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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 0-23958
CINERGI PICTURES ENTERTAINMENT INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4247952
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2308 BROADWAY
SANTA MONICA, CALIFORNIA 90404
(Address of principal executive offices)
(Zip Code)
(310) 315-6000
(Registrant's telephone number, including area code)
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
------ -------
As of November 19, 1996, there were 14,191,556 shares of the registrant's
Common Stock outstanding.
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CINERGI PICTURES ENTERTAINMENT INC.
INDEX
PART I. FINANCIAL INFORMATION
Page No.
--------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets --
December 31, 1995 and September 30, 1996 (unaudited)..............3
Condensed Consolidated Statements of Operations (unaudited)
for the three and nine months ended September 30, 1995 and
September 30, 1996................................................5
Condensed Consolidated Statements of Cash Flows (unaudited)
for the nine months ended September 30, 1995 and
September 30, 1996................................................6
Notes to Condensed Consolidated
Financial Statements (unaudited)..................................8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....................12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................18
Item 2. Changes in Securities............................................18
Item 3. Defaults Upon Senior Securities..................................18
Item 4. Submission of Matters to a Vote of Security Holders..............18
Item 5. Other Information................................................19
Item 6. Exhibits and Reports on Form 8-K.................................20
Signature........................................................21
2
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PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CINERGI PICTURES ENTERTAINMENT INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, September 30,
1995 1996
------------ ------------
(unaudited)
ASSETS
Cash and cash equivalents $ 29,832,000 $ 11,032,000
Accounts receivable 7,494,000 11,280,000
Accounts receivable, related parties 682,000 1,039,000
Film costs, less accumulated amortization 160,756,000 144,684,000
Property and equipment, at cost,
less accumulated depreciation 4,381,000 5,173,000
Other assets 3,112,000 3,170,000
------------ ------------
TOTAL ASSETS $206,257,000 $176,378,000
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accounts payable $ 235,000 $ 844,000
Accrued expenses 1,550,000 626,000
Accrued interest 2,613,000 4,126,000
Accrued residuals & participations 8,781,000 9,993,000
Deferred revenue 68,791,000 47,038,000
Capital lease obligation -- 475,000
Loans payable 65,360,000 55,161,000
Notes and amounts payable
to related parties 5,310,000 5,207,000
------------ ------------
TOTAL LIABILITIES $152,640,000 $123,470,000
3
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CINERGI PICTURES ENTERTAINMENT INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, September 30,
1995 1996
------------ ------------
(unaudited)
Common Stock with certain redemption
features, $.01 par value, 1,117,000
shares issued and outstanding less
notes receivable from related parties
amounting to $1,350,000 $1,900,000 $2,838,000
Commitments & Contingencies (Note 4) -- --
STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par value,
5,000,000 shares authorized, no shares
issued and outstanding -- --
Common Stock, $.01 par value,
20,000,000 shares authorized,
13,075,000 shares issued and outstanding 131,000 131,000
Additional Paid-in Capital 64,753,000 64,753,000
Retained Deficit (13,167,000) (14,814,000)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 51,717,000 50,070,000
------------ ------------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $206,257,000 $176,378,000
------------ ------------
------------ ------------
NOTE: The balance sheet at December 31, 1995 has been derived from the audited
consolidated financial statements at that date but does not include all the
information and footnotes required by generally accepted accounting principals
for complete financial statements.
See notes to condensed consolidated financial statements.
4
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CINERGI PICTURES ENTERTAINMENT INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1996 1995 1996
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues
Feature films $51,442,000 $30,160,000 $114,920,000 $89,712,000
Fee income 86,000 29,000 274,000 60,000
----------- ----------- ------------ -----------
51,528,000 30,189,000 115,194,000 89,772,000
Cost and expenses:
Amortization of film
costs, residuals &
participations 59,690,000 28,543,000 131,387,000 86,954,000
Selling, general & ad-
ministrative expenses 1,055,000 2,111,000 2,444,000 4,990,000
----------- ----------- ------------ -----------
Operating loss (9,217,000) (465,000) (18,637,000) (2,172,000)
Interest expense (142,000) -- (142,000) (176,000)
Interest income 300,000 171,000 518,000 701,000
----------- ----------- ------------ -----------
Net loss
before provision for
income taxes (9,059,000) (294,000) (18,261,000) (1,647,000)
Provision for
income taxes -- -- -- --
----------- ----------- ------------ -----------
Net loss $(9,059,000) $ (294,000) $(18,261,000) $(1,647,000)
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
Net loss per share $(0.64) $(0.02) $(1.45) $(0.12)
------ ------ ------ ------
------ ------ ------ ------
Weighted average number
of shares outstanding 14,192,000 14,192,000 12,632,000 14,192,000
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
</TABLE>
See notes to condensed consolidated financial statements.
5
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CINERGI PICTURES ENTERTAINMENT INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
Nine Months Ended
September 30,
1995 1996
----------- -----------
OPERATING ACTIVITIES
Net loss $(18,261,000) $ (1,647,000)
Adjustments to reconcile net loss to net
cash provided by (used in)
operating activities:
Depreciation 423,000 901,000
Amortization of unearned compensation 337,000 938,000
Film cost amortization 126,299,000 81,317,000
Changes in operating assets and liabilities:
Accounts receivable 1,928,000 (3,786,000)
Accounts receivable, related parties 414,000 (357,000)
Film cost additions (125,216,000) (65,245,000)
Other assets 539,000 (58,000)
Accounts payable, accrued expenses
and interest (1,024,000) 1,198,000
Accrued residuals and participations payable 1,499,000 1,212,000
Deferred revenue 32,106,000 (21,753,000)
---------- -----------
Net cash provided by (used in)
operating activities 19,044,000 (7,280,000)
INVESTING ACTIVITIES
Purchase of property and equipment (1,166,000) (112,000)
---------- ----------
Net cash used in investing activities $(1,166,000) $(112,000)
See notes to condensed consolidated financial statements.
