVERS: Notwithstanding paragraph 11.1.1 of the Syndication
Agreement, Coutts and Berliner hereby acknowledge and waive the breach by the
Company as of the date of this Amendment and/or prior thereto, of the Banks'
requirement in Section 11.1.1 of the Syndication Agreement in relation to a
minimum net worth (the "Net Worth Covenant") and provide further that such
Net Worth Covenant shall be amended for the next twelve months to be
$11,000,000 and thereafter shall be subject to further review. Additionally,
Coutts and Berliner hereby acknowledge that certain unsecured liabilities
incurred in the ordinary course of business as provided under paragraph
11.1.3.1 of the Syndication Agreement are more than forty-five days past due
(and waive any non-compliance with paragraph 11.1.3.1 in connection
therewith), that the Company expects to meet these liabilities in accordance
with the Cash Flow Schedule and that they consent to such arrangements.
10. GOVERNING LAW AND JURISDICTION: This Amendment shall be governed by and
construed in accordance with English law and the parties hereby submit to the
non-exclusive jurisdiction of the English Courts and the state and federal
courts located in Los Angeles, California.
This Amendment sets out, inter alia, the terms under which the Syndication
Agreement is amended. Except as expressly provided herein, the Syndication
Agreement, as hereby amended, shall remain in full force and effect. The
parties hereto agree to use their best efforts to expeditiously effectuate
any further documents and/or instruments reasonably requested or necessary to
carry out the intention of the provisions hereof. This Amendment may be
executed in any number of counterparts each of which, when executed, shall be
deemed an original and all of which shall together constitute one and the
same agreement. When signed by all the parties hereto, this Amendment shall
be a binding agreement on the parties hereto.
<PAGE>
Overseas Filmgroup, Inc.
April 15, 1998
Page 5
Please sign and return the enclosed copies of this letter to indicate your
agreement to the foregoing.
Yours faithfully
for and on behalf Coutts & Co.
By: /s/ CHRIS COLLINS /s/ RODNEY PAINE
------------------------------------
Its:
----------------------------------
for and on behalf of Berliner Bank A.G.
By: /s/ STEVE ROBBINS
------------------------------------
Its: Associate Director
----------------------------------
By: /s/ DAVID BRAY
------------------------------------
Its: Director
----------------------------------
ACCEPTED AND AGREED
AS OF THE DATE WRITTEN ABOVE:
Overseas Filmgroup, Inc.
By: /s/ WILLIAM F. LISCHAK
--------------------------------
Its: COO/CFO
-------------------------------
ACCEPTED AND AGREED
AS OF THE DATE WRITTEN ABOVE:
Ellen Little (in her capacity as an individual)
/s/ ELLEN DINERMAN LITTLE
- ------------------------------------------------
Robert Little (in his capacity as an individual)
/s/ ROBERT B. LITTLE
- ------------------------------------------------
<PAGE>
EXHIBIT 10.26
RESTATED LOAN OUT AGREEMENT
---------------------------
THIS LOAN OUT is effective as of March 11, 1996, between Overseas
Filmgroup, Inc. ("Company"), whose principal place of business is at 8800
Sunset Boulevard, Los Angeles, California 90069 and BLAH, Inc. ("Lender"),
whose principal place of business is at 601 North Sweetzer, Unit B, Los
Angeles, California 90048.
In consideration of Company's engagement of Lender to provide the
services of Anita Hope ("Hope") to Company and in consideration of Lender's
acceptance of such appointment, Lender and Company agree as follows:
1. TERM OF AGREEMENT. The business relationship between Lender and
Company shall commence on March 11, 1996, and shall continue until
termination by either of Company or Lender.
2. SERVICES. Company hereby engages Lender to cause Hope to render
services to Company as a Production Executive. Lender shall cause Hope to
render all services customarily rendered by directors of production
executives in the motion picture industry, including but not limited to,
coordination and supervision of all pre-production, production and post
production activities of any designated production in which the Company has an
interest and so designates. Lender shall cause Hope to render such services
on an exclusive basis.
3. COMPENSATION. In consideration for the services to be performed by
Hope, Company agrees to pay Lender One Thousand Two Hundred Dollars
($1,200)--One Thousand Six Hundred Dollars ($1,600) as of March 11, 1997 to
be paid weekly on Company's regular payday.
4. NOTICE. Any notice of communication given hereunder by either party
to the other shall be forwarded to the address given below or such other
address for which notice has been given:
To Company: Overseas Filmgroup, Inc.
8800 Sunset Boulevard, Third Floor
Los Angeles, California 90069
Facsimile: (310) 855-0719
Attention: Mr. William Lischak
To Lender: BLAH, INC.
