<PAGE>
================================================================================
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 JUNE 30, 1997
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)
Registrant's telephone number, including area code: (310) 315-6000
---------------------
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.
/X/ Yes / / No
As of August 15, 1997, there were 13,446,874 shares of the Registrant's
Common Stock outstanding.
================================================================================
<PAGE>
CINERGI PICTURES ENTERTAINMENT INC.
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets --
December 31, 1996 and June 30, 1997 (unaudited) . . . . . . . . . . 3
Condensed Consolidated Statements of Operations (unaudited)
for the three and six months ended June 30, 1996 and
June 30, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Condensed Consolidated Statements of Cash Flows (unaudited)
for the six months ended June 30, 1996 and
June 30, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Notes to Condensed Consolidated
Financial Statements (unaudited). . . . . . . . . . . . . . . . . . 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . . 15
Item 3. Quantitative and Qualitative Disclosures
about Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . 22
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . 22
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . 22
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . 22
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
</TABLE>
2
<PAGE>
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CINERGI PICTURES ENTERTAINMENT INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, JUNE 30,
1996 1997
------------- ------------
(UNAUDITED)
ASSETS
Cash and cash equivalents $ 27,364,000 $ 30,274,000
Restricted cash 5,654,000 3,920,000
Accounts receivable 10,850,000 8,946,000
Accounts receivable, related parties 799,000 874,000
Film costs, less accumulated amortization 103,792,000 68,522,000
Property and equipment, at cost,
less accumulated depreciation 4,819,000 1,670,000
Other assets 3,270,000 1,890,000
------------ ------------
TOTAL ASSETS $156,548,000 $116,096,000
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accounts payable $ 2,141,000 $ 2,798,000
Accrued interest 23,000 22,000
Accrued residuals & participations 13,045,000 12,181,000
Deferred revenue 46,568,000 15,272,000
Capital lease obligation 291,000 --
Loans payable 6,026,000 8,093,000
Notes and amounts payable
to related parties 49,747,000 51,975,000
------------ ------------
TOTAL LIABILITIES $117,841,000 $ 90,341,000
3
<PAGE>
CINERGI PICTURES ENTERTAINMENT INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
DECEMBER 31, JUNE 30,
1996 1997
------------- ------------
(UNAUDITED)
Common Stock with certain redemption
features, $.01 par value, 744,682 (1996)
and 0 (1997) shares issued and outstanding
less notes receivable from related parties
amounting to $900,000 (1996) and $0 (1997) $ 2,100,000 $ --
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,
13,074,533 (1996) and 13,446,874
(1997) shares issued and outstanding 131,000 135,000
Additional Paid-in Capital 65,548,000 68,095,000
Retained Deficit (29,072,000) (42,025,000)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 36,607,000 26,205,000
Receivable from shareholder -- (450,000)
------------ ------------
$ 36,607,000 $ 25,755,000
------------ ------------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $156,548,000 $116,096,000
------------ ------------
------------ ------------
NOTE: The balance sheet at December 31, 1996 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 principles for complete financial statements.
See notes to condensed consolidated financial statements.
4
<PAGE>
CINERGI PICTURES ENTERTAINMENT INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1997 1996 1997
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues
Feature films $22,447,000 $17,013,000 $59,552,000 $43,539,000
Fee income 20,000 1,000 31,000 1,000
----------- ----------- ------------ -----------
22,467,000 17,014,000 59,583,000 43,540,000
Cost and expenses:
Amortization of film
costs, residuals &
participations 22,076,000 17,069,000 58,411,000 44,414,000
Selling, general &
administrative expenses 1,403,000 4,319,000 7,879,000 7,838,000
Provision for
impairment of
long-lived asssets -- 2,665,000 -- 2,665,000
----------- ----------- ------------ -----------
Operating loss (1,012,000) (7,039,000) (1,707,000) (11,377,000)
Interest expense -- (1,260,000) (176,000) (2,393,000)
Interest income 296,000 526,000 530,000 817,000
----------- ----------- ------------ -----------
Net loss $ (716,000) $(7,773,000) $(1,353,000) $(12,953,000)
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
Net loss per share $(0.05) $(0.58) $(0.10) $(0.96)
------ ------ ------ ------
------ ------ ------ ------
Weighted average number
of shares outstanding 14,192,000 13,447,000 14,192,000 13,449,000
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
CINERGI PICTURES ENTERTAINMENT INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
1996 1997
-------------- --------------
OPERATING ACTIVITIES
Net loss $( 1,353,000) $(12,953,000)
Adjustments to reconcile net loss to net
cash provided by (used in)
operating activities:
Depreciation 641,000 594,000
Provision for
impairment of
long-lived assets -- 2,665,000
Amortization of unearned
compensation 625,000 0
Film cost amortization 53,481,000 38,885,000
Changes in operating assets and liabilities:
Accounts receivable 3,181,000 1,904,000
Accounts receivable, related parties (129,000) (75,000)
Film cost additions (57,272,000) (3,615,000)
Other assets 374,000 1,380,000
Accounts payable & accrued interest 336,000 656,000
Accrued residuals and
participations payable 551,000 (864,000)
Deferred revenue (14,458,000) (31,296,000)
------------ -----------
Net cash used in
operating activities (14,023,000) (2,719,000)
INVESTING ACTIVITIES
Purchase of property and equipment (70,000) (110,000)
------------ -----------
Net cash used in investing activities (70,000) (110,000)
See notes to condensed consolidated financial statements.
6
<PAGE>
CINERGI PICTURES ENTERTAINMENT INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (CONTINUED)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
1996 1997
------------ ------------
FINANCING ACTIVITIES
Increase in loans payable $ 29,483,000 $ 19,883,000
Payments on loans payable (31,328,000) (17,816,000)
Decrease in restricted cash -- 1,734,000
Increase in notes and amounts payable
to related parties 421,000 2,646,000
Payments on notes and amounts payable
to related parties (718,000) (417,000)
Payments on capital lease obligation (921,000) (291,000)
------------ ------------
Net cash (used in) provided by
financing activities (3,063,000) 5,739,000
------------ ------------
(Decrease) increase in cash (17,156,000) 2,910,000
Cash and cash equivalents at
beginning of year 29,832,000 27,364,000
------------ ------------
Cash and cash equivalents at end of
period $ 12,676,000 $ 30,274,000
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes $23,000 $18,400
SIX MONTHS ENDING JUNE 30, 1997
In January 1997, the Company repurchased 372,341 shares of
Common Stock of the Company in exchange for the forgiveness of a note
amounting to $450,000.