6
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CINERGI PICTURES ENTERTAINMENT INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (CONTINUED)
(UNAUDITED)
Nine Months Ended
September 30,
1995 1996
----------- -----------
FINANCING ACTIVITIES
Increase in loans payable $71,425,000 $32,196,000
Payments on loans payable (99,375,000) (42,396,000)
Increase in notes and amounts payable to
related parties 17,627,000 615,000
Payments on notes and amounts payable to
related parties (9,407,000) (718,000)
Payments on capital lease obligation -- (1,105,000)
Issuance of common stock, net of expenses 23,317,000 --
---------- ----------
Net cash provided by (used in)
financing activities 3,587,000 (11,408,000)
---------- ----------
Increase (decrease) in cash 21,465,000 (18,800,000)
Cash and cash equivalents at beginning of year 2,665,000 29,832,000
----------- ------------
Cash and cash equivalents at end of period $24,130,000 $11,032,000
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes $ 193,000 $ 23,000
NINE MONTHS ENDING SEPTEMBER 30, 1996
Visual effects equipment amounting to $1,580,000 was purchased under a
capital lease agreement.
Accrued interest of $575,000 relating to production loans owed to a third
party was offset against monies owed to the Company by such third party.
NINE MONTHS ENDING SEPTEMBER 30, 1995
Film assets amounting to $1,221,000 were transferred from film inventory to
fixed assets.
See notes to condensed consolidated financial statements.
7
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CINERGI PICTURES ENTERTAINMENT INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1996
NOTE 1 -- PREPARATION OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements of
Cinergi Pictures Entertainment Inc. (the "Company" or "CPEI") have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine months ended September 30, 1996
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1996. For further information, refer to the consolidated
financial statements and footnotes thereto included in CPEI's Annual Report on
Form 10-K ("Annual Report") filed with the Securities and Exchange Commission.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
NET LOSS PER COMMON SHARE. The per share data for the three and nine month
periods ended September 30, 1995 and 1996 are based on the weighted average
number of common and common share equivalents outstanding during the period.
Common Stock with certain redemption features are considered common share
equivalents. Stock options and warrants are considered common share equivalents
if dilutive.
RECLASSIFICATION. Certain reclassifications were made to the 1995 balances
to conform to the September 30, 1996 presentation primarily to not reflect Buena
Vista Pictures Distribution, Inc. as a related party.
NOTE 3 -- FILM COSTS
Film costs consist of the following:
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
Released, less amortization. . . . . . $101,238,000 $ 35,029,000
In production. . . . . . . . . . . . . 53,545,000 101,290,000
Development. . . . . . . . . . . . . . 5,973,000 8,365,000
------------ ------------
$160,756,000 $144,684,000
------------ ------------
------------ ------------
8
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CINERGI PICTURES ENTERTAINMENT INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
September 30, 1996
NOTE 4 -- COMMITMENTS AND CONTINGENCIES
In December 1995, the U.S. Attorney for the Central District of California
served subpoenas ("Subpoenas") on the Company related to a grand jury
investigation of federal tax aspects of various transactions involving Andrew G.
Vajna, President, Chief Executive Officer and Chairman of the Board of Directors
of the Company, and certain other persons and entities (the "Investigation").
The Company believes the Investigation is focusing primarily on (i) the 1988 and
1989 personal tax returns of Mr. Vajna and the tax returns of certain other
persons and entities, and (ii) the ongoing audits of Mr. Vajna's tax returns
since 1990 by the Internal Revenue Service. The Company has not been identified
by the U.S. Attorney as being a target of the Investigation; however, there can
be no assurance that the Company's status will not change in the future. The
Board of Directors of the Company has formed a committee of the three outside
directors of the Company (the "Special Committee") to monitor the Company's
response to the Subpoenas, to consider the Company's indemnification obligations
with respect to its employees, officers and directors and to otherwise evaluate
and act upon matters related to the Investigation. The Company has engaged
counsel to represent it in connection with the Investigation and is in the
process of responding to the Subpoenas. Given the uncertainty of the
Investigation, there is currently no basis upon which to estimate the impact, if
any, the Investigation may have on the Company.
Pursuant to Article Tenth of the Company's Restated Certificate of
Incorporation, Article V of the Company's Restated Bylaws, indemnity agreements
entered into between the Company and certain of its officers and directors, and
the provisions of Section 145 of the Delaware General Corporation Law
("Indemnification Provisions"), the Company is advancing the expenses of certain
of its current and former employees, officers and directors other than Mr. Vajna
(the "Indemnitees") which they may incur in connection with the Investigation.
As of November 19, 1996, the Company had advanced an aggregate of $134,000 on
behalf of the Indemnitees. The Indemnitees have undertaken to reimburse the
Company for their expenses if it is ultimately determined by the Special
Committee that they are not entitled to be indemnified. In addition, Mr. Vajna
has undertaken to reimburse the Company under certain circumstances with respect
to the expenses of the Indemnitees. Given the current uncertainty regarding the
scope and duration of the Investigation and the amount of expenses which may be
incurred by the Indemnitees in connection with the Investigation, there is no
basis upon which to estimate the financial impact which the foregoing may have
on the Company.