601 North Sweetzer,
<PAGE>
Unit B
Los Angeles, California 90048
Attention: Ms. Anita Hope
Facsimile: (213) 655-1320
5. CONSENT TO JURISDICTION. Both parties consent to the jurisdiction of
any court, State or federal, in the State of California, provided notice is
given of the commencement of such action, as provided in paragraph 4.
6. ASSIGNMENT. This agreement shall be binding upon the parties hereto,
their respective successors and assigns; provided, however, Lender shall not,
without prior written approval of Company or its Designee, assign the whole
or part of its interest in this Agreement; and any unapproved assignment
shall be void.
7. ENTIRE AGREEMENT. This Agreement replaces all other contracts, oral
or written, between the parties hereto and contains all of the agreements and
understandings between said parties. This is an integrated document.
8. MODIFICATIONS. This Agreement may be modified or amended only by a
writing executed by all parties.
9. GOVERNING LAW. This Agreement will be governed by the laws of the
State of California.
This Agreement contains the entire understanding of the parties.
The signatures of Lender and Company below acknowledge review,
understanding and full, knowing and voluntary acceptance by Lender and
Company of the terms and conditions set forth in this Agreement.
BLAH, INC.
/s/ ANITA HOPE
------------------------
By: Anita Hope Dated: 3/25/97
Its: President -------------
OVERSEAS FILMGROUP, INC.
/s/ WILLIAM F. LISCHAK
------------------------
By: William F. Lischak Dated: 3/25/97
Its: COO,CFO -------------
<PAGE>
EXHIBIT 10.30
AMENDMENT TO LEASE
This Amendment to Lease is entered into as of April 1, 1997 (the
"Amendment") by and between TMC REALTY HOLDINGS CO., a California corporation
(the "Landlord"), and OVERSEAS FILM GROUP, INC., a Delaware corporation (the
"Tenant"). This Amendment is made with reference to the following facts and
objectives:
A. Landlord, as assignee from Carolco Pictures, Inc. and Tenant are
parties to that certain Office Lease dated April 21, 1987, as amended by that
certain Amendment to Lease dated September 15, 1987, and that certain
Amendment to Lease dated as of July 16, 1992 and that certain Amendment to
Lease dated as of January 1, 1995 and that certain Fourth Amendment to Lease
dated as of October 7, 1995 (as amended, the "Lease") relating to certain
premises consisting of approximately 10,195 square feet (the "Premises")
located in the building commonly known as 8800 Sunset Boulevard, West
Hollywood, California (the "Building").
B. Capitalized terms not otherwise defined herein shall have the
meaning ascribed to them in the Lease.
C. The term of the Lease commenced on October 1, 1987, and is
scheduled to expire on September 30, 1997.
D. The parties hereto desire to extend the term of the Lease and to
amend the Lease in certain respects as hereinafter set forth.
NOW, THEREFORE, for good and valuable consideration, receipt of which is
hereby acknowledged, the parties hereto agree as follows:
1. The term of the Lease is hereby extended for five years, so that
it shall now expire on September 30, 2002.
2. Effective as of October 1, 1997, the monthly rental payable by
Tenant under the Lease shall be increased from the current amount to the
amount of Twenty Thousand Three Hundred Ninety Dollars ($20,390), based on a
rate of $2.00 per rentable square foot of the Premises. Tenant shall be
entitled to continue to occupy that certain portion of the storage facility
known as P302, and consisting of approximately 42 rentable square feet, from
the date hereof until September 30, 2002, at the rate of $32.00 per month.
3. The "Comparison Year" for computing Tenant's share of direct costs
(as defined in Paragraph (b) of Article 2 of the Lease) shall be 1997.
Additionally, Tenant shall have no responsibility for any share of direct
costs incurred prior to October 1, 1999. "Tenant's Proportionate Share,"
pursuant to said Paragraph (b), shall be 14.38 percent.
<PAGE>
4. The monthly rental established in Paragraph 2 of this Amendment
shall not be subject to CPI Adjustment during the period from the date hereof
through September 30, 2002.
5. Within a reasonable time after the date this Amendment is signed
by both parties, Landlord will paint the interior walls of the Premises, and
will install new carpeting in the Premises. Landlord will provide Tenant
with at least three (3) choices of color and types of paint and carpet to
select from, taking into consideration Tenant's current improvements and
preferences.
6. The Lease, as modified hereby, is hereby reaffirmed, and the
provisions thereof, as so modified, shall remain in full force and effect.
Without limiting the generality of the foregoing, it is understood that all
provisions of the Lease which could reasonably and logically be construed as
applying to this Amendment (including, without limitation, the authority and
counterpart execution provisions thereof) shall apply to this Amendment as
well as the Lease.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the day and year first above written.