SIX MONTHS ENDING JUNE 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.
See notes to condensed consolidated financial statements.
7
<PAGE>
CINERGI PICTURES ENTERTAINMENT INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 1997
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 six months ended June 30, 1997 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1997. 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 six month
periods ended June 30, 1996 and 1997 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.
RECENT DEVELOPMENTS. In February 1997, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 128, Earnings Per Share, which is effective
for annual and interim financial statements issued for periods ending after
December 15, 1997 and early adoption is not permitted. When adopted, the
statement will require restatement of prior years' earnings per share
("EPS"). SFAS No. 128 was issued to simplify the standards for calculating
EPS previously found in APB No. 15, Earnings Per Share. SFAS No. 128 replaces
the presentation of primary EPS with a presentation of basic EPS. The new
rules also require dual presentation of basic and diluted EPS on the face of
the statement of operations for companies with a complex capital structure.
For the Company, basic EPS will exclude the dilutive effects of stock options
and warrants. Diluted EPS for the Company will reflect all potential
dilutive securities. Under the provisions of SFAS No. 128, basic and diluted
EPS would have been the same as the reported amounts.
NOTE 3 -- FILM COSTS
Film costs consist of the following:
DECEMBER 31, JUNE 30,
1996 1997
------------ ------------
Released, less amortization . . $ 52,077,000 $50,659,000
Completed, not released . . . 37,025,000 --
In production . . . . . . . . . 9,373,000 11,028,000
Development . . . . . . . . . . 5,317,000 6,835,000
------------ -----------
$103,792,000 $68,522,000
------------ -----------
------------ -----------
8
<PAGE>
CINERGI PICTURES ENTERTAINMENT INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
June 30, 1997
NOTE 4 -- COMMITMENTS AND CONTINGENCIES
In December 1995, the U.S. Attorney for the Central District of
California served subpoenas ("Subpoenas") on the Company relating 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 Company 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 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,
the Company is advancing the expenses of certain of its employees, officers
and directors other than Mr. Vajna ("Indemnitees") which they may incur in
connection with the Investigation. As of August 15, 1997, the Company had
advanced an aggregate of $258,000 on behalf of the Indemnitees. The
Indemnitees have undertaken to reimburse the Company for their expenses if it
is ultimately determined 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.
In February 1997, the Company ceased production on the motion picture,
BROADWAY BRAWLER after commencement of principal photography and entered into
discussions with certain parties involved in the production, including Buena
Vista Pictures Distribution, Inc. ("BVPD"), a performer in the film and an
affiliate of such individual, regarding settlement of various obligations
("Shutdown Costs") incurred in connection with the production and shut down
of the film. As a result of agreements entered into among such parties, on
May 15, 1997, the Company was relieved of the obligation to repay $3,000,000
in advances which had been made by BVPD as part of funding production of the
film, the Company transferred its BROADWAY BRAWLER subsidiary and the
Company's right in the film to the performer's affiliate, the Company was
paid an aggregate of $11,821,000 representing Shutdown Costs incurred or
committed to by the Company and payment for the transfer of the production
subsidiary and the film rights. Of the $11,821,000 paid to the Company,
approximately $8,466,000 was immediately used by the Company to repay the
debt incurred under the Credit Facility in connection with production of the
film,
9
<PAGE>
CINERGI PICTURES ENTERTAINMENT INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
June 30, 1997
and the Company was indemnified for additional Shutdown Costs it may bear,
subject to certain limited exceptions and limitations. The Company was not
reimbursed for overhead otherwise allocable to production of the film.
In April 1997, the Company has settled legal proceedings with Le Film
Office ("LFO") which had arisen with respect to a $3,071,000 minimum
guarantee advance payable by LFO to the Company upon delivery of THE SHADOW
CONSPIRACY to LFO pursuant to an output arrangement then in effect between
the Company and LFO. In August and September 1996, respectively, LFO obtained
first a temporary restraining order and then a preliminary injunction in
California Superior Court, Los Angeles, California (the "Court") preventing
the Company, the international sales company handling the international
distribution of THE SHADOW CONSPIRACY, and one of the lenders under the
Company's credit facility, from drawing down the letter of credit securing
LFO's minimum guarantee 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. The parties agreed to stay the Court proceedings
and submit the dispute to binding arbitration by the American Film Marketing
Association which occurred on April 17, 1997. On April 18, 1997 and before a
decision could be rendered in the arbitration, the Company and LFO entered
into a settlement agreement whereby the parties agreed to reduce the minimum
guarantee advance from $3,071,000 to $2,300,000, which was subsequently paid
on May 12, 1997 by LFO (which will distribute the film in France).
Trial is scheduled for August 25, 1997, in Los Angeles Superior Court, in
a lawsuit by Laurence Fishburne and the LOA Productions, Inc., Mr.
Fishburne's loan-out corporation, against the Company, a subsidiary of the
Company and Randolph M. Paul, Senior Vice President, Business Affairs and a
Director of the Company. The action, for breach of oral contract, fraud and
deceit, and civil conspiracy was originally filed on July 11, 1994. The
plaintiffs claim that the Company entered into an oral contract for Mr.
Fishburne to appear in the motion picture, DIE HARD WITH A VENGEANCE, but
repudiated the contract the following day. Plaintiffs are claiming damages of
$1,750,000, representing the fixed compensation to which they alleged they
are entitled, additional compensatory damages of up to $350,000 and general
and punitive damages. The Company believes it has meritorious defenses to the
allegations.
The Company is a party to various other legal proceedings arising in the
ordinary course of its business. The Company does not currently believe that
any such proceedings will have a material adverse effect on the Company's
operations or financial condition.