On May 13, 1996, two purported class action lawsuits were filed in the
Superior Court of California for the County of Los Angeles by alleged
stockholders of the Company, against the Company and certain of its current and
former executive officers and directors. On July 26,
9
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1996, the court consolidated the two cases and plaintiffs filed an amended
consolidated complaint alleging, among other things, that the defendants
negligently misrepresented (or omitted) material facts about the business,
financial condition, future growth and profitability of the Company in
connection with the Company's 1995 public offering of Common Stock, and in
alleged statements by certain of the individual defendants. The complaint
alleged violations of Sections 11 and 15 of the Securities Act of 1933, as
amended, and common law negligent misrepresentations. The amended complaint
sought, among other things, an award of unspecified monetary damages in favor of
the plaintiffs and the other members of the purported class for all losses and
injuries allegedly suffered as a result of the defendants' alleged conduct.
On September 19, 1996, the court sustained defendants' demurrer to the
amended complaint, granting leave to amend certain allegations. Limited
discovery is underway. Management of the Company does not believe that these
lawsuits have merit and intends to defend them vigorously.
Pursuant to the Indemnification Provisions, the Company is advancing the
expenses of the current and former officers and directors named as defendants
in the litigation (the "Litigation Indemnitees") which they may incur in the
defense of the litigation. The Litigation Indemnities are being jointly
represented with the Company. As of November 19, 1996, total fees
incurred on behalf of the Company and the Litigation Indemnitees in
connection with this litigation were approximately $200,000. The Litigation
Indemnitees have undertaken to reimburse the Company for their portion of the
expenses if it is ultimately determined that they are not entitled to be
indemnified. Given the current uncertainty regarding the scope and duration
of this litigation and the amount of expenses which may be incurred by the
Litigation Indemnitees in connection with this litigation, there is no basis
upon which to estimate the financial impact which the foregoing may have on
the Company.
The Company and Hollywood Pictures Company ("HPC") have agreed to enter into
a Financing and Distribution Agreement whereby the Company, in exchange for (i)
a 50% equity participation in the motion picture tentatively entitled DEEP
RISING (a high seas action-adventure, thriller starring Treat Williams which is
currently in production and anticipated to be released in mid-1997) and (ii) a
sales fee for international distribution of such motion picture, is financially
obligated to pay to HPC the lesser of 50% of the cost of the picture or
$22,500,000.
NOTE 5 -- SUBSEQUENT EVENTS
10
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In September 1995, the Company sold its interest in JUDGE DREDD to the
British corporation Lloyds Commercial Leasing Ltd. ("Lloyds") and concurrently
leased the film back pursuant to a 12 year lease. A portion of the sale
proceeds was placed on deposit with ABN AMRO Bank (the "Bank") to be used as
security for a guaranty of the lease payments issued by the Bank. Under the
original terms of such transaction, depending on the level of the UK corporate
tax rate over various time periods, the Company could have been liable for
additional lease payments or entitled to a return of a portion of the amount on
account at the Bank. In October 1996, the parties to such transaction agreed to
amend the terms of such transaction to eliminate the adjustments for changes in
the UK corporate tax rate. As a result, in October 1996, $1,388,000 (net of
related fees) of the funds on account at the Bank was returned to the Company.
11
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion contains "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
statements 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" 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 which can be substantial with respect
to the Company's films) depend primarily upon its acceptance by the public,
which cannot be predicted. The results for the nine months ended September 30,
1996 are not necessarily indicative of the results that may be expected for the
entire year. Due to the uncertainties of the release schedules of the
relatively limited number of motion pictures produced by the Company and the
audience responses thereto, the Company's revenues and earnings fluctuate
significantly from quarter to quarter and from year to year. In addition,
management of the Company is conducting an ongoing strategic review of the
Company's business strategies and goals and has retained the financial advisory
firm of Jefferson Capital Group, Ltd. (of which R. Timothy O'Donnell, a director
of the Company, is President), to assist it in such review. The strategic
review includes discussions with third parties regarding the sale of a partial
interest in the Company or the entire Company. As the Company has not concluded
its strategic review nor have any agreements been reached with respect thereto,
it is not possible to predict at this time what changes, if any, may be made in
the Company's business strategies and what effect any changes may have on the
Company's business, future results of operations and financial condition. As
indicated below under "Liquidity and Capital Resources," the Company, which is
continuing to consider motion picture projects on a case-by-case basis, recently
began production on one motion picture and is preparing another project for
production. The average direct negative cost of such motion pictures is
currently estimated to be, subject to changes in existing budgets, approximately
$18,450,000 which is substantially below the average direct negative costs of
the Company's slate of motion picture productions in 1995 (DIE HARD WITH A
VENGEANCE, JUDGE DREDD, THE SCARLET LETTER and NIXON) and 1996 (EVITA, AMANDA
and THE SHADOW CONSPIRACY), which averaged $64,297,000 and $35,822,000,
respectively. As the strategic review has not yet been concluded, there can be
no assurances that the direct negative costs of these motion pictures is
necessarily indicative of the direct negative costs of the Company's future
releases. In addition, it has not yet been determined whether there will be
additional motion pictures produced by the Company for release in 1997.
12
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The risks highlighted above should not be assumed to be the only things
that could affect future performance of the Company. The Company 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 Company over time means that
actual events are bearing out as estimated in such forward-looking statements.
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 1996 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1995
Feature film revenues decreased from $51,442,000 for the quarter ended
September 30, 1995 to $30,160,000 for the quarter ended September 30, 1996.