LANDLORD: TENANT:
TMC REALTY HOLDINGS CO., OVERSEAS FILM GROUP, INC.,
a California corporation a Delaware corporation
By: /s/ Ned S. Goldstein By: /s/ William F. Lischak
------------------------------- --------------------------------
Title: Senior Vice President Title: COO/CFO
---------------------------- ----------------------------
<PAGE>
EXHIBIT 10.31
LOAN AGREEMENT
This Loan Agreement (the "Loan Agreement") is entered into as of February
15, 1998, among Ellen Dinerman Little and Robert B. Little (collectively
"Lender") and Overseas Filmgroup, Inc. ("Borrower") in connection with that
certain motion picture entitled "MRS. DALLOWAY" ("the Picture").
WHEREAS, the Borrower has entered that certain Distribution/Collection
Agreement (the "Distribution/Collection Agreement") among Borrower, Elphich
Limited, Newmarket Capital Group, L.P. ("Newmarket"), European Co-Production
Fund Limited, British Screen Rights Limited, Film Finances, Inc.,
Bergen and the British Broadcasting Corporation in connection with the
Picture.
WHEREAS, pursuant to the terms of the Distribution/Collection Agreement,
Borrower has been granted certain distribution rights in and to the Picture
including but not limited to the right to distribute and exploit the Picture in
the United States, its territories, possessions and commonwealths (the "Domestic
Territory");
WHEREAS, the Borrower and Newmarket have entered into that certain
Co-Investment Agreement dated September 12, 1997 with effect from September
6, 1996 (the "Co-Investment Agreement") in connection with the Picture
wherein Borrower shall be entitled to recoup all distribution fees payable to
Borrower, all expenses incurred by Borrower in connection with Borrower's
distribution and exploitation of the Picture in the Domestic Territory and
all amounts advanced by Borrower in connection with that certain motion
picture entitled "DIFFERENT FOR GIRLS";
WHEREAS, pursuant to the terms of the restated and amended Syndication
Agreement (the "Syndication Agreement") dated as of October 31, 1996, between
Borrower and Coutts & Co. and Berliner (the "Banks"), Borrower has entered into
that certain Facility Agreement (the "Facility") dated as of September 16, 1997,
wherein the Banks have loaned $925,000 to Borrower in connection with the motion
picture entitled "DIFFERENT FOR GIRLS" (the "Bank Loan") pursuant to which the
Banks have certain repayment entitlements in connection with "DIFFERENT FOR
GIRLS" and the Picture;
WHEREAS, pursuant to the Facility, Borrower has assigned its right to
receive revenues derived from the exploitation of the Picture in the Domestic
Territory and "DIFFERENT FOR GIRLS" to the Banks in payment of the Bank Loan;
WHEREAS, Lender has loaned Borrower the sum of $400,000 which amount was
loaned in two installments of $200,000 each, the first of which was paid to
Borrower on December 12, 1997 (the "First Installment") and the second of which
was paid to Borrower on February 15, 1998 (the "Second Installment"), for the
purpose of funding P&A costs in connection with the
<PAGE>
domestic theatrical release of the Picture. The First Installment and the
Second Installment shall be collectively referred to herein as the "Loan".
WHEREAS, the Loan is repayable with interest thereon at the rate of 9% per
annum;
NOW THEREFORE, for good and valuable consideration, receipt of which is
hereby acknowledged and notwithstanding anything to the contrary set forth in
the Co-Investment Agreement, the Syndication Agreement and the Facility, the
parties hereto agree as follows;
1. REPAYMENT OF LOAN: Subject always to the entitlements of the Banks and
Newmarket, Borrower hereby assigns to Lender all of Borrower's entitlements
to revenues derived from the Picture and "DIFFERENT FOR GIRLS" until such
time as the Loan has been repaid to Lender with interest thereon.
Additionally in the event the foregoing revenues are insufficient to repay
the Loan, until such time as the Loan has been repaid by Borrower with
interest thereon, Borrower hereby assigns to Lender Borrower's entitlements
to additional revenues payable to Borrower subject to the requirements of
Borrower's senior lenders.
2. PRIORITY OF SECURITY INTERESTS: The parties hereto agree that the priority
of security interests shall be as set forth in that certain Inter-Creditor
Agreement of even date herewith, by and among, Lender, Borrower, Coutts & Co.
and Berliner Bank A.G. London and Newmarket Capital Group, L.P.
3. NO WAIVER: No waiver by any of the parties hereto of any breach hereof by
the other parties hereto in any one instance shall be deemed a waiver of any
prior or subsequent breach of the same or any other provision hereof.