On April 3, 1997, the Company entered into a Purchase and Sale Agreement
(the "Library Sale Agreement") with Walt Disney Pictures and Television, a
subsidiary of The Walt Disney Company, to sell to Walt Disney Pictures and
Television substantially all of the films in the Company's motion picture
library and certain other assets (referred to herein as the "Film Library Sale";
"Disney" is used herein to refer to Walt Disney Pictures and Television and/or
its affiliates, including The Walt Disney Company,
10
<PAGE>
CINERGI PICTURES ENTERTAINMENT INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
June 30, 1997
as applicable). In exchange for the assets being sold to Disney, Disney has
agreed to relinquish its equity interest in the Company (555,556 shares of
the Company's Common Stock and a warrant to purchase 150,000 shares of the
Company's Common Stock at an exercise price of $9.00 per share) and cancel
its outstanding loans and outstanding interest to the Company (approximately
$39,209,000 as of June 30, 1997). In addition, Disney has agreed to assume
with respect to the films and rights therein being sold to Disney all
residuals and participation obligations, as well as all scheduled obligations
relating to the Company's existing exploitation agreements. Disney also
agreed to assume the outstanding debt under the Company's credit facility
relating to the soon to be completed AN ALAN SMITHEE FILM (one of the films
included in the Film Library Sale), up to a maximum amount of $10,000,000,
and the Company agreed to transfer to Disney all minimum guarantee payments
and any overages paid or to be paid with respect to such film. The Company
and Disney, however, have agreed in principle to change such arrangement,
subject to preparation and execution of an appropriate amendment to the
Library Sale Agreement. Under the proposed amendment, Disney would pay
$3,950,000 to the Company upon delivery of AN ALAN SMITHEE FILM to Disney
(which amount would be used by the Company to pay off a portion of the
outstanding balance under the Company's credit facility) and, in the event
the Film Library Sale is consummated, the Company may be obligated to pay
Disney an amount currently estimated by the Company to be approximately
$425,000. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources" for additional
information regarding this proposed amendment to the Library Sale Agreement.
The film library being sold to Disney includes primarily all of the
Company's rights (except minimum guarantee payments) to the following eleven
motion pictures: MEDICINE MAN, TOMBSTONE, RENAISSANCE MAN, COLOR OF NIGHT,
JUDGE DREDD, THE SCARLET LETTER, NIXON, EVITA (excluding soundtrack rights),
AMANDA, THE SHADOW CONSPIRACY, and AN ALAN SMITHEE FILM. Disney will also
retain overages otherwise payable to the Company by Disney after January 1,
1997 with respect to certain distribution rights to DIE HARD WITH A VENGEANCE
previously licensed to Disney. In addition, upon consummation of the Film
Library Sale, the Company's twenty-five film domestic distribution
arrangement with BVPD, under which nine films have been delivered, will be
terminated.
The Film Library Sale is subject to numerous conditions, including,
among other things, completion of certain due diligence by Disney, expiration
of any applicable Hart-Scott-Rodino waiting period, and the approval of the
Company's stockholders. The Library Sale Agreement and related Film Library
Sale may also be terminated by the Company or Disney in certain
circumstances, including, among other things, upon failure to consummate the
Film Library Sale by September 15, 1997. The Company and Disney have agreed
in principle to amend the Library Sale Agreement to change such date to a
date in the fourth quarter of 1997, however, no amendment has been executed
nor has a different date been agreed to as of August 19, 1997. Members of
the Company's Board of Directors who are also stockholders in the Company
have agreed to vote their shares in favor of the transaction in accordance
with the terms of the Library Sale Agreement.
11
<PAGE>
CINERGI PICTURES ENTERTAINMENT INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
June 30, 1997
On April 3, 1997, the Company also announced that it did not presently
intend to commence production on any additional motion pictures (although the
Library Sale Agreement does not preclude the Company, pending consummation of
the Film Library Sale, from commencing production on films that would not be
distributed by Disney) and that it was in the process of considering its
alternatives assuming consummation of the Film Library Sale to Disney. See
"Note 6 -- Subsequent Events and Other Matters" regarding certain additional
announcements by the Company and agreements entered into by the Company after
the quarter ended June 30, 1997.
The Company has a "first-look" arrangement with Oliver Stone and certain
of his affiliated entities pursuant to which Mr. Stone submits to the Company
all theatrical motion picture projects owned or controlled by Mr. Stone for
the Company's development and consideration of possible production and, as
consideration for Mr. Stone's submitting such projects to the Company, the
Company pays certain amounts annually to Mr. Stone for overhead and
development. The Walt Disney Company has reimbursed the Company for all
amounts payable to Mr. Stone through February 10, 1997. However, pursuant to
the Library Sale Agreement, the Company is generally responsible for all
payments to Mr. Stone from such date through expiration of the arrangement on
February 10, 1998. The Company currently estimates that the payments due
under Mr. Stone's agreement from June 30, 1997 through expiration of the
arrangement in February 1998 will be approximately $1,570,000.
In 1996, the Company and Hollywood Pictures Company ("HPC"), a subsidiary
of The Walt Disney Company, entered into a Financing and Distribution
Agreement whereby the Company is financially obligated to pay to HPC the
lesser of 50% of the cost of the motion picture tentatively entitled "DEEP
RISING" or $22,500,000 (the "Cinergi Amount"), in exchange for (i) a 50%
equity participation in such motion picture and (ii) a sales fee for
international distribution of such motion picture. Pursuant to the Library
Sale Agreement, upon consummation of the Film Library Sale, the Company will
no longer be obligated to pay the Cinergi Amount, will relinquish the equity
participation and sales fee, and will no longer serve as sales agent with
respect to such motion picture.
12
<PAGE>
CINERGI PICTURES ENTERTAINMENT INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
June 30, 1997
NOTE 5 -- PROVISION FOR IMPAIRMENT OF LONG-LIVED ASSETS
During 1996, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" (SFAS No. 121). In April 1997, the Company
announced that (i) the Company had entered into the Library Sale Agreement with
Disney to sell to Disney substantially all of the films in the Company's motion
picture library and certain other assets, (ii) the Company did not presently
intend to commence production of any additional motion pictures, and (iii) the
Company was considering its alternatives assuming consummation of the Film
Library Sale. The Company's visual effects assets are not included in the Film
Library Sale. In light of the foregoing and due to operating losses of the
special effects facility, the Company determined that a write-down to net
realizable value of the visual effects assets was required under SFAS No. 121.
Accordingly, the Company recognized a non-cash charge of $2,665,000 at June 30,
1997 for the impairment of the visual effects long-lived assets. The provision
for impairment was calculated based upon the excess of the carrying amount of
the visual effects assets over the estimated fair value of the visual effects
assets.