Feature film revenues for the quarter ended September 30, 1995 consisted mainly
of international revenues from the release of DIE HARD WITH A VENGEANCE and
JUDGE DREDD as well as domestic syndication revenue from MEDICINE MAN. Feature
film revenues for the quarter ended September 30, 1996 consisted mainly of the
domestic home video availability of NIXON, domestic and international
availability of AMANDA and continuing domestic and foreign revenues from
TOMBSTONE and DIE HARD WITH A VENGEANCE.
Amortization of film costs, residuals and participations decreased from
$59,690,000 for the quarter ended September 30, 1995 to $28,543,000 for the
quarter ended September 30, 1996 primarily due to the decrease in feature film
revenue recognized in the quarter ended September 30, 1996 as compared to the
quarter ended September 30, 1995 and the write down to net realizable value in
the quarter ended September 30, 1995 of THE SCARLET LETTER, which was released
on October 13, 1995 to less than expected box office results. The Company
estimates the total projected revenues to be received from the exploitation of a
motion picture in all territories and media. As revenues from a motion picture
are recognized, the percentage of revenues recognized to total projected
revenues is applied to film costs for such motion picture to record
amortization. Where applicable, unamortized film costs for a picture are
written down to net realizable value for such picture based upon the Company's
appraisal of current market conditions.
Selling, general and administrative ("SG&A") expenses (excluding production
overhead costs capitalized to film costs) increased from $1,055,000 for the
quarter ended September 30, 1995 to $2,111,000 for the quarter ended September
30, 1996. The difference is primarily due to a larger number of personnel at
the special effects facility in the third quarter of 1996 compared to the third
quarter of 1995 (additional personnel were retained to pursue potential third
party special effects projects), as well as depreciation expense associated with
the special effects equipment leased by the Company in 1996. The increase in
overhead during the quarter ended September 30, 1996 was also due to legal
expenses in connection with the Investigation and lawsuits described in Note 4
of the Financial Statements. The Company capitalizes production overhead
incurred in connection with the production of a motion picture by adding such
costs to the capitalized film costs of the motion picture. Production overhead
being
13
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capitalized to film costs decreased from $1,667,000 in the third quarter of 1995
as compared to $1,179,000 in the third quarter of 1996, and the total of SG&A
expenses and production overhead costs capitalized to film costs increased from
$2,722,000 for the quarter ended September 30, 1995 to $3,290,000 for the
quarter ended September 30, 1996.
Interest expense decreased from $142,000 for the quarter ended September
30, 1995 to none for the quarter ended September 30, 1996 because all interest
expense for the quarter ended September 30, 1996 was capitalized to film costs.
The Company capitalizes applicable interest expense incurred in connection with
the production of each motion picture. The Company determines the amount of
interest expense to be capitalized to each motion picture in production by
multiplying the average cumulative film cost of each motion picture in a given
period by the overall effective interest rate paid by the Company on the
aggregate amount of debt outstanding for such period. Interest expense,
including interest capitalized to film costs, decreased from $2,507,000 for the
quarter ended September 30, 1995 to $1,678,000 for the quarter ended September
30, 1996. This decrease was due to the lower average outstanding balance of the
Company's production loans in the quarter ended September 30, 1996 as compared
to the quarter ended September 30, 1995. Two films were in various stages of
production during the third quarter of 1996 as compared to three films during
the third quarter of 1995.
Fee income decreased from $86,000 for the quarter ended September 30, 1995
to $29,000 for the quarter ended September 30, 1996. Fee income represents fees
earned in connection with an arrangement to collect accounts receivable on
behalf of and to distribute motion pictures produced by an unrelated third
party.
Interest income decreased from $300,000 for the quarter ended September 30,
1995 to $171,000 for the quarter ended September 30, 1996 due to lower cash
balances during the third quarter of 1996 compared to the third quarter of 1995.
As a result of the above, the Company incurred a net loss for the quarter
ended September 30, 1996 of $294,000 as compared to a net loss of $9,059,000 for
the quarter ended September 30, 1995.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1995
Feature film revenues decreased from $114,920,000 for the nine months ended
September 30, 1995 to $89,712,000 for the nine months ended September 30, 1996.
Feature film revenues for the nine months ended September 30, 1995 consisted of
domestic home video and pay television revenues for TOMBSTONE, domestic home
video revenues for COLOR OF NIGHT, international revenues from the release of
DIE HARD WITH A VENGEANCE and JUDGE DREDD and domestic syndication revenue from
MEDICINE MAN. Feature film revenues for the nine months ended September 30,
1996 consisted mainly of the domestic home video availability of THE SCARLET
LETTER and NIXON, international availability of NIXON, domestic and
international
14
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availability of AMANDA and continuing domestic and international revenues from
TOMBSTONE and DIE HARD WITH A VENGEANCE.
Amortization of film costs, residuals and participations decreased from
$131,387,000 for the nine months ended September 30, 1995 to $86,954,000 for the
nine months ended September 30, 1996 primarily due to the decrease in feature
film revenue recognized for the nine months ended September 30, 1996 as compared
to the nine months ended September 30, 1995 and the write down to net realizable
value of JUDGE DREDD and THE SCARLET LETTER during the nine months ended
September 30, 1995 both of which were released to less than expected box office
results.