4. GOVERNING LAW; JURISDICTION: All questions with respect to the
construction of this Agreement and the rights and liabilities of the parties
hereto shall be governed by the laws of the State of California applicable to
agreements entered into and wholly to be performed in California. The parties
hereby consent and submit to the jurisdiction of the federal and state courts
located in the State of California in any action brought to enforce or otherwise
relating to this Agreement; and they agree that such courts shall be the
exclusive forum with respect to any such action.
5. COUNTERPARTS; FACSIMILES: This Agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument. The parties hereto acknowledge and
agree that facsimile copies hereof shall be treated as originals, fully binding
and with full legal force and effect, and hereby waive any rights they may have
to object to said treatment.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
this date first above written.
/s/ ELLEN DINERMAN LITTLE
- ----------------------------
ELLEN DINERMAN LITTLE
/s/ ROBERT B. LITTLE
- ----------------------------
ROBERT B. LITTLE
OVERSEAS FILMGROUP, INC.
By: /s/ WILLIAM F. LISCHAK
-------------------------
Its: COO/CFO
------------------------
<PAGE>
EXHIBIT 21
OVERSEAS FILMGROUP, INC. SUBSIDIARIES
Alien Towers, Inc., a California corporation
Code 99 Productions, Inc., a California corporation
Enough Rope, Inc., a California corporation
Intrastate Film Distributors, Inc., a Delaware corporation
Jacaranda Music, Inc., a Delaware corporation
Overseas Filmgroup (UK) Limited, a corporation organized under the laws of the
United Kingdom
Positive, Inc., a California corporation
Road to Ruin, Inc., a California corporation
Walrus Pictures, Inc., a California corporation
OVERSEAS FILMGROUP (UK) LIMITED SUBSIDIARIES
Elphich Limited, a corporation organized under the laws of the United Kingdom
OFG Films Limited, a corporation organized under the laws of the Island of
Jersey
<PAGE>
EXHIBIT 23
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (Nos. 333-22023 and 333-16997) of Overseas Filmgroup,
Inc. of our report dated April 21, 1998 appearing on page F-1 of this Annual
Report on Form 10-K.
Los Angeles, California
April 27, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF OVERSEAS FILMGROUP, INC. FOR THE YEAR ENDED
DECEMBER 31, 1997 CONTAINED ON OVERSEAS FILMGROUP, INC.'S FORM 10-K FOR THE YEAR
ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,351,631
<SECURITIES> 0
<RECEIVABLES> 15,447,540
<ALLOWANCES> 750,000
<INVENTORY> 29,740,567
<CURRENT-ASSETS> 45,789,738
<PP&E> 1,291,981
<DEPRECIATION> 883,296
<TOTAL-ASSETS> 46,560,320
<CURRENT-LIABILITIES> 6,392,597
<BONDS> 0
0
0
<COMMON> 10,571,775
<OTHER-SE> 989,337
<TOTAL-LIABILITY-AND-EQUITY> 46,560,320
<SALES> 22,494,256
<TOTAL-REVENUES> 22,494,256
<CGS> 19,152,847
<TOTAL-COSTS> 22,661,969
<OTHER-EXPENSES> (184,102)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 853,666
<INCOME-PRETAX> (837,277)
<INCOME-TAX> (293,357)
<INCOME-CONTINUING> (543,920)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (543,920)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF OVERSEAS FILMGROUP, INC. FOR THE YEAR ENDED
DECEMBER 31, 1996 CONTAINED ON OVERSEAS FILMGROUP, INC.'S FORM 10-K FOR THE YEAR
ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 399,726
<SECURITIES> 0
<RECEIVABLES> 12,141,239
<ALLOWANCES> 1,000,000
<INVENTORY> 28,358,324
<CURRENT-ASSETS> 39,899,289
<PP&E> 1,280,324
<DEPRECIATION> 723,197
<TOTAL-ASSETS> 40,803,685
<CURRENT-LIABILITIES> 6,335,896
<BONDS> 0
0
0
<COMMON> 10,658,509
<OTHER-SE> 1,533,257
<TOTAL-LIABILITY-AND-EQUITY> 40,803,685
<SALES> 28,677,571
<TOTAL-REVENUES> 28,677,571
<CGS> 23,058,000
<TOTAL-COSTS> 26,653,660
<OTHER-EXPENSES> (210,541)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 569,183
<INCOME-PRETAX> 1,665,269
<INCOME-TAX> 3,131,367
<INCOME-CONTINUING> (1,466,098)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,466,098)
<EPS-PRIMARY> (.41)
<EPS-DILUTED> (.41)
</TABLE>