NOTE 6 -- SUBSEQUENT EVENTS AND OTHER MATTERS
On July 15, 1997, the Company entered into an Assignment Agreement (the
"Assignment Agreement") with Twentieth Century Fox Film Corporation ("Fox")
to sell to Fox, subject to certain conditions, the Company's rights in DIE
HARD WITH A VENGEANCE in exchange for $11,250,000 in cash. The Company owns
DIE HARD WITH A VENGEANCE with Fox. Fox controls all sequel rights to the
film, as well as distribution right to the film in the United States, Canada
and Japan (and certain additional minor territories), and worldwide in
certain ancillary media. Pursuant to the Assignment Agreement, the Company
will relinquish the right to receive overages from those territories and
media for which Fox controls distribution rights.
Fox will receive the Company's rights in DIE HARD WITH A VENGEANCE
subject to the terms of the Company's existing exploitation agreements
relating to such rights, including the Company's agreements with Disney. The
Company, which controls distribution rights to DIE HARD WITH A VENGEANCE in
international territories other than those for which Fox controls
distribution rights, has previously granted Disney distribution rights to
the film in a portion of those international territories. Pursuant to the
Library Sale Agreement, the Company has agreed, upon consummation of the Film
Library Sale, to relinquish overages payable by Disney after January 1, 1997
with respect to DIE HARD WITH A VENGEANCE. However, pursuant to the
Assignment Agreement, the Company will still be entitled to receive any
overages under its existing exploitation agreements which relate to DIE HARD
WITH A VENGEANCE and are with parties other than Disney and Fox.
Pursuant to the Assignment Agreement, Fox will continue to be
responsible for the payment of residuals relating to distribution of the film
in those territories for which Fox currently controls distribution rights,
and, as the Company's existing exploitation agreements expire (including the
Company's agreements with Disney) and the distribution rights in those
territories revert to Fox, Fox will become responsible for the payment of
residuals in the applicable territories covered by any exploitation
agreements. The Company, however, will continue to be responsible for all
participations due to profit participants in the film (other than those
associated with distribution of the film in the territories licensed to
Disney, for which Disney is responsible). The Company currently anticipates,
subject to, among other things, actual future revenues generated by the film,
that the Company's residuals and participation obligations with respect to
such film will not exceed approximately $1,000,000.
The sale of the Company's rights in DIE HARD WITH A VENGEANCE to Fox is
subject to several conditions including, among other things, consummation of
the Film Library Sale to Disney and applicable approval of the Company's
stockholders. If the Library Sale Agreement terminates, the Assignment
Agreement will automatically also terminate.
In June 1997, the Company instructed its financial advisor, Jefferson
Capital Group, Ltd., to solicit cash bids from qualified buyers for the
purchase of the Company's slate of approximately twenty wholly-owned
development projects. The Company received an initial bid for the
development projects of $4,750,000 (plus the reimbursement of certain of the
Company's costs related to such projects)
13
<PAGE>
CINERGI PICTURES ENTERTAINMENT INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
June 30, 1997
from Mr. Vajna, President, Chief Executive Officer and Chairman of the Board
of Directors of the Company. Additional qualified bids were required to be
at least fifteen percent higher than the initial bid and submitted to the
Company by noon, eastern time, on August 19, 1997. As no additional
qualified bids were received by the bidding deadline, Mr. Vajna was the
prevailing bidder and, subject to consummation of the Film Library Sale and
the transactions contemplated by the Assignment Agreement, will purchase such
development projects for his initial bid. Not included in the slate of
development projects for which bids were initially solicited are
approximately twenty development projects funded by the Company under its
"first-look" arrangement with Oliver Stone and certain of his affiliated
entities. In July 1997, the Company instructed Jefferson Capital Group, Ltd.
to solicit cash bids from qualified buyers with respect to five such projects
which are being offered for sale by the Company subject to certain rights of
Stone as a producer and/or director attached to the projects. Mr. Vajna has
not submitted a bid for such five projects. The bidding deadline for such
projects had not expired as of the date of the filing of this Report. Oliver
Stone and his affiliates have the right to arrange with a third party for
production of the other projects developed under the "first-look" arrangement
subject to certain rights of the Company to elect to further develop or
produce such projects in certain circumstances. In the event any such
projects are produced by Stone, Stone must reimburse the related actual costs
(plus interest) previously incurred by the Company and Disney (which funded
the first-look arrangement with Stone through February 1997).
On June 24, 1997, the Company announced that the Company, through a
Special Committee of its Board of Directors, had commenced negotiations with
Mr. Vajna with respect to the terms of a merger that would follow the Film
Library Sale and the sale of all or a portion of the Company's other assets
(including the Company's rights with respect to DIE HARD WITH A VENGEANCE).
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THIS QUARTERLY REPORT ON FORM 10-Q 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" 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 ACTION EVENTS OR RESULTS TO DIFFER MATERIALLY FROM THOSE REFERRED
TO IN SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY (I) HAS ENTERED INTO AN
AGREEMENT TO SELL SUBSTANTIALLY ALL OF THE FILMS IN THE COMPANY'S MOTION
PICTURE LIBRARY AND CERTAIN OTHER ASSETS TO WALT DISNEY PICTURES AND
TELEVISION, (II) HAS ENTERED INTO AN AGREEMENT TO SELL THE COMPANY'S RIGHTS
IN DIE HARD WITH A VENGEANCE TO TWENTIETH CENTURY FOX FILM CORPORATION,(III)
HAS SOLICITED BIDS FOR CERTAIN WHOLLY-OWNED DEVELOPMENT PROJECTS FOR WHICH
MR. VAJNA HAS BECOME THE PREVAILING BIDDER, AND (IV) IS NEGOTIATING, THROUGH
A SPECIAL COMMITTEE OF THE BOARD OF DIRECTORS, WITH ANDREW G. VAJNA,
PRESIDENT, CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD OF DIRECTORS OF
THE COMPANY, REGARDING THE TERMS OF A MERGER THAT WOULD FOLLOW CONSUMMATION
OF THE FILM LIBRARY SALE AND THE TRANSACTIONS CONTEMPLATED BY THE ASSIGNMENT
AGREEMENT. IN ADDITION, THE COMPANY ALSO HAS ANNOUNCED THAT IT DOES NOT
PRESENTLY INTEND TO COMMENCE PRODUCTION ON ANY ADDITIONAL MOTION PICTURES.