SG&A expenses (excluding production overhead costs capitalized to film
costs) increased from $2,444,000 for the nine months ended September 30, 1995
to $4,990,000 for the nine months ended September 30, 1996. The difference
is primarily because indirect costs attributable to the special effects
facility were included in overhead in the nine months ended September 30,
1996. For the nine months ended September 30, 1995, substantially all of the
indirect costs attributable to the special effects facility were included in
film costs, as the special effects for JUDGE DREDD, which was in production
during such period, were primarily created at the facility. The increase in
overhead during the nine months ended September 30, 1996 was also due to
legal expenses in connection with the Investigation and lawsuits described in
Note 4 of the Financial Statements. Total of SG&A expenses (including
production overhead costs capitalized to film costs) increased from
$7,133,000 for the nine months ended September 30, 1995 to $9,261,000 for the
nine months ended September 30, 1996. Such increase was primarily due to
legal expenses in connection with the Investigation and lawsuits and the
expenses related to a larger number of personnel at the special effects
facility during most of the nine months ended September 30, 1996, as compared
to the comparable period in 1995.
Interest expense increased from $142,000 for the nine months ended
September 30, 1995 to $176,000 for the nine months ended September 30, 1996.
Interest expense, including interest capitalized to film costs, decreased from
$8,726,000 for the nine months ended September 30, 1995 to $5,015,000 for the
nine months ended September 30, 1996 due to the lower average outstanding
balance of the Company's production loans in the nine months ended September 30,
1996 as compared to the nine months ended September 30, 1995. The Company had a
lower average outstanding balance of production loans for the nine months ended
September 30, 1996 because three films were in production in such period as
compared to six films in production in the corresponding period in 1995.
Fee income decreased from $274,000 for the nine months ended September 30,
1995 to $60,000 for the nine months ended September 30, 1996. Fee income
represents fees earned in connection with an arrangement to collect accounts
receivable on behalf of and to distribute motion pictures produced by an
unrelated third party.
Interest income increased from $518,000 for the nine months ended September
30, 1995 to $701,000 for the nine months ended September 30, 1996 due primarily
to higher cash balances during the nine months ended September 30, 1996.
15
<PAGE>
As a result of the above, the Company incurred a net loss for the nine
months ended September 30, 1996 of $1,647,000 as compared to a net loss of
$18,261,000 for the nine months ended September 30, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a Credit, Security, Pledge and Guaranty Agreement dated as
of August 16, 1994 with The Chase Manhattan Bank ("Chase") and a syndicate of
lenders (collectively, the "Lenders") which provides the Company with a
revolving credit facility of $150,000,000 (the "Credit Facility"). The Credit
Facility is secured by substantially all of the assets of the Company, including
$5,000,000 in "key man" life insurance on Mr. Vajna. As of September 30, 1996,
approximately $23,739,000 in borrowings was outstanding under the Credit
Facility. As of September 30, 1996, the interest rate on the amounts
outstanding under the Credit Facility was approximately 7% per annum. The
commitment fee on the average daily unused portion of the commitment is 3/8 of
one percent per annum.
Under the Credit Facility, the Lenders have committed to make loans
available until August 31, 1997, although the Lenders will continue to make
loans to finance any motion picture in which principal photography has commenced
or that has otherwise satisfied certain conditions prior to such date. The
Company and the Lenders are currently discussing an extension of the commitment
to lend under the Credit Facility, although there can be no assurance that such
an extension will be obtained or be obtained on terms equivalent to those
currently contained in the Credit Facility. The Credit Facility matures on
February 28, 1999.
The Company previously entered into term loan agreements with Buena Vista
Pictures Distribution, Inc. ("BVPD") to finance a portion of the costs of
COLOR OF NIGHT, THE SCARLET LETTER, NIXON, THE SHADOW CONSPIRACY and EVITA.
Each loan must be repaid with accrued interest on or before the earlier of
(i) four years after the loan proceeds are first made available to the
Company or (ii) three years after the initial domestic theatrical release of
the applicable picture. The first of these loans will become due in May 1997
for COLOR OF NIGHT (for which approximately $6,312,000 was outstanding as
of September 30, 1996). Each of these loans are secured by rights to
distribute the respective motion picture in the Americas and, except for the
term loan with respect to COLOR OF NIGHT which is personally guaranteed by
Mr. Vajna, certain other distribution rights related to other motion pictures
financed by BVPD. At September 30, 1996, the aggregate loan balances were
approximately $35,483,000.
In September 1995, the Company sold its interest in JUDGE DREDD to the
British corporation Lloyds Commercial Leasing Ltd. ("Lloyds") and concurrently
leased the film back pursuant to a 12 year lease. A portion of the sale
proceeds was placed on deposit with ABN AMRO Bank (the "Bank") to be used as
security for a guaranty of the lease payments issued by the Bank. Under the
original terms of such transaction, depending on the level of the UK corporate
tax rate over various time periods, the Company could have been liable for
additional lease payments or entitled to a return of a portion of the amount on
account at the Bank. In
16
<PAGE>
October 1996, the parties to such transaction agreed to amend the terms of such
transaction to eliminate the adjustments for changes in the UK corporate tax
rate. As a result, in October 1996, $1,388,000 (net of related fees) of the
funds on account at the Bank were returned to the Company.
The Company has a one year capital lease for certain visual effects
equipment. The total capital lease obligation at September 30, 1996 was
$475,000.
Subsequent to the quarter ended September 30, 1996, the Company completed
delivery of THE SHADOW CONSPIRACY, currently scheduled for release in late
January 1997, to BVPD for domestic distribution and delivered the picture to
Summit Entertainment L.P., an international sales company ("Summit"), for
international distribution. The theatrical release of THE SHADOW CONSPIRACY
was delayed due to an extremely competitive box office environment. See Part
II, Item 1 ("Legal Proceedings") in this Report. The Company currently is
in post-production of EVITA. Through September 30, 1996, the Company incurred
approximately $88,736,000 in direct negative costs in connection with the
motion pictures THE SHADOW CONSPIRACY and EVITA. The Company currently
expects, subject to changes in existing budgets, that an additional
approximately $5,031,000 in direct negative costs will be incurred in
connection with such motion pictures.
In addition, the Company has recently commenced production on one motion
picture (AN ALAN SMITHEE FILM) which has an anticipated release date in
mid-1997, and has another project (BROADWAY BRAWLER, which will star Bruce
Willis) in pre-production and preparation with an anticipated release date in
late 1997. The aggregate direct costs of these two motion pictures is currently
expected to be, subject to changes in existing budgets, approximately
$36,900,000. In addition, the Company and Hollywood Pictures Company ("HPC")
have agreed to enter into a Financing and Distribution Agreement whereby the
Company, in exchange for (i) a 50% equity participation in the motion picture
tentatively entitled DEEP RISING (a high seas action-adventure, thriller
starring Treat Williams which is currently in production and anticipated to be
released in mid-1997) and (ii) a sales fee for international distribution of
such motion picture, is financially obligated to pay to HPC the lesser of 50% of
the cost of the picture or $22,500,000. There can be no assurance that any of
these motion pictures will necessarily involve all the creative elements listed
above, will be completed or that completion will occur in accordance with the
anticipated schedule or budget, as the production, completion and distribution
of motion pictures is subject to numerous uncertainties, including financing
requirements, personnel availability and the release schedule of competitive
films.
In July 1996, AMANDA was delivered for domestic distribution to
Family Channel Pictures, Inc. ("FCP"), which controls all U.S. and Canadian
distribution rights to AMANDA. AMANDA has also been delivered to Summit
which is assisting the Company in exploitation of the Company's international
distribution rights to AMANDA. FCP has not yet obtained domestic theatrical
distribution of AMANDA, which, if not obtained, could adversely affect certain
foreign revenues ultimately realized by the Company from the exploitation of
the international distribution rights to AMANDA.
17
<PAGE>
The Company believes that its existing capital, funds from operations,
borrowings under the Credit Facility, advances and production loans from BVPD
and other available sources of capital (including single picture production
loans), will be sufficient to enable the Company to fund its planned
development, production and overhead expenditures for the next 12 months.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company has an output agreement in France with Le Film Office ("LFO")
(which expires after the delivery of EVITA). Pursuant to the output agreement
with LFO, a $3,071,000 advance is payable to the Company upon delivery of THE
SHADOW CONSPIRACY to LFO. On August 27, 1996, LFO filed for and obtained a
temporary restraining order in California Superior Court, in Los Angeles,
California (the "Court") restraining the Company, Summit (the international
sales company handling the international distribution of THE SHADOW CONSPIRACY)
and Chase (one of the lenders under the Company's Credit Facility), from drawing
down the letter of credit securing LFO's advance on the basis of LFO's
allegations that the Company failed to give proper notice to LFO for extending
the delivery date of THE SHADOW CONSPIRACY. On September 20, 1996, the Court
issued a preliminary injunction against the Company, Summit and Chase. The
parties have agreed to stay the Court proceedings and submit the dispute to
binding arbitration by the American Film Marketing Association, as required by
the output agreement. The Company believes that LFO's allegations are without
merit and intends to defend them vigorously. In the event the Company does not
prevail in the arbitration, it believes that it can obtain alternative
distribution of THE SHADOW CONSPIRACY in France. However, there can be no
assurance that the Company will obtain an alternative distribution arrangement
or that any such arrangement will provide for an advance on delivery or
otherwise be on terms equivalent to those under the Company's output agreement
with LFO.
See also Note 4 to Condensed Consolidated Financial Statements set forth
herein.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
18
<PAGE>
ITEM 5. OTHER INFORMATION.
Not applicable.
19
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits.
10.1 Engagement letter dated May 8, 1996 between Jefferson
Capital Group, Ltd. and the Company.
27. Financial Data Schedule
b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended September
30, 1996.
20
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CINERGI PICTURES ENTERTAINMENT INC.
November 19, 1996 By: /s/ Warren Braverman
-----------------------------------------
Warren Braverman, Executive Vice President,
Chief Financial Officer and Treasurer,
signing both in his capacity as Executive
Vice President on behalf of Registrant and
as Chief Financial Officer of Registrant
21
<PAGE>
EXHIBIT INDEX
Sequentially
Exhibit Number Description Numbered Page
- -------------- ----------- -------------
10.1 Engagement Letter dated May 8,
1996 between Jefferson Capital
Group, Ltd. and the Company.
27 Financial Data Schedule
22
<PAGE>
<PAGE>
JEFFERSON CAPITAL GROUP, LTD.
One James Center, Suite 1414
Richmond Virginia 23219
(804) 643-0100
Fax (804) 643-8140
May 8, 1996
Cinergi Pictures Entertainment Inc.
2808 Broadway
Santa Monica, CA 90404
Attention: Warren Braverman, Chief Operating Officer
Dear Warren:
We are pleased to set forth the terms of the retention of Jefferson Capital
Group, Ltd. (JCG or the "Financial Advisor") by Cinergi Pictures Entertainment
Inc. (collectively with its affiliates, the "Company" or "Cinergi"). As your
Financial Advisor, we will assist the Company in connection with the activities
enumerated in paragraph 1 below (collectively, the "Transaction").