AS A RESULT, THE COMPANY'S RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS
ENDED JUNE 30, 1997 ARE NOT NECESSARILY INDICATIVE OF THE RESULTS THAT MAY BE
EXPECTED IN FUTURE PERIODS (INCLUDING FOR THE YEAR ENDING DECEMBER 31, 1997).
THE AGREEMENTS TO SELL SUBSTANTIALLY ALL OF THE FILMS IN THE COMPANY'S MOTION
PICTURE LIBRARY AND THE COMPANY'S RIGHTS IN DIE HARD WITH A VENGEANCE ARE
SUBJECT TO NUMEROUS CONDITIONS AND MAY ALSO BE TERMINATED IN CERTAIN
CIRCUMSTANCES. THE SALE OF THE COMPANY'S WHOLLY-OWNED DEVELOPMENT PROJECTS
TO MR. VAJNA IS SUBJECT TO CONSUMMATION OF THE FILM LIBRARY SALE AND THE
TRANSACTIONS CONTEMPLATED BY THE ASSIGNMENT AGREEMENT. NO ASSURANCE CAN BE
GIVEN THAT THE SALES OF ASSETS TO DISNEY AND FOX (AND THUS ALSO THE SALE OF
THE DEVELOPMENT PROJECTS TO MR. VAJNA) WILL BE CONSUMMATED OR THAT A MERGER
AGREEMENT WITH MR. VAJNA WILL BE ENTERED INTO (OR ENTERED INTO ON ANY TERMS
INDICATED HEREIN) OR THAT IF ANY SUCH MERGER AGREEMENT IS EXECUTED, THAT IT
WILL NECESSARILY BE CONSUMMATED. ADDITIONAL RISKS AND UNCERTAINTIES ARE
DISCUSSED ELSEWHERE IN APPROPRIATE SECTIONS OF THIS REPORT AND IN OTHER
FILINGS MADE BY THE COMPANY WITH THE SECURITIES AND EXCHANGE COMMISSION,
INCLUDING, WITHOUT LIMITATION, THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR
ITS FISCAL YEAR ENDED DECEMBER 31, 1996, THE COMPANY'S FORM 8-K DATED APRIL
3, 1997, FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 4, 1997,
AND THE COMPANY'S FORM 8-K DATED JULY 9, 1997, FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION ON JULY 17, 1997. 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 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.
GENERAL
As indicated under Note 4 to "Notes to Condensed Consolidated Financial
Statements (unaudited)" under Item 1 above, in April 1997, the Company
entered into the Library Sale Agreement with Disney, to sell to Disney
substantially all of the films in the Company's motion picture library and
certain other assets, subject to certain conditions (including completion of
certain due diligence by Disney, expiration of any applicable
Hart-Scott-Rodino waiting period, and the approval of the Company's
stockholders) and termination in certain circumstances, including upon
failure to consummate the Film Library Sale by September 15, 1997. The
Company and Disney have agreed in principle to amend the Library Sale
Agreement to change such date to a date in the fourth quarter of 1997,
however, no amendment has been executed nor has a different date been agreed
to as of August 19, 1997. Upon consummation of the Film Library Sale, the
Company's twenty-five film domestic distribution arrangement with BVPD, an
affiliate of Disney, under which nine films have been delivered, will be
terminated. As indicated under Note 6 to "Notes to Condensed Consolidated
Financial Statements (unaudited)" under Item 1 above, in July 1997, the
Company entered into the Assignment Agreement with
15
<PAGE>
Fox, to sell to Fox the Company's rights in DIE HARD WITH A VENGEANCE in
exchange for $11,250,000 in cash. Such transaction is subject to several
conditions including consummation of the Film Library Sale and applicable
approval of the Company's stockholders. In addition to Notes 4 and 6 to
"Notes to Condensed Consolidated Financial Statements (unaudited)" under Item
1 above, see the Company's Annual Report on Form 10-K for its fiscal year
ended December 31, 1996, its Current Report on Form 8-K dated April 3, 1997
filed by the Company with the Securities and Exchange Commission on April 4,
1997, its Current Report on Form 8-K dated July 9, 1997 filed by the Company
with the Securities and Exchange Commission on July 17, 1997, the Library
Sale Agreement (Exhibit 2.1 hereto) and the Assignment agreement (Exhibit 2.2
hereto) for additional information regarding the Library Sale Agreement and
the Assignment Agreement and the transactions contemplated thereby. The
Company has also announced that it does not presently intend to commence
production on any additional motion pictures. In addition, the Company
solicited bids for the purchase of the Company's slate of approximately
twenty wholly-owned development projects for which Mr. Vajna's bid of
$4,750,000 (plus the reimbursement of certain of the Company's costs related
to such projects) was the prevailing bid. The sale of such development
projects to Mr. Vajna is subject to consummation of the Film Library Sale and
the transactions contemplated by the Assignment Agreement. See Note 6 to
"Notes to Condensed Consolidated Financial Statements (unaudited)" under Item
1 above for certain additional information regarding the solicitation of bids
for the development projects.
The Company, through a Special Committee of the Board of Directors, is
presently negotiating with Mr. Vajna with respect to the terms of a merger
that would follow consummation of the Film Library Sale and the transactions
contemplated by the Assignment Agreement. The Company anticipates that at
the time of such a merger, assuming consummation of the Film Library Sale and
transactions contemplated by the Assignment Agreement, the Company's assets
(other than the Company's slate of twenty wholly-owned development projects
which Mr. Vajna has agreed to purchase) would consist primarily of cash in
addition to certain miscellaneous assets (including among other things, the
EVITA soundtrack rights, the Company's visual effects equipment, certain of
the development projects which the Company funded pursuant to its
"first-look" arrangement with Oliver Stone and his affiliates, and the right
to receive overages under the Company's existing exploitation agreements
which relate to DIE HARD WITH A VENGEANCE and are with parties other than
Disney and Fox), unless the Company otherwise arranges to sell any such
assets prior to such a merger. Although a merger agreement with Mr. Vajna
has not been entered into, the Company anticipates that any such agreement
would provide for, among other things, the merger of the Company with an
entity controlled by Mr. Vajna and his affiliates, the receipt by the
Company's stockholders of cash in exchange for their stock in the Company and
the cancellation of Mr. Vajna's employment agreement with the Company,
effective upon consummation of the merger, in exchange for a portion of the
compensation otherwise payable under the employment agreement through its
term (which ends December 31, 1998). Immediately following such a merger,
the Company would be privately held by Mr. Vajna and his affiliates. The
Company anticipates that any merger agreement with Mr. Vajna will be subject
to, among other things, consummation of the Film Library Sale and the
transactions contemplated by the Assignment Agreement, and the approval of
the Company's stockholders. Even if the Special Committee and Mr. Vajna are
able to agree to the terms of such a merger, the Company does not anticipate
that the merger would be consummated until at least the fourth quarter of
1997, and could be delayed beyond such time as a result of a variety of
factors including the time required to obtain necessary approvals.