1. In connection with our activities hereunder, JCG will, among
other things, (a) review and familiarize ourselves with the business,
operations, properties, financial condition and prospects of the Company and
its subsidiaries; (b) review the Company's capital structure; (c) assist in
structuring and placing an appropriate working capital facility at the
Company; (d) make specific recommendations with respect to a transaction or
series of transactions necessary to restructure the Company's capital
structure to more appropriately reflect the Company's financial condition and
future prospects; (e) assist in an analysis of the value of the Company and
its subsidiaries under differing financing scenarios; (f) assist in the
structuring and placing of debt and equity securities of the Company; (g)
assist the Company in analyzing its strategic alternatives including, but not
limited, to the sale of all or portion of the Company's outstanding common
stock or a potential combination of the Company in one or a series of
transactions by (i) merger, consolidation, reorganization or other
transaction pursuant to which the Company may combine with a third party or
(ii) an acquisition involving all or a substantial amount of the business,
stock, or assets of a third party.
2. In connection with JCG's activities on the Company's behalf, the
Company will cooperate with JCG and will furnish information and data concerning
the Company and the Transaction (the "Information") which JCG deems appropriate
and will provide JCG and any prospective financing sources with access to the
Company's officers, directors, employees, independent accountants and legal
counsel. JCG agrees to use such information only in connection with their
agreement herein, unless otherwise agreed by the Company in writing. The
Company represents and warrants that to the best of its knowledge all
information (a) made available to JCG by the Company, or (b) contained in any
memorandum or offering document prepared by the Company with respect to the
Transaction (the "Memorandum") will, at all times during the period of the
engagement of JCG hereunder, be complete and correct in all material respects
and will not contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein not misleading
in the light of the circumstances under which they are made. The Company
further represents and warrants that any
<PAGE>
projections provided by it to JCG will have been prepared in good faith and will
be based upon assumptions which, in light of the circumstances under which they
are made, are reasonable. The Company acknowledges and agrees that in rendering
its services hereunder, JCG will be using and relying on the information (and
information available from public sources and other sources deemed reliable by
JCG) without independent verification thereof by JCG or independent appraisal by
JCG of any of the Company's assets. JCG does not assume responsibility for the
accuracy or completeness of the information or any other information regarding
the Company, or any Transaction. Any advice rendered by JCG pursuant to this
Agreement may not be disclosed publicly without JCG's prior written consent
unless required by law, rule or regulation.
3. In consideration of its services pursuant to this Agreement, JCG
shall be entitled to receive, and the Company agrees to pay, JCG the following
compensation, without duplication:
a) The Company shall pay to JCG a retainer in the amount of
$75,000. $37,500 of the retainer will be offset against any
fees payable pursuant to paragraphs 3(b) - (f).
b) 2% of the aggregate amount of any senior debt arranged by
JCG having a term of three years or more.
c) 3% of the aggregate amount of any subordinated debt arranged
by JCG.
d) 4% of the aggregate amount of any convertible subordinated
debt or preferred equity financing arranged by JCG.
e) 5% of the aggregate amount of any equity financing arranged
by JCG.
f) 1% of the total enterprise value of the Company in the event
of a transaction described in paragraph 1(g). Enterprise
value shall be defined as the sum of the total equity
consideration paid in a Transaction plus the amount of any
outstanding debt assumed by the acquirer.
4. In addition to the fees described in paragraph 3 above, the
Company agrees to promptly reimburse JCG, upon request from time to time, for
all reasonable out-of-pocket expenses incurred by JCG (including reasonable fees
and disbursements of counsel, and of other consultants and advisors retained by
the Financial Advisors, provided the retention of such other consultants and
advisors has been approved in advance by the Company) in connection with the
matters contemplated by this Agreement.
5. The Company agrees to indemnify JCG in accordance with the
indemnification provisions (the "Indemnification Provisions") attached to this
Agreement, which Indemnification Provisions are incorporated herein and made a
part hereof.
6. This Agreement will continue for as long as the Company is
actively pursuing the Transaction, but either party hereto may terminate this
Agreement at any time upon written notice, without liability or continuing
obligation except as set forth in the following sentence. Neither termination
of this Agreement nor completion of the assignment contemplated hereby shall
affect: (i) any compensation earned by JCG up to the date of termination, (ii)
any compensation earned by JCG after termination pursuant to paragraph 3 hereof
for transactions in which JCG has had substantial and substantive involvement
before termination, (iii) the reimbursement of expenses incurred by JCG up to
the date of termination or completion, (iv) the attached Indemnification
Provisions which are incorporated herein, all of which shall remain operative
and in full force and effect.
<PAGE>
7. The validity and interpretation of this Agreement shall be
governed by the laws of the State of Virginia applicable to agreements made and
to be fully performed therein.
8. The benefits of this Agreement shall inure to the respective
successors and assigns of the Company, and the obligations and liabilities
assumed in this Agreement by the parties hereto shall be binding upon their
respective successors and assigns.
9. For the convenience of the parties, any number of counterparts of
this Agreement may be executed by the parties hereto. Each such counterpart
shall be, and shall be deemed to be, an original instrument, but all such
counterparts taken together shall constitute one and the same Agreement. This
Agreement may not be modified except in writing signed by the parties hereto.
If the foregoing correctly sets forth our Agreement, please sign the
enclosed copy of this letter in the space provided and return it to us.
Very truly yours,
JEFFERSON CAPITAL GROUP, LTD.