RESULTS OF OPERATIONS
QUARTER ENDED JUNE 30, 1997 COMPARED TO QUARTER ENDED JUNE 30, 1996
Feature film revenues decreased from $22,447,000 for the quarter ended
June 30, 1996 to $17,013,000 for the quarter ended June 30, 1997. Feature
film revenues for the quarter ended June 30, 1996 consisted mainly of the
domestic home video availability of THE SCARLET LETTER and continuing
domestic and foreign revenues from TOMBSTONE and DIE HARD WITH A VENGEANCE.
Feature film revenues for the quarter ended June 30, 1997 resulted mainly
from the domestic home video availability of EVITA.
Amortization of film costs, residuals and participations decreased from
$22,076,000 for the quarter ended June 30, 1996 to $17,069,000 for the
quarter ended June 30, 1997 primarily due to the decrease in feature film
revenue recognized in the quarter ended June 30, 1997 as compared to the
quarter ended June 30, 1996. 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
16
<PAGE>
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
$1,403,000 for the quarter ended June 30, 1996 to $4,319,000 for the quarter
ended June 30, 1997. The increase is due primarily to (i) no production
overhead being capitalized into film costs in the second quarter of 1997 in
light of the Company's agreements to sell the films in its motion picture
library and the Company's current intention not to commence production on
additional motion pictures, and (ii) the creation of a $1,350,000 reserve with
respect to litigation pending against the Company. In 1996 and prior
periods, the Company capitalized 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
capitalized to film costs was $1,428,000 for the second quarter of 1996. The
total of SG&A expenses and production overhead costs capitalized to film
costs increased from $2,831,000 for the quarter ended June 30, 1996 to
$3,719,000 for the quarter ended June 30, 1997.
The provision for impairment of long-lived assets reflects a write down
of the Company's visual effects equipment under provisions of Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS No.
121). In April 1997, the Company announced that (i) the Company had entered
into the Library Sale Agreement with Disney to sell to Disney substantially
all of the films in the Company's motion picture library and certain other
assets, (ii) the Company did not presently intend to commence production of
any additional motion pictures and (iii) the Company was considering its
alternatives assuming consummation of the Film Library Sale. The Company's
visual effects assets are not included in the Film Library Sale. In light of
the foregoing and due to operating losses of the special effects facility,
the Company determined that a write-down to net realizable value of the
visual effects assets was required under SFAS No. 121. Accordingly, the
Company recognized a non-cash charge of $2,665,000 at June 30, 1997 for the
impairment of the visual effects long-lived assets. The provision for
impairment was calculated based upon the excess of the carrying amount of the
visual effects assets over the estimated fair value of the visual effects
assets.
Interest expense increased from $0 for the quarter ended June 30, 1996
to $1,260,000 for the quarter ended June 30, 1997 primarily because no
interest expense for the quarter ended June 30, 1997 was capitalized to film
costs in light of the Company's agreements to sell the films in its motion
picture library and the Company's current intention not to commence
production on additional motion pictures. In 1996 and prior periods, the
Company capitalized applicable interest expense incurred in connection with
the production of each motion picture. The Company determined 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 $1,785,000 for
the quarter ended June 30, 1996 to $1,260,000 for the quarter ended June 30,
1997. This decrease was primarily due to the lower average outstanding
balance of the Company's production loans in the quarter ended June 30, 1997
as compared to the quarter ended June 30, 1996. One film was in various
stages of production during the second quarter of 1997 as compared to three
films during the second quarter of 1996.
Interest income increased from $296,000 for the quarter ended June 30,
1996 to $526,000 for the quarter ended June 30, 1997 primarily due to higher
cash balances during the second quarter of 1997 compared to the second
quarter of 1996.
As a result of the above, the Company incurred a net loss for the
quarter ended June 30, 1997 of $7,773,000 as compared to a net loss of
$716,000 for the quarter ended June 30, 1996.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Feature film revenues decreased from $59,552,000 for the six months
ended June 30, 1996 to $43,539,000 for the six months ended June 30, 1997.
Feature film revenues for the six months ended June 30, 1996 consisted mainly
of the domestic home video availability of THE SCARLET LETTER, international
availability of NIXON, continuing domestic home video revenue from TOMBSTONE
and continuing domestic and international revenues from DIE HARD WITH A
VENGEANCE. Feature film revenues
17
<PAGE>
for the six months ended June 30, 1997 resulted mainly from revenues from the
theatrical release of THE SHADOW CONSPIRACY and the domestic home video
availability of EVITA.
Amortization of film costs, residuals and participations decreased from
$58,411,000 for the six months ended June 30, 1996 to $44,414,000 for the six
months ended June 30, 1997 primarily due to the decrease in feature film
revenue recognized for the six months ended June 30, 1997 as compared to the
six months ended June 30, 1996.
SG&A expenses (excluding production overhead costs capitalized to film
costs) increased from $2,879,000 for the six months ended June 30, 1996 to
$7,838,000 for the six months ended June 30, 1997. The increase is due
primarily to (i) no production overhead being capitalized into film costs in
the six months ended June 30, 1997 in light of the Company's agreements to
sell the films in its motion picture library and the Company's current
intention not to commence production on additional motion pictures, and (ii)
the creation of a $1,350,000 reserve with respect to litigation pending
against the Company. The total of SG&A expenses and production overhead costs
capitalized to film costs increased from $5,971,000 for the six months ended
June 30, 1996 to $7,838,000 for the six months ended June 30, 1997 primarily
due to the creation of the litigation reserve as described above and the
Company paying a bonus to an executive (the Executive Vice President, Chief
Operating Officer, and Chief Financial Officer of the Company) pursuant to an
amendment of such executive's employment agreement in January 1997.