By: /s/ R. Timothy O'Donnell
------------------------------
President
JEFFERSON CAPITAL GROUP, LTD.
Confirmed and Agreed to
this 29th day of May, 1996
Cinergi Pictures Entertainment Inc.
By: /s/ Warren Braverman
---------------------------
<PAGE>
INDEMNIFICATION PROVISIONS
The Company (as such term is defined in the Agreement (as such term is
defined below)) agrees to indemnify and hold harmless JCG against any and all
losses, claims, damages, liabilities, obligations, penalties, judgments, awards,
costs, expenses and disbursements and any and all legal and other costs,
expenses or disbursements in giving testimony or furnishing documents in
response to a subpoena or otherwise, including, without limitation, the costs,
expenses and disbursements, as and when incurred, of investigating, preparing or
defending any such action, suit, proceeding or investigation asserted or
initiated by a third party (whether or not in connection with litigation in
which JCG is a party), directly or indirectly, caused by, relating to, based
upon, arising out of or in connection with (a) any act or omission by JCG in
connection with its acceptance of or the performance or nonperformance of its
obligations under the agreement dated May 8, 1996 between JCG and the Company as
it may be amended from time to time (the "Agreement"), or (b) any untrue
statement or alleged untrue statement of a material fact contained in, or
omissions or alleged omissions from, any memorandum or offering document
prepared by the Company with respect to the Transaction (as such term is defined
in the Agreement) or similar statements or omissions in or from any other
information furnished by the Company to JCG or any financing source; PROVIDED,
HOWEVER, such indemnity agreement shall not apply to any portion of any such
loss, claim, damage, obligation, penalty, judgment, award, liability, cost,
expense or disbursement to the extent it is found in a final judgment by a court
of competent jurisdiction (not subject to further appeal) to have resulted
primarily and directly from the gross negligence, bad faith or willful
misconduct of JCG or from any information provided by JCG. The Company also
agrees that JCG shall not have any liability (whether direct or indirect, in
contract or tort or otherwise) to the Company or to any person (including,
without limitation, Company shareholders) claiming through the Company for or in
connection with the engagement of JCG, except to the extent that any such
liability that is found in a final judgment by a court of competent jurisdiction
(not subject to further appeal) to have resulted primarily and directly from
JCG's gross negligence, willful misconduct or bad faith.
If any action, suit, proceeding or investigation is commenced, as to which
JCG proposes to demand indemnification, JCG shall notify the Company with
reasonable promptness; PROVIDED, HOWEVER, that any failure by JCG to notify the
Company shall not relieve the Company from its obligations hereunder unless the
Company shall have been prejudiced by the failure of JCG to notify the Company
and then only to the extent of such prejudice. JCG shall have the right to
retain counsel of its own choice to represent JCG, and the Company shall pay the
reasonable fees, expenses and disbursements of such counsel, and such counsel
shall, to the extent consistent with its professional responsibilities,
cooperate with the Company and any counsel designated by the Company. The
Company shall be liable for any settlement of any claim against JCG made with
the Company's written consent, which consent shall not be unreasonably withheld.
The Company shall not, without the prior written consent of JCG, settle or
compromise any claim, or permit a default or consent to the entry of any
judgment in respect thereof, unless such settlement, compromise or consent
includes, as an unconditional term thereof, the giving by the claimant to JCG of
any unconditional release from all liability in respect of such claim.
In order to provide for just and equitable contribution, if a claim for
indemnification pursuant to these Indemnification Provisions is made but is
found in a final judgment by a court of competent jurisdiction (not subject to
further appeal) that such indemnification may not be enforced in such case, even
though the express provisions hereof provide for indemnification in such case,
then the Company, on the one hand, and JCG on the other hand, shall contribute
to the losses, claims, damages, obligations, penalties, judgments, awards,
liabilities, costs, expenses and disbursements to which the indemnified persons
may be subject in accordance with the relative benefits received by the Company,
on the one hand, and JCG, on the other hand, and also the relative fault of the
Company on the one hand, and JCG, on the other hand, in connection with the
statements, acts or omissions which resulted in such losses, claims, damages,
obligations, penalties, judgments, awards, liabilities, costs expenses and
disbursements
<PAGE>
and the relevant equitable considerations shall also be considered. No person
found liable for a fraudulent misrepresentation shall be entitled to
contribution from any person who is not also found liable for such fraudulent
misrepresentation. Notwithstanding the foregoing, JCG shall not be obligated to
contribute any amount hereunder that exceeds the amount of fees previously
received by JCG pursuant to the Agreement.
Neither termination nor completion of the engagement of JCG referred to
above shall affect these Indemnification Provisions which shall then remain
operative and in full force and effect.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES 3 THROUGH 5 OF THE COMPANY'S FORM 10-Q FOR THE YEAR-TO-DATE, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1996
<CASH> 11,032
<SECURITIES> 0
<RECEIVABLES> 12,319
<ALLOWANCES> 0
<INVENTORY> 144,684
<CURRENT-ASSETS> 160,024
<PP&E> 7,706
<DEPRECIATION> 2,533
<TOTAL-ASSETS> 176,378
<CURRENT-LIABILITIES> 78,819
<BONDS> 0
0
0
<COMMON> 131
<OTHER-SE> 49,939
<TOTAL-LIABILITY-AND-EQUITY> 176,378
<SALES> 89,772
<TOTAL-REVENUES> 90,473
<CGS> 86,954
<TOTAL-COSTS> 91,944
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 176
<INCOME-PRETAX> (1,647)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,647)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,647)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> (.12)
</TABLE>