As described in "Results of Operations for the Quarter Ended June 30,
1997 Compared to the Quarter Ended June 30, 1996," the Company determined
that a write-down to net realizable value of the visual effects assets was
required under SFAS No. 121. Accordingly, the Company recognized a non-cash
charge of $2,665,000 at June 30, 1997 for the impairment of the visual
effects long-lived assets. The provision for impairment was calculated based
upon the excess of the carrying amount of the visual effects assets over the
estimated fair value of the visual effects assets.
Interest expense increased from $176,000 for the six months ended June
30, 1996 to $2,393,000 for the six months ended June 30, 1997 primarily
because no interest expense for the six months ended June 30, 1997 was
capitalized to film costs in light of the Company's agreements to sell the
films in its motion picture library and the Company's current intention not
to commence production on additional motion pictures. Interest expense,
including interest capitalized to film costs, decreased from $3,337,000 for
the six months ended June 30, 1996 to $2,393,000 for the six months ended
June 30, 1997. The decrease is the result of the Company having a lower
average outstanding balance of production loans for the six months ended June
30, 1997 because one film was in production in such period as compared to
three films in production in the corresponding period in 1996.
Interest income increased from $530,000 for the six months ended June
30, 1996 to $817,000 for the six months ended June 30, 1997 primarily due to
higher cash balances during the six months ended June 30, 1997 compared to
the six months ended June 30, 1996.
As a result of the above, the Company incurred a net loss for the six
months ended June 30, 1997 of $12,953,000 as compared to a net loss of
$1,353,000 for the six months ended June 30, 1996.
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 (the "Credit Facility") in the amount of
$50,000,000. The Credit Facility (which is secured by substantially all of
the assets of the Company) matures on February 28, 1999. As of June 30, 1997,
approximately $8,093,000 in borrowings were outstanding under the Credit
Facility, net of cash retained from the collection of deposits of minimum
guarantees. As of the same date, the interest rate on the amounts
outstanding under the Credit Facility was approximately 7.15% per annum.
Under the Credit Facility, the Lenders have committed to make
18
<PAGE>
loans available until August 31, 1997, although the Company does not
currently contemplate any additional borrowings under the Credit Facility.
Although at December 31, 1996 and March 31, 1997, the Company was in default
under the Credit Facility because it was not in compliance with certain
covenants, the Lenders under the Credit Facility have since, in each case,
either waived such noncompliance or amended the applicable covenant, as a result
of which the Company was in compliance with such covenants as of June 30, 1997.
The Company previously entered into term loan agreements with 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. 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. The COLOR OF NIGHT term
loan with a balance of $4,510,000 at June 30, 1997 was scheduled to mature in
May 1997, however, Disney has agreed pursuant to the Library Sale Agreement
that no repayment of such loan or any other term loan is required unless the
Library Sale Agreement is terminated. None of the remaining currently
outstanding term loans with BVPD mature in the ordinary course in the next
twelve months. At June 30, 1997, the aggregate amount outstanding under all
term loans from BVPD plus accrued interest was approximately $39,209,000.
The Company also has an outstanding promissory note in favor of Valdina
Corporation N.V. ("Valdina") which is currently due and payable and under
which an aggregate of $3,452,000 in principal and accrued interest was
outstanding at June 30, 1997.
Pursuant to the Library Sale Agreement, in the event the Film Library
Sale is consummated, Disney agreed to assume the outstanding debt under the
Company's Credit Facility relating to AN ALAN SMITHEE FILM (which is now in
post-production) up to a maximum of $10,000,000, and the Company agreed to
transfer to Disney all minimum guarantees and any overages paid or to be paid
with respect to the film. The Company and Disney, however, have agreed in
principle to change such arrangement, subject to preparation and execution of
an appropriate amendment to the Library Sale Agreement. Pursuant to such an
amendment, Disney would pay $3,950,000 to the Company upon delivery of AN
ALAN SMITHEE FILM to Disney (a reduction of $1,050,000 from Disney's current
payment obligation pursuant to existing agreements between the Company and
Disney). The Company would agree to use such amount to pay off a portion of
the outstanding principal and interest which the Company owes under the
Credit Facility relating to production of the film. In addition, in the
event the Film Library Sale is consummated, the Company would pay to Disney
an amount equal to the difference between (a) the aggregate amount of minimum
guarantees payable to the Company with respect to such film, which amount is
to be no less than $10,912,000 and (b) the sum of (x) the actual
out-of-pocket production costs for AN ALAN SMITHEE FILM (including actual
finance costs and interest under the Credit Facility to the extent such costs
and interest are directly attributable to loans under the Credit Facility in
connection with production of the film) (the "Smithee Production Costs") up
to $10,000,000 plus (y) 50% of any Smithee Production Costs in excess of
$10,000,000 (such sum of (x) and (y) not to exceed $10,500,000). The Company
presently estimates, based on information currently available to management,
that it will receive approximately $10,912,000 in advances and minimum
guarantees with respect to such film and that the Smithee Production Costs
will be
19
<PAGE>
approximately $10,972,000 (the direct negative cost of approximately
$10,419,000 plus an estimated $553,000 in finance costs and interest), and,
therefore, the Company currently anticipates that the payment to Disney would
be approximately $425,000. However, such amount is only an estimate and the
actual payment to Disney under this arrangement could be different depending
on, among other things, the actual amount of post-production costs and the
actual date of delivery of the film to Disney. The minimum guarantees
received by the Company from parties other than Disney with respect to AN
ALAN SMITHEE FILM will be used to pay down amounts outstanding under the
Credit Facility relating to the film. The Company currently anticipates that
no significant amounts will be outstanding under the Credit Facility after
the application of such minimum guarantees (including the $3,950,000 from
Disney) to pay down amounts outstanding under the Credit Facility.
The Company and HPC have an arrangement whereby the Company is
financially obligated to pay to HPC the lesser of 50% of the cost of the
motion picture tentatively entitled DEEP RISING or $22,500,000 (the "Cinergi
Amount"), in exchange for (i) a 50% equity participation in DEEP RISING and
(ii) a sales fee for international distribution of such motion picture. In
connection with the Library Sale Agreement, upon consummation of the Film
Library Sale, the Company will no longer be obligated to pay the Cinergi
Amount, will relinquish the equity participation and sales fee, and will no
longer serve as sales agent with respect to such motion picture. In the
event the Film Library Sale is not consummated, the Company currently
anticipates that it will have obtained sufficient advances and minimum
guarantees with respect to its interest in the film to satisfy the payment
obligation.
The Company has a "first-look" arrangement with Oliver Stone and certain
of his affiliated entities (collectively, "Stone") pursuant to which Stone
submits to the Company all theatrical motion picture projects owned or
controlled by Stone for the Company's development and consideration of
possible production and, as consideration for Stone's submitting such
projects to the Company, the Company pays certain amounts annually to Stone
for overhead and development. Disney has reimbursed the Company for all
amounts payable to Stone through February 10, 1997, however, pursuant to the
Library Sale Agreement, the Company is generally responsible for all payments
to Stone from such date through expiration of the arrangement in February
1998. The Company currently estimates that the payments due under the Stone
Agreement from June 30, 1997 through February 1998 will be approximately
$1,570,000.
At June 30, 1997, the Company had cash on hand of approximately
$30,274,000 (exclusive of restricted cash of approximately $3,920,000
consisting primarily of amounts due to HPC from deposits received in
connection with the international distribution of DEEP RISING pursuant to the
arrangement between the Company and HPC described above).
As the Company does not presently intend to commence production on any
additional motion pictures, management of the Company has been implementing
reductions in personnel to achieve staff size commensurate with the Company's
current level of activity. The Company has also agreed to reduce the amount
of space it leases in its corporate headquarters building by approximately
fifty percent beginning September 1, 1997.
The Company believes that its existing capital, funds from operations
and other available sources of capital (including cash on hand), will be
sufficient to enable the Company to fund its overhead related expenditures
and currently intended reduced level of activities for the next 12 months.
20
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable, as the Securities and Exchange Commission phase-in date
for this Item with respect to the Company has not yet occurred.
21
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Trial in the lawsuit by Laurence Fishburne and The LOA Productions,
Inc., Mr. Fishburne's loan-out corporation, against the Company, a subsidiary
of the Company and Randolph M. Paul, Senior Vice President, Business Affairs
and a Director of the Company, which was originally scheduled for August 11,
1997 in Los Angeles Superior Court has been rescheduled by agreement of the
parties to August 25,1997. The action, for breach of oral contract, fraud
and deceit, and civil conspiracy was originally filed on July 11, 1994. The
plaintiffs claim that the Company entered into an oral contract for Mr.
Fishburne to appear in the motion picture, DIE HARD WITH A VENGEANCE, but
repudiated the contract the following day. Plaintiffs are claiming damages
of $1,750,000, representing the fixed compensation to which they allege they
are entitled, additional compensatory damages of up to $350,000 and general
and punitive damages. The Company believes it has meritorious defenses to
the allegations. An adverse judgment in such litigation could have a
material adverse effect on the Company's financial condition.
As previously reported by the Company in its Quarterly Report on Form
10-Q for the quarter ended March 31, 1997, in May 1997 the Company settled
certain legal proceedings with Le Film Office relating to monies payable to
the Company with respect to THE SHADOW CONSPIRACY. See Note 4 of "Notes
to Condensed Consolidated Financial Statements (unaudited)" set forth herein.
22
<PAGE>
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.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits.
2.1 Purchase and Sale Agreement, dated April 3, 1997, by and between
the Company and Cinergi Productions N.V. Inc. and Walt Disney
Pictures and Television Incorporated. Incorporated by
reference to Exhibit 2.1 to the Company's Current Report on
Form 8-K, dated April 3, 1997, filed with the Securities and
Exchange Commission on April 4, 1997.
2.2 Assignment Agreement, dated as of July 14, 1997, between
Twentieth Century Fox Film Corporation and Cinergi Pictures
Entertainment Inc. and Cinergi Productions N.V. Inc.
Incorporated by reference to Exhibit 2.1 to the Company's
Current Report on Form 8-K, dated July 9, 1997, filed with the
Securities and Exchange Commission on July 17, 1997.
27 Financial Data Schedule (filed electronically only). Filed
herewith.
b) Reports on Form 8-K.
The following reports on Form 8-K were filed by the Company during the
quarter ended June 30, 1997:
Current Report on Form 8-K, dated April 3, 1997, filed by the
Company with the Securities and Exchange Commission on April 4,
1997 reporting under "Item 5 --
23
<PAGE>
Other Events" the execution of the Library Sale Agreement with
Disney and the Company's announcement of its intention not to
commence production on any additional motion pictures.
Current Report on Form 8-K, dated June 24, 1997, filed by the
Company with the Securities and Exchange Commission on the same
date reporting under "Item 5 -- Other Events" the Company's
announcement that (i) it had instructed the Company's financial
advisor, Jefferson Capital Group, Ltd., to solicit cash bids from
qualified buyers for the purchase of certain development projects,
(ii) it had received an initial bid for such development projects
from Andrew G. Vajna, President, Chief Executive Officer and
Chairman of the Board of Directors of the Company, (iii) it was in
discussions with Twentieth Century Fox regarding the sale to
Twentieth Century Fox of the Company's rights in the film DIE HARD
WITH A VENGEANCE, and (iv) it had commenced negotiations, through a
Special Committee of the Company's Board of Directors, with Mr.
Vajna with respect to a potential merger with an entity controlled
by Mr. Vajna that would occur after the sale of substantially all
of the assets of the Company.
24
<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.
August 19, 1997 By: /s/ WARREN BRAVERMAN
--------------------------------------------
Warren Braverman, Executive Vice President,
Chief Operating Officer and Chief Financial
Officer, signing both in his capacity as
Executive Vice President on behalf of
Registrant and as Chief Financial Officer of
Registrant
25
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 30,274
<SECURITIES> 0
<RECEIVABLES> 9,820
<ALLOWANCES> 0
<INVENTORY> 68,522
<CURRENT-ASSETS> 105,712
<PP&E> 7,812
<DEPRECIATION> 6,142
<TOTAL-ASSETS> 116,096
<CURRENT-LIABILITIES> 40,636
<BONDS> 0
0
0
<COMMON> 135
<OTHER-SE> 25,620
<TOTAL-LIABILITY-AND-EQUITY> 116,096
<SALES> 43,540
<TOTAL-REVENUES> 44,357
<CGS> 44,414
<TOTAL-COSTS> 54,917
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,393
<INCOME-PRETAX> (12,953)
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,953)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,953)
<EPS-PRIMARY> (.96)
<EPS-DILUTED> (.96)
</TABLE>
